The Second Cup Ltd. Reports First Quarter Results

MISSISSAUGA, ON, May 10, 2019 /CNW/ - The Second Cup Ltd. (TSX: SCU) today reported financial results for the first quarter ended March 30, 2019.

Highlights

• Net Income in the quarter was $750,000 or $0.04 per share, compared with a loss of $138,000 or $0.01 per share in Q1 of 2018.
• EBITDA of $349,000 compared to $174,000 in Q1 2018.
• Q1 same store sales of -0.9% compared to -2.0% for Q4 2018.

First Quarter 2019

Net Income in Q1 was $750,000 compared to a loss of $138,000 in the same quarter last year.  Excluding income related to the National Access Cannabis (NAC) strategic alliance and change in value of the NAC warrants, adjusted Net Loss of $295,000 compares with the prior year loss of $138,000 while the net loss per share was $0.01 in both years.

During the quarter, the Company cancelled 60,335 shares, which had been purchased at an average price of $1.91 per share. The strategic review initiated late in 2018 to examine alternatives to enhance shareholder value is ongoing. 

Garry Macdonald, Second Cup President & CEO said, "Our focus in 2019 is on building café sales and enhancing our customer experience. In the first quarter we completed a brand strategy review and we are now in the process of implementing the new concept into test cafés which are expected to launch in the coming months.  At the same time, we continue to introduce new innovative products including our Iced T-Fusions and the continued roll out of the Pinkberry premium frozen yogurt."

New Developments 

The company plans to open three new cafés in the second quarter, located in Kanata, Belleville and Saskatoon.

The Second Cup Coffee Co. Rewards program which represents 25% of sales continues to be a key strategy for growth. Development is currently underway for the addition of Mobile Order and Pay Ahead.

About Second Cup Coffee Co.™

Founded in 1975, The Second Cup Ltd. is a Canadian specialty coffee retailer operating franchised and company-owned cafés across Canada. The company's vision is to be the Canadian specialty coffee brand of choice across Canada, committed to superior quality, innovation and profitable growth. For more information, please visit www.secondcup.com or find the company on Facebook and Twitter.

FINANCIAL HIGHLIGHTS

The following table sets out selected IFRS and certain non-GAAP financial measures of the Company and should be read in conjunction with the Unaudited Condensed Interim Financial Statements of the Company for the 13 weeks ended March 30, 2019 and March 31, 2018.

ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

In January 2016, the International Accounting Standards Board ("IASB") issued IFRS 16 Leases ("IFRS 16").  IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, the customer ("lessee") and the supplier ("lessor"). This will replace IAS 17, Leases, and related interpretations.  IFRS 16 provides revised guidance on identifying a lease and for separating lease and non-lease components of a contract.  IFRS 16 introduces a single accounting model for all leases and requires a lessee to recognize (i) right-of-use assets and lease liabilities for leases with terms of more than 12 months, unless the underlying asset is of low value; and (ii) depreciation of lease assets separately from interest on lease liabilities on the consolidated statements of operations and comprehensive income (loss).

Under IFRS 16, lessor accounting for operating and finance leases will remain substantially unchanged. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with earlier application permitted for entities that apply IFRS 15. The guidance allows for either a full retrospective or modified retrospective transition method. The Company has selected to apply the modified retrospective transition method. Further, the Company has selected to apply the practical expedients to (i) grandfather the assessment of which transactions are leases; (ii) recognition exemption of short-term leases; and (iii) recognition exemption leases of low-value items.

From December 30, 2018, leases are recognized as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Company. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. Assets and liabilities arising from a lease are initially measured on a present value basis.

The financial statements reflect the application of IFRS 16 beginning in 2019, while the financial statements for prior periods were prepared under the guidance of the previous standard.

First Quarter

System sales of cafés
System sales of cafés for the 13 weeks ended March 30, 2019 were $34,312 compared to $35,920 for the 13 weeks ended March 31, 2018 representing a decrease of $1,608 or -4.5%.  The decrease in system sales of cafés is primarily due to the reduction in café count.

Same café sales
During the Quarter, same café sales decreased by 0.9%, compared to a decline of 2.2% in the same Quarter of 2018.  The decline in same café sales is primarily due to reduced transactions.

Analysis of revenue
Total revenue for the Quarter was $6,239 (2018 - $5,576), an increase of $663, consisting of Company-owned café and product sales, royalty revenue, advertising fund contributions, fees and other revenue.

Company-owned cafés and product sales for the Quarter were $2,462 (2018 - $1,291), an increase of $1,171.  The increase in revenue is primarily due to the increased Company-owned café count from 15 last year to 29 this Quarter.

Franchise revenue was $3,777 for the Quarter (2018 - $4,285), a decrease of $508.  The decrease in franchise revenue in the Quarter is primarily due to lower franchise café count – 227 this Quarter compared with 264 last year.

Operating costs and expenses
Operating costs and expenses include the costs of Company-owned cafés and product sales, franchise-related expenses, general and administrative expenses, loss on disposal of assets, and depreciation and amortization.

Total operating costs and expenses for the Quarter were $6,728 (2018 - $5,751), an increase of $977.

Company-owned cafés and product related expenses for the Quarter were $2,505 (2018 - $1,486), an increase of $1,019. The increase in costs is due to the increase in store count of Company-owned cafés. 

