10-Q 1 dtea-20180804x10q.htm 10-Q dtea_Current_Folio_10Q

 

 

 

FORM 10-Q

 


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 


 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

For the quarterly period ended August 4, 2018.

 

 

OR

 

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

For the transition period from            to         

 

Commission file number 001-37404

 


 

 

DAVIDsTEA Inc.

(Exact name of registrant as specified in its charter)

 


 

 

 

 

 

Canada

 

98-1048842

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

5430 Ferrier

Town of Mount-Royal, Québec, Canada, H4P 1M2

(Address of principal executive offices) (zip code)

 

(888) 873-0006

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES ☒  NO ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES ☒  NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12-b2 of the Exchange Act.

 

 

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

Emerging growth company ☒

 

 

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES ☐  NO ☒

 

As of September  10, 2018,  25,996,629 common shares of the registrant were outstanding.

 

 

 

 


 

DAVIDsTEA Inc.

 

TABLE OF CONTENTS

 

 

DAVIDsTEA Inc. (the “Company”), a corporation incorporated under the Canada Business Corporations Act, qualifies as a foreign private issuer in the United States for purposes of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a foreign private issuer, the Company has chosen to file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K with the United States Securities and Exchange Commission (“SEC”) instead of filing the reporting forms available to foreign private issuers, although the Company is not required to do so.

 

In this quarterly report, unless otherwise specified, all monetary amounts are in Canadian dollars, all references to “$,” “C$,” “CAD,” “CND$,” “Canadian dollars” and “dollars” mean Canadian dollars and all references to “U.S. dollars,” “US$” and “USD” mean U.S. dollars.

 

On September 7, 2018, the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York was US$1.00 = $1.3170.

 

 

 

2


 

Part I. FINANCIAL INFORMATION

 

Item 1.    Consolidated Financial Statements

 

DAVIDsTEA Inc.

 

Incorporated under the laws of Canada

 

INTERIM CONSOLIDATED BALANCE SHEETS

 

[Unaudited and in thousands of Canadian dollars]

 

 

 

 

 

 

 

 

 

    

 

    

As at

 

 

 

 

August 4,

 

February 3,

 

 

 

 

2018

 

2018

 

 

 

 

$

 

$

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Current

 

 

 

 

 

 

Cash

 

 

 

39,623

 

63,484

Accounts and other receivables

 

 

 

3,201

 

3,131

Inventories

 

[Note 5]

 

33,680

 

24,450

Income tax receivable

 

 

 

5,869

 

2,968

Prepaid expenses and deposits

 

 

 

9,233

 

7,712

Derivative financial instruments

 

[Note 15]

 

425

 

 —

Total current assets

 

 

 

92,031

 

101,745

Property and equipment

 

[Note 6]

 

32,422

 

36,558

Intangible assets

 

 

 

6,640

 

4,439

Deferred income tax assets

 

[Note 10]

 

6,287

 

5,194

Total assets

 

 

 

137,380

 

147,936

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current

 

 

 

 

 

 

Trade and other payables

 

 

 

16,079

 

14,392

Deferred revenue

 

 

 

4,986

 

5,186

Current portion of provisions

 

[Note 7]

 

5,278

 

4,693

Derivative financial instruments

 

[Note 15]

 

 —

 

229

Total current liabilities

 

 

 

26,343

 

24,500

Deferred rent and lease inducements

 

 

 

8,806

 

8,608

Provisions

 

[Note 7]

 

12,406

 

13,460

Total liabilities

 

 

 

47,555

 

46,568

Equity

 

 

 

 

 

 

Share capital

 

[Note 9]

 

112,481

 

111,692

Contributed surplus

 

 

 

1,160

 

2,642

Deficit

 

 

 

(25,639)

 

(14,721)

Accumulated other comprehensive income

 

 

 

1,823

 

1,755

Total equity

 

 

 

89,825

 

101,368

 

 

 

 

137,380

 

147,936

 

See accompanying notes

3


 

DAVIDsTEA Inc.

