UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 30, 2021
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 ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically 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 ☒ 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
☐
☒
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant 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 ☒
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
As of August 1, 2020, 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$13,200,483.
As of April 26, 2021, 26,255,769 common shares of the registrant were outstanding.
The brand, service or product names or marks referred to in this Annual Report are trademarks or services marks, registered or otherwise, of
DAVIDsTEA Inc. and our wholly-owned subsidiary, DAVIDsTEA (USA) Inc.
EXPLANATORY NOTE
DAVIDsTEA Inc. (the “Company”), a corporation incorporated under the Canada Business Corporations Act, qualifies as a foreign private issuer
in the United States for purposes of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company has chosen to file annual
reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K with the United States Securities and Exchange Commission
(“SEC”) instead of filing on the reporting forms available to foreign private issuers, although the Company is not required to do so. We are permitted to file
our audited consolidated financial statements with the SEC under International Financial Reporting Standards (“IFRS”), as issued by the International
Accounting Standards Board (“IASB”), without a reconciliation to U.S. generally accepted accounting principles (“U.S. GAAP”). As a result, we do not
prepare a reconciliation of our results to U.S. GAAP. It is possible that certain of our accounting policies could be different from U.S. GAAP.
The Company prepares and files a management proxy circular and related material under Canadian requirements. As the Company’s management
proxy circular is not filed pursuant to Regulation 14A, the Company may not incorporate by reference information required by Part III of this Form 10-K
from its management proxy circular.
In this annual report on Form 10-K, unless otherwise specified, all monetary amounts are in Canadian dollars, all references to “$,” “C$,” “CAD”,
“CND$”, “CDN$,” “CDN,” “Canadian dollars” and “dollars” mean Canadian dollars and all references to “U.S. dollars,” “US$” and “USD” mean U.S.
dollars.
On April 26, 2021, the Bank of Canada closing average exchange rate was US$1.00 = CAD$1.2412.
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
TABLE OF CONTENTS
PART I
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 STOCKHOLDER 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.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Page
6
12
33
33
34
34
35
35
36
37
51
52
85
85
86
87
87
95
103
ITEM 13.
ITEM 14.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15.
ITEM 16.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
SIGNATURES
104
106
107
107
107
108
3
PART I
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or
projections regarding future events or future results and there are, or may be deemed to be, “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995 (the “Act”). The following cautionary statements are being made pursuant to the provisions of the Act and with
the intention of obtaining the benefits of the “safe harbor” provisions of the Act. These forward-looking statements can generally be identified by the use of
forward-looking terminology, including the terms “believes”, “expects”, “may”, “will”, “should”, “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 and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our restructuring
process, the COVID-19 pandemic, our strategy of transitioning to e-commerce and wholesale sales, future sales through our e-commerce and wholesale
channels, the closing of certain of our retail stores, future lease liabilities, our results of operations, financial condition, liquidity and prospects, the impact
of the COVID-19 pandemic on the global macroeconomic environment, and our ability to avoid the delisting of the Company’s common stock by Nasdaq
due to the restructuring or our inability to maintain compliance with Nasdaq listing requirements.
While we believe these opinions and expectations 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:
☐ The effects of our Restructuring Plan pursuant to the CCAA in Canada and recognition of the CCAA proceedings in the United States under
Chapter 15 of the United States Bankruptcy Code;
☐ We may not have sufficient cash to maintain our operations following the Restructuring Plan.
☐ We are subject to actions and decisions of our creditors and other third parties who have interests in our Restructuring Plan that may be
inconsistent with our interests.
☐ Our ability to successfully pivot our business to a digital-first strategy, supported by our wholesale distribution capabilities and our retail
operations, including our ability to attract and retain employees that are instrumental to growing our online and wholesale channel
businesses;
☐ The duration and impact of the 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 ability to avoid the delisting of the Company’s common stock by Nasdaq due to the Restructuring Plan or our inability to maintain
compliance with Nasdaq listing requirements;
☐ Our ability to manage significant changes to our leadership team;
☐ Our ability to maintain and enhance our brand image;
☐ Significant competition within our industry;
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4
☐ Our ability to attract and retain employees that embody our entrepreneurial culture;
☐ Changes in consumer preferences and economic conditions affecting disposable income;
☐ Our ability to source, develop and market new varieties of teas, tea accessories, and beverages;
☐ Our reliance upon the continued retention of key personnel;
☐ The impact from real or perceived quality or safety issues with our teas, tea accessories, and beverages;
☐ Our ability to obtain quality products from third-party manufacturers and suppliers on a timely basis or in sufficient quantities, in particular in
light of supply chain disruption due to the COVID-19 pandemic;
☐ The impact of weather conditions, natural disasters and man-made 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.
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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 wholly-owned subsidiary, DAVIDsTEA (USA) Inc.
The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a 52-week year, but occasionally gives rise to an
additional week, resulting in a 53-week year. Fiscal years are designated in the Consolidated Financial Statements and Notes thereto, as well as the
remainder of this Annual Report on Form 10-K, by the calendar year in which the fiscal year commenced. All references herein to the Company’s fiscal
years are as follows:
Fiscal year
Fiscal 2016
Fiscal 2017
Fiscal 2018
Fiscal 2019
Fiscal 2020
Year ended /
ending
January 28, 2017
February 3, 2018
February 2, 2019
February 1, 2020
January 30, 2021
Number of
weeks
52
53
52
52
52
Our Company
DAVIDsTEA offers a specialty branded selection of high-quality proprietary loose-leaf teas, pre-packaged teas, tea sachets, tea-related accessories
and gifts through its e-commerce platform at www.davidstea.com and the Amazon Marketplace, its wholesale customers which include over 2500 grocery
stores and pharmacies, and 18 company-owned stores 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.
We believe that our proprietary loose-leaf tea assortment and related product suite differentiates us from competitors in North America and
resonates with our target customer base. Our strategy is to stabilize our business from unfavorable trend lines by playing to our core strengths and
strengthening our business by focusing on how to grow our product portfolio. This includes migrating sales to a virtual experience and best-in-class
customer service execution. We are focused on effectively optimizing our retail footprint into a more sustainable physical presence that complements a
growing online and wholesale business, all supported by a right-sized support organization.
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 COVID-19 pandemic. Due to the degree of uncertainty in connection with the scope and extent of the COVID-19 pandemic and the
resulting impact to our business, and considering that significant losses were historically incurred in our brick-and-mortar operations which were anchored
by commercial leases that are difficult to modify, we concluded that our transformation objectives would be better achieved through a formal restructuring
process.
On July 8, 2020, we announced that we were implementing the Restructuring Plan under the CCAA in order to accelerate our transition to an
online retailer and wholesaler of high-quality tea and accessories and that during the restructuring process, we would continue to operate our online
business through our e-commerce platform at www.davidstea.com and on the Amazon Marketplace, as well as our wholesale distribution channel.
Following a careful review of available options to stem the losses from its brick-and-mortar footprint, our management and Board of Directors determined
that a formal restructuring process was the best option in the context of an increasingly challenging retail environment, further exacerbated by the COVID-
19 pandemic.
On July 8, 2020, we obtained the Initial Order pursuant to the CCAA from the Québec Superior Court in order to implement the Restructuring
Plan. Among other things, the Initial Order provided for the appointment of PricewaterhouseCoopers (“PwC”) as Monitor in the CCAA proceedings.
On July 9, 2020, the United States Bankruptcy Court for the District of Delaware entered an order in favor of the Company under Chapter 15 of
the United States Bankruptcy Code. The order of the United States Bankruptcy Court provisionally recognized the proceedings under the CCAA and
enforced the Initial Order, in effect providing protection to us from creditor action against its assets in the United States.
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6
As part of its Restructuring Plan and further to obtaining the Initial Order, we, on July 10, 2020, sent notices to terminate leases for 82 of our
stores in Canada and all 42 of our stores in the United States. These lease terminations were effective on August 9, 2020.
On July 16, 2020, we obtained an Amended and Restated Initial Order from the Québec Superior Court, extending to September 17, 2020 the
application of the Initial Order. The Amended and Restated Initial Order also dealt with certain administrative matters, particularly with regards to the lease
terminations.
On July 30, 2020, we sent notices to terminate leases for an additional 82 stores in Canada. These lease terminations were effective on August 29,
2020.
On August 21, 2020, we re-opened 18 stores across Canada.
On September 17, 2020, the Québec Superior Court extended the stay of all proceedings against us to December 15, 2020 and issued a Claims
Process Order establishing the claims procedures for our creditors under the CCAA. This Order, among other things set November 6, 2020 (the “Claims
Bar Date”) as the time by which creditors had to submit their claims to PwC.
On December 15, 2020, the Québec Superior Court extended the stay of all proceedings against us to March 19, 2021. The Court also approved a
retention plan for certain key employees (“KERP”) and created a priority charge over the debtors’ assets for the KERP in addition to extending the Claims
Bar Date for certain Canadian employees until December 31, 2020.
On March 19, 2021, the Québec Superior Court extended the stay of all proceedings against us to June 4, 2021, and addressed certain
administrative matters.
Management believes that there is material uncertainty surrounding our ability to execute the strategy necessary to return to profitability in the
current environment, including the unpredictability surrounding the recovery from the COVID-19 pandemic, changes in consumer behavior and the ability
to successfully emerge from the Restructuring Plan. As a result, these events and conditions indicate that a material uncertainty exists that raises substantial
doubt about our ability to continue as a going concern and, therefore, realize its assets and discharge its liabilities in the normal course of business.
Our Market and Competition
We participate in a large and growing global tea market which, combined with the relatively low percentage of tea sales in North America, makes
the market opportunity very attractive. The markets for tea products in Canada and the United States are highly fragmented and 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.
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
Our Product Offerings
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 substantially all either fully recyclable or compostable.
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7
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.
Distribution Channels
We have strategically pivoted the organization to serve consumer demand by leveraging our digital channels supported by emerging omni-channel
fulfillment capabilities, including buy online pick-up in store and curbside pick-up. These strategies align with rapidly evolving consumer preferences as
we refocus our energies to provide consumers with an enhanced shopping experience on our online channels. We believe our continued efforts to transform
our business to a digital first organization will improve our customer experience, our overall performance, and ultimately position us for long-term growth.
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 on various social media platforms 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 periodically enhance our online
store with new features and functionality to improve our customers’ experience and accessibility for mobile users. We have also launched a select
assortment on the Amazon Marketplace that complements our full product assortment on our online store.
Wholesale
We sell our tea and related products to premium grocery and drugstore chains throughout Canada. 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 2020, demand from hotels, restaurants and various other office and corporate customers was softened by the impact of COVID-
19.
Retail Stores and Operations
Over the last decade, our brand connected with consumers and created a reputation of quality and innovation driven primarily from our in-store
experience. The secular decline in retail and consumers’ move to everything digital has significantly impacted our business. We continue our transition to a
digital first organization, complemented by select stores strategically located throughout Canada and we continue to re-invent our in-store experience.
We began the year with over 230 stores in North America and as of January 30, 2021, our retail footprint consisted of 18 mall-based stores in
Canada. Each store exterior prominently displays the DAVIDsTEA teal signage and our in-store Tea Guides’ passion for tea and wellness permeate our
culture. 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.
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8
Marketing and Advertising
We use a variety of marketing and advertising mediums to drive brand health, customer acquisition, and engagement. We leverage our customer
database and respond to shopping behaviors and needs with content across email, site, and digital media to drive relevance and urgency. Our diversified
media mix spans traditional to digital to social media. We focus on productivity of marketing investment to drive increased effectiveness.
We are focused on amplifying all marketing and advertising efforts to help build brand awareness and increase sales on our digital platforms. Such
marketing efforts include communications with our Super Steeper and Frequent Steeper loyalty members and using paid and non-paid media programs to
help create demand on platforms such as Facebook, Instagram, Twitter, Pinterest, LinkedIn, YouTube, Snapchat, Tik-Tok and Yelp.
COVID-19 has impacted 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.
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 have not impacted 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.
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 using third-party logistics facilities in these locations. 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.
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We also assemble finished goods from our production facility located in Montreal, Québec. 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, including
cleanliness protocols, have put constraints on our production capacity, which we have addressed through 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.
Insurance
We maintain third-party insurance for a number of risk management activities including, but not limited to, workers’ compensation, general
liability, property, directors and officers, cyber insurance and employee-related health care benefits. We evaluate our insurance requirements on an ongoing
basis to ensure that we maintain adequate levels of coverage.
Trademarks and Other Intellectual Property
We regard intellectual property and other proprietary rights as important to our success. In addition to registered intellectual property, such as our
patents and marks, we also rely upon trade secrets and know‑how to develop and maintain our competitive position. We protect our intellectual property
rights through a variety of methods, including by availing ourselves of trademark and trade secret laws and by entering into confidentiality agreements with
vendors, employees, consultants and others who have access to our proprietary information.
We own several trademarks and servicemarks that have been registered with the Canadian Intellectual Property Office and the U.S. Patent and
Trademark Office, including DAVIDsTEA®. We have also registered our stylized logos, and we own domain names, including www.davidstea.com. In
addition, we have registered or have applied to register one or more of our marks in a number of foreign countries and expect to continue to do so in the
future. However, we cannot be certain that we can obtain the registration for the marks in every country where we apply for registration.
We must constantly protect against any infringement by competitors. If we believe a competitor has infringed or is infringing upon our rights, we
may take legal action, which could result in litigation, in which case we may incur significant expenses and divert significant attention from our business
operations.
As of January 30, 2021, we employed a total of 252 full‑time employees and 182 part‑time employees in Canada. Of all those employees, 137
were employed in our corporate office, 112 in our production and distribution operations and 185 were employed in our store network. None of our
Human Capital
employees is represented by a labor union.
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10
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 30, 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 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 January 30, 2021, 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.
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ITEM 1A. RISK FACTORS
11
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. These risk factors
could cause actual results to differ materially from those expressed or implied in any of our forward-looking statements.
Risks Associated with the Restructuring Plan
Risk Factor Summary
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We are subject to the risks and uncertainties associated with the Restructuring Plan, and even if our Restructuring Plan is completed, we may
not be able to achieve our stated goals, creating substantial doubt regarding our ability to continue as a going concern.
As a result of the Restructuring Plan, our financial results may be volatile and may not reflect historical trends.
Any Plan of Arrangement that we implement under the CCAA will be based in large part upon assumptions and analyses developed by us; if
these assumptions and analyses prove to be incorrect, our Plan of Arrangement may be unsuccessful in its execution.
Trading in our shares for the duration of the Restructuring Plan poses substantial risks.
We may be subject to claims that will not be discharged in the Restructuring Plan, which could have a material adverse effect on our financial
condition and results of operations.
We may not have sufficient cash to maintain our operations following the Restructuring Plan.
Operating under Court protection for an extended period of time may harm our business.
We may not be able to obtain approval of a Plan of Arrangement under the CCAA.
We may experience increased levels of employee attrition as a result of the Restructuring Plan.
We are subject to actions and decisions of our creditors and other third parties who have interests in our Restructuring Plan that may be
inconsistent with our interests.
We may not be able to obtain financing.
Risks Related to Operational and Strategic Matters
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Substantial doubt about the Company’s ability to continue as a going concern.
Our transition from a focus on sales through retail stores to online sales and sales through wholesale channels required that we expand and
improve our operations and has strained our operational, managerial and administrative resources, which may adversely affect our business.
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 craft beverages – we are vulnerable to changes in consumer preferences and in economic
conditions affecting disposable income that could harm our financial results.
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.
Our failure to accurately forecast consumer demand for our products while increasing inventory levels could adversely affect our gross
margins, cash flow and liquidity.
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.
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.
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Risks Related to External and Economic Matters
12
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We face significant competition from other specialty tea and beverage retailers and retailers of grocery products, which could adversely affect
our growth plans and us.
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.
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.
Our ability to source our loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories, 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.
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 beverages.
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.
Fluctuations in foreign currency exchange rates could harm our results of operations as well as the price of common shares.
We face risks from the shifting dynamics in international trade.
Risks Related to Regulatory, Data Privacy and Compliance Matters
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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 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.
Data security breaches could negatively affect our reputation, credibility and business.
Use of social media may adversely affect our reputation or subject us to fines or other penalties.
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.
Risks Related to Accounting and Tax Matters
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We previously identified material weaknesses in our internal control over financial reporting. 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.
Risks Related to Ownership of Our Common Shares
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If we fail to comply with the continued listing requirements of the Nasdaq Global Market, it could result in our common stock being delisted,
which could adversely affect the market price and liquidity of our securities and have other adverse effects.
Nasdaq has the discretionary authority to suspend or terminate our listing as a result of the Restructuring Plan.
Our largest shareholder owns 46% of our common shares, which may limit our minority shareholders’ ability to influence corporate matters.
Our stock price may be volatile or may decline.
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 may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.
There could be adverse tax consequence for our shareholders in the United States if we are a passive foreign investment company.
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Risks Associated with the Restructuring Plan
We are subject to the risks and uncertainties associated with the Restructuring Plan, and even if our Restructuring Plan is completed, we may not be
able to achieve our stated goals.
As set out above, on July 8, 2020, we obtained the Initial Order pursuant to the CCAA from the Quebec Superior Court (the “Court”) in order to
implement the Restructuring Plan and on July 9, 2020, the United States Bankruptcy Court for the District of Delaware entered an order in favor of the
Company under Chapter 15 of the United States Bankruptcy Code which provisionally recognized the proceedings under the CCAA and enforced the
Initial Order, in effect providing protection to the Company from creditor action against its assets in the United States. On July 16, 2020, we obtained an
Amended and Restated Initial Order from the Quebec Superior Court, extending the stay of all proceedings against the Company to September 17, 2020.
We have since approached the Court and obtained most recently a stay of all proceedings against the Company to June 4, 2021. The Amended and Restated
Initial Order and subsequent Orders also dealt with certain administrative matters.
For the duration of the Restructuring Plan, our operations and our ability to develop and execute our business plan, as well as our continuation as a
going concern, are subject to the risks and uncertainties associated with restructuring in general, including:
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our ability to develop, confirm and consummate a Plan of Arrangement under the CCAA or an alternative restructuring transaction;
our ability to obtain approval from the Quebec Superior Court with respect to motions filed from time to time in connection with the
Restructuring Plan;
our ability to obtain approval from the United States Bankruptcy Court for the District of Delaware with respect to motions filed from time to
time under Chapter 15 of the United States Bankruptcy Code in connection with the Restructuring Plan;
our ability to maintain our relationships with our suppliers, service providers, customers, employees and other third parties;
our ability to maintain contracts that are critical to our operations;
our ability to develop and execute our business plan;
our ability to maintain our listing on the Nasdaq Global Market; and
our lowered ability to obtain acceptable and appropriate financing.
Because of the risks and uncertainties associated with the Restructuring Plan, we cannot accurately predict or quantify the ultimate impact of
events that will occur during the Restructuring Plan that may be inconsistent with our plans.
Even if our Restructuring Plan is completed, we may continue to face a number of risks, such as further deterioration in economic conditions, particularly
in light of the COVID-19 pandemic, changes in consumer habits, changes in demand for our products and increasing expenses. Some of these risks become
more acute when a restructuring under the CCAA continues for a protracted period without indication of how or when the restructuring may be completed.
As a result of these risks and others, we cannot guarantee that our Restructuring Plan will achieve our stated goals, and there is substantial doubt regarding
our ability to continue as a going concern.
As a result of the Restructuring Plan, our financial results may be volatile and may not reflect historical trends.
For the duration of the Restructuring Plan, we expect our financial results to continue to be volatile as restructuring activities and expenses, lease
terminations, and claims assessments significantly impact our consolidated financial statements. As a result, our historical financial performance is likely
not indicative of our financial performance after the date of the Initial Order. In addition, if we emerge from the Restructuring Plan, the amounts reported in
subsequent consolidated financial statements may materially change relative to our historical consolidated financial statements, including as a result of
revisions to our operating plans in connection with the Restructuring Plan.
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Any Plan of Arrangement that we implement under the CCAA will be based in large part upon assumptions and analyses developed by us; if these
assumptions and analyses prove to be incorrect, our Plan of Arrangement may be unsuccessful in its execution.
Any Plan of Arrangement that we implement under the CCAA will reflect assumptions and analyses based on our experience and perception of
historical trends, current conditions and expected future developments, as well as other factors that we consider appropriate under the circumstances.
Whether actual future results and developments will be consistent with our expectations and assumptions depends on a number of factors, including but not
limited to:
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our ability to transition to online sales and sales through wholesale channels than from sales through retail stores;
our ability to generate adequate liquidity or access financing sources;
our ability to maintain customers’ confidence in our viability as a continuing entity and to attract and retain sufficient business from them;
our ability to retain key employees; and
the overall strength and stability of general economic conditions and the retail industry, both in Canada and the United States.
The failure of any of these factors could materially adversely affect the successful restructuring of our business.
