DAVIDsTEA INC. — Annual Report 2020

May 1, 2021

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Preface

In preparing this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), we have taken into account all information available to us up to April 30, 2021, the date of this MD&A. The audited annual consolidated financial statements and this MD&A were reviewed by the Company’s Audit Committee and were approved and authorized for issuance by our Board of Directors on April 30, 2021.

All financial information contained in this annual MD&A and in the audited annual consolidated financial statements has been prepared in accordance with IFRS, except for certain non-GAAP information discussed in this Annual Report on Form 10-K. As a foreign private issuer, we are permitted to file our audited consolidated financial statements with the SEC under IFRS without a reconciliation to U.S. GAAP and as a result, we do not prepare a reconciliation of our results to U.S. GAAP. It is possible that certain of our accounting policies could be different from GAAP. All monetary amounts in this MD&A are expressed in Canadian dollars, except for share and per share data and where otherwise indicated.

This MD&A should be read in conjunction with the audited consolidated financial statements and the notes thereto of the Company as of January 30, 2021 and February 1, 2020 and for the years ended January 30, 2021, February 1, 2020, and February 2, 2019 which are contained in this Annual Report on Form 10-K.

Business Update

We participate in a large and growing global tea market which, combined with the relatively low percentage of tea sales in North America, makes the market opportunity very attractive.

Looking back, we ended Fiscal 2019 with revenues of $196.5 million, a decline of 8% over the prior year. Accumulated net losses for the three-year period ended February 1, 2020 amounted to $93.2 million. Our strategy entering Fiscal 2020 was to stabilize our business from these unfavorable trend lines by playing to our core strengths and improving operational execution. Our online and emerging wholesale business represented opportunities to strengthen our business, while continuing to innovate and expand our product portfolio. Over 78% of Fiscal 2019 revenues were generated from our 230 brick-and-mortar stores. These stores were the source of significant losses which were anchored by commercial leases that are difficult to modify. Notwithstanding attempts to right-size our store network, we were not making enough of an impact to stem the losses from our negotiation efforts alone.

In March 2020, the outbreak of a novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization and on March 17, 2020, in response to the COVID-19 pandemic, the Company announced the temporary closure of all of its retail stores in Canada and the United States.

Although we continued to offer our products directly to consumers through our online store and in supermarkets and drugstores across Canada, it was unlikely that consumers would continue to purchase our products at previous volumes through these alternative channels. Furthermore, the duration and impact of the COVID-19 pandemic is unknown and the influence on consumer shopping behavior and consumer demand, including online shopping, continues to evolve.

Following a careful review of available options to stem the losses generated primarily from its brick-and-mortar footprint, our management and Board of Directors determined that a formal restructuring process was the best option in the context of an increasingly challenging retail environment, further exacerbated by the COVID-19 pandemic.

On July 8, 2020, we obtained the Initial Order pursuant to the CCAA from the Québec Superior Court and announced that we were implementing the Restructuring Plan under the CCAA in order to accelerate our transition to predominantly an online retailer and wholesaler of high-quality teas and accessories. Among other things, the Initial Order provided for the appointment of PwC as Monitor in the CCAA proceedings.

On July 9, 2020, the United States Bankruptcy Court for the District of Delaware entered an order in favor of the Company under Chapter 15 of the United States Bankruptcy Code. The order of the United States Bankruptcy Court provisionally recognized the proceedings under the CCAA and enforced the Initial Order, in effect providing protection to us from creditor action against its assets in the United States.

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As part of its Restructuring Plan and further to obtaining the Initial Order, on July 10, 2020 we sent notices to terminate leases for 82 of our stores in Canada and all 42 of our stores in the United States. These lease terminations were effective on August 9, 2020.

On July 16, 2020, we obtained an Amended and Restated Initial Order from the Québec Superior Court, extending to September 17, 2020 the application of the Initial Order. The Amended and Restated Initial Order also dealt with certain administrative matters, particularly with regards to the lease terminations.

On July 30, 2020, we sent notices to terminate leases for an additional 82 of its stores in Canada. These lease terminations were effective on August 29, 2020.

On August 21, 2020, we re-opened 18 stores across Canada.

On September 17, 2020, the Québec Superior Court extended the stay of all proceedings against us to December 15, 2020 and issued a Claims Process Order establishing the claims procedures for our creditors under the CCAA. This Order, among other things, set November 6, 2020 (the “Claims Bar Date”) as the time by which creditors had to submit their claims to PwC, the Court-appointed Monitor.

On December 15, 2020, the Québec Superior Court extended the stay of all proceedings against us to March 19, 2021. The Court also approved a retention plan for certain key employees (“KERP”) and created a priority charge over the debtors’ assets for the KERP in addition to extending the Claims Bar Date for certain Canadian employees until December 31, 2020.

On March 19, 2021, the Québec Superior Court extended the stay of all proceedings against us to June 4, 2021, and addressed certain administrative matters.

We ended Fiscal 2020 with revenues of $121.7 million, a decline of $74.8 million and 38% from Fiscal 2019 and incurred a net loss of $55.9 million versus a loss of $31.2 million in the prior year. After excluding a series of adjustments which include $56.3 million of restructuring charges, Adjusted EBITDA in Fiscal 2020 was $9.7 million versus $11.4 million in the prior year. Furthermore, sequential Adjusted EBITDA has trended favorably since the second quarter of Fiscal 2020. For Fiscal 2020, e-commerce and wholesale sales represented 80% of total sales as opposed to 22% in prior year.

The Company’s current liabilities total $112.2 million as at January 30, 2021 and we held cash and accounts and other receivables of $36.4 million. The Company does not currently have any third-party credit facilities available with which to meet any future financial obligations. Furthermore, funds required to satisfy creditors upon exit of CCAA are expected to be significant and will place increased operating pressure on the organization, in light of its ongoing transformation efforts.