 

Incorporated under the laws of Canada

 

INTERIM CONSOLIDATED STATEMENTS OF INCOME (LOSS)

 

AND COMPREHENSIVE INCOME (LOSS)

 

[Unaudited and in thousands of Canadian dollars, except share and per share information]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

 

 

 

 

August 4,

 

July 29,

 

August 4,

 

July 29,

 

 

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

    

[Note 14]

    

40,167

    

45,687

    

85,953

    

94,356

 

Cost of sales

 

 

 

22,824

 

25,482

 

45,918

 

49,969

 

Gross profit

 

 

 

17,343

 

20,205

 

40,035

 

44,387

 

Selling, general and administration expenses

 

[Note 11]

 

31,350

 

27,816

 

55,746

 

51,969

 

Results from operating activities

 

 

 

(14,007)

 

(7,611)

 

(15,711)

 

(7,582)

 

Finance costs

 

 

 

78

 

157

 

157

 

288

 

Finance income

 

 

 

(215)

 

(135)

 

(452)

 

(271)

 

Loss before income taxes

 

 

 

(13,870)

 

(7,633)

 

(15,416)

 

(7,599)

 

Recovery of income tax

 

 

 

(3,872)

 

(2,070)

 

(4,216)

 

(1,674)

 

Net loss

 

 

 

(9,998)

 

(5,563)

 

(11,200)

 

(5,925)

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

Items to be reclassified subsequently to income (loss):

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

 

(90)

 

(1,614)

 

(411)

 

(892)

 

Items that may be reclassified subsequently to income (loss):

 

 

 

 

 

 

 

 

 

 

 

Unrealized net gain (loss) on forward exchange contracts

 

[Note 15]

 

87

 

(2,977)

 

794

 

(1,777)

 

Realized net (gain) loss on forward exchange contracts reclassified to inventory

 

 

 

(578)

 

(292)

 

(140)

 

(745)

 

Provision for income tax (recovery) on forward exchange contracts

 

 

 

131

 

867

 

(175)

 

668

 

Other comprehensive income (loss), net of tax

 

 

 

(450)

 

(4,016)

 

68

 

(2,746)

 

Total comprehensive loss

 

 

 

(10,448)

 

(9,579)

 

(11,132)

 

(8,671)

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

[Note 12]

 

(0.39)

 

(0.22)

 

(0.43)

 

(0.23)

 

Fully diluted

 

[Note 12]

 

(0.39)

 

(0.22)

 

(0.43)

 

(0.23)

 

Weighted average number of shares outstanding

 

 

 

 

 

 

 

 

 

 

 

— basic

 

[Note 12]

 

25,910,086

 

25,745,221

 

25,878,982

 

25,573,894

 

— fully diluted

 

[Note 12]

 

25,910,086

 

25,745,221

 

25,878,982

 

25,573,894

 

 

See accompanying notes

4


 

DAVIDsTEA Inc.

 

Incorporated under the laws of Canada

 

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

 

[Unaudited and in thousands of Canadian dollars]

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

 

August 4,

 

July 29,

 

August 4,

 

July 29,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

$

 

$

 

$

 

$

 

OPERATING ACTIVITIES

    

 

    

 

    

 

 

 

 

Net loss

 

(9,998)

 

(5,563)

 

(11,200)

 

(5,925)

 

Items not affecting cash:

 

 

 

 

 

 

 

 

 

Depreciation of property and equipment

 

1,722

 

2,114

 

3,408

 

4,178

 

Amortization of intangible assets

 

346

 

472

 

528

 

754

 

Loss on disposal of property and equipment

 

14

 

24

 

14

 

30

 

Impairment of property and equipment

 

2,560

 

2,313

 

2,560

 

2,313

 

Deferred rent

 

46

 

200

 

(91)

 

203

 

Provision (recovery) for onerous contracts

 

2,068

 

(641)

 

1,892

 

(1,527)

 

Stock-based compensation expense

 

(393)

 

802

 

(98)

 

1,376

 

Amortization of financing fees

 

20

 

20

 

40

 

40

 

Accretion on provisions

 

58

 

139

 

117

 

251

 

Deferred income taxes (recovery)

 

(2,302)

 

(570)

 

(1,346)

 

