Second Cup Reports Third Quarter Results and Details of Strategic Initiatives for Growth

MISSISSAUGA, ON, Nov. 8, 2019 /CNW/ - The Second Cup Ltd. ("Second Cup" or the "Company") (TSX: SCU) today reported financial results for the third quarter ended September 28, 2019.

Highlights

• Adjusted EBITDA was $785,000 in the quarter, compared with $880,000 last year.
• Adjusted Net Loss was $62,000 or $0.0 per share compared with Adjusted Net Income of $432,000 or $0.03 per share in the prior year.
• Same store sales were -2.9% compared to flat (0.0%) in Q2 2019.

Third Quarter 2019

EBITDA, after adjusting for non-recurring items, was $785,000 in the quarter compared with $880,000 last year. Net Loss was $62,000 or $0.0 per share after adjusting for non-recurring items and the non-cash loss due to a reduction in value of the National Access Cannabis (NAC) warrants offset by the amortized income related to the NAC alliance.

Positioning Second Cup to deliver on its plan to achieve sustainable growth as well as create bench strength for future acquisitions required management changes in Q3. The restructuring necessary for the future as well as slower-than-expected same store sales negatively affected the operating results of the Quarter.

Steven Pelton, who assumed the role of President and CEO in June, said, "I am confident in the team we now have in place to drive positive change in the experience for the Second Cup Customers and Franchisees. These experiences are foundational for the future of the Second Cup business." Q3 also saw the continued focus on three key initiatives for the Company: strategic acquisitions, retail cannabis locations and growth of the Second Cup brand through non-traditional sites.

In a separate release, the Company announced a new operating structure to support the broader focus on acquiring coffee and food brands that are strategically and culturally aligned with the Second Cup business. The Company will change its name to Aegis Brands Inc. ("Aegis"), which will own and operate the existing Second Cup Coffee Co. specialty coffee business as part of a portfolio of brands. "We created Aegis with the vision of building a portfolio of amazing brands that can grow and flourish with access to the resources and expertise that we've developed over 40 years in the Canadian foodservice industry. We are committed to letting each company under the Aegis umbrella operate as an independent brand, and to working with them to provide shared expertise - and shared services - to help them thrive," said Pelton. The name change is subject to shareholder and TSX approval.  The Company expects to seek shareholder approval for the Aegis name change at its 2020 annual general meeting of shareholders.

Q1 of 2020 will see the opening of two new cannabis retail stores in Calgary, which will be owned and operated through the joint venture between National Access Cannabis and the Company (Aegis).  The Company confirmed that it will continue to evaluate the best opportunities for all real estate under lease.  "Ontario is a great opportunity for a retail cannabis partnership to flourish.  We believe location and service is key to winning when this market opens up, and we are well positioned for future success in this province," said Pelton.

Expanding the Second Cup brand's growth in non-traditional locations also continues to be a focus. Market tests in new non-traditional venues are underway while Second Cup creates new partnerships with non-traditional landlords and operators. New growth in 2020 will be heavily weighted in non-traditional locations.

About Second Cup Coffee Co.™
Founded in 1975, The Second Cup Ltd. is a Canadian specialty coffee retailer operating franchised and company-owned cafes across Canada. 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-IFRS 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 and 39 weeks ended September 28, 2019 and September 29, 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 replaces 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.

Second Quarter

System sales of cafés
System sales of cafés for the 13 weeks ended September 28, 2019 were $32,936 compared to $35,704 for the 13 weeks ended September 29, 2018 representing a decrease of $2,768 or 7.8%.  The decrease in system wide sales is primarily due to the reduction in café count and a decline in same café sales.

Same café sales
During the Quarter, there was a 2.9% decline in same café sales, compared to an increase of 0.3% in the same Quarter of 2018.  The number of transactions decreased by 6.2% offset by a 3.3% increase in the average ticket.

Analysis of revenue
Total revenue for the Quarter was $6,652 (2018 - $6,609), an increase of $43, 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 $2,794 (2018 - $2,186), an increase of $608.  The increase in revenue is primarily due to the increased Company-owned café count to 30 this Quarter from 24 last year.

Franchise revenue was $3,858 for the Quarter (2018 - $4,423), a decrease of $565.  The decrease in franchise revenue in the Quarter is primarily due to lower franchise café count – 216 this Quarter compared with 246 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 $7,378 (2018 - $6,089), an increase of $1,289.

Company-owned cafés and product related expenses for the Quarter were $2,715 (2018 - $2,541), an increase of $174. The increase in costs is due to the increase in store count of Company-owned cafés, offset by a decrease in rent expense as a result of a change in accounting for leases IFRS 16. 

Franchise related expenses for the Quarter were $2,013 in the Quarter (2018 – 2,087), a decrease of $74.  The decrease in franchise related expenses in the Quarter is mainly due to lower advertising fund expenses and lower bad debts.

General and administrative expenses were $1,757 for the Quarter (2018 - $1,123), an increase of $634, mainly due to management transition costs and professional fees, offset by a decrease in rent expense as a result of a change in accounting for leases IFRS 16.

Depreciation and amortization expense was $905 (2018 - $338), an increase of $567.  Total amortization of right-of-use assets was $581 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 $179 (2018 - $858), a decrease of $679, mainly as a result of higher loss attributed to Company-owned cafés, lower franchise revenue, and management transition costs, offset by a change in the accounting for operating leases in accordance with IFRS 16.  Adjusted for non-recurring costs, EBITDA was $785 (2018 - $880).

