~~FORM 10-Q~~

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~Washington, D.C. 20549~~FORM 10-Q/A

(Amendment No. 1)

☒ x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended ~~November 3, 2018.~~

May 4, 2019.

☐ ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from ___________ to ___________

Commission file number 001-37404

~~DAVIDsTEA Inc.~~

~~(Exact name of registrant as specified in its charter)~~

		DAVIDsTEA Inc.
(Exact name of registrant as specified in its charter)

Canada		98-1048842
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

5430 Ferrier

~~Town of~~ Mount-Royal, Québec, Canada, H4P 1M2

(Address of principal executive offices) (zip code)

(888) 873-0006

(Registrant’s telephone number, including area code)

~~Not Applicable~~

~~(Former name, former address and former fiscal year, if changed since last report)~~Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered		Trading Symbol
Common shares, no par value per share		NASDAQ Global Market		DTEA

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ x NO ☐¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒ x NO ☐¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12-b2 of the Exchange Act.


Large accelerated filer ☐	¨	Accelerated filer ☒	¨
Non-accelerated filer	x	Smaller reporting company	¨
		Emerging growth company ☒

~~Non-accelerated filer ☐~~		~~Smaller reporting company ☐~~		x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ ¨ NO ☒x

As of December ~~10, 2018, 26,007,757~~20, 2019, 26,079,662 common shares of the registrant were ~~outstanding.~~outstanding

On June 14, 2019, the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York was US$1.00 = CAD$1.3382

~~Table of Contents~~EXPLANATORY NOTE

DAVIDsTEA Inc. (the “Company”) is filing this Form 10-Q/A (“Form 10-Q/A”) to amend its Quarterly Report on Form 10-Q for the period ended May 4, 2019, originally filed with the Securities and Exchange Commission (the “SEC”) on June 18, 2019 (“Original Filing”) to restate its unaudited condensed interim consolidated financial statements and related footnote disclosures for the three months ended May 4, 2019. Consequently, the previously filed unaudited condensed interim consolidated financial statements for the period ended May 4, 2019 should no longer be relied upon. This Form 10-Q/A also amends certain other items in the Original Filing, as listed in “Items Amended in this Form 10 -Q/A” below.

~~TABLE OF CONTENTS~~Effects of the restatement

As previously disclosed in a Current Report on Form 8-K filed with the SEC on December 18, 2019, the Board of Directors of the Company (the “Board”) in consultation with the Audit Committee of the Board, reached a determination that the Company's unaudited condensed interim consolidated financial statements and related footnote disclosures for the three months ended May 4, 2019 included in its Quarterly Report on Form 10-Q for the quarter ended May 4, 2019 contained a material error. During the course of the Company’s financial statement close process for the quarter ended November 2, 2019, accounting errors were identified in the assessment of impairment indicators upon completing the store impairment analysis under IAS 36, Impairment of Assets (“IAS 36”), subsequent to the adoption of IFRS 16, Leases (“IFRS 16”). When appropriately performing the assessment of impairment indicators with respect to the right-of-use assets (“ROU assets”) as at May 4, 2019 and August 3, 2019, impairment charges of $13,924 and $5,025 respectively were identified that would have been required to be recognized in the respective periods under the Company’s accounting policy for transition to IFRS 16, which included the use of the practical expedient for assessing impairment. Upon further review, the Company also determined that, pursuant to IFRS standards, its financial statements would be more relevant had they applied IAS 36 to assess impairment of ROU assets as of the date of initial adoption, instead of applying the available practical expedient. Accordingly, the Company elected to voluntarily change its accounting policy to perform an impairment assessment in accordance with IAS 36 at the date of transition to IFRS 16. The Company believes this change is more relevant because it more faithfully depicts the performance of the Company. Subsequent to the retrospective application of the change in accounting policy, the impairment charges were nil and $5,025 for the quarters ended May 4, 2019 and August 3, 2019, respectively.

The changes to the unaudited condensed interim consolidated financial statements and related footnote disclosures for the quarters ended May 4, 2019 and August 3, 2019 as a result of the error correction and subsequent voluntary change in accounting policy result in (i) a non-cash impact on the opening deficit within total equity upon the initial adoption of IFRS 16 and (ii) impairment charges for the three and six-month periods ended August 3, 2019, offset by the ongoing impact related to lower depreciation of the ROU assets, respectively. The Company determined that these changes have a material impact on the as filed condensed interim consolidated financial statements as at and for the three-month period ended May 4, 2019, and the three and six-month periods ended August 3, 2019, and as a result, the unaudited condensed interim consolidated financial statements and related footnote disclosures for the quarters ended May 4, 2019 and August 3, 2019 are being restated.

Based on the impairment test performed at February 3, 2019 upon the voluntary change to the Company’s method of transition to IFRS 16 to eliminate the use of the practical expedient, the Company’s ROU assets were impaired upon initial adoption by $32,487 as compared to the application of the previously recognized onerous lease provisions of $19,154 against the ROU assets. The difference that results from performing an IAS 36 impairment test at February 3, 2019 and the application of the practical expedient related to onerous leases results from a difference in the application of certain assumptions required under the two standards. The Company previously had recorded a reduction to the deficit of $1,280 on transition to IFRS 16. After the application of the voluntary change in accounting policy, the deficit increased by $14,613 to $61,293. The additional reduction in the initial value of the ROU assets resulted in a decrease in amortization expense in the three-month periods ended May 4, 2019 and August 3, 2019 of $689 and $699 respectively.

The following table illustrates the amended effect of the adoption of IFRS 16 as at February 3, 2019, upon application of the voluntary change in accounting policy:

							February 3,
							2019			Change in
	February 2, 2019			IFRS 16 Adoption			As previously reported			Policy Adjustment			February 3, 2019
													Restated
ASSETS
Right-of-use assets		-			75,596			75,596			(14,613	)		60,983
Other assets		122,500			-			122,500			-			122,500
Total assets		122,500			75,596			198,096			(14,613	)		183,483
LIABILITIES
Lease liability		-			102,168			102,168			-			102,168
Deferred rent and lease inducements		8,698			(8,698	)		-			-			-
Provisions		19,154			(19,154	)		-			-			-
Other liabilities		27,192			-			27,192			-			27,192
Total liabilities		55,044			74,316			129,360			-			129,360
EQUITY
Deficit		(47,960	)		1,280			(46,680	)		(14,613	)		(61,293	)
Other		115,416			-			115,416			-			115,416
Total equity		67,456			1,280			68,736			(14,613	)		54,123
TOTAL LIABILITIES AND EQUITY		122,500			75,596			198,096			(14,613	)		183,483

The following tables illustrate the impact of the error correction related to unrecognized impairment charges, and the retrospective application of the voluntary change in accounting policy:

Consolidated Balance sheet

	May 4, 2019
	As previously reported			Correction of error - Adjustment			Correction of error - Restated			Change in policy - Adjustment		Restated
Right-of-use assets		72,373			(14,165	)		58,208			—		58,208
Total assets		184,591			(14,165	)		170,426			—		170,426
Deficit		(50,540	)		(13,924	)		(64,464	)		—		(64,464	)
Accumulated other comprehensive income		1,241			(241	)		1,000			—		1,000
Total equity		64,529			(14,165	)		50,364			—		50,364
Total liabilities and equity		184,591			(14,165	)		170,426			—		170,426

Consolidated statement of income (loss) and comprehensive income (loss)

	For the three months ended May 4, 2019
	As previously reported			Correction of error - Adjustment			Correction of error - Restated			Change in policy - Adjustment			Restated
Selling, general and administration expenses		28,709			13,924			42,633			(14,613	)		28,020
Results from operating activities		(2,373	)		(13,924	)		(16,297	)		14,613			(1,684	)
Loss before income taxes		(4,009	)		(13,924	)		(17,933	)		14,613			(3,320	)
Net loss		(4,009	)		(13,924	)		(17,933	)		14,613			(3,320	)
Cumulative translation adjustment		(256	)		(241	)		(497	)		—			(497	)
Total comprehensive loss		(4,265	)		(14,165	)		(18,430	)		14,613			(3,817	)
Net loss per share		(0.15	)		(0.54	)		(0.69	)		0.56			(0.13	)