430

 

 

 

(5,859)

 

(690)

 

(4,176)

 

2,123

 

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

 

(6,579)

 

3,509

 

(15,368)

 

(5,965)

 

Cash flows related to operating activities

 

(12,438)

 

2,819

 

(19,544)

 

(3,842)

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

Proceeds from issuance of common shares pursuant to exercise of stock options

 

74

 

791

 

74

 

1,606

 

Cash flows related to financing activities

 

74

 

791

 

74

 

1,606

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

Additions to property and equipment

 

(740)

 

(2,910)

 

(1,668)

 

(4,731)

 

Additions to intangible assets

 

(1,141)

 

(641)

 

(2,723)

 

(1,066)

 

Cash flows related to investing activities

 

(1,881)

 

(3,551)

 

(4,391)

 

(5,797)

 

Increase (decrease) in cash during the period

 

(14,245)

 

59

 

(23,861)

 

(8,033)

 

Cash, beginning of period

 

53,868

 

56,348

 

63,484

 

64,440

 

Cash, end of period

 

39,623

 

56,407

 

39,623

 

56,407

 

Supplemental Information

 

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

 

Income taxes (classified as operating activity)

 

 2

 

216

 

 2

 

712

 

Cash received for:

 

 

 

 

 

 

 

 

 

Interest

 

210

 

127

 

443

 

287

 

Income taxes (classified as operating activity)

 

 —

 

26

 

 —

 

26

 

 

See accompanying notes

 

5


 

DAVIDsTEA Inc.

 

Incorporated under the laws of Canada

 

INTERIM CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)

 

[Unaudited and in thousands of Canadian dollars]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

  

 

  

 

  

Accumulated Other Comprehensive Income

  

 

 

 

 

 

 

 

 

 

 

Accumulated

  

Accumulated

  

 

 

 

 

 

 

 

 

 

 

 

 

Derivative

 

Foreign

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Financial

 

Currency

 

Other

 

 

 

 

 

Share

 

Contributed

 

 

 

Instrument

 

Translation

 

Comprehensive

 

Total

 

 

 

Capital

 

Surplus

 

Deficit

 

Adjustment

 

Adjustment

 

Income

 

Equity

 

 

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 28, 2017

 

263,828

 

8,833

 

(142,398)

 

333

 

2,854

 

3,187

 

133,450

 

Net loss for the six months ended July 29, 2017

 

 —

 

 —

 

(5,925)

 

 —

 

 —

 

 —

 

(5,925)

 

Other comprehensive loss

 

 —

 

 —

 

 —

 

(1,854)

 

(892)

 

(2,746)

 

(2,746)

 

Total comprehensive loss

 

 —

 

 —

 

(5,925)

 

(1,854)

 

(892)

 

(2,746)

 

(8,671)

 

Issuance of common shares

 

2,434

 

(828)

 

 —

 

 —

 

 —

 

 —

 

1,606

 

Common shares issued on vesting of restricted stock units

 

704

 

(1,219)

 

118

 

 —

 

 —

 

 —

 

(397)

 

Stock-based compensation expense

 

 —

 

1,376

 

 —

 

 —

 

 —

 

 —

 

1,376

 

Income tax impact associated with stock options

 

 —

 

(82)

 

 —

 

 —

 

 —

 

 —

 

(82)

 

Reduction of stated capital

 

(155,947)

 

 —

 

155,947

 

 —

 

 —

 

 —

 

 —

 

Balance, July 29, 2017

 

111,019

 

8,080

 

7,742

 

(1,521)

 

1,962

 

441

 

127,282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, February 3, 2018

 

111,692

 

2,642

 

(14,721)

 

(167)

 

1,922

 

1,755

 

101,368

 

Net loss for the six months ended August 4, 2018

 

 —

 

 —

 

(11,200)

 

 —

 

 —

 

 —

 

(11,200)

 

Other comprehensive income (loss)

 

 —

 

 —

 

 —

 

479

 

(411)

 

68

 

68

 

Total comprehensive income (loss)

 

 —

 

 —

 

(11,200)

 

479

 

(411)

 

68

 

(11,132)