Management believes that there is material uncertainty surrounding our ability to execute the strategy necessary to return to profitability in the current environment, including the unpredictability surrounding the recovery from the COVID-19 pandemic, changes in consumer behavior and the ability to successfully navigate the uncertain future given its reduced working capital. As a result, these events and conditions indicate that a material uncertainty exists that raises substantial doubt about our ability to continue as a going concern and, therefore, realize our assets and discharge our liabilities in the normal course of business.

Accounting Periods

The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a 52-week year, but occasionally gives rise to an additional week, resulting in a 53-week year. Fiscal years are designated in the Consolidated Financial Statements and Notes thereto, as well as the remainder of this Annual Report on Form 10-K, by the calendar year in which the fiscal year commenced. All references herein to the Company’s fiscal years are as follows:

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Fiscal year Year ended / ending Number of weeks
Fiscal 2016 January 28, 2017 52
Fiscal 2017 February 3, 2018 53
Fiscal 2018 February 2, 2019 52
Fiscal 2019 February 1, 2020 52
Fiscal 2020 January 30, 2021 52
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Overview

DAVIDsTEA offers a specialty branded selection of high-quality proprietary loose-leaf teas, pre-packaged teas, tea sachets, tea-related accessories and gifts through its e-commerce platform at www.davidstea.com and the Amazon Marketplace, its wholesale customers which include over 2500 grocery stores and pharmacies, and 18 company-owned stores across Canada. We offer primarily proprietary tea blends that are exclusive to DAVIDsTEA, as well as traditional single-origin teas and herbs. Our passion for and knowledge of tea permeates our culture and is rooted in an excitement to explore the taste, health and lifestyle elements of tea.

Factors Affecting Our Performance

We believe that our performance and future success depend on a number of factors that present significant opportunities for us and may pose risks and challenges, as discussed in the “Risk Factors” section of this Form 10-K.

Fiscal 2020 Highlights

During Fiscal 2020, sales declined by $74.8 million and 38% over the prior year to $121.7 million. Net loss increased by $24.7 million to $55.9 million for the year from a net loss of $31.2 million in Fiscal 2019. After excluding a series of adjustments which include $56.3 million of restructuring charges, Adjusted EBITDA in Fiscal 2020 was $9.7 million versus $11.4 million in the prior year. Furthermore, sequential Adjusted EBITDA has trended favorably since the second quarter of Fiscal 2020. For Fiscal 2020, e-commerce and wholesale sales represented 80% of total sales as opposed to 22% in prior year.

How We Assess Our Performance

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

Sales. Sales are generated from our online store, retail stores, and from our wholesale distribution channel. Our business is seasonal and, as a result, our sales fluctuate from quarter to quarter. Sales are traditionally highest in the fourth fiscal quarter, which includes the holiday sales period, and tend to be lowest in the second and third fiscal quarters because of lower customer engagement in both our online store and physical locations in the summer months.

The specialty retail industry is cyclical, and our sales are affected by general economic conditions. A number of factors that influence the level of consumer spending, including economic conditions and the level of disposable consumer income, consumer debt, interest rates and consumer confidence can affect purchases of our products.

As we transition to generating sales primarily from our online store, measuring the change in period-over-period comparable same store sales, although still a valid measure within our retail sales channel, loses its significance in the overall evaluation of how our business is performing. Other measures such as sales performance in total and in our e- commerce and wholesale channels begin to influence how we direct resources and evaluate our performance. Factors affecting our performance include:

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

• our ability to provide a product offering that generates new and repeat visits online and in our other channels;

• the customer experience we provide online and in our other channels;

• the level of customer traffic to our website and our online presence more generally;

• the number of customer transactions and average ticket online;

• the pricing of our tea, tea accessories; and

• our ability to obtain, manufacture and distribute product efficiently.

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

Restructuring plan activities, net. Restructuring plan activities, net consist of gains on modification of lease liabilities, estimates for allowed landlord claims, loss on disposal of property and equipment and right-of-use assets, impairment of property and equipment and right-of-use assets, severance costs, interest and penalties related to unpaid occupancy charges, professional fees, and store closure related costs.

Selling, General and Administration Expenses. Selling, general and administration expenses (“SG&A”) consist of store operating expenses and other general and administration expenses. Store operating expenses consist of all store expenses excluding certain occupancy related costs (which are included in costs of sales). General and administration costs consist of salaries and other payroll costs, travel, professional fees, stock compensation, marketing expenses, information technology, depreciation of property and equipment, amortization of intangible assets, amortization of rightof-use assets, any store or other asset impairment taken in the normal course of business and other operating costs.

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

We present Adjusted selling, general and administration expenses as a supplemental measure because we believe it facilitates a comparative assessment of our selling, general and administration expenses under IFRS, while isolating the effects of some items that vary from period to period. It is reconciled to its nearest IFRS measure under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, of this Form 10-K (the “MD&A”).

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

We present Adjusted results from operating activities as a supplemental performance measure because we believe it facilitates a comparative assessment of our operating performance relative to our performance based on our results under IFRS, while isolating the effects of some items that vary from period to period. It is reconciled to its nearest IFRS measure in our MD&A.

Finance Costs. Finance costs consist of cash and imputed non-cash charges related to any credit facility, and interest expense from lease liabilities.

Finance Income. Finance income consists of interest income on cash balances.

Adjusted EBITDA. We present Adjusted EBITDA as a supplemental performance measure because we believe it facilitates a comparative assessment of our operating performance relative to our performance based on our results under IFRS, while isolating the effects of some items that vary from period to period. Specifically, Adjusted EBITDA allows for an assessment of our operating performance and our ability to service or incur indebtedness without the effect of noncash charges, such as depreciation, amortization, finance costs, non-cash compensation expense, loss on disposal of property and equipment, impairment of property and equipment and right-of-use assets, and certain non-recurring expenses. This measure also functions as a benchmark to evaluate our operating performance. It is reconciled to its nearest IFRS measure in our MD&A.