Other income and expenses
Other expenses for the Quarter was $349 (2018 - $456 income), composed of a decrease in the fair value of NAC warrants of $785 offset by 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 September 28, 2019, the fair value of the warrants was $0.246 versus $0.403 at the end of the prior quarter, resulting in a decrease of $785 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 $36 compared to interest and financing income of $61 in the same Quarter of 2018.  Interest income from investments was $60 for the Quarter and the Company also recognized interest expense for real estate leases of $24.  The Company became debt-free in the third quarter of 2017.

Net income/loss
The Company's net loss for the Quarter was $762 or $0.04 per share, compared to a net income of $766 or $0.04 per share in 2018.  Adjusted net loss was $62 or $nil per share, compared to a net income of $432 or $0.03 per share in 2018.

Year to date

System sales of cafés
System sales of cafés for the 39 weeks ended September 28, 2019 were $101,625 (September 29, 2018 - $107,837), a decrease of $6,212 or 5.8%.  The decrease is primarily due to the reduction in café count.

Same café sales
Year to date same café sales declined by 1.3% compared to a decline of 0.9% in 2018.  The decline this Year is primarily due to reduced transactions.

Analysis of revenue
Year to date total revenue was $19,433 (September 29, 2018 - $18,538), an increase of $895, consisting of Company-owned café and product sales, royalty revenue, Co-op Fund contributions, franchise fees and other revenue. 

Year to date Company-owned cafés and product sales were $8,002 (September 29, 2018 - $5,444), an increase of $2,558. The increase is primarily due to a higher number of Company-owned café this Year compared to 2018.

Year to date franchise revenue was $11,431 (September 29, 2018 - $13,094), a decrease of $1,663.  The decrease in franchise revenue is primarily due to lower franchise café count.

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.  Year to date total operating costs and expenses were $21,289 (2018 - $17,980), an increase of $3,309.

Year to date Company-owned cafés and product related expenses were $7,820 (2018 - $6,102), an increase of $1,718. The increase was related to increase in corporate-owned cafes during the period compared to the prior year, offset by a decrease in rent expense as a result of a change in accounting for leases IFRS 16.

Year to date franchise related expenses were $5,942 (2018 - $6,940), a decrease of $998. The decrease in franchise related expenses is mainly due to a reduction in remuneration, lower advertising fund expenses and lower bad debts.

Year to date general and administrative expenses were $4,916 (2018 - $3,924), an increase of $992.  This increase in expenses is primarily due to management transition costs offset by a decrease in rent expense as a result of a change in accounting for leases IFRS 16.

Depreciation and amortization expense was $2,599 (2018 - $1,011), an increase of $1,588. Total amortization of right-of-use assets was $1,674 in the year to date period under IFRS 16.  Prior to the adoption, payments made under real estate leases for base rent were charged to rent expense.

EBITDA
Year to date EBITDA was $746 (2018 - $1,569), a decrease of $823.  The decrease is primarily a result of higher Company-owned café operating loss, lower franchise revenue, and management transition costs, offset by lower bad debts and a change in the accounting for operating leases in accordance with IFRS 16.  Adjusted for non-recurring costs, EBITDA was $1,751 (2018 - $1,633).

Other income and expenses
Year to date other income was $818 (2018 - $989), composed of recognized income from the NAC strategic alliance of $1,308, offset by a decrease in the fair value of NAC warrants of $490.

As of September 28, 2019, the fair value of the warrants was $0.246 each versus $0.344 at the end of 2018, resulting in a decrease in the fair value of the NAC warrants of $490 for the Year.  The change in fair value of the NAC warrants will fluctuate in accordance with the trading price of the NAC common shares.

Interest and financing costs
Interest income for the year to date period was $177 compared to $102 in the same period in 2018.  Interest income from investments was $219 (2018 - $102) and interest expense related to leases was $42 (2018 – nil).  The Company became debt free in the third quarter of 2017.

Net income/loss
The Company's net loss to date was $629 or $0.03 per share, compared to net income of $1,205 or $0.06 per share in 2018.  Adjusted net loss was $492 or $0.02 per share, compared to a net income of $480 or $0.03 per share in 2018.

DEFINITIONS AND DISCUSSION ON CERTAIN NON-IFRS FINANCIAL MEASURES

In this MD&A, the Company reports certain non-IFRS 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-IFRS 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 statements

This press release may contain forward-looking information that represents internal expectations, estimates or beliefs concerning, among other things, future activities or future operating results and various components thereof. The use of any of the words "anticipate", "continue", "expect", "may", "will", "project", "should", "believe", and similar expressions suggesting future outcomes or events are intended to identify forward-looking information. Forward-looking statements include the Company's expectations with respect to the implementation of the Company's proposed new operating structure, the change of the Company's name, the pursuit of future acquisitions and the sectors of focus being foodservice, coffee and cannabis. Statements regarding such forward-looking information reflect management's current beliefs and are based on information currently available to management.

These statements are not guarantees of future performance and are based on management's estimates and assumptions that are subject to inherent risks and uncertainties, which could cause Second Cup's actual performance and financial results in future periods to differ materially from the forward-looking information contained in this press release, including the factors discussed under the heading "Risk Factors" in the Company's annual information form available at www.sedar.com.  These assumptions include: the ability to receive required shareholder and stock exchange approvals and that the Company will be able to identify, complete and integrate appropriate acquisition. Risks and uncertainties include: ability to achieve anticipated benefits of the corporate reorganization; receipt of shareholder and stock exchange approvals; risks relating to identification and completion of acquisitions; risks relating to the new holding company structure following the reorganization, including the integration of the proposed acquisitions. Although the forward-looking information contained in this press release is based upon what management believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements. Readers, therefore, should not place undue reliance on any such forward-looking statements.

All forward-looking information in this press release is qualified by these cautionary statements. Forward-looking information in this press release is presented only as of the date made. Except as required by law, Second Cup disclaims any intention or obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances.

SOURCE The Second Cup Ltd.