 

Issuance of common shares

 

153

 

(79)

 

 —

 

 —

 

 —

 

 —

 

74

 

Common shares issued on vesting of restricted stock units

 

636

 

(1,305)

 

282

 

 —

 

 —

 

 —

 

(387)

 

Stock-based compensation expense

 

 —

 

(98)

 

 —

 

 —

 

 —

 

 —

 

(98)

 

Income tax impact associated with stock options

 

 —

 

 0

 

 —

 

 —

 

 —

 

 —

 

 0

 

Balance, August 4, 2018

 

112,481

 

1,160

 

(25,639)

 

312

 

1,511

 

1,823

 

89,825

 

 

See accompanying notes

 

6


 

DAVIDsTEA Inc.

 

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

For the three and six-month periods ended August 4, 2018 and July 29, 2017 [Unaudited]

 

[Amounts in thousands of Canadian dollars except share and per share amounts]

 

1. CORPORATE INFORMATION

 

The unaudited condensed interim consolidated financial statements of DAVIDsTEA Inc. and its subsidiary (collectively, the “Company”) for the three and six-month periods ended August 4, 2018 were authorized for issue in accordance with a resolution of the Board of Directors on September 13, 2018.  The Company is incorporated and domiciled in Canada and its shares are publicly traded on the NASDAQ Global Market under the symbol “DTEA”. The registered office is located at 5430 Ferrier St., Town of Mount-Royal, Québec, Canada, H4P 1M2.

 

The Company is engaged in the retail and online sale of tea, tea accessories and food and beverages in Canada and the United States. The results of operations for the interim period are not necessarily indicative of the results of operations for the full year. Sales fluctuate from quarter to quarter. Sales are traditionally higher in the fourth fiscal quarter due to the year-end holiday season, and tend to be lowest in the second and third fiscal quarters because of lower customer traffic during the summer months.

 

2. STATEMENT OF COMPLIANCE AND BASIS OF PREPARATION

 

These unaudited condensed interim consolidated financial statements have been prepared in accordance with IAS 34, “Interim Financial Reporting” as issued by the International Accounting Standards Board (“IASB”). Accordingly, these financial statements do not include all of the financial statement disclosures required for annual financial statements and should be read in conjunction with the Company’s audited consolidated financial statements for the year ended February 3, 2018, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the IASB. In management’s opinion, the unaudited condensed interim consolidated financial statements reflect all the adjustments that are necessary for a fair presentation of the results for the interim period presented. These unaudited condensed interim consolidated financial statements have been prepared using the accounting policies and methods of computation as outlined in note 3 of the consolidated financial statements for the year ended February 3, 2018.  

 

3. CHANGES IN ACCOUNTING POLICIES

 

As of February 4, 2018, the Company adopted IFRS 9, “Financial Instruments” (“IFRS 9”). IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after January 1, 2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement; impairment; and hedge accounting.

 

With the exception of hedge accounting, which the Company applied prospectively, the Company has applied IFRS 9 retrospectively, with the initial application date of February 4, 2018.

 

Overall, there was no material impact on the Company’s consolidated financial statements.

 

a)

Classification and measurement. The Company did not identify any material impact on its consolidated financial statements in applying the classification and measurement requirements of IFRS 9. The following table presents the carrying amount of financial assets held by the Company at February 3, 2018 and their measurement category under IAS 39 and the new model under IFRS 9.

 

7


 

 

 

 

 

 

 

 

 

 

 

 

February 3, 2018

 

February 3, 2018

 

 

IAS 39

 

IFRS 9

 

    

Measurement

    

Carrying

 

Measurement

    

Carrying

 

 

category

 

Value

 

category

 

Value

 

 

 

 

$

 

 

 

$

Cash

 

FVTPL

 

63,484

 

FVTPL

 

63,484

Credit card cash clearing receivables

 

Amortized cost

 

1,291

 

Amortized cost

 

1,291

Other receivables

 

Amortized cost

 

1,840

 

Amortized cost

 

1,840

Derivative financial instruments

 

FVTPL

 

229

 

FVTPL

 

229

 

There has been no significant impact caused by the new classification of financial assets under IFRS 9. The classification of all financial liabilities as financial liabilities at amortized cost remains unchanged as well as their measurement resulting from their classification.