Consolidated statement of cash flows

	For the three months ended May 4, 2019
	As previously reported			Correction of error - Adjustment			Correction of error - Restated			Change in policy - Adjustment			Restated
Net loss		(4,009	)		(13,924	)		(17,933	)		14,613			(3,320	)
Amortization of right-of-use assets		3,791			—			3,791			(689	)		3,102
Impairment of right-of-use assets		—			13,924			13,924			(13,924	)		—
Cash flows related to operating activities		360			—			360			—			360

Consolidated statement of equity (deficit)

	For the three months ended May 4, 2019
	As previously reported			Correction of error - Adjustment			Correction of error - Restated			Change in policy - Adjustment			Restated
IFRS 16 adoption adjustment		1,280			—			1,280			(14,613	)		(13,333	)
Adjusted balance at beginning of period		68,736			—			68,736			(14,613	)		54,123
Net loss		(4,009	)		(13,924	)		(17,933	)		14,613			(3,320	)
Accumulated other comprehensive loss		(256	)		(241	)		(497	)		—			(497	)
Total comprehensive loss		(4,265	)		(14,165	)		(18,430	)		14,613			(3,817	)

Internal Control Considerations

In light of the restatement, our Chief Executive Officer and Chief Financial Officer have reassessed their evaluation of the effectiveness of the design and operation of its disclosure controls over financial reporting as of May 4, 2019 and concluded that the Company did not maintain effective disclosure control and procedures due to a material weakness in the Company’s internal control over financial reporting that existed at that date. The material weakness that existed on those dates is described in Part I, Item 4 – Controls and Procedures in this Form 10-Q/A.

Items Amended in this Form 10-Q/A

For the convenience of the reader, this Form 10-Q/A sets forth the Original Filing, in its entirety, as amended and superseded as necessary to reflect the restatement described above. The following items in the Original Filing have been amended as a result of, and to reflect, the restatement:

· Part I, Item 1. Financial Statements

· Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
· Part I, Item 4. Controls and Procedures
·
Part II, Item 1A. Risk Factors
· Part II, Item 6. Exhibits

Signatures

In accordance with applicable SEC rules, this Form 10-Q/A includes new certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, as amended, from our Chief Executive Officer and Chief Financial Officer dated as of the filing date of this Form 10-Q/A. In addition, the Exhibit Index has been appropriately updated.

Except as describe above no other changes have been made to the Original Filing. This Form 10-Q/A speaks as of the date of the Original Filing and does not reflect events that may have occurred after the date of the Original Filing or modify or update any disclosures that may have been affected by subsequent events.

Restatement of Other Financial Statements

The Company is also concurrently filing an amended Quarterly Report on Form 10-Q/A for its second quarter period ended August 3, 2019 (the “Q2 Form 10-Q/A”) to amend and restate the previously issued unaudited condensed interim consolidated financial statements as a result of the same error correction and voluntary change in accounting policy described above and originally filed with the SEC on September 17, 2019.

DAVIDsTEA Inc.

TABLE OF CONTENTS

6
Table of Contents

DAVIDsTEA Inc. (the “Company”), a corporation incorporated under theCanada Business Corporations Act, qualifies as a foreign private issuer in the United States for purposes of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a foreign private issuer, the Company has chosen to file annual reports on Form 10-K, quarterly reports on Form ~~10-Q~~10-Q/A and current reports on Form 8-K with the United States Securities and Exchange Commission (“SEC”) instead of filing the reporting forms available to foreign private issuers, although the Company is not required to do so.

In this quarterly report, unless otherwise specified, all monetary amounts are in Canadian dollars, all references to “$,” “C$, ~~“C$~~” “CAD,” “CND$, ~~“CAD”, “CND$~~”, “Canadian dollars” and “dollars” mean Canadian dollars and all references to “U.S. dollars,” “US$” and “USD” mean U.S. dollars.

On ~~December 7, 2018,~~June 14, 2019, the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York was US$1.00 = ~~C$1.3302.~~CAD$1.3382.

7
Table of Contents

~~Table of Contents~~

Part I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

DAVIDsTEA Inc.

Incorporated under the laws of Canada

INTERIM CONSOLIDATED BALANCE SHEETS

[Unaudited and in thousands of Canadian ~~dollars~~dollars]


		As at			As at
		November 3,	February 3,		May 4,			February 2,
		2018	2018		2019			2019
		$	$		$			$
					(Restated - Note 3)
ASSETS
Current
Cash		18,714	63,484			35,491			42,074
Accounts and other receivables		4,007	3,131			2,909			3,681
Inventories	[Note 5]	44,408	24,450	[Note 5]		31,642			34,353
Income tax receivable		4,808	2,968			4,112			4,107
Prepaid expenses and deposits		9,476	7,712			9,164			8,819
Total current assets		81,413	101,745			83,318			93,034
Property and equipment	[Note 6]	31,698	36,558			22,879			23,788
Intangible assets		7,392	4,439			6,021			5,678
Deferred income tax assets	[Note 10]	8,962	5,194
Right-of-use assets				[Note 3]		58,208			—
Total assets		129,465	147,936			170,426			122,500
LIABILITIES AND EQUITY
Current
Trade and other payables		16,096	14,392			15,305			20,951
Deferred revenue		4,966	5,186			5,567			6,241
Current portion of provisions	[Note 7]	4,658	4,693	[Note 3]		—			3,714
Derivative financial instruments	[Note 15]	—	229
Current portion of lease liabilities				[Note 3]		16,324			—
Total current liabilities		25,720	24,500			37,196			30,906
Deferred rent and lease inducements		8,829	8,608	[Note 3]		—			8,698
Provisions	[Note 7]	14,434	13,460	[Note 3]		—			15,440
Non-current portion of lease liabilities				[Note 3]		82,866			—
Total liabilities		48,983	46,568			120,062			55,044
Commitments and contingencies
Equity
Share capital	[Note 9]	112,499	111,692	[Note 7]		112,740			112,519
Contributed surplus		1,230	2,642			1,088			1,400
Deficit		(34,696)	(14,721)			(64,464	)		(47,960	)
Accumulated other comprehensive income		1,449	1,755			1,000			1,497
Total equity		80,482	101,368			50,364			67,456
		129,465	147,936
Total liabilities and equity						170,426			122,500

See accompanying ~~notes~~notes.

8
Table of Contents

DAVIDsTEA Inc.

Incorporated under the laws of Canada

INTERIM CONSOLIDATED STATEMENTS OF ~~LOSS~~INCOME (LOSS)

AND COMPREHENSIVE ~~LOSS~~INCOME (LOSS)

[Unaudited and in thousands of Canadian dollars, except share and per share ~~information~~information]


