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TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

As filed with the Securities and Exchange Commission on May 26, 2015

Registration No. 333-203219


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



Amendment No. 3 to

FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933



DAVIDsTEA INC.
(Exact name of registrant as specified in its charter)

Canada
(State or other jurisdiction of
incorporation or organization)
  5499
(Primary Standard Industrial
Classification Code Number)
  98-1048842
(I.R.S. Employer
Identification Number)

5430 Ferrier
Mount-Royal, Québec, Canada, H4P 1M2
Telephone: (888) 873-0006

(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)



Sylvain Toutant
President and Chief Executive Officer
5430 Ferrier
Mount-Royal, Québec, Canada, H4P 1M2
Telephone: (888) 873-0006

(Name, address, including zip code, and telephone number, including area code, of agent for service)



Sylvain Toutant
President and Chief Executive Officer
400 Fifth Avenue
Waltham, Massachusetts 02451
Telephone: (888) 873-0006

(Name, address, including zip code, and telephone number, including area code, of agent for service)



Copies to:

Jane D. Goldstein
Marko S. Zatylny
Ropes & Gray LLP
Prudential Tower
800 Boylston Street
Boston, MA 02199
Telephone: (617) 951-7000

 

Shahir Guindi
François Paradis
Osler, Hoskin & Harcourt LLP
1000 De La Gauchetière
Street West
Suite 2100
Montréal, Québec,
Canada H3B 4W5

 

D. Rhett Brandon
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017
Telephone: (212) 455-2000

 

Philippe Fortier
McCarthy Tétrault LLP
1000 De La Gauchetière
Street West
Suite 2500
Montréal, Québec,
Canada H3B 0A2



Approximate date of commencement of proposed sale to public:
As soon as practicable after this Registration Statement is declared effective.

               If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    o

               If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

               If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

               If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

CALCULATION OF REGISTRATION FEE

               
 
Title of Each Class of Securities
to be Registered

  Amount to be
Registered(1)

  Proposed Maximum
Offering Price Per
Share

  Proposed Maximum
Aggregate Offering
Price(2)

  Amount of
Registration Fee(2)(3)

 

Common Shares, no par value

  5,865,000   $16.00   $93,840,000   $10,905

 

(1)
Includes 765,000 common shares issuable upon exercise of the underwriters' option to purchase additional common shares.

(2)
Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) of the Securities Act of 1933, as amended, based upon an estimate of the maximum offering price.

(3)
$8,715 previously paid.

               The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

   


Table of Contents

The information in this prospectus is not complete and may be changed. Neither we nor the selling shareholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to Completion
Preliminary Prospectus dated May 26, 2015

PROSPECTUS

5,100,000 Shares

LOGO

DAVIDsTEA INC.

Common Shares



          This is the initial public offering of our common shares. We are offering 2,988,600 common shares, no par value per share, and the selling shareholders named in this prospectus, which include certain of our affiliated shareholders are offering, in the aggregate, 2,111,400 common shares. We will not receive any proceeds from the common shares sold by the selling shareholders. We currently expect the initial public offering price to be between US$14.00 and US$16.00 per common share.

          Prior to this offering there has been no public market for our common shares. We have applied for listing of our common shares on The NASDAQ Global Market under the symbol "DTEA."

          We are eligible to be treated as an "emerging growth company" as defined in Section 2(a) of the Securities Act of 1933 and, as a result, are subject to reduced public company reporting requirements. See "Prospectus Summary — Implications of Being an Emerging Growth Company and a Foreign Private Issuer."

          Investing in our common shares involves risk. See "Risk Factors" beginning on page 14.

          Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 
Per Share
 
Total
 

Initial public offering price

  US$               US$              

Underwriting discounts and commissions(1)

  US$               US$              

Proceeds to us before expenses

  US$               US$              

Proceeds before expenses to the selling shareholders

  US$               US$              

(1)
See "Underwriting" for a detailed description of compensation payable to the underwriters. We have agreed to reimburse the underwriters for certain expenses in connection with this offering. See "Underwriting."

          To the extent that the underwriters sell more than 5,100,000 common shares, the underwriters have the option to purchase up to an aggregate of 765,000 additional common shares from us and from the selling shareholders at the initial public offering price less the underwriting discounts and commissions for 30 days after the date of this prospectus.

          The underwriters expect to deliver the common shares against payment in New York, New York on or about                      , 2015.

Goldman, Sachs & Co.   J.P. Morgan


 

 

BofA Merrill Lynch

 

 


BMO Capital Markets

 

William Blair

   

Prospectus dated                      , 2015


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TABLE OF CONTENTS

 
 
Page
 

Prospectus Summary

    1  

Risk Factors

    14  

Cautionary Note Regarding Forward-Looking Statements

    36  

Exchange Rate Information

    38  

Use of Proceeds

    39  

Dividend Policy

    40  

Capitalization

    41  

Dilution

    44  

Selected Consolidated Financial Data

    46  

Management's Discussion and Analysis of Financial Condition and Results of Operations

    47  

Business

    64  

Management

    78  

Executive and Director Compensation

    85  

Security Ownership of Beneficial Owners and Management

    100  

Related Party Transactions

    103  

Description of Share Capital

    108  

Comparison of Shareholder Rights

    116  

Shares Eligible for Future Sale

    128  

Material United States Federal Income Tax Considerations for U.S. Holders

    130  

Canadian Tax Implications for Non-Canadian Holders

    135  

Underwriting

    137  

Legal Matters

    143  

Experts

    143  

Enforcement of Civil Liabilities

    143  

Expenses Related to this Offering

    144  

Where You Can Find More Information

    144  

Index to Consolidated Financial Statements

    F-1  

          We are responsible for the information contained in this prospectus and in any free writing prospectus we prepare or authorize. We have not, and the underwriters have not, authorized anyone to provide you with different information, and we and the underwriters take no responsibility for any other information others may give you. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than its date.

          In this prospectus, unless otherwise specified, all monetary amounts are in Canadian dollars, all references to "$," "C$," "CDN$," "Canadian dollars" and "dollars" mean Canadian dollars and all references to "U.S. dollars," "US$" and "USD" mean U.S. dollars.



Industry and Market Data

          Although we are responsible for all disclosure contained in this prospectus, in some cases we have relied on certain market and industry data obtained from third-party sources that we believe to be reliable. Market estimates are calculated by using independent industry publications and third-party forecasts in conjunction with our assumptions about our markets. While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed under the headings "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" in this prospectus.



Trademarks and Service Marks

          We own or have rights to trademarks and service marks for use in connection with the operation of our business, including, but not limited to, DAVIDsTEA®. All other trademarks or service marks appearing in this prospectus that are not identified as marks owned by us are the property of their respective owners.

          Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus are listed without the ®, (TM) and (sm) symbols, but we will assert, to the fullest extent under applicable law, our applicable rights in these trademarks, service marks and trade names.

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PROSPECTUS SUMMARY

          This summary highlights information contained in other parts of this prospectus. Because it is only a summary, it does not contain all of the information that you should consider before investing in our common shares and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. You should read the entire prospectus carefully, especially "Risk Factors" and our financial statements and the related notes included elsewhere in this prospectus, before deciding to buy our common shares. Unless the context requires otherwise, references in this prospectus to the "Company," "DAVIDsTEA," "we," "us" and "our" refer to DAVIDsTEA Inc. and its wholly owned subsidiary. Unless otherwise noted, this prospectus assumes the 1.6-for-1 forward split of our common shares, which was effective on May 21, 2015, as well as the exchange of all of our Class AA Common Shares into common shares and the conversion of all of our Junior Preferred Shares, Series A Preferred Shares, Series A-1 Preferred Shares and Series A-2 Preferred Shares into common shares. In this prospectus, unless otherwise specified, all monetary amounts are in Canadian dollars, all references to "$," "C$," "CDN$," "Canadian dollars" and "dollars" mean Canadian dollars and all references to "U.S. dollars," "US$" and "USD" mean U.S. dollars.


Our Company

          DAVIDsTEA is a fast-growing branded beverage company, offering a differentiated selection of proprietary loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts and accessories through 161 DAVIDsTEA stores, as of May 2, 2015, and our website, davidstea.com. We are building a brand that seeks to expand the definition of tea with innovative products that consumers can explore in an open and inviting retail environment. The 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 design our stores with a modern and simple aesthetic that, coupled with our teal-colored logo, create an inviting atmosphere and stand in stark contrast to common perceptions of tea as a more traditional product. We strive to make tea a multi-sensory experience by facilitating interaction with our products through education and sampling so that our customers appreciate the compelling attributes of loose-leaf teas as well as the ease of preparation. Our in-store "Tea Guides" help novice and experienced tea drinkers alike select from the approximately 150 varieties of premium teas and tea blends featured on our "Tea Wall," which is the focal point of our stores. We replicate our store experience online by engaging users with rich content that allows them to easily explore their options amongst our many tea and tea-related offerings.

          We sell our products exclusively through our retail and online channels, giving us control of the presentation of our brand as well as greater interaction with the customer, which increases our pace of innovation. We have a dedicated and highly experienced product development team that is constantly creating new tea blends using high-quality ingredients from around the world. By continually offering new products and refining our blending techniques to enhance existing teas, we believe we bring new customers into the category and drive the frequency of visits to our stores and website among existing customers. We bring newness and capitalize on our product development capabilities with approximately 30 new blends each year that we rotate into our offering on a continuous basis. We also focus on product innovation in our accessories, providing our customers with fun, inventive and more convenient ways to enjoy tea. We believe that our product development platform and level of innovation have helped us earn a strong and loyal customer following that is passionate about DAVIDsTEA.

          We were founded in Montréal, Canada by Herschel and David Segal in 2008. They sought to build a brand and company to respond to consumers' increasing focus on health and wellness by leveraging tea's potential health benefits and providing high-quality products. Since opening our first retail store and launching our website (www.davidstea.com) in late 2008, we have poured our

 

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love for tea into an active online community with over 3.5 million unique visitors to our website in 2014 and 161 DAVIDsTEA locations, including 136 in Canada and 25 in the United States as of May 2, 2015. To date, we have been successful in a variety of Canadian markets, including in Montréal, Toronto and Vancouver. The strong performance of our stores across geographies demonstrates the appeal of our brand and underscores our growth opportunity. With our success in Canada and over three years of experience in U.S. markets, including New York, Boston, Chicago and San Francisco, we believe we are well positioned to take advantage of the significant growth opportunity across North America. Consistent with our stores, davidstea.com features our innovative products while offering expertise, community and numerous tools to aid the discovery and exploration of tea. During fiscal 2014, approximately 68% of our revenue was driven by the sale of loose-leaf tea and tea-related gifts that consumers enjoy at home, on-the-go or at work, with the balance driven by tea accessories (22%) and food and beverages prepared in our stores (10%).

          We believe our business model is based on innovation, quality and the customer experience. These attributes have positioned us to deliver strong financial results, as evidenced by the following:

GRAPHIC

    The growth of our store base from 70 stores in fiscal 2011 to 154 stores in fiscal 2014, representing a 30% compound annual growth rate. As of January 31, 2015, we had a total of 154 stores or approximately 24% more than at the end of fiscal 2013. As of May 2, 2015, we had 161 stores in North America.

    Twenty-two consecutive quarters of positive comparable sales growth through the end of fiscal 2014. On an annual basis since fiscal 2011, we have reported double-digit comparable sales growth ranging from 33.4% in fiscal 2011 to 11.1% in fiscal 2014.

    An increase in sales from $41.9 million in fiscal 2011 to $141.9 million in fiscal 2014, representing a 50% compound annual growth rate. Sales in fiscal 2014 were approximately 31% higher than in fiscal 2013.

    Growth of our Adjusted EBITDA from $7.7 million in fiscal 2012 to $21.9 million in fiscal 2014, representing a 68% compound annual growth rate. Adjusted EBITDA in fiscal 2014 was approximately 54% higher than in fiscal 2013. Our net income was $(4.4) million, $(6.2) million and $6.5 million in fiscal 2012, 2013 and 2014.

 

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Our Market Opportunity

          We participate in the large and growing global tea market, which had approximately $40 billion of retail sales in 2013 in 2014 U.S. dollars, according to Euromonitor International data as of November 4, 2014. We believe that the large size and outsized growth of the tea category combined with the relatively low percentage of tea value sales in North America make our market opportunity highly attractive, especially as we expect consumer awareness of tea in Canada and the United States to increase.


Our Competitive Strengths

          We believe that the following strengths differentiate us from our competitors and are important to our success:

    Modern Brand Reinventing the Tea Experience.    Our mission is to make tea fun and accessible. We believe that our brand, passion for tea and breadth of offering, as underscored by the approximately 150 varieties of premium teas and tea blends in our stores, cause customers to see tea as fresh and stylish. The DAVIDsTEA retail experience is led by our Tea Guides, who share our knowledge of tea with our customers through sampling, education and by showing customers that tea is easy to prepare, comes in a variety of great flavors and is suitable for multiple occasions. To reinforce this sense of accessibility, we create fun names for our teas that are designed to highlight the smell, taste profile and other attributes of the product. We believe our differentiated approach will continue to lead existing customers to engage with our brand and will attract new customers to both our brand and the category.

    Focus on Innovation and Design.    We focus on constant innovation to improve the taste and presentation of our existing tea blends while creating new offerings that delight our customers. Our product development and sourcing teams work closely together and find inspiration from our suppliers as well as from direct feedback from our customers and Tea Guides, all the while following key consumer trends. Our team has launched over 400 different teas since DAVIDsTEA was founded. We seek to develop creative accessories that are unique and make steeping tea easy at home or on-the-go. We also develop gifts that incorporate our love of tea such as tea-scented candles, tea sachets and tea gift boxes. We believe that our focus on innovation and design keeps existing customers engaged while also attracting new customers to our brand.

    Distinct Retail Concept Reinforces Brand and Customer Loyalty.    The clean, modern aesthetic of our retail concept communicates the newness and innovation behind our brand. A key element of the DAVIDsTEA in-store experience is our "Tea Wall," a focal point of the store, which displays approximately 150 varieties of premium loose-leaf teas and tea blends. Our Tea Guides help facilitate a highly interactive and immersive customer experience. It is this personable customer interaction combined with the high-quality teas that has allowed us to develop strong customer loyalties. We have very broad customer appeal that spans novice and experienced tea consumers. To capitalize on this growing following, we introduced our "Frequent Steeper" customer loyalty program in April 2014. This loyalty program has rapidly expanded to over a million members currently. Since April 2014, approximately 80% of our sales have come from Frequent Steepers. We believe that our retail concept and our retail experience led by our Tea Guides both reinforce our brand and drive our customer loyalty.

    Broad Demographic Appeal Supports Sustainable Long-Term Growth.    We believe that our fresh approach to tea gives us broad appeal, while benefitting from several consumer trends. We believe that consumers are increasingly looking for products that are both great tasting and healthy. Tea naturally contains no sodium, fat, carbonation or sugar and is virtually calorie-free. We also offer one of the largest certified organic collections of tea among branded

 

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    tea retailers in North America. We believe that consumers are also looking to find beverages that provide functional benefits and can be customized and enjoyed on a variety of occasions. Lastly, we believe that as consumers become more educated about tea, they will seek out venues like DAVIDsTEA that provide a large selection of high-quality products. We believe that our tea's broad, multi-generational appeal coupled with several important consumer trends, most notably health and wellness, will help support our long-term growth.

    Effective Grassroots Marketing Strategy Drives Customer Trial and Engagement.    We use a field-based marketing approach in addition to social media to build brand awareness and drive customers to our stores. One aspect of this effort is our events sponsorship group, which we believe is a differentiated capability and allows us to create excitement for our brand by engaging directly in the communities around our stores and drive store visits by offering product samplings and beverage coupons. In the last 12 months, we participated in approximately 2,000 events that more than one million people attended. We also have a strong social media platform that is distinguished from peers by our high level of customer engagement. We believe that our ability to build brand awareness is largely driven by our grassroots marketing strategy and our strong social media platform.

    Versatile Store Model with Compelling Store Economics.    Our stores have been successful in a variety of geographic regions, population densities and real estate venues. The success of our stores with consumers is underscored, in part, by our comparable sales growth, which has been positive for the past 22 consecutive quarters. We have proven our concept across Canada, where we believe there remains significant growth opportunity. Our average unit is approximately 850 square feet, although our store format allows us to be flexible so that we can get the most desirable location. Our units in Canada averaged four-wall Adjusted EBITDA margins in excess of 30% in fiscal 2014. Our new stores in Canada have historically averaged a cash-on-cash payback period of approximately two years. We opened our first store in the United States in 2011 and we believe the experience over the last two years demonstrates the potential of our brand and retail concept. For our new stores in the United States, we target a cash-on-cash payback of approximately three years, rather than the two we have historically achieved for our Canadian stores. Our ability to achieve this target is dependent on our ability to increase brand awareness in the United States and to leverage economies of scale in our U.S. distribution channel as we increase our U.S. store base. We believe the strong results we continue to experience in North America underscore our growth opportunity.

    Passionate Customer-Focused Culture supported by Experienced Management Team and Dedicated Board Members.    Our core values and distinctive corporate culture allow us to attract passionate and friendly employees who share a vision of making tea fun and accessible. Our President and Chief Executive Officer, Sylvain Toutant, joined us in May 2014. He most recently served as president of Keurig Canada, and was previously Chief Operating Officer at VanHoutte. Our Chief Financial Officer, Luis Borgen, joined us in 2012, having previously served as the Chief Financial Officer of DaVita HealthCare Partners, a public company in the healthcare space. Prior to DaVita Healthcare Partners, Mr. Borgen spent more than 12 years at Staples. The strength of our management team is supported by our dedicated board of directors, including our co-founder Herschel Segal. Mr. Segal retains an advisory role in our Company and works closely with Mr. Toutant and our other executives in initiatives related to developing corporate strategy, building our corporate culture and enhancing our sales and operations infrastructure. Our board of directors and management team's experience is balanced between entrepreneurial growth and large scale operations. We support a culture that is rooted in our love and excitement for tea. As a result, we believe our culture directly translates into how we interact with our customers and the knowledge and passion our team members display.

 

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Our Growth Strategies

          Key elements of our growth strategy are to:

    Increase Brand Awareness.    We will continue to increase consumer awareness and excitement for the DAVIDsTEA brand and drive customer loyalty through our field-based marketing efforts, social media presence, continued store expansion and growing e-commerce sales. Our field-based marketing programs are designed to develop and foster a personal connection with the community and position DAVIDsTEA as a high-quality, community-conscious brand that simplifies tea preparation in a way that encourages consumption for both tea enthusiasts and novices. We will also continue to leverage our growing social media presence to increase our online sales and drive additional store visits within existing and new markets. We see a significant opportunity to increase our brand visibility in the U.S. market, which will be a key area of focus in our marketing strategy going forward.

    Grow Our Store Base.    We believe there is a highly attractive, long-term growth opportunity for our store base in North America with a potential for up to an additional 100 stores in Canada and up to an additional 300 stores in the United States, based on management estimates. As shown in the table below, our store base has grown considerably in the past few years.

 
  Total Number of Stores    
 
Fiscal Year
 
Canada
 
United States
 
Total
 

2011

    68     2     70  

2012

    91     14     105  

2013

    108     16     124  

2014

    130     24     154  

    In fiscal 2015, we expect to open approximately 25-30 stores in Canada and 10-15 stores in the United States. Over the longer term, we believe that we have the ability to open approximately 30-40 stores annually. We are targeting U.S. store openings so that stores in the United States comprise approximately 25%-35% of our store base within five years. Our U.S. growth depends, in part, on increasing consumer awareness and consumption of tea in the United States, as well as successfully translating our operating experience in Canada to the United States.

    Drive Comparable Sales.    We expect to drive positive comparable sales growth by increasing the size and frequency of purchases by our existing customers, as well as by attracting new customers. We intend to execute this strategy through both our retail stores and e-commerce site, through:

      Enhancing our current product assortment.  We believe that our attractive and continuously evolving assortment of tea, pre-packaged teas, tea sachets, tea-related accessories and other tea-related merchandise, including popular limited-time and seasonal offerings, drives consumers to our stores and website and creates a sense of excitement in attaining our latest products.

      Introducing new product categories and broadening existing categories to provide additional reasons to shop at DAVIDsTEA.  We continue to look for adjacent categories in which we can infuse our tea flavors, such as tea-scented candles and tea-infused chocolates.

 

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      Offering a website that blends product expertise, community and numerous tools to aid in the discovery and exploration of tea.  Our e-commerce sales increased from 2.7% of sales in fiscal 2010 to 7.9% of sales for the year ended January 31, 2015, and we are targeting greater than 15% of sales over the long term as we educate consumers about our products and introduce a new website in fiscal 2015.

      Capitalizing on our strong customer loyalty and growing customer base.  We believe there is an opportunity to enhance our recently introduced Frequent Steeper loyalty program to provide customers with more targeted messages. We are making significant investments to drive our loyalty program.

    Expand Adjusted EBITDA Margin.    We have increased our Adjusted EBITDA margin from 10.6% in fiscal 2012 to 15.4% in fiscal 2014. As we continue to grow and benefit from the leveraging of our cost structure, we believe further opportunities to increase our margins will exist. We intend to capitalize on opportunities across our supply chain as we grow our business and achieve further economies of scale. We have invested significantly in our business ahead of our growth, and we are targeting an Adjusted EBITDA margin in the high teens over the long term.


Recent Developments

April 2015 Refinancing

          Effective as of April 24, 2015, we entered into a three year credit agreement with Bank of Montreal, which we refer to as BMO. The credit agreement provides for a $20.0 million revolving credit facility (referred to as the "Revolving Facility"). The Revolving Facility is available by way of Canadian dollar advances, U.S. dollar advances, prime rate loans, U.S. base rate loans, bankers' acceptances, LIBOR loans, letters of credit or letters of guarantee. The borrowings will bear interest at rates varying from bank's prime plus 0.5% to 1.25% for advances, prime rate loans and U.S. base rate loans and applicable rates plus 1.5% to 2.25% for bankers' acceptances, LIBOR advances, Letters of Credit or Letters of Guarantee. Any undrawn portion of the Revolving Facility will be subject to standby fees ranging from 30 bps to 45 bps of the undrawn amounts. Letters of credit and letters of guarantee borrowings are limited to $2.0 million in the aggregate.

          A portion of the Revolving Facility was used to repay the outstanding balance of $5.2 million under our prior credit facility with HSBC that was entered into on August 19, 2013 and $4.6 million under our Term Loan with Investissement Québec.

          We refer to the transactions through which we entered into the credit agreement with BMO and applied the proceeds as described above as the "April 2015 Refinancing." See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Cash Flows Relating to Financing Activities—Credit Agreement with Bank of Montreal."

Preliminary First Quarter Results

          Management has prepared the sales, comparable sales and gross profit information below in good faith based upon our internal reporting for the fiscal quarter ended May 2, 2015. Such information has not yet been subject to our normal quarterly financial closing processes, and our independent registered public accounting firm has not commenced its review of these results. We are currently unable to provide additional material financial measures, including any ranges, with a reasonable degree of certainty for this recently completed fiscal quarter.

          We expect to report sales of approximately $35.6 million for the thirteen weeks ended May 2, 2015, an increase of approximately $7.8 million, or approximately 28%, as compared to sales of $27.8 million for the thirteen weeks ended April 26, 2014. Comparable sales increased 6.3% for the

 

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fiscal quarter ended May 2, 2015 following an increase of 11.6% for the fiscal quarter ended April 26, 2014. The increase in comparable sales was driven by a 7.2% increase in average ticket and partly offset by a 0.8% decrease in number of transactions.

          For the thirteen weeks ended May 2, 2015, we expect gross profit to be between $18.7 million and $19.0 million, as compared to gross profit of $15.8 million for the thirteen weeks ended April 26, 2014. The estimated increase in gross profit for the period was primarily the result of increased sales volume as described above.

          As of May 2, 2015, the Company operated 161 stores, reflecting seven openings fiscal year-to-date, as compared to 126 as of April 26, 2014.


Summary Risk Factors

          An investment in our common shares involves a high degree of risk. Any of the factors set forth under "Risk Factors" may limit our ability to successfully execute our business strategy. You should carefully consider all of the information set forth in this prospectus and, in particular, should evaluate the specific factors set forth under "Risk Factors" in deciding whether to invest in our common shares. Among these important risks are the following:

    Our ability to successfully implement our growth strategy;

    Our ability to grow our brand recognition and store base in the United States;

    Changes in consumer preferences and economic conditions affecting disposable income;

    The impact from real or perceived quality or safety issues with our teas, tea accessories and other tea-related merchandise;

    Our ability to obtain quality products from third-party manufacturers and suppliers on a timely basis or in sufficient quantities;

    Significant competition within our industry; and

    The impact of weather conditions, natural disasters and manmade disasters on the supply and price of tea.


Implications of Being an Emerging Growth Company and a Foreign Private Issuer

          As a company with less than US$1.0 billion in revenue during our most recently completed fiscal year as of the initial filing date of the registration statement of which this prospectus forms a part, we qualify as an "emerging growth company" as defined in Section 2(a) of the Securities Act of 1933, as amended, which we refer to as the Securities Act, as modified by the Jumpstart our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies that are not emerging growth companies. These provisions include exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.

          We may take advantage of these exemptions for up to five years or such time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we (1) have US$1.0 billion or more in annual revenues as of the end of our fiscal year, (2) are a large accelerated filer and have more than US$700.0 million in market value of our stock held by non-affiliates as of the end of our second fiscal quarter, or (3) we issue more than US$1.0 billion of non-convertible debt securities over a three-year period. We may choose to take advantage of some but not all of these reduced disclosure obligations. If we do, the information that we provide

 

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shareholders may be different than you might get from other public companies in which you hold stock.

          The JOBS Act permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We prepare our financial statements in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standard Board, which make no distinction between public and private companies for purposes of compliance with new or revised accounting standards. As a result, the requirements for our compliance as a private company and as a public company are the same.

          Upon consummation of this offering, we will report under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as a non-U.S. company with foreign private issuer status. As a foreign private issuer, we may take advantage of certain provisions in the NASDAQ Listing Rules that allow us to follow Canadian law for certain corporate governance matters. See "Management — Foreign Private Issuer Status." Even after we no longer qualify as an emerging growth company, as long as we qualify as a foreign private issuer under the Exchange Act, we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including:

    the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;

    the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time;

    the rules under the Exchange Act requiring the filing with the Securities and Exchange Commission 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 Fair Disclosure, or Regulation FD, which regulates selective disclosures of material information by issuers.


Corporate Information

          DAVIDsTEA Inc. was incorporated under the Canada Business Corporations Act, or the CBCA, on April 29, 2008 and our principal executive offices are located at 5430 Ferrier, Mount-Royal, Québec, Canada, H4P 1M2. Our office in the United States is located at 400 Fifth Avenue, Waltham, Massachusetts, 02451. Our telephone number at our principal executive offices is (888) 873-0006. Our website address is www.davidstea.com. Our website and the information contained on our website do not constitute a part of this prospectus.

 

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The Offering

Common shares offered by us

  2,988,600 shares.

Common shares offered by the selling shareholders

 

2,111,400 shares.

Common shares to be outstanding immediately after completion of this offering

 

23,155,571 shares.

Option to purchase additional shares

 

We and the selling shareholders have granted the underwriters an option for a period of 30 days after the date of this prospectus to purchase up to an additional 765,000 shares from us and the selling shareholders.

Use of proceeds

 

We estimate that the net proceeds to us from this offering will be approximately US$37.3 million (or approximately US$43.3 million if the underwriters exercise their option to purchase additional shares in full), at an assumed initial public offering price of US$15.00 per share, the midpoint of the price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds of this offering to repay indebtedness and for working capital and general corporate purposes. See "Use of Proceeds."

 

We will not receive any of the proceeds from the sale of common shares by the selling shareholders.

Dividend policy

 

We do not expect to pay any dividends on our common shares in the foreseeable future.

Risk factors

 

You should read the "Risk Factors" section of this prospectus for a discussion of factors to consider carefully before deciding to invest in our common shares.

Proposed symbol

 

"DTEA"

          The number of common shares to be outstanding after this offering is based on 20,166,971 common shares outstanding as of January 31, 2015 and excludes the following:

    2,905,648 common shares issuable upon exercise of options outstanding under our equity incentive plan as of January 31, 2015 at a weighted average exercise price of $2.06 per share;

    235,120 common shares issuable upon the vesting of restricted share units outstanding under our equity incentive plan as of March 31, 2015; and

    1,204,880 common shares reserved for future issuance under our equity incentive plan as of March 31, 2015.

          Unless otherwise indicated, this prospectus reflects and assumes the following:

    the 1.6-for-1 forward split of our common shares effective as of May 21, 2015;

 

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    the adoption of our articles of amendment and our amended and restated bylaws, each to be effective upon the closing of this offering;

    the automatic exchange of all of our Class AA Common Shares, no par value, into 80,000 common shares upon the closing of this offering;

    the automatic conversion of all of our Junior Preferred Shares, no par value, into 11,906,145 common shares upon the closing of this offering;

    the automatic conversion of all of our Series A Preferred Shares, no par value, into 6,423,900 common shares upon the closing of this offering;

    the automatic conversion of all of our Series A-1 Preferred Shares, no par value, into 1,460,298 common shares upon the closing of this offering; and

    the automatic conversion of all of our Series A-2 Preferred Shares, no par value, into 244,606 common shares upon the closing of this offering.

 

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Summary Consolidated Financial and Other Data

          The following summary consolidated financial data has been derived from the statements of operations and comprehensive income data for the years ended January 31, 2015, January 25, 2014 and January 26, 2013 and the balance sheet data as of January 31, 2015 and January 25, 2014 from our audited consolidated financial statements appearing elsewhere in this prospectus. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.

          The following information should be read in conjunction with "Risk Factors," "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this prospectus. Our financial statements have been prepared in accordance with the International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB.

 
  For the year ended  
 
 
January 31,
2015
 
January 25,
2014
 
January 26,
2013
 
(in thousands, except share information and store data)
  (as restated)
(1)

  (as restated)
(1)

   
 

 

 

 

 

 

 

 

 

 

 

 

Consolidated statement of income (loss) data:

                   

Sales

  $ 141,883   $ 108,169   $ 73,058  

Cost of sales

    64,185     48,403     32,177  

Gross profit

    77,698     59,766     40,881  

Selling, general and administration expenses

    66,565     52,369     37,338  

Results from operating activities

    11,133     7,397     3,543  

Finance costs

    2,345     1,967     1,829  

Finance income

    (133 )   (45 )    

Accretion of preferred shares

    1,044     514     416  

Loss from embedded derivative on Series A, A-1 and A-2 Preferred Shares

    380     8,058     3,960  

IPO-related costs

    856          

Settlement cost related to former option holder

    520          

Income/(loss) before income taxes

    6,121     (3,097 )   (2,662 )

Provision for income tax (recovery)

    (333 )   3,067     1,692  

Net income (loss)

  $ 6,454   $ (6,164 ) $ (4,354 )

Weighted average number of shares outstanding

    11,984,763     11,928,626     12,226,202  

Net income (loss) per share:

                   

Basic

    0.54     (0.52 )   (0.36 )

Fully diluted

    0.45     (0.52 )   (0.36 )

Consolidated balance sheet data (at period end):

   
 
   
 
   
 
 

Cash

  $ 19,784   $ 15,350        

Total assets

    79,060     61,946        

Long-term debt, including current portion

    10,429     14,059        

Loan from the controlling shareholder

    2,952     8,690        

Preferred shares — Series A, A-1 and A-2

    28,768     18,449        

Financial derivative liability embedded in Preferred Shares — Series A, A-1 and A-2

    16,427     14,024        

Total liabilities

    79,106     71,253        

Shareholders' equity (deficit)

    (46 )   (9,307 )      

Other financial and operations data (unaudited):

   
 
   
 
   
 
 

Adjusted EBITDA(2)

  $ 21,905   $ 14,222        

Number of stores at end of year

    154     124        

Comparable sales growth for year(3)

    11.1 %   17.8 %      

(1)
Our consolidated financial statements and related notes as of January 31, 2015 and January 25, 2014 and for the years ended January 31, 2015 and January 25, 2014 have been restated due to the revaluation of the liability related to the embedded derivative related to our Series A, A-1 and A-2 Preferred Shares. See note 2 to our consolidated financial statements included elsewhere in this prospectus for a description and summary of

 

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    the impact of the restatement on the fiscal year ended January 31, 2015 and the fiscal year ended January 25, 2014.

(2)
Adjusted EBITDA is not a presentation made in accordance with IFRS, and the use of the term Adjusted EBITDA may differ from similar measures reported by other companies. We believe that Adjusted EBITDA provides investors with useful information with respect to our historical operations.


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 of the period, such as depreciation, amortization, impairment costs, costs related to onerous contracts or contracts where we expect the costs of the obligations to exceed the economic benefit and non-recurring expenses relating to our initial public offering. This measure also functions as a benchmark to evaluate our operating performance.