 

b)

Impairment. IFRS 9 requires the Company to record expected credit losses on all of its debt securities, loans and trade receivables, either on a 12-month or lifetime basis. The Company applied the simplified approach and records lifetime expected losses on all trade receivables. The Company performed a detailed analysis that considered all reasonable and supportable information, including forward-looking elements to determine the extent of the impact. The Company’s IFRS 9 expected credit loss model did not have a material impact on its consolidated financial statements.

 

c)

Hedge accounting. The Company believes that all existing hedge relationships that are currently designated in effective hedging relationships still qualify for hedge accounting under IFRS 9. As IFRS 9 does not change the general principles of how an entity accounts for effective hedges, the adoption of IFRS 9 did not have a material impact on the Company’s hedge accounting.

 

As of February 4, 2018, the Company adopted IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”). IFRS 15 replaces IAS 11, “Construction Contracts”, and IAS 18, “Revenue”, as well as various interpretations regarding revenue. This standard introduces a single model for recognizing revenue that applies to all contracts with customers, except for contracts that are within the scope of standards on leases, insurance and financial instruments. This standard also requires enhanced disclosures. Adoption of IFRS 15 is mandatory and is effective for annual periods beginning on or after January 1, 2018. The implementation of IFRS 15 impacts the allocation of revenue that is deferred in relation to the Company’s customer loyalty award programs. Prior to adoption, revenue was allocated to the customer loyalty awards using the residual fair value method. Under IFRS 15, consideration is allocated between the loyalty program awards and the goods on which the awards were earned, based on their relative stand-alone selling prices. The change in allocation of revenue that is deferred in relation to the Company’s customer loyalty program does not have a material impact on retained earnings as at February 4, 2018. Overall, there was not a material impact on the Company’s consolidated financial statements.

 

As of February 4, 2018, the Company adopted International Financial Reporting Interpretations (“IFRIC”) 22, “Foreign Currency Transactions and Advance Consideration” (“IFRIC 22”). In December 2016, the IASB issued IFRIC 22, which addresses how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) and on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency. IFRIC 22 is effective for annual periods beginning on or after January 1, 2018. There was no material impact on the Company’s consolidated financial statements.

 

Information on significant new accounting standards and amendments issued but not yet adopted is described below.

 

IFRS 16, “Leases” (“IFRS 16”) replaces IAS 17, “Leases”. This standard provides a single model for leases abolishing the current distinction between finance and operating leases, with most leases being recognized on the balance sheet. Certain exemptions will apply for short-term leases and leases of low value assets. The new standard will be effective for annual periods beginning on or after January 1, 2019 with early application permitted. The Company has performed a preliminary assessment of the potential impact of the adoption of IFRS 16 on its consolidated financial

8


 

statements. The Company expects the adoption of IFRS 16 will have a significant impact as the Company will recognize new assets and liabilities for its operating leases of retail stores. In addition, the nature and timing of expenses related to those leases will change as IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of use assets and interest expense on lease liabilities. The Company has not yet determined which transition method it will apply or whether it will use the optional exemptions or practical expedients under the standard. The Company expects to disclose additional detailed information, including its transition method, any practical expedients elected and estimated quantitative financial effects, before the adoption of IFRS 16.

 

IFRIC 23, “Uncertainty over Income Tax Treatments”, was issued by the IASB in June 2017. IFRIC 23 provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. IFRIC 23 is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted. IFRIC 23 requires an entity to:

 

·

Contemplate whether uncertain tax treatments should be considered separately, or together as a group, based on which approach provides better predictions of the resolution;

·

Reflect an uncertainty in the amount of income tax payable (recoverable) if it is probable that it will pay (or recover) an amount for the uncertainty; and

·

Measure a tax uncertainty based on the most likely amount or expected value depending on whichever method better predicts the amount payable (recoverable).

 

The Company does not expect a material impact from the adoption of IFRIC 23 on its consolidated financial statements.

