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Second Cup Ltd (The)
Symbol C : SCU
Shares Issued 19,940,073
Close 2019-03-04 C$ 1.95
Recent Sedar Documents

Second Cup earns $1.15-million in 2018

2019-03-04 07:58 ET - News Release

Mr. Garry Macdonald reports

SECOND CUP REPORTS HIGHEST FULL YEAR PROFIT IN FOUR YEARS

The Second Cup Ltd. has released its financial results for the fourth quarter ended Dec. 29, 2018.

Highlights:

  • Two thousand eighteen adjusted net income grew to $1,074,000 or six cents per share compared with $110,000 or one cent per share in 2017.
  • Fiscal year adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $2.93-million compared with $2,721,000 one year ago.
  • Fourth quarter adjusted net income was $594,000 or three cents per share compared with $655,000 or four cents per share in the prior year.
  • Fourth quarter adjusted EBITDA was $1,297,000 compared with $1,339,000 last year.
  • Normal course issuer bid initiated in the fourth quarter.

Fourth quarter 2018

Same-store sales declined 2.0 per cent in the fourth quarter and 1.2 per cent for the full year. Adjusted EBITDA and adjusted net income in the quarter were down slightly versus year ago mainly due to a reduction in cafe count. Full-year results compared favourably with the prior year -- adjusted EBITDA for the full year improved by $209,000 while adjusted net income improved by $964,000 or five cents per share.

The company commenced a normal course issuer bid beginning Dec. 20, 2018. Earlier in the year, following the strengthening of the balance sheet, Second Cup initiated a strategic review to examine alternatives to create shareholder value. This review is continuing.

Garry Macdonald, Second Cup president and chief executive officer, said: "We introduced a number of initiatives throughout 2018 that have demonstrated strong potential to build sales this year including Pinkberry frozen yogurt, now in over 35 per cent of our cafes, and delivery services like UberEats and Skip The Dishes. Additionally, 40 per cent of our cafes have been upgraded over the last four years and Second Cup expansion continues in traditional and non-traditional formats. We continue to deliver improvement in profitability and our focus remains on growing cafe sales as well as enhancing our customer experience."

The Second Cup rewards program continues to grow, representing one-quarter of cafes sales at year-end. Further program enhancements are planned for 2019.

New developments

Reinventing the Second Cup brand is a continuing initiative. While progress has been made in elevating the brand, the company is actively engaged in a brand strategy review to identify and test new innovations to aggressively grow cafe sales and improve the cafe economic model which remain top priorities.

About The Second Cup Ltd.

Founded in 1975, The Second Cup is a Canadian specialty coffee retailer operating franchised and company-owned cafes 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.

Financial highlights

The associated table sets out selected IFRS (international financial reporting standards) and certain non-GAAP (generally accepted accounting principles) financial measures of the company and should be read in conjunction with the audited consolidated financial statements of the company for the 52 weeks ended Dec. 29, 2018.

                                      FINANCIAL HIGHLIGHTS
     (in thousands of dollars, except same-cafe sales, number of cafes, per-share amounts) 
  
                                                           13 weeks ended                  52 weeks ended
                                            Dec. 29, 2018   Dec. 30, 2017   Dec. 29, 2018   Dec. 30, 2017

System sales of cafes                             $38,860         $41,326        $146,697        $154,153
Same-cafe sales (decrease)                          (2.0%)          (1.1%)          (1.2%)          (0.2%)
Number of cafes -- end of period                      262             286             262             286
Total revenue                                      $7,176          $6,085         $25,714         $23,636
Operating costs and expenses                       $6,362          $5,092         $24,342         $22,660
Operating income                                     $814            $993          $1,372            $976
EBITDA                                             $1,138          $1,339          $2,707          $2,434
Adjusted EBITDA                                    $1,297          $1,339          $2,930          $2,721
Net income (loss) and
comprehensive income (loss)                          ($55)           $655          $1,151         ($3,097)
Adjusted net income (loss) and
comprehensive income (loss)                          $594            $655          $1,074            $110
Basic and diluted earnings
(loss) per share as reported                        $0.00           $0.04           $0.06          ($0.21)
Adjusted basic and diluted
earnings (loss) per share as reported               $0.03           $0.04           $0.06           $0.01
Total assets -- end of period                     $56,001         $44,700         $56,001         $44,700

Currency figures are in thousands, except where indicated.

Fourth quarter

System sales of cafes

System sales of cafes for the 13 weeks ended Dec. 29, 2018, were $38,860 compared with $41,326 for the 13 weeks ended Dec. 30, 2017, representing a decrease of $2,466 or 6.0 per cent. The decrease in system sales of cafes is primarily due to the reduction in cafe count and lower transactions.