Adjusted EBITDA and Adjusted EBITDA margin are not measurements of our financial performance under IFRS and should not be considered in isolation or as an alternative to net income, net cash provided by operating, investing or financing activities or any other financial statement data presented as indicators of financial performance or liquidity, each as presented in accordance with IFRS. We understand that although Adjusted EBITDA and Adjusted EBITDA margin are frequently used by securities analysts, lenders and others in their evaluation of companies, they have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under IFRS. Some of these limitations are:
 


Adjusted EBITDA and Adjusted EBITDA margin do not reflect changes in, or cash requirements for, our working capital needs;
 


Adjusted EBITDA and Adjusted EBITDA margin do not reflect the cash requirements necessary to service interest or principal payments on our debt; and
 


Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA and Adjusted EBITDA margin do not reflect any cash requirements for such replacements.


Because of these limitations, Adjusted EBITDA and Adjusted EBITDA margin 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.


Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of sales.

 

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The following table presents a reconciliation of Adjusted EBITDA to our net income (loss) determined in accordance with IFRS:

 
  For the year ended  
 
 
January 31,
2015
 
January 25,
2014
 
January 26,
2013
 
(in thousands)
  (as restated)
  (as restated)
   
 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

  $ 6,454   $ (6,164 ) $ (4,354 )

Finance costs

    2,345     1,967     1,829  

Finance income

    (133 )   (45 )    

Depreciation and amortization

    5,447     4,745     3,180  

Loss on disposal of property and equipment

    31          

Provision for income tax (recovery)

    (333 )   3,067     1,692  

EBITDA

    13,811   $ 3,570   $ 2,347  

Additional adjustments

                   

Stock-based compensation expense(a)

    947     228     237  

Impairment of property and equipment(b)

    2,740     1,192      

Onerous contracts(c)

    805          

Deferred rent(d)

    802     660     769  

Accretion of preferred shares(e)

    1,044     514     416  

Loss from embedded derivative on Series A, A-1 and A-2 Preferred Shares(f)

    380     8,058     3,960  

IPO costs(g)

    856          

Settlement costs related to former option holder(h)

    520          

Adjusted EBITDA

  $ 21,905   $ 14,222   $ 7,729  

(a)
Represents non-cash stock-based compensation expense.

(b)
Represents costs related to impairment of property, equipment and intangible assets for stores in the United States.

(c)
Represents provision related to certain stores where the unavoidable costs of meeting the obligations under the lease agreements are expected to exceed the economic benefits expected to be received from the contract.

(d)
Represents the extent to which our annual rent expense has been above or below our cash rent.

(e)
Represents non-cash accretion expense on our preferred shares. In connection with the completion of this offering, we expect that all of our outstanding preferred shares will convert automatically into common shares.

(f)
Represents provision for the conversion feature of the Series A, A-1 and A-2 Preferred Shares. In connection with the completion of this offering, we expect that this liability will be converted into equity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Conversion Feature of our Preferred Shares."

(g)
Represents fees and expenses incurred for the year ended January 31, 2015 in connection with this offering.

(h)
Represents costs incurred to settle a dispute with a former option holder.
(3)
Comparable sales refers to year-over-year comparison information for comparable stores and e-commerce. Our stores are added to the comparable sales calculation in the beginning of their thirteenth month of operation.

 

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RISK FACTORS

          Investing in our common shares involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all of the other information contained in this prospectus, including our consolidated financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in our common shares. 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. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.


Risks Related to Our Business and Our Industry

We may not be able to successfully implement our growth strategy on a timely basis or at all, which could harm our results of operations.

          Our continued growth depends, in large part, on our ability to open new stores and to operate those stores successfully. We believe there is a significant opportunity to expand our store base in the United States and Canada from 24 locations in the United States and 130 locations in Canada as of January 31, 2015 to potentially add up to an additional 100 stores in Canada and up to an additional 300 stores in the United States, based on management estimates. In fiscal 2015, we expect to open approximately 25-30 stores in Canada and 10-15 stores in the United States. Over the longer term, we believe that we have the ability to open approximately 30-40 stores annually. We are targeting U.S. store openings so that stores in the United States comprise approximately 25%-35% of our store base within five years. Our U.S. growth depends, in part, on increasing consumer awareness and consumption of tea in the United States, as well as successfully expanding our operating experience in Canada to the United States.

          Our ability to successfully open and operate new stores depends on many factors, including:

    Our ability to increase brand awareness in the United States and to increase tea consumption in areas where we open stores;

    the identification and availability of suitable sites for store locations, the availability of which is beyond our control;

    the negotiation of acceptable lease terms;

    the maintenance of adequate distribution capacity, information systems and other operational system capabilities;

    integrating new stores into our existing buying, distribution and other support operations;

    the hiring, training and retention of store management and other qualified personnel;

    assimilating new store employees into our corporate culture;

    the effective sourcing and management of inventory to meet the needs of our stores on a timely basis; and

    the availability of sufficient levels of cash flow and financing to support our expansion.

          Unavailability of attractive store locations, delays in the acquisition or opening of new stores, delays or costs resulting from a decrease in commercial development due to capital constraints, difficulties in staffing and operating new store locations or lack of customer acceptance of stores in new market areas may negatively impact our new store growth and the costs or the profitability associated with new stores.

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          Additionally, some of our new stores may be located in areas where we have little experience or a lack of brand recognition, particularly in the United States. Those markets may have different competitive conditions, market conditions, consumer tastes and discretionary spending patterns than our existing markets, which may cause these new stores to be less successful than stores in our existing markets. Other new stores may be located in areas where we have existing stores. Although we have experience in these markets, increasing the number of locations in these markets may result in inadvertent over-saturation of markets and temporarily or permanently divert customers and sales from our existing stores, thereby adversely affecting our overall financial performance.

          Accordingly, we cannot assure you that we will achieve our planned growth or, even if we are able to grow our store base as planned, that any new stores will perform as planned. If we fail to successfully implement our growth strategy, we will not be able to sustain the rapid growth in sales and profits that we expect, which would likely have an adverse impact on the price of our common shares.

Our business largely depends on a strong brand image, and if we are unable to maintain and enhance our brand image, particularly in new markets where we have limited brand recognition, we may be unable to increase or maintain our level of sales.

          We believe that our brand image and brand awareness has contributed significantly to the success of our business. We also believe that maintaining and enhancing our brand image, particularly in new markets, such as the United States, where we have limited brand recognition, is important to maintaining and expanding our customer base. Our ability to successfully integrate new stores into their surrounding communities, to expand into new markets or to maintain the strength and distinctiveness of our brand in our existing markets will be adversely impacted if we fail to connect with our target customers. Maintaining and enhancing our brand image may require us to make substantial investments in areas such as merchandising, marketing, store operations, community relations, store graphics and employee training, which could adversely affect our cash flow and which may ultimately be unsuccessful. Furthermore, our brand image could be jeopardized if we fail to maintain high standards for merchandise quality, if we fail to comply with local laws and regulations or if we experience negative publicity or other negative events that affect our image and reputation. Some of these risks may be beyond our ability to control, such as the effects of negative publicity regarding our suppliers. Failure to successfully market and maintain our brand image in new and existing markets could harm our business, results of operations and financial condition.

Our limited operating experience and limited brand recognition in the United States may limit our expansion strategy and cause our business and growth to suffer.

          Our future growth depends, to a considerable extent, on our expansion efforts outside of Canada into the United States. Our current operations are based largely in Canada. We have a limited number of customers and limited experience in operating outside of Canada. We also have limited experience with legal environments and market practices outside of Canada and cannot guarantee that we will be able to penetrate or successfully operate in any market outside of Canada. In addition, in connection with our initial expansion efforts in the United States, we have experienced longer projected payback periods for our new stores. Although we are currently targeting cash-on-cash payback of approximately three years in the United States, we have not yet achieved this in any of our U.S. stores. We may also encounter difficulty expanding in U.S. markets because of limited brand recognition. In particular, we have no assurance that our marketing efforts will prove successful outside of the narrow geographic regions in which they have been used. In addition, because tea consumption is greater in Canada than in the United States on a per capita

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basis, we may encounter challenges in the United States in establishing consumer awareness and loyalty or interest in our products and our brand to a different degree than in Canada. The expansion into the United States may also present competitive, merchandising, forecasting and distribution challenges that are different from or more severe than those we currently face. Failure to develop new markets outside of Canada or disappointing growth outside of Canada may harm our business and results of operations.

We face significant competition from other specialty tea and beverage retailers and retailers of grocery products, which could adversely affect us and our growth plans.

          The U.S. and Canadian tea markets are highly fragmented. We compete directly with a large number of relatively small independently owned tea retailers and a number of regional and national tea retailers, as well as retailers of grocery products, including loose-leaf tea and tea bags and other beverages. We compete with these retailers on the basis of taste, quality and price of product offered, atmosphere, location, customer service and overall customer experience. We must spend considerable resources to differentiate our customer experience. Some of our competitors may have greater financial, marketing and operating resources than we do. Therefore, despite our efforts, our competitors may be more successful than us in attracting customers. In addition, as we continue to drive growth in the loose-leaf tea category in the United States and Canada, our success, combined with relatively low barriers to entry, may encourage new competitors to enter the market. As we continue to expand geographically, we expect to encounter additional regional and local competitors.

We plan to use primarily cash from operations to finance our growth strategy, and if we are unable to maintain sufficient levels of cash flow we may not meet our growth expectations.

          We intend to finance our growth through the cash flows generated by our existing stores, borrowings under our available credit facilities and the net proceeds from this offering. Our primary source of financing for our growth will be cash from operations. However, if our stores are not profitable or if our store profits decline, we may not have the cash flow necessary in order to pursue or maintain our growth strategy. We may also be unable to obtain any necessary financing on commercially reasonable terms to pursue or maintain our growth strategy. If we are unable to pursue or maintain our growth strategy, the market price of our common shares could decline and our results of operations and profitability could suffer.

The planned addition of a significant number of new stores each year will require us to continue to expand and improve our operations and could strain our operational, managerial and administrative resources, which may adversely affect our business.

          Our growth strategy calls for the opening of a significant number of new stores each year and our continued expansion will place increased demands on our operational, managerial, administrative and other resources, which may be inadequate to support our expansion. Our senior management team may be unable to effectively address challenges involved with expansion forecasts for fiscal 2015 and 2016. Managing our growth effectively will require us to continue to enhance our store management systems, financial and management controls and information systems and to hire, train and retain regional directors, district managers, store managers and other personnel. Implementing new systems, controls and procedures and these additions to our infrastructure and any changes to our existing operational, managerial, administrative and other resources could negatively impact our results of operations and financial condition.

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As we expand our store base we may not experience the same increases in comparable sales or profitability that we have experienced in the past.

          We may not be able to maintain the levels of comparable sales that we have experienced historically. If our future comparable sales decline or fail to meet market expectations, the price of our common shares could decline. In addition, the aggregate results of operations of our stores have fluctuated in the past and can be expected to continue to fluctuate in the future. For example, over the past ten fiscal quarters, our quarterly comparable sales (including e-commerce) have ranged from an increase of 31% in the fourth quarter of fiscal 2012 to an increase of 8% in the fourth quarter of fiscal 2014. A variety of factors affect comparable sales including consumer tastes, competition, current economic conditions, pricing, inflation and weather conditions. These factors may cause our comparable sales results to be materially lower than recent periods and our expectations, which could harm our results of operations and result in a decline in the price of our common shares.

We may be unable to maintain or improve our Adjusted EBITDA margin, which could adversely affect our financial condition and ability to grow.

          Although we believe we can expand our Adjusted EBITDA margin to the high teens over the long term, reaching that target depends on our ability to successfully manage our operating costs and capture certain efficiencies of scale that we expect from expansion. If we are not able to continue our cost discipline, improve our systems, maintain appropriate labor levels and capture certain efficiencies of scale, or if increased competition imposes pricing pressures or our input prices increase, such as the price of tea, materials used in our tea accessories and other tea-related merchandise or labor, our Adjusted EBITDA margin may not expand as anticipated and could even stagnate or decline, which could have a material adverse effect on our business, financial condition and results of operations.

Any decrease in customer traffic in the shopping malls or other locations in which our stores are located could cause our sales to be less than expected.

          Our stores are located in shopping malls, other shopping centers and street locations. Sales at these stores are derived, to a significant degree, from the volume of customer traffic in those locations and in the surrounding area. Our stores benefit from the current popularity of shopping malls and centers as shopping destinations and their ability to generate customer traffic in the vicinity of our stores. Our sales volume and customer traffic may be adversely affected by, among other things:

    economic downturns in the United States, Canada or regionally;

    high fuel prices;

    changes in consumer demographics;

    a decrease in popularity of shopping malls or centers in which a significant number of our stores are located;

    the closing of a shopping mall's or center's "anchor" store or the stores of other key tenants; or

    a deterioration in the financial condition of shopping mall and center operators or developers which could, for example, limit their ability to maintain and improve their facilities.

A reduction in customer traffic as a result of these or any other factors could have a material adverse effect on us.

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          In addition, severe weather conditions and other catastrophic occurrences in areas in which we have stores may have a material adverse effect on our results of operations. Such conditions may result in physical damage to our stores, loss of inventory, decreases in customer traffic and closure of one or more of our stores. Any of these factors may disrupt our business and have a material adverse effect on our financial condition and results of operations.

If we are unable to attract, train, assimilate and retain employees that embody our culture, including store personnel, store and district managers and regional directors, we may not be able to grow or successfully operate our business.

          Our success depends in part upon our ability to attract, train, assimilate and retain a sufficient number of employees, including Tea Guides, store managers, district managers and regional directors, who understand and appreciate our culture, are able to represent our brand effectively and establish credibility with our customers. If we are unable to hire and retain store personnel capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for our culture, understanding of our customers and knowledge of the loose-leaf tea, tea accessories and other tea-related merchandise we offer, our ability to open new stores may be impaired, the performance of our existing and new stores could be materially adversely affected and our brand image may be negatively impacted. In addition, the rate of employee turnover in the retail industry is typically high and finding qualified candidates to fill positions may be difficult. Our planned growth will require us to attract, train and assimilate even more personnel. Any failure to meet our staffing needs or any material increases in team member turnover rates could have a material adverse effect on our business or results of operations. We also rely on temporary or seasonal personnel to staff our stores and distribution centers. We cannot guarantee that we will be able to find adequate temporary or seasonal personnel to staff our operations when needed, which may strain our existing personnel and negatively impact our operations.

Because our business is highly concentrated on a single, discretionary product category, loose-leaf teas, tea accessories and other tea-related merchandise, 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 and accessories. Consumer preferences often change rapidly and without warning, moving from one trend to another among many retail concepts. Therefore, our business is substantially dependent on our ability to educate consumers on the many positive attributes of tea and anticipate shifts in consumer tastes. Any future shifts in consumer preferences away from the consumption of beverages brewed from premium loose-leaf teas would also have a material adverse effect on our results of operations. In particular, there has been an increasing focus on health and wellness by consumers, which we believe has increased demand for products, such as our teas, that are perceived to be healthier than other beverage alternatives. If such consumer preference trends change, or if our teas are not perceived to be healthier than other beverage alternatives, our financial results could be adversely affected.

          Consumer purchases of specialty retail products, including our products, are historically affected by economic conditions such as changes in employment, salary and wage levels, the availability of consumer credit, inflation, interest rates, tax rates, fuel prices and the level of consumer confidence in prevailing and future economic conditions. These discretionary consumer purchases may decline during recessionary periods or at other times when disposable income is lower. Our financial performance may become susceptible to economic and other conditions in regions or states where we have a significant number of stores. Our continued success will depend, in part, on our ability to anticipate, identify and respond quickly to changing consumer preferences and economic conditions.

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We rely on independent certification for a number of our products and our marketing of products as organic is subject to government regulation. Loss of certification within our supply chain or as related to our manufacturing process or failure to comply with government regulations pertaining to the use of the term organic could harm our business.

          We rely on independent certification, such as certifications of our products as "organic," "Fair Trade," or "Kosher," to differentiate some of our products from others. We offer one of the largest certified organic collections of tea in North America amongst branded tea retailers. We must comply with the requirements of independent organizations or certification authorities in order to label our products as certified. The loss of any independent certifications could adversely affect our marketplace position, which could harm our business.

          In addition, the U.S. Department of Agriculture and the Canadian Food Inspection Agency require that our certified organic products meet certain consistent, uniform standards. Compliance with such regulations could pose a significant burden on some of our suppliers, which could cause a disruption in some of our product offerings. Moreover, in the event of actual or alleged non-compliance, we might be forced to find an alternative supplier, which could adversely affect our business, results of operations and financial condition.

Our success depends, in part, on our ability to source, develop and market new varieties of teas and tea blends, tea accessories and other tea-related merchandise that meet our high standards and customer preferences.

          We currently offer approximately 150 varieties of teas and tea blends, including 30 new teas and tea blends each year, and a wide assortment of tea accessories and other tea-related merchandise. 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, tea accessories and other tea-related merchandise that both meet our standards for quality and appeal to customers' preferences. Failure to innovate, develop, source and market new varieties of tea, pre-packaged teas, tea sachets, tea accessories and other tea-related merchandise that consumers want to buy could lead to a decrease in our sales and profitability.

We may experience negative effects to our brand and reputation from real or perceived quality or safety issues with our teas and tea blends, tea accessories and other tea-related merchandise, 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 blends, tea accessories and other tea-related merchandise. Concerns regarding the safety of our teas, tea blends, tea accessories and other tea-related merchandise or the safety and quality of our supply chain could cause consumers to avoid purchasing certain products from us or to seek alternative sources of tea, even if the basis for the concern has been addressed or is outside of our control. Adverse publicity about these concerns, whether or not ultimately based on fact, and whether or not involving teas, tea blends, tea accessories or tea-related merchandise sold at our stores, could discourage consumers from buying our teas, tea blends, tea accessories and other tea-related merchandise and have an adverse effect on our brand, reputation and operating results.

          Furthermore, the sale of tea, tea blends, tea accessories and other tea-related merchandise entails a risk of product liability claims and the resulting negative publicity. For example, tea supplied to us may contain contaminants that, if not detected by us, could result in illness or death upon their consumption. Similarly, tea accessories and other tea-related merchandise could contain contaminants or contain design or manufacturing defects that could result in illness, injury or death. We cannot assure you that product liability claims will not be asserted against us or that we will not be obligated to perform product recalls in the future.

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          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 tea-related merchandise and have a negative impact on our future sales and results of operations.

          Any loss of confidence on the part of our customers in the safety and quality of our teas, tea blends, tea accessories and other tea-related merchandise 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 blends, tea accessories and other tea-related merchandise and could significantly reduce our brand value. Issues regarding the safety of any teas, tea accessories or other tea-related merchandise sold by us, regardless of the cause, could have a substantial and adverse effect on our sales and operating results.

Use of social media may adversely impact our reputation or subject us to fines or other penalties.

          There has been a substantial increase in the use of social media platforms and similar devices, including blogs, social media websites, and other forms of Internet-based communications, which allow individuals access to a broad audience of consumers and other interested persons. As laws and regulations rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices could adversely affect our reputation or subject us to fines or other penalties.

          Consumers value readily available information concerning retailers and their goods and services and often act on such information without further investigation and without regard to its accuracy. Information concerning us may be posted on social media platforms and similar devices by unaffiliated third parties, whether seeking to pass themselves off as us or not, at any time, which may be adverse to our reputation or business. The harm may be immediate without affording us an opportunity for redress or correction.

Because we rely on a limited number of third-party suppliers and manufacturers, we may not be able to obtain quality products on a timely basis or in sufficient quantities.

          We rely on a limited number of vendors to supply us with straight tea and specially blended teas on a continuous basis. Our financial performance depends in large part on our ability to purchase tea in sufficient quantities at competitive prices from these vendors. In general, we do not have long-term purchase contracts or other contractual assurances of continued supply, pricing or exclusive access to products from these vendors.

          Any of our suppliers or manufacturers could discontinue supplying us with teas in sufficient quantities for a variety of reasons. The benefits we currently experience from our supplier and manufacturer relationships could be adversely affected if they:

    raise the prices they charge us;

    discontinue selling products to us;

    sell similar or identical products to our competitors; or

    enter into arrangements with competitors that could impair our ability to sell our suppliers' and manufacturers' products, including by giving our competitors exclusive licensing arrangements or exclusive access to tea blends or limiting our access to such arrangements or blends.

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          During fiscal 2014, our five largest vendors represented approximately 75% of our total loose-leaf tea inventory purchases. Any disruption to these relationships would have a material adverse effect on our business.

          Events that adversely affect our vendors could impair our ability to obtain inventory in the quantities and at the quality that we desire. Such events include difficulties or problems with our vendors' businesses, finances, labor relations, ability to import raw materials, costs, production, insurance and reputation, as well as natural disasters or other catastrophic occurrences.

          More generally, if we experience significant increased demand for our teas, tea accessories and other tea-related merchandise, or need to replace an existing vendor, there can be no assurance that additional supplies or additional manufacturing capacity will be available when required on terms that are acceptable to us, or at all, or that any vendor would 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 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 tea accessories and other tea-related merchandise 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 as a result of weather conditions, earthquakes, crop disease, pests or other natural or manmade causes could impose significant costs and losses on our business.

          The supply and price of tea is subject to fluctuation, depending on demand and other factors outside of our control. The supply, quality and price of our teas can be affected by multiple factors in tea-producing countries, including political and economic conditions, civil and labor unrest, adverse weather conditions, including floods, drought and temperature extremes, earthquakes, tsunamis, and other natural disasters and related occurrences. This risk is particularly true with respect to regions or countries from which we source a significant percentage of our products. In extreme cases, entire tea harvests may be lost or may be negatively impacted in some geographic areas. These factors can increase costs and decrease sales, which may have a material adverse effect on our business, results of operations and financial condition.

          Tea may be vulnerable to crop disease and pests, which may vary in severity and effect. The costs to control disease and pest damage vary depending on the severity of the damage and the extent of the plantings affected. Moreover, there can be no assurance that available technologies to control such conditions will continue to be effective. These conditions can increase costs and decrease sales, which may have a material adverse effect on our business, results of operations and financial condition.

Our success depends substantially upon the continued retention of our senior management.

          Our future success is substantially dependent on the continued service of certain members of our senior management, including Sylvain Toutant, our President and Chief Executive Officer, and Luis Borgen, our Chief Financial Officer. Messrs. Toutant and Borgen play an integral role in determining our strategic direction and for executing our growth strategy and are important to our brand, culture and the positive business reputation we enjoy with our customers and vendors. The loss of the services of either of these executives could have a material adverse effect on our

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business and prospects, as we may not be able to find suitable individuals to replace them on a timely basis, if at all. In addition, any such departure could be viewed negatively by investors and analysts, which could cause the price of our common shares to decline.

We rely significantly on information technology systems and any failure, inadequacy, interruption or security failure of those systems could harm our ability to operate our business effectively.

          We rely on our information technology systems to effectively manage our business data, communications, point-of-sale, supply chain, order entry and fulfillment, inventory and distribution centers and other business processes. The failure of our systems to perform as we anticipate could disrupt our business and result in transaction errors, processing inefficiencies and the loss of sales, causing our business to suffer. Despite any precautions we may take, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, systems failures, power outages, viruses, security breaches, cyber attacks and terrorism, including breaches of our transaction processing or other systems that could result in the compromise of confidential company, customer or employee data. We maintain disaster recovery procedures, but there is no guarantee that these will be adequate in all circumstances. Any such damage or interruption could have a material adverse effect on our business, cause us to face significant fines, customer notice obligations or costly litigation, harm our reputation with our customers, require us to expend significant time and expense developing, maintaining or upgrading our information technology systems or prevent us from paying our vendors or employees, receiving payments from our customers or performing other information technology, administrative or outsourcing services on a timely basis. Furthermore, our ability to conduct our website operations may be affected by changes in foreign, state, provincial and federal privacy laws and we could incur significant costs in complying with the multitude of foreign, state, provincial and federal laws regarding the unauthorized disclosure of personal information. Although we carry business interruption insurance, our coverage may not be sufficient to compensate us for potentially significant losses in connection with the risks described above.

          In addition, we sell merchandise over the Internet through our website. Our website operations may be affected by our reliance on third-party hardware and software providers (whose products and services are not within our control, making it more difficult for us to correct any defects), technology changes, risks related to the failure of computer systems through which we conduct our website operations, telecommunications failures, security breaches or attempts thereof and similar disruptions. We cannot assure you that any third-party hardware and software providers will continue to make their products available to us on acceptable terms, or at all, or that such providers will maintain policies and practices regarding data privacy and security in compliance with all applicable laws. Any impairment in our relationships with such providers could have an adverse effect on our business.

Our marketing programs, e-commerce initiatives and use of consumer information are governed by an evolving set of laws and enforcement trends and unfavorable changes in those laws or trends, or our failure to comply with existing or future laws, could substantially harm our business and results of operations.

          We collect, maintain and use data, including personally identifiable information, provided to us through online activities and other customer interactions in our business. Our current and future marketing programs depend on our ability to collect, maintain and use this information, and our ability to do so is subject to evolving international and U.S. and Canadian federal, state and/or provincial laws and enforcement trends with respect to the foregoing. We strive to comply with all applicable laws and other legal obligations relating to privacy, data protection and consumer

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protection, including those relating to the use of data for marketing purposes. It is possible, however, that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another, may conflict with other rules or may conflict with our practices. If so, we may suffer damage to our reputation and be subject to proceedings or actions against us by governmental entities or others. Any such proceeding or action could hurt our reputation, force us to spend significant amounts to defend our practices, distract our management, increase our costs of doing business and result in monetary liability.

          In addition, as data privacy and marketing laws change, we may incur additional costs to ensure we remain in compliance. If applicable data privacy and marketing laws become more restrictive at the international, federal, state or provincial levels, our compliance costs may increase, our ability to effectively engage customers via personalized marketing may decrease, our investment in our e-commerce platform may not be fully realized, our opportunities for growth may be curtailed by our compliance capabilities or reputational harm and our potential liability for security breaches may increase.

Data security breaches and attempts thereof could negatively affect our reputation, credibility and business.

          We collect and store personal information relating to our customers and employees, including their personally identifiable information, and rely on third parties for the operation of our e-commerce site and for the various social media tools and websites we use as part of our marketing strategy. Consumers are increasingly concerned over the security of personal information transmitted over the Internet (or through other mechanisms), consumer identity theft and user privacy. Any perceived, attempted or actual unauthorized disclosure of personally identifiable information regarding our employees, customers or website visitors could harm our reputation and credibility, reduce our e-commerce sales, impair our ability to attract website visitors, reduce our ability to attract and retain customers and could result in litigation against us or the imposition of significant fines or penalties. We cannot assure you that any of our third-party service providers with access to such personally identifiable information will maintain policies and practices regarding data privacy and security in compliance with all applicable laws, or that they will not experience data security breaches or attempts thereof which could have a corresponding adverse effect on our business.

          Recently, data security breaches suffered by well-known companies and institutions have attracted a substantial amount of media attention, prompting new foreign, federal, provincial and state laws and legislative proposals addressing data privacy and security, as well as increased data protection obligations imposed on merchants by credit card issuers. As a result, we may become subject to more extensive requirements to protect the customer information that we process in connection with the purchase of our products, resulting in increased compliance costs.

Fluctuations in our results of operations for the fourth fiscal quarter would have a disproportionate effect on our overall financial condition and results of operations.

          Our business is seasonal and, historically, we have realized a higher portion of our sales, net income and cash flow from operations in the fourth fiscal quarter, due to the impact of the holiday selling season. Any factors that harm our fourth fiscal quarter operating results, including disruptions in our supply chain, adverse weather or unfavorable economic conditions, could have a disproportionate effect on our results of operations for the entire fiscal year.

          In order to prepare for our peak shopping season, we must order and maintain higher quantities of inventory than we would carry at other times of the year. As a result, our working capital requirements also fluctuate during the year, increasing in the second and third fiscal quarters

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in anticipation of the fourth fiscal quarter. Any unanticipated decline in demand for our loose-leaf teas, pre-packaged teas, tea sachets, tea accessories and other tea-related merchandise during our peak shopping season could require us to sell excess inventory at a substantial markdown, which could diminish our brand and reduce our sales and gross profit.

          Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of new store openings and the sales contributed by new stores. As a result, historical period-to-period comparisons of our sales and operating results are not necessarily indicative of future period-to-period results. You should not rely on the results of a single fiscal quarter, particularly the fourth fiscal quarter holiday season, as an indication of our annual results or our future performance.

Third-party failure to deliver merchandise from our distribution centers to our stores and e-commerce customers could result in lost sales or reduced demand for our teas, tea accessories and other tea-related merchandise.

          We currently rely upon third-party transportation providers for all of our product shipments from our distribution centers to our stores and e-commerce customers. Our utilization of third-party delivery services for shipments is subject to risks, including increases in fuel prices, which would increase our shipping costs, and employee strikes and inclement weather, which may impact third parties' abilities to provide delivery services that adequately meet our shipping needs. If we change shipping companies, we could face logistical difficulties that could adversely affect deliveries, and we would incur costs and expend resources in connection with such change. Moreover, we may not be able to obtain terms as favorable as those we receive from the third-party transportation providers in Canada and the United States that we currently use, which in turn would increase our costs and thereby adversely affect our operating results.

Our ability to source our teas, tea accessories and other tea-related merchandise profitably or at all could be hurt if new trade restrictions are imposed or existing trade restrictions become more burdensome.

          All of our teas are currently grown, and a substantial majority of our tea accessories and other tea-related merchandise is currently manufactured, outside of the United States and Canada. The United States, Canada, and the countries in which our products are produced or sold internationally have imposed and may impose additional quotas, duties, tariffs, or other restrictions or regulations, or may adversely adjust prevailing quota, duty or tariff levels. Countries impose, modify and remove tariffs and other trade restrictions in response to a diverse array of factors, including global and national economic and political conditions that make it impossible for us to predict future developments regarding tariffs and other trade restrictions. Trade restrictions, including tariffs, quotas, embargoes, safeguards and customs restrictions, could increase the cost or reduce the supply of teas, tea blends, tea accessories and other tea-related merchandise 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 U.S., 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.

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Fluctuations in foreign currency exchange rates may affect our price negotiations with our third-party suppliers and manufacturers.

          Substantially all of our suppliers and manufacturers are located outside of Canada and changes in the exchange rates between the Canadian dollar and the U.S. dollar and Euro may have a significant, and potentially adverse, effect on our price negotiations with such parties. If the Canadian dollar weakens against any such currencies, our suppliers and manufacturers may attempt to renegotiate the terms of their arrangements with us, which may have a negative effect on our operating results.

Fluctuations in foreign currency exchange rates could harm our results of operations as well as the price of common shares and any dividends that we may pay.

          Sales in the United States accounted for approximately 8% and 9% of our total sales for fiscal 2013 and fiscal 2014. The reporting currency for our combined consolidated financial statements is the Canadian dollar. In the future, we expect to derive an increasing portion of our sales and incur a significant portion of our operating costs in the United States, and changes in exchange rates between the Canadian dollar and the U.S. dollar may have a significant, and potentially adverse, effect on our results of operations. Because we recognize sales in the United States in U.S. dollars, if the U.S. dollar weakens against the Canadian dollar it would have a negative impact on our U.S. operating results upon translation of those results into Canadian dollars for the purposes of consolidation. Any hypothetical reduction in sales could be partially or completely offset by lower cost of sales and lower selling, general and administration expenses that are generated in U.S. dollars. We have not historically engaged in hedging transactions and do not currently contemplate engaging in hedging transactions to mitigate foreign exchange risks. As we continue to recognize gains and losses in foreign currency transactions, depending upon changes in future currency rates, such gains or losses could have a significant, and potentially adverse, effect on our results of operations.

          Our earnings per share are reported in Canadian dollars, and accordingly may be translated into U.S. dollars by analysts or our investors. Given the foregoing, the value of an investment in our common shares to a U.S. shareholder will fluctuate as the U.S. dollar rises and falls against the Canadian dollar. Our decision to declare a dividend depends on results of operations reported in Canadian dollars, and we will declare dividends, if any, in Canadian dollars. As a result, U.S. and other shareholders seeking U.S. dollar total returns, including increases in the share price and dividends paid, are subject to foreign exchange risk as the U.S. dollar rises and falls against the Canadian dollar.

A widespread health epidemic could adversely affect our business.

          Our business could be severely affected by a widespread regional, national or global health epidemic. A widespread health epidemic may cause customers to avoid public gathering places such as our stores or otherwise change their shopping behaviors. Additionally, a widespread health epidemic could adversely affect our business by disrupting production of products to our stores and by affecting our ability to appropriately staff our stores.

We are subject to potential challenges relating to overtime pay and other regulations that impact our employees, which could cause our business, financial condition, results of operations or cash flows to suffer.

          Various labor laws, including U.S. federal, U.S. state and Canadian federal and provincial laws, among others, govern our relationship with our employees and affect our operating costs. These laws include minimum wage requirements, overtime pay, unemployment tax rates, workers' compensation rates and citizenship requirements. These laws change frequently and may be difficult to interpret and apply. In particular, as a retailer, we may be subject to challenges regarding

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the application of overtime and related pay regulations to our employees. A determination that we do not comply with these laws could harm our brand image, business, financial condition and results of operation. Additional government-imposed increases in minimum wages, overtime pay, paid leaves of absence or mandated health benefits could also cause our business, financial condition, results of operations or cash flows to suffer.