		For the three months ended		For the nine months ended			For the three months ended
		November 3,	October 28,	November 3,	October 28,		May 4,			May 5,
		2018	2017	2018	2017		2019			2018
		$	$	$	$		$			$
							(Restated - Note 3)
Sales	[Note 14]	43,656	42,997	129,609	137,353	[Note 12]		44,265			45,786
Cost of sales		25,275	24,625	71,193	74,594			17,929			23,094
Gross profit		18,381	18,372	58,416	62,759			26,336			22,692
Selling, general and administration expenses	[Note 11]	29,119	27,035	84,865	79,004	[Note 9]		28,020			24,396
Results from operating activities		(10,738)	(8,663)	(26,449)	(16,245)			(1,684	)		(1,704	)
Finance costs		80	327	237	615			1,827			79
Finance income		(122)	(149)	(574)	(420)			(191	)		(237	)
Loss before income taxes		(10,696)	(8,841)	(26,112)	(16,440)			(3,320	)		(1,546	)
Recovery of income tax		(1,635)	(2,356)	(5,851)	(4,030)
Provision for income tax (recovery)						[Note 8]		—			(344	)
Net loss		(9,061)	(6,485)	(20,261)	(12,410)			(3,320	)		(1,202	)
Other comprehensive income (loss)
Items to be reclassified subsequently to income (loss):
Other comprehensive loss
Items to be reclassified subsequently to income:
Unrealized net gain on forward exchange contracts						[Note 13]		—			707
Realized net loss on forward exchange contracts reclassified to inventory								—			438
Provision for income tax recovery								—			(306	)
Cumulative translation adjustment		(62)	1,872	(473)	95			(497	)		(321	)
Items that may be reclassified subsequently to income (loss):
Unrealized net gain on forward exchange contracts	[Note 15]	—	824	794	79
Realized net (gain) on forward exchange contracts reclassified to inventory		(425)	(714)	(565)	(46)
Provision for income tax (recovery) on forward exchange contracts		113	589	(62)	(303)
Other comprehensive income (loss), net of tax		(374)	2,571	(306)	(175)			(497	)		518
Total comprehensive loss		(9,435)	(3,914)	(20,567)	(12,585)			(3,817	)		(684	)
Net loss per share:
Basic	[Note 12]	(0.35)	(0.25)	(0.78)	(0.48)
Fully diluted	[Note 12]	(0.35)	(0.25)	(0.78)	(0.48)
Basic and fully diluted						[Note 10]		(0.13	)		(0.05	)
Weighted average number of shares outstanding
— basic	[Note 12]	25,992,339	25,829,090	25,862,086	25,659,164
— fully diluted	[Note 12]	25,992,339	25,829,090	25,862,086	25,659,164
Basic and fully diluted						[Note 10]		26,019,594			25,893,327

See accompanying ~~notes~~notes.

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DAVIDsTEA Inc.

Incorporated under the laws of Canada

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

[Unaudited and in thousands of Canadian ~~dollars~~dollars]

					For the three months ended
	For the three months ended		For the nine months ended		May 4,			May 5,
	November 3,	October 28,	November 3,	October 28,	2019			2018
	2018	2017	2018	2017	$			$
	$	$	$	$	(Restated - Note 3)
OPERATING ACTIVITIES
Net loss	(9,061)	(6,485)	(20,261)	(12,410)		(3,320	)		(1,202	)
Items not affecting cash:
Depreciation of property and equipment	1,785	2,138	5,193	6,316		1,325			1,686
Amortization of intangible assets	377	494	905	1,248		399			182
Loss on disposal of property and equipment	—	18	14	48
Impairment of property and equipment	725	2,658	3,285	4,971
Amortization of right-of-use assets						3,102			—
Interest on lease liabilities						1,827			—
Deferred rent	74	174	(17)	377		—			(137	)
Provision (recovery) for onerous contracts	3,414	(46)	5,306	(1,573)
Recovery for onerous contracts						—			(176	)
Stock-based compensation expense	91	362	(7)	1,738		127			295
Amortization of financing fees	21	19	61	59		—			20
Accretion on provisions	60	307	177	558		—			59
Deferred income taxes (recovery)	(2,575)	(227)	(3,921)	203
	(5,089)	(588)	(9,265)	1,535
Deferred income taxes						—			956
Sub-total						3,460			1,683
Net change in other non-cash working capital balances related to operations	(12,948)	(15,546)	(28,316)	(21,511)		(3,100	)		(8,789	)
Cash flows related to operating activities	(18,037)	(16,134)	(37,581)	(19,976)		360			(7,106	)
FINANCING ACTIVITIES
Proceeds from issuance of common shares pursuant to exercise of stock options	8	90	82	1,696
Payment of lease liabilities						(5,823	)		—
Cash flows related to financing activities	8	90	82	1,696		(5,823	)		—
INVESTING ACTIVITIES
Additions to property and equipment	(1,752)	(2,770)	(3,420)	(7,501)		(415	)		(928	)
Additions to intangible assets	(1,128)	(728)	(3,851)	(1,794)		(705	)		(1,582	)
Cash flows related to investing activities	(2,880)	(3,498)	(7,271)	(9,295)		(1,120	)		(2,510	)
Decrease in cash during the period	(20,909)	(19,542)	(44,770)	(27,575)		(6,583	)		(9,616	)
Cash, beginning of period	39,623	56,407	63,484	64,440
Cash, end of period	18,714	36,865	18,714	36,865
Cash, beginning of the period						42,074			63,484
Cash, end of the period						35,491			53,868
Supplemental Information
Cash paid for:
Interest						—			—
Income taxes (classified as operating activity)	7	165	9	877		—			—
Cash received for:
Interest	120	146	563	433		195			233
Income taxes (classified as operating activity)	—	—	—	26		—			—

See accompanying ~~notes~~notes.

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~~Table of Contents~~

DAVIDsTEA Inc.

Incorporated under the laws of Canada

INTERIM CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)

[Unaudited and in thousands of Canadian ~~dollars~~dollars]


				Accumulated Other Comprehensive Income												Accumulated Other Comprehensive Income
				Accumulated	Accumulated											Accumulated			Accumulated
				Derivative	Foreign	Accumulated										Derivative			Foreign			Accumulated
				Financial	Currency	Other										Financial			Currency			Other
	Share	Contributed		Instrument	Translation	Comprehensive	Total	Share		Contributed						Instrument			Translation			Comprehensive			Total
	Capital	Surplus	Deficit	Adjustment	Adjustment	Income	Equity	Capital		Surplus			Deficit			Adjustment			Adjustment			Income			Equity
	$	$	$	$	$	$	$	$		$			$			$			$			$			$

Balance, January 28, 2017	263,828	8,833	(142,398)	333	2,854	3,187	133,450
Net loss for the nine months ended October 28, 2017	—	—	(12,410)	—	—	—	(12,410)
Balance, February 3, 2018									111,692		2,642			(14,721	)		(167	)		1,922			1,755			101,368
Net loss for the three months ended May 5, 2018									—		—			(1,202	)		—			—			—			(1,202	)
Other comprehensive loss	—	—	—	128	(303)	(175)	(175)		—		—			—			839			(321	)		518			518
Total comprehensive loss	—	—	(12,410)	128	(303)	(175)	(12,585)		—		—			(1,202	)		839			(321	)		518			(684	)
Issuance of common shares	2,546	(850)	—	—	—	—	1,696		—		—			—			—			—			—			—
Common shares issued on vesting of restricted stock units	912	(1,652)	184	—	—	—	(556)		257		(593	)		134			—			—			—			(202	)
Stock-based compensation expense	—	1,738	—	—	—	—	1,738		—		295			—			—			—			—			295
Income tax impact associated with stock options	—	(133)	—	—	—	—	(133)		—		11			—			—			—			—			11
Reduction of stated capital	(155,947)	—	155,947	—	—	—	—
Balance, October 28, 2017	111,339	7,936	1,323	461	2,551	3,012	123,610
Balance, May 5, 2018									111,949		2,355			(15,789	)		672			1,601			2,273			100,788

Balance, February 3, 2018	111,692	2,642	(14,721)	(167)	1,922	1,755	101,368
Net loss for the nine months ended November 3, 2018	—	—	(20,261)	—	—	—	(20,261)
Other comprehensive income (loss)	—	—	—	167	(473)	(306)	(306)
Total comprehensive income (loss)	—	—	(20,261)	167	(473)	(306)	(20,567)
Balance, February 2, 2019									112,519		1,400			(47,960	)		—			1,497			1,497			67,456
IFRS 16 adoption adjustment (1)									—		—			(13,333	)		—			—			—			(13,333	)
Adjusted balance at beginning of period (1)									112,519		1,400			(61,293	)		—			1,497			1,497			54,123
Net loss for the three months ended May 4, 2019 (1)									—		—			(3,320	)		—			—			—			(3,320	)
Other comprehensive loss									—		—			—			—			(497	)		(497	)		(497	)
Total comprehensive loss (1)									—		—			(3,320	)		—			(497	)		(497	)		(3,817	)
Issuance of common shares	164	(82)	—	—	—	—	82		—		—			—			—			—			—			—
Common shares issued on vesting of restricted stock units	643	(1,322)	286	—	—	—	(393)		221		(439	)		149			—			—			—			(69	)
Stock-based compensation expense	—	(7)	—	—	—	—	(7)		—		127			—			—			—			—			127
Income tax impact associated with stock options	—	(1)	—	—	—	—	(1)
Balance, November 3, 2018	112,499	1,230	(34,696)	—	1,449	1,449	80,482
Balance, May 4, 2019									112,740		1,088			(64,464	)		—			1,000			1,000			50,364

_________

(1) See restated note 3

See accompanying ~~notes~~notes.