In addition, any Plan of Arrangement will rely upon financial projections, including with respect to revenues, earnings, capital expenditures,
payment of liabilities and cash flow. Financial projections are necessarily speculative, and it is likely that one or more of the assumptions and estimates that
are the basis of these financial projections will not be entirely accurate. The financial projections may be even more speculative than normal in light of the
COVID-19 pandemic. Accordingly, we expect that our actual financial condition and results of operations will differ, perhaps materially, from what we
have anticipated. Consequently, there can be no assurance that the results or developments contemplated by any Plan of Arrangement under the CCAA we
may implement will occur or, even if they do occur, that they will have the anticipated effects on us or our business or operations. The failure of any such
results or developments to materialize as anticipated could materially adversely affect the successful execution of the Restructuring Plan.
Trading in our shares for the duration of the Restructuring Plan poses substantial risks.
The Company’s stockholders are cautioned that trading in shares of the Company for the duration of the Restructuring Plan may be highly
speculative and pose substantial risks due to the uncertainty related to the Restructuring Plan. Accordingly, the Company urges extreme caution with
respect to existing and future investments in its shares.
We may be subject to claims that will not be discharged in the Restructuring Plan, which could have a material adverse effect on our financial
condition and results of operations.
The CCAA provides that approval of a Plan of Arrangement discharges a debtor from substantially all debts arising prior to such approval. With
few exceptions, all claims that arose prior to confirmation of a Plan of Arrangement (i) would be subject to compromise and/or treatment under the Plan of
Arrangement and/or (ii) would be discharged in accordance with the terms of such Plan of Arrangement. Any claims not ultimately discharged through the
Plan of Arrangement could be asserted against us and may have an adverse effect on our financial condition and results of operations on a post-
Restructuring Plan basis.
We may not have sufficient cash to maintain our operations following the Restructuring Plan.
We face considerable uncertainty regarding the adequacy of our liquidity and capital resources. In addition to the cash required to fund our ongoing
operations, we have incurred significant professional fees and other expenses in connection with the Restructuring Plan and expect that such fees and other
expenses will continue throughout the Restructuring Plan process. We cannot provide any assurance that our cash on hand and cash flow from operations
will be sufficient to fund our operations and allow us to satisfy our obligations following the Restructuring Plan.
Operating under Court protection for an extended period of time may harm our business.
An extended period of operations under protection of the Quebec Superior Court could have a material adverse effect on our business, financial
condition, results of operations and liquidity. During such time as our Restructuring Plan is ongoing, our senior management will be required to spend a
significant amount of time and effort dealing with the Restructuring Plan instead of focusing exclusively on our business operations. A prolonged period of
operating under protection of the Quebec Superior Court also may make it more difficult to retain management and other key personnel necessary for the
success and growth of our business. In addition, the longer the Restructuring Plan continues, the more likely it is that our customers and suppliers will lose
confidence in our ability to restructure our business successfully and will seek to establish alternative commercial relationships. Furthermore, so long as the
Restructuring Plan continues, we will be required to incur substantial costs for professional fees and other expenses associated with the administration of
the Restructuring Plan.
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We may not be able to obtain approval of a Plan of Arrangement under the CCAA.
15
In connection with the Restructuring Plan, we are required to obtain approval from our creditors for a Plan of Arrangement by the requisite
majority votes set out in the CCAA. Specifically, in accordance with the CCAA, the Plan of Arrangement will be subject to approval by a simple majority
in number of the holders of “provable claims”, representing at least two-thirds of the aggregate dollar amount of such “provable claims”. There can be no
assurance that we will be successful in obtaining such approval from our creditors. If we do not obtain such approval from our creditors, we will have to
submit a new or amended Plan of Arrangement to our creditors for approval. If such new or amended Plan of Arrangement is not approved by our creditors
by the foregoing requisite majority votes, it is possible that our creditors will ask the Quebec Superior Court to lift the stay of proceedings currently in
effect and exercise their various legal recourses against us.
Moreover, if our Plan of Arrangement is approved by our creditors by the requisite majority votes set out in the CCAA, we will have to obtain an
order from the Quebec Superior Court homologating or ratifying the Plan of Arrangement. In order to obtain the order, we will have to appear before the
Quebec Superior Court and demonstrate to the Court that the Plan of Arrangement is fair and reasonable, independent of creditor approval. There can be no
assurance that we will be able to obtain homologation of the Plan of Arrangement from the Quebec Superior Court.
We may experience increased levels of employee attrition as a result of the Restructuring Plan.
As a result of the Restructuring Plan, we may experience increased levels of employee attrition, and our employees likely will face considerable
distraction and uncertainty. A loss of key personnel or material erosion of employee morale could adversely affect our business and results of operations.
Our ability to engage, motivate and retain key employees or take other measures intended to motivate and incentivize key employees to remain with us
through the Restructuring Plan may be limited. The loss of services of members of our senior management team could impair our ability to execute our
strategy and implement operational initiatives, which would likely have a material adverse effect on our business, financial condition and results of
operations.
We are subject to actions and decisions of our creditors and other third parties who have interests in our Restructuring Plan that may be inconsistent
with our interests.
The decisions of our creditors and other third parties could significantly affect our business and operations in various ways. For example, negative
publicity or events associated with the Restructuring Plan may adversely affect our relationships with our suppliers, service providers, employees and
customers, which in turn could adversely affect our operations and financial condition. Because of the risks and uncertainties associated with the
Restructuring Plan, we cannot predict or quantify the ultimate impact that events occurring during the Restructuring Plan will have on our business,
financial condition, results of operations, or the certainty as to our ability to continue as a going concern. As a result of the Restructuring Plan, settlement of
liabilities is subject to uncertainty. While operating under the protection of the CCAA, and subject to approval of the Quebec Superior Court, we may settle
liabilities for amounts other than those reflected in our consolidated financial statements. Further, a Plan of Arrangement under the CCAA could materially
change the amounts and classifications reported in our consolidated historical financial statements.
We may not be able to obtain financing.
Because of our financial condition, we have heightened exposure to, and less ability to withstand, the operating risks that are customary in the
retail industry, exacerbated by the COVID-19 pandemic. Any of these risks could result in our need for substantial funding. A number of factors, including
the Restructuring Plan, our financial results in recent years, and the competitive environment we face, adversely affect the availability and terms of funding
that might be available to us during, and upon completion of, the Restructuring Plan. As such, we may not be able to source capital at rates acceptable to us,
or at all, to fund current operations on completion of the Restructuring Plan. We have also defaulted on our credit agreement in the past. In the event we
need funds to execute our strategy, we could have limited access to liquidity, which would have negative consequences on our long-term business plan. Our
Restructuring Plan may raise serious doubts about our ability to borrow money on terms favorable to us, which would have negative consequences on our
ability to achieve our long-term business plan or to take advantage of future opportunities.
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Our inability to obtain necessary funding on acceptable terms would have a material adverse impact on us and on our ability to sustain our
operations. We do not currently have a credit facility or loan with a bank or financial institution and can give no assurance that we will be able to obtain any
such facility or loan on terms acceptable to us, or at all.
Substantial doubt about the Company’s ability to continue as a going concern.
Risks Related to Operational and Strategic Matters
Our audited financial statements as of and for the year ended January 30, 2021 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 the successful transition to a
digital first organization and emerging from our formal restructuring process.
Our transition from a focus on sales through retail stores to online sales and sales through wholesale channels required that we expand and improve
our operations and has strained our operational, managerial and administrative resources, which may adversely affect our business.
Our business strategy involves a transition to online sales and sales through wholesale channels of our high-quality tea and accessories, from our
previous model focused on sales through our retail stores. This transition has placed increased demands on our operational, managerial, administrative and
other resources, which may be inadequate to support the transition. Our senior management team may be unable to effectively address challenges involved
with the transition from a focus on sales primarily through retail stores to a focus on online sales and sales through wholesale channels, given the
substantial differences in those sales environments. We will also need to enhance our operational management systems, financial and management controls
and information systems, and to hire, train and retain personnel. Implementing or enhancing our infrastructure, management systems, information systems,
controls and procedures, particularly as they relate to online sales, 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, meaning our former high levels of growth may not be
achieved in future periods without successfully shifting our strategy away from retail sales.
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 store, increased marketing and product development to support
our wholesale business, and changes to our promotional strategy, the negative impact of the COVID-19 pandemic on our retail sales has accelerated our
decision to shift away from a significant retail focus and to focus on our online store and wholesale business.
If we are unable to execute these or other related strategies, our results of operations and financial condition will be negatively impacted.
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 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 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.
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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 as well as the
transition to selling our products primarily online 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, due to the COVID-19 pandemic and our permanent store closings, our
financial performance has 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 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.
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.
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.
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.
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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.
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.
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.
Risks Related to External and Economic Matters
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.
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Because we rely on a limited number of third‑party suppliers and manufacturers, we may not be able to obtain quality products on a timely basis or in
sufficient quantities.
We rely on a limited number of decentralized vendors to supply us with straight tea and specially blended teas on a continuous basis. Our financial
performance depends in large part on our ability to purchase tea in sufficient quantities at competitive prices from these vendors. In general, we do not have
long‑term purchase contracts or other contractual assurances of continued supply, pricing or exclusive access to products from these vendors.
Any of our suppliers or manufacturers could discontinue supplying us with teas in sufficient quantities for a variety of reasons. The benefits we
currently experience from our supplier and manufacturer relationships could be adversely affected if they:
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raise the prices they charge us;
change payment terms;
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.
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Our ability to source our loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories, 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.
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 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.
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.
COVID-19 spread rapidly throughout the world, prompting governments and businesses to take unprecedented measures in response. On March
17, 2020, we closed all of our stores in North America, as subsequently mandated by governments in both Canada and the United States, to protect our
employees, customers and communities in light of the COVID-19 pandemic. As we have moved away from a significant retail footprint toward an online
and wholesale focused business, there is no assurance that the customers will purchase our products at previous volumes through these 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. As part of the reevaluation of our strategy due to the impact of the
COVID-19 pandemic on our retail business and our decision to pursue a restructuring, we significantly decreased our retail footprint, by terminating leases
for 164 of our stores in Canada and all 42 of our stores in the United States. On August 21, 2020, we re-opened 18 stores across Canada. We cannot predict
when any of our contractors, third-party transportation providers, vendors and other business partners will be 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 Company
has at times required substantially all of its employees to work remotely.
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The Company continues to monitor the situation and take appropriate actions in accordance with recommendations and requirements of relevant
authorities. The impacts to date; however, have been significant, including but not limited to the acceleration of our decision to shift away from a
significant retail footprint. The ultimate 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 on the shipment of goods.
The COVID-19 pandemic continues to rapidly evolve. The ultimate impact of the COVID-19 pandemic on our results, financial position and
liquidity will depend on future developments, which are highly uncertain and cannot be predicted, such as the transmission rate of the disease, including the
impact from new variants, the extent and effectiveness of containment actions and vaccination rollout, particularly as areas are reopened, and the impact of
these and other factors on our stores, employees, distributors, vendors and customers. If we are not able to respond to and manage the impact of such events
effectively, our business, operating results, financial condition and cash flows could be adversely affected.
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 2020 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 face risks from the shifting dynamics in international trade.
The lack of clarity about the effects of Brexit and future laws and regulations pertaining to international trade creates uncertainty for us, which
may affect our business and operations.
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 United Kingdom formally left the European Union on January 31, 2020. This began a transition period that ran
until December 31, 2020. On December 24, 2020, the European Commission reached a trade agreement with the United Kingdom on the terms of its future
cooperation with the European Union (the “Trade Agreement”). The Trade Agreement offers United Kingdom and European Union companies preferential
access to each other’s markets, ensuring imported goods that satisfy applicable point of origin rules (that is, that United Kingdom or European Union goods
are wholly produced or significantly worked in the United Kingdom or European Union, as applicable) will be free of tariffs and quotas; however,
economic relations between the United Kingdom and the European Union will now be on more restrictive terms than existed previously.
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Further, uncertainty related to future protectionist trade policies may have a material adverse effect on global economic conditions, and may
significantly reduce global trade. Increasing trade protectionism may cause an increase in (i) the cost of goods exported from regions globally, (ii) the
length of time required to transport goods and (iii) the risks associated with exporting goods. Such increases may significantly affect the quantity of goods
to be shipped, shipping time schedules, shipping costs and other associated costs, which could have a material adverse effect on our business, results of
operations and financial condition.
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.
Risks Related to Regulatory, Privacy and Compliance Matters
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, other customer
interactions in our business, and our employees and service providers. Our business and current and future marketing programs depend on our ability to
collect, maintain, use and otherwise process this data, and our ability to do so is subject to evolving international and U.S. and Canadian federal, state
and/or provincial laws, regulations and enforcement trends with respect to the foregoing. We strive to comply with all applicable laws, regulations and
other legal obligations relating to privacy, data protection, information security 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 laws, regulations and legal obligations, or may conflict with our practices. If so, we may suffer damage to our reputation
and be subject to public scrutiny, proceedings or actions against us by governmental entities or others, which 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, and we could be
required to change our practices.
Because the interpretation and application of many laws and regulations relating to privacy, data protection, information security, and consumer
protection, along with industry standards, are uncertain, it is possible that relevant laws, regulations, or standards may be interpreted and applied in
manners that are, or are alleged to be, inconsistent with our practices. In addition, as privacy, data protection, information security and consumer protection
laws and regulations change, we may incur additional costs to ensure we remain in compliance. For example, we have online sales to Californians, which
subject us to the California Consumer Privacy Act (“CCPA”), the standards and restrictions of which are in certain cases more stringent than other U.S.
privacy laws. Additionally, the California Privacy Rights Act (“CPRA”) was approved by California voters in the November 2020 election. The CPRA
significantly modifies the CCPA, creating obligations relating to consumer data beginning on January 1, 2022, with enforcement beginning July 1, 2023.
More generally, some observers have noted the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the United States, as
observed with the recent Virginia Consumer Data Protection Act, enacted March 2021. These new state laws could increase our potential liability and
adversely affect our business.
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Complying with the CCPA, CPRA and other privacy, data protection, information security and consumer protection laws and regulations may
cause us to incur substantial operational costs or require us to modify our practices. If applicable privacy, data protection, information security and
consumer protection laws and regulations evolve or become more restrictive, 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. Any failure, or
perceived failure, by us to comply with international, federal, state and/or provincial laws and regulations relating to privacy, data protection, information
security and consumer protection, or self-regulatory standards that apply to us or that third parties assert are applicable to us, our policies or notices we post
or make available, or other actual or asserted obligations relating to privacy, data protection, information security and data protection could subject us to
claims, investigations, sanctions, enforcement actions and other proceedings, disgorgement of profits, fines, damages, civil and criminal liability, penalties
or injunctions.
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.
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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.
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.
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.
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, 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.
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Litigation may adversely affect our business, financial condition, results of operations or liquidity.
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Our business is subject to the risk of litigation by employees, consumers, vendors, competitors, intellectual property rights holders, shareholders,
government agencies and others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of
litigation, particularly class action lawsuits, regulatory actions and intellectual property claims, is inherently difficult to assess or quantify. Plaintiffs in
these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to these lawsuits may
remain unknown for substantial periods of time. In addition, certain of these lawsuits, if decided adversely to us or settled by us, may result in liability
material to our financial statements as a whole or may negatively affect our operating results if changes to our business operation are required. Regardless
of the outcome or merit, the cost to defend future litigation may be significant and result in the diversion of management and other company resources.
There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the
allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition, results of
operations or liquidity.
Our failure to comply with existing or new regulations, both in the United States and Canada, or an adverse action regarding product claims
or advertising could have a material adverse effect on our results of operations and financial condition.
Our business operations, including labeling, advertising, sourcing, distribution and sale of our products, are subject to regulation by various
federal, state and local government entities and agencies, particularly the FDA, the 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.
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From time to time, third parties have sold our products using our name without our consent, and, we believe, have infringed or misappropriated
our intellectual property rights. We respond to these actions on a case‑by‑case basis and where appropriate may commence litigation to protect our
intellectual property rights. However, we may not be able to detect unauthorized use of our intellectual property or to take appropriate steps to enforce,
defend and assert our intellectual property in all instances.
Effective trade secret, patent, copyright, trademark and domain name protection is expensive to obtain, develop and maintain, Our failure to
register or protect our trademarks could prevent us in the future from using our trademarks or challenging third parties who use names and logos similar to
our trademarks, which may in turn cause customer confusion, impede our marketing efforts, negatively affect customers’ perception of our brand, stores
and products, and adversely affect our sales and profitability. Moreover, intellectual property proceedings and infringement claims brought by or against us
could result in substantial costs and a significant distraction for management and have a negative impact on our business. We cannot assure you that we are
not infringing or violating, and have not infringed or violated, any third‑party intellectual property rights, or that we will not be accused of doing so in the
future.
In addition, although we have also taken steps to protect our intellectual property rights internationally, the laws of certain foreign countries may
not protect intellectual property to the same extent as do the laws of the United States and Canada and mechanisms for enforcement of intellectual property
rights may be inadequate in those countries. Other entities may have rights to trademarks that contain portions of our marks or may have registered similar
or competing marks in foreign countries. There may also be other prior registrations in other foreign countries of which we are not aware. We may need to
expend additional resources to defend our trademarks in these countries, and the inability to defend such trademarks could impair our brand or adversely
affect the growth of our business internationally.
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.
Risks Related to Accounting and Tax Matters
We previously identified material weaknesses in our disclosure controls and procedures and internal control over financial reporting. These
weaknesses were remediated in the Fiscal 2020, however, it is possible that in future periods material weakness could be identified. If we are unable to
implement and maintain effective disclosure controls and procedures and 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. Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) requires that we evaluate and determine the effectiveness of our internal control
over financial reporting and furnish a report by management on the effectiveness of our internal control over financial reporting; however, as “non-
accelerated filer,” our independent accountants are not required to provide a separate attestation regarding the effectiveness of our internal controls. We
evaluate our existing internal controls over financial reporting based on the 2013 framework established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment includes the evaluation of elements such as the
design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment.
During the course of our ongoing evaluation of our disclosure controls and procedures and internal controls, we may identify areas requiring improvement,
and may have to design enhanced processes and controls to address issues identified through this review. Due to the identification of material weaknesses
in Fiscal 2019, our management concluded that our disclosure controls and procedures and internal controls over financial reporting were not effective as
of February 1, 2020. During Fiscal 2020, we were able to remediate the material weaknesses and for Fiscal 2020, and based on its evaluation of our
disclosure controls and procedures and internal controls over financial reporting, our management has concluded that our disclosure controls and
procedures and internal controls over financial reporting were effective as of January 30, 2021. If we identify additional material weaknesses in our internal
controls over financial reporting, if our management is unable to conclude that our disclosure controls and procedures and internal controls over financial
reporting are effective, or once we are no longer an “non-accelerated filer” if our independent accountants are unable to attest to the effectiveness of our
internal controls over financial reporting, 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.
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27
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 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.
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.
Although due to our entry into CCAA, the CRA will not be able to impose cash penalties, they will still have the authority to require us to decrease our
available net operating loss carryforwards. A recent 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.
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28
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.
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 stockholders’ equity of $10,000,000, and a minimum bid price for our common stock of $1.00 per
share, or risk possibly delisting, which could have a material adverse effect on our business.
On August 6, 2020, the Company received a notification letter (the “Stockholders’ Equity Notice”) from the Listing Qualifications Staff (the
“Staff”) of Nasdaq indicating that the Company’s stockholders’ equity of $(17,604,000), as reported in its Quarterly Report on Form 10-Q for the period
ended May 2, 2020 did not satisfy the Nasdaq Global Market continued listing requirement set forth in Nasdaq Listing Rule 5450(b)(1)(A), which requires
companies listed on the Nasdaq Global Market to maintain a minimum of US $10,000,000 in stockholders’ equity. The Stockholders’ Equity Notice had no
immediate effect on the listing of the Company’s common stock. The Company had until September 21, 2020 to submit to Nasdaq a plan to regain
compliance with Nasdaq Listing Rule 5450(b)(1)(A), which it did as noted below.
On August 10, 2020, the Company received a notification letter (the “Bid Price Notice”) from Nasdaq saying that the Company was not in
compliance with the minimum bid price requirement under Nasdaq Listing Rule 5450(a)(1). The Bid Price Notice had no immediate effect on the listing of
the Company’s common stock on Nasdaq and the Company had until February 8, 2021 to regain compliance, which it did as noted below
On October 15, 2020, the Company received a letter from Nasdaq saying that it had regained compliance with Listing Rule 5450(a)(1) as the
closing bid price of the Company’s common stock had been greater than $1.00 for 10 consecutive business days, from September 30, 2020 to October 14,
2020.
Separately, from the previous noted letter received on August 6, 2020, Nasdaq had notified the Company that it did not comply with Listing Rule
5450(b)(1)(A); however, on October 15, 2020, Nasdaq determined that the Company met the alternative continued listing requirements under Rule
5450(b), wherein the Company met the minimum $50 million in total assets and $50 million in total revenue alternative requirement under Listing Rule
5450(b)(3). As a result, the Company had met the requirements for continued listing, and that both the Bid Price Notice and Stockholders’ Equity Notice
were closed.
The Company is now in compliance with Nasdaq’s continued listing requirements; however, in the event other listing rules are breached, a
delisting could make it 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.