Selected Operating and Financial Highlights

Results of Operations

Our financial results for the fourth quarter and year include the impact of our Restructuring Plan which began on July 8, 2020 and July 9, 2020 when we obtained the Initial Order pursuant to the CCAA from the Québec Superior Court and when we received protection from creditor action against our assets in the United States from the United States

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Bankruptcy Court for the District of Delaware, respectively. On July 10, 2020, we sent notices to terminate leases for 82 of our stores in Canada and all 42 of our stores in the United States. These lease terminations were effective on August 9, 2020. On July 30, 2020, we sent notices to terminate leases for an additional 82 of our stores in Canada. These lease terminations were effective on August 29, 2020. Our retail footprint now includes 18 stores in Canada which we reopened on August 21, 2020.

Sales during the fourth quarter of $40.2 million declined by $33.3 million or 45.3% over the prior year quarter due primarily to the reduction in our retail store footprint. Adjusted EBITDA in the fourth quarter of Fiscal 2020 was $5.4 million compared to $10.0 million in the prior year quarter.

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

Consolidated statement of income (loss) data:	2021 2020 For the three months ended January 30, February 1,	2021 2020 For the three months ended January 30, February 1,	2021 2020 For the three months ended January 30, February 1,	2021 2020 For the three months ended January 30, February 1,	For the twelve	For the twelve	months ended	months ended
	2021 January 30,				2021 January 30,		2020 February 1,
Sales	$ 40,189		$ 73,538		$ 121,686		$	196,462
Cost of sales		24,544		34,457		71,953		87,886
Gross profit		15,645		39,081		49,733		108,576
Selling, general and administration expenses		10,581		45,050		46,464		135,306
Restructuring plan activities, net		32,310		—		56,327		—
Results from operating activities		(27,246)		(5,969)		(53,058)		(26,730)
Finance costs		13		1,446		3,273		6,751
Finance income		(37)		(214)		(399)		(784)
Loss before income taxes		(27,222)		(7,201)		(55,932)		(32,697)
Recovery of income tax		—		(1,500)		—		(1,500)
Net loss	$ (27,222)		$ (5,701)		$ (55,932)		$	(31,197)
Percentage of sales:
Sales	100.0%		100.0%		100.0%			100.0%
Cost of sales	61.1%		46.9%		59.1%			44.7%
Gross profit	38.9%		53.1%		40.9%			55.3%
Selling, general and administration expenses	26.3%		61.3%		38.2%			68.9%
Restructuring plan activities, net	80.4%		0.0%		46.3%			0.0%
Results from operating activities	(67.8% )		(8.1%)		(43.6% )			(13.6%)
Finance costs	0.0%		2.0%		2.7%			3.4%
Finance income	(0.1%)		(0.3%)		(0.3% )			(0.4%)
Loss before income taxes	(67.7% )		(9.8%)		(46.0% )			(16.6%)
Recovery of income tax	0.0%		(2.0%)		0.0%			(0.8%)
Net loss	(67.7% )		(7.8%)		(46.0% )			(15.9%)
Other financial and operations data:
Adjusted EBITDA(1)	$ 5,384		$ 9,971		$ 9,650 $		$	11,359
Adjusted EBITDA as a percentage of sales	13.4%		13.6%		7.9%			5.8%
Adjusted SG&A(1)	$ 11,631		$ 34,346		$ 48,397		$	117,526
Adjusted results from operating activities (1)	$ 4,014		$ 4,813		$ 1,337		$	(8,850)
Adjusted net income(loss) (1)	$ 4,039		$ 3,503		$ (1,538)		$	(14,917)

_ (1) For a reconciliation of Adjusted EBITDA, Adjusted SG&A, Adjusted results from operating activities, and Adjusted net income (loss), to the most directly comparable measure calculated in accordance with IFRS, see “Non-IFRS financial measures” below.

Non-IFRS financial measures

The Company uses certain non-IFRS financial measures for purposes of comparison to prior periods, to prepare annual operating budgets, and for the development of future projections. These measures are not recognized measures under IFRS, do not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similarly titled measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of our results of operations from management’s perspective. Accordingly, they should not be considered in isolation nor as a substitute for analysis of our financial information reported under IFRS.

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We use non-IFRS financial measures to provide supplemental measures of our operating performance and thus highlight trends in our business that may not otherwise be apparent when relying solely on IFRS financial measures.

These non-IFRS financial measures include; Adjusted selling general and administrative expenses, Adjusted results from operating activities, Adjusted net income (loss), Adjusted EBITDA and Adjusted fully diluted net income (loss) per common share.

We believe that although these non-IFRS financial measures provide investors with useful information with respect to our historical operations and are frequently used by securities analysts, lenders and others in their evaluation of companies, they have limitations as an analytical tool. Some of these limitations are:

• Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net income (loss) and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

• Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net income (loss) and Adjusted EBITDA do not reflect the cash requirements necessary to fund capital expenditures; and

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

Because of these limitations, these non-IFRS financial measures should not be considered as discretionary cash available to us to reinvest in the growth of our business or as a measure of cash that will be available to us to meet our obligations.

The following tables provide reconciliations of our non-IFRS financial measures to the most directly comparable measure calculated in accordance with IFRS:

Reconciliation of Selling, general and administration expenses to Adjusted selling, general and administration expenses

	For the three months ended January 30, February 1, 2021 2020	For the three months ended January 30, February 1, 2021 2020	2021 For the twelve January 30,	2020 months ended February 1,
Selling, general and administration expenses	$ 10,581	$ 45,050	$ 46,464	$ 135,306
Impairment of property and equipment and right-of-use assets (a) —		(10,704)	(2,561)	(17,780)
Government emergency wage subsidy (b)	1,050	—	4,494	—
Adjusted selling, general and administration expenses	$ 11,631	$ 34,346	$ 48,397	$ 117,526

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(a) Represents costs related to impairment of property, equipment and right-of-use assets for stores and intangible assets.