11
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~~Table of Contents~~

DAVIDsTEA Inc.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the ~~three and nine-month~~three-month periods ended ~~November 3,~~May 4, 2019 and May 5, 2018 ~~and October 28, 2017~~[Unaudited]

~~Unaudited and~~[Amounts in thousands of Canadian dollars except share and per share ~~amounts~~amounts]

1. CORPORATE INFORMATION

The unaudited condensed interim consolidated financial statements of DAVIDsTEA Inc. and its subsidiary (collectively, the “Company”) for the ~~three~~three-month period ended May 4, 2019 were authorized for issue in accordance with a resolution of the Board of Directors on June18, 2019. The amended and ~~nine-month periods~~restated unaudited condensed interim consolidated financial statements of DAVIDsTEA Inc. and its subsidiary (collectively, the “Company”) for the three-month period ended ~~November 3, 2018~~May 4, 2019 were authorized for issue in accordance with a resolution of the Board of Directors on December ~~13, 2018.~~20, 2019. The Company is incorporated and domiciled in Canada and its shares are publicly traded on the NASDAQ Global Market under the symbol “DTEA”. The registered office is located at 5430, Ferrier St., Town of Mount-Royal, ~~Québec,~~Quebec, Canada, H4P 1M2.

The Company is engaged in the retail and online sale of tea, tea accessories and food and beverages in Canada and the United States. The results of operations for the interim period are not necessarily indicative of the results of operations for the full year. Sales fluctuate from quarter to quarter. Sales are traditionally higher in the fourth fiscal quarter due to the year-end holiday season, and tend to be lowest in the second and third fiscal ~~quarters~~quarter because of lower customer traffic during the summer months.

2. STATEMENT OF COMPLIANCE AND BASIS OF PREPARATION

These unaudited condensed interim consolidated financial statements have been prepared in accordance with IAS 34, “Interim Financial Reporting” as issued by the International Accounting Standards Board (“IASB”). Accordingly, these financial statements do not include all of the financial statement disclosures required for annual financial statements and should be read in conjunction with the Company’s audited consolidated financial statements for the year ended February ~~3, 2018,~~2, 2019, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the IASB. In management’s opinion, the unaudited condensed interim consolidated financial statements reflect all the adjustments that are necessary for a fair presentation of the results for the interim period presented. These unaudited condensed interim consolidated financial statements have been prepared using the accounting policies and methods of computation as outlined in note 3 of the consolidated financial statements for the year ended February 2, 2019, other than as disclosed in note 3 ~~2018 on Form 10-K filed~~below with ~~the SEC on April 19, 2018.~~respect to changes in accounting policies.

3. CHANGES IN ACCOUNTING POLICIES AND RESTATEMENT OF PREVIOUSLY-ISSUED FINANCIAL STATEMENTS

AsDuring the course of ~~February~~the Company’s financial statement close process for the quarter ended November 2, 2019, accounting errors were identified in the assessment of impairment indicators upon completing the store impairment analysis under IAS 36, Impairment of Assets (“IAS 36”), subsequent to the adoption of IFRS 16, Leases (“IFRS 16”). When appropriately performing the assessment of impairment indicators with respect to the right-of-use assets (“ROU assets”) as at May 4, ~~2018,~~2019 and August 3, 2019, impairment charges of $13,924 and $5,025 respectively were identified that would have been required to be recognized in the respective periods under the Company’s accounting policy for transition to IFRS 16, which included the use of the practical expedient for assessing impairment. Upon further review, the Company ~~adopted~~also determined that, pursuant to IFRS ~~9, “Financial Instruments” (“IFRS 9”). IFRS 9 replaces~~standards, its financial statements would be more relevant had they applied IAS ~~39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after January 1, 2018, bringing together all three aspects~~36 to assess impairment of ROU assets as of the date of initial adoption, instead of applying the available practical expedient. Accordingly, the Company elected to voluntarily change its accounting policy to perform an impairment assessment in accordance with IAS 36 at the date of transition to IFRS 16. The Company believes this change is more relevant because it more faithfully depicts the performance of the Company. Subsequent to the retrospective application of the change in accounting policy, the impairment charges were nil and $5,025 for ~~financial instruments: classification~~the quarters ended May 4, 2019 and ~~measurement; impairment; and hedge accounting.~~August 3, 2019, respectively.

~~With~~Effects of the ~~exception of hedge accounting, which the Company applied prospectively, the Company has applied IFRS 9 retrospectively, with the initial application date of February 4, 2018.~~restatement

~~Overall, there was no material impact~~Based on the ~~Company’s consolidated financial statements.~~

~~Classification and measurement~~. The Company did not identify any material impact on its consolidated financial statements in applying the classification and measurement requirements of IFRS 9. The following table presents the carrying amount of financial assets held by the Company at February 3, 2018 and their measurement category under IAS 39 and the new model under IFRS 9.

~~Table of Contents~~

February 3, 2018

February 3, 2018

IAS 39

IFRS 9


Measurement

Carrying

Measurement

Carrying

category

Value

category

Value

$

$
Cash

FVTPL

63,484

FVTPL

63,484
Credit card cash clearing receivables

Amortized cost

1,291

Amortized cost

1,291
Other receivables

Amortized cost

1,840

Amortized cost

1,840
Derivative financial instruments

FVTPL

229

FVTPL

229

~~There has been no impact caused by~~impairment test performed at February 3, 2019 upon the new classification of financial assets under IFRS 9. The classification of all financial liabilities as financial liabilities at amortized cost remains unchanged as well as their measurement resulting from their classification.

~~Impairment~~. IFRS 9 requires the Company to record expected credit losses on all of its debt securities, loans and trade receivables, either on a 12-month or lifetime basis. The Company applied the simplified approach and records lifetime expected losses on all trade receivables. The Company performed a detailed analysis that considered all reasonable and supportable information, including forward-looking elements to determine the extent of the impact. The Company’s IFRS 9 expected credit loss model did not have a material impact on its consolidated financial statements.

~~Hedge accounting. The Company believes that all existing hedge relationships that are currently designated in effective hedging relationships still qualify for hedge accounting under IFRS 9. As IFRS 9 does not~~voluntary change ~~the general principles of how an entity accounts for effective hedges, the adoption of IFRS 9 did not have a material impact on the Company’s hedge accounting.~~

As of February 4, 2018, the Company adopted IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”). IFRS 15 replaces IAS 11, “Construction Contracts”, and IAS 18, “Revenue”, as well as various interpretations regarding revenue. This standard introduces a single model for recognizing revenue that applies to all contracts with customers, except for contracts that are within the scope of standards on leases, insurance and financial instruments. This standard also requires enhanced disclosures. Adoption of IFRS 15 is mandatory and is effective for annual periods beginning on or after January 1, 2018. The implementation of IFRS 15 impacts the allocation of revenue that is deferred in relation to the Company’s ~~customer loyalty award programs. Prior~~method of transition to IFRS 16 to eliminate the use of the practical expedient, the Company’s ROU assets were impaired upon initial adoption ~~revenue was allocated~~by $32,487 as compared to the ~~customer loyalty awards using~~application of the ~~residual fair value method. Under IFRS 15, consideration is allocated between~~previously recognized onerous lease provisions of $19,154 against the ~~loyalty program awards~~ROU assets. The difference that results from performing an IAS 36 impairment test at February 3, 2019 and the ~~goods~~application of the practical expedient related to onerous leases results from a difference in the application of certain assumptions required under the two standards. The Company previously had recorded a reduction to the deficit of $1,280 on ~~which~~transition to IFRS 16. After the ~~awards were earned, based on their relative stand-alone selling prices. The~~application of the voluntary change in ~~allocation~~accounting policy, the deficit increased by $14,613 to $61,293. The additional reduction in the initial value of ~~revenue that is deferred~~the ROU assets resulted in ~~relation to~~a decrease in amortization expense in the ~~Company’s customer loyalty program does not have a material impact~~three-month periods ended May 4, 2019 and August 3, 2019 of $689 and $699 respectively.