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29
Nasdaq has the discretionary authority to suspend or terminate our listing as a result of the Restructuring Plan
Under Nasdaq Rule 5110(b), Nasdaq may use its discretionary authority to suspend or terminate the listing of our common stock in that we have
filed for protection under the CCAA, which is comparable to United States federal bankruptcy laws, even though our securities may otherwise meet all
enumerated criteria for continued listing on Nasdaq. In the event that Nasdaq’s Listing Qualifications Department determines that the listing of our
common stock will be suspended or terminated, we will have the right to request a hearing before the Nasdaq Hearings Panel in order to review the matter,
by submitting a request in writing within seven calendar days of the date of the notification of suspension or termination of the listing. Under Nasdaq
Rules, any such hearing before the Nasdaq Hearings Panel will generally take place within 45 days of the written request. In connection with our
announcement of the Restructuring Plan, we held discussions on July 8 and July 9, 2020 with Nasdaq’s Listing Qualifications Department with respect
thereto. We subsequently received written requests from the Listing Qualifications Department for information with respect to the Restructuring Plan, to
assist Nasdaq in its ongoing review, and provided the requested information to Nasdaq. We have not received a notification of suspension or termination of
the listing of our common stock from Nasdaq. Any delisting of our common stock from Nasdaq would have the consequences set out in the paragraph
immediately above. In the event that Nasdaq determines to continue our listing during the Restructuring Plan, we must nevertheless satisfy all requirements
for initial listing on Nasdaq.
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 initial public offering to April 29, 2021.
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, volatility, price changes, volume changes, disruption and credit contraction, which could adversely affect global economic
conditions. 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.
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30
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;
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 January 30, 2021;
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;
instability in financial markets or other factors that may affect economic conditions, on a global level or in particular markets;
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 that may be used by the investment
community;
changes in financial estimates by us or by any securities analysts who might cover our shares;
issuance of new or changed securities analysts’ reports or recommendations;
loss of visibility as to investor expectations as a result of a lack of published reports from industry analysts;
actions and announcements by us or our competitors, including new product offerings, significant acquisitions, strategic partnerships or
divestitures;
sales, or anticipated sales, of large blocks of our shares, including sales by our directors, officers or significant shareholders;
additions or departures of key personnel;
significant developments relating to our relationships with business partners, vendors and distributors;
regulatory developments negatively affecting our industry;
changes in accounting standards, policies, guidance, interpretation or principles;
volatility in our share price, which may lead to higher share-based compensation expense under applicable accounting standards;
speculation about our business in the press or investment community;
investors’ perception of the retail industry in general and our Company in particular; and
other events beyond our control such as major catastrophic events, weather and war.
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
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31
These and other factors, many of which are beyond our control, may cause our operating results and the market price and demand for our shares to
fluctuate substantially. Fluctuations in our quarterly operating results could limit or prevent investors from readily selling their shares and may otherwise
negatively affect the market price and liquidity of our shares. In addition, in the past, securities class action litigation has often been instituted against
companies following periods of volatility in their stock price. If any of our shareholders brought a lawsuit against us, we could incur substantial costs
defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our
profitability and reputation.
Our articles 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 and
all or a substantial portion of our assets and those of such persons are located outside the United States. Consequently, it may be difficult for U.S. investors
to effect service of process within the United States upon us or our directors or officers or such auditors who are not residents of the United States, or to
realize in the United States upon judgments of courts of the United States predicated upon civil liabilities under the Securities Act. Investors should not
assume that Canadian courts: (1) would enforce judgments of U.S. courts obtained in actions against us or such persons predicated upon the civil liability
provisions of the U.S. federal securities laws or the securities or “blue sky” laws of any state within the United States or (2) would enforce, in original
actions, liabilities against us or such persons predicated upon the U.S. federal securities laws or any such state securities or blue sky laws.
We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.
As discussed above, we are a foreign private issuer, and therefore, we are not required to comply with all of the periodic disclosure and current
reporting requirements of the Exchange Act. The determination of foreign private issuer status is made annually on the last business day of an issuer’s most
recently completed second fiscal quarter, and, accordingly, the next determination will be made with respect to us on August 1, 2021. 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, 2021 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
2021, 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.
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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.
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Properties
Our principal executive and administrative offices are located at 5430 Ferrier Street, Mount‑Royal, Québec, Canada, H4P 1M2. We currently lease
one production and assembly facility 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
Production and Assembly Facility
Use
Approximate
Square Feet
Lease
Renewal Date
22,000
61,500
October 31, 2023
June 30, 2026
As of January 30, 2021, we operated 18 company-operated stores located in Canada consisting of approximately 15,000 gross square feet. All of
our stores are leased from third parties and generally require us to pay insurance, utilities, real estate taxes and repair and maintenance expenses.
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The following table summarizes the locations of our stores as of January 30, 2021:
33
Locations in Canada
Alberta
British Columbia
Manitoba
New Brunswick
Ontario
Qu bec
Total
ITEM 3. LEGAL PROCEEDINGS
Number
of Stores
3
1
1
1
5
7
18
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 in connection with our Restructuring Plan, 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. See “Item 1. Business — Our Company” and “Item 1A. Risk Factors – Risks
Associated with the Restructuring Plan” above for further information about our Restructuring Plan and the related legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
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34
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information
Our common shares have been listed on the NASDAQ Global Market under the symbol “DTEA” since June 2015. Prior to that date, there was no
public trading of our common shares. As of April 26, 2021, 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 April 26, 2021, as reported under the NASDAQ Global Market Exchange, was $3.31.
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 January 30, 2016 through January 30, 2021. 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 January 30, 2016. The performance shown on the graph below is not intended to forecast or be indicative of possible future performance
of our common shares.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
35
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 January 30, 2021 and February 1, 2020 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 2, 2019, February 3, 2018
and January 28, 2017 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.
(in thousands, except share information)
Consolidated statements of income (loss) data:
Sales
Cost of sales
Gross profit
Selling, general and administration expenses
Restructuring plan activities, net
Results from operating activities
Finance costs
Finance income
Loss before income taxes
Provision for (recovery of) income tax
Net loss
Weighted average number of shares outstanding - basic
Net loss per share:
Basic and fully diluted
Consolidated balance sheet data (at year end):
Cash
Total assets
Total liabilities
Total equity (deficiency)
January 30,
February 1,
For the year ended
February 2 February 3,
January 28,
2021
2020
2019
2018
2017
$
$
$
$
$
$
$
121,686 $
71,953
49,733
46,464
56,327
(53,058)
3,273
(399)
(55,932)
—
(55,932) $
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)
26,168,848
26,056,332
25,967,836
25,716,186
24,699,290
(2.14) $
(1.20) $
(1.29) $
(1.11) $
(0.15)
30,197 $
81,242 $
112,533 $
(31,291) $
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
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36
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Preface
In preparing this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), we have taken into
account all information available to us up to April 30, 2021, the date of this MD&A. The audited annual consolidated financial statements and this MD&A
were reviewed by the Company’s Audit Committee and were approved and authorized for issuance by our Board of Directors on April 30, 2021.
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 January
30, 2021 and February 1, 2020 and for the years ended January 30, 2021, February 1, 2020, and February 2, 2019 which are contained in this Annual
Report on Form 10-K.
Business Update
We participate in a large and growing global tea market which, combined with the relatively low percentage of tea sales in North America, makes
the market opportunity very attractive.
Looking back, we ended Fiscal 2019 with revenues of $196.5 million, a decline of 8% over the prior year. Accumulated net losses for the three-
year period ended February 1, 2020 amounted to $93.2 million. Our strategy entering Fiscal 2020 was to stabilize our business from these unfavorable
trend lines by playing to our core strengths and improving operational execution. Our online and emerging wholesale business represented opportunities to
strengthen our business, while continuing to innovate and expand our product portfolio. Over 78% of Fiscal 2019 revenues were generated from our 230
brick-and-mortar stores. These stores were the source of significant losses which were anchored by commercial leases that are difficult to modify.
Notwithstanding attempts to right-size our store network, we were not making enough of an impact to stem the losses from our negotiation efforts alone.
In March 2020, the outbreak of a novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization and
on March 17, 2020, in response to the COVID-19 pandemic, the Company announced the temporary closure of all of its retail stores in Canada and the
United States.
Although we continued to offer our products directly to consumers through our online store and in supermarkets and drugstores across Canada, it
was unlikely that consumers would continue to purchase our products at previous volumes through these alternative channels. Furthermore, the duration
and impact of the COVID-19 pandemic is unknown and the influence on consumer shopping behavior and consumer demand, including online shopping,
continues to evolve.
Following a careful review of available options to stem the losses generated primarily from its brick-and-mortar footprint, our management and
Board of Directors determined that a formal restructuring process was the best option in the context of an increasingly challenging retail environment,
further exacerbated by the COVID-19 pandemic.
On July 8, 2020, we obtained the Initial Order pursuant to the CCAA from the Québec Superior Court and announced that we were implementing
the Restructuring Plan under the CCAA in order to accelerate our transition to predominantly an online retailer and wholesaler of high-quality teas and
accessories. Among other things, the Initial Order provided for the appointment of PwC as Monitor in the CCAA proceedings.
On July 9, 2020, the United States Bankruptcy Court for the District of Delaware entered an order in favor of the Company under Chapter 15 of
the United States Bankruptcy Code. The order of the United States Bankruptcy Court provisionally recognized the proceedings under the CCAA and
enforced the Initial Order, in effect providing protection to us from creditor action against its assets in the United States.
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37
As part of its Restructuring Plan and further to obtaining the Initial Order, on July 10, 2020 we sent notices to terminate leases for 82 of our stores
in Canada and all 42 of our stores in the United States. These lease terminations were effective on August 9, 2020.
On July 16, 2020, we obtained an Amended and Restated Initial Order from the Québec Superior Court, extending to September 17, 2020 the
application of the Initial Order. The Amended and Restated Initial Order also dealt with certain administrative matters, particularly with regards to the lease
terminations.
On July 30, 2020, we sent notices to terminate leases for an additional 82 of its stores in Canada. These lease terminations were effective on
August 29, 2020.
On August 21, 2020, we re-opened 18 stores across Canada.
On September 17, 2020, the Québec Superior Court extended the stay of all proceedings against us to December 15, 2020 and issued a Claims
Process Order establishing the claims procedures for our creditors under the CCAA. This Order, among other things, set November 6, 2020 (the “Claims
Bar Date”) as the time by which creditors had to submit their claims to PwC, the Court-appointed Monitor.
On December 15, 2020, the Québec Superior Court extended the stay of all proceedings against us to March 19, 2021. The Court also approved a
retention plan for certain key employees (“KERP”) and created a priority charge over the debtors’ assets for the KERP in addition to extending the Claims
Bar Date for certain Canadian employees until December 31, 2020.
On March 19, 2021, the Québec Superior Court extended the stay of all proceedings against us to June 4, 2021, and addressed certain
administrative matters.
We ended Fiscal 2020 with revenues of $121.7 million, a decline of $74.8 million and 38% from Fiscal 2019 and incurred a net loss of $55.9
million versus a loss of $31.2 million in the prior year. After excluding a series of adjustments which include $56.3 million of restructuring charges,
Adjusted EBITDA in Fiscal 2020 was $9.7 million versus $11.4 million in the prior year. Furthermore, sequential Adjusted EBITDA has trended favorably
since the second quarter of Fiscal 2020. For Fiscal 2020, e-commerce and wholesale sales represented 80% of total sales as opposed to 22% in prior year.
The Company’s current liabilities total $112.2 million as at January 30, 2021 and we held cash and accounts and other receivables of $36.4
million. The Company does not currently have any third-party credit facilities available with which to meet any future financial obligations. Furthermore,
funds required to satisfy creditors upon exit of CCAA are expected to be significant and will place increased operating pressure on the organization, in light
of its ongoing transformation efforts.
Management believes that there is material uncertainty surrounding our ability to execute the strategy necessary to return to profitability in the
current environment, including the unpredictability surrounding the recovery from the COVID-19 pandemic, changes in consumer behavior and the ability
to successfully navigate the uncertain future given its reduced working capital. As a result, these events and conditions indicate that a material uncertainty
exists that raises substantial doubt about our ability to continue as a going concern and, therefore, realize our assets and discharge our liabilities in the
normal course of business.
The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a 52-week year, but occasionally gives rise to an
additional week, resulting in a 53-week year. Fiscal years are designated in the Consolidated Financial Statements and Notes thereto, as well as the
remainder of this Annual Report on Form 10-K, by the calendar year in which the fiscal year commenced. All references herein to the Company’s fiscal
years are as follows:
Accounting Periods
Fiscal year
Fiscal 2016
Fiscal 2017
Fiscal 2018
Fiscal 2019
Fiscal 2020
Table of Contents
Year ended /
ending
January 28, 2017
February 3, 2018
February 2, 2019
February 1, 2020
January 30, 2021
Number of
weeks
52
53
52
52
52
38
Overview
DAVIDsTEA offers a specialty branded selection of high-quality proprietary loose-leaf teas, pre-packaged teas, tea sachets, tea-related accessories
and gifts through its e-commerce platform at www.davidstea.com and the Amazon Marketplace, its wholesale customers which include over 2500 grocery
stores and pharmacies, and 18 company-owned stores 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.
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 2020, sales declined by $74.8 million and 38% over the prior year to $121.7 million. Net loss increased by $24.7 million to $55.9
million for the year from a net loss of $31.2 million in Fiscal 2019. After excluding a series of adjustments which include $56.3 million of restructuring
charges, Adjusted EBITDA in Fiscal 2020 was $9.7 million versus $11.4 million in the prior year. Furthermore, sequential Adjusted EBITDA has trended
favorably since the second quarter of Fiscal 2020. For Fiscal 2020, e-commerce and wholesale sales represented 80% of total sales as opposed to 22% in
prior year.
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 are generated from our online store, retail stores, and from our wholesale distribution channel. 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 quarters because of lower customer engagement in both our online store and physical 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.
As we transition to generating sales primarily from our online store, measuring the change in period-over-period comparable same store sales,
although still a valid measure within our retail sales channel, loses its significance in the overall evaluation of how our business is performing. Other
measures such as sales performance in total and in our e-commerce and wholesale channels begin to influence how we direct resources and evaluate our
performance. Factors affecting our performance include:
☐ 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 online and in our other channels;
☐ the customer experience we provide online and in our other channels;
☐ the level of customer traffic to our website and our online presence more generally;
☐ the number of customer transactions and average ticket online;
☐ the pricing of our tea, tea accessories; and
☐ our ability to obtain, manufacture and distribute product efficiently.
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39
Gross Profit. Gross profit is equal to our sales less our cost of sales. Cost of sales includes product costs, freight costs, certain store occupancy
costs, assembly and distribution costs.
Restructuring plan activities, net. Restructuring plan activities, net consist of gains on modification of lease liabilities, estimates for allowed
landlord claims, loss on disposal of property and equipment and right-of-use assets, impairment of property and equipment and right-of-use assets,
severance costs, interest and penalties related to unpaid occupancy charges, professional fees, and store closure related costs.
Selling, General and Administration Expenses. Selling, general and administration expenses (“SG&A”) consist of store operating expenses and
other general and administration expenses. Store operating expenses consist of all store expenses excluding certain occupancy related costs (which are
included in costs of sales). General and administration costs consist of salaries and other payroll costs, travel, professional fees, stock compensation,
marketing expenses, information technology, depreciation of property and equipment, amortization of intangible assets, amortization of right-of-use assets,
any store or other asset impairment taken in the normal course of business 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 under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, of this
Form 10-K (the “MD&A”).
Results from Operating Activities. Results from operating activities consist of our gross profit less our selling, general and administration expenses
and Restructuring plan activities.
We present Adjusted results from operating activities 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. It is reconciled to its nearest IFRS measure in our MD&A.
Finance Costs. Finance costs consist of cash and imputed non-cash charges related to any credit facility, and interest expense from lease liabilities.
Finance Income. Finance income consists of interest income on cash balances.
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, non-cash compensation expense, loss on disposal of
property and equipment, impairment of property and equipment and right-of-use assets, and certain non-recurring expenses. This measure also functions as
a benchmark to evaluate our operating performance. It is reconciled to its nearest IFRS measure in our MD&A.
Results of Operations
Selected Operating and Financial Highlights
Our financial results for the fourth quarter and year include the impact of our Restructuring Plan which began on July 8, 2020 and July 9, 2020
when we obtained the Initial Order pursuant to the CCAA from the Québec Superior Court and when we received protection from creditor action against
our assets in the United States from the United States Bankruptcy Court for the District of Delaware, respectively. On July 10, 2020, we sent notices to
terminate leases for 82 of our stores in Canada and all 42 of our stores in the United States. These lease terminations were effective on August 9, 2020. On
July 30, 2020, we sent notices to terminate leases for an additional 82 of our stores in Canada. These lease terminations were effective on August 29, 2020.
Our retail footprint now includes 18 stores in Canada which we reopened on August 21, 2020.
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40
Sales during the fourth quarter of $40.2 million declined by $33.3 million or 45.3% over the prior year quarter due primarily to the reduction in
our retail store footprint. Adjusted EBITDA in the fourth quarter of Fiscal 2020 was $5.4 million compared to $10.0 million in the prior year quarter.
The following table summarizes key components of our results of operations for the period indicated:
For the three months ended
For the twelve months ended
January 30,
February 1,
January 30,
February 1,
2021
2020
2021
2020
$
$
$
$
$
73,538
34,457
39,081
45,050
—
(5,969)
1,446
(214)
(7,201)
(1,500)
(5,701)
40,189
24,544
15,645
10,581
32,310
(27,246)
13
(37)
(27,222)
—
(27,222)
196,462
87,886
108,576
135,306
—
(26,730)
6,751
(784)
(32,697)
(1,500)
(31,197)
121,686
71,953
49,733
46,464
56,327
(53,058)
3,273
(399)
(55,932)
—
(55,932)
Consolidated statement of income (loss) data:
Sales
Cost of sales
Gross profit
Selling, general and administration expenses
Restructuring plan activities, net
Results from operating activities
Finance costs
Finance income
Loss before income taxes
Recovery of income tax
Net loss
Percentage of sales:
Sales
Cost of sales
Gross profit
Selling, general and administration expenses
Restructuring plan activities, net
Results from operating activities
Finance costs
Finance income
Loss before income taxes
Recovery of income tax
Net loss
Other financial and operations data:
Adjusted EBITDA (1)
Adjusted EBITDA as a percentage of sales
Adjusted SG&A (1)
Adjusted results from operating activities (1)
Adjusted net income (loss) (1)
_________
(1) For a reconciliation of Adjusted EBITDA, Adjusted SG&A, Adjusted results from operating activities, and Adjusted net income (loss), to the most
100.0%
46.9%
53.1%
61.3%
0.0%
(8.1%)
2.0%
(0.3%)
(9.8%)
(2.0%)
(7.8%)
100.0%
44.7%
55.3%
68.9%
0.0%
(13.6%)
3.4%
(0.4%)
(16.6%)
(0.8%)
(15.9%)
100.0%
61.1%
38.9%
26.3%
80.4%
(67.8%)
100.0%
59.1%
40.9%
38.2%
46.3%
(43.6%)
$
5,384
13.4%
$
$
$
$
9,971
13.6%
$
$
$
0.0%
(0.1%)
(67.7%)
0.0%
(67.7%)
2.7%
(0.3%)
(46.0%)
0.0%
(46.0%)
$
7.9%
$
$
$
117,526
(8,850)
(14,917)
48,397
1,337
(1,538)
34,346
4,813
3,503
11,631
4,014
4,039
$
$
$
11,359
9,650
5.8%
$
$
$
$
directly comparable measure calculated in accordance with IFRS, see “Non-IFRS financial measures” below.
Non-IFRS financial measures
The Company uses certain non-IFRS financial measures for purposes of comparison to prior periods, to prepare annual operating budgets, and for
the development of future projections. These measures are not recognized measures under IFRS, do not have a standardized meaning prescribed by IFRS
and therefore may not be comparable to similarly titled measures presented by other companies. Rather, these measures are provided as additional
information to complement those IFRS measures by providing further understanding of our results of operations from management’s perspective.
Accordingly, they should not be considered in isolation nor as a substitute for analysis of our financial information reported under IFRS.
Table of Contents
41
We use non-IFRS financial measures to provide supplemental measures of our operating performance and thus highlight trends in our business that
may not otherwise be apparent when relying solely on IFRS financial measures.
These non-IFRS financial measures include; Adjusted selling general and administrative expenses, Adjusted results from operating activities,
Adjusted net income (loss), Adjusted EBITDA and Adjusted fully diluted net income (loss) per common share.
We believe that although these non-IFRS financial measures provide investors with useful information with respect to our historical operations and
are frequently used by securities analysts, lenders and others in their evaluation of companies, they have limitations as an analytical tool. Some of these
limitations are:
☐ Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net income (loss) and Adjusted
EBITDA 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 net income (loss) and Adjusted
EBITDA do not reflect the cash requirements necessary to fund capital expenditures; 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, these non-IFRS financial measures 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 provide reconciliations of our non-IFRS financial measures to the most directly comparable measure calculated in
accordance with IFRS:
Reconciliation of Selling, general and administration expenses to Adjusted selling, general and administration expenses
For the three months ended For the twelve months ended
January 30,
February 1,
January 30,
February 1,
2021
2020
2021
2020
Selling, general and administration expenses
Impairment of property and equipment and right-of-use assets (a)
Government emergency wage subsidy (b)
Adjusted selling, general and administration expenses
___________
(a) Represents costs related to impairment of property, equipment and right-of-use assets for stores and intangible assets.
