dtea_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended July 30, 2022

☐ 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

incorporation or organization)

(I.R.S. Employer

Identification No.)

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of

Each Class

Name of Each Exchange on

Which Registered

Trading Symbol

for Each Class

Common shares, no par value per share

NASDAQ

Global Market

DTEA

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
		Emerging growth company	☐

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

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

As of September 9, 2022, 26,561,744 common shares of the registrant were outstanding.

The brand, service or product names or marks referred to in this Quarterly Report are trademarks or services marks, registered or otherwise, of DAVIDsTEA Inc. and our wholly-owned subsidiary, DAVIDsTEA (USA) Inc.

DAVIDsTEA Inc.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

Item 4.	Controls and Procedures	24

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	25

Item 1A.	Risk Factors	25

Item 2.	Unregistered Sales of Equity Securities	25

Item 3.	Defaults Upon Senior Securities	25

Item 4.	Mine Safety Disclosures	25

Item 5.	Other Information	25

Item 6.	Exhibits	26

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”, “Canadian dollars” and “dollars” mean Canadian dollars and all references to “U.S. dollars”, “US$” and “USD” mean U.S. dollars.

On September 9, 2022, the Bank of Canada exchange rate was US$1.00 = CAD$1.3035.

Table of Contents

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
		July 30,			January 29,
		2022			2022
		$			$
ASSETS
Current
Cash			19,048			25,107
Accounts and other receivables			2,497			3,209
Inventories			30,234			31,048
Prepaid expenses and deposits			5,172			4,142
Total current assets			56,951			63,506
Property and equipment			739			775
Intangible assets			1,957			2,234
Right-of-use assets			10,829			12,087
Total assets			70,476			78,602
LIABILITIES AND EQUITY
Current
Trade and other payables			11,701			12,300
Deferred revenue			5,430			5,434
Current portion of lease liabilities			2,484			2,364
Total current liabilities			19,615			20,098
Non-current portion of lease liabilities			8,945			10,189
Total liabilities			28,560			30,287
Commitments and contingencies
Equity	[Note 4]
Share capital			113,862			113,534
Contributed surplus			2,545			2,507
Deficit			(77,466	)		(70,671	)
Accumulated other comprehensive income			2,975			2,945
Total equity			41,916			48,315
Total liabilities and equity			70,476			78,602

See accompanying notes.

Table of Contents

DAVIDsTEA Inc.

Incorporated under the laws of Canada

INTERIM CONSOLIDATED STATEMENTS OF NET (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME

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

		For the three-months ended						For the six-months ended
		July 30,			July 31,			July 30,			July 31,
		2022			2021			2022			2021
		$			$			$			$
Sales	[Note 9]		15,225			18,743			35,660			41,992
Cost of sales			8,751			10,748			20,222			23,229
Gross profit			6,474			7,995			15,438			18,763
Selling, general and administration expenses	[Note 5]		11,219			9,085			22,025			18,279
Restructuring plan activities, net	[Note 6]		—			(75,557	)		—			(77,159	)
Results from operating activities			(4,745	)		74,467			(6,587	)		77,643
Finance costs			167			23			338			33
Finance income			(77	)		(34	)		(116	)		(89	)
Net income (loss) before income taxes			(4,835	)		74,478			(6,809	)		77,699
Recovery of income taxes	[Note 6,8]		—			(1,000	)		—			(1,000	)
Net (loss) income			(4,835	)		75,478			(6,809	)		78,699

Other comprehensive income:
Cumulative translation adjustment			12			200			30			1,012
Other comprehensive income, net of tax			12			200			30			1,012
Total comprehensive (loss) income			(4,823	)		75,678			(6,779	)		79,711
Net (loss) earnings per share:
Basic	[Note 7]		(0.18	)		2.87			(0.26	)		3.00
Fully diluted	[Note 7]		(0.18	)		2.75			(0.26	)		2.87
Weighted average number of shares outstanding:
Basic	[Note 7]		26,487,933			26,299,094			26,456,830			26,270,284
Fully diluted	[Note 7]		26,487,933			27,455,005			26,456,830			27,422,066

See accompanying notes.