Litigation may adversely affect our business, financial condition, results of operations or liquidity.

          Our business is subject to the risk of litigation by employees, consumers, vendors, competitors, intellectual property rights holders, shareholders, government agencies and others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action lawsuits, regulatory actions and intellectual property claims, is inherently difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to these lawsuits may remain unknown for substantial periods of time. In addition, certain of these lawsuits, if decided adversely to us or settled by us, may result in liability material to our financial statements as a whole or may negatively affect our operating results if changes to our business operation are required. Regardless of the outcome or merit, the cost to defend future litigation may be significant and result in the diversion of management and other company resources. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition, results of operations or liquidity.

Our failure to comply with existing or new regulations, both in the United States and Canada, or an adverse action regarding product claims or advertising could have a material adverse effect on our results of operations and financial condition.

          Our business operations, including labeling, advertising, sourcing, distribution and sale of our products, are subject to regulation by various federal, state and local government entities and agencies, particularly the Food and Drug Administration, or the FDA, the Federal Trade Commission, or the FTC, and the Office of Foreign Asset Control, or OFAC, in the United States, as well as Canadian entities and agencies, including the Canadian Food Inspection Agency. From time to time, we may be subject to challenges to our marketing, advertising or product claims in litigation or governmental, administrative or other regulatory proceedings. Failure to comply with applicable regulations or withstand such challenges could result in changes in our supply chain, product labeling, packaging or advertising, loss of market acceptance of the product by consumers, additional recordkeeping requirements, injunctions, product withdrawals, recalls, product seizures, fines, monetary settlements or criminal prosecution. Any of these actions could have a material adverse effect on our results of operations and financial condition.

          In addition, consumers who allege that they were deceived by any statements that were made in advertising or labeling could bring a lawsuit against us under consumer protection laws. If we were subject to any such claims, while we would defend ourselves against such claims, we may ultimately be unsuccessful in our defense. Defending ourselves against such claims, regardless of their merit and ultimate outcome, would likely result in a significant distraction for management, be lengthy and costly and could adversely affect our results of operations and financial condition. In addition, the negative publicity surrounding any such claims could harm our reputation and brand image.

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We may not be able to protect our intellectual property adequately, which could harm the value of our brand and adversely affect our business.

          We believe that our intellectual property has substantial value and has contributed significantly to the success of our business. We pursue the registration of our domain names, trademarks, service marks and patentable technology in Canada, the United States and in certain other jurisdictions. In particular, our trademarks, including our registered DAVIDsTEA and DAVIDsTEA logo design trademarks and the unregistered names of a significant number of the varieties of specially blended teas that we sell, are valuable assets that reinforce the distinctiveness of our brand and our customers' favorable perception of our stores.

          We also strive to protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions with our employees, contractors (including those who develop, source, manufacture, store and distribute our tea blends, tea accessories and other tea-related merchandise), vendors and other third parties. However, we may not enter into confidentiality and/or invention assignment agreements with every employee, contractor and service provider to protect our proprietary information and intellectual property ownership rights. Those agreements that we do execute may be breached, resulting in the unauthorized use or disclosure of our proprietary information. Individuals not subject to invention assignments agreements may make adverse ownership claims to our current and future intellectual property, and even the existence of executed confidentiality agreements may not deter independent development of similar intellectual property by others. In addition, although we have exclusivity agreements with each of our significant suppliers who performs blending services for us, or who has access to our designs, we may not be able to successfully protect the tea blends and designs to which such suppliers have access under trade secret laws, and the periods for exclusivity governing our tea blends last for periods as brief as 18 months. Unauthorized disclosure of or claims to our intellectual property or confidential information may adversely affect our business.

          From time to time, third parties have used our trade dress and/or sold our products using our name without our consent, and, we believe, have infringed or misappropriated our intellectual property rights. We respond to these actions on a case-by-case basis and where appropriate may commence litigation to protect our intellectual property rights. However, we may not be able to detect unauthorized use of our intellectual property or to take appropriate steps to enforce, defend and assert our intellectual property in all instances.

          Effective trade secret, patent, copyright, trademark and domain name protection is expensive to obtain, develop and maintain, both in terms of initial and ongoing registration or prosecution requirements and expenses and the costs of defending our rights. Our trademark rights and related registrations may be challenged in the future and could be opposed, canceled or narrowed. Our failure to register or protect our trademarks could prevent us in the future from using our trademarks or challenging third parties who use names and logos similar to our trademarks, which may in turn cause customer confusion, impede our marketing efforts, negatively affect customers' perception of our brand, stores and products, and adversely affect our sales and profitability. Moreover, intellectual property proceedings and infringement claims brought by or against us could result in substantial costs and a significant distraction for management and have a negative impact on our business. We cannot assure you that we are not infringing or violating, and have not infringed or violated, any third-party intellectual property rights, or that we will not be accused of doing so in the future.

          In addition, although we have also taken steps to protect our intellectual property rights internationally, the laws of certain foreign countries may not protect intellectual property to the same extent as do the laws of the United States and Canada and mechanisms for enforcement of intellectual property rights may be inadequate in those countries. Other entities may have rights to trademarks that contain portions of our marks or may have registered similar or competing marks in foreign countries. There may also be other prior registrations in other foreign countries of which we

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are not aware. We may need to expend additional resources to defend our trademarks in these countries, and the inability to defend such trademarks could impair our brand or adversely affect the growth of our business internationally.

We are subject to the risks associated with leasing substantial amounts of space and are required to make substantial lease payments under our operating leases. Any failure to make these lease payments when due would likely harm our business, profitability and results of operations.

          We do not own any real estate. Instead, we lease all of our store locations, our corporate offices in Montréal, Canada and Waltham, Massachusetts and our distribution center in Montréal, Canada. Our store leases typically have ten-year terms and generally require us to pay total rent per square foot that is reflective of our small average store square footage and premium locations. Many of our lease agreements have defined escalating rent provisions over the initial term and any extensions. As our stores mature and as we expand our store base, our lease expense and our cash outlays for rent under our lease agreements will increase. Our substantial operating lease obligations could have significant negative consequences, including:

    requiring that an increased portion of our cash from operations and available cash be applied to pay our lease obligations, thus reducing liquidity available for other purposes;

    increasing our vulnerability to adverse general economic and industry conditions;

    limiting our flexibility to plan for or react to changes in our business or in the industry in which we compete; and

    limiting our ability to obtain additional financing.

          We depend on cash flow from operations to pay our lease expenses, finance our growth capital requirements and fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities to fund these requirements, we may not be able to achieve our growth plans, fund our other liquidity and capital needs or ultimately service our lease expenses, which would harm our business.

          If an existing or future store is not profitable, and we decide to close it, we may nonetheless remain committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation under that lease. In addition, as our leases expire, we may fail to negotiate renewals on commercially acceptable terms or at all, which could cause us to close stores in desirable locations. Even if we are able to renew existing leases, the terms of such renewal may not be as attractive as the expiring lease, which could materially and adversely affect our results of operations. Of our current stores, no store leases expire without an option to renew in fiscal 2015 and three store leases expire without an option to renew in fiscal 2016. Our inability to enter into new leases or renew existing leases on terms acceptable to us or be released from our obligations under leases for stores that we close could materially adversely affect us.

Our ability to use our net operating loss carryforwards in the United States may be subject to limitation in the event we experience an "ownership change."

          As of January 31, 2015, we had U.S. federal net operating loss carryforwards of $5.8 million. Our U.S. federal net operating loss carryforwards begin to expire in 2032.

          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 stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than

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50 percentage points over their lowest ownership percentage within a rolling three-year period. The completion of this offering, together with transactions that have occurred since our inception, may trigger such an "ownership change" pursuant to Section 382. Accordingly, the application of Section 382 could have a material effect on the use of our net operating loss carryforwards, which could adversely affect our future cash flow from operations.


Risks Relating to Our Common Shares and this Offering

We will continue to have a majority shareholder following this offering, which will limit your ability to influence corporate matters.

          After completion of this offering, Rainy Day Investments Ltd., or Rainy Day, will own a majority of our common shares. Accordingly, Rainy Day will 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. Because we are incorporated in Canada, certain matters, such as amendments to our articles of incorporation or votes regarding a potential merger or a sale of all or substantially all of our assets, require approval of at least two-thirds of our shareholders; following this offering, Rainy Day's approval will be required to achieve any such threshold. In addition, Rainy Day will have a significant influence over the management and the strategic direction of our Company.

We are eligible to be treated as an "emerging growth company," as defined in the Securities Act, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common shares less attractive to investors.

          We are eligible to be treated as an "emerging growth company," as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies," including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a non-binding shareholder advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. As a result, our shareholders may not have access to certain information that they may deem important. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if our total annual gross revenues exceed US$1.0 billion, if we issue more than US$1.0 billion in non-convertible debt securities during any three-year period, or if we are a large accelerated filer and the market value of our common shares held by non-affiliates exceeds US$700 million as of the end of any second quarter before that time. We cannot predict if investors will find our common shares less attractive because we may rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our stock price may be more volatile.

As a foreign private issuer, we are not subject to certain U.S. securities law disclosure requirements that apply to a domestic U.S. issuer, which may limit the information publicly available to our shareholders.

          As a foreign private issuer we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act and therefore there may be less publicly available information about us than if we were a U.S. domestic issuer. For example, we are not subject to the proxy rules in the United States and disclosure with respect to our annual meetings will be governed by Canadian requirements. In addition, our officers, directors and principal shareholders are exempt from the reporting and "short-swing" profit recovery provisions of Section 16 of the Exchange Act and the rules thereunder. Therefore, our shareholders may not know on a timely basis when our officers, directors and principal shareholders purchase or sell our

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shares. Furthermore, as a foreign private issuer, we may take advantage of certain provisions in the NASDAQ listing rules that allow us to follow Canadian law for certain governance matters.

If we are unable to implement and maintain effective internal control over financial reporting in the future, 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 will be required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. In addition, beginning with our second annual report on Form 20-F, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act. Our independent registered public accounting firm is not required to express an opinion as to the effectiveness of our internal control over financial reporting until after we are no longer an "emerging growth company," as defined in the JOBS Act. At such time, however, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating.

          The process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation is time-consuming, costly and complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting once we are no longer an "emerging growth company," investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected. We could also become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.

We have identified a material weakness in our internal control over financial reporting. If the material weakness persists or if we fail to establish and maintain effective internal control over financial reporting in the future, our ability to both timely and accurately report our financial results could be adversely affected.

          A material weakness in our internal control over financial reporting existed as of January 31, 2015 and January 25, 2014 related to our controls over our valuation process used in valuing the liability associated with the embedded derivative related to our Series A, A-1 and A-2 Preferred Shares. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented, detected and corrected on a timely basis. In May 2015, we identified that our approach to determining the fair value of our common shares used to value the liability associated with the embedded derivative, as of January 31, 2015 and January 25, 2014, contained a methodological error. Had we considered valuation methods in addition to the discounted cash flow model, we would have determined that as of January 31, 2015 a higher fair value for our common shares would have been appropriate in calculating the fair value of our embedded derivative liability. Concurrently, we adopted the use of the Monte Carlo simulation pricing model to calculate the fair value of the derivative liability. As a result, we retrospectively revisited the valuation of our common shares as of January 31, 2015 and as of January 25, 2014. The retrospective valuation of our common shares, as well as our adoption of the Monte Carlo model, led us to restate our consolidated financial statements as of and for the years ended January 31, 2015 and January 25, 2014 to update the value of the embedded derivative liability related to our Series A, Series A-1 and Series A-2 Preferred Shares. We determined that the error was caused by the fact that certain controls relating to our valuation process were not at a precise

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enough level to identify the proper valuation methodology for determining the fair value of our common shares.

          The material weakness described above resulted in a material misstatement of our financial statements that was not prevented or detected. We are taking steps to remediate the material weakness, including designing and implementing improved processes and controls related to the review of the underlying assumptions and inputs used in our valuations. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the material weakness described above or to avoid potential future material weaknesses.

If you purchase common shares in this offering, you will suffer immediate and substantial dilution of your investment.

          The initial public offering price of our common shares is substantially higher than the net tangible book value per share of our common shares. Therefore, if you purchase our common shares in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. Based on the initial public offering price of US$15.00 per share, the mid-point of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of US$11.80 per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and the initial public offering price. In addition, purchasers of common shares in this offering will have contributed 67% of the aggregate price paid by all purchasers of our common shares but will own only approximately 25% of our common shares outstanding after this offering. We also have a large number of outstanding stock options to purchase common shares with exercise prices that are below the estimated initial public offering price of our common shares. To the extent that these options are exercised, you will experience further dilution. See "Dilution" for more detail.

An active, liquid trading market for our common shares may not develop, which may limit your ability to sell your shares.

          Prior to this offering, there was no public market for our common shares. Although we have applied to list our common shares on The NASDAQ Global Market under the symbol "DTEA", an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price will be determined by negotiations between us and the underwriters and may not be indicative of market prices of our common shares that will prevail in the open market after the offering. A public trading market having the desirable characteristics of depth, liquidity and orderliness depends upon the existence of willing buyers and sellers at any given time, such existence being dependent upon the individual decisions of buyers and sellers over which neither we nor any market maker has control. The failure of an active and liquid trading market to develop and continue would likely have a material adverse effect on the value 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.

Our operating results and share price may be volatile, and the market price of our common shares after this offering may drop below the price you pay.

          Our quarterly operating results are likely to fluctuate in the future. In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could subject the market price of our shares to wide price fluctuations regardless of our

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operating performance. Our operating results and the trading price of our shares may fluctuate in response to various factors, including:

    market conditions or trends in our industry or the broader stock market and, in particular, in the specialty retail sales environment;

    variations in our operating performance and the performance of our competitors;

    seasonal fluctuations;

    our entry into new markets;

    timing of new store openings and our levels of comparable sales;

    actual or anticipated fluctuations in our quarterly financial and operating results;

    actions of our competitors;

    issuance of new or changed securities analysts' reports or recommendations;

    sales, or anticipated sales, of large blocks of our stock;

    additions or departures of key personnel;

    regulatory developments negatively affecting our industry;

    changing economic conditions;

    investors' perception of us; and

    other events beyond our control such as weather and war.

          These and other factors, many of which are beyond our control, may cause our operating results and the market price and demand for our shares to fluctuate substantially. Fluctuations in our quarterly operating results could limit or prevent investors from readily selling their shares and may otherwise negatively affect the market price and liquidity of our shares. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. 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.

As a public company, we will become subject to additional laws, regulations and stock exchange listing standards, which will impose additional costs on us and may strain our resources and divert our management's attention.

          We have historically operated our business as a private company. After this offering, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the listing requirements of The NASDAQ Stock Market, and other applicable securities laws and regulations. We will also become obligated to file with the Canadian securities regulators similar reports pursuant to securities laws and regulations applicable in all the provinces and territories of Canada in which we will be a reporting issuer. Compliance with these laws and regulations will increase our legal and financial compliance costs and make some activities more difficult, time-consuming or costly. For example, the Exchange Act will require us, among other things, to file annual and current reports with respect to our business and operating results. We also intend to file quarterly reports with the SEC on Form 6-K. We also expect that being a public company and being subject to new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors may therefore strain our resources, divert management's attention and affect our ability to attract and retain qualified Board members.

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A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common shares to drop significantly, even if our business is doing well.

          Sales of a substantial number of our common shares in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common shares. After this offering, we will have outstanding 23,155,571 common shares based on the number of shares outstanding as of January 31, 2015. This includes 2,988,600 shares that we are selling in this offering, which may be resold in the public market immediately, and assumes no exercises of outstanding options. Following the consummation of this offering, 18,055,571 shares that are not being sold in this offering will be subject to a 180-day lock-up period provided under lock-up agreements executed in connection with this offering described in "Underwriting" and restricted from immediate resale under the federal securities laws as described in "Shares Eligible for Future Sale." All of these shares will, however, be able to be resold after the expiration of the lock-up period, as well as pursuant to customary exceptions thereto or upon the waiver of the lock-up agreement by certain of the underwriters. We also intend to register 4,480,000 common shares that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements. As restrictions on resale end, the market price of our stock could decline if the holders of currently restricted shares sell them or are perceived by the market as intending to sell them.

Because we have no current plans to pay regular cash dividends on our common shares following this offering, you may not receive any return on investment unless you sell your common shares for a price greater than that which you paid for it.

          We do not anticipate paying any regular cash dividends on our common shares following this offering. Any decision to declare and pay dividends in the future will be made at the discretion of our Board and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our Board may deem relevant. In addition, our ability to pay dividends is, and may be, limited by covenants of existing and any future outstanding indebtedness we or our subsidiaries incur. Therefore, any return on investment in our common shares is solely dependent upon the appreciation of the price of our common shares on the open market, which may not occur. See "Dividend Policy" for more detail.

If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.

          The trading market for our common shares will be influenced by the research and reports that industry or securities analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our Company. If no securities or industry analysts commence coverage of our Company, the trading price of our shares would likely be negatively impacted. In the event securities or industry analysts initiated coverage, if one or more of these analysts ceases coverage of our Company or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline. Moreover, if our operating results do not meet the expectations of the investor community, or one or more of the analysts who cover our Company downgrades our shares or publishes unfavorable research about our business, our share price could decline.

Our articles, bylaws and certain Canadian legislation contain provisions that may have the effect of delaying or preventing a change in control.

          Certain provisions of our articles of amendment and bylaws, together or separately, could discourage potential acquisition proposals, delay or prevent a change in control and limit the price that certain investors may be willing to pay for our common shares.

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          For instance, our bylaws to be effective upon the completion of this offering contain provisions that establish certain advance notice procedures for nomination of candidates for election as directors at shareholders' meetings.

          The Investment Canada Act requires that a "non-Canadian," as defined therein, file an application for review with the Minister responsible for the Investment Canada Act and obtain approval of the Minister prior to acquiring control of a Canadian business, where prescribed financial thresholds are exceeded. Otherwise, there are no limitations either under the laws of Canada or in our articles on the rights of non-Canadians to hold or vote our common shares.

          Any of these provisions may discourage a potential acquirer from proposing or completing a transaction that may have otherwise presented a premium to our shareholders.

Because we are a federally incorporated Canadian corporation and the majority of our directors and officers are resident in Canada, it may be difficult for investors in the United States to enforce civil liabilities against us based solely upon the federal securities laws of the United States.

          We are a federally incorporated Canadian corporation with our principal place of business in Canada. A majority of our directors and officers and the auditors named herein are residents of Canada and all or a substantial portion of our assets and those of such persons are located outside the United States. Consequently, it may be difficult for U.S. investors to effect service of process within the United States upon us or our directors or officers or such auditors who are not residents of the United States, or to realize in the United States upon judgments of courts of the United States predicated upon civil liabilities under the Securities Act. Investors should not assume that Canadian courts: (1) would enforce judgments of U.S. courts obtained in actions against us or such persons predicated upon the civil liability provisions of the U.S. federal securities laws or the securities or "blue sky" laws of any state within the United States or (2) would enforce, in original actions, liabilities against us or such persons predicated upon the U.S. federal securities laws or any such state securities or blue sky laws.

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, 2015. 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, 2015 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 on January 30, 2016, 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 Stock Market. As a U.S. listed public company that is not a foreign private issuer, we will incur significant additional legal, accounting and other expenses that we will not incur as a foreign private issuer, and accounting, reporting and other expenses in order to maintain a listing on a U.S. securities exchange. These expenses will relate to, among other things, the obligation to reconcile our financial information that is reported according to IFRS to U.S. GAAP in the future.

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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, or 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 cannot assure you that we will not 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. See the discussion in "Material United States Federal Income Tax Considerations for U.S. Holders."

          If we are a PFIC, U.S. holders would be subject to adverse U.S. federal income tax consequences, such as ineligibility for any preferred tax rates on capital gains or on actual or deemed dividends, interest charges on certain taxes treated as deferred, and additional reporting requirements under U.S. federal income tax laws or regulations. Whether or not U.S. holders make a timely qualified electing fund, or QEF, election or mark-to-market election may affect the U.S. federal income tax consequences to U.S. holders with respect to the acquisition, ownership and disposition of our common shares and any distributions such U.S. holders may receive. Investors should consult their own tax advisors regarding all aspects of the application of the PFIC rules to our common shares.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

          This prospectus contains forward-looking statements. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations or assumptions regarding the future of our business, future plans and strategies, our operational results and other future conditions. Forward-looking statements can be identified by words such as "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "predict," "project," "seek," "target," "potential," "will," "would," "could," "should," "continue," "contemplate" and other similar expressions, although not all forward-looking statements contain these identifying words. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this prospectus and include statements regarding our intentions, beliefs or current expectation concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate.

          By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, those described in the "Risk Factors" section of this prospectus, which include, but are not limited to, the following:

    Our ability to successfully implement our growth strategy;

    Our limited operating experience and limited brand recognition in the United States;

    Significant competition within our industry;

    Our ability to generate sufficient cash flow to meet our growth expectations;

    The possibility that our expanded store base may not be as profitable as our existing store base;

    The effect of a decrease in customer traffic to the shopping malls, centers and street locations where our stores are located;

    Our ability to attract and retain employees that embody our culture, including Tea Guides and store and district managers and regional directors;

    Changes in consumer preferences and economic conditions affecting disposable income;

    Our ability to source, develop and market new varieties of teas and tea blends, tea accessories and other tea-related merchandise;

    Our reliance upon the continued retention of key personnel;

    The impact from real or perceived quality or safety issues with our teas and tea blends, tea accessories and other tea-related merchandise;

    Our ability to obtain quality products from third-party manufacturers and suppliers on a timely basis or in sufficient quantities;

    The impact of weather conditions, natural disasters and manmade disasters on the supply and price of tea;

    Actual or attempted breaches of data security;

    The impact of a regional, national or global health epidemic;

    The costs of protecting and enforcing our intellectual property rights and defending against intellectual property claims brought by others;

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    Fluctuations in exchange rates; and

    The seasonality of our business.

          These factors should not be construed as exhaustive and should be read with the other cautionary statements in this prospectus.

          Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this prospectus. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate, are consistent with the forward-looking statements contained in this prospectus, those results or developments may not be indicative of results or developments in subsequent periods.

          Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this prospectus speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.

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EXCHANGE RATE INFORMATION

          The following table sets forth, for each period indicated, the high and low exchange rate between the Canadian dollar and the U.S. dollar expressed in the Canadian dollar equivalent of one U.S. dollar, and the average exchange rate for the periods indicated. Averages for year-end periods are calculated by using the exchange rates on the last day of each full month during the relevant period and the last available exchange rate in January during the relevant fiscal year. These rates are based on the noon buying rate certified for custom purposes by the U.S. Federal Reserve Bank of New York set forth in the H.10 statistical release of the Federal Reserve Board.

          On May 15, 2015, the noon buying rate was US$1.00 = $1.2009.

Year Ended
 
Period End
 
Period Average Rate
 
High Rate
 
Low Rate
 

January 29, 2011

  $ 0.9989   $ 1.0297   $ 0.9864   $ 1.0776  

January 28, 2012

  $ 1.0014   $ 0.9858   $ 0.9448   $ 1.0605  

January 26, 2013

  $ 1.0078   $ 0.9996   $ 0.9710   $ 1.0417  

January 25, 2014

  $ 1.1063   $ 1.0436   $ 0.9959   $ 1.1128  

January 31, 2015

  $ 1.2716   $ 1.1138   $ 1.0633   $ 1.2716  

Last Six Months

   
 
   
 
   
 
   
 
 

November 2014

  $ 1.1426   $ 1.1325   $ 1.1236   $ 1.1426  

December 2014

  $ 1.1601   $ 1.1532   $ 1.1343   $ 1.1644  

January 2015

  $ 1.2716   $ 1.2122   $ 1.1725   $ 1.2716  

February 2015

  $ 1.2506   $ 1.2499   $ 1.2401   $ 1.2635  

March 2015

  $ 1.2681   $ 1.2618   $ 1.2439   $ 1.2803  

April 2015

  $ 1.2116   $ 1.2345   $ 1.1955   $ 1,2610  

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USE OF PROCEEDS

          We estimate that the net proceeds to us from our issuance and sale of 2,988,600 common shares in this offering will be approximately US$37.3 million (or approximately US$43.3 million if the underwriters exercise their option to purchase additional shares in full), after deducting underwriting discounts and commissions and estimated offering expenses payable by us. This estimate assumes an initial public offering price of US$15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus. We will not receive any of the proceeds from the sale of common shares by the selling shareholders.

          A US$1.00 increase (decrease) in the assumed initial public offering price of US$15.00 per share would increase (decrease) the net proceeds to us from this offering by approximately US$2.8 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

          We intend to use a portion of the net proceeds of this offering to repay the full amount outstanding under our term loan agreement with Rainy Day, which we refer to as the Shareholder Loan. The Shareholder Loan bears an interest rate of 4.5% per annum on the daily unpaid balance of the outstanding loan. As of January 31, 2015, the principal outstanding on the Shareholder Loan was approximately $3.0 million. The principal is due in three equal annual installments, with one payment being due on each of the three dates on which we make annual redemption payments on our Series A Preferred Shares, which may not occur earlier than April 3, 2017. If the Series A Preferred Shares are not redeemed before April 3, 2020, the principal on the loan is due in three annual installments beginning on April 3, 2020.

          In addition, we also intend to use a portion of net proceeds of this offering, together with cash on hand, to repay amounts outstanding under the Revolving Facility. The Revolving Facility bears interest at a rate of (a) the bank's prime rate plus 0.50% to 1.25% per annum, (b) the bank's U.S. base rate plus 0.50% to 1.25% per annum, (c) LIBOR plus 1.50% to 2.25% per annum, subject to availability, or (d) 1.50% to 2.25% on the face amount of each banker's acceptance, letter of credit or letter of guarantee, as applicable. The Revolving Facility matures on April 24, 2018. We used initial borrowings under the Revolving Facility to pay off indebtedness outstanding as of January 31, 2015.

          We expect to use the balance of the net proceeds of this offering for working capital and other general corporate purposes. The amounts and timing of our actual expenditures will depend on numerous factors, including that rate at which we expand our store base, our operating costs and expenditures and the amount of cash generated by our operations.

          For additional information regarding the Shareholder Loan, see "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources" and "Related Party Transactions — Shareholder Loan." For additional information regarding the Revolving Facility, see "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Cash Flows Relating to Financing Activities — Credit Agreement with Bank of Montreal."

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DIVIDEND POLICY

          We have never declared or paid regular cash dividends on our common shares. We currently expect to retain all future earnings for use in the operation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. The declaration and payment of any dividends in the future will be determined by our Board of Directors, in its discretion, and will depend on a number of factors, including our earnings, capital requirements, overall financial condition, and contractual restrictions, including restrictions contained in any agreements governing any indebtedness we may incur.

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CAPITALIZATION

          The following table sets forth our cash and cash equivalents and capitalization as of January 31, 2015:

    on an actual basis;

    on a pro forma basis to reflect the automatic conversion of all of our outstanding series of preferred shares, as well as the automatic exchange of all of our Class AA Common Shares, into common shares upon the completion of this offering; and

    on a pro forma as adjusted basis to reflect the issuance of 2,988,600 common shares in this offering and the application of net proceeds from this offering described under "Use of Proceeds."

          The information below is illustrative only, and assumes an initial public offering price at the midpoint of the price range set forth on the cover page of this prospectus. Our capitalization following this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing, including the amount by which actual offering expenses are higher or lower than estimated. The table should be read in conjunction with the information contained in "Use of Proceeds," "Selected Consolidated Financial Data" and "Management's

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Discussion and Analysis of Financial Condition and Results of Operations," as well as our consolidated financial statements and the related notes included elsewhere in this prospectus.

 
  As of January 31, 2015  
 
 
Actual
 
Pro Forma
 
Pro Forma As
Adjusted(2)
 
(in thousands, except share information)
  (as restated)(1)
   
   
 

Cash(3)

  $ 19,784   $ 19,784   $ 51,856  

Long-term debt:

                   

Loan from the controlling shareholder

    2,952     2,952      

Other indebtedness(4)

    10,429     10,429      

Total indebtedness

    13,381     13,381      

Series A, A-1 and A-2 Preferred Shares(5)

    45,195          

Equity:

   
 
   
 
   
 
 

Junior Preferred Shares, no par value; 7,441,341 shares authorized, issued and outstanding on an actual basis; no shares issued and outstanding on a pro forma basis; no shares issued and outstanding on a pro forma as adjusted basis

             

Class AA Common Shares, no par value; 3,200,000 shares authorized, 80,000 shares issued and outstanding on an actual basis; no shares issued and outstanding on a pro forma basis; no shares issued and outstanding on a pro forma as adjusted basis

    345          

Common shares, no par value; unlimited shares authorized, 52,022 shares issued and outstanding on an actual basis; 20,166,971 shares issued and outstanding on a pro forma basis; 23,155,571 shares issued and outstanding on a pro forma as adjusted basis

    40     26,461     80,296  

Contributed surplus

    1,412     1,412     1,412  

Retained earnings (deficiency)

    (4,129 )   14,990     6,608  

Accumulated other comprehensive income

    2,286     2,286     2,286  

Total shareholders' equity(3)

    (46 )   45,149     90,602  

Total capitalization

  $ 58,530   $ 58,530   $ 90,602  

(1)
Our consolidated financial statements and related notes as of January 31, 2015 and January 25, 2014 and for the years ended January 31, 2015 and January 25, 2014 have been restated due to the revaluation of the liability related to the embedded derivative related to our Series A, A-1 and A-2 Preferred Shares. See note 2 to our consolidated financial statements included elsewhere in this prospectus for a description and summary of the impact of the restatement on the fiscal year ended January 31, 2015 and the fiscal year ended January 25, 2014.

(2)
Net proceeds to us from this offering have been translated for convenience only using the noon buying rate for Canadian dollars in New York City, as certified for customs purposes by the Federal Reserve Bank of New York on May 15, 2015 of US$1.00=$1.2009.

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(3)
A US$1.00 increase (decrease) in the assumed initial public offering price of US$15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents and total shareholders' equity by approximately $3.3 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Pro forma as adjusted cash and cash equivalents does not reflect the impact of offering expenses paid prior to January 31, 2015.

(4)
Does not give effect to April 2015 Refinancing.

(5)
Includes embedded derivative relating to the conversion of our Series A, A-1 and A-2 Preferred Shares. For a description see "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Conversion Feature of our Preferred Shares."

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DILUTION

          If you invest in our common shares in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common shares in this offering and the pro forma net tangible book value per share of our common shares after this offering.

          As of January 31, 2015, we had a net tangible book value of $(1.7) million, or $(0.14) per common share as determined by dividing our total tangible assets less our total liabilities by the number of shares of our common stock outstanding as of January 31, 2015.

          As of January 31, 2015 our pro forma net tangible book value was $43.5 million, or $2.16 per share, based on the total number of common shares outstanding as of January 31, 2015, after giving effect to the automatic exchange of our outstanding Class AA Common Shares and the automatic conversion of our outstanding Junior Preferred Shares, Series A Preferred Shares, Series A-1 Preferred Shares and Series A-2 Preferred Shares into 20,034,949 common shares, which will occur upon the completion of this offering.

          As of January 31, 2015 our pro forma as adjusted net tangible book value was $88.9 million, or $3.84 per share, based on the total number of common shares outstanding as of January 31, 2015, after giving effect to the receipt of the estimated net proceeds from our sale of shares in this offering, assuming an initial public offering price of US$15.00 per share (the midpoint of the price range shown on the cover of this prospectus), and the application of the estimated net proceeds therefrom as described under "Use of Proceeds." This represents an immediate increase in net tangible book value per share of $1.68 to existing shareholders and an immediate dilution in net tangible book value per share of $14.17 to you, or 79%. The following table illustrates this dilution per share.

 
  $   US$  

Assumed initial public offering price per share(1)

  $ 18.01         $ 15.00        

Net tangible book value per share as of January 31, 2015(1)

    (0.14 )         (0.12 )      

Pro forma increase in net tangible book value per share as of January 31, 2015(1)

    2.30           1.92        

Pro forma net tangible book value per share as of January 31, 2015(1)

    2.16           1.80        

Increase in pro forma as adjusted net tangible book value per share attributable to new investors participating in this offering(1)

    1.68           1.40        

Pro forma as adjusted net tangible book value per share after this offering(1)

        $ 3.84         $ 3.20  

Dilution per share to new investors participating in this offering(1)

        $ 14.17         $ 11.80  

(1)
Translated for convenience only using the noon buying rate for Canadian dollars in New York City, as certified for customs purposes by the Federal Reserve Bank of New York, on May 15, 2015 of US$1.00=$1.2009.

          A US$1.00 increase (decrease) in the assumed initial public offering price of US$15.00 per share of our common shares would increase (decrease) our net tangible book value after giving effect to the offering by approximately US$2.8 million, assuming no change to the number of our common shares offered by us as set forth on the cover page of this prospectus, and after

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deducting estimated underwriting discounts and commissions and estimated expenses payable by us.