(b) Represents the wages subsidy received from the Canadian government under the COVID-19 Economic Response Plan.
45,050 $
(10,704)
—
34,346 $
10,581 $
—
1,050
11,631 $
$
$
46,464 $
(2,561)
4,494
48,397 $
135,306
(17,780)
—
117,526
Reconciliation of Results from operating activities to Adjusted results from operating activities
For the three months ended For the twelve months ended
January 30,
January 30,
February 1,
February 1,
2021
2020
2021
2020
$
Results from operating activities
Impairment of property and equipment and right-of-use assets (a)
Loss on disposal of property and equipment and right-of-use assets
Restructuring plan activities, net (b)
Government emergency wage subsidy (c)
Adjusted results from operating activities
________
(a) Represents costs related to impairment of property, equipment and right-of-use assets for stores and intangible assets.
(b) Represents the costs related to the Restructuring plan activities, net
(c) Represents the wages subsidy received from the Canadian government under the COVID-19 Economic Response Plan.
(27,246) $
—
—
32,310
(1,050)
4,014 $
(5,969) $
10,704
78
—
—
4,813 $
$
(53,058) $
2,561
—
56,327
(4,494)
1,337 $
(26,730)
17,780
100
—
—
(8,850)
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Reconciliation of Net income (loss) to Adjusted EBITDA
42
For the three months ended For the twelve months ended
January 30,
January 30,
February 1,
February 1,
2021
2020
2021
2020
$
(27,222) $
13
(37)
1,327
—
(25,919) $
Net loss
Finance costs
Finance income
Depreciation and amortization
Recovery of income tax
EBITDA
Additional adjustments :
Stock-based compensation expense (a)
Impairment of property and equipment and right-of-use assets (b)
Loss on disposal of property and equipment
Restructuring plan activities, net (c)
Government emergency wage subsidy (d)
Adjusted EBITDA
________
(a) Represents non-cash stock-based compensation expense.
(b) Represents costs related to impairment of property and equipment and right-of-use assets and intangibles assets for stores.
(c) Represents the costs related to the Restructuring plan activities, net
(d) Represents the wages subsidy received from the Canadian government under the COVID-19 Economic Response Plan.
42
—
—
32,310
(1,050)
5,384 $
286
10,704
78
—
—
9,971 $
(5,701) $
1,446
(214)
4,872
(1,500)
(1,097) $
$
$
(55,932) $
3,273
(399)
7,493
—
(45,564) $
820
2,561
—
56,327
(4,494)
9,650 $
(31,197)
6,751
(784)
19,396
(1,500)
(7,334)
813
17,780
100
—
—
11,359
Reconciliation of Net income (loss) to Adjusted net income (loss)
Net loss
Impairment of property and equipment and right-of-use assets (a)
2021
2020
2021
2020
$
(27,222) $
—
(5,701) $
10,704
(55,932) $
2,561
(31,197)
17,780
For the three months ended For the twelve months ended
January 30,
January 30,
February 1,
February 1,
Restructuring plan activities, net (b)
Government emergency wage subsidy (c)
Recovery for income tax (d)
Adjusted Net income (loss)
_______
(a) Represents costs related to impairment of property and equipment and right-of-use assets and intangibles assets for stores.
(b) Represents the costs related to the Restructuring plan activities, net
(c) Represents the wages subsidy received from the Canadian government under the COVID-19 Economic Response Plan.
(d) Represents revised provision for uncertain tax position as a result of a settlement reached with the taxation authorities.
32,310
(1,050)
—
4,038 $
—
—
(1,500)
3,503 $
$
56,327
(4,494)
—
(1,538) $
—
—
(1,500)
(14,917)
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43
Reconciliation of fully diluted net loss per common share to Adjusted fully diluted net income (loss) per common share
For the three months ended For the twelve months ended
January 30,
January 30,
February 1,
February 1,
2021
2020
2021
2020
Weighted average number of shares outstanding, fully diluted
26,228,206
26,080,529
26,168,848
26,056,332
Adjusted weighted average number of shares outstanding, fully diluted
27,140,065
26,769,190
26,168,848
26,056,332
Net loss
Adjusted net income (loss)
Net loss per share, fully diluted
Adjusted Net income (loss) per share, fully diluted
$
$
$
$
(27,222) $
(5,701) $
(55,932) $
(31,197)
4,039 $
3,503 $
(1,538) $
(14,917)
(1.00) $
(0.21) $
(2.14) $
0.15 $
0.13 $
(0.06) $
(1.20)
(0.57)
Operating Results for the Fourth Quarter of Fiscal 2020 Compared to the Operating Results for the Fourth Quarter of Fiscal 2019
Sales. Sales decreased 45.3% to $40.2 million from $73.5 million in the fourth quarter of Fiscal 2019. On March 17, 2020, in response to the
COVID-19 pandemic, the Company temporarily closed all its retail stores in Canada and the United States, and subsequently, as part of its formal
Restructuring Plan, exited all of its brick and mortar stores except for 18 Canadian stores which were reopened on August 21, 2020. Accordingly, brick and
mortar sales for the quarter declined when compared to the prior year quarter by $50.5 million or 90.7% to $5.2 million. Sales from e-commerce and
wholesale channels increased by $17.1 million or 95.9% to $35.0 million, from $17.9 million in the prior year quarter. E-commerce and wholesale sales
represented 87.1% of sales compared to 24.3% of sales in the prior year quarter.
Gross Profit. Gross profit of $15.6 million for the three months ended January 30, 2021 decreased by $23.4 million or 60.0% from the prior year
quarter due primarily to a decline in sales during the period. As the Company pivots to a digital-first strategy, the cost of delivery and distribution that is
included in arriving at gross profit will compare unfavorably to prior periods that were predominantly focused on retail sales distribution. The significant
increase in e-commerce sales resulted in an increase of $1.7 million in delivery and distribution costs, thereby negatively impacting gross profit percentage.
As a result, gross profit as a percentage of sales declined to 38.9% for the three-month period ended January 30, 2021 from 53.1% in the prior year quarter.
We expect that the increased cost to deliver online purchases will be less than the selling expenses incurred in a brick and mortar environment that have
been historically included as part of Selling, general and administration expenses.
Selling, General and Administration Expenses (“SG&A”). Selling, general and administration expenses decreased by $34.5 million or 76.5% to
$10.6 million in the three months ended January 30, 2021 from the prior year quarter. Excluding the impact of the $1.1 million wage subsidy received
under the Canadian government COVID-19 Economic Response Plan in Fiscal 2020, and the impact in Fiscal 2019 of the impairment of property and
equipment and right-of use assets amounting to $10.7 million, Adjusted SG&A decreased by $22.7 million to $11.6 million. In connection with our
Restructuring Plan, we terminated the leases for all of our stores in North America except for 18 Canadian stores which reopened on August 21, 2020. As a
result, wages, salaries and employee benefits were reduced by $13.9 million, and we realized a reduction of $3.5 million in amortization expenses due to a
lower right-of-use asset value at the beginning of the period. Adjusted SG&A as a percentage of sales in the quarter decreased to 28.9% from 46.7% in the
prior year quarter.
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44
Results from Operating Activities. Loss from operating activities was $27.2 million as compared to a loss of $6.0 million in the prior year quarter.
Excluding the impact of the Restructuring Plan announced on July 8, 2020, the wage subsidy received from the Canadian government under the COVID-19
Economic Response Plan, the impact of the impairment of property and equipment and right-of-use assets and the loss on disposal of property and
equipment, Adjusted operating income amounted to $4.0 million in the three-month period ended January 30, 2021 compared to $4.8 million in the prior
year quarter. This resulting decrease of $0.8 million is explained by a reduction of the gross profit of $23.4 million, partially offset by a reduction in wages,
salaries and employee benefits from stores and head office, amounting to $13.9 million, a reduction of $3.5 million in amortization expense due to a lower
right-of-use asset value at the beginning of the period, and a reduction of other brick and mortar selling expenses of $3.9 million.
Finance Costs. Finance costs amounted to almost nil in the three months ended January 30, 2021, a decrease of $1.4 million from the prior year
quarter. The interest expense relates to the accounting for lease liabilities with variable lease arrangements and has decreased from the prior year quarter.
Finance Income. Finance income of almost nil is derived mainly from interest on cash on hand and has decreased slightly $0.2 million from the
prior year quarter.
EBITDA and Adjusted EBITDA. EBITDA, which excludes non-cash and other items in the current and prior periods, was negative $25.9 million in
the quarter ended January 30, 2021 compared to a negative $1.1 million in the prior year quarter representing a decrease of $24.8 million over Fiscal 2019.
Adjusted EBITDA for the quarter ended January 30, 2021, which excludes the impact of stock-based compensation expense, the impairment of property
and equipment and right-of-use assets, the Restructuring plan activities, net, the wage subsidy received from the Canadian Government under the COVID-
19 Economic Response Plan, and the loss on disposal of property and equipment amounted to $5.4 million compared to $10.0 million for the same period
in the prior year. The decrease in Adjusted EBITDA, of $4.6 million, is an outcome of the decline in gross profit partially offset by the reduction in
adjusted SG&A.
Recovery of Income Tax. Recovery of income tax amounted to nil compared to $1.5 million in the prior year quarter. The prior year recovery is due
to an adjustment of the provision for uncertain tax provision.
Net Loss. Net loss was $27.2 million in the quarter ended January 30, 2021 compared to a Net loss of $5.7 million in the prior year quarter.
Adjusted net income, which excludes the Restructuring plan activities, the subsidy received from the Canadian Government under the COVID-19
Economic Response Plan, the impairment of property and equipment and right-of-use assets, and the recovery for uncertain tax positions amounted to $4.0
million compared to $3.5 million in the prior year quarter. This $0.5 million improvement is driven by the same reasons mentioned above in “Results from
operating activities”.
Fully Diluted Net Loss per Share. Fully diluted net loss per common share was $1.00 compared to a net loss of $0.21 in the fourth quarter of
Fiscal 2019. Adjusted fully diluted net income per common share, which is Adjusted net income on a fully-diluted weighted average shares outstanding
basis, was $0.15 per share compared to $0.13 per share in the same quarter of prior year.
Cash on Hand. At the end of the fourth quarter of Fiscal 2020, the Company had cash amounting to $30.2 million. Our cash position enables us to
execute our strategy and invest further in funding working capital, transformative technology improvements and related infrastructure. Upon creditor
acceptance of a Plan of Arrangement and ratification by the Court, we will have to fund the payment of this settlement amount from cash on hand as the
Company does not have any credit facilities.
Fiscal Year Ended January 30, 2021 Compared to Fiscal Year Ended February 1, 2020
Sales. Sales for Fiscal 2020 decreased by 38.1%, or by $74.8 million, to $121.7 million from $196.5 million in Fiscal 2019. On March 17, 2020, in
response to the COVID-19 pandemic, the Company announced the temporary closures of all its retail stores in Canada and the United States, and
subsequently, as part of its Restructuring Plan, exited all of its brick and mortar stores except for 18 Canadian stores which were reopened on August 21,
2020. Accordingly, brick and mortar sales declined by $129.7 million or 84.1% when compared to the prior year. Sales from our e-commerce and
wholesale channels increased $54.9 million or 129.8% to $97.2 million, from $42.3 million in prior year as we shifted to a digital first strategy to address
consumers changing shopping habits. For Fiscal 2020, e-commerce and wholesale sales represented 79.9% of total sales as opposed to 21.5% in prior year.
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45
Gross Profit. Gross profit decreased by 54.2% and $58.8 million, to $49.7 million in Fiscal 2020 in comparison to Fiscal 2019 due primarily to a
decline in sales during the year. Gross profit as a percentage of sales declined to 40.9% for the year ended January 30, 2021 from 55.3% in the prior year.
As the Company pivots to a digital first strategy, the cost of delivery and distribution that is included in arriving at gross profit will compare unfavorably to
prior periods that were predominantly focused on retail sales distribution. The significant increase in e-commerce sales during the year ended January 30,
2021 resulted in an increase of $11.0 million in delivery and distribution costs. We expect that the increased cost to deliver online purchases will be less
than the selling expenses incurred in a brick and mortar environment that have been historically included as part of Selling, general and administration
expenses.
Selling, General and Administration Expenses. SG&A decreased by $88.8 million or 65.7%, to $46.5 million in Fiscal 2020. Excluding the impact
of the impairment of property and equipment and right-of-use assets, and the wage subsidy received from the Canadian Government under the COVID-19
Economic Response Plan in the year ended January 30, 2021 which amounted to $1.9 million, Adjusted SG&A decreased by $69.1 million for the year
ended January 30, 2021. This is mostly explained by the closure of our stores effective March 17, 2020 and the reopening of 18 stores on August 21, 2020.
As a result, wages, salaries and employee benefits were reduced by $45.1 million and we realized a reduction of $11.9 million in amortization expense due
to a lower right-of-use asset value at the beginning of Fiscal 2020. As a percentage of sales, Adjusted SG&A decreased to 39.8% from 59.8% due to lower
selling expenses resulting from the now permanent closure of our 206 stores effective March 17, 2020 and the reopening of 18 stores on August 21, 2020.
Results from Operating Activities. Loss from operating activities in Fiscal 2020 was $53.1 million as compared to a loss of $26.7 million in Fiscal
2019. Excluding the impact of the Restructuring plan activities, the impairment of property and equipment and right-of-use assets, the wage subsidy
received from the Canadian Government under the COVID-19 Economic Response Plan, and the loss on disposal of property and equipment, Adjusted
operating income of $1.3 million compared to a loss of $8.9 million in Fiscal 2019. Excluding the impact of the Restructuring plan activities, the
impairment of property and equipment and right-of-use assets, the wage subsidy received from the Canadian Government under the COVID-19 Economic
Response Plan, and the loss on disposal of property and equipment, Adjusted operating income of $1.3 million compared to a loss of $8.9 million in Fiscal
2019. This resulting improvement of $10.2 million is explained by reduction in wages, salaries and employee benefits, from stores and head office,
amounting to $45.1 million and an $11.9 million reduction in amortization expense due to a lower right-of-use asset value at the beginning of Fiscal 2020,
and a reduction of other selling expenses of $9.1 million, partially offset by the reduction of gross profit of $58.8 million.
Finance Costs. Finance costs amounted to $3.3 million in the year ended January 30, 2021, a decrease of $3.5 million from the prior year. The
interest expense relates to lease liabilities and has decreased from the prior year due to the store closures and variable rent on remaining stores.
Finance Income. Finance income of $0.4 million is derived mainly from interest on cash on hand and has decreased slightly from $0.8 million in
the prior year.
EBITDA and Adjusted EBITDA. EBITDA was negative $45.6 million in the year ended January 30, 2021 compared to negative $7.3 million in
Fiscal 2019, representing a decrease of $38.2 million over Fiscal 2019. Adjusted EBITDA for the year ended January 30, 2021, which excludes the impact
of stock-based compensation expense, the impairment of property and equipment and right-of-use assets, the Restructuring plan activities, the wage
subsidy received from the Canadian Government under the COVID-19 Economic Response Plan, and the loss on disposal of property and equipment
amounted to $9.7 million compared to $11.4 million in the same period in the prior year. The decrease in Adjusted EBITDA, of $1.7 million, is an outcome
of the decline in gross profit partially offset by the reduction in SG&A.
Recovery of Income Tax. Recovery of income tax amounted to nil compared to $1.5 million in Fiscal 2019. The prior year recovery is due to the
adjustment of the provision for uncertain tax provision. Our effective tax rates were nil and 4.6% in Fiscal 2020 and 2019, respectively. The effective tax
rate decreased primarily from the increase of the unrecognized deferred income tax assets and an adjustment to the provision for uncertain tax position in
the current year.
Net Loss. Net loss was $55.9 million in the year ended January 30, 2021 compared to a net loss of $31.2 million in the prior year. Adjusted net
loss, which excludes the impact from the impairment of property and equipment and right-of-use assets, the Restructuring plan activities, the subsidy
received from the Canadian Government under the COVID-19 Economic Response Plan, loss on disposal of property and equipment, and the recovery for
uncertain tax position was a loss of $1.5 million compared to a loss of $14.9 million in the prior year. This $13.4 million improvement is driven by the
same reasons mentioned above in Results from operating activities partially offset by lower recovery for uncertain tax position compared to the prior year.
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46
Net Loss per Share. Fully diluted net loss per common share was $2.14 in Fiscal 2020 compared to $1.20 in Fiscal 2019. Adjusted fully diluted
loss per common share, which is adjusted net loss on a fully-diluted weighted average shares outstanding basis, was $0.06 per share in Fiscal 2020
compared to $0.57 per share in Fiscal 2019.
Summary of quarterly results
Due to seasonality and the timing of holidays, the results of operations for any quarter are not necessarily indicative of the results of operations for
the fiscal year. The table below presents selected consolidated financial data for the eight most recently completed quarters.
For year ended, January 30, 2021
For year ended, February 1, 2020
Fourth Third Second
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
Fourth Third Second
First
First
Sales
Net income (loss)
EBITDA
Adjusted EBITDA
40,189
(27,222)
26,225
14,467
23,031
2,609
32,242
(45,788)
73,538
(5,701)
39,493
(10,830)
39,167
(11,344)
44,265
(3,320)
(25,918)
5,384
15,295
3,834
5,426
1,365
(40,367)
(935)
(1,097)
9,971
(4,548)
(2,241)
(4,829)
361
3,142
3,269
Net income (loss) per share - fully diluted
(1.00)
0.54
0.10
(1.76)
(0.21)
(0.42)
(0.44)
(0.13)
Cash
Accounts receivable
Prepaid expenses and deposits
Inventories
Trade and other payables
Liquidity and Capital Resources
30,197
6,157
14,470
23,468
4,152
21,925
7,669
13,400
26,176
3,621
34,285
6,757
8,476
24,354
6,460
39,343
4,371
4,928
23,450
18,000
46,338
6,062
4,542
22,363
20,794
28,044
5,430
6,906
32,638
21,155
29,725
3,913
9,890
27,893
13,810
35,491
2,909
9,164
31,642
15,305
As at January 30, 2021, we had $30.2 million of cash primarily held by major Canadian financial institutions. Working capital, adjusted for
liabilities subject to compromise amounting to $100.6 million, was $62.7 million as at January 30, 2021, compared to $36.4 million as at February 1, 2020.
In light of implementing the Restructuring Plan, the Company expects to use cash on hand to pay for professional fees and for the settlement of obligations,
which is expected to be significant, upon acceptance, if any, of a plan of arrangement that will be presented to creditors.
Our primary source of liquidity is cash on hand as we have no access to any form of debt financing. Our primary cash needs are to finance
working capital and capital expenditures in connection with enhancing the functions and features of our online store. Capital expenditures typically vary
depending on the timing of infrastructure-related and technology investments. During Fiscal 2020, capital expenditures totaled $0.9 million. We devoted
approximately 53% of our capital expenditures to make continued investments in our technology infrastructure. The remainder of the capital expenditures
was used to enhance existing stores.
Our working capital requirements are for the purchase of inventory and payment of payroll and other 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 fund our capital expenditures and working capital requirements from a combination of cash on hand
and cash provided by operating activities.
As at January 30, 2021, 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. Purchase obligations, net of $6.8 million of
advances, amounting to $14.1 million (2019 - $11.5 million) are expected to be discharged within 12 months.
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47
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
Gain on modification of lease liabilities
Liabilities subject to compromise
Interest on lease liabilities
Loss on disposal of property and equipment and right-of-use assets
Loss on disposal of intangible assets
Impairment of property and equipment and right-of-use assets
Stock-based compensation expense
Sub-total
Net change in other non-cash working capital balances related to operations
Cash flows from (used in) operating activities
For the year ended
January 30,
2021
$
February 1,
2020
$
(11,269)
(6,003)
1,132
(16,140)
33,108
(23,192)
(5,652)
4,264
For the twelve months ended
January 30,
February 1,
2021
$
2020
$
(55,932)
(31,197)
2,399
2,053
3,041
(75,121)
100,550
3,230
769
790
39,960
820
22,559
(33,828)
(11,269)
5,411
1,934
12,051
—
—
6,962
100
17,780
813
13,854
19,254
33,108
Cash Flows Provided in Operating Activities. Net cash flows used in Operating activities during the year ended January 30, 2021 amounted to
$11.3 million and represented a change of $44.4 million from the prior year. The change is primarily due to the impact of our Restructuring Plan, wherein a
majority of our trade vendors have not extended credit terms and instead required deposits and pre-payments for both services and purchases of inventory
related goods.