 

4. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS

 

The preparation of condensed interim consolidated financial statements requires management to make estimates and assumptions using judgments that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense during the reporting period. Estimates and other judgments are continually evaluated and are based on management’s experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances. Actual results may differ from those estimates.

 

In preparing these unaudited condensed interim consolidated financial statements, critical judgments made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty were the same as those referred to in note 5 of the consolidated financial statements for the year ended February 3, 2018

 

5. INVENTORIES

 

 

 

 

 

 

 

    

August 4,

    

February 3,

 

 

2018

 

2018

 

 

$

 

$

Finished goods

 

26,157

 

17,600

Goods in transit

 

3,620

 

4,608

Packaging

 

3,903

 

2,242

 

 

33,680

 

24,450

 

 

6. PROPERTY AND EQUIPMENT

 

For the three and six months ended August 4, 2018, an assessment of impairment indicators was performed which caused the Company to review the recoverable amount of the property and equipment for certain cash generating units (“CGUs”) with an indication of impairment. CGUs reviewed included stores performing below the Company’s expectations.

 

As a result, for the three and six months ended August 4, 2018, an impairment loss of $2,560 [July 29, 2017 — $3,179] related to store leasehold improvements, furniture and equipment, and computer hardware was recorded in the

9


 

Canada and U.S. segments for $2,371 and $189, respectively [July 29, 2017 — nil and $3,179, respectively]. These losses were determined by comparing the carrying amount of the CGU’s net assets with their respective recoverable amounts based on value in use. Value in use of nil [July 29, 2017 — nil] was determined based on management’s best estimate of expected future cash flows from use over the remaining lease terms, considering historical experience as well as current economic conditions, and was then discounted using a pre-tax discount rate of 11.9% [July 29, 2017 — 13.4%]. A reversal of impairment occurs when previously impaired CGUs see improved financial results. For the three and six months ended August 4, 2018, no impairment losses were reversed [July 29, 2017 — $866 reversed in the U.S. segment, with value in use of $848]. Impairment losses are reversed only to the extent that the carrying amounts of the CGU’s net assets do not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognized.

 

7. PROVISIONS

 

 

 

 

 

 

For the

 

 

six months ended

 

    

August 4,

 

 

2018

 

 

$

Opening balance

 

18,153

Additions

 

2,151

Reversals

 

(259)

Utilization

 

(2,694)

Settlements

 

(658)

Accretion expense

 

117

Cumulative translation adjustment

 

874

Ending balance

 

17,684

Less: Current portion

 

(5,278)

Long-term portion of provisions

 

12,406

 

Provisions for onerous contracts have been recognized in respect of store leases where the unavoidable costs of meeting the obligations under the lease agreements exceed the economic benefits expected to be received from the contract. The unavoidable costs reflect the present value of the lower of the expected cost of terminating the contract and the expected net cost of operating under the contract.

 

During the six-month period ended August 4, 2018, due to changes to assumptions, additions to the onerous provision were recorded in the amount of $2,151 [July 29, 2017 — $458], while the provision for other stores were partially or fully reversed by an amount of $259 [July 29, 2017 — $1,985].

 

 

8. REVOLVING FACILITY

 

On June 11, 2018, the Company amended its existing Credit Agreement (the “Amended Credit Agreement”) with the Bank of Montreal (“BMO”). The Amended Credit Agreement provides for a two-year revolving facility (“Amended Revolving Facility”) in the principal amount of $15.0 million or the equivalent in U.S. dollars, repayable at any time, two years from June 11, 2018, with no accordion feature. Borrowings under the Amended Revolving Facility may not exceed the lesser of the total commitment for the revolving facility and the borrowing base, calculated as 75% of the face value of all eligible receivables plus 50% of the estimated value of all eligible inventory, less any priority payables.