• (b) Represents the wages subsidy received from the Canadian government under the COVID-19 Economic Response Plan.

Reconciliation of Results from operating activities to Adjusted results from operating activities

	2020 For the three months ended January 30, February 1, 2021	2020 For the three months ended January 30, February 1, 2021	2021 For the twelve January 30,	2020 months ended February 1,
Results from operating activities	$ (27,246)	$ (5,969)	$ (53,058)	$ (26,730)
Impairment of property and equipment and right-of-use assets (a)	—	10,704	2,561	17,780
Loss on disposal of property and equipment and right-of-use assets	—	78	—	100
Restructuring plan activities, net (b)	32,310	—	56,327	—
Government emergency wage subsidy (c)	(1,050)	—	(4,494)	—
Adjusted results from operating activities	$ 4,014	$ 4,813	$ 1,337	$ (8,850)

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(a) Represents costs related to impairment of property, equipment and right-of-use assets for stores and intangible assets.

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• (b) Represents the costs related to the Restructuring plan activities, net

• (c) Represents the wages subsidy received from the Canadian government under the COVID-19 Economic Response Plan.

Reconciliation of Net income (loss) to Adjusted EBITDA

	2021 2020 For the three months ended January 30, February 1,	2021 2020 For the three months ended January 30, February 1,	2021 2020 For the twelve months ended January 30, February 1,	2021 2020 For the twelve months ended January 30, February 1,
Net loss	$ (27,222)	$ (5,701)	$ (55,932)	$ (31,197)
Finance costs	13	1,446	3,273	6,751
Finance income	(37)	(214)	(399)	(784)
Depreciation and amortization	1,327	4,872	7,493	19,396
Recovery of income tax	—	(1,500)	—	(1,500)
EBITDA	$ (25,919)	$ (1,097)	$ (45,564)	$ (7,334)
Additional adjustments :
Stock-based compensation expense (a)	42	286	820	813
Impairment of property and equipment and right-of-use assets (b)	—	10,704	2,561	17,780
Loss on disposal of property and equipment	—	78	—	100
Restructuring plan activities, net (c)	32,310	—	56,327	—
Government emergency wage subsidy (d)	(1,050)	—	(4,494)	—
Adjusted EBITDA	$ 5,384	$ 9,971	$ 9,650	$ 11,359

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

(b) Represents costs related to impairment of property and equipment and right-of-use assets and intangibles assets for stores.

(c) Represents the costs related to the Restructuring plan activities, net

(d) Represents the wages subsidy received from the Canadian government under the COVID-19 Economic Response Plan.

Reconciliation of Net income (loss) to Adjusted net income (loss)

	2021 2020 For the three months ended January 30, February 1,	2021 2020 For the three months ended January 30, February 1,	2021 2020 For the three months ended January 30, February 1,	2021 2020 For the three months ended January 30, February 1,	2021 2020 For the twelve months ended January 30, February 1,	2021 2020 For the twelve months ended January 30, February 1,	2021 2020 For the twelve months ended January 30, February 1,	2021 2020 For the twelve months ended January 30, February 1,
Net loss	$ (27,222)		$ (5,701)		$ (55,932)		$ (31,197)
Impairment of property and equipment and right-of-use assets (a)		—		10,704		2,561		17,780
Restructuring plan activities, net (b)		32,310		—		56,327		—
Government emergency wage subsidy (c)		(1,050)		—		(4,494)		—
Recovery for income tax (d)		—		(1,500)		—		(1,500)
Adjusted net income (loss)	$ 4,038		$ 3,503		$ (1,538)		$ (14,917)

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• (a)Represents costs related to impairment of property and equipment and right-of-use assets and intangibles assets for stores.

(b)Represents the costs related to the Restructuring plan activities, net

(c)Represents the wages subsidy received from the Canadian government under the COVID-19 Economic Response Plan.

(d)Represents revised provision for uncertain tax position as a result of a settlement reached with the taxation authorities.

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Reconciliation of fully diluted net loss per common share to Adjusted fully diluted net income (loss) per common share

	2020 For the three months ended January 30, February 1, 2021	2020 For the three months ended January 30, February 1, 2021	2021 2020 For the twelve months ended January 30, February 1,	2021 2020 For the twelve months ended January 30, February 1,
Weighted average number of shares outstanding, fully diluted	26,228,206	26,080,529	26,168,848	26,056,332
Adjusted weighted average number of shares outstanding, fully diluted	27,140,065	26,769,190	26,168,848	26,056,332
Net loss	$ (27,222)	$ (5,701)	$ (55,932)	$ (31,197)
Adjusted net income (loss)	$ 4,039	$ 3,503	$ (1,538)	$ (14,917)
Net loss per share, fully diluted	$ (1.00)	$ (0.21)	$ (2.14)	$ (1.20)
Adjusted Net income (loss) per share, fully diluted	$ 0.15	$ 0.13	$ (0.06)	$ (0.57)

Operating Results for the Fourth Quarter of Fiscal 2020 Compared to the Operating Results for the Fourth Quarter of Fiscal 2019

Sales . Sales decreased 45.3% to $40.2 million from $73.5 million in the fourth quarter of Fiscal 2019. On March 17, 2020, in response to the COVID-19 pandemic, the Company temporarily closed all its retail stores in Canada and the United States, and subsequently, as part of its formal Restructuring Plan, exited all of its brick and mortar stores except for 18 Canadian stores which were reopened on August 21, 2020. Accordingly, brick and mortar sales for the quarter declined when compared to the prior year quarter by $50.5 million or 90.7% to $5.2 million. Sales from e- commerce and wholesale channels increased by $17.1 million or 95.9% to $35.0 million, from $17.9 million in the prior year quarter. E-commerce and wholesale sales represented 87.1% of sales compared to 24.3% of sales in the prior year quarter.