Cash Flows Used in Investing Activities
INVESTING ACTIVITIES
Additions to property and equipment
Additions to intangible assets
Repayment (issuance) of loan from a Company controlled by an executive employee
Cash flows from (used in) investing activities
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48
For the twelve months ended
January 30,
February 1,
2021
$
2020
$
(433)
(480)
2,045
1,132
(1,032)
(2,594)
(2,026)
(5,652)
Cash Flows Used in Investing Activities. Cash flows provided by investing activities of $1.1 million during the year ended January 30, 2021
increased by $6.8 million compared to prior year. The increase is primarily due to the receipt of cash from repayment of the loan from a Company
controlled by an executive employee, partially offset by capital expenditures. Capital expenditures decreased by $2.7 million to $0.9 million for the year
ended January 30, 2021, from $3.6 million in the prior year. This decrease was primarily due to lower investment in both leasehold improvements as well
as software enhancements.
Cash Flows Provided by Financing Activities
FINANCING ACTIVITIES
Proceeds from issuance of common shares pursuant to exercise of stock options
Payment of lease liabilities
For the twelve months ended
January 30,
February 1,
2021
$
2020
$
4
(6,007)
14
(23,206)
Cash flows used in financing activities
(6,003)
(23,192)
Cash Flow Provided in Financing Activities. Net cash flows used in financing activities of $6.0 million during the year ended January 30, 2021
represents a reduction of $17.2 million compared to the prior year and due primarily to the non-payment of lease obligations from April 1, 2020 to July 8,
2020 and the termination of our store lease agreements.
Other than operating lease obligations, we have no off‑balance sheet obligations.
Off‑Balance Sheet Arrangements
Contractual Obligations and Commitments
In the normal course of business, we enter into contractual obligations that will require us to disburse cash over future periods. All commitments
have been recorded in our consolidated balance sheets, except for purchase obligations. As at January 30, 2021, 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. Purchase obligations, net of $6.8 million of advances, amounting to $14.1 million (2019 - $11.5 million) is expected to be discharged
within 12 months.
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:
i. Liabilities subject to compromise
As a result of the termination of leases pursuant to the Restructuring Plan, included in liabilities subject to compromise is a liability related to
disclaimed leases of $75.3 million, determined at the reporting date based on an analysis of the nature and carrying value of the underlying liabilities, proof
of claim, as well as well as the stage of advancement of the claims identification, resolution and barring process.
Liabilities subject to compromise may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect
to disputed claims, determination of secured status of certain claims, the determination as to the value of any collateral securing claims, proof of claims or
other events, and is therefore subject to significant estimation uncertainty, as proceedings are in a preliminary stage. Changes to the provision in future
periods may be material and will be recorded through earnings.
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ii. Recoverability and impairment of non‑financial assets
49
The temporary store closures as a result of COVID-19, as well as the permanent closure of a majority of our retail stores resulting from the
Restructuring Plan, and the related reduction in operating income during fiscal 2020 are considered to be indicators of impairment and the Company
performed an assessment of recoverability for the property and equipment and right-of-use assets associated with its retail locations.
Key judgments in applying accounting principles
i. 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 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 that it is difficult to adequately predict future cash flows given the inherent uncertainties concerning the formal
restructuring process and the impact of the COVID-19 pandemic, 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.
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iv. Determination of the lease term of leases with renewal options
50
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 one 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 June 30, 2020. 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.
In April 2021, the IASB extended the relief to cover rent concessions that reduce lease payments due on or before June 30, 2022.
JOBS Act Exemptions and Foreign Private Issuer Status
Exchange Act Exemptions and Foreign Private Issuer Status
We do not qualify as an “accelerated filer” or “large accelerated filer” as defined in the Exchange Act. Companies that are not an accelerated filer
or large accelerated filer 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 until such time as we qualify as an accelerated filer or large accelerated filer. We will
qualify (1) as an accelerated filer if we have an aggregate worldwide market value of the voting and non-voting common equity held by its non-affiliates of
US$75 million or more, but less than US$700 million, as of the last business day of our most recently completed second fiscal quarter, or (2) as a large
accelerated filer if we have an aggregate worldwide market value of the voting and non-voting common equity held by its non-affiliates of US$700 million
or more, as of the last business day of our most recently completed second fiscal quarter. We may choose to take advantage of some but not all of these
reduced burdens.
We report under the Exchange Act as a non‑U.S. company with foreign private issuer status. 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
51
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
As of January 30, 2021 and February 1, 2020:
Consolidated Balance Sheets
For the years ended January 30, 2021, February 1, 2020, and February 2, 2019:
Consolidated Statements of Loss and Comprehensive Loss
Consolidated Statements of Cash Flows
Consolidated Statements of Equity
Notes to Consolidated Financial Statements
52
Page
53
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 January 30, 2021 and February 1,
2020, the related consolidated statements of loss and comprehensive loss, cash flows and equity for each of the three years in the period ended January 30,
2021 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 January 30, 2021 and February 1, 2020 and the results of its operations and its cash
flows for each of the three years in the period ended January 30, 2021, 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 Notes 1 and 2 to the consolidated financial statements, on July 8, 2020, the Company announced that it was implementing a restructuring plan
under the Companies’ Creditors Arrangement Act, and 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 3 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.
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.
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Critical audit matter
53
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated
or required to be communicated to the audit committee and that: [1] relates to accounts or disclosures that are material to the financial statements and [2]
involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion
on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion
on the critical audit matter or on the accounts or disclosures to which it relates.
Restructuring Plan Activities – Measurement of liabilities subject to compromise
Description of the matter
As more fully described in Note 1 to the consolidated financial statements, on July 8, 2020, the Company announced that it
was implementing a restructuring plan under the Companies’ Creditors Arrangement Act (Canada) (“CCAA”), and obtained
an Initial Order pursuant to the CCAA from the Quebec Superior Court in order to implement the restructuring plan (the
“Initial Order”).
As of January 30, 2021, the Company has recorded liabilities subject to compromise of $100.6 million. Liabilities subject to
compromise represent the liabilities that will ultimately be subject to the plan of arrangement (“allowed claims”) and
compromise to the Company’s creditors, and include disclaimed leases, trade and other payables, and severance costs, as
further described in note 13. Trade and other payables and severance costs represent the Company’s legal obligations.
Disclaimed and modified leases are measured at the Company’s best estimate of the allowed claims. Liabilities subject to
compromise are measured at the reporting date based on an analysis of the nature and carrying value of the underlying
liabilities, proof of claim, as well as the stage of advancement of the claims identification, resolution and barring process.
Auditing the estimation of liabilities subject to compromise was especially challenging because of the complexity of
accounting for an entity under CCAA, and the magnitude of the liabilities subject to compromise as at January 30, 2021.
To test the Company’s measurement of liabilities subject to compromise, among other procedures, we read the court motions
and orders, Monitor’s reports, notices to creditors, and corroborated the Company’s interpretation of the CCAA regulation.
On a sample basis, we performed testing around July 8, 2020 to evaluate the appropriate classification of liabilities as pre-
filing and post-filing, and tested the accuracy and completeness of the data by inspecting claims submitted by creditors used
to determine allowable claims. In addition, we evaluated management’s assessment of the nature and measurement of the
underlying liabilities relative to the applicable accounting literature, and performed a search for new or contrary evidence
that would affect the estimate including consideration of events after the balance sheet date.
How we addressed the matter
in our audit
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2011.
Montréal, Canada
April 30, 2021
Table of Contents
54
DAVIDsTEA Inc.
Incorporated under the laws of Canada
CONSOLIDATED BALANCE SHEETS
[In thousands of Canadian dollars]
ASSETS
Current
Cash
Accounts and other receivables
Inventories
Income tax receivable
Prepaid expenses and deposits
Total current assets
Property and equipment
January 30,
As at
February 1,
2021
$
2020
$
[Note 6]
[Note 7]
[Note 8]
30,197
6,157
23,468
55
14,470
74,347
2,309
46,338
6,062
22,363
1,196
4,542
80,501
17,737
Intangible assets
Right-of-use assets
Total assets
LIABILITIES AND EQUITY
Current
Trade and other payables
Deferred revenue
Liabilities subject to compromise
Current portion of lease liabilities
Total current liabilities
Non-current portion of lease liabilities
Total liabilities
Commitments and contingencies
Equity
Share capital
Contributed surplus
Deficit
Accumulated other comprehensive income
Total equity (deficiency)
Total liabilities and equity
Table of Contents
See accompanying notes
55
DAVIDsTEA Inc.
Incorporated under the laws of Canada
[Note 9]
[Note 10]
[Note 11]
[Note 12]
[Note 13]
[Note 10]
[Note 10]
[Note 15]
3,929
657
81,242
6,339
35,082
139,659
4,152
7,080
100,550
396
112,178
355
112,533
113,167
1,747
(148,068)
1,863
(31,291)
81,242
20,794
6,852
—
16,434
44,080
72,230
116,310
112,843
1,577
(92,278)
1,207
23,349
139,659
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
Restructuring plan activities, net
Results from operating activities
Finance costs
Finance income
Loss before income taxes
Provision for (recovery of) income tax
Net loss
Other comprehensive income (loss):
Items to be reclassified subsequently to income:
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
Fully diluted
Weighted average number of shares outstanding
Basic
Fully diluted
January 30,
For the year ended
February 1,
February 2,
2021
2020
2019
[Note 22]
[Note 18]
[Note 19]
[Note 16]
[Note 17]
[Note 20]
[Note 20]
[Note 20]
[Note 20]
121,686
71,953
49,733
46,464
56,327
(53,058)
3,273
(399)
(55,932)
—
(55,932)
196,462
87,886
108,576
135,306
—
(26,730)
6,751
(784)
(32,697)
(1,500)
(31,197)
—
—
656
656
(55,276)
—
—
(290)
(290)
(31,487)
(2.14)
(2.14)
(1.20)
(1.20)
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)
(1.29)
(1.29)
26,168,848
26,168,848
26,056,332
26,056,332
25,967,836
25,967,836
Table of Contents
See accompanying notes
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
Gain on modification of lease liabilities
Liabilities subject to compromise
Interest on lease liabilities
Loss on disposal of property and equipment and right-of-use assets
Loss on disposal of intangible assets
Impairment of property and equipment and right-of-use assets
Stock-based compensation expense
Deferred rent
Recovery for onerous contracts
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
Proceeds 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
Repayment (issuance) of loan from a Company controlled by an executive employee
Cash flows from (used in) investing activities
Increase (decrease) in cash during the year
Cash, beginning of the year
Cash, end of the year
Supplemental Information
Cash paid for:
Interest
Income taxes (classified as operating activity)
Cash received for:
Interest
Income taxes (classified as operating activity)
January 30,
For the year ended
February 1,
February 2,
2021
$
2020
$
2019
$
(55,932)
(31,197)
(33,539)
2,399
2,053
3,041
(75,121)
100,550
3,230
769
790
39,960
820
—
—
—
—
—
22,559
(33,828)
(11,269)
4
(6,007)
(6,003)
(433)
(480)
2,045
1,132
(16,140)
46,338
30,197
—
—
368
870
5,411
1,934
12,051
—
—
6,962
100
—
17,780
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
211
25
6,282
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
Table of Contents
See accompanying notes.
57
DAVIDsTEA Inc.
Incorporated under the laws of Canada
CONSOLIDATED STATEMENTS OF EQUITY
[In thousands of Canadian dollars]
Balance, February 1, 2020
Net loss for the twelve months ended January 30, 2021
Other comprehensive income
Total comprehensive loss
Issuance of common shares
Share
Capital
$
112,843
—
—
—
5
Contributed
Surplus
$
Deficit
$
(92,278)
(55,932)
—
(55,932)
—
1,577
—
—
—
(1)
Accumulated
Other
Comprehensive
Income
$
Total
Equity
(Deficiency)
$
1,207
—
656
656
—
23,349
(55,932)
656
(55,276)
4
Common shares issued on vesting of restricted stock units
Stock-based compensation expense
Balance, January 30, 2021
Balance, February 2, 2019
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
319
—
113,167
112,519
—
—
—
21
303
—
112,843
(649)
820
1,747
1,400
—
—
—
(7)
(629)
813
1,577
142
—
(148,068)
(61,293)
(31,197)
—
(31,197)
—
212
—
(92,278)
—
—
1,863
1,497
—
(290)
(290)
—
—
—
1,207
(188)
820
(31,291)
54,123
(31,197)
(290)
(31,487)
14
(114)
813
23,349
Table of Contents
See accompanying notes
58
DAVIDsTEA Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended January 30, 2021, February 1, 2020 and February 2, 2019
[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 wholly-owned subsidiary, DAVIDsTEA (USA) Inc., (collectively, the
“Company”) for the year ended January 30, 2021 were authorized for issue in accordance with a resolution of the Board of Directors on April 30, 2021.
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 offers a specialty branded selection of high-quality proprietary loose-leaf teas, pre-packaged teas, tea sachets, tea-related
accessories and gifts through its e-commerce platform at www.davidstea.com and the Amazon Marketplace, its wholesale customers which include over
2500 grocery stores and pharmacies, and 18 company-owned stores 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. Sales fluctuate from quarter to quarter. Sales are traditionally highest 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 engagement during the summer
months.
In March 2020, the outbreak of a novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization and
on March 17, 2020, in response to the COVID-19 pandemic, the Company announced the temporary closure of all of its retail stores in Canada and the
United States. On August 21, 2020, the Company re-opened 18 stores across Canada.
The Company qualifies for the Canada Emergency Wage Subsidy (“CEWS”) under the COVID-19 Economic Response Plan of the Government of
Canada. During the year ended January 30, 2021, the Company recognized payroll subsidies of $4.5 million under this wage subsidy program as a
reduction in the associated wage costs which the Company incurred, which was recognized in Selling, general and administration expenses.
CCAA Proceedings
On July 8, 2020, the Company announced that it was implementing a restructuring plan (the “Restructuring Plan”) under the Companies’ Creditors
Arrangement Act (Canada) (the “CCAA”) in order to accelerate its transition to predominantly an online retailer and wholesaler of high-quality tea and
accessories and that during the restructuring process, the Company would continue to operate its online business through its e-commerce platform, the
Amazon Marketplace and its wholesale distribution channel. Following a careful review of available options to stem the losses from its brick-and-mortar
footprint, the Company’s management and Board of Directors determined that the formal Restructuring Plan was the best option in the context of an
increasingly challenging retail environment, further exacerbated by the COVID-19 pandemic.
On July 8, 2020, the Company obtained an Initial Order pursuant to the CCAA from the Québec Superior Court in order to implement the
Restructuring Plan (the “Initial Order”).
On July 9, 2020, the United States Bankruptcy Court for the District of Delaware entered an order in favor of the Company under Chapter 15 of the
United States Bankruptcy Code. The order of the United States Bankruptcy Court provisionally recognized the proceedings under the CCAA and enforced
the Initial Order, in effect providing protection to the Company from creditor action against its assets in the United States.
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59
As part of its Restructuring Plan and further to obtaining the Initial Order, the Company, on July 10, 2020, sent notices to terminate leases for 82 of
its stores in Canada and all 42 of its stores in the United States. These lease terminations were effective on August 9, 2020.
On July 16, 2020, the Company obtained an Amended and Restated Initial Order from the Québec Superior Court, extending to September 17,
2020 the application of the Initial Order. The Amended and Restated Initial Order also dealt with certain administrative matters, particularly with regards to
the lease terminations.
On July 30, 2020, the Company sent notices to terminate leases for an additional 82 of its stores in Canada. These lease terminations were effective
on August 29, 2020.
On September 17, 2020, the Québec Superior Court extended the stay of all proceedings against the Company to December 15, 2020 and issued a
Claims Process Order establishing the claims procedures for the Company’s creditors under the CCAA. This Order, among other things set November 6,
2020 as the time by which creditors had to submit their claims to PwC, the Court-appointed Monitor.
On December 15, 2020, the Québec Superior Court extended the stay of all proceedings against the Company to March 19, 2021. The Court also
approved a retention plan for certain key employees (“KERP”) and created a priority charge over the debtors’ assets for the KERP in addition to extending
the Claims Bar Date for certain Canadian employees until December 31, 2020.
On March 19, 2021, the Québec Superior Court extended the stay of all proceedings against the Company to June 4, 2021, and addressed certain
administrative matters.
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.
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, 2021, February 1, 2020 and February 2, 2019 cover a 52-week period.
Going Concern Uncertainty
In December 2019, a novel strain of coronavirus, responsible for 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 temporarily close all of its retail locations across North America effective March 17, 2020.
On July 8, 2020, the Company announced that it was implementing the Restructuring Plan under applicable laws in both Canada and the United
States in order to accelerate its transition to predominantly an online retailer and wholesaler of high-quality tea and accessories. As part of the
Restructuring Plan, in July 2020, the Company sent notices to terminate leases for 164 of its stores in Canada and all 42 of its stores in the United States.
On August 21, 2020, the Company re-opened 18 of its stores throughout Canada.
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 COVID-19 pandemic is unknown and may influence consumer shopping behavior and consumer demand including online shopping.
Notwithstanding that the Company expects to emerge from the Restructuring Plan as a leaner organization, there is no assurance that the Restructuring Plan
will be successful and that all relevant and required regulatory, creditor and court approvals will be obtained. Furthermore, significant resources are
expected to be required to legally emerge from the formal restructuring process that will place increased risk on the Company’s available liquidity,
especially considering the Company does not currently have access to any debt or financing arrangements.
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60
For the year ended January 30, 2021, the Company reported a net loss of $55.9 million. The Company’s current liabilities total $112.2 million as
at January 30, 2021. As at January 30, 2021, the Company held cash and accounts and other receivables of $36.4 million. The Company does not currently
have any third-party financing available with which to meet any future financial obligations.
The Company’s ability to continue as a going concern is dependent on its ability to stabilize its business from unfavorable trend lines, and by
focusing on how to grow its product portfolio including sales and customer service execution. The Company expects to transition to a digital-first
organization with a leaner, more sustainable physical presence that complements a growing world-class online and grocery business, 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 pandemic, changes in consumer
behavior and the ability to successfully emerge from the Restructuring Plan.
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 January 30, 2021 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.
Government assistance
The Company qualifies for the CEWS under the COVID-19 Economic Response Plan of the Government of Canada. Government assistance,
including wage subsidies, is recognized when there is a reasonable assurance that the assistance will be received and that the Company will comply with all
relevant conditions. Government assistance related to incurred expenses is recorded as a reduction of the related expenses.
Table of Contents
Inventory valuation
61
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 lease term.
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
On February 3, 2019, the Company adopted IFRS 16, “Leases” using the modified retrospective method.
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.
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62
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 recognized 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.
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63
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.
Liabilities subject to Compromise
As a result of the Initial Order obtained on July 8, 2020 and subsequent amendments (Note 1), the payment of liabilities owing as of July 8, 2020 is
stayed, and the outstanding liabilities, as well as any additional outstanding claims by creditors are subject to compromise pursuant to a plan of
arrangement that is expected to be presented to creditors. Obligations for goods and services provided to the Company after the filing date of July 8, 2020
are discharged based on negotiated terms and conditions.
Liabilities subject to compromise represent the liabilities that will ultimately be subject to the plan of arrangement (“allowed claims”) and
compromise to the Company’s creditors, and include disclaimed leases, trade and other payables, and severance costs, as further described in note 13.
Trade and other payables, and severance costs represent the Company’s legal obligation. Disclaimed leases are measured at the Company’s best estimate of
liabilities that will ultimately be subject to the plan of arrangement (“allowed claims”). The measurement of liabilities subject to compromise is measured
at the reporting date based on an analysis of the nature and carrying value of the underlying liabilities, proof of claim, as well as the stage of advancement
of the claims identification, resolution and barring process.
Liabilities subject to compromise may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect
to disputed claims, determination of secured status of certain claims, the determination as to the value of any collateral securing claims, proof of claims or
other events, and is therefore subject to significant estimation uncertainty. Changes to the provision in future periods may be material and will be recorded
through earnings.
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.
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64
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.
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 is recognized on e-commerce sales when merchandise is delivered to the consumer. Revenue from retail sales is recorded upon delivery to the
customer. Revenues are recorded net of discounts, rebates, estimated returns, sales taxes and amounts deferred related to the issuance of Frequent Steeper
points.
Revenue from the Company's wholesale business is recognized upon receipt of products by the customer. Wholesale revenue is recorded net of
estimates of returns, discounts, operational chargebacks, and certain advertising allowances. Estimates for operational chargebacks are based on actual
customer notifications of order fulfillment discrepancies and historical trends. The Company reviews and refines these estimates on at least a quarterly
basis. The Company's historical estimates of these amounts have not differed materially from actual results.
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.
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65
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.
iii.
Subscription box
Revenue is recognized at a point in time, which is upon delivery of subscription boxes, as it meets the criteria to satisfy the performance
obligation. Deferred revenue is recognized for consideration received in advance of the delivery of subscription boxes.
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.
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66
The diluted earnings per share is calculated by adjusting the weighted average number of shares outstanding to include additional shares issued
from the assumed conversion of preferred shares and the exercise of stock options and RSUs, if dilutive. For stock options, the number of additional shares
is calculated by assuming that the proceeds from such exercises, as well as the amount of unrecognized stock-based compensation which is considered to
be assumed proceeds, are used to purchase common shares at the average market price during the reporting period.