          The following table sets forth, as of January 31, 2015, the number of common shares purchased from us, the total consideration paid to us and the average price per share paid by existing shareholders (after giving effect to the exchange of our outstanding Class AA Common Shares and the conversion of our outstanding Junior Preferred Shares, Series A Preferred Shares, Series A-1 Preferred Shares and Series A-2 Preferred Shares into common shares) and to be paid by new investors purchasing common shares in this offering, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 
  Shares
purchased
  Total
consideration
   
 
 
 
Average price
per share
 
 
 
Number
 
Percent
 
Amount
 
Percent
 

Existing shareholders(1)

    20,166,971     87 % $ 26,461     33 % $ 1.31  

New investors

    2,988,600     13     53,835     67     18.01  

Total

    23,155,571     100 % $ 80,296     100 % $ 3.47  

(1)
Does not give effect to the sale of 2,111,400 shares by the selling shareholders in this offering.

          Following the completion of this offering, the percentage of our common shares held by existing shareholders will be 78%, and the percentage of our common shares held by new investors will be 22%.

          If the underwriters were to fully exercise their option to purchase additional common shares from us and the selling shareholders, the percentage of our common shares held by existing shareholders would be 75%, and the percentage of our common shares held by new investors would be 25%.

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SELECTED CONSOLIDATED FINANCIAL DATA

          The following table sets forth our selected historical consolidated financial data as of the dates and for the periods indicated. The selected historical consolidated financial data as of January 31, 2015 and January 25, 2014 and for the years ended January 31, 2015, January 25, 2014 and January 26, 2013 presented in this table has been derived from our audited consolidated financial statements included elsewhere in this prospectus. 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, as issued by the IASB.

          This selected historical consolidated financial data should be read in conjunction with the disclosures set forth under "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus.

 
  For the year ended  
 
 
January 31,
2015
 
January 25,
2014
 
January 26,
2013
 
 
  (as restated)
  (as restated)
   
 
 
  (1)
  (1)
   
 
(in thousands, except share information)
   
   
   
 

Consolidated statement of income (loss) data:

                   

Sales

  $ 141,883   $ 108,169   $ 73,058  

Cost of sales

    64,185     48,403     32,177  

Gross profit

    77,698     59,766     40,881  

Selling, general and administration expenses

    66,565     52,369     37,338  

Results from operating activities

    11,133     7,397     3,543  

Finance costs

    2,345     1,967     1,829  

Finance income

    (133 )   (45 )    

Accretion of preferred shares

    1,044     514     416  

Loss from embedded derivative on Series A, A-1 and A-2 Preferred Shares

    380     8,058     3,960  

IPO-related costs

    856          

Settlement cost related to former option holder

    520          

Income (loss) before income taxes

    6,121     (3,097 )   (2,662 )

Provision for income tax (recovery)

    (333 )   3,067     1,692  

Net income (loss)

  $ 6,454   $ (6,164 ) $ (4,354 )

Weighted average number of shares outstanding

    11,984,763     11,928,626     12,226,202  

Net income (loss) per share:

                   

Basic

    0.54     (0.52 )   (0.36 )

Fully diluted

    0.45     (0.52 )   (0.36 )

Consolidated balance sheet data (at period end):

   
 
   
 
   
 
 

Cash

  $ 19,784   $ 15,350        

Total assets

    79,060     61,946        

Long-term debt, including current portion

    10,429     14,059        

Shareholder Loan

    2,952     8,690        

Series A, A-1 and A-2 Preferred Shares

    28,768     18,449        

Financial derivative liability embedded in Preferred Shares — Series A, A-1 and A-2

    16,427     14,024        

Total liabilities

    79,106     71,253        

Shareholders' equity (deficit)

    (46 )   (9,307 )      

(1)
Our consolidated financial statements and related notes as of January 31, 2015 and January 25, 2014 and for the years ended January 31, 2015 and January 25, 2014 have been restated due to the revaluation of the liability related to the embedded derivative related to our Series A, A-1 and A-2 Preferred Shares. See note 2 to our consolidated financial statements included elsewhere in this prospectus for a description and summary of the impact of the restatement on the fiscal year ended January 31, 2015 and the fiscal year ended January 25, 2014.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          You should read the following discussion and analysis of our financial condition and results of operations together with "Selected Consolidated Financial Data" and our audited financial statements and the related notes appearing elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should read the "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" sections of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. The terms "Company," "DAVIDsTEA," "we," "our" or "us" as used herein refer to DAVIDsTEA Inc. and its consolidated subsidiaries unless otherwise stated or indicated by context. "Management's Discussion and Analysis of Financial Condition and Results of Operations" has been revised for the effects of the restatement of our consolidated financial statements. See note 2 to our audited financial statements included elsewhere in this prospectus.


Overview

          We are a fast-growing branded beverage company, offering a differentiated selection of proprietary loose-leaf teas, pre-packaged teas, tea sachets, and tea-related gifts and accessories through 161 DAVIDsTEA stores, as of May 2, 2015, and our website, davidstea.com. We are building a brand that seeks to expand the definition of tea with innovative products that consumers can explore in an open and inviting retail environment. The 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 design our stores with a modern and simple aesthetic that, coupled with our teal-colored logo, create an inviting atmosphere and stand in stark contrast to common perceptions of tea as a more traditional product. We strive to make tea a multi-sensory experience by facilitating interaction with our products through education and sampling so that our customers appreciate the compelling attributes of loose-leaf teas as well as the ease of preparation. Our in-store "Tea Guides" help novice and experienced tea drinkers alike select from the approximately 150 varieties of premium teas and tea blends featured on our "Tea Wall," which is the focal point of our stores. We replicate our store experience online by engaging users with rich content that allows them to easily explore their options amongst our many tea and tea-related offerings.

          We sell our products exclusively through our retail and online channels, giving us control of the presentation of our brand as well as greater interaction with the customer, which increases our pace of innovation. We have a dedicated and highly experienced product development team that is constantly creating new tea blends using high-quality ingredients from around the world. By continually offering new products and refining our blending techniques to enhance existing teas, we believe we bring new customers into the category and drive the frequency of visits to our stores and website among existing customers. We bring newness and capitalize on our product development capabilities with approximately 30 new blends each year that we rotate into our offering on a continuous basis. We also focus on product innovation in our accessories, providing our customers with fun, inventive and more convenient ways to enjoy tea. We believe that our product development platform and level of innovation have helped us earn a strong and loyal customer following that is passionate about DAVIDsTEA.

          We have restated our previously issued consolidated financial statements and related notes as of January 31, 2015 and January 25, 2014 and for each of the years then ended January 31, 2015 and January 25, 2014 due to an increase in the liability related to the embedded derivative related to our Series A, A-1 and A-2 Preferred Shares. The increase in such liability is a result of a

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methodological error in the valuation of our common shares and the adoption of the Monte Carlo simulation model to calculate the fair value of the derivative liability. For additional information regarding this restatement, see note 2 to our consolidated financial statements included elsewhere in this prospectus.

          Accordingly, in the restated consolidated statements of income (loss) for the years ended January 31, 2015 and January 25, 2014, we increased the loss from the embedded derivative on our Series A, Series A-1 and Series A-2 Preferred Shares by $4.9 million and $5.8 million respectively, decreased the basic income per share by $0.42 and $0.49 respectively, and increased the diluted income per share by $0.03 as at January 31, 2015.

          In the restated consolidated balance sheets as of January 31, 2015 and January 25, 2014, we increased the financial derivative liability embedded in our Series A, Series A-1 and Series A-2 Preferred Shares by $10.7 million and $5.8 million respectively.

          All data included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" as of the year ended January 31, 2015, January 25, 2014 and for the years ended January 31, 2015 and January 25, 2014 is derived from our restated consolidated financial statements for those periods.


Performance and Growth Factors Outlook

          During fiscal 2014, we grew our sales from $108.2 million to $141.9 million, representing growth of 31.1% over the prior year. We added 30 net new stores, increasing our store base from 124 to 154 stores, representing growth of 24.2%. Our Adjusted EBITDA grew from $14.2 million to $21.9 million, an increase of 54.2%, and we improved our Adjusted EBITDA margin from 13.1% to 15.4%. Our cash flow from operating activity grew from $14.2 million to $17.0 million, driven by increased operating earnings and effective working capital management. We believe we can continue to deliver strong total sales growth driven by adding new stores and achieving positive comparable sales, which includes sales on our e-commerce site. Continuing growth on our e-commerce site leads us to believe that there is potential for our direct to consumer sales to become an increasingly larger part of our business. To support this growth, we plan to continue to commit significant resources to further developing this channel. We also believe that our strong focus on operating efficiencies and leveraging our fixed costs will result in expansion of our Adjusted EBITDA margin.

          General economic conditions and consumer spending are two of the largest variables impacting our future performance. These variables impact the sales at our individual store locations as well as our e-commerce site. Our ability to increase our sales in future fiscal periods will depend, among other things, on our ability to:

    Select new prime retail locations;

    Increase comparable sales, which includes sales through our e-commerce site; and

    Manage our costs of goods sold and selling, general and administration expenses.


How we assess our performance

          The key measures we use to evaluate the performance of our business and the execution of our strategy are set forth below:

          Sales.    Sales consist of sales from stores and e-commerce sales. Our business is seasonal and, as a result, our sales fluctuate from quarter to quarter. Sales are traditionally highest in the fourth fiscal quarter, which includes the holiday sales period, and tend to be lowest in the second and third fiscal quarter because of lower customer traffic in our locations in the summer months.

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          The specialty retail industry is cyclical, and our sales are affected by general economic conditions. Purchases of our products can be impacted by 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.

          Comparable Sales.    Comparable sales refers to year-over-year comparison information for comparable stores and e-commerce. Our stores are added to the comparable sales calculation in the beginning of their thirteenth month of operation. As a result, data in this prospectus regarding comparable sales may not be comparable to similarly titled data from other retailers.

          Measuring the change in year-over-year comparable sales allows us to evaluate how our business is performing. Various factors affect comparable sales, including:

    our ability to anticipate and respond effectively to consumer preference, buying and economic trends;

    our ability to provide a product offering that generates new and repeat visits to our stores and online;

    the customer experience we provide in our stores and online;

    the level of customer traffic near our locations in which we operate;

    the number of customer transactions and average ticket in our stores and online;

    the pricing of our tea, tea-related merchandise and beverages;

    our ability to obtain and distribute product efficiently;

    our opening of new stores in the vicinity of our existing stores; and

    the opening or closing of competitor stores in the vicinity of our stores.

          Non-Comparable Sales.    Non-comparable sales include sales from stores prior to the beginning of their thirteenth fiscal month of operation. As we pursue our growth strategy, we expect that a significant percentage of our sales will continue to come from non-comparable sales.

          Gross Profit.    Gross profit is equal to our sales less our cost of sales. Cost of sales include product costs, freight costs, store occupancy costs and distribution costs.

          Selling, General and Administration Expenses.    Selling, general and administration expenses consist of store operating expenses and other general and administration expenses, including store impairments and onerous contracts. Store operating expenses consist of all store expenses excluding occupancy related costs (which are included in costs of sales). General and administration costs consist of salaries and other payroll costs, travel, professional fees, stock compensation, marketing expenses, information technology and other operating costs.

          General and administration costs, which are generally fixed in nature, do not vary proportionally with sales to the same degree as our cost of sales. We believe that these costs will decrease as a percentage of sales over time. Accordingly, this expense as a percentage of sales is usually higher in lower volume quarters and lower in higher volume quarters.

          Finance Costs.    Finance costs consists of cash and imputed non-cash charges related to our credit facility, long-term debt, finance lease obligations, the Shareholder Loan, and the preferred shares.

          Provision for Income Taxes.    Provision for income taxes consist of federal, provincial, state and local current and deferred income taxes.

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          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, non-cash compensation expense, costs related to onerous contracts or contracts where we expect the costs of the obligations to exceed the economic benefit, and certain non-recurring expenses. This measure also functions as a benchmark to evaluate our operating performance. For a reconciliation to net income (loss) see footnote 1 under "Prospectus Summary — Summary Consolidated Financial and Other Data."

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Selected Operating and Financial Highlights

Results of Operations

          The following table summarizes key components of our results of operations for the period indicated:

 
  For the year ended  
(in thousands, except store data)
 
January 31,
2015
 
January 25,
2014
 
January 26,
2013
 
 
  (as restated)(1)
  (as restated)(1)
   
 

Consolidated statement of income (loss) data:

                   

Sales

  $ 141,883   $ 108,169   $ 73,058  

Cost of sales

    64,185     48,403     32,177  

Gross profit

    77,698     59,766     40,881  

Selling, general and administration expenses

    66,565     52,369     37,338  

Results from operating activities

    11,133     7,397     3,543  

Finance costs

    2,345     1,967     1,829  

Finance income

    (133 )   (45 )    

Accretion of preferred shares

    1,044     514     416  

Loss from embedded derivative on Series A, A-1 and A-2 Preferred Shares

    380     8,058     3,960  

IPO related costs

    856          

Settlement cost related to former option holder

    520          

Income/(loss) before income taxes

    6,121     (3,097 )   (2,662 )

Provision for income tax (recovery)

    (333 )   3,067     1,692  

Net income (loss)

  $ 6,454   $ (6,164 ) $ (4,354 )

Percentage of sales:

                   

Sales

    100.0 %   100.0 %   100.0 %

Cost of sales

    45.2 %   44.7 %   44.0 %

Gross profit

    54.8 %   55.3 %   56.0 %

Selling, general and administration expenses

    46.9 %   48.4 %   51.1 %

Results from operating activities

    7.9 %   6.9 %   4.9 %

Finance costs

    1.7 %   1.8 %   2.5 %

Finance income

    (0.1 )%   0.0 %   0.0 %

Accretion of preferred shares

    0.7 %   0.5 %   0.6 %

Loss from embedded derivative on Series A, A-1 and A-2 Preferred Shares

    0.3 %   7.5 %   5.4 %

IPO related costs

    0.6 %   0.0 %   0.0 %

Settlement cost related to former option holder

    0.4 %   0.0 %   0.0 %

Income/(loss) before income taxes

    4.3 %   (2.9 )%   (3.7 )%

Provision for income tax (recovery)

    (0.2 )%   2.8 %   2.3 %

Net income (loss)

    4.5 %   (5.7 )%   (6.0 )%

Other financial and operations data (unaudited):

                   

Adjusted EBITDA

  $ 21,905   $ 14,222   $ 7,729  

Adjusted EBITDA as a percentage of sales

    15.4 %   13.1 %   10.6 %

Number of stores at end of period

    154     124     105  

Comparable sales growth for period

    11.1 %   17.8 %   26.6 %

(1)
Our consolidated financial statements and related notes as of January 31, 2015 and January 25, 2014 and for the years ended January 31, 2015 and January 25, 2014 have been

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    restated due to the revaluation of the liability related to the embedded derivative related to our Series A, A-1 and A-2 Preferred Shares. See note 2 to our consolidated financial statements included elsewhere in this prospectus for a description and summary of the impact of the restatement on the fiscal year ended January 31, 2015 and the fiscal year ended January 25, 2014.

    Fiscal Year Ended January 31, 2015 Compared to Fiscal Year Ended January 25, 2014

              Sales.    Sales for fiscal 2014 increased 31.2%, or $33.7 million, to $141.9 million from $108.2 million in fiscal 2013, comprising $11.8 million in comparable sales and $21.9 million in non-comparable sales. Comparable sales increased by 11.1% driven both by a 10.2% increase in average ticket and a 0.9% increase in number of transactions and non-comparable sales increased primarily due to an additional 30 stores opened as of the end of fiscal 2014 as compared to fiscal 2013 and due to non-comparable sales for the 20 stores opened in fiscal 2013.

              Gross Profit.    Gross profit increased by 30.0%, or $17.9 million, to $77.7 million in fiscal 2014 from $59.8 million in fiscal 2013. Gross profit as a percentage of sales decreased to 54.8% in fiscal 2014 from 55.3% in fiscal 2013 due to changes in product mix and higher product costs relating to foreign exchange rates.

              Selling, General and Administration Expenses.    Selling, general and administration expenses increased by 27.1%, or $14.2 million, to $66.6 million in fiscal 2014 from $52.4 million in fiscal 2013 due primarily to the operations of 154 stores as of January 31, 2015 as compared to 124 stores as of January 25, 2014 as well as the hiring of additional staff to support the growth of the Company. As a percentage of sales, selling, general and administration expenses decreased to 46.9% in fiscal 2014 from 48.4% in fiscal 2013 due primarily to the leveraging of store labor and administration expenses. Excluding the impact of charges relating to impairment and onerous contracts, selling, general and administration expenses increased 23.0%, to $63.0 million in fiscal 2014 from $51.2 million in fiscal 2013. As a percentage of sales, selling, general and administration expenses excluding the impact of these charges decreased to 44.4% from 47.3%.

              Finance Costs.    Finance costs increased by $0.4 million, or 19.2%, to $2.3 million in fiscal 2014 from $2.0 million in fiscal 2013 as a result of higher accrued dividends on the Series A-1 and A-2 Preferred Shares issued during the year and borrowings under the credit facility for capital expenditure in connection with our store openings and related infrastructure. This was offset by a decrease in interest on the Shareholder Loan as a portion of the loan was converted to Series A-1 and A-2 Preferred Shares during the year.

              Provision for Income Taxes.    Provision for income taxes decreased by $3.4 million, to $(0.3) million in fiscal 2014 from $3.1 million in fiscal 2013. The decrease in the provision for income taxes was due primarily to the recognition of a deferred tax asset for U.S. tax accounting purposes. Our effective tax rates were (5.5)% and (99.0)% in fiscal 2014 and 2013, respectively. The effective tax rate increased primarily as a result of permanent differences related to the loss from embedded derivatives and accretion relating to our preferred shares.

    Fiscal Year Ended January 25, 2014 Compared to Fiscal Year Ended January 26, 2013

              Sales.    Sales for fiscal 2013 increased 48.1%, or $35.1 million, to $108.2 million from $73.1 million in fiscal 2012, comprising $12.7 million in comparable sales and $22.4 million in non-comparable sales. Comparable sales increased by 17.8% driven both by a 13.0% increase in average ticket and a 4.2% increase in number of transactions and non-comparable sales increased primarily due to an additional 19 stores opened as of the end of fiscal 2013 as compared to fiscal 2012 and due to non-comparable sales for 35 stores opened in fiscal 2012.

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              Gross Profit.    Gross profit increased by 46.2%, or $18.9 million, to $59.8 million in fiscal 2013 from $40.9 million in fiscal 2012. Gross profit as a percentage of sales decreased to 55.3% in fiscal 2013 from 56.0% in fiscal 2012 due to changes in product mix and higher product costs relating to foreign exchange rates.

              Selling, General and Administration Expenses.    Selling, general and administration expenses increased by 40.3%, or $15.0 million, to $52.4 million in fiscal 2013 from $37.3 million in fiscal 2012 due primarily to the operations of 124 stores as of January 25, 2014 as compared to 105 stores as of January 26, 2013 as well as the hiring of additional staff to support the growth of the Company. As a percentage of sales, selling, general and administration expenses decreased to 48.4% in fiscal 2013 from 51.1% in fiscal 2012 due primarily to the leveraging of store labor and administration expenses. Excluding the impact of charges relating to impairment and onerous contracts, selling, general and administration expenses increased 37.3%, to $51.2 million in fiscal 2013 from $37.3 million in fiscal 2012. As a percentage of sales, selling, general and administration expenses excluding the impact of these charges decreased to 47.3% from 51.1%.

              Finance Costs.    Finance costs increased by $0.2 million, or 7.5%, to $2.0 million in fiscal 2013 from $1.8 million in fiscal 2012 as a result of borrowings under our revolving credit facility resulting from the need for capital expenditures in connection with our store openings and related infrastructure and working capital to support sales growth.

              Provision for Income Taxes.    Provision for income taxes increased by 81.3%, or $1.4 million, to $3.1 million in fiscal 2013 from $1.7 million in fiscal 2012. The increase in the provision for income taxes was due primarily to the $5.3 million increase in our earnings before income taxes. Our effective tax rates were (99.0)% and (63.6)% in fiscal 2013 and 2012, respectively. The effective tax rate decreased primarily as a result of unrecognized benefits of U.S. tax losses and permanent differences relating to the loss from embedded derivative and accretion relating to our preferred shares. Our income tax rate has been historically affected by the fact that we cannot apply tax losses in the United States against taxable income in Canada.

    Liquidity and Capital Resources

              Our primary sources of liquidity are cash flows from operations and borrowings under our credit facilities. Our primary cash needs are for capital expenditures related to new stores and working capital.

              Capital expenditures typically vary depending on the timing of new stores openings and infrastructure-related investments. During fiscal 2015, we plan to spend approximately $16.0-$19.0 million on capital expenditures. We expect to devote approximately 85-90% of our capital budget to construct, lease and open 25-30 stores in Canada and 10-15 stores in the United States and renovate a number of existing stores, with the remainder of the capital budget to make continued investment in our infrastructure.

              Our primary working capital requirements are for the purchase of store inventory and payment of payroll, rent and other store operating costs. Our working capital requirements fluctuate during the year, rising in the second and third fiscal quarters as we take title to increasing quantities of inventory in anticipation of our peak selling season in the fourth fiscal quarter. Historically, we have funded our capital expenditures and working capital requirements during the fiscal year with borrowings under our long-term debt and finance lease facilities and revolving credit facility. The revolving credit facility has typically been paid down at the end of the fiscal year with cash generated during our peak selling season in the fourth quarter. Our utilization of our revolving credit facility, and therefore the amount of indebtedness outstanding under it, has tended to be highest in the beginning of the fourth quarter of each fiscal year.

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              We believe that our cash position, net cash provided by operating activities and availability under our revolving credit facility and capital lease facility, together with the proceeds from this offering, will be adequate to finance our planned capital expenditures and working capital requirements for the foreseeable future.

    Cash Flow

              A summary of our cash flows from operating, investing and financing activities is presented in the following table:

 
  For the year ended  
(in thousands)
 
January 31,
2015
 
January 25,
2014
 
January 26,
2013
 

Cash flows provided by (used in):

                   

Operating activities

  $ 16,966   $ 14,202   $ 166  

Investing activities

    (13,153 )   (8,758 )   (13,409 )

Financing activities

    621     2,262     17,869  

Increases in cash

  $ 4,434   $ 7,706   $ 4,626  

    Cash Flows Related to Operating Activities

 
  For the year ended  
(in thousands)
 
January 31,
2015
 
January 25,
2014
 
January 26,
2013
 
 
  (as restated)(1)
  (as restated)(1)
   
 

Cash flows from operating activities:

                   

Net income (loss)

  $ 6,454   $ (6,164 ) $ (4,354 )

Depreciation of property and equipment

    4,874     3,801     2,579  

Amortization of intangible assets

    573     944     601  

Amortization of financing fees

    172     114     77  

Loss on sale of property and equipment

    31          

Impairment of property and equipment

    2,740     1,192      

Provision for onerous contracts

    805          

Deferred rent

    802     660     769  

Accretion of Preferred Shares

    1,044     514     416  

Net change in fair value of financial derivative liability

    380     8,058     3,960  

Stock-based compensation expense

    947     228     237  

Settlement cost related to former option holder

    345          

Deferred income taxes (recovered)

    (3,024 )   102     (98 )

Net change in other non-cash working capital balances related to operations

    823     4,753     (4,021 )

Cash flows related to operating activities

  $ 16,966   $ 14,202   $ 166  

(1)
Our consolidated financial statements and related notes as of January 31, 2015 and January 25, 2014 and for the years ended January 31, 2015 and January 25, 2014 have been restated due to the revaluation of the liability related to the embedded derivative related to our Series A, A-1 and A-2 Preferred Shares. See note 2 to our consolidated financial statements included elsewhere in this prospectus for a description and summary of the impact of the

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    restatement on the fiscal year ended January 31, 2015 and the fiscal year ended January 25, 2014.

              Net cash provided by operating activities increased to $17.0 million in 2014 from $14.2 million in 2013. The improvement in the cash flows are due primarily to higher net income, and continued improved net working capital as a result of more effective inventory productivity and improved payment terms.

              Net cash provided by operating activities increased to $14.2 million in 2013 from $0.2 million in 2012. The improvement in the cash flows are due primarily to improved net working capital as a result of more effective inventory productivity and improved payment terms.

    Cash Flows Related to Investing Activities

              Capital expenditures increased $4.4 million, to $13.2 million in fiscal 2014, from $8.8 million in fiscal 2013. This increase was due primarily to the number of new store build-outs. We opened 31 new stores in fiscal 2014 compared to 20 new stores in fiscal 2013.

              Capital expenditures decreased $4.6 million, to $8.8 million in fiscal 2013, from $13.4 million in fiscal 2012. This decrease was due primarily to the number of new store build-outs. We opened 20 new stores in fiscal 2013 compared to 35 new stores in fiscal 2012.

    Cash Flows Related to Financing Activities

 
  For the year ended  
(dollars in thousands)
 
January 31,
2015
 
January 25,
2014
 
January 26,
2013
 

Cash flows from financing activities:

                   

Proceeds of capital lease obligations

        970      

Repayment of capital lease obligations

    (314 )   (1,623 )   (783 )

Proceeds (repayment) of operating loan

        (507 )   507  

Proceeds of long-term debt

        14,000     16,116  

Repayment of long-term debt

    (3,375 )   (10,014 )   (8,311 )

Share issuance of Class AA common shares and common shares

    40          

Share issuance of Series A, A-1 and A-2 Preferred Shares

    4,404         11,000  

Financing fees

    (134 )   (214 )   (660 )

Repurchase of Class AA common shares

        (350 )    

Cash flows related to financing activities

    621     2,262     17,869  

              Cash flows from financing activities consist primarily of borrowing and payments on our term facilities and their related financing costs and proceeds from share issuances.

              Net cash provided by financing activities decreased by $1.6 million to $0.6 million in fiscal 2014 from $2.3 million in fiscal 2013 due to a $3.6 million reduction in amounts outstanding under our long-term credit arrangements in fiscal 2014, offset by share issuances in 2014 and the absence of any new long-term debt issuances in fiscal 2014 versus fiscal 2013.

              Net cash provided by financing activities decreased by $15.6 million to $2.3 million in fiscal 2013 from $17.9 million in fiscal 2012 due to the share issuances in 2012 and a $4.7 million reduction in amounts outstanding under our long-term credit arrangements in fiscal 2013.

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    Credit Facility with HSBC Bank Canada

              On August 19, 2013, we entered into a credit facility with HSBC Bank Canada, or HSBC. The credit facility provides for a demand revolving loan in the amount of $5.0 million, increasing to $10.0 million from September 1 to December 31 of each calendar year, which we refer to as the Operating Loan. The credit facility also provides for a $9.0 million demand non-revolving loan, which we refer to as the Term Loan, and a $15.0 million demand revolving leasing facility, which we refer to as the Leasing Facility, the aggregate combined indebtedness of which shall not exceed $15.0 million. In addition, the credit facility provides us with a $3.0 million demand revolving line to purchase forward exchange contracts for major currencies identified by HSBC up to an aggregate of $11.1 million in order to hedge against currency fluctuations in connection with our import purchases and export sales, which we refer to as the Foreign Exchange Loan and an interest rate swap facility in the amount of $1.0 million, which we refer to as the Swap Facility to allow for up to a 36-month interest rate swap contract to fix the rate of interest payable under the Term Loan or for calculation of lease payments under the Leasing Facility. As of January 31, 2015, no amounts were outstanding on the Operating Loan, $5.2 million had been drawn from the Term Loan and $0.6 million had been drawn from the Leasing Facility. As of January 31, 2015, no amounts were outstanding under the Foreign Exchange Loan or the Swap Facility.

              The credit facility subjects us to certain coverage ratios. Without the prior written consent of HSBC, our fixed charge coverage ratio may not be less than 1.10:1.00 and our ratio of current assets to current liabilities may not be less than 1.10:1.00. In addition, our debt to net tangible worth ratio may not be less than 2.50:1.00. As of January 31, 2015 and January 25, 2014, we were in compliance with the restrictive covenants.

              Borrowings under the Operating Loan are available in the form of Canadian dollar advances, U.S. dollar advances, banker's acceptances and LIBOR loans and $500,000 is available by way of letters of credit or letters of guarantees. The Operating Loan bears interest, at our option, at (a) the bank's prime rate plus 0.75% per annum, (b) the bank's U.S. base rate plus 0.75% per annum or (c) LIBOR plus 2.00% per annum, subject to availability. The Term Loan is available by way of banker's acceptances, U.S. dollar advances and LIBOR loans and bears interest, at our option, at (a) the bank's prime rate plus 1.00% per annum, (b) the bank's U.S. base rate plus 1.00% per annum or (c) LIBOR plus 2.50% per annum, subject to availability. The Leasing Facility is available by way of capital leases and bears interest, at our option, at (a) the bank's fixed cost of funds plus 2.65% per annum or (b) LIBOR plus 2.00% per annum, subject to availability. In addition to these interest rates, we must pay an annual review fee and customary letter of credit fees, stamping fees and administration fees.

              The credit facility loans are subject to various repayment terms. The Operating Loan is to be repaid on demand by the bank. The Term Loan is to be repaid on demand and unless and until otherwise demanded, interest and principal repayments are to be made based on a 36-month amortization for each advance. The Leasing Facility is repayable by consecutive monthly principal payments based on a maximum amortization of three years and a maximum term of three years. The Foreign Exchange Loan is payable on demand.

              The credit facility is guaranteed by DavidsTea (USA) Inc., our wholly owned U.S. subsidiary (the "Guarantor"). In addition, the credit facility is secured by a first lien security interest in all of our assets, including but not limited to accounts receivable, inventory, intellectual property and trademarks in the amount of $40.0 million, a security agreement over our cash, credit balances and deposit instruments in the amount of $40.0 million, general security agreements creating a first priority charge on all of our assets, present and future, corporeal and incorporeal, registered in each Canadian province in which we do business and general security agreement over all of the Guarantor's moveable personal property and assets, including debts, accounts, inventory and leasehold improvements of the Guarantor.

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          The credit facility contains a number of covenants that, among other things and subject to certain exceptions, restrict our ability to become guarantor or endorser or otherwise become liable upon any note or other obligation other than in the normal course of business or repay the loan from our controlling shareholder or repay the loan from Investissement Québec, other than scheduled repayments. The Company also cannot make any dividend payments.

          We repaid all amounts outstanding under the HSBC loan in connection with the April 2015 Refinancing.

Term Loan with Investissement Québec

          We have also entered into a term loan with Investissement Québec, or IQ, in the amount of $5.0 million that bears an interest rate of prime plus 6.5% and is used to fund leasehold improvements. The loan is repayable in 60 equal monthly installments of $83,333 each, excluding interest, commencing November 2014, which is one year after the first disbursement of the loan. We can prepay the loan at any time by paying an indemnity equal to three months of interest on the amount prepaid.

          The loan is collateralized by a second ranking hypothec over the universality of our assets, in the amount of $6.0 million. Our subsidiary, DavidsTea (USA) Inc. is also a guarantor of the loan. The loan agreement contains restrictive covenants which require us to maintain a minimum working capital ratio of 1.10:1.00, a maximum debt to adjusted equity ratio of 2.50:1.00 and a fixed cost ratio of 1.10:1.00. As of January 31, 2015, and January 25, 2014, we were in compliance with the restrictive covenants. In addition, the loan requires the consent of IQ to modify our articles of incorporation or our share capital, to enter into a merger or to declare or pay our dividends or repay our term loan with Rainy Day Investments Ltd., among other restrictions.

          We repaid all amounts outstanding under the IQ loan in connection with the April 2015 refinancing.

Credit Agreement with Bank of Montreal

          On April 24, 2015, we entered into a credit agreement with Bank of Montreal, or BMO, which we refer to as the Credit Agreement. The Credit Agreement provides for a three-year revolving term facility in the principal amount of $20.0 million (which we refer to as the Revolving Facility) or the equivalent amount in U.S. dollars. The Credit Agreement also provides for an accordion feature whereby we may, at any time prior to the end of the three-year term, request an increase to the Revolving Facility by an amount not greater than $10.0 million. As of April 24, 2015, an amount of approximately $10.0 million was outstanding under the Revolving Facility.

          The Credit Agreement subjects us to certain coverage ratios. Without the prior written consent of BMO, our fixed charge coverage ratio may not be less than 1.25:1.00 and our leverage ratio may not exceed 3.00:1.00. In addition, our net tangible worth may not be less than $30.0 million. As of April 24, 2015, we were in compliance with all financial covenants.

