DAVIDsTEA Inc. - Quarter Report: 2016 April (Form 10-Q)

 

 

 

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 April 30, 2016.

 

 

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)

 

 

 

 

 

5430 Ferrier

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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 June 7, 2016, 24,507,558 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 June 3, 2016, the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York was US$1.00 = $1.2947.

 

 

 

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]

 

 

See accompanying notes

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 information]

 

 

See accompanying notes

DAVIDsTEA Inc.

 

Incorporated under the laws of Canada

 

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

 

[Unaudited and in thousands of Canadian dollars]

 

 

See accompanying notes

 

DAVIDsTEA Inc.

 

Incorporated under the laws of Canada

 

INTERIM CONSOLIDATED STATEMENTS OF EQUITY (DEFICIENCY)

 

[Unaudited and in thousands of Canadian dollars]

 

 

See accompanying notes

 

 

DAVIDsTEA Inc.

 

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

For the three-month period ended April 30, 2016 and May 2, 2015 [Unaudited]

 

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

 

1. CORPORATE INFORMATION

 

The unaudited condensed interim consolidated financial statements of DAVIDsTEA Inc. and its subsidiary (collectively, the “Company”) for the three-month period ended April 30, 2016 were authorized for issue in accordance with a resolution of the Board of Directors on June 8, 2016. 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, Quebec, Canada, H4P 1M2.

 

The Company is engaged in the retail and online sale of tea, tea accessories and food and beverages in Canada and 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 quarter 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 January 30, 2016, 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.

 

On May 12, 2015, the Company’s Board of Directors approved a 1.6-for-1 split on common and Class AA common shares, which was effective May 21, 2015. The accompanying financial statements have been adjusted to reflect the forward split. As a result, the historical per share amounts and the number of shares in these unaudited condensed interim consolidated financial statements have been retroactively adjusted to reflect this change.

 

Basis of consolidation

 

The unaudited condensed interim consolidated financial statements include the accounts of the Company and its wholly-owned U.S. subsidiary, DAVIDsTEA (USA) Inc. The unaudited condensed interim financial statements of the subsidiary are prepared for the same reporting period as the parent company, using consistent accounting policies. All intercompany transactions, balances and unrealized gains or losses have been eliminated. The Company has no interests in special purpose entities.

 

Basis of measurement

 

These unaudited condensed interim consolidated financial statements have been prepared on the historical cost basis except for the following material items:

 

 

Functional and presentation currency

 

These unaudited condensed interim consolidated financial statements are presented in Canadian dollars, which is the parent Company’s functional currency. All financial information presented in Canadian dollars has been rounded to the nearest thousand, except per share amounts.

 

Comparative figures

 

The Company has reclassified the comparative figure related to stock-based compensation related to cashless exercise on the statement of income (loss) to make selling, general and administration expenses comparable.

 

3. SIGNIFICANT ACCOUNTING POLICIES

 

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 January 30, 2016. During the three-month period ended April 30, 2016, we implemented the following new accounting standard on the presentation of financial statements.

 

IAS 1, “Presentation of Financial Statements” (“IAS 1”), was modified in December 2014 when the IASB issued amendments to clarify materiality, order of notes to financial statements, disclosure of accounting policies as well as aggregation and disaggregation of items presented in the consolidated balance sheets and consolidated statements of income (loss) and comprehensive income (loss). These amendments shall be applied to fiscal years beginning on or after January 1, 2016. The Company has adopted this accounting standard effective on January 31, 2016, the first day of its newest fiscal year. The adoption of IAS 1 has resulted in no impact to the consolidated financial statements.

 

There were no other new accounting standards implemented during the three-month period ended April 30, 2016.

 

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

 

IFRS 9, “Financial Instruments”(“IFRS 9”), 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, 2018, with earlier application permitted. The Company is currently assessing the impact of adopting this standard on the Company’s consolidated financial statements and related note disclosures.

 

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, 2018. The Company is currently assessing the impact of adopting this standard on the Company’s consolidated financial statements and related note disclosures.

 

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 in the statement of financial position. Certain exemptions will apply for short-term leases and leases of low value assets. The new standard will be effective for annual periods beginning on or after January 1, 2019. Early application is permitted, provided the new revenue standard, IFRS 15, has been applied, or is applied at the same date as IFRS 16. The Company is currently assessing the impact of adopting this standard on our consolidated financial statements and related note disclosures.

 

 

4. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS

 

The preparation of condensed interim consolidated financial statements requires management to make estimates and assumptions using judgment 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 judgements 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 January 30, 2016.

 

5. INVENTORIES

 

 

For the three-month period ended April 30, 2016, $256 [May 2, 2015 —$151] was written-down as a result of the net realizable value being lower than the cost of the inventory. No inventory write-downs recognized in previous years were reversed in the period.