Franchise related expenses for the Quarter were $2,016 in the Quarter (2018 - $2,469), a decrease of $453.  The decrease in franchise related expenses in the Quarter is mainly due to a reduction in remuneration, lower advertising fund expenses and lower bad debts.

General and administrative expenses were $1,368 for the Quarter (2018 - $1,447), a decrease of $79, mainly as a result of a change in accounting for leases IFRS 16.

Depreciation and amortization expense was $838 (2018 - $349), an increase of $491.  Total amortization of right-of-use assets was $545 in the Quarter under IFRS 16.  Prior to the adoption, payments made under real estate leases for base rent were charged to rent expense.

EBITDA
EBITDA for the Quarter was $350 (2018 - $174), an increase of $165, mainly as a result of a change in the accounting for leases offset by a higher loss attributed to Company-owned cafés.

Other income
Other income for the Quarter was $1,426, composed of an increase in the fair value of NAC warrants of $990 and recognized income from the NAC strategic alliance of $436.

In entering into the strategic alliance with NAC, the Company received five million warrants that will expire after five years from the date of issuance.  The Black-Scholes fair value of the warrants received ($2,655) was recorded in deferred income and is being recognized as other income over the life of the agreement which is 18 months.

As of March 30, 2019, the fair value of the warrants was $0.542 versus $0.344 at the end of 2018, resulting in an increase of $990 to the fair value of the NAC warrants.  The fair value of the NAC warrants will fluctuate in accordance with the trading price of the NAC common shares.

Interest and financing income
Net interest and financing income for the Quarter was $84 compared to interest and financing income of $5 in the same Quarter of 2018.  The Company became debt-free in the third quarter of 2017.

Net income (loss)
The Company's net income for the Quarter was $750 or $0.04 per share, compared to a net loss of $138 or $0.01 per share in 2018.

DEFINITIONS AND DISCUSSION ON CERTAIN NON-GAAP FINANCIAL MEASURES

In this MD&A, the Company reports certain non-GAAP financial measures such as system sales of cafés, same café sales, operating income (loss), EBITDA, adjusted EBITDA, adjusted net income (loss) and adjusted net income (loss) per share.  Non-GAAP measures are not defined under IFRS and are not necessarily comparable to similarly titled measures reported by other issuers.

System sales of cafés
System sales of cafés comprise the net revenue reported to Second Cup by franchisees of Second Cup cafés and by Company-owned cafés. This measure is useful in assessing the operating performance of the entire Company network, such as capturing the net change of the overall café network.

Changes in system sales of cafés result from the number of cafés and same café sales (as described below). The primary factors influencing the number of cafés within the network include the availability of quality locations and the availability of qualified franchisees.

Same café sales
Same café sales represent the percentage change, on average, in sales at cafés operating system-wide that have been open for more than 12 months.  It is one of the key metrics the Company uses to assess its performance as an indicator of appeal to customers.  Two principal factors that affect same café sales are changes in customer count and changes in average transaction size.

Operating income (loss)
Operating income (loss) represents revenue, less cost of goods sold, less operating expenses, and less impairment charges. This measure is not defined under IFRS, although the measure is derived from input figures in accordance with IFRS.  Management views this as an indicator of financial performance that excludes costs pertaining to interest and financing, and income taxes.

EBITDA and adjusted EBITDA
EBITDA represents earnings before interest and financing, income taxes, and depreciation and amortization.  Adjustments to EBITDA are for items that are not necessarily reflective of the Company's underlying operating performance.  As there is no generally accepted method of calculating EBITDA, this measure is not necessarily comparable to similarly titled measures reported by other issuers. EBITDA is presented as management believes it is a useful indicator of the Company's ability to meet debt service and capital expenditure requirements, and evaluate liquidity.  Management interprets trends in EBITDA as an indicator of relative financial performance.  EBITDA should not be considered by an investor as an alternative to net income or cash flows as determined in accordance with IFRS.

Adjusted net income (loss) and adjusted net income (loss) per share
Adjustments to net earnings (loss) and net earnings (loss) per share are for items that are not necessarily reflective of the Company's underlying operating performance. These measures are not defined under IFRS, although the measures are derived from input figures in accordance with IFRS.  Management views these as indicators of financial performance.

Reconciliations of net income (loss) to operating income (loss) and EBITDA, adjusted net income (loss) and adjusted net income (loss) per share are provided below:

Forward-looking information

This news release may contain forward-looking statements (within the meaning of applicable securities laws) relating to the business of the Company and the environment in which it operates. Forward-looking statements are identified by words such as "believe", "anticipate", "expect," "intend", "plan", "will", "may" and other similar expressions. These statements are based on the Company's expectations, estimates, forecasts and projections. The forward-looking statements in this news release are based on certain assumptions, including that the Company will be able to execute its plan, including store growth in traditional and non-traditional channels. They are not guarantees of future performance and involve risks and uncertainties that are difficult to control or predict. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to, the factors discussed under the heading "Risk Factors" in the Company's annual information form available at www.sedar.com. There can be no assurance that forward-looking statements will prove to be accurate as actual outcomes and results may differ materially from those expressed in these forward-looking statements. Readers, therefore, should not place undue reliance on any such forward-looking statements. Further, a forward-looking statement speaks only as of the date on which such statement is made. The Company undertakes no obligation to publicly update any such statement or to reflect new information or the occurrence of future events or circumstances.

SOURCE The Second Cup Ltd.