Table of Contents

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
		July 30,			July 31,			July 30,			July 31,
		2022			2021			2022			2021
		$			$			$			$
OPERATING ACTIVITIES
Net (loss) income			(4,835	)		75,478			(6,809	)		78,699
Items not affecting cash:
Depreciation of property and equipment			88			407			164			795
Amortization of intangible assets			137			484			277			887
Amortization of right-of-use assets			669			135			1,319			294
Gain on liabilities subject to compromise, including the recovery of income taxes	[Note 6]		—			(77,713	)		—			(79,861	)
Interest on lease liabilities			167			23			334			33
Stock-based compensation expense			398			363			708			545
Sub-total			(3,376	)		(823	)		(4,007	)		1,392
Net change in non-cash working capital balances related to operations			641			(18,256	)		(406	)		(19,164	)
Cash flows used in operating activities			(2,735	)		(19,079	)		(4,413	)		(17,772	)
FINANCING ACTIVITIES
Payment of lease liabilities including interest			(769	)		(139	)		(1,518	)		(322	)
Cash flows used in financing activities			(769	)		(139	)		(1,518	)		(322	)
INVESTING ACTIVITIES
Additions to property and equipment			(128	)		(52	)		(128	)		(52	)
Cash flows used in investing activities			(128	)		(52	)		(128	)		(52	)
Decrease in cash during the period			(3,632	)		(19,270	)		(6,059	)		(18,146	)
Cash, beginning of the period			22,680			31,321			25,107			30,197
Cash, end of the period			19,048			12,051			19,048			12,051
Supplemental Information
Cash paid for:
Interest			—			—			—			—
Income taxes (classified as operating activity)			—			—			—			—
Cash received for:
Interest			43			39			77			94
Income taxes (classified as operating activity)			—			—			—			—

See accompanying notes.

Table of Contents

DAVIDsTEA Inc.

Incorporated under the laws of Canada

INTERIM CONSOLIDATED STATEMENTS OF EQUITY (DEFICIENCY)

[Unaudited and in thousands of Canadian dollars]

									Accumulated
									other		Total
	Share		Contributed						comprehensive		equity
	capital		surplus			Deficit			income		(deficiency)
	$		$			$			$		$
Balance, January 29, 2022		113,534		2,507			(70,671	)		2,945		48,315
Net loss for the six months ended July 30, 2022		—		—			(6,809	)		—		(6,809	)
Other comprehensive income		—		—			—			30		30
Total comprehensive loss		—		—			(6,809	)		30		(6,779	)
Common shares issued on vesting of restricted stock units		328		(670	)		14			—		(328	)
Stock-based compensation expense		—		708			—			—		708
Balance, July 30, 2022		113,862		2,545			(77,466	)		2,975		41,916

Balance, January 30, 2021		113,167		1,747			(148,068	)		1,863		(31,291	)
Net income for the six months ended July 31, 2021		—		—			78,699			—		78,699
Other comprehensive income		—		—			—			1,012		1,012
Total comprehensive income		—		—			78,699			1,012		79,711
Common shares issued on vesting of restricted stock units		239		(486	)		(493	)		—		(740	)
Stock-based compensation expense		—		545			—			—		545
Balance, July 31, 2021		113,406		1,806			(69,862	)		2,875		48,225

See accompanying notes.

Table of Contents

DAVIDsTEA Inc.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and six-month periods ended July 30, 2022 and July 31, 2021 [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, DAVIDsTEA (USA) Inc., (collectively, the “Company”) for the three and six-month periods ended July 30, 2022 and July 31, 2021 were authorized for issue by the Board of Directors on September 9, 2022. 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 offers a specialty branded selection of high-quality proprietary loose-leaf teas, pre-packaged teas, tea sachets, tea-related accessories and gifts through its e-commerce platform at www.davidstea.com and the Amazon Marketplace, its wholesale customers which include over 3,800 grocery stores and pharmacies, and 18 Company-owned stores across Canada. The Company offers primarily proprietary tea blends that are exclusive to the Company, as well as traditional single-origin teas and herbs. Our passion for and knowledge of tea permeates our culture and is rooted in an excitement to explore the taste, health and lifestyle elements of tea. With a focus on innovative flavours, wellness-driven ingredients and organic tea, the Company launches seasonally driven “collections” with a mission of making tea fun and accessible to all.

Sales fluctuate from quarter to quarter. Sales are traditionally highest in the fourth fiscal quarter due to the year-end holiday season and tend to be lowest in the second and third fiscal quarters because of lower customer engagement during the summer months.

2. 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 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 29, 2022, 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 January 29, 2022.

3. SIGNIFICANT ACCOUNTING JUDGMENTS, 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 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 January 29, 2022.

Table of Contents

4. SHARE CAPITAL

Authorized

An unlimited number of common shares.

Issued and outstanding

	July 30,		January 29,
	2022		2022
	$		$
Share Capital - (26,561,744) Common shares (January 29, 2022 - 26,423,717)		113,862		113,534

During the three and six-month periods ended July 30, 2022, 134,452 and 138,027 common shares, respectively, (July 31, 2021 – 104,200 and 125,387 common shares, respectively), were issued in relation to the vesting of restricted stock units (“RSU”), resulting in an increase in share capital of $322 and $328, net of tax (July 31, 2021 – $70 and $239, net of tax respectively) and a reduction in contributed surplus of $658 and $670 respectively (July 31, 2021 – $142 and $486, respectively).