Same-cafe sales

During the quarter, same-cafe sales declined 2.0 per cent, compared with a decline of 1.1 per cent in the comparable quarter of 2017. The decline is primarily due to a reduction in transactions.

Analysis of revenue

Total revenue for the quarter was $7,176 (2017 -- $6,085), an increase of $1,091, consisting of company-owned cafe and product sales, royalty revenue, co-op fund contributions, fees, and other revenue. The transition to IFRS 15 on a modified retrospective basis in 2018 requires the presentation of the co-op fund contributions and related expenses on a gross basis. As a result, revenue for the quarter includes co-op fund contributions of $855.

Company-owned cafes and product sales for the quarter were $2,441 (2017 -- $1,713), an increase of $728. The number of company-owned cafes increased in the quarter to 25 (2017 -- 12), part of the company's short-term effort to improve the operation and customer experience by taking back certain underperforming cafes. The company maintains its continuing objective of reducing the number of company-owned cafes, consistent with the company's strategy of returning to an asset-light business model.

Franchise revenue was $4,735 for the quarter (2017 -- $4,372), an increase of $363. The increase is due to the consolidation of co-op fund contributions of $855, offset by lower royalties and co-ordination fees as a result of a lower number of franchise cafes.

Operating costs and expenses

Operating costs and expenses include the costs of company-owned cafes and product sales, franchise-related expenses, general and administrative expenses, loss/gain on disposal of assets, and depreciation and amortization. Total operating costs and expenses for the quarter were $6,362 (2017 -- $5,092), an increase of $1,269, including co-op fund expenses of $849.

Company-owned cafes and product-sales-related expenses for the quarter were $2,852 (2017 -- $1,772), an increase of $1,080. The increase in costs is due to the increase in company-owned cafes compared with prior year.

Franchise-related expenses for the quarter were $2,021 (2017 -- $1,670), an increase of $351. The increase in franchise-related expenses is primarily due to the consolidation of co-op fund expenses of $849, offset by lower remuneration.

General and administrative expenses were $1,140 for the quarter (2017 -- $1,206), a decrease of $66. This decrease in expenses is primarily due to a reduction in remunerations and directors' fees expenses.

A loss on disposal of $25 was recognized in the quarter (2017 -- loss of $98). Gain and loss on disposal of assets are related to the franchising of company-owned cafes to franchise partners.

Depreciation and amortization expense was $324 (2017 -- $346), a decrease of $22.

EBITDA

EBITDA for the quarter was $1,138 (2017 -- $1,339), a decrease of $201. The savings in franchise and corporate expenses offset the lower franchise revenue and higher operating losses attributed to company-owned cafes. Adjusted for non-recurring transaction costs, EBITDA for the quarter was $1,297.

Other expenses

Other expenses for the quarter were $885, comprising a change in fair value of NAC warrants of $1,105 and asset impairment charges of $216, offsetting 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 Dec. 29, 2018, the fair value of the warrants was 34.4 cents versus 56.5 cents at the end of the third quarter, resulting in a decrease to the fair value of the NAC warrants of $1,105. The change in fair value of the NAC warrants will fluctuate in accordance with the trading price of the NAC common shares.

The company incurred impairment charges of $216 (2017 -- nil) related to an impairment of property and equipment of some company-owned cafes.

Interest and financing income

Interest income for the quarter was $63 compared with interest income of $5 in the same quarter of 2017.

Net income (loss)

The company's net loss for the quarter was $55 or nil per share, compared with a net income of $655 or four cents per share in 2017. Adjusted for extraordinary items, net income for the quarter was $594 or three cents per share.

The consolidated financial statements for 2018 reflect the consolidation of the co-op fund under IFRS 15 whereas the condensed interim financial statements for the previous three quarters were prepared under the guidance of the previous standard.

Reconciliations of net income (loss) to EBITDA, adjusted EBITDA, adjusted net income (loss) and adjusted net income (loss) per share are provided on the company's website.

Year

System sales of cafes

System sales of cafes for the year were $146,697 (2017 -- $154,153), a decrease of $7,456 or 4.8 per cent. The decrease is primarily due to the reduction in cafe count.

Same-cafe sales

For the year, same-cafe sales declined by 1.2 per cent compared with a decline of 0.2 per cent in 2017. The decline is primarily due to reduced transactions.

Analysis of revenue

Total revenue for the year was $25,714 (2017 -- $23,636), an increase of $2,078, consisting of company-owned cafe and product sales, royalty revenue, co-op fund contributions, franchise fees, and other revenue. The transition to IFRS 15 on a modified retrospective basis in 2018 requires the presentation of the co-op fund contributions and related expenses on a gross basis. As a result, revenue for the year includes co-op fund contributions of $3,031.