          Borrowings under the Revolving Facility are available in the form of Canadian dollar advances, U.S. dollar advances, prime rate loans, U.S. base rate loans, banker's acceptances and LIBOR loans. Further, up to an aggregate maximum amount of $2.0 million, or the equivalent amount in other currencies authorized by BMO, is available by way of letters of credit or letters of guarantees for terms of not more than 364 days. The Revolving Facility bears interest based on our adjusted leverage ratio. In the event our adjusted leverage ratio is equal to or less than 3.00:1.00, the Revolving Facility bears interest at (a) the bank's prime rate plus 0.50% per annum, (b) the bank's U.S. base rate plus 0.50% per annum, (c) LIBOR plus 1.50% per annum, subject to availability, or (d) 1.50% on the face amount of each banker's acceptance, letter of credit or letter of guarantee, as applicable. In addition, a standby fee of 0.30% will be paid on the daily principal amount of the unused portion of the Revolving Facility. Should our adjusted leverage ratio be greater than

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3.00:1.00 but less than or equal to 4.00:1.00, the Revolving Facility bears interest at (a) the bank's prime rate plus 0.75% per annum, (b) the bank's U.S. base rate plus 0.75% per annum, (c) LIBOR plus 1.75% per annum, subject to availability, or (d) 1.75% on the face amount of each banker's acceptance, letter of credit or letter of guarantee, as applicable. Further, a standby fee of 0.35% will be paid on the daily principal amount of the unused portion of the Revolving Facility. If our adjusted leverage ratio is greater than 4.00:1.00, the Revolving Facility bears interest at (a) the bank's prime rate plus 1.25% per annum, (b) the bank's U.S. base rate plus 1.25% per annum, (c) LIBOR plus 2.25% per annum, subject to availability, or (d) 2.25% on the face amount of each banker's acceptance, letter of credit or letter of guarantee, as applicable. A standby fee of 0.45% will be paid on the daily principal amount of the unused portion of the Revolving Facility. In addition to these interest rates, we must pay customary letter of credit fees, stamping fees, administration fees and any fees owing from time to time under the credit agreement and the other credit documents relating thereto.

          We may obtain, repay, re-borrow and convert borrowings under the Revolving Facility until the end of the term, subject to the terms and conditions of the Credit Agreement. The principal amount of any borrowings outstanding at the end of the term, together with all interest, fees, indemnities and other amounts owing to BMO, will be due and payable on the last day of the term. Subject to certain restrictions, notably the restrictions on the prepayment of borrowings outstanding by way of banker's acceptances, LIBOR loans, letters of credit or letters of guarantee, as applicable before maturity, we may voluntarily reduce (a) the credit available under the Revolving Facility without penalty, or (b) the entire amount outstanding on account of the Revolving Facility, in principal, interest, fees, indemnities and other sums.

          Our obligations under the Credit Agreement are guaranteed by DavidsTea (USA) Inc., our wholly owned U.S. subsidiary (the "Guarantor"). In addition, the Credit Agreement is secured by a first lien security interest in all of our assets in the amount of $37.5 million, a general security agreement, registered in each Canadian province in which we do business, creating a first priority charge on all of our assets, and a general security agreement over all of the Guarantor's moveable personal property and assets.

          The credit agreement contains a number of customary covenants that, among other things and subject to certain exceptions, restrict our ability to make dividend payments, or become a guarantor or an endorser or otherwise become liable upon any note or other obligation other than in the normal course of business. The credit agreement includes other restrictive covenants, including limitations on subordinated indebtedness, liens, sales or dispositions of assets, mergers, investments and transactions with related parties.

Term Loan with Rainy Day Investments Ltd.

          We have a non-revolving loan in an initial amount of approximately $8.7 million with Rainy Day Investments Ltd., which is solely owned by Herschel Segal, one of our co-founders and a director, which we refer to as the Shareholder Loan. The Shareholder Loan bears an interest rate of 4.5% per annum on the daily unpaid balance of the outstanding loan. As of January 31, 2015, the principal outstanding on the Shareholder Loan was $3.0 million. The principal is due in three equal annual installments, with one payment being due on each of the three dates on which we make annual redemption payments of our Series A, A-1 and A-2 Preferred Shares, which may not occur earlier than April 3, 2017. If the Series A, A-1 and A-2 Preferred Shares are not redeemed before April 3, 2020, the principal on the loan is due in three annual installments beginning on April 3, 2020.

          In connection with the completion of this offering, we expect to repay the full amount outstanding under the Shareholder Loan. See "Use of Proceeds."

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Conversion Feature of our Preferred Shares

          We account for the conversion feature of our preferred shares as an embedded derivative, which feature is a separate right from the right to redeem the preferred shares for cash after April 3, 2017. A conversion of the preferred shares would be satisfied by delivery of common shares at the then-current conversion ratio. As of January 31, 2015, we had a $16.4 million liability attributable to this embedded derivative, which fluctuates over time based on the embedded value of the conversion feature. Upon any conversion of our preferred shares into common shares, including in connection with this offering, this liability will be converted into equity.

          As disclosed in note 4 to our consolidated financial statements on page F-14, the embedded derivative, representing the conversion feature of our Series A, A-1 and A-2 Preferred Shares, is measured at fair value at each reporting date, with all changes in fair value recognized immediately in profit or loss. The conversion rights allow the holders of the Preferred Shares to convert such shares into common shares. Further, as set out in note 18 to our consolidated financial statements on page F-29, the Series A, A-1 and A-2 Preferred Shares will be automatically converted into common shares, in connection with a public offering of our shares if three conditions are met, which we expect will be satisfied at the closing of this offering—(i) we complete a firm commitment underwritten offering pursuant to an effective registration statement under the Securities Act or a final prospectus for which a Canadian securities regulatory authority has issued a receipt; (ii) such offering results in at least US$50 million of gross proceeds to us and the selling shareholders, collectively, and (iii) the shares offered to the public are sold at a price of at least CDN$16.11 per share on a pre-split basis or CDN$10.07 on a post-split basis.

          Certain key assumptions underlie the valuation of the derivative liability, which is estimated using a Monte Carlo simulation pricing model. See note 18 to our consolidated financial statements beginning on page F-31 for a description of the Monte Carlo simulation pricing model. These assumptions are determined as at the measurement date and include the risk free discount rate, the expected volatility, the expected dividend yield, probabilities as to the date of conversion or redemption and the underlying value of the common shares. In cases such as ours, with a pending initial public offering, the assumptions with respect to the latter two assumptions are particularly important and sensitive, requiring significant judgment by management. For example, the underlying value of the common shares is subject to estimation based on the valuation techniques selected and an evaluation of the inputs used in creating the valuation. These assumptions are considered as of the measurement date.


Off-Balance Sheet Arrangements

          Other than operating lease obligations, we have no off-balance sheet obligations.

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Contractual Obligations and Commitments

          The following table summarizes our contractual obligations as of January 31, 2015, and the effect such obligations are expected to have on our liquidity and cash flows in future periods.

 
  Payments Due By Period  
(dollars in thousands)
 
Total
 
less than
1 year
 
Between
1 and 5 years
 
More than
5 years
 

Long-term debt obligations

  $ 9,878   $ 3,961   $ 5,917      

Finance lease obligations

    551     326     225      

Operating lease obligations(1)

    102,814     12,314     49,209     41,291  

Loan from controlling shareholder

    2,952         2,952      

Series A, A-1and A-2 redeemable Preferred Shares(2)

    31,334         31,334      

  $ 147,529   $ 16,601   $ 89,637   $ 41,291  

(1)
Operating lease obligations under long-term operating leases is exclusive of certain operating costs for which the Company is responsible. Certain of the operating lease agreements provide for additional rentals based on sales.

(2)
Represents accreted value of Series A, A-1 and A-2 redeemable Preferred Shares including dividends payable thereon, which become redeemable at the holders' election after April 3, 2017. Does not give effect to the conversion feature which is accounted for separately as an embedded derivative.


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 judgement involved and its potential impact on our reported financial results. Estimates are deemed critical when a different estimate could have reasonably been used or where changes in the estimates are reasonably likely to occur from period to period, and would materially impact our financial position, changes in financial position or results of operations. Our significant accounting policies are discussed under note 3 to our consolidated financial statements included elsewhere in this prospectus. We believe the following critical accounting policies are affected by significant judgements and estimates used in the preparation of our consolidated financial statements and that the judgements and estimates are reasonable.

          Impairment of non-financial assets.    Management is required to make significant judgments in determining if individual commercial premises in which it carries out its activities are individual CGUs, or if these units should be aggregated at a district or regional level to form a CGU. The significant judgments applied by management in determining if stores should be aggregated in a given geographic area to form a CGU include the determination of expected customer behavior and whether customers could interchangeably shop in any of the stores in a given area and whether management views the cash flows of the stores in the group as inter-dependant.

          Leasehold improvements and furniture and equipment are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. A review for impairment is conducted by comparing the carrying amount of the cash generating units', or CGUs', assets with their respective recoverable amounts based on value in use. Value in use is determined based on management's best estimate of expected future cash flows, which includes estimates of growth rates, from use over the remaining lease term and discounted using a pre-tax weighted average cost of capital.

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          Hybrid financial instruments and embedded derivatives.    As part of assessing whether an instrument is a hybrid financial instrument and contains an embedded derivative, significant judgment is required in evaluating whether the host contract is more akin to debt or equity and whether the host contract is clearly and closely related to the underlying of the derivative. In applying its judgment, management relies primarily on the economic characteristics and risks of the instrument as well as the substance of the contractual arrangement. In addition, the fair value evaluation of the embedded financial derivative liability relating to our outstanding preferred shares is based on numerous assumptions and estimates that may have a significant impact on the amount recognized as a financial derivative liability. The impact of material changes in assumptions and the review of estimates is recognized in profit or loss in the period in which the changes occur or the estimates are reviewed, as required.

          Income taxes.    We may be subject to audits related to tax risks, and uncertainties exist with respect to the interpretation of tax regulations, changes in tax laws, and the amount and timing of future taxable income. Differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to taxable income and income tax expense already recorded. We establish provisions if required, based on reasonable estimates, for possible consequences of audits by the tax authorities. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the entity and the responsible tax authority, which may arise on a wide variety of issues.

          To determine the extent to which deferred income tax assets can be recognized, management estimates the amount of probable future taxable profits that will be available against which deductible temporary differences and unused tax losses can be used. Such estimates are made as part of the budget and strategic plan by tax jurisdiction. Management exercises judgment to determine the extent to which realization of future taxable benefits is probable considering factors such as the number of years included in the forecast period and prudent tax planning strategies.

          Deferred revenue.    We measure the gift card liability and breakage income by estimating the value of gift cards that are not expected to be redeemed by customers. We measure the Frequent Steeper loyalty program liability and income by estimating the fair value of points based on expected future redemption rates. The Frequent Steeper program allows customers to earn points on their purchases. The fair value of these points is based on many factors, including the expected future redemption patterns and associated costs. On an on-going basis, we monitor trends in redemption patterns and net cost per point redeemed, adjusting the estimated cost per point based on expected future activity. To the extent that estimates differ from actual experience, the Frequent Steeper program costs could be higher or lower. We also recognize revenue from unredeemed Frequent Steeper program points if the likelihood of redemption by the customer is considered remote. The Frequent Steeper program commenced in April 2014.

          Restatement of our financial statements.    A material weakness in our internal control over financial reporting existed as of January 31, 2015 and January 25, 2014 related to our controls over our valuation process used in valuing the liability associated with the embedded derivative related to our Series A, A-1 and A-2 Preferred Shares. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented, detected and corrected on a timely basis. In May 2015, we identified that our approach to determining the fair value of our common shares used to value the liability associated with the embedded derivative, as of January 31, 2015 and January 25, 2014, contained a methodological error. Had we considered valuation methods in addition to the discounted cash flow, we would have determined that a higher fair value for our common shares would have been appropriate in calculating the fair value of our embedded derivative liability. Concurrently, we adopted the use of the Monte Carlo simulation pricing model to calculate the fair value of the derivative liability. As a

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result, we retrospectively revisited the valuation of our common shares as of January 31, 2015 and as of January 25, 2014. The retrospective valuation of our common shares, as well as our adoption of the Monte Carlo model, led us to restate our consolidated financial statements as of and for the years ended January 31, 2015 and January 25, 2014 and to update the value of the embedded derivative liability associated with our Series A, Series A-1 and Series A-2 Preferred Shares. We determined that the error was caused by the fact that certain controls relating to our valuation process were not at a precise enough level to identify the proper valuation methodology for determining the fair value of our common shares.

          The material weakness described above resulted in a material misstatement of our financial statements that was not prevented or detected. We are taking steps to remediate the material weakness, including designing and implementing improved processes and controls related to the review of the underlying assumptions and inputs used by the valuation specialist. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the material weakness described above or to avoid potential future material weaknesses. Following the completion of this offering, our Series A, Series A-1 and Series A-2 Preferred Shares will be converted into common shares and the derivative liability will be converted into equity.


Recently Issued Accounting Standards

          There were no new accounting standards implemented during the year ended January 31, 2015.

          IFRS 9, "Financial Instruments", partially replaces the requirements of IAS 39, "Financial Instruments: Recognition and Measurement". This standard is the first step in the project to replace IAS 39. The IASB intends to expand IFRS 9 to add new requirements for the classification and measurement of financial liabilities, derecognition of financial instruments, impairment and hedge accounting to become a complete replacement of IAS 39. These changes are applicable for annual periods beginning on or after January 1, 2015, with earlier application permitted. We have not yet assessed the future impact of this new standard on its consolidated financial statements.

          In May 2014, the IASB issued new standards as follows: IFRS 15, "Revenue from Contracts with Customers" ("IFRS 15") replaces IAS 11, "Construction Contracts," and IAS 18, "Revenue," as well as various interpretations regarding revenue. This standard introduces a single model for recognizing revenue that applies to all contracts with customers, except for contracts that are within the scope of standards on leases, insurance and financial instruments. This standard also requires enhanced disclosures. Adoption of IFRS 15 is mandatory and will be effective for annual periods beginning on or after January 1, 2017, with earlier adoption permitted. We are currently assessing the impact of adopting this standard on our consolidated financial statements and related note disclosures.


JOBS Act Exemptions and Foreign Private Issuer Status

          We qualify as an "emerging growth company" as defined in the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. This includes an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act. We may take advantage of this exemption for up to five years or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company if we (1) have US$1.0 billion or more in annual revenue as of the end of our fiscal year, (2) are a large accelerated filer and have more than US$700.0 million in market value of our common shares held by non-affiliates as of the end of our second fiscal quarter or (3) issue more than US$1.0 billion of non-convertible debt securities over a three-year period. We may choose to take advantage of some but not all of these reduced burdens.

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          We will not take advantage of the extended transition period provided under Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Because IFRS standards make no distinction between public and private companies for purposes of compliance with new or revised accounting standards, the requirements for our compliance as a private company and as a public company are the same.

          Upon consummation of this offering, we will report under the Exchange Act as a non-U.S. company with foreign private issuer status. Even after we no longer qualify as an emerging growth company, as long as we qualify as a foreign private issuer under the Exchange Act we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including:

    the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;

    the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time;

    the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events; and

    Regulation FD, which regulates selective disclosures of material information by issuers.


Quantitative and Qualitative Disclosures about Market Risk

          We are exposed to market risk in interest rates on debt and foreign currency on purchases of our teas and tea accessories.

Interest Rate Risk

          Our line of credit carries floating interest rates tied to our lender's prime rate, and therefore, our consolidated statement of earnings and cash flows will be exposed to changes in interest rates.

Foreign Exchange Risk

          A significant portion of our tea and tea accessory purchases are in U.S. dollars as is our revenue from U.S. stores and U.S. e-commerce customers. As a result, our statement of earnings and cash flows could be adversely impacted by changes in exchange rates. We do not currently hedge foreign currency fluctuations.

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BUSINESS

Our Company

          We are a fast-growing branded beverage company, offering a differentiated selection of proprietary loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts and accessories through 161 DAVIDsTEA stores, as of May 2, 2015, and our website, davidstea.com. We are building a brand that seeks to expand the definition of tea with innovative products that consumers can explore in an open and inviting retail environment. The 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 design our stores with a modern and simple aesthetic that, coupled with our teal-colored logo, create an inviting atmosphere and stand in stark contrast to common perceptions of tea as a more traditional product. We strive to make tea a multi-sensory experience by facilitating interaction with our products through education and sampling so that our customers appreciate the compelling attributes of loose-leaf teas as well as the ease of preparation. Our in-store "Tea Guides" help novice and experienced tea drinkers alike select from the approximately 150 varieties of premium teas and tea blends featured on our "Tea Wall," which is the focal point of our stores. We replicate our store experience online by engaging users with rich content that allows them to easily explore their options amongst our many tea and tea-related offerings.

          We sell our products exclusively through our retail and online channels, giving us control of the presentation of our brand as well as greater interaction with the customer, which increases our pace of innovation. We have a dedicated and highly experienced product development team that is constantly creating new tea blends using high-quality ingredients from around the world. By continually offering new products and refining our blending techniques to enhance existing teas, we believe we bring new customers into the category and drive the frequency of visits to our stores and website among existing customers. We bring newness and capitalize on our product development capabilities with approximately 30 new blends each year that we rotate into our offering on a continuous basis. We also focus on product innovation in our accessories, providing our customers with fun, inventive and more convenient ways to enjoy tea. We believe that our product development platform and level of innovation have helped us earn a strong and loyal customer following that is passionate about DAVIDsTEA.

          We were founded in Montréal, Canada by Herschel and David Segal in 2008. They sought to build a brand and company to respond to consumers' increasing focus on health and wellness by leveraging tea's potential health benefits and providing high-quality products. Since opening our first retail store and launching our website (www.davidstea.com) in late 2008, we have poured our love for tea into an active online community with over 3.5 million unique visitors to our website in 2014 and 161 DAVIDsTEA locations, including 136 in Canada and 25 in the United States, as of May 2, 2015. While our stores average approximately 850 square feet, we have significant flexibility to modify our store sizes in order to access the most desirable locations. To date, we have been successful in a variety of Canadian markets, including in Montréal, Toronto and Vancouver. The strong performance of our stores across geographies demonstrates the appeal of our brand and underscores our growth opportunity. With our success in Canada and over three years of experience in U.S. markets, including New York, Boston, Chicago and San Francisco, we believe we are well positioned to take advantage of the significant growth opportunity across North America. Consistent with our stores, davidstea.com features our innovative products while offering expertise, community and numerous tools to aid the discovery and exploration of tea. During fiscal 2014, approximately 68% of our revenue was driven by the sale of loose-leaf tea and tea-related gifts that consumers enjoy at home, on-the-go or at work. The balance of our revenue was driven by tea accessories (22%) and food and beverages prepared in our stores (10%).

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          We believe our business model is based on innovation, quality and the customer experience. These attributes have positioned us to deliver strong financial results, as evidenced by the following:

GRAPHIC

    The growth of our store base from 70 stores in fiscal 2011 to 154 stores in fiscal 2014, representing a 30% compound annual growth rate. As of January 31, 2015, we had a total of 154 stores or approximately 24% more than in fiscal 2013. As of May 2, 2015, we had 161 stores in North America.

    Twenty-two consecutive quarters of positive comparable sales growth through the end of fiscal 2014. On an annual basis since fiscal 2011, we have reported double-digit comparable sales growth ranging from 33.4% in fiscal 2011 to 11.1% in fiscal 2014.

    An increase in sales from $41.9 million in fiscal 2011 to $141.9 million in fiscal 2014, representing a 50% compound annual growth rate. Sales in fiscal 2014 were approximately 31% higher than in fiscal 2013.

    Growth of our Adjusted EBITDA from $7.7 million in fiscal 2012 to $21.9 million in fiscal 2014, representing a 68% compound annual growth rate. Adjusted EBITDA in fiscal 2014 was approximately 54% higher than in fiscal 2013. Our net income was $(4.4) million, $(6.2) million and $6.5 million in fiscal 2012, 2013 and 2014.


Our Market Opportunity

          We participate in the large and growing global tea market, which had approximately $40 billion of retail sales in 2013 in 2014 U.S. dollars, according to Euromonitor International data as of November 4, 2014. We believe that the large size and outsized growth of the tea category combined with the relatively low percentage of tea value sales in North America make our market opportunity highly attractive, especially as we expect consumer awareness of tea in Canada and the United States to increase. Specifically, we note:

    According to Euromonitor International data as of November 4, 2014, the global tea market has grown consistently at a CAGR of approximately 8% in 2014 U.S. dollar terms, from 2009 to 2013, and the global tea market is forecast to continue to grow consistently at a CAGR of approximately 7% to 8%, from 2014 through 2018.

    According to Euromonitor International data as of November 4, 2014, Canada and the United States represented only 7% of global tea value sales in 2013, excluding

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      ready-to-drink tea. We believe the low percentage of tea value sales in North America provides significant runway for growth for our business.

    We believe growth of the overall North American tea market will be driven by a number of underlying consumer trends including the increasing health consciousness of consumers in North America and the versatility of tea as a beverage, which is broader for tea than most other beverages.


Our Competitive Strengths

          We believe that the following strengths differentiate us from our competitors and are important to our success:

    Modern Brand Reinventing the Tea Experience.    Our mission is to make tea fun and accessible. We believe that our brand, passion for tea and breadth of offering, as underscored by the approximately 150 varieties of premium teas and tea blends in our stores, cause customers to see tea as fresh and stylish. The DAVIDsTEA retail experience is led by our Tea Guides, who share our knowledge of tea with our customers through sampling, education and by showing customers that tea is easy to prepare, comes in a variety of great flavors and is suitable for multiple occasions. To reinforce this sense of accessibility, we create fun names for our teas that are designed to highlight the smell, taste profile and other attributes of the product. For example, our "Forever Nuts" blend combines almonds, apple bits, cinnamon bark and hints of beetroot, to invoke the unique nutty flavor suggested by the name. We believe our differentiated approach will continue to lead existing customers to engage with our brand and will attract new customers to both our brand and the category.

    Focus on Innovation and Design.    We focus on constant innovation to improve the taste and presentation of our existing tea blends while creating new offerings that delight our customers. We currently offer approximately 150 proprietary teas and tea blends, including approximately 30 new teas each year, which are made from high-quality ingredients from around the world. Our product development and sourcing teams work closely together and find inspiration from our suppliers as well as from direct feedback from our customers and Tea Guides, all the while following key consumer trends. Our team has launched over 400 different teas since DAVIDsTEA was founded. We seek to develop creative accessories that are unique and make steeping tea easy at home or on-the-go. We also develop gifts that incorporate our love of tea such as tea-scented candles, tea sachets and tea gift boxes. We believe that our focus on innovation and design keeps existing customers engaged while also attracting new customers to our brand.

    Distinct Retail Concept Reinforces Brand and Customer Loyalty.    The clean, modern aesthetic of our retail concept communicates the newness and innovation behind our brand. A key element of the DAVIDsTEA in-store experience is our "Tea Wall," a focal point of the store, which displays approximately 150 varieties of premium loose-leaf teas and tea blends. Our Tea Guides help facilitate a highly interactive and immersive customer experience. It is this personable customer interaction combined with the high-quality teas that has allowed us to develop strong customer loyalties. We have very broad customer appeal that spans novice and experienced tea consumers. To capitalize on this growing following, we introduced our "Frequent Steeper" customer loyalty program in April 2014. This loyalty program has rapidly expanded to over a million members currently. Since April 2014, approximately 80% of our sales have come from Frequent Steepers. We believe that our retail concept and our retail experience led by our Tea Guides both reinforce our brand and drive our customer loyalty.

    Broad Demographic Appeal Supports Sustainable Long-Term Growth.    We believe that our fresh approach to tea gives us broad appeal, while benefitting from several consumer trends.

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    We believe that consumers are increasingly looking for products that are both great tasting and healthy. Tea naturally contains no sodium, fat, carbonation or sugar and is virtually calorie-free. We also offer one of the largest certified organic collections of tea among branded tea retailers in North America. We believe that consumers are also looking to find beverages that provide functional benefits and can be customized and enjoyed on a variety of occasions. Lastly, we believe that as consumers become more educated about tea, they will seek out venues like DAVIDsTEA that provide a large selection of high-quality products. We believe that our tea's broad, multi-generational appeal coupled with several important consumer trends, most notably health and wellness, will help support our long-term growth.

    Effective Grassroots Marketing Strategy Drives Customer Trial and Engagement.    DAVIDsTEA uses a field-based marketing approach in addition to social media to build brand awareness and drive customers to our stores. One aspect of this effort is our events sponsorship group, which we believe is a differentiated capability and allows us to create excitement for our brand by engaging directly in the communities around our stores and drive store visits by offering product samplings and beverage coupons. In the last 12 months, we have participated in approximately 2,000 events that more than one million people attended, which included the Seawheeze Half Marathon in Vancouver, the Ghirardelli Chocolate Festival in San Francisco, and the Boston Common Tree Lighting Ceremony. These events are identified and coordinated by our local store managers and Tea Guides with support from our dedicated corporate events team. In the United States, we have received significant media coverage, including appearances on the Today Show, as well as appearing in articles in the Wall Street Journal, Boston Globe and SFGate, and have had successful field marketing events with the Boston Red Sox, San Francisco Giants, as well as a national co-branding campaign with Banana Republic. We also have a strong social media platform, with a total following base of approximately 520,000 that spans Facebook, Google+, Instagram, Twitter, Pinterest and Vine. Our following base has increased over 15 times since 2011. We believe that our ability to build brand awareness is largely driven by our grassroots marketing strategy and our strong social media platform.

    Versatile Store Model with Compelling Store Economics.    Our stores have been successful in a variety of geographic regions, population densities and real estate venues. The success of our stores with consumers is underscored, in part, by our comparable sales growth, which has been positive for the past 22 consecutive quarters. We have proven our concept across Canada, where we believe there remains significant growth opportunity. Our average unit is approximately 850 square feet, although our store format allows us to be flexible so that we can get the most desirable location. Our units in Canada averaged four-wall Adjusted EBITDA margins in excess of 30% in fiscal 2014. Our new stores in Canada have historically averaged a cash-on-cash payback period of approximately two years. We opened our first store in the United States in 2011 and we believe the experience over the last two years demonstrates the potential of our brand and retail concept. For our new stores in the United States, we target a cash-on-cash payback of approximately three years, rather than the two we have historically achieved for our Canadian stores. Our ability to achieve this target is dependent on our ability to increase brand awareness in the United States and to leverage economies of scale in our U.S. distribution channel as we increase our U.S. store base. We believe the strong results we continue to experience in North America underscore our growth opportunity.

    Passionate Customer-Focused Culture supported by Experienced Management Team and Dedicated Board Members.    Our core values and distinctive corporate culture allow us to attract passionate and friendly employees who share a vision of making tea fun and accessible. We have a strong focus on community engagement, and our culture reflects our belief in doing right by our customers and our communities. We provide our employees with extensive training, career development, individual enrichment, and empowerment, which we believe is a key contributor for our success. Our President and Chief Executive Officer, Sylvain

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    Toutant, joined us in May 2014. He most recently served as president of Keurig Canada, and was previously Chief Operating Officer at VanHoutte. Our Chief Financial Officer, Luis Borgen, joined us in 2012, having previously served as the Chief Financial Officer of DaVita HealthCare Partners, a public company in the healthcare space. Prior to DaVita Healthcare Partners, Mr. Borgen spent more than 12 years at Staples. The strength of our management team is supported by our dedicated board of directors, including our co-founder Herschel Segal. Mr. Segal retains an advisory role in our Company and works closely with Mr. Toutant and our other executives in initiatives related to developing corporate strategy, building our corporate culture and enhancing our sales and operations infrastructure. Our board of directors and management team's experience is balanced between entrepreneurial growth and large scale operations. We support a culture that is rooted in our love and excitement for tea. As a result, we believe our culture directly translates into how we interact with our customers and the knowledge and passion our team members display.


Our Growth Strategies

          Key elements of our growth strategy are to:

    Increase Brand Awareness.    We will continue to increase consumer awareness and excitement for the DAVIDsTEA brand and drive customer loyalty through our field-based marketing efforts, social media presence, continued store expansion and growing e-commerce sales. Our field-based marketing programs are designed to develop and foster a personal connection with the community and position DAVIDsTEA as a high-quality, community-conscious brand that simplifies tea preparation in a way that encourages consumption for both tea enthusiasts and novices. We will also continue to leverage our growing social media presence to increase our online sales and drive additional store visits within existing and new markets. We see a significant opportunity to increase our brand visibility in the U.S. market, which will be a key area of focus in our marketing strategy going forward.

    Grow Our Store Base.    We believe there is a highly attractive, long-term growth opportunity for our store base in North America with a potential for an additional 100 stores in Canada and an additional 300 stores in the United States, based on management estimates. As shown in the table below, our store base has grown considerably in the past few years.

 
  Total Number of Stores  
Fiscal Year
 
Canada
 
United States
 
Total
 

2011

    68     2     70  

2012

    91     14     105  

2013

    108     16     124  

2014

    130     24     154  

              In fiscal 2015, we expect to open approximately 25-30 stores in Canada and 10-15 stores in the United States. Over the longer term, we believe that we have the ability to open approximately 30-40 stores annually. We are targeting U.S. store openings so that stores in the United States comprise approximately 25%-35% of our store base within five years. Our U.S. growth depends, in part, on increasing consumer awareness and consumption of tea in the United States, as well as successfully translating our operating experience in Canada to the United States.

    Drive Comparable Sales.    We expect to drive positive comparable sales growth by increasing the size and frequency of purchases by our existing customers, as well as by

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    attracting new customers. We intend to execute this strategy through both our retail stores and e-commerce site, through:

      Enhancing our current product assortment.  We believe that our attractive and continuously evolving assortment of tea, pre-packaged teas, tea sachets, tea-related accessories and other tea-related merchandise, including popular limited-time and seasonal offerings, drives consumers to our stores and website and creates a sense of excitement in attaining our latest products.

      Introducing new product categories and broadening existing categories to provide additional reasons to shop at DAVIDsTEA.  We continue to look for adjacent categories in which we can infuse our tea flavors, such as tea-scented candles and tea-infused chocolates.

      Offering a website that blends product expertise, community and numerous tools to aid in the discovery and exploration of tea.  We launched our website just prior to opening our first store and have since consistently demonstrated how well-suited our products are for e-commerce. For example, our online tea finder helps the customer identify the right teas based on their taste and other preferences replicating the in-store experience with our Tea Guides. Our e-commerce sales increased from 2.7% of sales in fiscal 2010 to 7.9% of sales for the year ended January 31, 2015, and we are targeting greater than 15% of sales over the long term as we educate consumers about our products and introduce a new website in fiscal 2015. We believe the growth of our store network and our extensive social media presence will drive the growth of our e-commerce site.

      Capitalizing on our strong customer loyalty and growing customer base.  We believe there is an opportunity to enhance our recently introduced Frequent Steeper loyalty program to provide customers with more targeted messages. We are making significant investments to drive our loyalty program.

    Expand Adjusted EBITDA Margin.    We have increased our Adjusted EBITDA margin from 10.6% in fiscal 2012 to 15.4% in fiscal 2014. As we continue to grow and benefit from the leveraging of our cost structure, we believe further opportunities to increase our margins will exist. We intend to capitalize on opportunities across our supply chain as we grow our business and achieve further economies of scale. We have invested significantly in our business ahead of our growth, and we are targeting an Adjusted EBITDA margin in the high teens over the long term.


Our Stores and Operations

Our Stores

          As of January 31, 2015, our retail footprint consisted of 130 stores in Canada and 24 stores in the United States. Our retail stores are located primarily within malls and on street locations and to some degree in lifestyle centers and outlets. Each store exterior prominently displays the DAVIDsTEA teal signage. In fiscal 2014, our average store was approximately 850 square feet. We have rapidly pursued new store growth, having significantly increased our store base from one store in fiscal 2008 to 154 stores as of January 31, 2015. As of May 2, 2015, our store base consists of 161 stores.

Distinctive Retail Experience

          The DAVIDsTEA experience starts with our people both in stores, our Tea Guides, and at our support center office. Their knowledge and passion permeates our culture and is rooted in a deep knowledge of, and desire to share, the compelling attributes of tea. We design our stores with a

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modern and simple aesthetic that, coupled with our teal-colored logo, create an inviting atmosphere and stand in stark contrast to common perceptions of tea as a more traditional product. A key element of the retail experience is our "Tea Wall," a focal point of the store, which displays approximately 150 varieties of our loose-leaf teas and tea blends in silver tins. Our Tea Guides within the store are knowledgeable, personable and excited about tea, and help facilitate a highly interactive and immersive customer experience. We strive to make tea a multi-sensory experience by facilitating interaction with our products through education and sampling so that our customers appreciate the compelling attributes of loose-leaf teas as well as the ease of preparation. Every visit to our stores is designed to create a sense of adventure where our customers can spend time with our well-trained and enthusiastic Tea Guides that help novice and experienced tea drinkers alike select from the many varieties of premium loose-leaf teas and tea blends available on our "Tea Wall." Our Tea Guides assist our customers in navigating the "Tea Wall" by selecting a variety of teas for customers to smell based on their taste preferences. We strive to ensure that the taste of our teas mirror their smell. Our unique blends contain ingredients from all around the world. In order to encourage customers to visit regulary and discover the latest blends, we introduce new blends every month and for seasonal occasions.