Stock-based compensation

As at July 30, 2022, 694,412 (July 31, 2021, 937,868) common shares remain available for issuance under the 2015 Omnibus Plan.

No stock options were granted during the three and six-month periods ended July 30, 2022 and July 31, 2021. A summary of the status of the Company’s stock option plan during the six-month periods is presented below.

For the six-months ended

July 30,

July 31,

2022

2021

Weighted

average

Options

exercise

Options

exercise

outstanding

price

outstanding

price

Outstanding and exercisable - beginning and end of period

3,490

14.39

17,490

6.32

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

For the six-months ended

July 30,

July 31,

2022

2021

Weighted

average

RSUs

fair value

RSUs

fair value

outstanding

per unit (1)

outstanding

per unit (1)

Outstanding, beginning of period

1,282,790

2.60

1,306,101

1.70

Granted

511,264

2.66

425,764

4.64

Forfeitures

(27,466

)

2.28

(32,747

)

1.50

Vested

(138,027

)

2.38

(125,387

)

1.91

Vested, withheld for tax

(143,711

)

2.38

(130,562

)

1.91

Outstanding, end of period

1,484,850

2.67

1,443,169

2.53

_____________

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

During the three and six-month periods ended July 30, 2022, the Company recognized a stock-based compensation expense of $398 and $708, respectively (July 31, 2021 – $363 and $545, respectively).

Table of Contents

5. SELLING, GENERAL AND ADMINISTRATION EXPENSES

The Company qualified in Fiscal 2021 for the Canada Emergency Wage Subsidy and the Canada Emergency Rent Subsidy under the COVID-19 Economic Response Plan of the Government of Canada. During the three and six-month periods ended July 30, 2022, the Company recognized payroll and rent subsidies of $nil (July 31, 2021 – $2.5 million and $3.6 million, respectively).

	For the three-months ended					For the six-months ended
	July 30,		July 31,			July 30,		July 31,
	2022		2021			2022		2021
	$		$			$		$
Wages, salaries and employee benefits		3,542		3,447			6,950		6,824
Marketing expenses		1,609		1,692			3,906		2,896
IT ongoing expenses		1,326		1,173			2,735		2,487
Software implementation and configuration costs		1,325		1,592			2,080		2,454
Credit card fees		275		443			677		979
Director & officer and other insurance		343		305			690		565
Professional and consulting fees		764		790			1,159		1,255
Depreciation of property and equipment		88		407			164		795
Amortization of intangible assets		137		484			277		887
Amortization right-of-use asset		669		135			1,319		294
Stock-based compensation		398		363			708		545
Other selling, general and administration		743		786			1,360		1,894
Sub-total		11,219		11,617			22,025		21,875
Government emergency wage and rent subsidy		—		(2,532	)		—		(3,596	)
		11,219		9,085			22,025		18,279

6. RESTRUCTURING PLAN ACTIVITIES, NET

On July 8, 2020, the Company announced that it was implementing a restructuring plan (the “Restructuring Plan”) under the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”) in order to accelerate its transition to predominantly an online retailer and wholesaler of high-quality tea and accessories. At a creditors’ meeting held on June 11, 2021, the Company’s Plan of Arrangement was approved by the requisite majorities of creditors of the Company. As a result, the Company was required and paid approximately $17.6 million to its creditors in full and final settlement in the second quarter of Fiscal 2021.

During the three-and six-month periods ended July 31, 2021, the Company recorded a net gain on the settlement of liabilities subject to compromise of $75,557 and $77,159, respectively net of professional fees in connection with the CCAA proceedings of $1,156 and $1,702, respectively and before a gain from the recovery of income taxes of $1,000 for both periods. This net gain is presented in the interim consolidated statement of income (loss) and comprehensive income (loss) in Restructuring Plan activities, net and Recovery of income taxes.

7. NET (LOSS) EARNINGS PER SHARE

Basic Net (loss) earnings per share (“EPS”) amounts are calculated by dividing the Net (loss) income 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 (loss) income attributable to ordinary equity holders 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.

Table of Contents

The following reflects the Net (loss) income and share data used in the basic and diluted EPS computations:

For the three-months ended

For the six-months ended

July 30,

July 31,

July 30,

July 31,

2022

2021

2022

2021

Net (loss) income for basic EPS

(4,835

)

75,478

(6,809

)

78,699

Weighted average number of shares outstanding:

Basic

26,487,933

26,299,094

26,456,830

26,270,284

Fully diluted

26,487,933

SEC Form 10-Q filed by DAVIDsTEA Inc.