 

6. PROVISIONS

 

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.

 

7. REVOLVING FACILITY

 

The Company has a credit agreement (the “Credit Agreement”) with the Bank of Montreal (“BMO”). The Credit Agreement provides for a revolving term facility, maturing April 24, 2018, in the principal amount of $20,000 (which the Company refers to as the “Revolving Facility”) or the equivalent amount in U.S. dollars, repayable at any time. The Credit Agreement also provides for an accordion feature whereby the Company may, at any time prior to maturity and with permission from BMO, request an increase to the Revolving Facility by an amount not greater than $10,000.

 

The credit facility contains a number of financial and 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 cannot make any dividend payments. As at April 30, 2016, the Company is in compliance with these covenants.

 

As at April 30, 2016 and January 30, 2016, the Company did not have any borrowings on the Revolving Facility.

 

8. MANDATORILY REDEEMABLE PREFERENCE SHARES

 

Prior to the Company’s initial public offering (“IPO”) on June 10, 2015, the Series A, A-1, and A-2 redeemable preferred shares liability was being accreted to their nominal value and the financial derivative liability embededded in the preferred shares was being measured at fair value with all changes recognized immediately in income (loss). For the three-month period ended May 2, 2015, the accretion on preferred shares was $314 and the changes in the carrying value of the financial derivative liability embedded in preferred shares amounted to $90,705. The amounts were recorded as a loss in the unaudited condensed interim consolidated statements of income (loss) and comprehensive income (loss) for the three months ended May 2, 2015.

 

On June 10, 2015, immediately prior to the completion of the Company’s IPO, the financial derivative liability embedded in preferred shares was increased to reflect the fair market value of the IPO common shares. Subsequently, all of the Series A, A-1 and A-2 preferred shares were converted into common shares and the financial derivative liability embedded in the Series A, A-1 and A-2 preferred shares was converted into equity. On June 10, 2015, immediately following the IPO, the Company amended its articles to remove the Series A, A-1 and A-2 preferred shares from its authorized capital.

 

 

 

9. SHARE CAPITAL

 

Authorized

 

An unlimited number of common shares.

 

Issued and outstanding

 

During the three-month period ended April 30, 2016, 394,515 stock options were exercised for common shares. The carrying value of common shares includes $126 [May 2, 2015 — $125] which corresponds to a reduction in contributed surplus representing the value of accumulated stock-based compensation expense associated to options exercised during the period. In addition, during the three-month period ended April 30, 2016, 30,398 of common shares were issued in relation to the vesting of restricted stock units (“RSU”), resulting in an increase in share capital of $214 [May 2, 2015 – nil].

 

Stock-based compensation

 

As at April 30, 2016, 1,017,620 common shares remain available for issuance under the 2015 Omnibus Plan.

 

The weighted average fair value of options granted of $3.65 for the three-month period ended April 30, 2016 [for the three-month period ended May 2, 2015 — $6.15] was estimated using the Black Scholes option pricing model, using the following assumptions:

 

 

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 three-month period is presented below.

 

 

The weighted average share price at the date of exercise for stock options exercised during the three-month period ended April 30, 2016 was $14.50 [for three three-month period ended May 2, 2015 — $15.64].

 

The following table summarizes information about the Company’s RSU.

 

 

 

During the three-month period ended April 30, 2016, the Company recognized a stock-based compensation expense of $316 [May 2, 2015 — $325] and a stock-based compensation expense related to cashless exercise of options by former employees of nil [May 2, 2015 — $4,052].

 

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:

 

 

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

 

 

As at April 30, 2016, the Company’s U.S. subsidiary has accumulated losses amounting to US$10.6 million [January 30, 2016 — US$9.7 million], the tax benefit of which has been fully recorded as a deferred income tax asset, which expire during the years 2033 to 2036.

 

11. SELLING, GENERAL AND ADMINISTRATION EXPENSES

 

 

 

 

12. EARNINGS PER SHARE

 

Basic earnings per share (“EPS”) amounts are calculated by dividing the net income (loss) for the period attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the period. Diluted EPS amounts are calculated by dividing the net income (loss) attributable to ordinary equity holders (after adjusting for dividends, accretion interest on the mandatorily redeemable preference shares and any gain or loss from embedded derivative on preferred shares) by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares, unless these would be anti‑dilutive.

 

The following reflects the income and share data used in the basic and diluted EPS computations:

 

 

As a result of the net loss during the three-month period ended May 2, 2015, the stock options and restricted stock units disclosed in Note 9 and the Series A, Series A-1 and Series A-2 preferred shares disclosed in Note 8 are anti-dilutive.

