DAVIDsTEA Inc.

Good afternoon, ladies and gentlemen. Welcome to David T's conference call for the second quarter of fiscal year 2020. Today's call is being recorded and all lines are in listen-only mode. Before we get started, I would like to remind you of the company's Safe Harbor language. This presentation includes forward-looking statements about our expectations for the performance of our business in the coming year and quarter. Each forward-looking statement contained in this presentation is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Additional information regarding these factors appears under the heading Risk Factors in our Form 10-Q, which was filed with the Securities and Exchange Commission today and is available at www.sec.gov. and on David T's website. The forward-looking statements in this discussion speak only as of today's date, and we undertake no obligation to update or revise any of these statements. A reconciliation of non-IFRS measures to the most directly comparable IFRS financials is detailed in our Form 10-Q, which was filed with the Security and Exchange Commission earlier today. As a reminder, All dollar amounts referred to are in Canadian dollars, unless otherwise indicated. Now, I would like to turn the call over to Mr. Herschel Siegel, founder, executive chairman, and interim CEO of David's Tea.

Thank you, operator. Good afternoon, everyone, and thank you all for joining us as we review our second quarter results and provide an update on the business. With me is Frank Zetella, David's key COO and CFO. We are pleased with our second quarter results, which clearly reflect our transition to a digital-first strategy and the accelerated implementation of our business plan in the context of COVID-19. In early July, we moved forward with a restructuring under the Companies Creditors Arrangements Act to release David's Tea from the heavy burden of brick-and-mortar leases and of unprofitable stores. Circumstances were such that we needed to execute our business plan to turn the company around in a matter of months rather than years. While this was a very difficult decision to take and one that has brought its fair share of challenges, our team has truly risen to the occasion. The progress we have made since the onset of the pandemic is a major accomplishment we can all be proud of. The decision to file for creditor protection had an adverse impact on many of our employees, partners, and suppliers. We regret the impact this has had on our passionate store employees, and we also thank our business partners for their support as we move forward with our restructuring. Because there is no doubt, this was the best path forward for David's Tea to ensure the long-term sustainability of our great brand. As it stands today, we have permanently closed all unprofitable stores and have maintained a footprint of 18 of our best performing stores in Canada. We also significantly reduce our general and administrative expenses to reflect a leaner operation as we focus on e-commerce and wholesale channels. Our customers and stakeholders now have a clearer picture of what David's Tea will look like going forward. In just a few months, we have moved decisively to create a leaner, more efficient company better positioned for long-term growth. We are thankful that our lawyer customers evolved with us as we move forward with our digital first strategy, remaining loyal to the David's Tea brand. We are absolutely committed to ensuring that North American consumers can continue to enjoy the best and most innovative tea blends on the market. I will now turn the call over to Frank.

Thanks, Herschel, and good afternoon, everyone. First, the proceedings under the CCAA restructuring process are progressing as planned. And last Thursday, the Quebec Superior Court extended the stay of proceedings that are currently in effect until December 15, 2020. Looking now at our Q2 results, With all stores closed during the second quarter, sales decreased 41.2% to 23 million compared to 39.2 million in the prior year quarter. For the same period, e-commerce and wholesale channels recorded impressive growth of approximately 190%. The success in the migration of sales to our online and wholesale channels is underlined by the fact that these channels represented only 20.2% of total sales last year. For the quarter, gross profit was 8.3 million, down 61.8% from the prior year, primarily due to a decline in sales. As a percentage of sales, gross profit declined to 36.2% for the quarter, from 55.7% last year. As we pivot to a digital first strategy, the cost of delivery and distribution that is included in arriving at gross profit will compare favorably to prior periods, that were predominantly focused on retail sales distribution. We expect that, going forward, the increased delivery and distribution expenses related to online sales impacting gross profit will be more than offset by the decrease in selling expenses related to operating stores that are accounted for in SG&A. The net impact will be favorable and provides a clear path to future profitability. SG&A decreased by 24.2 million, or 76.5%, to 7.4 million, while adjusted SG&A decreased by 18 million. The decrease is explained by the closure of all stores during the period and the corresponding impact on wages, salaries, and employee benefits amounting to 11.5 million, as well as a $3.6 million reduction in amortization expense due to the lower right-of-use asset value. As a percentage of sales, adjusted SG&A decreased to 37.2% from 67.8% due to lower selling expenses related to store closures. Second quarter EBITDA was $5.4 million compared to a negative $4.8 million last year. Adjusted EBITDA, which excludes the impact of stock-based compensation expense, restructuring costs, and the Canadian government wage subsidy, amounted to $1.4 million compared to $400,000 last year. We are very pleased by the year-over-year improvement, which reflects a lower G&A infrastructure to support the ongoing and future business. As of August 1, 2020, we had a cash position of $34.3 million. At this stage, we're confident we have the financial position and the flexibility to execute our business plan and sustain a return to profitability once the CCAA process is completed. Overall, we're extremely pleased to see consumers continuing to buy our teas, predominantly online, and in over 2,500 supermarkets and drugstores, including a network of 18 stores across Canada, which we reopened subsequent to quarter end on August 21st. As we continue to pivot to a digital-first strategy, our focus is on promoting customer migration from retail stores to online and wholesale channels, and to focus on generating organic growth. Several key initiatives have been implemented, and others are underway in support of the strategy. We continue to enhance the customer experience via davidstea.com, including the ability to virtually connect consumers with our tea guides. providing a human and personalized interaction. This is in addition to the capabilities of Davie, our virtual assistant that helps customers shop, discover new collections, and stay abreast of the latest tea accessories and much more. From a product development and go-to-market standpoint, we continue to enhance our ability to quickly launch new tea blends in response to emerging consumer trends and invest in our online store to improve the user experience. From a market perspective, the demand for teas continues to grow at a healthy pace. And we remain extremely well positioned for consumers looking for high quality, distinctive, and innovative tea blends and accessories. These factors have been pillars and a hallmark of the David's Tea brand. And we are finding new ways to leverage these strengths in our digital first strategy with selective investments. In closing, We've made substantial progress in our plan to stabilize our business from unfavorable trend lines by playing to our core strengths and strengthening of our business by focusing on how to grow our product portfolio. This includes repositioning sales to a virtual experience supported by best-in-class customer service execution. Our restructuring has been focused on optimizing our real estate footprint that complements a growing world-class online and emerging grocery business. all supported by a right-sized support organization. This has been achieved thanks to the focus and dedication of our amazing team. The transformation of David's Tea is underway and we're all truly excited about the future. We'll continue to update our stakeholders as we pursue this course and provide consumers with the most compelling, high-quality tea offering on the market. This concludes our remarks and we thank you all for joining us today.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.