Gross Profit. Gross profit of $15.6 million for the three months ended January 30, 2021 decreased by $23.4 million or 60.0% from the prior year quarter due primarily to a decline in sales during the period. As the Company pivots to a digital-first strategy, the cost of delivery and distribution that is included in arriving at gross profit will compare unfavorably to prior periods that were predominantly focused on retail sales distribution. The significant increase in e- commerce sales resulted in an increase of $1.7 million in delivery and distribution costs, thereby negatively impacting gross profit percentage. As a result, gross profit as a percentage of sales declined to 38.9% for the three-month period ended January 30, 2021 from 53.1% in the prior year quarter. We expect that the increased cost to deliver online purchases will be less than the selling expenses incurred in a brick and mortar environment that have been historically included as part of Selling, general and administration expenses.

Selling, General and Administration Expenses (“SG&A”). Selling, general and administration expenses decreased by $34.5 million or 76.5% to $10.6 million in the three months ended January 30, 2021 from the prior year quarter. Excluding the impact of the $1.1 million wage subsidy received under the Canadian government COVID-19 Economic Response Plan in Fiscal 2020, and the impact in Fiscal 2019 of the impairment of property and equipment and right-of use assets amounting to $10.7 million, Adjusted SG&A decreased by $22.7 million to $11.6 million. In connection with our Restructuring Plan, we terminated the leases for all of our stores in North America except for 18 Canadian stores which reopened on August 21, 2020. As a result, wages, salaries and employee benefits were reduced by $13.9 million, and we realized a reduction of $3.5 million in amortization expenses due to a lower right-of-use asset value

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at the beginning of the period. Adjusted SG&A as a percentage of sales in the quarter decreased to 28.9% from 46.7% in the prior year quarter.

Results from Operating Activities . Loss from operating activities was $27.2 million as compared to a loss of $6.0 million in the prior year quarter. Excluding the impact of the Restructuring Plan announced on July 8, 2020, the wage subsidy received from the Canadian government under the COVID-19 Economic Response Plan, the impact of the impairment of property and equipment and right-of-use assets and the loss on disposal of property and equipment, Adjusted operating income amounted to $4.0 million in the three-month period ended January 30, 2021 compared to $4.8 million in the prior year quarter. This resulting decrease of $0.8 million is explained by a reduction of the gross profit of $23.4 million, partially offset by a reduction in wages, salaries and employee benefits from stores and head office, amounting to $13.9 million, a reduction of $3.5 million in amortization expense due to a lower right-of-use asset value at the beginning of the period, and a reduction of other brick and mortar selling expenses of $3.9 million.

Finance Costs . Finance costs amounted to almost nil in the three months ended January 30, 2021, a decrease of $1.4 million from the prior year quarter. The interest expense relates to the accounting for lease liabilities with variable lease arrangements and has decreased from the prior year quarter.

Finance Income . Finance income of almost nil is derived mainly from interest on cash on hand and has decreased slightly $0.2 million from the prior year quarter.

EBITDA and Adjusted EBITDA. EBITDA, which excludes non-cash and other items in the current and prior periods, was negative $25.9 million in the quarter ended January 30, 2021 compared to a negative $1.1 million in the prior year quarter representing a decrease of $24.8 million over Fiscal 2019. Adjusted EBITDA for the quarter ended January 30, 2021, which excludes the impact of stock-based compensation expense, the impairment of property and equipment and right-of-use assets, the Restructuring plan activities, net, the wage subsidy received from the Canadian Government under the COVID-19 Economic Response Plan, and the loss on disposal of property and equipment amounted to $5.4 million compared to $10.0 million for the same period in the prior year. The decrease in Adjusted EBITDA, of $4.6 million, is an outcome of the decline in gross profit partially offset by the reduction in adjusted SG&A.

Recovery of Income Tax. Recovery of income tax amounted to nil compared to $1.5 million in the prior year quarter. The prior year recovery is due to an adjustment of the provision for uncertain tax provision.

Net Loss. Net loss was $27.2 million in the quarter ended January 30, 2021 compared to a Net loss of $5.7 million in the prior year quarter. Adjusted net income, which excludes the Restructuring plan activities, the subsidy received from the Canadian Government under the COVID-19 Economic Response Plan, the impairment of property and equipment and right-of-use assets, and the recovery for uncertain tax positions amounted to $4.0 million compared to $3.5 million in the prior year quarter. This $0.5 million improvement is driven by the same reasons mentioned above in “Results from operating activities”.

Fully Diluted Net Loss per Share. Fully diluted net loss per common share was $1.00 compared to a net loss of $0.21 in the fourth quarter of Fiscal 2019. Adjusted fully diluted net income per common share, which is Adjusted net income on a fully-diluted weighted average shares outstanding basis, was $0.15 per share compared to $0.13 per share in the same quarter of prior year.

Cash on Hand. At the end of the fourth quarter of Fiscal 2020, the Company had cash amounting to $30.2 million. Our cash position enables us to execute our strategy and invest further in funding working capital, transformative technology improvements and related infrastructure. Upon creditor acceptance of a Plan of Arrangement and ratification by the Court, we will have to fund the payment of this settlement amount from cash on hand as the Company does not have any credit facilities.

Fiscal Year Ended January 30, 2021 Compared to Fiscal Year Ended February 1, 2020

Sales. Sales for Fiscal 2020 decreased by 38.1%, or by $74.8 million, to $121.7 million from $196.5 million in Fiscal 2019. On March 17, 2020, in response to the COVID-19 pandemic, the Company announced the temporary closures of all its retail stores in Canada and the United States, and subsequently, as part of its Restructuring Plan, exited all of its brick and mortar stores except for 18 Canadian stores which were reopened on August 21, 2020. Accordingly, brick and mortar sales declined by $129.7 million or 84.1% when compared to the prior year. Sales from

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our e-commerce and wholesale channels increased $54.9 million or 129.8% to $97.2 million, from $42.3 million in prior year as we shifted to a digital first strategy to address consumers changing shopping habits. For Fiscal 2020, e- commerce and wholesale sales represented 79.9% of total sales as opposed to 21.5% in prior year.