Company-owned cafes and product sales were $7,885 (2017 -- $8,562), a decrease of $677. While the company maintains its continuing objective of reducing the number of company-owned cafes, consistent with the company's strategy of returning to an asset-light business model, the company took back a number of low-performing franchise cafes during the year as part of its effort to improve cafe operation and customer experience.

Franchise revenue was $17,829 for the year (2017 -- $15,074), an increase of $2,755. The increase is primarily due to the consolidation of co-op fund contributions of $3,031, offset by lower royalties and co-ordination fees as a result of a lower number of franchise cafes. There was also a net positive impact of $118 due to the application of the new revenue recognition standard IFRS 15.

Operating costs and expenses

Operating costs and expenses include the costs of company-owned cafes 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 year were $24,342 (2017 -- $22,660), an increase of $1,682.

Company-owned cafes and product-related expenses were $8,954 for the year (2017 -- $9,303), a decrease of $349. The decrease in costs is attributable to lower sales as compared with 2017.

Franchise-related expenses were $8,961 for the year (2017 -- $5,693), an increase of $3,268. This increase in expenses is primarily driven by the inclusion of co-op fund expenses of $3,022, an increase in provisions for bad debts of $653 offset by savings in remuneration and other operating expenses.

General and administrative expenses were $5,064 for the year (2017 -- $6,009), a decrease of $945. This decrease in expenses is primarily due to the one-time transition costs in 2017 and reductions in remuneration, director fees and IT-related expenses.

A loss on disposal of assets of $28 was recognized for the year (2017 -- $197 loss). Gain and loss on disposal of assets are primarily related to the franchising of company-owned cafes to franchise partners.

Depreciation and amortization expense was $1,335 (2016 -- $1,458), a decrease of $123.

EBITDA

EBITDA was $2,707 for the year (2017 -- $2,434), an increase of $273. The increase is primarily driven by corporate expense savings offset by higher company-owned cafe operating loss and bad debts. Adjusted for non-recurring transaction costs, EBITDA for the year was $2,950 compared with $2,721 last year.

Other income and expenses

Other income for the year was $105 (2017 -- nil), comprising recognized income from the NAC strategic alliance of $1,256 offset by a change in fair value of NAC warrants of $935 and asset impairment charges of $216.

As of Dec. 29, 2018, the fair value of the warrants was 34.4 cents each versus 53.1 cents each at issuance on April 12, 2018, resulting in a decrease to the fair value of the NAC warrants of $935 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.

The company incurred impairment charges of $216 (2017 -- nil) related to an impairment of property and equipment of some company-owned cafes.

Interest and financing costs

Interest income was $165 for the year compared with interest and financing costs of $3,897 in 2017. In the third quarter of 2017, one-time, non-cash financing charges of $3,290 were recognized. These charges consist of the difference between the share price of $2.60 on the issuance date and the agreed-to share price of $1.90, and the write-off of the unamortized portion of deferred transaction costs related to the debt.

Net income (loss)

The company's net income for the year was $1,151 or six cents per share, compared with a net loss of $3,097 or 21 cents per share in 2017. Adjusted for extraordinary items, net income for the year was $1,074 or six cents per share compared with a net income of $110 or one cent per share in 2017.

The consolidated financial statements for 2018 reflect the consolidation of the co-op fund under IFRS 15 whereas the condensed interim financial statements for the previous three quarters were prepared under the guidance of the previous standard.

Adoption of new accounting pronouncements

In May, 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, a new comprehensive model for entities to use accounting for revenue arising from contracts with customers. On Dec. 31, 2017, the company applied IFRS 15 using the modified retrospective transition method. The consolidated financial statements for fiscal year 2018 reflect the application of IFRS 15, while the financial statements for previous periods were prepared under the guidance of the previous standard.

Franchise revenue consists of royalties, as well as initial and renewal of franchise fees, and other fees. As required under the new guidance, the company defers the initial franchise and licensing fees and recognizes revenue over the term of the related agreement. Previously, the company recognized initial franchise fees when all material obligations and services had been performed, which generally occurred when the franchised cafe opened.

The transition to IFRS 15 requires the consolidation of the co-op fund contributions and related expenses on a gross basis. The adoption of IFRS 15 had no net impact on the company's cash provided by operating activities, cash used in investing activities or cash provided by financing activities during the year.

Under IFRS 15, the company recognizes gift card breakage income proportionately as gift cards are redeemed using an estimated breakage rate based on the company's historical experience. Previously, the company recognized the estimated breakage income on gift card sales on a pro rata basis based on an estimate breakage rate.

We seek Safe Harbor.

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