Financial instruments
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
A financial asset or liability is recognized initially (at settlement date) at its fair value plus, in the case of a financial asset or liability not at fair value
through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the instrument. Financial assets and liabilities carried at
fair value through profit or loss are initially recognized at fair value and transaction costs are expensed in the consolidated statements of loss.
After initial recognition, financial assets are measured at amortized cost or fair value. Where assets are measured at fair value, gains and losses are
either recognized entirely in profit or loss (“FVTPL”) or recognized in other comprehensive income (“FVOCI”).
The Company classifies its financial assets and liabilities according to their characteristics and management's choices and intentions related
thereto for the purposes of ongoing measurement.
Classifications that the Company has used for financial assets include:
(a) Amortized Cost – non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. This
includes trade receivables and 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.
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4. CHANGES IN ACCOUNTING PRINCIPLES
Recently Issued Accounting Pronouncements
67
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. In April 2021, the IASB extended the relief to cover rent concessions that reduce lease
payments due on or before June 30, 2022.
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 June 30, 2021.
The amendment is effective as of June 1, 2020 but can be applied immediately in any financial statements—interim or annual—not yet authorized
for issue. The Company applied the practical expedient to all rent concessions meeting the criteria as set out in the amendment, as of February 2, 2020.
With respect to rent concessions not meeting the definition of a lease modification, the Company elected to account for such concessions by continuing to
account for the lease liability and right-of-use asset using the rights and obligations of the existing lease and recognizing a separate lease payable in the
period in which the allocated lease cash payment is due. As a result of the Initial Order obtained from the Québec Superior Court on July 8, 2020, any rent
concessions provided by landlords are accordingly nullified.
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.
Key sources of estimation uncertainty
Liabilities subject to compromise
As a result of the termination of leases pursuant to the Restructuring Plan, included in liabilities subject to compromise is a liability related to
disclaimed leases of $75.3 million, determined at the reporting date based on an analysis of the nature and carrying value of the underlying liabilities, proof
of claim, as well as well as the stage of advancement of the claims identification, resolution and barring process.
Liabilities subject to compromise may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect
to disputed claims, determination of secured status of certain claims, the determination as to the value of any collateral securing claims, proof of claims or
other events, and is therefore subject to significant estimation uncertainty, as proceedings are in a preliminary stage. Changes to the provision in future
periods may be material and will be recorded through earnings.
Recoverability and impairment of non-financial assets
The temporary store closures as a result of COVID-19, as well as the permanent closure of a majority of our retail stores resulting from the
Restructuring Plan, and the related reduction in operating income during fiscal 2020 are considered to be indicators of impairment and the Company
performed an assessment of recoverability for the property and equipment and right-of-use assets associated with its retail locations.
Key judgments in applying accounting principles
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).
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Critical judgements in applying accounting policies
i.
Going concern uncertainty
68
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 that it is difficult to adequately predict future cash flows given the inherent uncertainties concerning the formal
restructuring process and the impact of the COVID-19 pandemic, 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 one 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).
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6. ACCOUNTS AND OTHER RECEIVABLES
69
Credit card and 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
January 30,
February 1,
2021
2020
706
1,232
4,219
6,157
849
2,072
2,026
1,115
6,062
January 30,
February 1,
2021
$
2020
$
17,478
3,123
2,867
23,468
18,590
2,059
1,714
22,363
During the year ended January 30, 2021, inventories recognized as cost of sales amounted to $34,463 [February 1, 2020 —$56,310, February 2, 2019 -
$63,195]. The cost of inventory includes a write-down of $557 [February 1, 2020 – nil, February 2, 2019 - $703] recorded as a result of net realizable value
being lower than cost. Inventory write-downs of nil [February 1, 2020 - $406, February 2, 2019 – nil] recognized in the previous years were reversed.
8. PROPERTY AND EQUIPMENT
Cost
Balance, February 2, 2019
Acquisitions
Disposals
Cumulative translation adjustment
Balance, February 1, 2020
Acquisitions
Disposals
Cumulative translation adjustment
Balance, January 30, 2021
Accumulated depreciation and impairment
Balance, February 2, 2019
Depreciation
Impairment
Disposals
Cumulative translation adjustment
Balance, February 1, 2020
Depreciation
Impairment
Disposals
Cumulative translation adjustment
Balance, January 30, 2021
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Net Carrying Value
Balance, February 1, 2020
Balance, January 30, 2021
Leasehold Furniture and Computer
equipment
improvements
$
$
hardware
$
Total
$
84,142
746
—
285
85,173
237
(78,001)
712
8,121
13,910
211
(131)
32
14,022
150
(11,987)
49
2,234
5,878
75
—
11
5,964
47
(4,251)
12
1,772
103,930
1,032
(131)
328
105,159
434
(94,239)
773
12,127
Leasehold Furniture and Computer
equipment
improvements
$
$
hardware
$
Total
$
65,874
4,032
1,587
—
278
71,771
1,582
10,665
(78,001)
573
6,590
10,001
854
—
(31)
29
10,853
517
1,990
(11,782)
93
1,671
4,267
525
—
—
6
4,798
300
512
(4,084)
31
1,557
80,142
5,411
1,587
(31)
313
87,422
2,399
13,167
(93,867)
697
9,818
70
Leasehold Furniture and Computer
equipment
improvements
$
$
hardware
$
Total
$
13,402
1,531
3,169
563
1,166
215
17,737
2,309
For the year ended January 30, 2021, 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 that were permanently closed as part of the Restructuring Plan
and the remaining stores that are expected to perform below the Company’s previous projection.
As a result, an impairment loss of $13,167 related to store leasehold improvements, furniture and equipment and computer hardware was recorded
[February 1, 2020 - $1,587, February 2, 2019 — $9,926 related to store leasehold improvements, furniture and equipment and computer hardware]. The
impairment was recorded in the Canada and U.S. segments for $13,167 and nil, respectively [February 1, 2020 – $1,535 and $52, February 2, 2019 -
$7,686 and $2,240, respectively]. Impairment losses related to closed stores of $12,966 is reported under Restructuring plan activities, net (note 19), while
impairment losses of $201 related to stores expected to remain open are reported in under selling, general and administration expenses (Note 18).
The impairment loss taken related to the stores that remain open was determined by comparing the carrying amount of the CGU’s net assets with
their respective recoverable amounts based on value in use for 7 of the 18 stores. This value in use of $791 [February 1, 2020 – $6,466] was determined
based on management’s best estimate of expected future cash flows from use over the remaining lease terms. This determination considered historical
experience as well as current economic conditions, including the expected reopening date and the timeframe to foot traffic recovery in those location, and
was then discounted using a pre‑tax discount rate of 13.0% for the first quarter of 2020 [February 1, 2020 – 12.1%]
For the year ended January 30, 2021, the depreciation expense was $2,399 [February 1, 2020 - $5,411, February 2, 2019 —$6,904]; with $1,838
recorded in the Canada segment [February 1, 2020 - $4,659, February 2, 2019 — $5,825], $53 recorded in the U.S. segment [February 1, 2020 - $219,
February 2, 2019 — $520], and $508 recorded in corporate selling, general and administration expenses [February 1, 2020 - $533, February 2, 2019 —
$559]. Depreciation expense is reported in the consolidated statement of loss and comprehensive loss under selling, general and administration expenses
(Note 18).
9. INTANGIBLE ASSETS
Cost
Balance, February 2, 2019
Acquisitions
Cumulative translation adjustment
Balance, February 1, 2020
Acquisitions
Disposals
Cumulative translation adjustment
Balance, January 30, 2021
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Accumulated amortization
Balance, February 2, 2019
Amortization
Cumulative translation adjustment
Balance, February 1, 2020
Amortization
Disposals
Cumulative translation adjustment
Balance, January 30, 2021
Net Carrying Value
Balance, February 1, 2020
Balance, January 30, 2021
71
Computer
software
$
Other
$
Total
$
11,915
2,594
2
14,511
479
(2,418)
(54)
12,518
101
—
—
101
—
—
—
101
12,016
2,594
2
14,612
479
(2,418)
(54)
12,619
Computer
software
$
Other
$
Total
$
6,336
1,934
3
8,273
2,053
(1,628)
(8)
8,690
2
—
(2)
—
—
—
—
—
6,338
1,934
1
8,273
2,053
(1,628)
(8)
8,690
Computer
software
$
Other
$
Total
$
6,238
3,828
101
101
6,339
3,929
Amortization expense is reported in the consolidated statement of loss and comprehensive loss under selling, general and administration expenses
(Note 18).
10. LEASE LIABILITIES
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 1, 2020
Additions
Amortization expense
Right-of-Use
Assets
$
Lease
Liability
$
35,082
1,987
(3,041)
88,664
1,987
—
Impairment of right-of-use assets
Gain on modification of lease liability
Loss on disposal
Interest expense
Payments
Transfer to liabilities subject to compromise
CTA
Balance, January 30, 2021
Presented as:
Current
Non-Current
(26,793)
(6,684)
(397)
—
—
503
657
—
—
—
(81,805)
—
3,230
(6,007)
(6,207)
889
751
396
355
The Company also recorded an impairment loss of $26,793 related to the Company’s right-of-use assets [February 1, 2020 - $16,193, February 2, 2019 -
nil]. The impairment was recorded in the Canada and U.S. segments for $20,804 and $5,989, respectively.
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These impairments are further broken down as follows:
72
Stores
permanently
closed $
Stores
that remain
open $
Total $
Right-of-use assets
24,433
2,360
26,793
Impairment losses related to stores permanently closed and stores that remain open have been recorded in Restructuring plan activities, net and Selling,
general and administration expenses, respectively. Refer to note 8 for further details.
Amortization expense is reported in the consolidated statement of loss and comprehensive loss under Selling, general and administration expenses.
The following table presents a maturity analysis of future contractual undiscounted cash flows from lease liabilities:
Within one year
After one year but no more than five years
More than five years
February 1,
2020
$
428
375
—
803
The Company has lease contracts that contain variable lease payments primarily based on a percentage of retail sales. The Company recognized variable
lease payments of $985 for the year ended January 30, 2021. 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
Included in prepaid expenses and deposits are advances to suppliers of $6.8 million.
12. DEFERRED REVENUE
Gift cards liability
Loyalty program
Subscription Box Liability
January 30,
February 1,
2021
$
2020
$
1,891
1,244
1,017
4,152
16,582
1,244
2,968
20,794
January 30,
February 1,
2021
$
2020
$
4,642
1,548
890
7,080
4,899
1,953
0
6,852
During the year, the Company recorded gift card breakage income of $74 [February 1, 2020 - $1,294, February 2, 2019 - $242]. Gift card breakage
is included in sales in the consolidated statement of loss.
73
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13. LIABILITIES SUBJECT TO COMPROMISE
As a result of the Initial Order obtained on July 8, 2020 and subsequent amendments (Note 1), the payment of liabilities owing as of July 8, 2020 is
stayed, and the outstanding liabilities, as well as any additional outstanding claims by creditors are subject to compromise pursuant to a plan of
arrangement that is expected to be presented to creditors.
On September 17, 2020, the Court issued a Claims Process Order establishing the claims procedures for the Company’s creditors under the CCAA.
This Order, among other things set November 6, 2020 as the time by which creditors had to submit their claims to PwC.
Obligations for goods and services provided to the Company after the filing date of July 8, 2020 are discharged based on negotiated terms and are
excluded from liabilities subject to compromise.
As of January 30, 2021, liabilities subject to compromise are broken down as follows:
Balance, January 30, 2021
Disclaimed
and modified
leases
$
Trade and
other
payables
$
Severance
Costs
$
75,310
20,699
4,541
Liabilities
subject to
compromise
$
100,550
Liabilities subject to compromise may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect
to disputed claims, determination of secured status of certain claims, the determination as to the value of any collateral securing claims, proof of claims or
other events.
As a result of the termination of leases pursuant to the Restructuring Plan in the year ended January 30, 2021, the Company has recorded an
estimate for allowed claims in the amount of $75.3 million, in Restructuring plan activities, net in the consolidated statement of income (loss) (Note 19).
This provision is subject to estimation uncertainty. Trade and other payables representing the payment of liabilities owing as of July 8, 2020, amounted to
$20.7 million and severance costs amounting to $4.5 million.
14. COMMITMENTS AND CONTINGENCIES
As at January 30, 2021, 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. Purchase obligations, net of $6.8 million of
advances, which is included in Prepaid expenses and deposits, amounting to $14.1 million (2019 - $11.5 million) is expected to be discharge within 12
months.
15. SHARE CAPITAL
Authorized
An unlimited number of common shares.
Issued and Outstanding
Share Capital - 26,234,582 Common shares (February 1, 2020 - 26,086,162)
Number of shares in issuance
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
Issuance of common shares upon exercise of options
Issuance of common shares upon vesting of restricted stock units
Balance, January 30, 2021
Table of Contents
74
January 30,
February 1,
2021
$
113,167
2020
$
112,843
Common
shares
#
26,011,817
18,500
55,845
26,086,162
4,000
144,420
26,234,582
During the year ended January 30, 2021, 4,000 stock options were exercised for common shares, for cash proceeds of $4 [February 1, 2020 –
18,500 stock options 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]. The carrying value of common shares during the year ended January 30, 2021 includes $1 [February 1, 2020 - $7] which corresponds
to a reduction in the contributed surplus associated to options exercised during the period.
In addition, during the year ended January 30, 2021, 144,420 common shares [February 1, 2020 – 55,845, February 2, 2019 —74,728] were issued
in relation to the vesting of restricted stock units (“RSU”), resulting in an increase in share capital of $319, net of tax [February 1, 2020 - $303, February 2,
2019 – $663].
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 January 30, 2021, 1,200,323 common shares remain available for issuance under the 2015 Omnibus Plan.
No options were granted for the year ended January 30, 2021 [February 1, 2020 – 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 year
Exercisable, end of year
76,350
—
(4,000)
(54,860)
17,490
17,490
January 30,
2021
Weighted
average
exercise
price
$
Options
outstanding
#
February 1,
2020
Weighted
average
exercise
price
$
Options
outstanding
#
137,540
—
(18,500)
(42,690)
76,350
75,475
8.96
—
0.77
10.40
6.32
6.32
7.17
—
0.77
6.72
8.96
8.90
The weighted average share price at the date of exercise for options exercised during the year ended January 30, 2021 was $0.87 [February 1, 2020
— $2.28].
Table of Contents
75
The following tables summarize information about the stock options outstanding at January 30, 2021 and February 1, 2020:
Number
outstanding at
January 30,
2021
#
14,000
3,490
17,490
Number
outstanding at
February 1,
2020
#
Weighted
average
contractual
remaining
life
(years)
0.8
2.2
1.1
Weighted
average
contractual
remaining
life
(years)
Weighted
average
exercise
price
$
4.30
14.39
6.32
Weighted
average
exercise
price
$
Number of
options
exercisable at
February 1,
2020
#
14,000
3,490
17,490
Number of
options
exercisable at
February 1,
2020
#
4,000
14,000
53,225
5,125
76,350
0.4
1.8
4.1
3.2
3.4
0.77
4.30
10.28
13.39
8.96
4,000
14,000
53,225
4,250
75,475
Weighted
average
exercise
price
$
4.30
14.39
6.32
Weighted
average
exercise
price
$
0.73
4.30
10.28
14.39
8.90
Range of exercise prices
$3.33 - $4.31
$14.39 - $17.99
As at January 30, 2021
Range of exercise prices
$ 0.77
$3.33 - $4.31
$8.76 - $10.28
$14.39 - $17.99
As at February 1, 2020
A summary of the status of the Company’s RSU plan and changes during the years ended January 30, 2021 and February 1, 2020 is presented
below.
For the year ended
January 30,
2021
Weighted
average
fair value
RSUs
February 1,
2020
Weighted
average
fair value
RSUs
Outstanding, beginning of year
Granted
Forfeitures
Vested
Vested, withheld for tax
Outstanding, end of period
_____________
(1) Weighted average fair value per unit as at date of grant.
outstanding per unit (1) outstanding per unit (1)
#
749,522
1,177,222
(351,205)
(121,920)
(147,518)
1,306,101
$
5.26
1.44
(1.71)
(1.54)
(2.16)
1.70
#
270,976
804,710
(188,685)
(78,465)
(59,014)
749,522
$
5.26
1.93
3.17
5.41
5.51
2.17
During the year ended January 30, 2021, the Company recognized a stock-based compensation expense of $820 [February 1, 2020 - $813,
February 2, 2019 — $211].
16. FINANCE COSTS
January 30,
For the Year Ended
February 1,
February 2,
2021
$
2020
$
2019
$
—
—
3,229
44
3,273
—
(250)
6,962
39
6,751
251
1,300
—
63
1,614
Accretion on provisions
Interest and penalty on provision for uncertain tax position
Interest on lease liabilities
Other finance costs
Table of Contents
17. INCOME TAXES
76
A reconciliation of the statutory income tax rate to the effective tax rate is as follows:
January 30,
2021
For the year ended
February 1,
2020
February 2,
2019
%
$
%
%
26.4
(14,737)
26.8
$
(8,747)
Income tax provision (recovery) — statutory rate
Increase (decrease) in provision for income tax (recovery) resulting from:
Non-deductible items
Effect of substantively enacted income tax rate changes
Unrecognized deferred income tax assets
Write-down of deferred income tax assets
Provision for uncertain tax assets
Other
Income tax provision (recovery) — effective tax rate
(0.1)
(0.7)
(25.4)
—
—
(0.2)
(0)
39
400
14,209
—
—
89
—
(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)
$
(7,700)
378
—
4,306
5,194
2,700
4
4,882
A breakdown of the income tax provision (recovery) on the consolidated statement of loss is as follows:
Income tax provision (recovery)
Current
Deferred
January 30,
For the Year Ended
February 1,
February 2,
2021
$
2020
$
2019
$
-
-
-
(1,500)
-
(1,500)
(187)
5,069
4,882
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. In fiscal 2019 the Company revised its estimate for this uncertain tax position to $1.2
million and $1.0 million for taxes and interest, respectively. In 2020, the Company further revised its estimate for this uncertain tax position to $359 for
interest. This is classified in trade and other payables within liabilities subject to compromise (note 13).
The tax effects of temporary differences and net operating losses that give rise to deferred income tax assets and lease liabilities are as follows:
January 30,
For the Year Ended
February 1,
February 2,
2021
2020
2019
Deferred income tax assets
Operating losses carried forward
Tax values of property and equipment in excess of carrying value including impairment
Deferred rent
14,295
3,099
-
7,893
2,330
-
1,417
3,505
1,762
Stock options
Financing fees and IPO-related costs
Lease inducements
Lease liabilities
Liabilities subject to compromise
Other
Total deferred income tax assets
Deferred income tax liabilities
Right-of-use assets
Unrealized foreign exchange gain related to intercompany advances
Total deferred income tax liabilities
Total deferred income tax assets, net
Unrecognized deferred income tax asset
Net deferred income tax assets
Table of Contents
77
3,587
3
-
197
21,454
791
43,426
(191)
(8)
(199)
43,227
(43,227)
-
3,763
5
-
23,942
-
953
38,886
(9,444)
(109)
(9,553)
29,333
(29,333)
-
3,843
588
634
-
5,357
665
17,771
-
(212)
(212)
17,559
(17,559)
-
As at January 30, 2021, the Company’s Canadian operations have accumulated losses amounting to $32.5 million [February 1, 2020 — $20.2
million; February 2, 2019 — $12.0 million], which begin to expire in 2039. As at January 30, 2021, the Company’s U.S. subsidiary has accumulated losses
amounting to US$26.6 million [February 1, 2020 — US$17.4 million; February 2, 2019 — US$13.9 million], of which US$13.9 million expire during the
years ending in 2033 to 2037. The remaining accumulated losses amounting to US$12.7 million have an indefinite carry forward period.
Based upon the projections for future taxable income 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 $43,227 was recorded against the
net deferred income tax asset.
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 liabilities
Lease inducement
Unrecognized deferred income tax asset
Provisions for onerous contracts
Liabilities subject to compromise
Other
Deferred income tax assets net, end of year
Table of Contents
18. SELLING, GENERAL AND ADMINISTRATION EXPENSES
Included in selling, general and administration expenses are the following expenses:
78
Wages, salaries and employee benefits
Depreciation of property and equipment
Amortization of intangible assets
Amortization right-of-use asset
Impairment of property and equipment and right-of-use assets
Loss on disposal of property and equipment
Marketing expenses
IT expenses
Credit card fees
January 30,
For the Year Ended
February 1,
February 2,
2021
2020
2019
-
-
6,402
769
(176)
(2)
-
101
9,253
(23,745)
-
(13,894)
-
21,454
(162)
-
-
(1,762)
6,476
(1,175)
(80)
(583)
-
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
-
January 30,
For the year ended
February 1,
February 2,
2021
$
2020
$
2019
$
20,222
2,399
2,053
3,041
2,561
—
4,693
3,986
2,770
65,288
5,411
1,934
12,051
17,780
100
7,282
4,022
3,030
68,324
6,904
1,298
—
9,960
151
6,248
3,735
2,915
Professional fees
Stores supplies
Stock-based compensation
Recovery of provision for onerous contracts
Executive separation cost related to salary
Strategic review and proxy contest
ERP project termination
Government emergency wage subsidy
Other selling, general and administration
19. RESTRUCTURING PLAN ACTIVITIES, NET
1,713
2,023
820
—
—
—
—
(4,494)
4,677
46,464
2,002
5,768
813
—
—
—
—
—
9,824
135,306
1,743
5,101
211
552
1,280
3,593
2,496
—
11,211
125,722
During the year ended January 30, 2021, the Company, in connection with the termination or modification of leases pursuant to the Restructuring
Plan, reduced its lease liabilities by $81.8M million, resulting in a gain on the modification of lease liabilities of $75.1M and a reduction in right-of-use
assets of $6.7M.