Gross Profit. Gross profit decreased by 54.2% and $58.8 million, to $49.7 million in Fiscal 2020 in comparison to Fiscal 2019 due primarily to a decline in sales during the year. Gross profit as a percentage of sales declined to 40.9% for the year ended January 30, 2021 from 55.3% in the prior year. As the Company pivots to a digital first strategy, the cost of delivery and distribution that is included in arriving at gross profit will compare unfavorably to prior periods that were predominantly focused on retail sales distribution. The significant increase in e-commerce sales during the year ended January 30, 2021 resulted in an increase of $11.0 million in delivery and distribution costs. We expect that the increased cost to deliver online purchases will be less than the selling expenses incurred in a brick and mortar environment that have been historically included as part of Selling, general and administration expenses.

Selling, General and Administration Expenses. SG&A decreased by $88.8 million or 65.7%, to $46.5 million in Fiscal 2020. Excluding the impact of the impairment of property and equipment and right-of-use assets, and the wage subsidy received from the Canadian Government under the COVID-19 Economic Response Plan in the year ended January 30, 2021 which amounted to $1.9 million, Adjusted SG&A decreased by $69.1 million for the year ended January 30, 2021. This is mostly explained by the closure of our stores effective March 17, 2020 and the reopening of 18 stores on August 21, 2020. As a result, wages, salaries and employee benefits were reduced by $45.1 million and we realized a reduction of $11.9 million in amortization expense due to a lower right-of-use asset value at the beginning of Fiscal 2020. As a percentage of sales, Adjusted SG&A decreased to 39.8% from 59.8% due to lower selling expenses resulting from the now permanent closure of our 206 stores effective March 17, 2020 and the reopening of 18 stores on August 21, 2020.

Results from Operating Activities. Loss from operating activities in Fiscal 2020 was $53.1 million as compared to a loss of $26.7 million in Fiscal 2019. Excluding the impact of the Restructuring plan activities, the impairment of property and equipment and right-of-use assets, the wage subsidy received from the Canadian Government under the COVID-19 Economic Response Plan, and the loss on disposal of property and equipment, Adjusted operating income of $1.3 million compared to a loss of $8.9 million in Fiscal 2019. This resulting improvement of $10.2 million is explained by reduction in wages, salaries and employee benefits, from stores and head office, amounting to $45.1 million and an $11.9 million reduction in amortization expense due to a lower right-of-use asset value at the beginning of Fiscal 2020, and a reduction of other selling expenses of $9.1 million, partially offset by the reduction of gross profit of $58.8 million.

Finance Costs. Finance costs amounted to $3.3 million in the year ended January 30, 2021, a decrease of $3.5 million from the prior year. The interest expense relates to lease liabilities and has decreased from the prior year due to the store closures and variable rent on remaining stores.

Finance Income. Finance income of $0.4 million is derived mainly from interest on cash on hand and has decreased slightly from $0.8 million in the prior year.

EBITDA and Adjusted EBITDA. EBITDA was negative $45.6 million in the year ended January 30, 2021 compared to negative $7.3 million in Fiscal 2019, representing a decrease of $38.2 million over Fiscal 2019. Adjusted EBITDA for the year ended January 30, 2021, which excludes the impact of stock-based compensation expense, the impairment of property and equipment and right-of-use assets, the Restructuring plan activities, the wage subsidy received from the Canadian Government under the COVID-19 Economic Response Plan, and the loss on disposal of property and equipment amounted to $9.7 million compared to $11.4 million in the same period in the prior year. The decrease in Adjusted EBITDA, of $1.7 million, is an outcome of the decline in gross profit partially offset by the reduction in SG&A.

Recovery of Income Tax. Recovery of income tax amounted to nil compared to $1.5 million in Fiscal 2019. The prior year recovery is due to the adjustment of the provision for uncertain tax provision. Our effective tax rates were nil and 4.6% in Fiscal 2020 and 2019, respectively. The effective tax rate decreased primarily from the increase of the unrecognized deferred income tax assets and an adjustment to the provision for uncertain tax position in the current year.

Net Loss. Net loss was $55.9 million in the year ended January 30, 2021 compared to a net loss of $31.2 million in the prior year. Adjusted net loss, which excludes the impact from the impairment of property and equipment and rightof-use assets, the Restructuring plan activities, the subsidy received from the Canadian Government under the COVID19 Economic Response Plan, loss on disposal of property and equipment, and the recovery for uncertain tax position was a loss of $1.5 million compared to a loss of $14.9 million in the prior year. This $13.4 million improvement is driven by

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the same reasons mentioned above in Results from operating activities partially offset by lower recovery for uncertain tax position compared to the prior year.

Net Loss per Share. Fully diluted net loss per common share was $2.14 in Fiscal 2020 compared to $1.20 in Fiscal 2019. Adjusted fully diluted loss per common share, which is adjusted net loss on a fully-diluted weighted average shares outstanding basis, was $0.06 per share in Fiscal 2020 compared to $0.57 per share in Fiscal 2019.

Summary of quarterly results

Due to seasonality and the timing of holidays, the results of operations for any quarter are not necessarily indicative of the results of operations for the fiscal year. The table below presents selected consolidated financial data for the eight most recently completed quarters.