 

13. RELATED PARTY DISCLOSURES

 

For the three-month period ended May 2, 2015, interest was incurred on the loan from the controlling shareholder amounting to $33 and dividends on Series A, A-1 and A-2 preferred shares were accrued for $322. As a result of the repayment of the loan from the controlling shareholder and the conversion of the Series A, A-1 and A-2 preferred shares during the year ended January 30, 2016, there were no such amounts for the three-month period ended April 30, 2016.

 

14. SEGMENT INFORMATION

 

An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses. The Company has reviewed its operations and determined that each of its retail stores represents an operating segment. However, because its retail stores have similar economic characteristics, sell similar products, have similar types of customers, and use similar distribution channels, the Company has determined that these operating segments can be aggregated at a geographic level. As a result, the Company has concluded that it has two reportable segments, Canada and the U.S., that derive their revenues from the retail and online sale of tea, tea accessories and food and beverages. The Company’s Chief Executive Officer (the chief operating decision maker) makes decisions about resources to be allocated to the segments and assesses performance, and for which discrete financial information is available.

 

The Company derives revenue from the following products:

 

 

Property and equipment and intangible assets by country are as follows:

 

 

Gross profit per country is used to measure performance because management believes this information is the most relevant in evaluating results. Gross profit per country is as follows:

 

 

 

 

 

15. FINANCIAL RISK MANAGEMENT

 

The Company’s activities expose it to a variety of financial risks, including risks related to foreign exchange, interest rate, liquidity and credit.

 

Currency risk — foreign exchange risk

 

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Given that some of its purchases are denominated in U.S. dollars, the Company is exposed to foreign exchange risk. The Company’s foreign exchange risk is largely limited to currency fluctuations between the Canadian and U.S. dollars. The Company is exposed to currency risk through its cash, accounts receivable and accounts payable denominated in U.S. dollars.

 

Assuming that all other variables remain constant, a revaluation of these monetary assets and liabilities due to a 5% rise or fall in the Canadian dollar against the U.S. dollar would have resulted in an increase or decrease to net income (loss) in the amount of $56.

 

The Company’s foreign exchange exposure is as follows:

 

 

The Company’s U.S. subsidiary’s transactions are denominated in U.S. dollars.

 

In order to protect itself from the risk of losses should the value of the Canadian dollar decline in relation to the U.S. dollar, the Company has entered into forward contracts to fix the exchange rate of its expected U.S. dollar inventory purchasing requirements, through April 2017. A forward foreign exchange contract is a contractual agreement to buy a specific currency at a specific price and date in the future. The Company designated the forward contracts as cash flow hedging instruments under International Accounting Standard 39. This has resulted in mark-to-market foreign exchange adjustments, for qualifying hedged instruments, being recorded as a component of other comprehensive income for the three-month period ended April 30, 2016. As at April 30, 2016, the designated portion of these hedges was considered effective.

 

The nominal and contract values of foreign exchange contracts outstanding as at April 30, 2016 are as follows:

 

 

The Company did not use any forward contracts to manage foreign exchange risk for the three-month period ended May 2, 2015, but rather satisfied its U.S dollar requirements primarily through spot rate purchases.

 

Market risk — interest rate risk

 

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Financial instruments that potentially subject the Company to cash flow interest rate risk include financial assets and liabilities with variable interest rates and consist of cash. The Company is exposed to cash flow risk on its Revolving Facility which bears interest at variable interest rates (note 7). As at April 30, 2016, the Company did not have any borrowings on the Revolving Facility.

 

Liquidity risk

 

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company’s approach to managing liquidity risk is to ensure, to the extent possible, that it will always have sufficient liquidity to meet liabilities when due. The Company’s liquidity follows a seasonal pattern based on the timing of inventory purchases and capital expenditures. The Company is exposed to this risk mainly in respect of its trade and other payables.

 

As at April 30, 2016, the Company had $69,068 in cash. In addition, as outlined in note 7, the Company has a Revolving Facility of $20,000, of which nil was drawn as at April 30, 2016. The Revolving Facility also provides for an accordion feature whereby the Company may, at any time prior to maturity, and with the permission of BMO, request an increase to the Revolving Facility by an amount not greater than $10,000.

 

The Company expects to finance its growth in store base and its store renovations through cash flows from operations, the Revolving Facility (note 7) and cash on hand.

 

The Company expects that its trade and other payables will be discharged within 90 days.

 

Credit risk

 

The Company is exposed to credit risk resulting from the possibility that counterparties may default on their financial obligations to the Company. The Company’s maximum exposure to credit risk at the reporting date is equal to the carrying value of accounts receivable and derivative financial instruments. Accounts receivable primarily consists of receivables from retail customers who pay by credit card, recoveries of credits from suppliers for returned or damaged products, and receivables from other companies for sales of products, gift cards and other services. Credit card payments have minimal credit risk and the limited number of corporate receivables is closely monitored.