Site Selection and Expansion

          We seek to open stores in strategic locations that support the brand image, targeting high customer traffic locations primarily within malls and on streets and to some degree within lifestyle centers and outlets. We employ a rigorous analytical process to identify new store locations. We target locations based on market characteristics, demographic characteristics, including income and education levels, the presence of key anchor stores and co-tenants, population density and other key characteristics. For every store location selected, our real estate team prepares a detailed financial plan, which is evaluated by our real estate committee. Our real estate committee includes both our CEO and CFO. Our real estate team is led by our Head of Real Estate, and includes a real estate manager, a senior construction manager to oversee new store construction and store maintenance and a store designer, among others. Members of our real estate team spend considerable time evaluating prospective sites. We also actively monitor and manage the performance of our stores and seek to incorporate information learned through the monitoring process into our future site selection decisions.

          We believe we have a flexible real estate model, whereby our stores can be located in both street and mall locations under our site selection process. We have grown our store base in both locations since our first store opened in 2008, with approximately one-third of our stores in street locations and approximately two-thirds in malls as of January 31, 2015.

GRAPHIC

          We believe there is a potential to open up to an additional 100 stores in Canada from 130 locations as of the end of fiscal 2014, having already internally identified the malls and street locations and to some extent the lifestyle centers and outlets, that are suitable locations in which to open new DAVIDsTEA stores. In the United States, we believe there is also a potential to open up to an additional 300 stores from the 24 locations we had as of the end of fiscal 2014. In fiscal 2015, we expect to open approximately 25-30 stores in Canada and 10-15 stores in the United States. We believe we have the ability to continue to open approximately 30-40 stores annually for the foreseeable future. We are targeting U.S. store openings so that stores in the United States

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comprise approximately 25%-35% of our store base within five years. Our new store model anticipates an average target store size of approximately 850 square feet that achieves annual sales of approximately $550,000-$600,000, in local currency, in the first year of operation. Our new store model also assumes an average new store investment of approximately $290,000-$320,000, in local currency, which includes our capital to build out the store, and we do not enter into understandings or arrangements until we are ready to introduce new locations into our pipeline. In addition, our new store model anticipates sales in the fourth year of operation of approximately $750,000 for Canadian stores and approximately US$780,000 for U.S. stores and Adjusted EBITDA margins of 28% and 25% in the fourth year of operation for our Canadian and U.S. stores. We target an average payback period of approximately two years on our initial investment in Canada. Our new store model for the United States targets a longer payback period as we have a smaller store base and lower brand awareness and there is lower tea consumption among consumers in the United States as compared to Canada.

Store Staffing and Operations

          Each of our stores is managed by a store manager and an assistant store manager who oversee an average of ten to sixteen full and part-time Tea Guides in each store. Each manager is responsible for the day-to-day operations of his or her store, including the unit's operating results, maintaining a clean and appealing store environment and the hiring, training and development of personnel. District Managers oversee geographical groupings of approximately 10 stores. We also employ regional directors, who are responsible for overseeing district managers.

          We are guided by a philosophy that recognizes customer service and the importance of delivering optimal performance, allowing us to identify and reward teams that meet our high performance standards. We use store level scorecards that report key performance indicators. We provide our store managers with a number of analytical tools to support our store operations and assist them in attaining optimum store performance. These tools include key performance indicator reports, coaching logs for one-on-one meetings, weekly one-on-one meetings between our store managers and district managers and bi-annual evaluations. While our main focus is on the overall performance of the team and our stores, we provide incentives to team members, assistant store managers, store managers and district managers.


Our Digital Platform

          Our digital platform is primarily comprised of our website, www.davidstea.com. We launched our website just prior to opening our first store. Our e-commerce sales represented 7.9% of sales for the year ended January 31, 2015, and we are targeting greater than 15% of sales over the long-term.

          Our website features our full assortment of premium loose-leaf teas, tea gift sets and tea-related merchandise. We aim to replicate our in-store experience with our Tea Guides with tools such as our online tea finder that helps the customer identify the right teas based on their taste and other preferences. To drive increased sales through our digital platform, we utilize online-specific marketing and promotional programs. In addition, we employ banner advertisements, search engine optimization and pay-per-click arrangements to help drive customer traffic to our website. We anticipate launching a new website during fiscal 2015 to improve our customers' experience.

          Through our digital platform, we can target a broader audience of customers who may not live near one of our retail locations. We believe our digital platform and our stores are complementary, as our digital platform provides our store customers an additional channel through which to purchase our teas and tea-related merchandise while also helping drive awareness of and customer traffic to our stores.

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          We also have a strong social media platform, with a total following base of approximately 520,000 that spans Facebook, Google+, Instagram, Twitter, Pinterest and Vine. We will continue to leverage our growing social media presence to increase our e-commerce site sales and drive additional store visits within existing and new markets.


Our Culture and Values

          We have developed a distinctive culture that inspires in our team members a passion for tea. Our culture is also focused on customer service through comprehensive training, career development and individual enrichment. We believe our culture allows us to attract knowledgeable, passionate, fun and motivated team members who are driven to succeed.

          Passion for Tea.    We believe our passionate and fun Tea Guides are a major element of our retail experience. We seek to recruit, hire, train, retain and promote qualified, knowledgeable and enthusiastic team members who share our passion for tea and strive to deliver an extraordinary retail experience to our customers.

          Extensive Training.    We have specific training and certification requirements for all new team members, including undergoing food handlers certification and nine hours of foundational training. This rigorous process helps ensure that all team members educate our customers and execute our standards accurately and consistently. As team members progress to the assistant manager and manager levels, they undergo additional weeks of training in sales, operations and management.

          Career Development and Individual Enrichment.    We actively track and reward team member performance, which we believe incentivizes excellence and helps us identify top performers and thus maintain a sufficient talent pool to support our growth. Many of our store managers and district managers are promoted from within our organization. We are guided by a philosophy that recognizes performance, allowing us to identify and reward teams who meet our high performance standards.

          We believe our culture allows us to attract and retain committed team members.


Our Product Categories

          We offer approximately 150 varieties of premium loose-leaf teas and tea blends in addition to gift packages, tea sachets and tea accessories in stores and through our website. Additionally, we offer on-the-go beverages and food items in our retail stores. Approximately 68% of our revenue is driven by the sale of loose-leaf tea and tea gifts that consumers enjoy at home, on-the-go or at work. The balance of our revenue is driven by tea accessories (22%) and food and beverages prepared in our stores (10%).

    Teas

          Our different flavors of tea span eight different tea categories — white, green, oolong, black, pu'erh, mate, rooibos and herbal tea. Furthermore, approximately 75% of our teas are blended with other ingredients while approximately 25% are straight tea. Our straight white tea, created from silvery buds, is sourced mostly from China. We offer a wide variety of straight green tea sourced from various regions throughout China, Japan and South Korea. Our oolong offering includes teas from China, Vietnam and Taiwan. Our black teas come from various regions across mainly India, Nepal, Kenya, Sri Lanka and China. Our pu'erh tea is sourced mostly from China and is traditionally aged underground. Our mate teas, sourced from South America, are packed with stimulants such as caffeine and come in a variety of fun flavors. Made from a South African plant, rooibos is a caffeine-free alternative that blends well with many flavors. Lastly, our herbal teas include many different ingredients and are mostly caffeine free. In addition to loose-leaf teas, we sell our

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pre-packaged teas and sachets to make the tea experience more convenient for customers. Our tea gifts range from special edition holiday gift packages to tea-scented candles.

    Tea Accessories

          Our tea accessories are created to simplify the tea preparation process and make the tea experience more convenient and fun and easy for customers. Tea accessories include tea mugs, travel mugs, teapots and tea makers, teacup sets, infusers and filters, kettles and frothers, tins and spoons. Many of our accessories are crafted with unique features to improve tea preparation and consumption. For example, our carry travel mug has a separate compartment under the lid to store dry tea leaves for use later in the day. All of our accessories are crafted with unique colors and designs.

    Beverages and Food

          Our retail stores offer beverages and food for on-the-go consumption. Our beverages range from the standard hot or iced tea to our more innovative Tea Lattes and TeaPop drinks. Furthermore, we bring our innovation through in our packaged food products, which include tea infused chocolate and cookies as well as sweeteners.


Product Design and Development

          Our merchandising team travels throughout the world to a variety of vendors seeking superior teas and tea products. Our merchandising team consists of Tea Blend Developers, Product Designers, Category Merchants and Quality Control, who leverage our extensive experience selecting and developing our product assortment. The ingredients in our tea come from around the globe, including Japan, China, India, South Korea, Latin America, Kenya and South Africa. We are constantly exploring different ingredients that are popular in a variety of cultures from which to introduce new teas to our customers. Our research and development team works with our blenders and supplier partners to develop special tea blends that we sell on an exclusive basis. We work with a variety of blenders to create new and exciting flavors of tea which we rotate into our product offering to attract new customers and keep current customers coming back. Our blending process is very focused on magnifying the senses and bringing smell and taste to the forefront. We use a variety of quality ingredients in our tea blends, including coconut, rosehips, almonds and chocolate. We introduce new flavors each month as well as around seasonal holidays. We believe our focus on innovation and product development is a key differentiating factor for our brand that helps drive our customer loyalty.

          Our innovation also extends to creating new and exciting merchandise to simplify tea consumption and enhance the tea drinking experience. We have a competitive advantage in that our accessory team designs and develops all of our products in-house. Therefore, we are better positioned to create unique, proprietary designs to make consuming loose-leaf tea easier and more fun for our customers. We believe our combination of product selection and product innovation allows us to offer customers a distinctive assortment of products that differentiate us from other specialty tea retailers and helps drive our continued strong financial results.


Marketing and Advertising

          We differentiate our business through a unique field-based marketing approach to build brand awareness and drive customers to our stores and e-commerce site in both new and existing markets. We customize our marketing mix for each of our markets and purposes through our events sponsorship group. Our events sponsorship group engages directly in the communities around our stores and drives store visits by offering product samplings and beverage coupons and participating in both hyper-local and large-scale events. In the last 12 months, we participated in

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approximately 2,000 events that more than one million people attended, which included the Seawheeze Half Marathon in Vancouver, the Ghirardelli Chocolate Festival in San Francisco, and the Boston Common Tree Lighting Ceremony. These events are identified and coordinated by our local store managers and Tea Guides with support from our dedicated corporate events team.

          We maintain an active social media program and have developed a strong presence on various social media platforms with a total following base of approximately 520,000, including Facebook (over 170,000 followers), Google+ (over 135,000 followers), Instagram (over 85,000 followers) and Twitter (over 65,000 followers), in each case as of March 14, 2015. Our following base has increased over 15 times since 2011. In addition, we take a proactive approach to public relations through national, local and trade media outlets.


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 products from all over the globe, including Ecuador, Argentina, Brazil, South Africa, Kenya, Sri Lanka, India, Nepal, China, Vietnam, South Korea, Taiwan and Japan. The majority of our tea blenders are in either Germany or the United States. We have a flexible and scalable supply chain system. All of our pre-packaged teas, gift packages and boxed accessories and merchandise are assembled in our Montréal warehouse and then shipped to our retail stores. Since we founded the Company in 2008, we have developed strong relationships with our suppliers. Our relationships with our suppliers are very important as we depend on our suppliers to provide us with the highest quality tea from around the world. In addition to bringing our designs for tea blends to fruition, our suppliers are crucial to the quality control process and ensuring our teas meet applicable regulatory guidelines.


Competition

          We believe we differentiate ourselves from our competitors on the basis of our distinct retail experience and the innovative tea products we offer. The U.S. and Canadian tea markets are highly fragmented. We compete with a large number of relatively small independently owned tea retailers and a number of regional and national tea retailers, as well as retailers of grocery products, including loose-leaf tea and tea bags and other beverages. We also compete with other vendors of loose-leaf tea, tea bags and ready-to-drink teas, such as club stores, wholesalers and Internet suppliers, as well as with houseware retailers and suppliers that offer teawares and related accessories. As we continue to expand geographically, we expect to encounter additional regional and local competitors.


Distribution Facilities

          We distribute our loose-leaf teas and tea-related gifts and accessories to our stores and our e-commerce customers from distribution centers in Montréal, Calgary and Champlain, New York. Our Montréal warehouse ships to our e-commerce customers and Eastern Canada stores, while our third-party distribution centers in Calgary and upstate New York ship to Western Canada and all U.S. stores, respectively. The facilities in Calgary and Champlain, New York are operated by third parties and are 500,000 and 88,000 square feet in size, respectively. We operate the distribution facility in Montréal, which is leased and is approximately 60,000 square feet in size. Our products are typically shipped to our stores and our e-commerce customers via a third-party national transportation provider multiple times per week.


Management Information Systems

          Our management information systems provide a full range of business process support to our stores, our store operations and support center teams. Additionally, we operate our e-commerce

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site on an independent platform. We believe our systems provide us with enhanced operational efficiencies, scalability, increased management control and timely reporting that allow us to identify and respond to trends in our business. We utilize a combination of industry-standard and customized software systems to provide various functions related to:

    point of sales;

    inventory management;

    warehouse management; and

    accounting and financial reporting.

          We believe our management information systems benefit us through enhanced customer service, more efficient operations and increased control over our business. Through our point of sale system we are able to facilitate the operations of our stores and e-commerce site and through our warehouse management systems we can efficiently manage our inventory of loose-leaf teas and tea-related gifts and accessories from our store support center.


Government Regulation

          We are subject to labor and employment 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 FTC and FDA. We are also subject to the laws of Canada, including the Canadian Food Inspection Agency, as well as provincial and local regulations. We monitor changes in these laws and believe that we are in material compliance with applicable laws.


Trademarks and Other Intellectual Property

          We regard intellectual property and other proprietary rights as important to our success. We own several trademarks and servicemarks that have been registered with the Canadian Intellectual Property Office and the U.S. Patent and Trademark Office, including DAVIDsTEA®. We have also registered our stylized logos. We also own domain names, including davidstea.com. In addition, we have registered or made application to register one or more of our marks in a number of foreign countries and expect to continue to do so in the future. There can be no assurance that we can obtain the registration for the marks in every country where registration has been sought.

          We also rely upon trade secrets and know-how to develop and maintain our competitive position. We protect our intellectual property rights through a variety of methods including trademark and trade secret laws, as well as confidentiality agreements with vendors, employees, consultants and others who have access to our proprietary information.

          We must constantly protect against any infringement by competitors. If a competitor infringes on our trademark rights, we may take action to protect our rights, which could result in litigation, in which case, we may incur significant expenses and divert significant attention from our business operations.


Employees

          As of the end of fiscal 2014, 2013 and 2012, we had 2,354, 1,561 and 1,376 employees. As of January 31, 2015, we employed a total of 340 full-time employees and 2,014 part-time employees, with 307 in the United States and 2,047 in Canada. Of all those employees, 2,165 were employed in our retail channel and 189 were employed in corporate, distribution and direct channel support

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functions. None of our employees is represented by a labor union. We believe our relationship with our employees is good.


Seasonality

          Our business experiences seasonal fluctuations, reflecting increased sales during the holiday shopping season. Our revenue 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.


Properties

          Our principal executive and administrative offices are located at 5430 Ferrier, Mount-Royal, Québec, Canada, H4P 1M2. We also lease office space outside of Boston, Massachusetts. We currently lease one distribution center located in Montréal, Québec, which we opened in July 2010. See "— 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
 
Use
 
Approximate
Square Feet
 
Lease
Renewal Date

Montréal, Québec

  Executive and Administrative Offices   22,000   October 31, 2018

Montréal, Québec

  Distribution Center   60,000   June 30, 2016

Waltham, Massachusetts

  Executive and Adminstrative Offices   3,000   April 30, 2018

          As of January 31, 2015, we operated 154 stores consisting of approximately 135,000 gross square feet. All of our stores are leased from third parties and the leases typically have 10 year terms. Most leases for our retail stores provide for a minimum rent, typically including rent increases, plus a percentage rent based upon sales after certain minimum thresholds are achieved. The leases generally require us to pay insurance, utilities, real estate taxes and repair and maintenance expenses.

          The following table summarizes the locations of our stores as of January 31, 2015:

Location
 
Number of
Stores
 

Alberta, Canada

    19  

British Columbia, Canada

    25  

Manitoba, Canada

    4  

Newfoundland, Canada

    2  

New Brunswick, Canada

    2  

Nova Scotia, Canada

    3  

Ontario, Canada

    44  

Prince Edward Island, Canada

    1  

Québec, Canada

    27  

Saskatchewan, Canada

    3  

California

    6  

Connecticut

    1  

Illinois

    5  

Massachusetts

    5  

New Jersey

    1  

New York

    5  

Pennsylvania

    1  

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Legal Proceedings

          We are, from time to time, subject to claims and suits arising in the ordinary course of business. Although the outcome of these and other claims cannot be predicted with certainty, management does not believe that the ultimate resolution of these matters will have a material adverse affect on our financial position or on our results of operations.


Corporate Structure

          DAVIDsTEA Inc. owns a 100% equity interest in its sole subsidiary, DavidsTea (USA) Inc., a corporation organized under the laws of Delaware.

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MANAGEMENT

Our Executive Officers and Directors

          Below is a list of the names and ages of our directors and officers as of May 15, 2015, and a brief account of the business experience of each of them. Unless otherwise stated, the business address for our directors and officers is c/o DAVIDsTEA Inc., 5430 Ferrier, Mount-Royal, Québec, Canada H4P 1M2.

Name
 
Age
 
Position

Sylvain Toutant

  51   President, Chief Executive Officer and Director

Luis Borgen

  45   Chief Financial Officer

David Segal

  34   Co-Founder and Brand Ambassador

Howard Tafler

  45   Chief Accounting Officer

Marc Macdonald

  43   Chief HR Officer

Edmund Noonan

  48   Head of Real Estate

Pierre Michaud

  71   Director and Chairman

Emilia Di Raddo

  57   Director

Tom Folliard

  50   Director

David W. McCreight

  52   Director

Lorenzo Salvaggio

  60   Director

Guy Savard

  72   Director

Herschel Segal

  84   Co-Founder and Director

Sarah Segal

  30   Director

Thomas Stemberg

  66   Director

          Sylvain Toutant, President and Chief Executive Office and Director.    Mr. Toutant, 51, joined the Company as President and Chief Executive Officer and as a director in May 2014. Prior to that, Mr. Toutant served as the President of Keurig Green Mountain Canada from December 2010 to May 2014 and as Chief Operating Officer of VanHoutte from August 2008 to December 2010. Mr. Toutant received a B.A.A. in Marketing and Commerce from Université du Québec à Trois-Rivières. Mr. Toutant brings significant experience in the beverage industry to our board. Mr. Toutant is a resident of Québec, Canada.

          Luis Borgen, Chief Financial Officer.    Mr. Borgen, 45, became our Chief Financial Officer in May 2012. Prior to joining us, Mr. Borgen served as Chief Financial Officer of DaVita HealthCare Partners Inc. from March 2010 to April 2012. From February 2009 to March 2010, Mr. Borgen served as Senior Vice President, Finance for the U.S. retail division of Staples, Inc., where he played a role in strategy development and business planning efforts. From June 2005 until January 2009, Mr. Borgen served as the Vice President, Finance for the U.S. retail division of Staples, Inc. From July 2002 to June 2005, Mr. Borgen served as Vice President, Corporate Financial Planning and Analysis of Staples, Inc. where he led the global business planning efforts. From February 1999 to June 2002, Mr. Borgen served in the corporate treasury department of Staples, Inc., including as Vice President and Assistant Treasurer. Mr. Borgen received a B.S. in Business Management from the United States Air Force Academy, a Masters in Finance from Boston College and an M.B.A. from The University of Chicago. Mr. Borgen is a resident of Massachusetts, USA.

          David Segal, Co-Founder and Brand Ambassador.    Mr. Segal, 34, is one of our co-founders and has held various positions with our Company since April 2008. In September 2014, Mr. Segal became our Chief Brand and Innovation Officer and in March 2015, he became our Brand Ambassador. Mr. Segal received a Bachelor of Commerce in Entrepreneurship and English Literature from McGill University. Mr. Segal is a resident of Québec, Canada.

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          Howard Tafler, Chief Accounting Officer.    Mr. Tafler, 45, joined our Company in January 2010 and serves as our Chief Accounting Officer. Prior to joining the Company, Mr. Tafler worked at a national accounting firm and was the Chief Financial Officer of a manufacturing company from 2003 to 2009. Mr. Tafler received a Bachelor of Commerce in Accounting from McGill University. Mr. Tafler is also a chartered accountant and a CPA. Mr. Tafler is a resident of Québec, Canada.

          Marc Macdonald, Chief HR Officer.    Mr. Macdonald, 43, joined our Company as Chief HR Officer in July 2014. Prior to joining our Company, Mr. Macdonald served as the Vice President, HR at Keurig Green Mountain Canada from August 2011 through July 2014 and as Director, HR at The Home Depot, Inc. from August 2008 through August 2011. Mr. Macdonald received a Bachelor of Commerce in Organizational Behavior and Labor Management Relations from McGill University and an M.Sc. in Human Resources from HEC Montréal. Mr. Macdonald is a resident of Québec, Canada.

          Edmund Noonan, Head of Real Estate.    Mr. Noonan, 48, became our Head of Store Development in October 2014 and Head of Real Estate in March 2015. Prior to that, Mr. Noonan served in increasing roles of responsibility at Abercrombie & Fitch, Inc. from January 2008 through September 2014, including Vice President, Real Estate for the United States & Canada, Vice President, Capital, Real Estate Finance & Accounting and Senior Director, Corporate Finance. Mr. Noonan received a B.S. in Finance and Political Science from Miami University and an M.B.A. in Finance from The Ohio State University. Mr. Noonan is a resident of Ohio, USA.

          Pierre Michaud, Chairman.    Mr. Michaud, 71, became a director of our Company in February 2014. Mr. Michaud is the founder and was the Chief Executive Officer and Chairman of Reno-Depot inc. until 1997. He was also Chairman of Provigo inc., a major food retailer in Canada from 1993 to 1999 and a director of The Laurentian Bank of Canada (TSX: LB) from 1990 to 2010, and went on to become Vice Chairman in 1997. His other directorships were: Loblaw Companies of Canada (TSX: L) from 1999 to 2011, BRP inc. (TSX: DOO) from 2004 to 2014, Gaz Metro inc. from 2004 to 2009, Castorama S.A. in France from 1997 to 2000 and The Caisse de Depot et Placements du Quebec from 1989 to 1995. Mr. Michaud brings extensive retailing knowledge to the Company. Mr. Michaud is a resident of Québec, Canada.

          Emilia Di Raddo, Director.    Ms. Di Raddo, 57, became a director of our Company in August 2012, which term ended in January 2013. Ms. Di Raddo rejoined our board in March 2014. Ms. Di Raddo has been the President and Chief Financial Officer of Le Chateau Inc. (TSX: CTU/A) since November 1996, where she also serves on the board of directors. Ms. Di Raddo received a Bachelor of Commerce and a Diploma in Accountancy from Concordia University and is also a chartered accountant and a CPA. Ms. Di Raddo brings valuable retail industry experience to our board. Ms. Di Raddo is a resident of Québec, Canada.

          Tom Folliard, Director.    Mr. Folliard, 50, became a director of our Company in February 2014. Mr. Folliard has served as the President and Chief Executive Officer of CarMax, Inc. since 2006. Prior to that, Mr. Folliard served as executive vice president of store operations from 2001 to 2006 and vice president of merchandising from 1996 to 2001. Mr. Folliard serves on the board of directors of CarMax, Inc. (NYSE: KMX). Mr. Folliard received a B.S. in Management from Florida Institute of Technology. Mr. Folliard brings valuable management and retail experience to our board. Mr. Folliard is a resident of Virginia, USA.

          David W. McCreight, Director.    Mr. McCreight, 52, became a director of our Company in November 2014. Mr. McCreight has served as Chief Executive Officer of Anthropologie Group, a division of Urban Outfitters, Inc., since November 2011. Prior to that, Mr. McCreight served as President of Under Armour, Inc. from 2008 until 2010 and President of Lands' End, Inc. from 2005 to 2008. Mr. McCreight also held the position of Senior Vice President of Merchandising at Lands'

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End from 2003 to 2005 and Senior Vice President and General Merchandising Manager of Disney Stores from 2001 to 2003. Mr. McCreight received a B.A. in Liberal Arts from the University of Virginia. Mr. McCreight is qualified to serve on our board given his experiences described above and his understanding of the retail industry. Mr. McCreight is a resident of Pennsylvania, USA.

          Lorenzo Salvaggio, Director.    Mr. Salvaggio, 60, became a director of our Company in September 2014. Mr. Salvaggio served as Chief Financial Officer of Les Distribution Regitan Ltd., a food wholesaler, from October 2012 to May 2014. Prior to that, Mr. Salvaggio was a consultant at and owner of Lyceum Management Services Inc., a consulting firm, from July 2005 to October 2012. Mr. Salvaggio received a Bachelor of Commerce in Accounting from Concordia University. Mr. Salvaggio is a CPA and CMA. Mr. Salvaggio brings significant management and accounting experience to our board. Mr. Salvaggio is a resident of Québec, Canada.

          Guy Savard, Director.    Mr. Savard, 72, became a director of our Company in November 2014. Mr. Savard served as Chairman of Merrill Lynch Canada Inc. from August 1998 to September 2012. Prior to joining Merrill Lynch Canada Inc., Mr. Savard started his career as a chartered accountant and then served as President and Chief Operating Officer of Caisse de dépôt et placement du Québec. Mr. Savard received a Bachelor of Commerce from Laval University, a Masters Degree in Accounting and Commerce from Laval University and a Diploma in Small Company Management from Harvard University. Mr. Savard brings significant financial and accounting experience to our board. Mr. Savard is a resident of Québec, Canada.

          Herschel Segal, Co-Founder and Director.    Mr. Segal, 84, is one of our co-founders and became a director of our Company in April 2008. Since January 1969, Mr. Segal has served as the President and Chief Executive Officer of Rainy Day Investments Ltd., an investment company. Mr. Segal founded Le Chateau Inc. (TSX: CTU/A), a clothing retailer, in 1959 and served as its Chief Executive Officer until September 2006, where he also served as Executive Chairman until February 2007 and where he is still a director. Mr. Segal received a B.A. in Economics and Political Science from McGill University. Mr. Segal brings vast retail industry experience to our board. Mr. Segal is a resident of Québec, Canada.

          Sarah Segal, Director.    Ms. Segal, 30, became a director of our Company in April 2012. Ms. Segal served as our President and Head of Product Development and Tea Department from December 2010 to September 2012. Since May 2013, Ms. Segal has served as the President and owner of SQUISH Candy. Ms. Segal received a B.A. in Environmental Health from McGill University and an M.Sc. in Water Science, Policy and Management from Oxford University. Ms. Segal brings knowledge of the Company and retail experience to our board. Ms. Segal is a resident of Québec, Canada.

          Thomas Stemberg, Director.    Mr. Stemberg, 66, became a director of our Company in April 2012. Mr. Stemberg became a managing general partner with Highland Consumer Partners, a venture capital firm, in 2006. From 1988 to 2005, Mr. Stemberg served as Chairman of Staples, Inc., an office supply superstore retailer, and from 1986 until 2002, he also served as Chief Executive Officer of Staples, Inc. (NASDAQ: SPLS). From 1988 to March 2015, Mr. Stemberg served on the board of PetSmart, Inc. Mr. Stemberg currently serves on the boards of CarMax, Inc. (NYSE: KMX), Guitar Center, Inc., PulteGroup, Inc. (NYSE: PHM) and lululemon athletica inc. (NASDAQ: LULU). Mr. Stemberg received an A.B. in Physical Science from Harvard College and an M.B.A. from Harvard Business School. Mr. Stemberg brings valuable management and retail industry experience to our board. Mr. Stemberg is a resident of Massachusetts, USA.

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Family Relationships

          Our co-founder and one of our directors, Herschel Segal, is the father of Sarah Segal, who is also currently one of our directors. Herschel Segal and David Segal, our other co-founder and an executive officer, are second cousins. Mr. Toutant, our President and Chief Executive Officer, is married to a niece of Mr. Michaud, our Chairman.


Composition of our Board of Directors

          Our board of directors consists of ten directors, nine of whom are non-employee directors. Each director was elected under board composition provisions in our Amended and Restated Voting Agreement, as amended, which will be terminated upon the closing of this offering. Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until their earlier resignation or removal from office in accordance with our bylaws.

          Five of our ten directors that make up our board of directors are considered independent under Canadian securities laws. Under these rules, Pierre Michaud, the chairman of our board of directors, Tom Folliard, David McCreight, Guy Savard and Tom Stemberg are considered independent, whereas Emilia Di Raddo, Lorenzo Salvaggio, Hershel Segal, Sarah Segal and Sylvain Toutant are not considered to be independent as a result of their respective relationships with the Company or their relationships with other non-independent members of our board of directors.

          To enhance the independent judgment of our board of directors, despite the fact that a majority of our directors will not be independent, the independent members of our board of directors may meet in the absence of members of management and the non-independent directors. Open and candid discussion among the independent directors is facilitated by the relatively small size of the board and great weight is attributed to the views and opinions of the independent directors. All non-independent directors are responsible to our board of directors as a whole and have a duty of care to the Company.

          Our board of directors does not have a written mandate delineating its roles and responsibilities. Our board of directors will function within the scope of our governing statutes, by-laws and, where applicable, the corporate governance guidelines.


Foreign Private Issuer Status

          The listing rules of The NASDAQ Stock Market, which we also refer to as the NASDAQ Listing Rules, include certain accommodations in the corporate governance requirements that allow foreign private issuers, such as us, to follow "home country" corporate governance practices in lieu of the otherwise applicable corporate governance standards of The NASDAQ Stock Market. The application of such exceptions requires that we disclose each noncompliance with the NASDAQ Listing Rules that we do not follow and describe the Canadian corporate governance practices we do follow in lieu of the relevant NASDAQ corporate governance standard. When our common shares are listed on The NASDAQ Stock Market, we intend to continue to follow Canadian corporate governance practices in lieu of the corporate governance requirements of The NASDAQ Stock Market in respect of the following:

    the majority independent director requirement under Section 5605(b)(1) of the NASDAQ Listing Rules;

    the requirement under Section 5605(b) of the NASDAQ Listing Rules that a company have regularly scheduled meetings at which only independent directors are present;

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    the requirement under Section 5605(d) of the NASDAQ Listing Rules that a compensation committee comprised solely of independent directors governed by a compensation committee charter oversee executive compensation;

    the requirement under Section 5605(e) of the NASDAQ Listing Rules that director nominees be selected or recommended for selection by either a majority of the independent directors or a nominations committee comprised solely of independent directors; and

    the requirement under Section 5610 of the NASDAQ Listing Rules that a company adopt one or more codes of conduct applicable to all directors, officers and employees, and that such codes are publicly available.

          Canadian law does not impose a requirement that the board consist of a majority of independent directors but does require certain disclosure if a majority of the board is not independent. Nor does Canadian law impose specific requirements on the establishment of a compensation committee or nominating committee or nominating process. In addition, Canadian law does not impose a requirement that a company have regularly scheduled meetings at which only independent directors are present. Furthermore, Canadian law does not require a company to adopt a written code of conduct applicable to all directors, officers and employees.


Board Structure and Committee Composition

          Our board of directors has established an Audit Committee and a Human Resources and Compensation Committee. Our board of directors will not establish a separate nomination committee. The process by which the board establishes new candidates for board nominations will lie within the discretion of our board of directors with a view of the best interests of the Company and in accordance with the corporate governance guidelines. Pursuant to our governing statutes, articles and by-laws, new candidates for board nominations can be proposed by our shareholders and will be voted on by our shareholders at each annual meeting of shareholders. See "Description of Share Capital" and "Comparison of Shareholder Rights".


Audit Committee

          Upon completion of this offering, our Audit Committee will consist of Guy Savard, Emilia Di Raddo and Pierre Michaud, with Guy Savard serving as Chairman of the committee, and we will have at least one independent member. We anticipate that, prior to the completion of this offering, the Board will determine that Guy Savard and Pierre Michaud meet the independence requirements under the rules of The NASDAQ Stock Market and under Rule 10A-3 under the Exchange Act. Within one year following the effective date of the registration statement of which this prospectus forms a part, our Audit Committee will consist exclusively of independent directors. The Board has determined that Guy Savard is an "Audit Committee financial expert." All members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and The NASDAQ Stock Market. Our Audit Committee's primary responsibilities and duties upon completion of this offering will include:

    appointing, compensating, retaining and overseeing the work of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services and reviewing and appraising the audit efforts of our independent accountants;

    establishing procedures for (i) the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters and (ii) confidential and anonymous submissions by our employees of concerns regarding questionable accounting or auditing matters;

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    engaging independent counsel and other advisers, as necessary;

    determining funding of various services provided by accountants or advisers retained by the committee;

    reviewing our financial reporting processes and internal controls;

    reviewing and approving related-party transactions or recommending related-party transactions for review by independent members of our board of directors; and

    providing an open avenue of communication among the independent accountants, financial and senior management and the board.