	F	or year ended, January 30, 20	or year ended, January 30, 20	First Quarter $ 21	F	or year ended, February 1, 2020	or year ended, February 1, 2020
	Fourth Quarter $	Third Quarter $	Second Quarter $		Fourth Quarter $	Third Quarter $	Second First Quarter Quarter $ $
Sales	40,189	26,225	23,031	32,242	73,538	39,493	39,167 44,265
Net income (loss)	(27,222)	14,467	2,609	(45,788)	(5,701)	(10,830)	(11,344) (3,320)
EBITDA	(25,918)	15,295	5,426	(40,367)	(1,097)	(4,548)	(4,829) 3,142
Adjusted EBITDA	5,384	3,834	1,365	(935)	9,971	(2,241)	361 3,269
Net income (loss) per share - fully diluted	(1.00)	0.54	0.10	(1.76)	(0.21)	(0.42)	(0.44) (0.13)
Cash	30,197	21,925	34,285	39,343	46,338	28,044	29,725 35,491
Accounts receivable	6,157	7,669	6,757	4,371	6,062	5,430	3,913 2,909
Prepaid expenses and deposits	14,470	13,400	8,476	4,928	4,542	6,906	9,890 9,164
Inventories	23,468	26,176	24,354	23,450	22,363	32,638	27,893 31,642
Trade and other payables	4,152	3,621	6,460	18,000	20,794	21,155	13,810 15,305

Liquidity and Capital Resources

As at January 30, 2021, we had $30.2 million of cash primarily held by major Canadian financial institutions. Working capital, adjusted for liabilities subject to compromise amounting to $100.6 million, was $62.7 million as at January 30, 2021, compared to $36.4 million as at February 1, 2020. In light of implementing the Restructuring Plan, the Company expects to use cash on hand to pay for professional fees and for the settlement of obligations, which is expected to be significant, upon acceptance, if any, of a plan of arrangement that will be presented to creditors.

Our primary source of liquidity is cash on hand as we have no access to any form of debt financing. Our primary cash needs are to finance working capital and capital expenditures in connection with enhancing the functions and features of our online store. Capital expenditures typically vary depending on the timing of infrastructure-related and technology investments. During Fiscal 2020, capital expenditures totaled $0.9 million. We devoted approximately 53% of our capital expenditures to make continued investments in our technology infrastructure. The remainder of the capital expenditures was used to enhance existing stores.

Our working capital requirements are for the purchase of inventory and payment of payroll and other operating costs. Our working capital requirements fluctuate during the year, rising in the second and third fiscal quarters as we take title to increasing quantities of inventory in anticipation of our peak selling season in the fourth fiscal quarter. We fund our capital expenditures and working capital requirements from a combination of cash on hand and cash provided by operating activities.

As at January 30, 2021, the Company has financial commitments in connection with the purchase of goods or services that are enforceable and legally binding on the Company, exclusive of additional amounts based on sales, taxes and other costs. Purchase obligations, net of $6.8 million of advances, amounting to $14.1 million (2019 - $11.5 million) are expected to be discharged within 12 months.

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Cash Flow

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

A summary of our cash flows table:	from operating, investing	from operating, investing
	For theyear ended
	January 30, 2021 $	February 1, 2020 $
Cash flows provided by (used in) :
Operating activities	(11,269)	33,108
Financing activities	(6,003)	(23,192)
Investing activities	1,132	(5,652)
Decrease in cash	(16,140)	4,264

Cash Flows Provided by Operating Activities

	January 30, 2021 $ For the twelve	February 1, 2020 $ months ended
OPERATING ACTIVITIES
Net loss	(55,932)	(31,197)
Items not affecting cash:
Depreciation of property and equipment	2,399	5,411
Amortization of intangible assets	2,053	1,934
Amortization of right-of-use assets	3,041	12,051
Gain on modification of lease liabilities	(75,121)	—
Liabilities subject to compromise	100,550	—
Interest on lease liabilities	3,230	6,962
Loss on disposal of property and equipment and right-of-use assets	769	100
Loss on disposal of intangible assets	790
Impairment of property and equipment and right-of-use assets	39,960	17,780
Stock-based compensation expense	820	813
Sub-total	22,559	13,854
Net change in other non-cash working capital balances related to operations	(33,828)	19,254
Cash flows from (used in) operating activities	(11,269)	33,108

Cash Flows Provided in Operating Activities. Net cash flows used in Operating activities during the year ended January 30, 2021 amounted to $11.3 million and represented a change of $44.4 million from the prior year. The change is primarily due to the impact of our Restructuring Plan, wherein a majority of our trade vendors have not extended credit terms and instead required deposits and pre-payments for both services and purchases of inventory related goods.

Cash Flows Used in Investing Activities

	January 30, 2021 $ For the twelve	February 1, 2020 $ months ended
INVESTING ACTIVITIES
Additions to property and equipment	(433)	(1,032)
Additions to intangible assets	(480)	(2,594)
Repayment (issuance) of loan from a Company controlled by an executive employee	2,045	(2,026)
Cash flows from (used in) investing activities	1,132	(5,652)

Cash Flows Used in Investing Activities . Cash flows provided by investing activities of $1.1 million during the year ended January 30, 2021 increased by $6.8 million compared to prior year. The increase is primarily due to the receipt of cash from repayment of the loan from a Company controlled by an executive employee, partially offset by capital expenditures. Capital expenditures decreased by $2.7 million to $0.9 million for the year ended January 30, 2021, from $3.6 million in the prior year. This decrease was primarily due to lower investment in both leasehold improvements as well as software enhancements.

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Cash Flows Provided by Financing Activities

	January 30, February 1, 2021 2020 $ $ For the twelve months ended	January 30, February 1, 2021 2020 $ $ For the twelve months ended
FINANCING ACTIVITIES
Proceeds from issuance of common shares pursuant to exercise of stock options	4	14
Payment of lease liabilities	(6,007)	(23,206)
Cash flows used in financing activities	(6,003)	(23,192)

Cash Flow Provided in Financing Activities. Net cash flows used in financing activities of $6.0 million during the year ended January 30, 2021 represents a reduction of $17.2 million compared to the prior year and due primarily to the non-payment of lease obligations from April 1, 2020 to July 8, 2020 and the termination of our store lease agreements.