 

Fair values

 

Financial assets and financial liabilities are measured on an ongoing basis at fair value or amortized cost. The disclosures in the “Financial instruments” section of note 3 of the consolidated financial statements for the year ended January 30, 2016 describe how the categories of financial instruments are measured and how income and expenses, including fair value remeasurement gains and losses, are recognized. The fair values of derivative financial instruments have been determined by reference to forward exchange rates at the end of the reporting period and classified in Level 2 of the fair value hierarchy.

 

Reconciliation of Level 3 fair values

 

Changes in fair value of Level 3 financial instruments were as follows, for the three-month period ended April 30, 2016 and for the year ended January 30, 2016:

 

 

 

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

Certain statements contained herein includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and there are, or may be deemed to be,“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). The following cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the “safe harbor” provisions of the Act. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “expects,” “may,” “will,” “should,” “could,” “seeks,” “projects,” “approximately,” “intends,” “plans,” “estimates” or “anticipates,” or, in each case, their negatives or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this Quarterly Report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, new store opening projections, use of cash and operating and capital expenditures, impact of new accounting pronouncements, impact of improvements to internal control and financial reporting. These risks and uncertainties include, but are not limited to the risks described under the section entitled “Risk Factors” in our Annual Report on Form 10-K dated April 12, 2016 and filed on April 13, 2016.  Forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q.  Except as required under federal securities laws and the rules and regulations of the SEC, we do not have any intention to update any forward-looking statements to reflect events or circumstances arising after the date of this Form 10-Q, whether as a result of new information, future events or otherwise. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements included in this Form 10-Q or that may be made elsewhere from time to time by, or on behalf of, us. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

 

Accounting Periods

 

All references to “Fiscal 2016” are to the Company’s fiscal year ending January 28, 2017. All references to “Fiscal 2015” are to the Company’s fiscal year ended January 30, 2016. All references to “Fiscal 2014” are to the Company’s fiscal year ended January 31, 2015.

 

The Company’s fiscal year ends on the last Saturday in January. The years ending January 28, 2017 and January 30, 2016 cover a 52-week period. The year ended January 31, 2015 covers a 53-week fiscal period.

 

Overview

 

We are a fast-growing branded retailer of specialty tea, offering a differentiated selection of proprietary loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories and food and beverages primarily through 198 company-operated DAVIDsTEA stores as of April 30, 2016, 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, and replicate our store experience online by engaging users with rich content. We strive to make tea a multi-sensory experience by facilitating interaction with our products through education and sampling so that our customers appreciate the compelling attributes of tea as well as the ease of preparation.

 

First Quarter 2016 Highlights

 

Compared to the first quarter of Fiscal 2015, we grew our sales from $35.8 million to $44.5 million, representing growth of 24.3% over the prior year. We added 5 new stores, increasing our store base from 193 stores as of January 30, 2016 to 198 stores as of April 30, 2016. Our Adjusted EBITDA increased from $4.0 million to $4.6 million. Our net cash flows used in operating activities decreased from $(6.7) million to $(0.8) million. 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. We also believe that our strong focus on operating efficiencies and leveraging our fixed costs will result in increased Adjusted EBITDA.

 

How we assess our performance

 

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

 

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

 

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

 

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

 

 

 

 

 

 

 

 

 

 

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

 

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

 

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

 

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

 

Results from Operating Activities.  Results from operating activities consist of our gross profit less our selling, general and administration expenses.

 

Finance Costs.  Finance costs consists of cash and imputed non-cash charges related to our credit facility, long-term debt, finance lease obligations, the loan from the controlling shareholder and the Series A, A-1 and A-2 preferred shares.

 

Provision for Income Tax.  Provision for income tax consists of federal, provincial, state and local current and deferred income taxes.

 

Adjusted EBITDA.  We present Adjusted EBITDA as a supplemental performance measure because we believe it facilitates a comparative assessment of our operating performance relative to our performance based on our results under IFRS, while isolating the effects of some items that vary from period to period. Specifically, Adjusted EBITDA allows for an assessment of our operating performance and our ability to service or incur indebtedness without the effect of non-cash charges, such as depreciation, amortization, 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. It is reconciled to its nearest GAAP measure on page 22 of this Quarterly Report on Form 10-Q.

Selected Operating and Financial Highlights

 

Results of Operations

 

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

 

 

Non-IFRS Metrics

 

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. Adjusted EBITDA is not a measurement 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 is frequently used by