Included in Restructuring plan activities, net are the following expenses:
[Note 13]
[Note 10]
[Note 13]
[Note 13]
For the year
ended
January 30,
2021
$
(75,121)
76,281
37,399
4,991
4,840
4,158
2,840
1,559
1,282
56,327
Gain on modification of lease liabilities
Disclaimed leases
Impairment of property and equipment and right-of-use assets
Trade and other payables
Severance costs
Store closure related costs
Professional fees
Loss on disposal of property and equipment, right-of-use assets and intangible assets
Interest and penalties related to unpaid occupancy charges
Restructuring plan activities, net
79
Table of Contents
20. EARNINGS PER SHARE
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
Fully diluted
Net loss per share:
Basic
Fully diluted
January 30,
For the year ended
February 1,
February 2,
2021
$
(55,932)
2020
$
(31,197)
2019
$
(33,539)
26,168,848
26,168,848
26,056,332
26,056,332
25,967,836
25,967,836
(2.14)
(2.14)
(1.20)
(1.20)
(1.29)
(1.29)
For the years ended January 30, 2021, February 1, 2020, and February 2, 2019, as a result of the net loss during the year, the stock options and
RSUs disclosed in Note 15 are anti‑dilutive.
21. 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 $4.0 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.
During the first quarter of 2020, the loan of $2.0 million and accrued interest of $45, including $19 which was earned in the first quarter, was fully
repaid.
parties.
Other transactions with related parties are measured at the exchange amount, being the consideration established and agreed to by the related
During the year ended January 30, 2021, the Company purchased merchandise for resale from a company controlled by one of its executive
employees amounting to $139 [February 1, 2020 — $124; February 2, 2019 — $241]. As of January 30, 2021, an amount of nil was outstanding and
presented in Trade and other payables.
The Company also provided infrastructure and administrative services of $90 [February 1, 2020 — $312; February 2, 2019 — nil] to a company
controlled by one of its executive employees. As of January 30, 2021, an amount of $43 was outstanding and presented in Accounts and other receivables.
During the year-ended January 30, 2021, the Company purchased perpetual license rights to a reporting data model and associated intellectual
property for nil [February 1, 2020 — $200] and spent $53 [February 1, 2020 — $237; February 2, 2019 — nil] for consulting services from a related party
of the principal shareholder. As of January 30, 2021, an amount of nil [February 1, 2020 — $28] was outstanding and presented in Trade and other
payables.
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.
Table of Contents
Transactions with Key Management Personnel
80
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
22. SEGMENT INFORMATION
January 30,
For the Year Ended
February 1,
February 2,
2021
2020
2019
1,895
—
670
2,565
2,784
110
669
3,563
2,706
1,025
101
3,832
An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses. As
a result of the Restructuring Plan which led to the closure of all but 18 retail stores, the CODM has changed the way in which they evaluate the business.
The Company has reviewed its operations and determined that each its operating segments are geographic components. The Company has concluded that it
has two operating segments, Canada and the U.S., that derive their revenues from the online, retail and wholesale sale of tea, tea accessories and food and
beverages. The Company’s Chief Executive and Brand Officer and President, Chief Financial and Operations Officer (the chief operating decision makers
or “CODM”) make decisions about resources to be allocated to the segments and assesses performance, and for which discrete financial information is
available. In the prior year the operating segments were the retail premises, and the reportable segments were Canada and US. As a result, there is no
impact on prior period information as reportable segments were previously Canada and US.
The Company derives revenue from the following products:
Tea
Tea accessories
Food and beverages
Property and equipment, right-of-use assets and intangible assets by country are as follows:
Canada
US
Total
Table of Contents
81
Results from operating activities before corporate expenses per country are as follows:
January 30,
For the year ended
February 1,
February 2,
2021
$
103,620
16,255
1,811
121,686
2020
$
148,846
34,003
13,613
196,462
2019
$
152,761
44,436
15,556
212,753
January 30,
February 1,
2021
$
6,895
-
6,895
2020
$
52,116
7,042
59,158
Sales
Cost of sales
Gross profit
Selling, general and administration expenses (allocated)
Impairment of property and equipment and right-of-use assets
Results from operating activities before corporate expenses
Selling, general and administration expenses (non-allocated)
Restructuring plan activities, net
Results from operating activities
Finance costs
Finance income
Net loss before income taxes
Sales
Cost of sales
Gross profit
Selling, general and administration expenses (allocated)
Impairment of property and 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
Net loss before income taxes
Sales
Cost of sales
Gross profit
Selling, general and administration expenses (allocated)
Impairment of property and 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
Net loss before income taxes
For the year ended
January 30, 2021
US
$
Canada
$
92,537
55,902
36,635
18,923
2,561
15,151
29,149
16,051
13,098
4,467
—
8,631
Consolidated
$
121,686
71,953
49,733
23,390
2,561
23,782
20,513
56,327
(53,058)
3,273
(399)
(55,932)
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)
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)
(28,657)
For the year ended
February 1, 2020
US
$
Canada
$
152,892
68,958
83,934
65,536
12,087
6,311
For the year ended
February 2, 2019
US
$
Canada
$
169,430
89,604
79,826
57,901
7,720
2,034
12,171
Table of Contents
23. FINANCIAL RISK MANAGEMENT
82
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 a significant amount 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 $287.
The Company’s foreign exchange exposure is as follows:
January 30,
February 1,
2021
US$
2020
US$
Cash
Accounts and other receivables
Prepaid expenses and deposits
Trade and other payables
The Company’s U.S. subsidiary’s transactions are denominated in U.S. dollars.
Market Risk — Interest Rate Risk
630
465
5,394
750
1,928
455
323
6,090
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 January 30, 2021, the Company had $30.2 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 $4.2 million (2020 - $20.4 million), will substantially be discharged within 90 days.
Purchase obligations, net of $6.8 million of advances, amounting to $14.1 million (2019 - $11.5 million) is expected to be discharge within 12 months.
Refer to note 2 for details with respect to the going concern uncertainty.
Table of Contents
Credit Risk
83
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. Accounts receivable primarily consists
of receivables from 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. Credit card payments have minimal credit risk and
the limited number of corporate receivables is closely monitored. As a result, expected credit loss on these financial assets is not significant.
Fair Values
Financial assets and financial liabilities are measured on an ongoing basis at fair value or amortized cost. The disclosures in the “Financial
instruments” section of Note 3 describe how the categories of financial instruments are measured and how income and expenses, including fair value gains
and losses, are recognized.
24. MANAGEMENT OF CAPITAL
The Company’s capital is composed of cash and shareholders’ (deficiency) equity as follows:
Cash
Shareholder's (deficiency) equity [Excluding Accumulated other comprehensive income]
Total capital under management
January 30,
February 1,
2021
$
30,197
(33,154)
(2,957)
2020
$
46,338
22,142
68,480
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. Furthermore, in light of implementing the Restructuring Plan, the Company expects to use cash on hand to pay for professional fees and for the
settlement of obligations upon acceptance, if any, of a plan of arrangement that will be presented to creditors.
The Company traditionally funded its requirements from its cash on hand and internally-generated cash flows. The Company does not have any
long-term financing debt (other than lease liabilities). As at January 30, 2021, the Company recognized $100.6 million of liabilities subject to compromise
as current liabilities as part of the CCAA claims process described in note 13. The timing and quantum of claims that will be allowed by the Court and
ultimately paid to the Company’s creditors is currently not possible to determine.
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.
25. GUARANTEES
Some agreements to which the Company is party include indemnification provisions that may require the Company to make payments to a third
party for breach of fundamental representation and warranty terms in the agreements, with respect to matters such as corporate status, title of assets,
environmental issues, consents to transfer, employment matters, litigation, taxes payable and other potential material obligations. The maximum potential
amount of future payments that the Company could be required to make under these indemnification provisions is not reasonably quantifiable as certain
indemnifications are not subject to a monetary limitation. As at January 30, 2021, 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.
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84
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 Chief Executive and Brand Officer and our President, Chief Financial and Operating Officer,
evaluated the effectiveness of our disclosure controls and procedures as of January 30, 2021. 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 the assessment of our disclosure controls and procedures, our management concluded that our disclosure controls and procedures were
effective as of January 30, 2021.
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.
Management, with the participation of our Chief Executive and Brand Officer and our President, Chief Financial and Operating Officer, assessed
our internal control over financial reporting as of January 30, 2021, the end of our fiscal year. Management based its assessment on the 2013 framework
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s
assessment included evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation,
accounting policies, and our overall control environment. Based on this assessment, management has concluded that our internal control over financial
reporting was effective as of January 30, 2021.
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Remediation of Material Weaknesses
85
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”). In fourth quarter of Fiscal 2019, 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, were determined to not be 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.
Remediation efforts which began during the first quarter of Fiscal 2020 included a thorough review of the design and effectiveness of the internal
control framework in connection with the evaluation and testing of non-financial asset impairment. These efforts included a more thorough documentation
of the rationale of significant assumptions including the independent review of our analysis. We have also enhanced our financial close process to help
establish a more thoroughly documented rationale for significant assumptions in connection with non-routine transactions. These material weaknesses were
remediated as at January 30, 2021.
Changes in Internal Control over Financial Reporting
The COVID-19 pandemic could negatively affect our internal controls over financial reporting, 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 remediation efforts to successfully address the previously reported material weaknesses, there were no significant changes in
our internal control over financial reporting during our fiscal year ended January 30, 2021 that materially affected, or were reasonably likely to materially
affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
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86
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following is a list of the names and ages of our directors and officers as of April 15, 2021, 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
Sarah Segal
Frank Zitella, CPA, CMA, CA
Pat De Marco, CPA, CA
Susan L. Burkman, MBA
Emilia Di Raddo, CPA, CA
Peter Robinson, MA, PHD
Age
90
36
56
60
67
63
68
Position
Chairman of the Board, Strategic Advisor and Director
Chief Executive Officer and Chief Brand Officer
President, Chief Financial and Operating Officer and Corporate Secretary
Lead Director
Director
Director
Director
Herschel Segal, Chairman of the Board and Strategic Advisor. Mr. Segal, 90, was appointed Chairman of the Board of Directors and Interim
Chief Executive Officer of the Company on June 14, 2018. Mr. Segal resigned as Interim Chief Executive Officer effective December 16, 2020, at which
time he was named Strategic Advisor. 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 as a director until his
resignation effective December 16, 2020. 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.
Sarah Segal, Chief Executive Officer and Chief Brand Officer. Ms. Segal, 36, served as the President and Head of the Product Development and
Tea Department of DAVIDsTEA from December 2010 to September 2012. Ms. Segal also served as the CEO of the retail company Oink Oink Candy Inc.,
doing business as “Squish”, based in Montreal, Québec. Ms. Segal was appointed VP, Product Development & Innovation of DAVIDsTEA in 2017, Chief
Brand Officer on August 21, 2018, and Chief Executive Officer effective December 16, 2020. 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.
Frank Zitella, CPA, CMA, CA, President, Chief Financial Officer, Chief Operating Officer and Secretary. Mr. Zitella, 56, 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 was appointed President effective December 16, 2020. 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.
Pat De Marco, CPA, CA, Lead Director (June 14, 2018 to present). Mr. De Marco, 60, 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.
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87
Susan L. Burkman, Director (August 23, 2018 to present). Ms. Burkman, 67, 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 (from August 21, 2012 to January 31, 2013; from March 2014 to May 10, 2018; since June 14, 2018).
Ms. Di Raddo, 63, has been a director of the Company since 2012, except from February 2013 to March 2014 and from May 10, 2018 to June 14, 2018.
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.
Peter Robinson, Director (June 14, 2018 to present). Mr. Robinson, 68, 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, Chief Executive Officer and Chief Brand Officer of DAVIDsTEA, is the daughter of Herschel Segal, Chairman of the Board of
Directors and Strategic Advisor of the Company and the owner of Rainy Day Investments Ltd., which controls approximately 46% of the outstanding
shares of DAVIDsTEA.
Family Relationships
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Function of Audit Committee
88
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”. 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.
Audit Committee Financial Experts
The Board has determined that Pat De Marco and Susan L. Burkman are “Audit Committee financial experts”. All members of the Audit
Committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and the NASDAQ Global Market.
Audited Financial Statements Included in Annual Report
Management has the primary responsibility for establishing and maintaining adequate internal financial controls, for preparing the financial
statements and for the public reporting process. Ernst & Young LLP (“EY”), the Company’s independent registered public accounting firm, is responsible
for expressing an opinion on the conformity of the Company’s audited consolidated financial statements with International Financial Reporting Standards.
The Audit Committee has reviewed and discussed with management and EY the Company’s audited consolidated financial statements for the year
ended January 30, 2021 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 PCAOB AS Section 1301, “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.
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89
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 January 30, 2021 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 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 five directors, four of whom are non-employee directors. Herschel Segal, Pat De Marco, Emilia Di Raddo and
Peter Robinson were 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 five directors were re-elected at the Company’s annual meeting of shareholders held on July 31, 2020. 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.
Three of the five 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 and Peter Robinson are considered independent, while Herschel
Segal is not considered to be independent in that he was within the last three years 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”
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Chair of the Board
90
Herschel Segal, 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 for 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.
Committee Chairs
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”) of the Board is responsible for the executive compensation programs for the
Company’s executive officers and reports to the Board on its discussions, decisions and other actions. The 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.
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Committees of the Board
91
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 Susan
L. Burkman (chair), Emilia Di Raddo and Peter Robinson. The HRCC Charter is available on our Investor Relations website at http://ir.davidstea.com
under “Corporate Governance”
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), Susan L. Burkman and Pat De Marco, each of whom is an independent director. The
Charter of the CGNC is available on our Investor Relations website at http://ir.davidstea.com under “Corporate Governance”
Board and Committee Meetings
During the period from February 2, 2020 to the date hereof, inclusively, the Board of Directors held 17 meetings, the Audit Committee held nine
meetings, the HRCC held eleven 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(1)
Pat De Marco
Emilia Di Raddo
Peter Robinson(2)
Ludwig Max Fischer(3)
____________________
(1) Susan L. Burkman was appointed to the CGNC on July 31, 2020.
(2) Peter Robinson was appointed to the HRCC on July 31, 2020.
(3) Ludwig Max Fischer served as a director until July 31, 2020.
17/17
17/17
17/17
17/17
17/17
10/11
In Camera Sessions
––
9/9
9/9
––
9/9
––
––
11/11
––
11/11
9/9
2/2
––
3/3
4/4
––
4/4
1/1
Total
17/17
40/40
30/30
28/28
39/39
13/14
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.
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Other Directorships
92
The following table sets out the sole director of the Company who is currently a director of another issuer that is a reporting issuer (or the
equivalent) in a jurisdiction of Canada or a foreign jurisdiction:
Name of Director
Emilia Di Raddo
Ethical Business Conduct
Issuer
Le Chateau Inc.
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.
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”. 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;
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93
(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.
Board, Committees and Directors Performance Assessment
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 diversity into consideration.
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Director Orientation and Continuing Education
Orientation
94
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 regularly monitor the Corporation’s website and 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.
ITEM 11. EXECUTIVE COMPENSATION
This section discusses the material components of the executive compensation program for our executive officers who are named in the “2020
Summary Compensation Table” below. In Fiscal 2020, our “Named Executive Officers” and their positions were as follows:
·
·
·
·
·
·
Herschel Segal, Interim Chief Executive Officer from June 14, 2018 to December 16, 2020, Chairman of the Board since June 14, 2018, and
Strategic Advisor since December 16, 2020
Sarah Segal, Chief Executive Officer since December 16, 2020 and Chief Brand Officer since August 21, 2018
Frank Zitella, President since December 16, 2020, Chief Operating Officer since April 26, 2019 and Chief Financial Officer since December
10, 2018
Martin Hillcoat, Vice-President, Supply Chain
Joe Bongiorno, Director of Finance
Fiona Horgan, former Senior Vice-President, Merchandising
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”.
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Executive and Director Compensation
Processes and Procedures for Compensation Decisions
95
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. The 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.
Short-Term Incentive Plan
The annual incentive program is a cash bonus intended to compensate officers for achieving short‑term corporate goals. It is also intended to
reward the Named Executive Officers for both the overall performance of the Company and individual performance during the year. The Company believes
that establishing cash bonus opportunities is an important factor in both attracting and retaining the services of qualified and highly-skilled executives. The
HRCC determined that the most meaningful measure of successful growth was Comparable Sales and selected other financial objectives in line with the
Company’s short-term corporate goals, which, together with Comparable Sales, would form the basis for the annual incentive program. The HRCC reviews
annually the weight attributed to each financial objective. Therefore, for fiscal 2020, 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 January
30, 2021 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 its initial public offering.
All equity and equity‑based awards, including RSU awards to the Named Executive Officers granted during the fiscal year ended January 30, 2021, are
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.
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96
The target award values for the Named Executive Officers are indicated in the table below. Actual awards for the fiscal year ended January 30,
2021 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
RSUs/performance share units granted based on the target award values, the Company determines the award value in the currency of the Named Executive
Officer, and if in Canadian dollars, converts the dollar amount into U.S. dollars to determine the award value.
Name
Herschel Segal
Sarah Segal
Frank Zitella
Martin Hillcoat
Joe Bongiorno
Fiona Horgan
Summary Compensation Table
Target
Value
Maximum
Value
(% of salary)
75%
40%
40%
25%
20%
25%
150%
80%
80%
50%
40%
50%
The following table illustrates the compensation paid to the Named Executive Officers for the last three completed fiscal years, as applicable.
Name and Principal
Position
Herschel Segal(2)
Former Interim Chief
Executive Officer;
Chairman of the Board
and Strategic Advisor
Salary
($)
Year
($)
2020 458,176
2019
2018
400,000
250,000
Non-Equity Incentive
Plan Compensation
Long-
term
Incentive
Plan
($)
Annual
Incentive
Plan
($)
All Other
Compensation
($)
—
—
—
Bonus
($)
Stock
Awards(1)
($)
— 375,000
Option
Awards
($)
—
—
240,000
—
—
—
—
—
—
—
Total
Compensation
($)
833,176
640,000
250,000
—
—
—
Sarah Segal(3)
Chief Executive Officer
and Chief Brand
Officer
2020
327,224
—
92,000
2019
230,000
2018 230,000
—
—
92,000
72,661
—
—
—
—
—
—
—
—
—
2020 398,650
— 317,300
—
—
—
Frank Zitella(4)
President, Chief
Financial Officer and
Chief
Operating Officer
Martin Hillcoat(5)
Vice-President, Supply
Chain
2019
382,981
2018
50,000
—
—
160,000
—
2020 228,462
—
53,756
2019
215,000
2018
86,000
5,000
10,000
53,750
—
—
—
—
—
—
Joe Bongiorno
Director of Finance
2020 237,183
2019 181,884
2018 169,922
—
—
—
36,004
36,001
27,248
18,525
—
—
Fiona Horgan(6)
Former Senior Vice-
President,
Merchandising
2020 128,908
— 137,500
2019
2018
84,571
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,154
—
—
—
—
1,181
1,181
1,096
419,224
322,000
302,661
715,950
544,135
50,000
282,218
273,750
96,000
274,364
219,065
198,265
—
132,212(7)
398,620
—
—
—
—
84,571
—
Notes:
____________
(1) Amounts shown reflect the aggregate grant date fair market value of time-vesting RSUs granted to Named Executive Officers on June 18, 2020,
February 27, 2020, June 20, 2019 and April 19, 2018, respectively, under the 2015 Omnibus Plan, excluding the value of estimated forfeitures on the
shares. Assumptions used in the calculation of these amounts are disclosed in note 15 to the Company’s Consolidated Financial Statements for the year
ended January 30, 2021 2021 ($1.00 USD = $1.28 CDN at January 30, 2021).
(2) Herschel Segal was appointed Interim Chief Executive Officer and Chairman of the Board on June 14, 2018 and resigned as Interim Chief Executive
Officer effective December 16, 2020, at which time he was named Strategic Advisor.
(3) Sarah Segal was appointed Chief Brand Officer on August 21, 2018 and prior thereto was the Company’s VP Product Development and Innovation.
Sarah Segal was appointed Chief Executive Officer effective December 16, 2020.
(4) Frank Zitella was appointed Chief Financial Officer and Corporate Secretary on December 10, 2018, Chief Operating Officer on April 26, 2019, and
President effective December 16, 2020.