 

The Amended Credit Agreement subjects the Company to certain financial covenants entered into between the Company and BMO. Without the prior written consent of BMO, the Company’s fixed charge coverage ratio may not be less than 1.10:1.00 and the Company’s leverage ratio may not exceed 3.00:1:00. In addition, the Company’s net tangible worth may not be less than $65,000 and the Company’s minimum excess availability must not be less than $15.0 million. The Amended Revolving Facility bears interest based on the Company’s adjusted leverage ratio, at the bank’s prime rate,

10


 

U.S. bank rate and LIBOR plus a range from 0.5% to 2.5% per annum. A standby fee range of 0.3% to 0.5% will be paid on the daily principal amount of the unused portion of the Amended Revolving Facility.

 

The credit facility also contains non-financial covenants that, among other things and subject to certain exceptions, restrict the Company’s ability to become guarantor or endorser or otherwise become liable upon any note or other obligation other than in the normal course of business. The Company also cannot make any dividend payments.

 

As at August 4, 2018 and February 3, 2018, the Company did not have any borrowings under the Amended Revolving Facility.

 

 

9. SHARE CAPITAL

 

Authorized

 

An unlimited number of Common shares.

 

Issued and outstanding

 

 

 

 

 

 

 

    

August 4,

 

February 3,

 

 

2018

 

2018

 

 

$

 

$

25,996,629 Common shares [February 3, 2018 - 25,885,372 shares]

 

112,481

 

111,692

 

 

112,481

 

111,692

 

During the three and six-month periods ended August 4, 2018, 78,135 and 78,135 stock options, respectively, were exercised for 78,135 common shares for cash proceeds of $74 and $74, respectively, and 36,418 common shares for a non-cash settlement of $121 and $121, respectively [July 29, 2017 —  195,773 and 412,773 stock options, respectively, for cash proceeds of $791 and $1,606, respectively]. During the three and six-month periods ended August 4, 2018, the carrying value of common shares includes $79 and $79, respectively [July 29, 2017 —  $175 and $828, respectively], which corresponds to a reduction in contributed surplus associated with options exercised during the period.

 

In addition, during the three and six-month periods ended August 4, 2018, 39,752 and 69,540 common shares, respectively [July 29, 2017 – 27,896 and 56,001 common shares, respectively] were issued in relation to the vesting of restricted stock units (“RSU”), resulting in an increase in share capital of $379 and $636, net of tax, respectively [July 29, 2017 – $436 and $704,  respectively] and a reduction in contributed surplus of $712 and $1,305, respectively [July 29, 2017 —  $665 and $1,219, respectively].

 

During the three and six-month periods ended July 29, 2017, the shareholders of the Company approved a resolution to reduce the stated capital maintained in respect of the common shares by an amount of $155,947, which resulted in a corresponding reduction of the deficit.

 

Stock-based compensation

 

As at August 4, 2018,  737,406 common shares remain available for issuance under the 2015 Omnibus Incentive Plan.

 

11


 

No stock options were granted during the six-month period ended August 4, 2018. For the six-month period ended July 29, 2017, the weighted average fair value of options granted of $2.39 was estimated using the Black Scholes option pricing model, using the following assumptions:

 

 

 

 

 

 

 

 

 

 

 

 

 

July 29,

 

    

2017

Risk-free interest rate

 

 

1.79

%  

Expected volatility

 

 

27.4

%  

Expected option life

 

 

4.0

years

Expected dividend yield

 

 

0

%  

Exercise price

 

$

9.76

 

 

Expected volatility was estimated using historical volatility of similar companies whose share prices were publicly available.

 

A summary of the status of the Company’s stock option plan and changes during the six-month period is presented below.

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended

 

 

August 4,

 

July 29,

 

 

2018

 

2017

 

    

 

    

Weighted

    

 

    

Weighted

 

 

 

 

average

 

 

 

average

 

 

Options

 

exercise

 

Options

 

exercise

 

 

outstanding

 

price

 

outstanding

 

price

 

 

#

 

$

 

#

 

$

Outstanding, beginning of period

 

447,779

 

7.18

 

933,195

 

5.63

Issued

 

 —

 

 —

 

161,980

 

9.76

Exercised

 

(78,135)

 

3.02

 

(412,773)

 

3.89

Forfeitures

 

(189,979)

 

8.51

 

(78,500)

 

11.81

Outstanding, end of period

 

179,665

 

7.59

 

603,902

 

7.12

Exercisable, end of period

 

102,572

 

5.70

 

270,906

 

4.46

 

For the six-month period ended August 4, 2018, the weighted average share price at the date of exercise for stock options exercised was $4.66 [July 29, 2017 — $8.84].