Off-Balance Sheet Arrangements

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

Contractual Obligations and Commitments

In the normal course of business, we enter into contractual obligations that will require us to disburse cash over future periods. All commitments have been recorded in our consolidated balance sheets, except for purchase obligations. As at January 30, 2021, the Company has financial commitments in connection with the purchase of goods or services that are enforceable and legally binding on the Company, exclusive of additional amounts based on sales, taxes and other costs. Purchase obligations, net of $6.8 million of advances, amounting to $14.1 million (2019 - $11.5 million) is expected to be discharged within 12 months.

Critical Accounting Policies and Estimates

Our discussion and analysis of operating results and financial condition are based upon our financial statements. The preparation of financial statements requires us to estimate the effect of various matters that are inherently uncertain as of the date of the financial statements. Each of these required estimates varies in regard to the level of judgment involved and its potential impact on our reported financial results. Estimates are deemed critical when a different estimate could have reasonably been used or where changes in the estimates are reasonably likely to occur from period to period, and would materially impact our financial position, changes in financial position or results of operations. Our significant accounting policies are discussed under Note 3 to our consolidated financial statements included in this Annual Report.

Key sources of estimation uncertainty

Key sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities within the next financial year are as follows:

i. Liabilities subject to compromise

As a result of the termination of leases pursuant to the Restructuring Plan, included in liabilities subject to compromise is a liability related to disclaimed leases of $75.3 million, determined at the reporting date based on an analysis of the nature and carrying value of the underlying liabilities, proof of claim, as well as well as the stage of advancement of the claims identification, resolution and barring process.

Liabilities subject to compromise may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determination of secured status of certain claims, the determination as to the value of any collateral securing claims, proof of claims or other events, and is therefore subject to significant estimation uncertainty, as proceedings are in a preliminary stage. Changes to the provision in future periods may be material and will be recorded through earnings.

• ii. Recoverability and impairment of non-financial assets

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The temporary store closures as a result of COVID-19, as well as the permanent closure of a majority of our retail stores resulting from the Restructuring Plan, and the related reduction in operating income during fiscal 2020 are considered to be indicators of impairment and the Company performed an assessment of recoverability for the property and equipment and right-of-use assets associated with its retail locations.

Key judgments in applying accounting principles

i. Estimating the incremental borrowing rate of leases

The Company cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the Company would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Company ‘would have to pay’, which requires estimation when no observable rates are available or when they need to be adjusted to reflect the terms and conditions of the lease. The Company estimates the IBR using observable inputs (such as market interest rates) when available and is required to make certain entity and asset-specific estimates (such as the subsidiary’s stand-alone credit rating).

Critical judgments in applying accounting policies

We believe the following are critical judgments that management has made in the process of applying accounting policies that have the most significant effect on the amounts recognized in our consolidated financial statements:

i. Going concern uncertainty

In assessing whether the going concern assumption is appropriate and whether there are material uncertainties that raise substantial doubt about the Company’s ability to continue as a going concern, management must estimate future cash flows for a period of at least twelve months following the end of the reporting period by considering relevant available information about the future. In addition, management must make assumptions about what actions it will take to right-size the business. Given that it is difficult to adequately predict future cash flows given the inherent uncertainties concerning the formal restructuring process and the impact of the COVID-19 pandemic, management has concluded that there are material uncertainties related to events or conditions that raise substantial doubt upon the Company’s ability to continue as a going concern for at least the next twelve months.

ii. Impairment of non-financial assets

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

iii. Income taxes

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

iv. Determination of the lease term of leases with renewal options

The Company determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.

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The Company has the option, under some of its leases to lease the assets for additional terms of one to five years. The Company applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal, including store performance, expected future performance and past business practice. After the commencement date, the Company reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew (e.g., a change in business strategy).

Recently Issued Accounting Standards

On May 28, 2020, the IASB issued an amendment to IFRS 16, Leases to make it easier for lessees to account for COVID-19-related rent concessions such as rent holidays and temporary rent reductions.

The amendment exempts lessees from having to consider individual lease contracts to determine whether rent concessions occurring as a direct consequence of the COVID-19 pandemic are lease modifications and allows lessees to account for such rent concessions as if they were not lease modifications. It applies to COVID-19-related rent concessions that reduce lease payments due on or before June 30, 2020. The amendment does not affect lessors.

The amendment is effective as of June 1, 2020 but can be applied immediately in any financial statements— interim or annual—not yet authorised for issue.

In April 2021, the IASB extended the relief to cover rent concessions that reduce lease payments due on or before June 30, 2022.

JOBS Act Exemptions and Foreign Private Issuer Status

Exchange Act Exemptions and Foreign Private Issuer Status

We do not qualify as an “accelerated filer” or “large accelerated filer” as defined in the Exchange Act. Companies that are not an accelerated filer or large accelerated filer may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. This includes an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act. We may take advantage of this exemption until such time as we qualify as an accelerated filer or large accelerated filer. We will qualify (1) as an accelerated filer if we have an aggregate worldwide market value of the voting and non-voting common equity held by its non-affiliates of US$75 million or more, but less than US$700 million, as of the last business day of our most recently completed second fiscal quarter, or (2) as a large accelerated filer if we have an aggregate worldwide market value of the voting and non-voting common equity held by its non-affiliates of US$700 million or more, as of the last business day of our most recently completed second fiscal quarter. We may choose to take advantage of some but not all of these reduced burdens.

We report under the Exchange Act as a non-U.S. company with foreign private issuer status. As long as we qualify as a foreign private issuer under the Exchange Act we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including:

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

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

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

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

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

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We are exposed to foreign currency exchange risk on purchases of our teas and tea accessories.

A significant portion of our tea and tea accessory purchases are in U.S. dollars as is our revenue from U.S. stores and U.S. e-commerce customers. As a result, our statement of loss and cash flows could be adversely impacted by changes in exchange rates, primarily between the U.S. dollar and the Canadian dollar.

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