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The following table illustrates the effect of the voluntary change in accounting policy on ~~retained earnings~~the adoption of IFRS 16 as at February ~~4, 2018. Overall, there was not a material~~3, 2019:

							February 3,
							2019
	February 2, 2019			IFRS 16 Adoption			As previously reported			Change in Policy Adjustment			February 3, 2019
													Restated
ASSETS
Right-of-use assets		-			75,596			75,596			(14,613	)		60,983
Other assets		122,500			-			122,500			-			122,500
Total assets		122,500			75,596			198,096			(14,613	)		183,483
LIABILITIES
Lease liability		-			102,168			102,168			-			102,168
Deferred rent and lease inducements		8,698			(8,698	)		-			-			-
Provisions		19,154			(19,154	)		-			-			-
Other liabilities		27,192			-			27,192			-			27,192
Total liabilities		55,044			74,316			129,360			-			129,360
EQUITY
Deficit		(47,960	)		1,280			(46,680	)		(14,613	)		(61,293	)
Other		115,416			-			115,416			-			115,416
Total equity		67,456			1,280			68,736			(14,613	)		54,123
TOTAL LIABILITIES AND EQUITY		122,500			75,596			198,096			(14,613	)		183,483

The following tables illustrate the impact onof the ~~Company’s consolidated financial statements.~~error correction related to unrecognized impairment charges, and the retrospective application of the voluntary change in accounting policy:

As of February 4, 2018, the Company adopted International Financial Reporting Interpretations (“IFRIC”) 22, “Foreign Currency Transactions and Advance Consideration” (“IFRIC 22”). In December 2016, the IASB issued IFRIC 22, which addresses how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) and on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency. IFRIC 22 is effective for annual periods beginning on or after January 1, 2018. There was no material impact on the Company’s consolidated financial statements.Consolidated Balance sheet

	May 4, 2019
	As previously reported			Correction of error - Adjustment			Correction of error - Restated			Change in policy - Adjustment		Restated
Right-of-use assets		72,373			(14,165	)		58,208			—		58,208
Total assets		184,591			(14,165	)		170,426			—		170,426
Deficit		(50,540	)		(13,924	)		(64,464	)		—		(64,464	)
Accumulated other comprehensive income		1,241			(241	)		1,000			—		1,000
Total equity		64,529			(14,165	)		50,364			—		50,364
Total liabilities and equity		184,591			(14,165	)		170,426			—		170,426

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~~Information on significant new accounting standards~~Consolidated statement of income (loss) and ~~amendments issued but not yet adopted is described below.~~comprehensive income (loss)

	For the three months ended May 4, 2019
	As previously reported			Correction of error - Adjustment			Correction of error - Restated			Change in policy - Adjustment			Restated
Selling, general and administration expenses		28,709			13,924			42,633			(14,613	)		28,020
Results from operating activities		(2,373	)		(13,924	)		(16,297	)		14,613			(1,684	)
Loss before income taxes		(4,009	)		(13,924	)		(17,933	)		14,613			(3,320	)
Net loss		(4,009	)		(13,924	)		(17,933	)		14,613			(3,320	)
Cumulative translation adjustment		(256	)		(241	)		(497	)		—			(497	)
Total comprehensive loss		(4,265	)		(14,165	)		(18,430	)		14,613			(3,817	)
Net loss per share		(0.15	)		(0.54	)		(0.69	)		0.56			(0.13	)

Consolidated statement of cash flows

	For the three months ended May 4, 2019
	As previously reported			Correction of error - Adjustment			Correction of error - Restated			Change in policy - Adjustment			Restated
Net loss		(4,009	)		(13,924	)		(17,933	)		14,613			(3,320	)
Amortization of right-of-use assets		3,791			—			3,791			(689	)		3,102
Impairment of right-of-use assets		—			13,924			13,924			(13,924	)		—
Cash flows related to operating activities		360			—			360			—			360

Consolidated statement of equity (deficit)

	For the three months ended May 4, 2019
	As previously reported			Correction of error - Adjustment			Correction of error - Restated			Change in policy - Adjustment			Restated
IFRS 16 adoption adjustment		1,280			—			1,280			(14,613	)		(13,333	)
Adjusted balance at beginning of period		68,736			—			68,736			(14,613	)		54,123
Net loss		(4,009	)		(13,924	)		(17,933	)		14,613			(3,320	)
Accumulated other comprehensive loss		(256	)		(241	)		(497	)		—			(497	)
Total comprehensive loss		(4,265	)		(14,165	)		(18,430	)		14,613			(3,817	)

Internal Control Considerations

IFRS 16 – Leases

IFRS 16, ~~“Leases”~~“Leases’’ (“IFRS ~~16”~~16’’) replaces IAS 17, ~~“Leases”.~~“Leases’’ and related interpretations. This standard provides a single model for leases abolishing the current distinction between finance and operating leases, with most leases being recognized on the balance sheet. Certain exemptions will apply for short-term leases and leases of low value assets. The new standard ~~will be~~is effective for annual periods beginning on or after January 1, ~~2019 with early application permitted. The Company has performed a preliminary assessment~~2019.

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a) Nature of the ~~potential impact~~effect of ~~the~~ adoption of IFRS 16 ~~on its consolidated financial~~(restated)

~~Table of Contents~~

~~statements.~~ The Company ~~expects the~~has adopted IFRS 16 as at February 3, 2019. The adoption of IFRS 16 ~~will have~~had a significant impact as the Company ~~will recognize~~recognized new assets and liabilities for its operating leases of retail stores. In addition, the nature and timing of expenses related to those leases will change as IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. The Company has ~~not yet determined which transition~~elected to apply the modified retrospective method ~~it will apply~~by setting right-of-use assets based on the lease liability at the date of initial application, adjusted by the amount of any prepaid or ~~whether it will use~~accrued lease payments, and has applied the ~~optional exemptions or~~following practical ~~expedients under~~expedients:

- applying IFRS 16 exclusively to contracts that were previously identified as leases applying IAS 17 at the date of initial application;
- applying a single discount rate to a portfolio of leases with reasonably similar characteristics;
- excluding initial direct costs from the measurement of the right-of-use asset at the date of initial application; and
- not separating the lease component and its associated non-lease component.

At the ~~standard.~~ date of initial application of IFRS 16, the Company tested for impairment in accordance with IAS 36 Impairment of assets.

The ~~Company expects to disclose additional detailed information, including its transition method, any practical expedients elected and estimated quantitative financial effects, before the~~effect of adoption of IFRS ~~16.~~16 as at February 3, 2019 is as follows:

February 3,
2019
February 2,
2019
IFRS 16
Adoption
As previously
reported
Change in Policy Adjustment
February 3,
2019
Restated
ASSETS
Right-of-use assets
- 75,596 75,596 (14,613 ) 60,983
Other assets
122,500 - 122,500 - 122,500
Total assets
122,500 75,596 198,096 (14,613 ) 183,483
LIABILITIES
Lease liability
- 102,168 102,168 - 102,168
Deferred rent and lease inducements
8,698 (8,698 ) - - -
Provisions
19,154 (19,154 ) - - -
Other liabilities
27,192 - 27,192 - 27,192
Total liabilities
55,044 74,316 129,360 - 129,360
EQUITY
Deficit
(47,960 ) 1,280 (46,680 ) (14,613 ) (61,293 )
Other
115,416 - 115,416 - 115,416
Total equity
67,456 1,280 68,736 (14,613 ) 54,123
TOTAL LIABILITIES AND EQUITY
122,500 75,596 198,096 (14,613 ) 183,483

For leases previously classified as operating leases, the Company recorded the right-of-use assets based on the amount equal to the lease liabilities, adjusted for any related prepaid and accrued lease payments previously recognized. Due to this, the Company derecognized an amount of $8,698 that was previously included under deferred rent and leasehold inducements with a corresponding adjustment to the right-of-use asset.