(5) Martin Hillcoat was appointed Vice-President, Supply Chain on September 4, 2018.
(6) Fiona Horgan was appointed Senior Vice-President, Merchandising on January 20, 2020 and left the Company on July 15, 2020.
(7) This amount represents a severance payment made to Ms. Horgan upon her departure from the Company on July 15, 2020.
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Incentive Plan Awards
Outstanding share-based awards and option-based awards
97
The following table sets out information regarding outstanding awards in U.S. dollars held by the Named Executive Officers as of January 30,
2021.
Option-based Awards
Share-based Awards
Number of
securities
underlying
unexercised
options
(#)
Option
exercise
price
($)
Option
expiration
date
Value of
unexercised
in-the-
money
options
($)
—
—
—
—
—
—
—
—
Name
Herschel Segal(3)
Former Interim Chief Executive Officer;
Chairman of the Board and Strategic
Advisor
Sarah Segal
Chief Executive Officer and Chief Brand
Officer
Number
of shares
or units
of stock
that have
not
vested(1)
(#)
Market
value of
shares or
units of
stock that
have not
vested(2)
($USD)
Market
value of
vested
share-
based
awards
not paid
out or
distributed
262,818
880,440
—
137,657
461,151
400,475
1,341,591
64,478
216,001
—
39,576
132,580
Grant
date
2020-06-
18
2019-06-
20
2020-06-
18
2019-06-
20
2018-04-
8,360
28,006
—
—
—
—
—
—
—
—
—
—
—
—
19
2020-06-
18
2020-02-
27
2019-06-
20
2020-06-
18
2019-07-
12
2020-06-
18
2019-07-
12
2018-04-
19
112,414
376,587
112,136
375,656
—
58,557
196,166
68,829
239,522
230,577
802,399
37,671
126,196
—
19,569
57,240
65,556
191,752
25,230
84,521
—
13,017
43,607
3,136
41,383
10,506
138,633
—
—
—
2020-06-
18
—
—
—
—
Frank Zitella
President, Chief Financial Officer
and Chief Operating Officer
Martin Hillcoat
Vice-President, Supply Chain
Joe Bongiorno
Director of Finance
Fiona Horgan(4)
Former Senior Vice‑President,
Merchandising
Notes:
_________
(1) Unless earlier terminated, forfeited, relinquished or expired, the RSUs will vest as to one quarter of the shares on each of the first two anniversaries of
the grant date and 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 Named Executive Officer has remained in continuous service from the date of grant through such vesting date, unless otherwise
provided in the long-term incentive plan further discussed under “Compensation of Executive Officers and Directors”.
(2) The market value is calculated by multiplying the closing price of the Company’s common shares on the NASDAQ Global Market on January 31, 2020
(USD $1.44), being the last business day of the Company’s last fiscal year, by the number of RSUs that had not vested as of such date.
(3) Herschel Segal also holds DSUs awarded for his services as a director of the Company.
(4) Fiona Horgan left the Company on July 15, 2020.
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Equity Compensation Plan Information
98
The table below illustrates the status of the shares reserved for issuance under the Company’s equity-based incentive plans.
Number of
securities to
be issued upon
exercise of
outstanding
options
(#)
(a)
Weighted
average
exercise price
of outstanding
options
($USD)
(b)
Number of
securities to
be issued
upon vesting
of RSUs
Weighted
average fair
value price of
RSUs
($USD)
Number of
securities
available for
future
issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a))
(#)
(c)
14,000
3,490
4.30
—
14,39
1,306,101
—
1.33
—
1,200,323
—
17,490
—
—
—
1,306,101
—
—
—
1,200,323
Plan Category
Plan Name
Amended and Restated Equity
Incentive Plan(1)
2015 Omnibus Equity
Incentive Plan
Equity compensation plans
approved
by security holders
Equity compensation plans
not approved by security
holders
Total
Notes:
_________
(1) Since the adoption of the 2015 Omnibus Plan, no awards have been or will be made under the Amended and Restated Equity Incentive Plan.
Outstanding options previously granted under the Amended and Restated Equity Incentive Plan remain subject to the terms thereof.
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
or a change of control of the Company pursuant to their respective employment agreements with the Company.
Sarah Segal
The Company entered into a new Executive Employment Agreement dated December 16, 2020 with Sarah Segal, which provides in part as follows:
If Sarah Segal’s employment is terminated by the Company without “Cause” or she resigns for “Good Reason”, as those terms are respectively defined in
the Executive Employment Agreement, she will be entitled to (i) her earned but unpaid base salary, (ii) any unpaid business expense reimbursements, (iii)
an amount payable for accrued but unused vacation days, and (iv) any awarded but unpaid bonus for the year preceding the year during which the
resignation occurs, and a prorated portion of any bonus that becomes payable for that fiscal year, as determined by the HRCC at the end of that fiscal year
(collectively, the “Termination Payments”). In addition, any stock options, RSUs, stock units or other long-term incentive grants held by Ms. Segal will be
deemed vested on the date of termination.
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99
Further, if Ms. Segal has less than 18 complete years of service with the Company as of the date on which the termination notice is given, the Company
will pay an indemnity to her in lieu of notice equal to 18 months of her base salary, plus an amount equal to the performance-based bonus at “Target”, as
that term is defined in the Executive Employment Agreement, to be paid in a lump sum within five business days following the date of termination. If Ms.
Segal has at least 18 complete years of service with the Company as of the date on which the termination notice is given, the Company will pay an
indemnity to her in lieu of notice equal to 24 months of her base salary, plus an amount equal to two times the performance-based bonus at “Target”, to be
paid in a lump sum within five business days following the date of termination.
If Ms. Segal 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 the Executive Employment Agreement, she will be entitled to the Termination Payments and acceleration applicable in the event of termination
without “Cause” or for “Good Reason”.
Had Ms. Segal’s employment been terminated without cause on January 30, 2021, the last business day of the Company’s most recently-completed fiscal
year, she would have been entitled to receive an incremental payment of approximately $1,562,031, subject to applicable withholding taxes.
Frank Zitella
The Company entered into a new Executive Employment Agreement dated December 16, 2020 with Frank Zitella, which provides in part as follows:
If Frank Zitella’s employment is terminated by the Company without “Cause” or he resigns for “Good Reason”, as those terms are respectively defined in
the Executive Employment Agreement, he will be entitled to the Termination Payments. 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 termination.
Further, if Mr. Zitella has less than ten complete years of service with the Company as of the date on which the termination notice is given, the Company
will pay an indemnity to him in lieu of notice equal to twelve months of his base salary, plus an amount equal to the performance-based bonus at “Target”,
as that term is defined in the Executive Employment Agreement, to be paid in a lump sum within five business days following the date of termination. If
Mr. Zitella has more than ten complete years and less than 18 years of service with the Company as of the date on which the termination notice is given, the
Company will pay an indemnity to him in lieu of notice equal to 18 months of his base salary, plus an amount equal to 1.5 times the performance-based
bonus at “Target”, to be paid in a lump sum within five business days following the date of termination. If Mr. Zitella has at least 18 complete years of
service with the Company as of the date on which the termination notice is given, the Company will pay an indemnity to him in lieu of notice equal to 24
months of his base salary, plus an amount equal to two times the performance based bonus at Target, to be paid in a lump sum within five business days
following the date of termination.
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 the Executive Employment Agreement, he will be entitled to the Termination Payments and acceleration applicable in the event of termination
without “Cause” or for “Good Reason”.
Had Mr. Zitella’s employment been terminated without cause on January 30, 2021, the last business day of the Company’s most recently-completed fiscal
year, he would have been entitled to receive an incremental payment of approximately $1,834,571, subject to applicable withholding taxes.
2015 Omnibus Plan
The following is a description of provisions of the 2015 Omnibus Plan relating to the effect of termination of employment and related matters.
Termination for Cause
Vested and unvested awards will be forfeited immediately at the time of termination for cause.
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100
Termination Due to Death
Upon death, all time-based awards will immediately vest and performance awards will vest at the target level of performance. Options will remain
exercisable until the earlier of the one-year anniversary of the executive’s death or the award’s normal expiration date.
Termination Due to Disability
Upon a termination of employment due to disability, all time-based awards will immediately vest and performance awards will remain eligible to vest to the
extent the applicable performance goals are achieved. Options will remain exercisable until the earlier of the one-year anniversary of the participant’s
termination of employment due to disability or the award’s normal expiration date.
Retirement
Awards other than stock options will vest based pro rata of the number 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.
Voluntary Resignation
Vested options will remain exercisable until the earlier of the one-year anniversary of the termination of employment or the award’s normal expiration date.
Unvested awards will be forfeited at the time of such termination.
Involuntary Termination
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
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.
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Compensation of Directors
101
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 adopted on June 10, 2020, directors received the cash and equity compensation set forth below.
Non-Executive Board Chair
Annual retainer
Annual target equity grant
Board members
Annual retainer
Annual target equity grant
Board meeting fees
Lead Director
Annual retainer
Audit Committee Chair
Additional annual retainer
Audit Committee meeting fees
Human Resources and Compensation Committee Chair
Additional annual retainer
Human Resources and Compensation Committee meeting fees
Corporate Governance and Nominating Committee Chair
Additional annual retainer
Corporate Governance and Nominating Committee meeting fee....
$ 100,000
20,000 RSUs or deferred share units (“DSUs”), at the option of
the chair
$ 50,000
10,000 RSUs or DSUs, at the option of the director
$1,000 per meeting attended
$ 25,000
$15,000 minimum
$1,000 per meeting attended
$10,000 minimum
$1,000 per meeting attended
$10,000 minimum
$1,000 per meeting attended
Under the Company’s non-employee director compensation policy, annual retainers and meeting fees are paid in quarterly cash payments. At a
meeting of the Board of Directors held on April 17, 2020, the directors agreed to a reduction of 20% in all annual retainers for the balance of 2020. At a
meeting of the Board of Directors held on December 11, 2020, upon the recommendation of the HRCC, the Board determined that the base compensation
of the chairs of the various committees of the Board of Directors return to 100%.
Equity grants generally will be made in the form of RSUs or DSUs granted under the Equity Incentive Plan and will generally vest in full on the
first anniversary of the grant date.
Director Compensation Table
The following table sets out information concerning all amounts of compensation provided to the directors of the Company for their services in
that capacity for the fiscal year ended January 30, 2021.
Name
Herschel Segal
Susan L. Burkman
Pat De Marco
Emilia Di Raddo
Peter Robinson
Ludwig Max Fischer(1)
Fees
earned
($)
90,986
83,656
110,000
62,000
84,000
45,000
Note:
_____________
(1) Ludwig Max Fischer served as a director until July 31, 2020.
Share-
based
awards
($)
Option-
based
awards
($)
Non-equity
incentive plan
compensation($)
Pension
value
($)
All other
compensation
($)
—
14,270
14,270
14,270
14,270
14,270
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
($)
90,986
—
—
97,926
— 124,270
76,270
—
98,270
—
59,270
—
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.
Table of Contents
Value vested or earned during the year for directors
102
The following table sets out information regarding option-based awards and share-based awards that vested in the fiscal year ended January 30,
2021 for our directors. All share-based awards that vested in the fiscal year are disclosed in U.S. dollars.
Name
Herschel Segal
Susan L. Burkman
Pat De Marco
Emilia Di Raddo
Peter Robinson
Ludwig Max Fischer(2)
Notes:
_________
(1) The directors do not hold any stock options.
(2) Ludwig Max Fischer served as a director until July 31, 2020.
Option-based
awards -
Value vested
during the
year (1)
($)
Share-based
awards -
Value vested
during the
year
($USD)
Non-equity
incentive plan
compensation
- Value
earned during
the year
($)
—
—
—
—
—
—
—
—
—
7,575
7,575
7,575
—
—
—
—
—
—
Indebtedness of Directors and Officers
As of January 30, 2021, no executive officer, director or employee, former or present, of the Company or a subsidiary thereof, no person who is a
nominee for election as a director of the Company, and no associate of such persons, is, or was at any time since the beginning of the fiscal year ended
January 30, 2021, indebted to the Company or a subsidiary thereof, nor has any such person been indebted at any time since the beginning of the fiscal year
ended January 30, 2021 to any other entity where such indebtedness is the subject of a guarantee, support agreement, letter of credit or other similar
arrangement or understanding provided by the Company or a subsidiary thereof.
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 April 26,
2021 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 26,255,769 common shares outstanding as of April 26, 2021.
Beneficial ownership is determined in accordance with SEC rules. In general, under these rules a beneficial owner of a security includes any
person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares voting power or investment
power with respect to such security. A person is also deemed to be a beneficial owner of a security if that person has the right to acquire beneficial
ownership of such security within 60 days. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the
table have sole voting and investment power with respect to all common shares held by that person. Our common shares that a person has the right to
acquire within 60 days of April 26, 2021 are deemed outstanding for purposes of computing the percentage ownership of such person holding, but are not
deemed outstanding for purposes of computing the percentage ownership of any other person, except with respect to the percentage ownership of all
directors, director nominees and executive officers as a group. As of April 26, 2021, 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
103
The Company’s transfer agent and registrar is AST Trust Company (Canada), 320 Bay Street, B1 Level, Toronto, Ontario, Canada M5H 4A6.
Name of beneficial owner
Shares Beneficially Owned
as at January 30, 2021
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
45.79%
Named Executive Officers and Directors:
Herschel Segal(2)
Frank Zitella(3)
Sarah Segal(4)
Pat De Marco(5)
Emilia Di Raddo(6)
Peter Robinson(7)
Susan L. Burkman(8)
All executive officers and directors as a group
431,998
279,458
129,353
25,000
30,514
17,068
22,001
935,392
1.65%
1.07%
*
*
*
*
*
3.57%
Notes:
________________
* represents less than 1%.
(1) Rainy Day Investments Ltd. (“Rainy Day”) is a company controlled by Herschel Segal, Chairman of the Board of the Company, who holds voting and
investment control over the shares held by Rainy Day. The principal business address for Rainy Day is 5695 Ferrier, Mount Royal, Québec, Canada, H4P
1N1.
(2) Herschel Segal holds 262,818 RSUs, 167,657 DSUs and 1,523 common shares.
(3) Frank Zitella holds 239,522 RSUs and 39,936 common shares.
(4) Sarah Segal holds 112,414 RSUs and 16,939 common shares.
(5) Pat De Marco holds 25,000 DSUs.
(6) Emilia Di Raddo holds 10,000 RSUs and 20,514 common shares.
(7) Peter Robinson holds 10,00 RSUs and 7,068 common shares.
(8) Susan L. Burkman holds 10,000 RSUs, 7,500 DSUs and 4,501 common shares.
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 21 – Related party transactions, in this Annual Report and excerpts included herein.
Loan to a company controlled by one of the Company’s executive employees
The Company, as lender, entered into a loan agreement dated May 7, 2019 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,
Chief Executive Officer and Chief Brand Officer of DAVIDsTEA. Rainy Day, the principal shareholder of DAVIDsTEA, is controlled by Herschel Segal,
Chairman, director and Strategic Advisor of DAVIDsTEA and father of Sarah Segal. 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.
On April 29, 2020, the loan in the amount of $2.0 million and outstanding interest thereon was repaid in full.
Table of Contents
Purchase of merchandise for resale from a company controlled by an executive of the Company
104
During the year ended January 30, 2021, the Company purchased merchandise for resale from a company controlled by one of its executive
officers amounting to $139 [February 1, 2020 — $124; February 2, 2019 — $241]. As of January 30, 2021, an amount of nil [February 1, 2020 — $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 $90 [February 1, 2020 — $312; February 2, 2019 — nil] to a company
controlled by one of its executive officers. As of January 30, 2021, the amount of $43 [February 1, 2020 — $312] was outstanding and presented in
Accounts and other receivables.
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 January 30, 2021, the Company purchased a perpetual license rights to a reporting data model and associated intellectual
property for nil [February 1, 2020 — $200] and spent $53 [February 1, 2020 — $237; February 2, 2019 — nil] for consulting services from a related party
of the principal shareholder. As of January 30, 2021, an amount of nil [February 1, 2020 — $28] was outstanding and presented in Trade and other
payables.
Reimbursement of proxy contest related charges to a controlling shareholder
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.
Director Independence
Three of the five 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 NASDAQ rules. Under these rules, Susan L. Burkman, Pat De Marco and Peter Robinson
are considered independent, whereas Herschel Segal is not considered to be independent in that he was within the last three years 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 Executive Officer and 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 Chairman of our Board of Directors.
Table of Contents
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
105
The following table sets out the aggregate fees billed to the Company for the fiscal years ended January 30, 2021 and February 1, 2020 by EY:
Audit fees (1)
Audit-related fees (2)
Tax fees (3)
All other fees (4)
__________
Notes:
For the year ended
January 30,
February 1,
2021
2020
701,000
-
119,896
-
820,896
583,000
-
132,521
-
715,521
(1) Audit fees consist of fees billed for professional services rendered for the audit of our consolidated annual financial statements and review of the
interim consolidated financial statements included in our quarterly reports, consultation concerning financial reporting and accounting standards,
and services provided in connection with statutory and regulatory filings or engagements, including consent procedures in connection with public
filings.
(2) Audit-related fees consist of fees billed for related services that are reasonably related to the performance of the audit or review of our
consolidated financial statements and that are not reported under "Audit Fees".
(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 2020 and Fiscal 2019 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
106
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 January 30, 2021, and February 1, 2020
Consolidated Balance Sheets
For the years ended January 30, 2021, February 1, 2020, and February 2, 2019:
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.
(a)(3) Exhibits
Exhibit
Number
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
Description of Document
Incorporated by Reference
Form
Filing Date
Exhibit
Number
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 Non statutory 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.
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
5/18/2015
4/2/2015
5/2/2019
4/2/2015
4/2/2015
4/2/2015
4/2/2015
4/2/2015
4/2/2015
4/2/2015
4/2/2015
4/2/2015
4/2/2015
3.1
3.2
4.1
10.3
10.14
10.15
10.16
10.17
10.41
10.42
10.43
10.44
10.45
9/17/2019
10.1
10.25
10.26
21.1
23.1
31.1
31.2
32.2
Movable Hypothec on Securities between DAVIDsTEA Inc. and Rainy Day Investments
LTD.
Collaboration and Shared Services Agreement, effective February 21, 2019, between
DAVIDsTEA Inc. and Oink Oink Candy Inc.
8-K
8-K
9/17/2019
9/17/2019
10.2
10.3
[Subsidiaries of the Registrant]
Consent of Independent Registered Public Accounting Firm
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, relating to DAVIDsTEA Inc.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, relating to DAVIDsTEA Inc.
Certification of Chief 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
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation Linkbase
XBRL Taxonomy Extension Definition Linkbase
ITEM 16. FORM 10-K SUMMARY
None
Table of Contents
107
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: April 30, 2021
DAVIDsTEA INC.
/s/ Sarah Segal
By:
Name: Sarah Segal
Title: Chief Executive Officer and Chief Brand Officer
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/ Sarah Segal
Name: Sarah Segal
/s/ Frank Zitella
Name: Frank Zitella
/s/ Pat De Marco
Name: Pat De Marco
/s/ Emilia Di Raddo
Name: Emilia Di Raddo
/s/ Susan L. Burkman
Name: Susan L. Burkman
/s/ Peter Robinson
Name: Peter Robinson
Date: April 30, 2021
Chairman of the Board
Chief Executive Officer and Chief Brand Officer
(principal executive officer)
President, Chief Financial and Operating Officer
(principal financial officer and principal accounting officer)
Director
Director
Director
Director
108
Consent of Independent Registered Public Accounting Firm
EXHIBIT 23.1
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-205058) pertaining to the Amended and Restated Equity
Incentive Plan and 2015 Omnibus Equity Incentive Plan of DAVIDsTEA Inc. of our report dated April 30, 2021, with respect to the consolidated financial
statements of DAVIDsTEA Inc. included in this Annual Report (Form 10-K) for the year ended January 30, 2021, filed with the Securities and Exchange
Commission.
/s/ ERNST & YOUNG LLP
Montreal, Canada
April 30, 2021
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, President, Chief Financial and Operating 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: April 30, 2021
/s/ Frank Zitella
Frank Zitella
President, Chief Financial and Operating 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, Sarah Segal, Chief Executive Officer and Chief Brand 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: April 30, 2021
/s/ Sarah Segal
Sarah Segal
Chief Executive Officer and Chief Brand Officer
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 January 30, 2021 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
the information contained in the Company’s Form 10-K for the fiscal year ended January 30, 2021 fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Dated: April 30, 2021
/s/ Sarah Segal
By:
Name: Sarah Segal
Title: Chief Executive Officer and Chief Brand Officer
CERTIFICATION PURSUANT TO
SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the
undersigned, as Chief Financial Officer of DAVIDsTEA Inc. (the “Company”), does hereby certify that to my knowledge:
1.
2.
the Company’s Form 10-K for the fiscal year ended January 30, 2021 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
the information contained in the Company’s Form 10-K for the fiscal year ended January 30, 2021 fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Dated: April 30, 2021
/s/ Frank Zitella
By:
Name: Frank Zitella
Title: President, Chief Financial and Operating Officer