Human Resources and Compensation Committee

          Upon completion of this offering, the Human Resources and Compensation Committee will consist of Tom Folliard, Pierre Michaud, Herschel Segal, Thomas Stemberg and David McCreight, with Mr. Folliard serving as Chairman of the committee. Four of the five members of the Human Resources and Compensation Committee are independent directors. Its primary purpose, with respect to compensation, will be to assist our board of directors in fulfilling its oversight responsibilities and to make recommendations to our board of directors with respect to the compensation of our directors and executive officers. Although not comprised solely of independent directors, our board of directors believes that the committee will be able to carry out its mandate in the same manner as if the committee were comprised entirely of independent directors. Independent consultants may also be periodically retained to assist the Human Resources and Compensation Committee in fulfilling its responsibilities when needed.


Other Board Committees

          In addition to the Audit Committee and the Human Resources and Compensation Committee, the Company has established a Real Estate Committee with a mandate to evaluate and approve sites to be leased by the Company within the budget, criteria and other qualifications as may be approved by our board of directors from time to time.


Position Descriptions

The Chairman of the Board of Directors

          The board of directors has adopted a written position description for the Chairman of the board of directors and each of the committee chairs, which sets out each of the chairs' key responsibilities, including duties relating to setting meeting agendas, chairing meetings and working with the respective committee and management to ensure, to the greatest extent possible, the effective functioning of the committee and the board of directors.

The Chief Executive Officer

          The primary functions of the Chief Executive Officer are to lead the day-to-day management of our business and affairs and to lead the implementation of the resolutions and the policies of the board of directors. The board of directors has, together with the Chief Executive Officer, developed a written position description and mandate for the Chief Executive Officer which sets out the Chief Executive Officer's key responsibilities, including duties relating to strategic planning, our operational direction, board of directors interaction, succession reporting and communication with shareholders. The Chief Executive Officer mandate will be considered by the board of directors for approval annually.

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Continuing Education and Gender Diversity

Orientation and Continuing Education

          We do not have a formal orientation and continuing education program for new directors. However, all new directors will be given training which will include written information about the duties and obligations of members of our board of directors, our business and operations, as well as documents from recent meetings of our board of directors. New directors will also have access to management to discuss our activities and our organization.

Gender Diversity

          We do not have a formal policy on the representation of women on our board of directors or in senior management positions. We are, however, mindful of the benefit of diversity of our board of directors and senior management and the need to maximize their effectiveness and respective decision-making abilities. Accordingly, in searches for new candidates, we will continue to consider the level of female representation and diversity on our board of directors and in senior management positions and this will be one of several factors used in the search process. This will be achieved through continuously monitoring the level of female representation on our board of directors and in senior management positions and, where appropriate, recruiting qualified female candidates as part of our overall recruitment and selection process to fill openings, as the need arises, through vacancies, growth or otherwise.


Corporate Governance Guidelines

          Our board of directors also intends to adopt additional corporate governance guidelines to assist in corporate governance responsibilities. These guidelines will set out general guidelines relating to the responsibilities, organization and membership of our board of directors, the composition and membership of the various committees, meetings of the board, director compensation, the evaluation of management and succession planning.


Insider Trading Policy

          Our board of directors intends to adopt an insider trading policy prior to the consummation of the offering to formalize our policy on trading in our securities by directors, officers and employees and other insiders in accordance with securities laws and regulations. The insider trading policy will prohibit all trades by a covered person when in possession of material nonpublic information until such information is disclosed and broadly disseminated for a minimum period of time and will also prohibit directors, officers and employees from passing material nonpublic information on to others or recommend to anyone the purchase or sale of any securities when aware of such information. The policy will also impose restrictions on trading during prescribed blackout periods of certain covered persons implemented at the end of each quarter. Our directors, officers and employees are also prohibited from purchasing financial instruments designed to hedge or offset a decrease in the market value of our securities, including securities granted as or underlying securities-based compensation.


Whistleblower Policy

          The board of directors intends to adopt a written whistleblower policy which provides employees with the ability to report, on a confidential basis, any violations within the Company including, but not limited to, criminal conduct, falsification of financial records or unethical conduct.

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EXECUTIVE AND DIRECTOR COMPENSATION

          The following discussion relates to the compensation of our named executive officers for the fiscal year ended January 31, 2015. Our named executive officers are:

    Sylvain Toutant, our President and Chief Executive Officer,

    Jevin Eagle, our former President and Chief Executive Officer,

    Luis Borgen, our Chief Financial Officer,

    David Segal, our Co-Founder and Brand Ambassador, and

    Kathie Lindemann, our former Chief Operating Officer.

Each year, the Human Resources and Compensation Committee of our board reviews and determines the compensation of our named executive officers.

Overview

          The Human Resources and Compensation Committee of our board (our "compensation committee") makes decisions regarding all forms of compensation paid to our executive officers, including our named executive officers and makes recommendations to our board relating to the compensation of the members of our board. Our compensation committee also administers our incentive compensation and benefit plans and regularly reports to and updates our board on matters related to executive compensation. With respect to the compensation of our executive officers, including our named executive officers, our compensation committee makes decisions regarding salaries, bonuses and equity incentive compensation and establishes the corporate goals and objectives on which incentive compensation is based. Our compensation committee also reviews the performance of the Company and of our President and Chief Executive Officer and other executive officers.

Compensation Objectives

          The objectives of our compensation program are to attract, retain and motivate highly skilled executives, to reward them for their performance and contributions to our Company's short- and long-term success, and to align the interests of our executive officers with those of our shareholders. The compensation of each executive officer is determined based on a number of factors, including the executive officer's qualifications and experience, role, responsibilities and contributions, as well as the market and our financial condition.

          Our compensation program includes incentive programs intended to align executive compensation with Company performance, to motivate our executive officers to work toward the achievement of our short- and long-term corporate objectives, including strategic goals and increasing shareholder value and, where appropriate, to reward superior performance. Our named executive officers are also entitled to receive benefits and executive perquisites in accordance with our Company policies.

Elements of Compensation Program

          The compensation of our named executive officers in fiscal 2014 consisted of base salary, annual cash bonuses, equity awards and employee benefits that generally are made available to substantially all salaried employees. Our named executive officers are also entitled to certain compensation and benefits upon certain terminations of employment and change of control transactions pursuant to employment agreements and the terms of individual equity award agreements.

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Base salary

          Base salaries for our named executive officers are determined annually by our compensation committee. When determining base salary each year, our compensation committee takes factors into account such as each executive's experience and individual performance, the Company's performance as a whole, cost of living adjustments and other industry conditions, but does not assign any specific weighting to any factor. For fiscal 2014, our compensation committee approved base salary increases of 11% for Mr. Borgen, and 2.50% for each of Messrs. Eagle and Segal and Ms. Lindemann, resulting in a base salary of US$344,451 for Mr. Borgen, US$370,948 for Mr. Eagle, US$264,963 for Mr. Segal and US$344,451 for Ms. Lindemann. Pursuant to the employment agreement entered into with Mr. Toutant upon the commencement of his employment as our President and Chief Executive Officer in June 2014, his 2014 base salary rate was CDN$375,000.

Equity awards

          Our named executive officers participate in our Amended and Restated Equity Incentive Plan (referred to as the "Equity Plan"). See "— Equity and Incentive Plans — Amended and Restated Equity Incentive Plan" below for a description of this plan. Our compensation committee determines the equity awards to be granted to our named executive officers. Each of our named executive officers, other than Mr. Segal, holds stock options to purchase our common shares, which were granted under the Equity Plan. Stock options were granted in fiscal 2014 to Messrs. Toutant and Borgen. The stock option granted to Mr. Toutant vests as to 25% of the award in June 2015, with the remainder vesting in equal monthly installments over the following 36 months and the stock option granted to Mr. Borgen vests in four equal, annual installments following the date of grant. These stock options are subject to earlier vesting upon a trigger event, which generally includes a change of control or a liquidation of the Company. Vesting is generally subject to the executive's continued employment. Stock option awards serve to align the interests of our named executive officers with the interests of our shareholders because no value is created unless the value of our common shares appreciates after grant. Stock option awards also encourage retention through the use of time-based vesting.

          In connection with this offering, our board adopted the DavidsTea Inc. 2015 Omnibus Equity Incentive Plan (referred to as the "2015 Omnibus Plan"). See "— Equity and Incentive Plans — 2015 Omnibus Equity Incentive Plan" below for a description of this plan. Following its adoption by our Board on March 31, 2015, all equity and equity-based awards, including awards to our named executive officers, are made under the 2015 Omnibus Plan.

Cash bonuses

          In fiscal 2014, each of our named executive officers (other than Mr. Eagle and Ms. Lindemann) was awarded an annual cash bonus under our 2014 Bonus Plan based on pre-established corporate goals. Before the start of fiscal 2014, our compensation committee met and determined that the performance goals under our 2014 Bonus Plan would be based on adjusted EBITDA growth and set the threshold, target and maximum levels of performance under the plan. Pursuant to employment agreements with each of Messrs. Toutant and Borgen, for fiscal 2014, each such executive's target bonus, as a percentage of base salary, was 50% and 40%, respectively, with each executive eligible to receive a maximum amount, as a percentage of base salary, of 100% and 80%, respectively. Our compensation committee determined that for fiscal 2014, Mr. Segal's target bonus, as a percentage of base salary, would be 15%, with a maximum payment of up to 30% of base salary. At the beginning of fiscal 2015, our board met and determined that the level of adjusted EBITDA growth for fiscal 2014 was 160% of the target level and approved annual cash bonuses of CDN$300,000 for Mr. Toutant, US$220,449 for Mr. Borgen and US$63,591 for Mr. Segal. Mr. Eagle and Ms. Lindemann received no annual cash bonus for fiscal 2014 since each such executive's employment was terminated prior to the end of fiscal 2014.

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          The cash bonuses are intended to compensate officers for achieving short-term corporate goals. Cash bonuses are also intended to reward our named executive officers for both overall Company and individual performance during the year. We believe that establishing cash bonus opportunities is an important factor in both attracting and retaining the services of qualified and highly skilled executives.

Benefits

          We provide modest benefits to our named executive officers, which are limited to participation in our basic health and welfare plans. These benefits are available to substantially all of our salaried employees.

Employment agreements

          We have entered into employment agreements with each of our named executive officers, other than Mr. Segal, that include severance protections, the details of which are described more fully below under "— Employment Agreements".

Summary Compensation Table

          The following table sets forth information about certain compensation awarded or paid to our named executive officers for fiscal 2014.

Name and principal position
 
Year
 
Salary($)
 
Nonequity
incentive plan
compensation($)
 
Option
awards
($)(1)
 
All other
compensation($)(6)
 
Total($)

Sylvain Toutant

  2014   198,494   235,923   1,026,926     1,461,343

President and Chief Executive Officer(2)

                       

Jevin Eagle

 
2014
 
97,930
 
 
 
185,474
 
283,404

Former President and Chief Executive Officer(3)

  2013   359,089   325,710       684,799

Luis Borgen

 
2014
 
352,241
 
220,449
 
33,422
 
 
606,112

Chief Financial Officer

  2013   306,953   223,344       530,297

David Segal

 
2014
 
267,405
 
63,591
 
 
 
330,996

Co-Founder and Brand Ambassador(4)

                       

Kathie Lindemann

 
2014
 
163,952
 
 
 
172,226
 
336,178

Former Chief Operating Officer(5)

  2013   331,957   241,956       573,913

(1)
Amounts shown reflect the aggregate grant date fair value of time-vesting stock options, using a Black-Scholes option pricing model, and exclude the value of estimated forfeitures. Assumptions used in the calculation of these amounts are included in Note 18 to our consolidated financial statements included elsewhere in this prospectus. Amounts in this column have been converted into U.S. dollars based on the U.S. dollar/Canadian dollar exchange rate in effect as of January 31, 2015 of 1.2716 US$/CDN$.

(2)
Mr. Toutant joined the Company on June 2, 2014 and, therefore, did not receive compensation from the Company in 2013. His compensation is disclosed for the year ended January 31, 2015. Compensation paid to Mr. Toutant is denominated in Canadian dollars. For purposes of this table, amounts paid to Mr. Toutant have been converted into U.S. dollars based on the U.S. dollar/Canadian dollar exchange rate in effect as of January 31, 2015 of 1.2716 US$/CDN$.

(3)
Mr. Eagle ceased to serve as our Chief Executive Officer in April 2014.

(4)
Mr. Segal was not a named executive officer in fiscal 2013. His compensation is disclosed for the fiscal year ended January 31, 2015. A portion of the salary paid to Mr. Segal in 2014 was denominated in Canadian dollars. Such portion was converted into U.S. dollars for purposes of this table based on the U.S. dollar/Canadian dollar exchange rate in effect as of January 31, 2015 of 1.2716 US$/CDN$.

(5)
Ms. Lindemann ceased to serve as our Chief Operating Officer in September 2014.

(6)
Amounts shown reflect severance payments to the executive in the form of salary continuation and, in the case of Ms. Lindemann, a lump sum payment of US$7,500 for outplacement services.

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Outstanding Equity Awards at Fiscal Year-End

          The following table sets forth information regarding equity awards held by our named executive officers as of January 31, 2015.

 
  Option awards
Name
 
Number of
securities
underlying
unexercised
options(#)
exercisable
 
Number of
securities
underlying
unexercised
options(#)
unexercisable
 
Option
exercise
price($)(1)
 
Option
expiration
date(2)

Sylvain Toutant

    583,616 (3) 3.34   6/2/2021

Jevin Eagle

  416,184 (4) (4) 0.61   4/30/2015

Luis Borgen

  214,595 (4) 97,542 (4) 0.61   2/22/2020

    40,000 (5) 3.38   12/11/2021

David Segal

       

Kathie Lindemann

  182,080 (4)   0.61   9/8/2015

(1)
The exercise price of the stock options is not less than the fair market value of a common share, as determined by our board based, in part, on an independent third-party valuation. On December 11, 2014 our board increased the exercise price of Mr. Toutant's stock options listed in the table above to US$5.35. Stock option exercise prices are denominated in Canadian dollars and have been converted into U.S. dollars based on the U.S. dollar/Canadian dollar exchange rate in effect as of January 31, 2015 of 1.2716 US$/CDN$.

(2)
All stock options have a seven-year term. In connection with the termination of the employment of each of Mr. Eagle and Ms. Lindemann in fiscal 2014, the stock options held by each such executive will terminate prior to the conclusion of the seven-year term of such stock options.

(3)
Represents an option to purchase common shares that will vest as to 25% of the option on June 2, 2015 and thereafter in equal monthly installments over the following 36 months.

(4)
Represents an option to purchase our common shares that vested as to 25% of the option on April 9, 2013 and thereafter continues to vest in equal monthly installments over the following 36 months.

(5)
Represents an option to purchase our common shares that vests in four equal, annual installments over four years following the date of grant.

Employment Agreements

          Mr. Sylvain Toutant.    In March 2015, we entered into an amended and restated employment agreement with Mr. Toutant, our President and Chief Executive Officer. The employment agreement provides for an initial base salary of CDN$375,000, a target bonus, as a percentage of base salary, of 75% with a maximum of up to 150%, a target annual equity grant value, as a percentage of base salary, of approximately 100% with a maximum of up to 150%, and severance payments upon certain terminations of employment. If Mr. Toutant's employment is terminated by us without cause or by him for good reason (as each term is defined in the employment agreement), he will be entitled to continued payment of his base salary and continued participation in the Company's group insurance plans for a period of 18 months following such termination and a pro rata portion of his target annual cash bonus for the year in which the termination occurs. If such termination occurs within 18 months following a change in control of the Company (as defined in the employment agreement), in addition to the severance described in the preceding sentence, Mr. Toutant will also be entitled to an amount equal to 1.5 times the average annual cash bonus paid to him for the two years preceding such termination, with all such severance payments paid in a single lump sum within 75 days following the termination of employment instead of in

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installments, and all outstanding equity awards then held by Mr. Toutant will become fully vested, and exercisable or payable, as the case may be.

          If Mr. Toutant's employment is terminated by us for cause or by him without good reason (as such terms are defined in the executive's employment agreement), Mr. Toutant will be entitled to receive earned but unpaid base salary, any earned but unpaid annual bonus for the year preceding the year in which such termination occurs, unreimbursed business expenses, and an amount payable for unused vacation days (together, the "unpaid base compensation"). Our obligation to provide Mr. Toutant with any severance payments or other benefits under his employment agreement other than his unpaid base compensation is conditioned on Mr. Toutant signing a release of claims in our favor and his continued compliance with covenants relating to confidentiality, assignment of inventions, non-solicitation and non-competition.

          Mr. Luis Borgen.    In March 2015, we entered into an amended and restated employment agreement with Mr. Borgen. The employment agreement provides for an initial base salary of US$344,451, a target bonus, as a percentage of base salary, of 40% with a maximum of up to 80%, a target annual equity grant value, as a percentage of base salary, of approximately 40% with a maximum of up to 60% and severance payments upon certain terminations of employment. If Mr. Borgen's employment is terminated by us without cause or by him for good reason (as each term is defined in the employment agreement), he will be entitled to continued payment of his base salary for a period of 12 months following such termination, payment of COBRA premiums for 12 months, an amount equal to the average annual cash bonus paid to him for the two years preceding such termination and a pro rata portion of his target annual cash bonus for the year in which the termination occurs. If such termination occurs within 18 months following a change in control of the Company (as defined in the employment agreement), the severance payments described in the preceding sentence will be paid in a single lump sum within 75 days following the termination of employment instead of in installments and all outstanding equity awards then held by Mr. Borgen will become fully vested, and exercisable or payable, as the case may be. In addition, pursuant to the terms of the stock option granted to Mr. Borgen in 2013, upon a change of control or a liquidation of the Company, such stock option will fully vest if he is employed on the closing date of such event, or if his employment was terminated without cause or he resigned for good reason within the 90-day period prior to such date.

          If Mr. Borgen's employment is terminated by us for cause or by Mr. Borgen without good reason (as each term is defined in the employment agreement), Mr. Borgen will be entitled to receive his unpaid base compensation. Our obligation to provide Mr. Borgen with any severance payments or other benefits under his employment agreement other than his unpaid base compensation is conditioned on Mr. Borgen signing a release of claims in our favor and his continued compliance with covenants relating to confidentiality, assignment of inventions, non-solicitation and non-competition.

          Mr. Jevin Eagle and Ms. Kathie Lindemann.    The employment agreement with each of Mr. Eagle and Ms. Lindemann provided for a base salary, a target and maximum performance bonus, as a percentage of base salary, as well as severance payments upon certain terminations of employment. The employment agreement with each of Mr. Eagle and Ms. Lindemann provided that if the executive's employment was terminated by us without cause or by the executive for good reason (as each term is defined in the executive's employment agreement) the executive would be entitled to continued payment of his or her base salary for a period of six months following such termination of employment. In addition, upon a change in control or a liquidation of the Company, the stock option granted to each executive pursuant to the executive's employment agreement would have become fully vested if the executive had been employed on the closing date of such event or if the executive's employment had been terminated without cause or the executive had resigned for good reason within the 90-day period prior to such date. Under the employment agreement with each executive, if the executive's employment had been terminated by us for cause

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or by the executive without good reason (as such terms are defined in the executive's employment agreement), the executive would have been entitled only to receive earned but unpaid base salary and unreimbursed business expenses and any other payments or benefits to which the executive would have been entitled under any applicable compensation arrangement or other benefit plan or agreement.

          Upon Mr. Eagle's termination of employment in April 2014, and Ms. Lindemann's termination of employment in September 2014, each executive became entitled to the severance payments provided under his or her employment agreement in connection with a termination of employment without cause as described above. In addition, Ms. Lindemann received a lump sum payment of US$7,500 for outplacement services. The provision of these severance payments was subject to each executive signing an agreement that included a release of claims in our favor and, in the case of Ms. Lindemann, obligations related to non-disparagement, confidentiality, non-competition and non-solicitation of customers and employees.

          Mr. Segal.    We have not entered into an employment agreement with Mr. Segal. However, the terms of his employment with the Company provide for a base salary of US$264,963, as well as continued payment of his base salary for four months following a termination of his employment by the Company without cause.

Retirement Plans

          We do not maintain any qualified or non-qualified defined benefit plans or supplemental executive retirement plans that cover our named executive officers.

Director Compensation

          We reimburse our directors for the reasonable costs and expenses they incur in connection with attending meetings of the board of directors and its committees including, to the extent applicable, the cost of travel on commercial or leased aircraft. In fiscal 2014, as compensation for service on our board of directors, we granted Messrs. Folliard, McCreight, Michaud and Savard and Ms. Di Raddo options to purchase our common shares that vest in equal monthly installments over the 36 months following the date of grant. These stock options are subject to earlier vesting upon a trigger event, which generally includes a change in control or a liquidation of the Company. No other compensation was paid to our directors for service on our board of directors for fiscal 2014.

          The following table sets forth information concerning the compensation earned by our non-employee directors during fiscal 2014. Messrs. Toutant and Eagle received no additional compensation for services as directors and, consequently, they are not included in this table. The compensation received by Mr. Toutant as our President and Chief Executive Officer and Mr. Eagle as our former President and Chief Executive Officer during fiscal 2014 is included in the "Summary Compensation Table" above.

Name
 
Option
awards($)(1)
 
Total($)
 

Mr. Folliard

    85,578     85,578  

Mr. McCreight

    71,907     71,907  

Mr. Michaud

    378,026     378,026  

Ms. Di Raddo

    85,578     85,578  

Mr. Savard

    71,907     71,907  

(1)
Amount represents the aggregate grant date fair value of time-vesting stock options granted to the director in fiscal 2014. This amount was computed using a Black-Scholes option pricing model and excludes the value of estimated forfeitures. Assumptions used in the calculation of these amounts are included in Note 18 to our consolidated financial statements included elsewhere in this prospectus. The grant date fair value of each stock option is denominated in Canadian dollars. For purposes

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    of this table, the grant date fair value has been converted into U.S. dollars based on the U.S. dollar/Canadian dollar exchange rate in effect as of January 31, 2015 of 1.2716 US$/CDN$.

    On December 11, 2014 our board increased the exercise price of the stock options granted to Messrs. Folliard and Michaud and Ms. Di Raddo included in the table above to US$4.19.

    As of January 31, 2015, our directors held the following aggregate number of options to purchase our common shares: Mr. Folliard held options to purchase 48,635 common shares, Mr. McCreight held options to purchase 49,761 common shares, Mr. Michaud held options to purchase 214,836 common shares, Ms. Di Raddo held options to purchase 48,635 common shares and Mr. Savard held options to purchase 49,761 common shares. Messrs. Salvaggio, Segal and Stemberg and Ms. Segal held no options to purchase our common shares. As of January 31, 2015, none of our directors held shares of restricted stock.

          In connection with this offering, our board adopted a non-employee director compensation policy, effective the first day of the first month following this offering. The policy is designed to enable us to attract and retain highly qualified non-employee directors. Under the policy, all non-employee directors will receive the cash and equity compensation set forth below:

Board Chair

   

Annual retainer

  CDN$100,000

Annual target equity grant value

  CDN $85,000

Board member

 

 

Annual retainer

  CDN$50,000

Annual target equity grant value

  CDN $85,000

Board meeting fees

 

CDN$1,000 (CDN$500 for teleconference) payable only after the fourth board meeting in a year

Audit Committee Chair

 

 

Additional annual retainer

  CDN$15,000 minimum

Audit Committee meeting fees

 

CDN$1,000 ($500 for teleconference)

Human Resources and Compensation Committee Chair

 

 

Additional annual retainer

  CDN$10,000 minimum

Human Resources and Compensation Committee meeting fees

 

CDN$1,000 (CDN$500 for teleconference)

Nominating and Governance Committee Chair

 

 

Additional annual retainer

  CDN$5,000 minimum

Nominating and Governance Committee meeting fees

 

CDN$1,000 (CDN$500 for teleconference)

          Under our non-employee director compensation policy, annual retainers and meeting fees will be paid in quarterly cash payments. Equity grants generally will be made in the form of restricted stock units granted under our 2015 Omnibus Plan and will vest in full on the first anniversary of the grant date. Equity awards under our non-employee director compensation policy will be made beginning in fiscal year 2016 following the Company's annual meeting of shareholders.

Equity and Incentive Plans

Amended and Restated Equity Incentive Plan

          Our Equity Plan provides for the grant of stock options and restricted stock to our and our subsidiaries' full and part-time employees, officers, directors, contractors and consultants. The following summary of the Equity Plan is not a complete description of all provisions of the Equity Plan and is qualified in its entirety by reference to the Equity Plan, which is filed as an exhibit to the registration statement of which this prospectus is a part.

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Plan administration

          The Equity Plan is administered by our board, which has authority to grant awards, to interpret the plan and to adopt, amend and rescind rules and regulations related to the plan as it deems advisable, and to make all necessary or desirable determinations regarding the granting of awards.

Authorized shares

          Subject to adjustment, the maximum number of common shares that may be delivered in satisfaction of awards under the Equity Plan is 3,040,000 common shares.

Termination of employment

          With respect to vested stock options held by a participant at termination of employment or service due to the participant's retirement, death, incapacity (as defined in the Equity Plan) or due to a termination by the Company without cause (as defined in the Equity Plan) (together, the employees or service providers terminating under these circumstances are referred to as "good leavers"), the participant's right to exercise will expire on the earliest of (i) 180 days from the date of the participant's death or incapacity, (ii) 90 days from the date of his or her retirement, or (iii) 30 days from the date of his or her termination of employment without cause (in each case not later than the date the stock option would otherwise expire according to its terms). The Company may elect, in lieu of delivering shares upon exercise of a stock option by a good leaver, to repurchase the stock option for an amount equal to the difference between the aggregate fair market value of the common shares underlying the option and the aggregate exercise price of the options. In addition, the Company may repurchase common shares held by good leavers, whether by reason of exercise of stock options or by the vesting of restricted shares for an amount equal to the fair market value of the common shares being repurchased. If a good leaver (other than by termination of employment by the Company without cause) does not exercise his or her vested stock options prior to the time the stock option expires, such stock options will be deemed to have been automatically exercised and we will set aside for pickup by the participant (or his beneficiary or legatee) the cash amount to which the participant is entitled to receive with respect to such stock options.

          In general, in the event of a participant's termination of employment or service by us for cause (as defined in the Equity Plan) or by any other participant who is not a good leaver (together, the participants terminated under these circumstances are referred to as "bad leavers"), then, upon such termination of employment, all awards then held by the participant, whether or not then vested or unvested, will immediately expire and be forfeited for no consideration. In addition, upon termination of employment by a bad leaver, our board may elect to repurchase all or a portion of the shares acquired pursuant to a stock option or the vesting of restricted stock at a per common share price equal to the lesser of the price paid for such common shares and the fair market value of such common shares.

Trigger events

          Upon the occurrence of a trigger event (as defined in the Equity Plan, generally a liquidation or change of control), participants holding vested options or options that would vest upon the completion of the trigger event will have the right to exercise such options on a basis that allows the participants to tender the common shares delivered upon such exercise in the transaction and any options not so exercised will expire and be cancelled upon the completion of the trigger event. In its discretion, our board may accelerate the vesting of all or any part of any outstanding stock options or restricted stock, subject to the participant's agreement, in the case of stock options, to exercise such options and tender the shares delivered upon such exercise in the transaction, and subject in each case to the completion of the trigger event. In the event of a trigger event in which the purchase price in the transaction will be paid in cash, in lieu of a participant exercising his or

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her vested options prior to the trigger event, the participant may require us to purchase his or her options for a purchase price per common share equal to the purchase price per common share in the transaction times the number of common shares subject to the option, minus the aggregate exercise price for such common shares, subject to the completion of the trigger event.

Amendment and termination

          Our board may amend, suspend or terminate the Equity Plan at any time, except that, in general, the amendment, suspension or termination of the plan may not diminish the rights of any participant under any award granted to such participant, unless an amendment is necessary to comply with any applicable regulations or stock exchange listing requirements.

          Following the adoption of our 2015 Omnibus Plan by our board in March 2015, all equity-based awards are granted under the 2015 Omnibus Plan described below.

2015 Omnibus Equity Incentive Plan

          In connection with this offering, our board of directors has adopted the 2015 Omnibus Plan and, following its adoption, all equity-based awards are granted under the 2015 Omnibus Plan. On March 31, 2015, our board granted restricted stock unit awards to each of Messrs. Toutant and Borgen under our 2015 Omnibus Plan. Mr. Toutant received 75,040 restricted stock units and Mr. Borgen received 27,520 restricted stock units. These restricted stock units will vest as to 25% of the award after one year, 25% of the award after two years and the remaining 50% will visit after three years. The following summary describes the material terms of the 2015 Omnibus Plan. This summary of the 2015 Omnibus Plan is not a complete description of all provisions of the 2015 Omnibus Plan and is qualified in its entirety by reference to the 2015 Omnibus Plan, which is filed as an exhibit to the registration statement of which this prospectus is a part.

          Administration.    The 2015 Omnibus Plan is administered by our compensation committee. Our compensation committee has the authority to, among other things, determine eligibility for awards to be granted, determine, modify or waive the type or types of, form of settlement (whether in cash, our common shares or other property) of, and terms and conditions of awards, to accelerate the vesting or exercisability of awards, to adopt rules, guidelines and practices governing the operation of the 2015 Omnibus Plan as the compensation committee deems advisable, to interpret the terms and provisions of the 2015 Omnibus Plan and any award agreement, and to otherwise do all things necessary or appropriate to carry out the purposes of the 2015 Omnibus Plan. The compensation committee's decisions with respect to the 2015 Omnibus Plan and any award under the 2015 Omnibus Plan are binding upon all persons.

          Eligibility.    Our key employees and non-employee directors on our board of directors who, in the opinion of the compensation committee, have the capacity to contribute to our and our affiliates' success are eligible to participate in the 2015 Omnibus Plan.

          Authorized Shares.    Subject to adjustment, as described below, the maximum number of our common shares that are available for issuance under the 2015 Omnibus Plan is 1,440,000 shares all of which may be delivered in satisfaction of incentive stock options, or ISOs, awarded under the 2015 Omnibus Plan. 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.

          Common shares subject to an award that for any reason expires without having been exercised, is cancelled, forfeited or terminated or otherwise is settled without the issuance of shares will again be available for grant under the 2015 Omnibus Plan. The grant of a tandem award of a stock option and a stock appreciation right, or SAR, will reduce the number of our common shares available for awards under the 2015 Omnibus Plan by the number of shares subject to the related stock option (and not as to both awards). To the extent consistent with applicable legal

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requirements (including applicable stock exchange requirements), common shares issued under awards of an acquired company that are converted, replaced or adjusted in connection with the acquisition will not reduce the number of shares available for awards under the 2015 Omnibus Plan.

          Types of Awards.    The 2015 Omnibus Plan provides for awards of stock options, SARs, restricted stock, unrestricted stock, stock units (including restricted stock units), performance awards, deferred share units, elective deferred share units and other awards convertible into or otherwise based on our common shares. Eligibility for stock options intended to be ISOs is limited to our employees. Dividend equivalents may also be provided in connection with an award under the 2015 Omnibus Plan.

    Stock options and SARs.  The exercise price of a stock option, and the base price against which a SAR is to be measured, may not be less than the fair market value (or, in the case of an ISO granted to a 10% shareholder, 110% of the fair market value) of our common shares on the date of grant. Our compensation committee will determine the time or times at which stock options or SARs become exercisable and the terms on which such awards remain exercisable. The maximum term of stock options and SARs is seven years, except that if a participant still holding an outstanding non-statutory stock option or SAR seven years from the date of grant (or in the case of such an award with a maximum term of less than seven years, such maximum term) is prohibited by applicable law or written policy of the Company applicable to similarly situated employees from engaging in any open-market sales of our common shares, and if at such time the stock is publicly traded, the maximum term of the award will instead by deemed to expire on the 30th day following the date the participant is no longer prohibited from engaging in such open market sales.

      A SAR that is granted in tandem with a stock option will become vested and exercisable on the same date or dates as the related stock option and may only be exercised upon the surrender of the right to exercise the related option for an equivalent number of our common shares.

    Restricted and unrestricted stock.  A restricted stock award is an award of our common shares subject to forfeiture restrictions, while an unrestricted stock award is not subject to such restrictions.

    Restricted Stock units.  A restricted stock unit award is an award denominated in our common shares that entitles the participant to receive our common shares or cash measured by the value of our common shares in the future. The delivery of our common shares or cash under a restricted stock unit award may be subject to the satisfaction of performance conditions or other vesting conditions.

    Performance awards.  A performance award is an award the vesting, settlement or exercisability of which is subject to specified performance criteria.

    Deferred share units.  A deferred share unit is an award of a notional investment in our common shares reflected on an unfunded, book-entry account maintained by the Company. Deferred share units may be subject to performance conditions or other vesting conditions. Each deferred share unit may be settled, at the compensation committee's discretion, in a share of our common shares, cash measured by the value of a share of our common shares or a combination thereof.

    Elective deferred share unit.  An elective deferred share unit is an award of a notional investment in a share of our common shares reflected on an unfunded, book-entry account maintained by the Company, where the number of elective deferred share units awarded to a participant is determined by the amount of a participant's elective deferral of his or her eligible compensation and/or bonus divided by the fair market value of a share of our common shares on the date of the payment of such amounts to be deferred, in accordance

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      with and subject to the conditions of the 2015 Omnibus Plan. Elective deferred share units are at all times fully vested and may be settled, at the compensation committee's discretion, in our common shares, cash measured by the value of our common shares or a combination thereof.