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The lease liabilities as at February 3, 2019 can be reconciled to the operating lease commitments as of February 2, 2019 as follows:

	February 3,
	2019
	$


Minimum lease payments under operating lease		116,772
Discounted using a weighted average incremental borrowing rate of 6.63%		(24,484	)
Discounted non-lease component associated with lease component pursuant to practical expedient		9,880
		102,168

Operating lease payments which were previously included in cost of sales on the consolidated statement of income are replaced with depreciation expenses (included in selling, general and administrative expenses) from the right-of-use asset and interest expense (included under finance costs) from the lease liability.

b) Summary of new accounting policies

Right-of-use assets

The Company recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless the Company is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognised right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of-use assets are subject to impairment. Amortization expense is recorded in selling, general and administrative expense.

Lease liabilities

At the commencement date of the lease, the Company recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Company and payments of penalties for terminating a lease, if the lease term reflects the Company exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognised as expense in the period on which the event or condition that triggers the payment occurs.

In calculating the present value of lease payments, the Company uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. Interest accretion is recorded as interest expense in finance costs. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset. The Company has elected to apply the practical expedient to not separate the lease component and its associated non-lease component.

Short-term leases and leases of low-value assets

The Company applies the short-term lease recognition exemption to its short-term leases of machinery and equipment (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered of low value (i.e., below US $5,000). Lease payments on short-term leases and leases of low-value assets are recognised as expense on a straight-line basis over the lease term.

Significant judgement in determining the lease term of contracts 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.

The Company has the option, under some of its leases to lease the assets for additional terms of three 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).

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c) Amounts recognised in the statement of financial position and profit or loss

Set out below are the carrying amounts of the Company’s right-of-use assets and lease liabilities and the movements during the period:

	Right-of use			Lease
	assets			liability
	$			$
	(Restated - Note 3)
Balance, February 3, 2019		60,983			102,168
Amortization expense		(3,102	)		—
Interest Expense		—			1,827
Payments		—			(5,823	)
CTA		327			1,018
Balance, May 4, 2019		58,208			99,190

Presented as:
Current		—			16,324
Non-Current		58,208			82,866

The Company recognizes variable lease payments of $210 for the three months ended May 4, 2019.

IFRS 23 – Uncertainty over Income Tax Treatments

IFRIC 23, “Uncertainty over Income Tax Treatments” (the “Interpretation”), was issued by the IASB in June 2017. ~~IFRIC 23~~The Interpretation provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. ~~IFRIC 23~~The Interpretation is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted. ~~IFRIC 23~~The Interpretation requires an entity to:

Contemplate whether uncertain tax treatments should be considered separately, or together as a group, based on which approach provides better predictions of the resolution;

Reflect an uncertainty in the amount of income tax payable (recoverable) if it is probable that it will pay (or recover) an amount for the uncertainty; and

Measure a tax uncertainty based on the most likely amount or expected value depending on whichever method better predicts the amount payable (recoverable).

The ~~Company does not expect a material impact from the~~ adoption of ~~IFRIC 23~~this interpretation did not have a significant impact on ~~its consolidated~~the Company’s financial statements.

4. SIGNIFICANT ACCOUNTING ~~JUDGMENTS,~~JUDGEMENTS, ESTIMATES AND ASSUMPTIONS

The preparation of condensed interim consolidated financial statements requires management to make estimates and assumptions using ~~judgments~~judgment that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense during the reporting period. Estimates and other judgments are continually evaluated and are based on management’s experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances. Actual results may differ from those estimates.

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In preparing these unaudited condensed interim consolidated financial statements, critical ~~judgments~~judgements made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty were the same as those referred to in note 5 of the consolidated financial statements for the year ended February ~~3, 2018 on Form 10-K filed with the SEC on April 19, 2018.~~2, 2019.

5. INVENTORIES

November 3,

February 3,

2018

2018

$

$
Finished goods

36,510

17,600
Goods in transit

2,784

4,608
Packaging

5,114

2,242

44,408

24,450

	May 4,		February 2,
	2019		2019
	$		$
Finished goods		28,978		28,991
Goods in transit		731		3,262
Packaging		1,933		2,100
		31,642		34,353

6. ~~PROPERTY AND EQUIPMENT~~

For the three and nine months ended November 3, 2018, an assessment of impairment indicators was performed which caused the Company to review the recoverable amount of the property and equipment for certain cash generating units (“CGUs”) with an indication of impairment. CGUs reviewed included stores performing below the Company’s expectations.

~~Table of Contents~~

As a result, for the three and nine months ended November 3, 2018, an impairment loss of $725 and $3,285, respectively, [October 28, 2017 — $2,658 and $4,971] related to store leasehold improvements, furniture and equipment, and computer hardware was recorded in the Canada and U.S. segments for $725 and nil, respectively, for the three months ended November 3, 2018 and $3,096 and $189, respectively, for the nine months ended November 3, 2018, respectively [October 28, 2017 — $595 and $2,063, respectively, for the three months and $595 and $5,242, respectively, for the nine months]. These losses were determined by comparing the carrying amount of the CGU’s net assets with their respective recoverable amounts based on value in use. Value in use of nil [October 28, 2017 —$635] was determined based on management’s best estimate of expected future cash flows from use over the remaining lease terms, considering historical experience as well as current economic conditions, and was then discounted using a pre-tax discount rate of 11.9% [October 28, 2017 — 13.4%]. A reversal of impairment occurs when previously impaired CGUs see improved financial results. For the three and nine months ended November 3, 2018, no impairment losses were reversed [October 28, 2017 — $866 reversed in the U.S. segment, with value in use of $848]. Impairment losses are reversed only to the extent that the carrying amounts of the CGU’s net assets do not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognized.

~~7. PROVISIONS~~


		~~For the~~
		~~nine months ended~~
		~~November 3,~~
		~~2018~~
		$
~~Opening balance~~		~~18,153~~
~~Additions~~		~~5,894~~
~~Reversals~~		~~(588)~~
~~Utilization~~		~~(4,820)~~
~~Settlements~~		~~(615)~~
~~Accretion expense~~		~~177~~
~~Cumulative translation adjustment~~		~~891~~
~~Ending balance~~		~~19,092~~
~~Less: Current portion~~		~~(4,658)~~
~~Long-term portion of provisions~~		~~14,434~~

Provisions for onerous contracts have been recognized in respect of store leases where the unavoidable costs of meeting the obligations under the lease agreements exceed the economic benefits expected to be received from the contract. The unavoidable costs reflect the present value of the lower of the expected cost of terminating the contract and the expected net cost of operating under the contract.

During the three and nine months ended November 3, 2018, due to changes to assumptions, additions to the onerous provision were recorded in the amount of $3,743 and $5,894, respectively, [October 28, 2017 — nil and $458], while the provisions for other stores were partially or fully reversed by an amount of $329 and $588, respectively, [October 28, 2017 — $46 and $2,031].

8. REVOLVING FACILITY

On June 11, 2018, the Company amended its existing Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provides for a ~~two-year~~two year revolving facility (“Amended Revolving Facility”) in the principal amount of ~~$15.0 million~~$15,000 or the equivalent in U.S. dollars, repayable at any time, two years from June 11, 2018, with no accordion feature. Borrowings under the Amended Revolving Facility may not exceed the lesser of the total commitment for the revolving facility and the borrowing base, calculated as 75% of the face value of all eligible receivables plus 50% of the estimated value of all eligible inventory, less any priority payables.