 

A summary of the status of the Company’s RSU plan and changes during the six-month period is presented below.

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended

 

 

 

August 4,

 

July 29,

 

 

 

2018

 

2017

 

 

   

 

   

Weighted

   

 

   

Weighted

 

 

 

 

 

average

 

 

 

average

 

 

 

RSUs

 

fair value

 

RSUs

 

fair value

 

 

 

outstanding

 

per unit (1)

 

outstanding

 

per unit (1)

 

 

 

#

 

$

 

#

 

$

 

Outstanding, beginning of period

 

289,416

 

9.70

 

252,233

 

12.42

 

Granted

 

476,450

 

3.10

 

279,437

 

8.79

 

Forfeitures

 

(244,296)

 

6.81

 

(26,369)

 

9.70

 

Vested

 

(69,540)

 

9.12

 

(56,001)

 

12.83

 

Vested, withheld for tax

 

(67,512)

 

8.97

 

(44,133)

 

11.82

 

Outstanding, end of period

 

384,518

 

5.30

 

405,167

 

10.10

 

(1)

Weighted average fair value per unit as at date of grant.

 

12


 

During the three and six-month periods ended August 4, 2018, the Company recognized a net reversal of stock-based compensation of $393 and $98, respectively  [July 29, 2017 — stock-based compensation expense of $802 and $1,374, respectively].

 

10. INCOME TAXES

 

Income tax expense is recognized based on management’s best estimate of the weighted average annual income tax rate expected for the full fiscal year.

 

A reconciliation of the statutory income tax rate to the effective tax rate is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

 

 

August 4,

 

July 29,

 

August 4,

 

July 29,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

%

  

$

  

%

  

$

 

%

 

$

 

%

 

$

 

Income tax recovery — statutory rate

  

26.9

  

(3,726)

  

26.5

  

(2,027)

  

26.9

  

(4,142)

  

26.5

  

(2,018)

 

Increase (decrease) in provision for income tax (recovery) resulting from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-deductible items

 

1.0

 

(140)

 

(2.9)

 

223

 

0.4

 

(69)

 

(4.5)

 

347

 

Other

 

 —

 

(6)

 

3.5

 

(266)

 

 —

 

(5)

 

(0.0)

 

(3)

 

Income tax provision (recovery) — effective tax rate

 

27.9

 

(3,872)

 

27.1

 

(2,070)

 

27.3

 

(4,216)

 

22.0

 

(1,674)

 

 

A breakdown of the income tax provision (recovery) on the interim consolidated statement of income (loss) is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

 

    

August 4,

    

July 29,

    

August 4,

    

July 29,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

$

 

$

 

$

 

$

 

Income tax provision (recovery)

 

 

 

 

 

 

 

 

 

Current

 

(1,570)

 

(1,500)

 

(2,870)

 

(2,104)

 

Deferred

 

(2,302)

 

(570)

 

(1,346)

 

430

 

 

 

(3,872)

 

(2,070)

 

(4,216)

 

(1,674)

 

 

 

11. SELLING, GENERAL AND ADMINISTRATION EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

 

    

August 4,

    

July 29,

    

August 4,

    

July 29,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

$

 

$

 

$

 

$

 

Wages, salaries and employee benefits

 

15,784

 

15,880

 

32,264

 

32,101

 

Depreciation of property and equipment

 

1,722

 

2,114

 

3,408

 

4,178

 

Amortization of intangible assets

 

346

 

472

 

528

 

754

 

Loss on disposal of property and equipment

 

14

 

24

 

14

 

30

 

Impairment of property and equipment

 

2,560

 

2,313

 

2,560

 

2,313

 

Provision (recovery) for onerous contracts

 

2,068

 

(641)

 

1,892

 

(1,527)

 

Utilization for onerous contracts

 

(1,354)

 

(719)

 

(2,694)

 

(1,248)

 

Stock-based compensation