    Other awards.  Other awards are awards that are convertible into or otherwise based on our common shares.

          Performance Awards.    The 2015 Omnibus Plan provides for the grant of performance awards that are made based upon, and subject to achieving, performance objectives. Performance objectives with respect to those awards that are intended to qualify as "performance-based compensation" for purposes of Section 162(m) of the Code, to the extent applicable, are limited to an objectively determinable measure or measures of performance relating to any, or any combination, of the following (measured either in absolute terms or relative to the performance of one or more similarly situated companies or a published index covering the performance of a number of companies and determined either on a consolidated basis or, as the context permits, with respect to one or more business units, divisions, subsidiaries, products, projects or geographic locations, or on combinations thereof): stockholder return; sales; assets; expenses; earnings before or after deduction for all or any portion of interest, taxes, depreciation, amortization or equity expense, whether or not on a continuing operation or an aggregate or per share basis; return on equity, investment, capital, capital employed or assets; operating earnings; one or more operating ratios; operating income or profit, including on an after-tax basis; net earnings; net income; income; earnings per share; revenues; stock price; economic value added; cash flow; expenses; capital expenditures; working capital levels; borrowing levels, leverage ratios or credit rating; gross profit; market share; workplace safety goals; workforce satisfaction and diversity goals; employee retention; completion of key projects; implementation and achievement of synergy targets; joint ventures and strategic alliances, licenses or collaborations; sales of particular products or services; customer acquisition or retention; acquisitions and divestitures (in whole or in part); spin-offs, split-ups and the like; reorganizations; recapitalizations, restructurings, financings (issuance of debt or equity); or refinancings. When establishing performance objectives, the compensation committee may exclude any or all "extraordinary items" as determined under IFRS and as identified in the financial statements, notes to the financial statements or management's discussion and analysis in the annual report, including, without limitation, the charges or costs associated with closures and restructurings of the Company or an affiliate, discontinued operations, extraordinary items, capital gains and losses, dividends, share repurchase, other unusual or non-recurring items, and the cumulative effects of accounting changes.

          To the extent consistent with Section 162(m), if applicable, the compensation committee may provide that one or more performance objectives applicable to awards intended to qualify for the performance-based compensation exception under Section 162(m) will be adjusted in an objectively determinable manner to reflect events occurring during the performance period that affect the applicable performance objective.

          Individual Limits.    The maximum aggregate number of our common shares subject to all awards under the 2015 Omnibus Plan (including stock options, SARs, restricted stock, unrestricted stock, restricted stock units, performance awards, deferred share units, elective deferred share units and any other award under the 2015 Omnibus Plan) that may be granted to any participant in the 2015 Omnibus Plan in any calendar year is 200,000 shares.

          A participant who is a non-employee director on our board of directors, in any calendar year, may not receive awards with respect to the greater of an aggregate of 75,000 common shares or CDN$500,000 in aggregate grant date fair value. In addition, the aggregate number of our common shares issuable under outstanding awards to non-employee directors, at any time, may not exceed 1% of our common shares that are issued and outstanding. These limitations, however, will not apply to any award or common shares granted pursuant to a non-employee director's election to receive our common shares in lieu of cash fees.

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          Vesting; Termination of Employment or Service.    Our compensation committee has the authority to determine the vesting schedule applicable to each award, and to accelerate the vesting or exercisability of any award. Our compensation committee will determine the effect of termination of employment or service on an award. Unless otherwise provided by our compensation committee, upon a termination of a participant's employment or service under the following circumstances the following treatment will apply:

    Death.  All time-based awards will immediately vest and performance awards will vest at the target level of performance. Awards subject to exercise will remain exercisable until the earlier of the one-year anniversary of the participant's death or the award's normal expiration date.

    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. Awards subject to exercise 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.

    Retirement.  All time-based awards will be deemed vested with respect to a portion of the award determined by multiplying the number of shares underlying the award by a fraction, the numerator of which is the number of days from the grant date to the date of retirement and the denominator of which is the number of days from the grant date to the final vesting date of the award. Performance awards will remain eligible to vest, to the extent the applicable performance goals are achieved, with respect to a portion of the award determined by multiplying the number of shares underlying the award by a fraction, the numerator of which is the number of days from the beginning of the applicable performance period through the date of retirement and the denominator of which is the number of days in the performance period. Unless otherwise defined in a participant's employment or award agreement, under the 2015 Omnibus Plan, "retirement" means a termination of the participant's employment or service at or after the time the participant reaches age 65 or reaches age 55 with at least 10 years of service.

    Resignation by Participant.  All unvested awards will be forfeited. Awards subject to exercise 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.

    Termination by the Company for Cause.  All stock options and SARs, whether vested or unvested, will be forfeited and all other awards, to the extent unvested, will be forfeited.

    Termination by the Company other than for Cause.  Awards other than RSUs and restricted stock awards will be forfeited to the extent then unvested. Awards subject to exercise, to the extent vested, 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, restricted stock awards and performance awards will be deemed vested with respect to a portion of the award determined by multiplying the number of shares underlying the award by a fraction, the numerator of which is the number of days from the grant date to the six-month anniversary of the date of the participant's termination of employment or service and the denominator of which is the number of days from the grant date to third anniversary of the grant date, with the vesting of such performance awards to be subject to performance assessed as of the date of such termination of employment or service.

    Termination by the Company other than for Cause within 12 months following a Change in Control.  To the extent granted prior to the time of the change in control and then outstanding, all time-based awards will vest and performance awards will vest at the target level of performance. Awards subject to exercise 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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          Non-Transferability of Awards.    Awards under the 2015 Omnibus Plan may not be sold, assigned, transferred, pledged or otherwise encumbered other than by the laws of succession or descent and distribution or, in the case of awards other than ISOs, to a permitted assign (within the meaning of the National Instrument 45-106 Prospectus and Registration Exemptions of the Canadian Securities Administrators).

          Recovery of Compensation.    Our compensation committee may cancel, rescind, withhold or otherwise limit or restrict any award at any time under the 2015 Omnibus Plan if the participant is not in compliance with the provisions of the 2015 Omnibus Plan or any award thereunder or if the participant breaches any agreement with our Company with respect to non-competition, non-solicitation or confidentiality. Our compensation committee also may recover any award or payments or gain in respect of any award under the 2015 Omnibus Plan in accordance with any applicable Company recoupment policy or as otherwise required by applicable law or applicable stock exchange listing standards.

          Change in Control.    In the event of certain consolidations, mergers or similar transactions, certain sales or other disposition of our common shares, certain liquidations of the Company or sales or dispositions of all or substantially all of the Company's assets, or members of our board of directors cease to constitute a majority of our board of directors or the board of directors of a successor entity, our compensation committee may provide for the conversion or exchange of outstanding awards for new awards, or, if no equivalent awards are available, for the accelerated vesting or delivery of shares under awards, or for a cash-out of outstanding awards.

          Certain Adjustments.    In the event of an extraordinary dividend, stock dividend, stock split or share combination (including a reverse stock split) or any recapitalization, business combination, merger, consolidation, spin-off, exchange of shares, liquidation or dissolution of the Company or other similar transaction affecting our common shares our board of directors will make adjustments as it determines in its sole discretion to the number and kind of shares available for issuance under the 2015 Omnibus Plan, the maximum number of shares that may be issued upon the exercise of ISOs, the annual per-participant share limits, the number, class, exercise price (or base value), performance objectives applicable to outstanding awards and any other terms of outstanding awards affected by such transaction. Our compensation committee may also make adjustments of the type described in the preceding sentence to take into account distributions and events other than those listed above if it determines that adjustments are appropriate to avoid distortion in the operation of the 2015 Omnibus Plan.

          Term.    The 2015 Omnibus Plan became effective on the date it was adopted by our board and will terminate on the tenth anniversary of such date, unless terminated earlier by our board of directors.

          Amendment; Termination.    Our compensation committee may amend the 2015 Omnibus Plan or outstanding awards, or terminate the 2015 Omnibus Plan as to future grants of awards, except that our compensation committee will not be able to alter the terms of an award if it would affect materially and adversely a participant's rights under the award without the participant's consent (unless expressly provided in the 2015 Omnibus Plan or the right to alter the terms of an award was expressly reserved by our compensation committee at the time the award was granted). Shareholder approval will be required for any amendment to the 2015 Omnibus Plan that increases the number of our common shares available for issuance under the 2015 Omnibus Plan or the individual award limitations specified in the 2015 Omnibus Plan (except with respect to certain adjustments described above), modifies the class of persons eligible for participation in the 2015 Omnibus Plan, allows options to be issued with an exercise price below fair market value on the date of grant, extends the term of any award granted under the 2015 Omnibus Plan beyond its original expiration date, permits an award to be exercisable beyond 10 years from its grant date (except where an expiration date would have fallen within a blackout period of the Company),

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permits awards to be transferred other than for normal estate settlement purposes, or deletes or reduces the range of amendments which require approval of the holders of voting shares of the Company, or to the extent required by law.

2015 Bonus Plan

          Our executive officers, including our named executive officers, and key employees are entitled to participate in our 2015 Bonus Plan for fiscal 2015. Our 2015 cash bonus awards will be determined based on pre-established consolidated Adjusted EBITDA targets, total e-commerce Adjusted EBITDA targets, and U.S. retail stores Adjusted EBITDA targets, weighted 60%, 20% and 20% respectively. Bonus payouts will range on a scale beginning with 50% of a participant's target bonus, if the threshold level of performance is achieved, with maximum payouts of up to 200% of a participant's target bonus, if the maximum level of performance is achieved. For fiscal 2015, our compensation committee determined that the target cash bonus as a percentage of base salary for each of Messrs. Toutant, Borgen and Segal would be 75%, 40% and 15%, respectively, with the maximum amount payable to each executive as a percentage of base salary equal to 150%, 80% and 30%, respectively.

Short-Term Incentive Plan

          In connection with this offering, our board has adopted the DavidsTea, Inc. Short-Term Incentive Plan. Starting with our 2016 fiscal year, cash award opportunities for executive officers, including our named executive officers, and other key employees will be granted under the Short-Term Incentive Plan. This summary is not a complete description of all provisions of the Short-Term Incentive Plan and is qualified in its entirety by reference to the Short-Term Incentive Plan, which is filed as an exhibit to the registration statement of which this prospectus is a part.

          Administration.    The Short-Term Incentive Plan will be administered by our Human Resources and Compensation Committee. Our compensation committee has authority to interpret the Short-Term Incentive Plan and awards granted under it, to determine eligibility for awards and to do all things necessary to administer the Short-Term Incentive Plan. Any interpretation or decision by the compensation committee will be final and conclusive on all participants.

          Participants; Individual Limit.    Our executive officers and other key employees will be selected from time to time by the compensation committee to participate in the Short-Term Incentive Plan. The maximum payment to any participant pursuant to an award intended to qualify as performance-based compensation under Section 162(m) under the Short-Term Incentive Plan in any fiscal year will in no event exceed CDN$1 million.

          Awards.    With respect to each award granted under the Short-Term Incentive Plan, the compensation committee will establish the performance criteria applicable to the award and the period over which performance will be measured, the amount or amounts payable if the performance criteria are achieved, and such other terms and conditions as the compensation committee deems appropriate. The Short-Term Incentive Plan permits the grant of awards that are intended to qualify as exempt performance-based compensation under Section 162(m), to the extent applicable, as well as awards that are not intended to so qualify. Any awards that are intended to qualify as performance-based compensation will be administered in accordance with the requirements of Section 162(m), to the extent applicable. Awards under the Short-Term Incentive Plan will not be required to comply with the provisions of the plan applicable to performance-based compensation under Section 162(m) if they are eligible for exemption from such provisions by reason of the transition relief under Section 162(m).

          Performance Criteria.    Awards under the Short-Term Incentive Plan will be made based on, and subject to achieving, performance criteria established by our compensation committee, which may be applied to a participant or participants on an individual basis, to a business unit or division,

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or to the Company as a whole. Performance criteria for awards intended to qualify as performance-based compensation for purposes of Section 162(m), to the extent applicable, are limited to the objectively determinable measures of performance relating to any or any combination of the following (measured either absolutely or by reference to an index or indices and determined either on a consolidated basis or, as the context permits, on a divisional, subsidiary, line of business, project or geographical basis or in combinations thereof): sales; revenues; assets; expenses; comparable sales growth, net promoter and other customer ratings scores, key hires, earnings before or after deduction for all or any portion of interest, taxes, depreciation, amortization or equity expense, whether or not on a continuing operations or an aggregate or per share basis; return on equity, investment, capital, capital employed or assets; one or more operating ratios; operating income or profit, including on an after-tax basis; net income; borrowing levels, leverage ratios or credit rating; market share; capital expenditures; cash flow; stock price; stockholder return; sales of particular products or services; customer acquisition or retention; acquisitions and divestitures (in whole or in part); joint ventures, strategic alliances; licenses or collaborations; spin-offs, split-ups and the like; reorganizations; recapitalizations, restructurings, financings (issuance of debt or equity) or refinancings or manufacturing or process development.

          To the extent consistent with the requirements of Section 162(m), to the extent applicable, the compensation committee may establish that in the case of any award intended to qualify as exempt performance-based compensation under Section 162(m), that one or more of the performance criteria applicable to such award be adjusted in an objectively determinable manner to reflect events (for example, the impact of charges for restructurings, discontinued operations, mergers, acquisitions, extraordinary items, and other unusual or non-recurring items, and the cumulative effects of tax or accounting changes, each as defined by U.S. generally accepted accounting principles) occurring during the performance period of such award that affect the applicable performance criteria.

          Payment under an Award.    A participant will be entitled to payment under an award only if all conditions to payment have been satisfied in accordance with the Short-Term Incentive Plan and the terms of the award. Our compensation committee will determine the payment date or dates for awards under the Short-Term Incentive Plan, which will be no later than March 15th of the calendar year following the year in which the relevant performance period ended. Following the close of the performance period, our compensation committee will determine (and, to the extent required by Section 162(m), certify) whether and to what extent the applicable performance criteria have been satisfied. Our compensation committee will then determine the actual payment, if any, under each award. Our compensation committee has the sole and absolute discretion to reduce the actual payment to be made under any award. Our compensation committee may permit a participant to defer payment of an award subject to the requirements of applicable law.

          Recovery of Compensation.    Awards under the Short-Term Incentive Plan will be subject to forfeiture, termination and rescission, and a participant who receives a payment pursuant to the Short-Term Incentive Plan will be obligated to return such payment to us, to the extent provided by our compensation committee in connection with a breach by the participant of an award agreement under the plan or any non-competition, non-solicitation, confidentiality or similar covenant or agreement with our Company or an overpayment of incentive compensation due to inaccurate financial data, in accordance with any applicable Company recoupment policy, or as otherwise required by law or applicable stock exchange listing standards.

          Amendment; Termination.    Our compensation committee may amend the Short-Term Incentive Plan at any time, provided that any amendment will be approved by our shareholders if required by Section 162(m). Our compensation committee may terminate the Short-Term Incentive Plan at any time.

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SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT

          The following table and accompanying footnotes set forth information relating to the beneficial ownership of our common shares as of May 15, 2015, assuming the conversion of our outstanding Junior Preferred Shares, Series A Preferred Shares, Series A-1 Preferred Shares and Series A-2 Preferred Shares and the exchange of our outstanding Class AA Common Shares into common shares upon the completion of this offering and giving effect to the 1.6-for-1 forward share split 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;

    each of our named executive officers;

    each selling shareholder; 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 before this offering is based on 20,489,710 common shares outstanding as of May 15, 2015, after giving effect to the share split and conversions described above. In addition, each shareholder's percentage ownership after this offering is based on 23,478,310 common shares outstanding immediately after completion of this offering.

          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 May 15, 2015 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 and executive officers as a group. As of May 15, 2015, 4,645,421 shares were owned by seven United States holders of record.

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          Unless otherwise indicated below, the address for each beneficial owner listed is c/o DAVIDsTEA Inc., 5430 Ferrier, Mount-Royal, Québec, Canada, HP4 1M2.

 
  Shares Beneficially
Owned
Before the Offering
  Shares
Offered
Hereby
(no Option
Exercise)
  Shares Beneficially
Owned
After the Offering
(no Option Exercise)
 
Name of beneficial owner
 
Number of
shares
 
Percentage
of shares
 
Number of
shares
 
Number of
shares
 
Percentage
of shares
 

Beneficial Owners of More than 5% of our Common Shares and/or Selling Shareholders:

                               

Entities affiliated with Highland Consumer Partners(1)

    4,200,305     20.5 %   752,038     3,448,267     14.7 %

Rainy Day Investments Ltd.(2)

    12,806,678     62.5 %   268,585     12,538,093     53.4 %

David Segal(3)

    2,306,145     11.3 %   752,038     1,554,107     6.6 %

Other Selling Shareholders:

   
 
   
 
   
 
   
 
   
 
 

Jevin Eagle

    220,248     1.1 %   220,248         *  

Kathie Lindemann

    102,491     *     102,491         *  

Javier San Juan

    52,022     *     16,000     36,022     *  

Named Executive Officers and Directors:

   
 
   
 
   
 
   
 
   
 
 

Sylvain Toutant(4)

    246,460     1.2 %       246,460     1.0 %

Luis Borgen(5)

    253,611     1.2 %       253,611     1.1 %

Pierre Michaud(6)

    281,216     1.4 %       281,216     1.2 %

Emilia Di Raddo(7)

    21,615     *         21,615     *  

Tom Folliard(8)

    111,498     *         111,498     *  

David W. McCreight(9)

    42,169     *         42,169     *  

Lorenzo Salvaggio

                    *  

Guy Savard(10)

    42,169     *         42,169     *  

Herschel Segal(2)

    12,806,678     62.5 %   268,585     12,538,093     53.4 %

Sarah Segal

                    *  

Thomas Stemberg(1)

    4,200,305     20.5 %   752,038     3,448,267     14.7 %

All executive officers and directors as a group (15 persons)(11)

    20,331,866     96.4 %   1,772,661     18,559,205     77.1 %

*
represents less than 1%.

(1)
Consists of (i) 3,372,587 common shares issuable upon conversion of preferred shares held by Highland Consumer Fund I, LP ("Fund I"), (ii) 719,560 common shares issuable upon conversion of preferred shares held by Highland Consumer Fund I-B, LP ("Fund I-B"), and (iii) 108,158 common shares issuable upon conversion of preferred shares held by Highland Consumer Entrepreneurs Fund I LP ("Entrepreneurs Fund", and together with Fund I and Fund I-B, the "Highland Entities"). Highland Consumer GP Limited Partnership is the general partner of each of the Highland Entities. Highland Consumer GP GP LLC ("HC GP GP") is the general partner of Highland Consumer GP Limited Partnership. Thomas Stemberg, one of our directors, and Peter Cornetta are the managing members of HC GP GP and share voting and investment power over the shares held by the Highland Entities. The principal business address for the Highland Entities is One Broadway, 16th Floor, Cambridge, Massachusetts 02142.

(2)
Rainy Day Investments Ltd. ("Rainy Day") is wholly owned by Herschel Segal, who holds voting and investment control over the shares held by Rainy Day. The principal business address for Rainy Day is 5695 Ferrier, Mount-Royal, Québec, Canada, H4P 1N1.

(3)
Mr. Segal expects to make gifts of approximately 152,633 shares in the aggregate in connection with this offering. Any such gifted shares will be subject to the 180-day lock-up agreement entered into in connection with this offering.

(4)
Consists of 88,398 common shares issuable on conversion of preferred shares held by 9222-2116 Québec Inc., an investment vehicle wholly owned by Mr. Toutant and options to purchase up to 158,062 common shares held by Mr. Toutant.

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(5)
Consists of options to purchase 253,611 common shares held by Mr. Borgen.

(6)
Consists of 179,766 common shares issuable on conversion of preferred shares held by Capital GVR Inc., an investment vehicle wholly owned by Mr. Michaud and options to purchase 101,450 common shares held by Mr. Michaud.

(7)
Consists of options to purchase 21,615 common shares held by Ms. Di Raddo.

(8)
Consists of 89,883 common shares issuable on conversion of shares of preferred stock beneficially owned by Mr. Folliard through a family trust and options to purchase up to 21,615 common shares held by Mr. Folliard.

(9)
Consists of 32,494 common shares issuable on conversion of shares of preferred stock held by Mr. McCreight and options to purchase 9,675 common shares held by Mr. McCreight.

(10)
Consists of 32,494 common shares issuable on conversion of shares of preferred stock held by Mr. Savard and options to purchase 9,675 common shares held by Mr. Savard.

(11)
Includes options to purchase up to 595,703 common shares exerciseable within 60 days of May 15, 2015.

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RELATED PARTY TRANSACTIONS

Arrangements with Our Investors

          We have entered into an amended and restated voting agreement, an amended and restated right of first refusal and co-sale agreement and an amended and restated investors' rights agreement with certain of our shareholders.

Voting Agreement

          We entered into an amended and restated voting agreement with certain of our shareholders in February 2014, which was amended in December 2014 in connection with the issuance of our Series A-2 Preferred Shares. The voting agreement sets the size of our board of directors at ten. The agreement grants certain investment funds affiliated with Highland Consumer Fund, or Highland, the right to name representatives to our board of directors. Highland has the right to designate two nominees for election to our board of directors until such time that it transfers, other than to us or its affiliates, more than 806,951 Series A Preferred Shares, and then the right to nominate one director for election to our board of directors until such time that it transfers, other than to us or its affiliates, more than 1,613,902 Series A Preferred Shares. The agreement grants the right to Rainy Day to designate four nominees for election to our board of directors, or five if Highland only has the right to designate one representative, provided that when the founders (as defined therein) in the aggregate own less than a majority of the outstanding common shares, but more than 5% of such shares, Rainy Day shall be entitled to designate the number of representatives that equals a proportion of the members of board of directors equal to the founders' proportionate ownership of common shares then outstanding rounded to the nearest whole number. The agreement also provides that the chief executive officer shall be a director. In addition, the agreement provides that three independent directors shall also serve on the board. Each independent director is to be selected through a process in which Rainy Day proposes candidates to Highland, after which Highland shall indicate which individuals should be approached by Rainy Day and Highland. Thereafter, Rainy Day and Highland interview the individuals they believe are ready and interested to serve on the board of directors. Highland then communicates to Rainy Day those individuals interviewed that it deems acceptable and Rainy Day shall select from that list of individuals. One of the independent directors, as agreed by Rainy Day and Highland, shall serve as the chair of the board of directors, so long as the individual remains involved with the Company and maintains an investment in the Company, directly or indirectly, equal to at least $500,000.

          The agreement also provides for certain drag-along rights in connection with a sale of our Company and certain restrictions on the ability to participate in the sale of the Company unless certain conditions are met. We expect that the voting agreement will terminate in connection with the consummation of this offering.

Right of First Refusal and Co-Sale Agreement

          We also entered into an amended and restated right of first refusal and co-sale agreement with certain of our shareholders in February 2014, which was amended in December 2014 in connection with the issuance of our Series A-2 Preferred Shares. Under the terms of the agreement, our Company has been granted a right of first refusal to purchase shares from each shareholder proposing to make a proposed transfer of shares on the same terms and conditions as the proposed transfer. If we do not purchase any or all of the shares subject to transfer, certain of our shareholders are granted a right of secondary refusal under the agreement to acquire the shares on the same terms and conditions as the proposed transfer. If any of the shares subject to the proposed transfer have not been claimed, the shareholders who had fully exercised their secondary refusal right may purchase all or any part of the balance of the remaining unsubscribed shares.

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          The agreement also provides that if any shares remain unsubscribed and are to be sold to a prospective transferee, certain shareholders may elect to participate on a pro rata basis in the proposed transfer on the same terms and conditions as the prospective transferee. The agreement prohibits the transfer of shares to any entity which, in the determination of our board of directors, directly or indirectly competes with the Company or to any customer, distributor or supplier of our Company that, in the view of the board of directors, would result in such transferee receiving information that would place the Company at a competitive disadvantage with respect to that transferee. We expect that the agreement will terminate in connection with the consummation of this offering.

Investors' Rights Agreement

          In February 2014, in connection with the issuance of our Series A-1 Preferred Shares, we entered into an amended and restated investors' rights agreement, which was amended in December 2014 in connection with our issuance of our Series A-2 Preferred Shares. The agreement contains provisions related to registration rights, information and observation rights, rights to future share issuances and approval rights by certain investors and/or their board designees. In particular, so long as Rainy Day has not transferred more than one-third of the common shares it held as of December 15, 2014, calculated on an as converted basis, we may not, without Rainy Day's prior written approval, amend, alter or repeal our articles of incorporation or bylaws, issue new securities, including in an initial public offering, or acquire or agree to acquire any business, among other things. Upon the consummation of this offering, the information and observation rights, rights to future share issuance and approval rights will terminate.

          Subject to certain conditions, holders of 20% or more of the Investor Registrable Shares or 20% or more of the Rainy Day Registrable Securities (as those terms are defined in the agreement) have the right to demand that we register under the Securities Act or under Canadian securities laws all or a portion of such shareholder or shareholders' Registrable Securities at our expense. Such rights become effective at the earlier of April 3, 2015 or 180 days after the effective date of a registration statement completed under the United States securities laws or a final prospectus completed under Canadian securities laws. Upon the exercise of this right, we must give notice to all other parties who then hold registrable securities, as defined in the agreement, to permit them to participate in the offering.

          In addition, if we propose to register our common shares under the Securities Act or under any Canadian securities laws, we must give prompt notice to each holder of registrable securities of our intent to do so and each such holder has piggyback registration rights and is entitled to include any part of its registrable securities in such registration, subject to certain conditions.

          Finally, if we become eligible to use a shelf registration statement on Form S-3 or Form F-3, holders of registrable securities may demand that we file a Form S-3, F-3 or S-10 registration statement with respect to any or a portion of such holder's registrable securities having an anticipated aggregate offering price, net of all underwriting discounts, selling commissions, share transfer taxes and certain other expenses, of at least $1 million. Upon receiving notice of such a demand, we must notify all other holders to permit them to exercise piggyback registration rights with respect to such demand.

          We expect that, in connection with the consummation of this offering, most of the rights of described in the Investors' Rights Agreement will terminate, and only the registration rights described above will continue.

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Shareholder Loan

          On April 3, 2012, we entered into a loan agreement with Rainy Day, our majority shareholder, which we refer to as the Shareholder Loan. Under the terms of the Shareholder Loan, we were provided with a non-revolving loan in the amount of approximately $8.7 million, which resulted from an original loan amount of approximately $16.2 million, which was reduced by approximately $7.5 million in connection with the sale and issuance of 1,396,648 Series A Preferred Shares to Rainy Day on April 3, 2012. The Shareholder Loan bears an interest rate of 4.5% per annum on the daily unpaid balance of the outstanding loan. The interest is payable on the last business day of each calendar year until the first principal payment date, at which time all accrued but unpaid interest is payable on the payment date for such principal. On February 24, 2014, we entered into a share subscription agreement with Rainy Day, pursuant to which we issued 258,836 Series A-1 Preferred Shares to Rainy Day Investments Ltd. for a subscription price of $9.05 per share, which was paid for by a reduction in the principal of the loan in the amount of approximately $2.3 million. On March 21, 2014, we entered into a share subscription agreement with Rainy Day, pursuant to which we issued 129,418 Series A-1 Preferred Shares to Rainy Day for a subscription price of $9.05 per share, which was paid for by a reduction in the principal of the loan in the amount of approximately $1.2 million. In addition, on December 15, 2014, we entered into a share subscription agreement with Rainy Day, pursuant to which we issued 84,580 Series A-2 Preferred Shares to Rainy Day for a subscription price of $12.31 per share, which was paid for by a reduction in the principal on the loan in the amount of approximately $1.0 million. As of January 31, 2015, the current balance of the loan was approximately $3.0 million.

          The principal is due in three equal annual installments, with one payment being due on each of the three dates on which we make annual redemption payments of our Series A Preferred Shares, which may not occur earlier than April 3, 2017. If the Series A Preferred Shares are not redeemed before April 3, 2020, the principal on the loan is due in three annual installments beginning on April 3, 2020. In the event of a closing of a qualified initial public offering, Rainy Day may, upon written notice to us, accelerate the maturity of the outstanding loan, whereupon the unpaid principal of and accrued interest on the outstanding loan shall become immediately due and payable in the amount of the outstanding loan equal to a portion of the unpaid principal of and accrued interest on the outstanding loan corresponding to the proportion of the outstanding shares held by Series A Preferred shareholders sold in the qualified initial public offering less the aggregate proceeds to the lender or its affiliates from the sale of shares in the qualified initial public offering. The remaining balance is due and payable in two equal installments on the first and second anniversaries of the closing of the qualified initial public offering. We may voluntarily prepay the loan, in whole or in part, at any time without any penalty or premium. We intend to use the proceeds from this offering to fully pay off the Shareholder Loan. See "Use of Proceeds."


Subscription Agreements

          On April 3, 2012, in connection with a new round of financing of approximately $18.5 million (the "Series A Preferred Share Offering"), we created a new class of Series A Preferred Shares and issued 3,445,065 Series A Preferred Shares from treasury at a price per share of $5.37, allocated as follows: (i) 1,862,197 Series A Preferred Shares were issued to Highland for a total amount of approximately $10.0 million, (ii) 186,220 Series A Preferred Shares were issued to Hold It All Inc. (f/k/a Whil Concepts Inc.) for a total amount of approximately $1.0 million, and (iii) 1,396,648 Series A Preferred Shares were issued to Rainy Day for a total amount of approximately $7.5 million, in the form of a reduction of the outstanding principal amount of the Shareholder Loan. Concurrently with the completion of the Series A Preferred Share Offering, (i) 6,000,000 Class A common shares previously issued to Rainy Day were re-designated as 6,000,000 common shares, and these were subsequently exchanged by Rainy Day for 6,000,000 Junior Preferred Shares, (ii) 2,000,000 Class A

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common shares previously issued to David Segal were re-designated as 2,000,000 common shares, and these were subsequently exchanged by David Segal for 2,000,000 Series A Preferred Shares. Out of the 2,000,000 Series A Preferred Shares then held by David Segal, 558,659 were transferred by David Segal to Highland for a total amount of approximately $3.0 million, and the remaining 1,441,341 Series A Preferred Shares were exchanged for 1,441,341 Junior Preferred Shares.

          On February 24, 2014, we entered into subscription agreements to sell Series A-1 Preferred Shares to certain of our principal investors and the Chairman of our board of directors, Pierre Michaud. We sold 84,715 Series A-1 Preferred Shares to Highland, 258,836 Series A-1 Preferred Shares to Rainy Day and 110,498 Series A-1 Preferred Shares to Capital GVR Inc., an entity controlled by Mr. Michaud, for a subscription price of $9.05 per share.

          On February 24, 2014, we issued 134,273 options to Mr. Michaud with an exercise price of $5.33 per share.

          In addition, on March 21, 2014, we entered into subscription agreements to sell Series A-1 Preferred Shares to certain of our principal investors and Thomas J. Folliard, IV Marital Deduction Trust uad 8/1/2011 (the "Folliard Trust"), which is controlled by Mr. Folliard, a member of our board of directors. We agreed to sell 55,249 Series A-1 Preferred Shares to the Folliard Trust, 42,357 Series A-1 Preferred Shares to Highland and 129,418 Series A-1 Preferred Shares to Rainy Day, for a subscription price of $9.05 per share.

          On March 3, 2014, we issued 30,397 options each to Mr. Folliard and Ms. Di Raddo, also each a member of our board of directors, to purchase common shares with an exercise price of $5.33 per share.

          On June 2, 2014, we entered into subscription agreements to sell Series A-1 Preferred Shares to certain of our principal investors, certain entities controlled by members of our board of directors and an entity controlled by our Chief Executive Officer. We sold 55,249 Series A-1 Preferred Shares to 9222-2116 Québec Inc., an entity controlled by Mr. Toutant, 42,803 Series A-1 Preferred Shares to Highland, 130,780 Series A-1 Preferred Shares to Rainy Day, 928 Series A-1 Preferred Shares to the Folliard Trust and 1,856 Series A-1 Preferred Shares to Capital GVR Inc., for a subscription price of $9.05 per share.

          In connection with Mr. Toutant joining our Company as President and Chief Executive Officer, we issued 364,760 options to purchase common shares at an exercise price of $6.80 per share on June 2, 2014.

          On December 15, 2014, in connection with the appointment of Messrs. Savard and McCreight to our board of directors, we entered into subscription agreements to sell Series A-2 Preferred Shares to certain of our principal investors and Messrs. Savard and McCreight. We agreed to sell 27,682 Series A-2 Preferred Shares to Highland, 84,580 Series A-2 Preferred Shares to Rainy Day, 20,309 Series A-2 Preferred Shares to Mr. McCreight and 20,309 Series A-2 Preferred Shares to Mr. Savard, for a subscription price of $12.31 per sha