The Amended Credit Agreement subjects the Company to certain financial ~~covenants entered into between the Company and the lender.~~covenants. Without the prior written consent of the lender, the Company’s fixed charge coverage ratio

~~Table of Contents~~

may not be less than 1.10:1.00 and the Company’s leverage ratio may not exceed 3.00:~~1:00.~~1.00. In addition, the Company’s net tangible worth may not be less than $65,000 and the Company’s minimum excess availability must not be less than ~~$15.0 million.~~$15,000. The Amended Revolving Facility bears interest based on the Company’s adjusted leverage ratio, at the bank’s prime rate, U.S. bank rate ~~and~~or LIBOR plus a range from 0.5% to 2.5% per annum. A standby fee range of 0.3% to 0.5% will be paid on the daily principal amount of the unused portion of the Amended Revolving Facility.

The credit facility also contains ~~non-financial~~nonfinancial covenants that, among other things and subject to certain exceptions, restrict the Company’s ability to become guarantor or endorser or otherwise become liable upon any note or other obligation other than in the normal course of business. The Company also cannot make any dividend payments.

As at ~~November 3, 2018 and February 3, 2018,~~May 4, 2019, the Company did not have any borrowings under the Amended Revolving Facility. ~~At November 3, 2018,~~

As at May 4, 2019, the Company is in breach of its fixed charge coverage ratio and ~~is taking measures~~certain nonfinancial covenants. BMO has temporarily agreed to ~~rectify~~forbear from exercising remedies under the ~~situation.~~Credit Agreement, however the Company cannot borrow under the facility.

The current lending agreement will be terminated on the earlier of (a) January 24, 2020, and (b) the company securing new financing. The Company is in ~~compliance~~good faith discussions with ~~its other financial and non-financial covenants.~~BMO to install an asset based lending facility that will provide a revolving facility at commercial reasonable terms.

9.7. SHARE CAPITAL

Authorized

An unlimited number of ~~common~~Common shares.

Issued and outstanding

November 3,

February 3,

2018

2018

$

$
26,007,009 common shares [February 3, 2018 - 25,885,372 shares]

112,499

111,692

112,499

111,692

	May 4,		February 2,
	2019		2019
	$		$
Share Capital - Common shares		112,740		112,519

During the ~~three and nine-month~~three-month periods ended ~~November 3,~~May 4, 2019 and May 5, 2018, ~~10,000 and 88,135~~no stock options ~~respectively,~~ were exercised for ~~88,135~~ common shares for cash proceeds of $8 and $82, respectively, and 36,418 common shares for a non-cash settlement of nil and $121, respectively [October 28, 2017 — 24,000 and 436,773 stock options, respectively, for cash proceeds of $90 and $1,696, respectively]. During the three and nine-month periods ended November 3, 2018, the carrying value of common shares includes $3 and $82, respectively [October 28, 2017 — $22 and $850, respectively], which corresponds to a reduction in contributed surplus associated with options exercised during the period.shares.

In addition, during the ~~three and nine-month periods~~three-month period ended ~~November 3, 2018, 1,128 and 70,668~~May 4, 2019, 39,365 common shares ~~respectively [October 28, 2017~~[May 5, 2018 – ~~19,819 and 75,820~~29,785 common ~~shares, respectively]~~shares] were issued in relation to the vesting of restricted stock units (“RSU”), resulting in an increase in share capital of ~~$7 and $643,~~$221, net of tax ~~respectively [October 28, 2017 – $208 and $912, respectively]~~[May 5, 2018 — $257] and a reduction in contributed surplus of ~~$18 and $1,322, respectively [October 28, 2017~~$439 [May 5, 2018 — ~~$433 and $1,652, respectively]~~$593].

During the nine-month period ended October 28, 2017, the shareholders of the Company approved a resolution to reduce the stated capital maintained in respect of the common shares by an amount of $155,947, which resulted in a corresponding reduction of the deficit.
18
Table of Contents

Stock-based compensation

As at ~~November 3, 2018, 842,905~~May 4, 2019, 929,053 common shares remain available for issuance under the 2015 Omnibus ~~Incentive~~ Plan.

~~Table of Contents~~

No stock options were granted during the ~~nine-month period~~three-month periods ended ~~November 3,~~May 4, 2019 and May 5, 2018. For the nine-month period ended October 28, 2017, the weighted average fair value of options granted of $2.39 was estimated using the Black Scholes option pricing model, using the following assumptions:



	~~October 28,~~
	~~2017~~
~~Risk-free interest rate~~		~~1.79~~	%
~~Expected volatility~~		~~27.4~~	%
~~Expected option life~~		~~4.0~~	~~years~~
~~Expected dividend yield~~		0	%
~~Exercise price~~	$	~~9.76~~

~~Expected volatility was estimated using historical volatility of similar companies whose share prices were publicly available.~~

A summary of the status of the Company’s stock option plan and changes during the ~~nine-month~~three-month period is presented below.

For the nine months ended

November 3,

October 28,

2018

2017




Weighted



Weighted

average

average

Options

exercise

Options

exercise

outstanding

price

outstanding

price

#

$

#

$
Outstanding, beginning of period

447,779

7.18

933,195

5.63
Issued

—

—

161,980

9.76
Exercised

(88,135)

2.76

(436,773)

3.88
Forfeitures

(220,791)

8.92

(135,135)

8.31
Outstanding, end of period

138,853

7.23

523,267

7.67
Exercisable, end of period

75,837

4.84

315,909

5.74

~~For the nine-month period ended November 3, 2018, the weighted average share price at the date of exercise for stock options exercised was $4.47 [October 28, 2017 — $8.68].~~

	For the three months ended
	May 4,					May 5,
	2019					2018
				Weighted					Weighted
				average					average
	Options			exercise		Options			exercise
	outstanding			price		outstanding			price
	#			$		#			$
Outstanding, beginning of year		137,540			7.17		447,779			7.18
Issued		—			—		—			—
Exercised		—			—		—			—
Forfeitures		(9,020	)		6.20		(55,342	)		5.34
Outstanding, end of period		128,520			7.20		392,437			7.44
Exercisable, end of period		127,101			7.12		260,604			6.01

A summary of the status of the Company’s RSU plan and changes during the ~~nine-month~~three-month period is presented below.

For the nine months ended

November 3,

October 28,

2018

2017




Weighted



Weighted

average

average

RSUs

fair value

RSUs

fair value

outstanding

per unit (1)

outstanding

per unit (1)

#

$

#

$

Outstanding, beginning of period

289,416

9.70

252,233

12.42

Granted

476,450

4.48

298,897

8.59

Forfeitures

(327,479)

6.45

(34,864)

10.19

Vested

(70,668)

9.08

(75,820)

12.21

Vested, withheld for tax

(69,017)

8.91

(65,342)

11.40

Outstanding, end of period

298,702

5.26

375,104

9.80

	For the three months ended
	May 4,					May 5,
	2019					2018
				Weighted					Weighted
				average					average
	RSUs			fair value		RSUs			fair value
	outstanding			per unit (1)		outstanding			per unit (1)
	#			$		#			$
Outstanding, beginning of year		270,976			5.26		289,416			9.70
Granted		—			—		416,450			4.35
Forfeitures		(21,716	)		5.73		(10,880	)		9.49
Vested		(42,934	)		5.15		(29,785	)		8.61
Vested, withheld for tax		(33,865	)		6.44		(31,694	)		8.58
Outstanding, end of period		172,461			5.00		633,507			6.29

_________

(1)
~~(1)~~
Weighted average fair value per unit as at date of grant.

~~Table of Contents~~

During the ~~three and nine-month periods~~three-month period ended ~~November 3, 2018,~~May 4, 2019, the Company recognized ~~stock-based compensation expense and~~ a ~~net reversal of stock-based compensation of $91 and $7, respectively [October 28, 2017 —~~ stock-based compensation expense of ~~$362 and $1,738, respectively]~~$127 [May 5, 2018 — $295].

~~10.~~
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8. INCOME TAXES

Income tax expense is recognized based on management’s best estimate of the weighted average annual income tax rate expected for the full fiscal year.

A reconciliation of the statutory income tax rate to the effective tax rate is as follows:

									For the three months ended
	For the three months ended				For the nine months ended				May 4,						May 5,
	November 3,		October 28,		November 3,		October 28,		2019						2018
	2018		2017		2018		2017		%			$			%			$
	%	$	%	$	%	$	%	$	(Restated - Note 3)
Income tax recovery — statutory rate	26.9	(2,873)	26.8	(2,368)	26.9	(7,015)	26.8	(4,404)		26.9			(893	)		26.9			(416	)
Increase (decrease) in provision for income tax (recovery) resulting from:
Non-deductible items	(0.4)	38	(0.4)	38	0.1	(31)	(2.3)	385		(1.0	)		33			(4.6	)		71
Provision for uncertain tax position	(8.8)	940	—	—	(3.6)	940	—	—
Unrecognized deferred income tax assets										(25.9	)		860			—			—
Other	(2.4)	260	0.3	(26)	(1.0)	255	0.1	(11)		—			—			(0.1	)		1
Income tax provision (recovery) — effective tax rate	15.3	(1,635)	26.7	(2,356)	22.4	(5,851)	24.6	(4,030)		—			—			22.2			(344	)

A breakdown of the income tax provision (recovery) on the interim consolidated statement of ~~loss~~income (loss) is as follows:


	For the three months ended		For the nine months ended		For the three months ended
	November 3,	October 28,	November 3,	October 28,	May 4,		May 5,
	2018	2017	2018	2017	2019		2018
	$	$	$	$	$		$
Income tax provision (recovery)
Current	940	(2,129)	(1,930)	(4,233)		—		(1,300	)
Deferred	(2,575)	(227)	(3,921)	203		—		956
	(1,635)	(2,356)	(5,851)	(4,030)		—		(344	)

20
Table of Contents

~~11.~~9. SELLING, GENERAL AND ADMINISTRATION EXPENSES

For the three months ended

For the nine months ended


November 3,

October 28,

November 3,

October 28,

2018

2017

2018

2017

$

$

$

$

Wages, salaries and employee benefits

16,767

15,012

49,031

47,113

Depreciation of property and equipment

1,785

2,138

5,193

6,316

Amortization of intangible assets

377

494

905

1,248

Loss on disposal of property and equipment

—

18

14

48

Impairment of property and equipment

725

2,658

3,285

4,971

Provision (recovery) for onerous contracts

3,414

(46)

5,306

(1,573)

Utilization for onerous contracts

(2,126)

(1,092)

(4,820)

(2,340)

Stock-based compensation

91

362

(7)

1,738

Executive separation costs related to salary

123

1,070

840

1,882

Strategic review and proxy contest costs

27

—

3,538

—

Other selling, general and administration

7,936

6,421

21,580

19,601

29,119

27,035

84,865

79,004

	For the three months ended
	May 4,		May 5,
	2019		2018
	$		$
	(Restated - Note 3)
Wages, salaries and employee benefits		16,517		16,480
Depreciation of property and equipment		1,325		1,686
Amortization of intangible assets		399		182
Amortization right-of-use asset		3,102		—
Utilization of onerous contract		—		(1,340	)
Recovery of provision for onerous contracts		—		(176	)
Stock-based compensation		127		295
Strategic review and proxy contest		—		794
Other selling, general and administration		6,550		6,475
		28,020		24,396

~~Table of Contents~~

~~12.~~10. EARNINGS PER SHARE

Basic earnings per share (“EPS”) amounts are calculated by dividing the net income (loss) for the period attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the period. Diluted EPS amounts are calculated by dividing the net income (loss) attributable to ordinary equity holders (after adjusting for dividends) by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares, unless these would be anti‑dilutive.

The following reflects the ~~loss~~income and share data used in the basic and diluted EPS computations:

					For the three months ended
	For the three months ended		For the nine months ended		May 4,			May 5,
	November 3,	October 28,	November 3,	October 28,	2019			2018
	2018	2017	2018	2017	$			$
	$	$	$	$	(Restated - Note 3)
Net loss for basic EPS	(9,061)	(6,485)	(20,261)	(12,410)		(3,320	)		(1,202	)

Weighted average number of shares outstanding — basic and fully diluted	25,992,339	25,829,090	25,862,086	25,659,164
Weighted average number of shares outstanding:
Basic and fully diluted						26,019,594			25,893,327
Net loss per share:
Basic and fully diluted						(0.13	)		(0.05	)

As a result of the net loss during the ~~three and nine-month~~three-month periods ended ~~November 3,~~May 4, 2019 and May 5, 2018, the stock options and ~~RSUs~~restricted stock units disclosed in Note 97 are ~~anti-dilutive~~.anti-dilutive.

~~13.~~11. RELATED PARTY DISCLOSURES

~~Other than the reimbursement of third-party costs described below incurred in connection~~Transactions with ~~the proxy contest which culminated~~related parties are measured at the ~~Company’s annual meeting held on June 14, 2018, (the “2018” Annual Meeting”), there have been no significant changes in~~exchange amount, being the consideration established and agreed to by the related ~~party transactions from those disclosed in the Company’s audited annual consolidated financial statements for the year ended February 3, 2018.~~parties.

During the ~~three and nine months~~three-month period ended ~~November 3, 2018,~~May 4, 2019, the Company purchased merchandise for resale amounting to $15 [May 5, 2018 - $64], and provided net infrastructure and administrative services of $18 [May 5, 2018 - $nil] from and to a company controlled by one of its executive employees, ~~amounting~~respectively.

21
Table of Contents

In February 2019, the Company entered into an arrangement with a related party of the controlling shareholder for reporting and consulting services. Subsequent to ~~$125~~quarter-end, the Company purchased the perpetual license rights to the reporting data model and ~~$222, respectively [October 28, 2017 — nil].~~associated intellectual property for $200. The Company also entered into a consulting services arrangement with a related party of the principal shareholder wherein nil charges were incurred.

Loan to a Company controlled by one of the Company’s executive employees

During the ~~three and nine months ended November 3, 2018,~~second quarter of 2019, the Company ~~reimbursed~~entered into a secured loan agreement with Oink Oink Candy Inc., doing business as “Squish”, as borrower, and Rainy Day Investments Ltd. (“~~Rainy Day Investments”~~RDI”), as guarantor pursuant to which the Company agreed to lend to Squish an amount of up to $4 million, amended on September 13, 2019 to reflect a ~~controlling shareholder, nil~~maximum amount available under the facility of $2.0 million and ~~$957, respectively,~~a repayment date no later than December 31, 2019. As of November 2, 2019, $2.0 million was outstanding under the agreement. The loan bears interest, payable monthly, at a rate of 1% over Bank of Montreal’s prime rate, which currently stands at 3.95%. RDI has guaranteed all of Squish’s obligations to the Company and, as security in full for ~~third-party costs incurred by it~~the guarantee, has given a movable hypothec (or lien) in ~~connection with the proxy contest, as approved by the independent members~~favour of the ~~Board~~Company on its shares of ~~Directors~~DAVIDsTEA. Squish is a company controlled by Sarah Segal, an officer of DAVIDsTEA. RDI, the ~~Company. This amount~~principal shareholder of DAVIDsTEA, is ~~included in selling, general~~controlled by Herschel Segal, Executive Chairman, Interim Chief Executive Officer and ~~administration expenses.~~a director of DAVIDsTEA. The Company and Squish previously entered into a Collaboration and Shared Services Agreement pursuant to which they collaborate on and share various services and infrastructure.

~~14.~~12. SEGMENT INFORMATION

An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses. The Company has reviewed its operations and determined that each of its retail stores represents an operating segment. However, because its retail stores have similar economic characteristics, sell similar products, have similar types of customers, and use similar distribution channels, the Company has determined that these operating segments can be aggregated at a geographic level. As a result, the Company has concluded that it has two reportable segments, Canada and the U.S., that derive their ~~respective~~ revenues from the retail and online sale of tea, tea accessories and food and beverages. The Company’s ~~Interim~~ Chief Executive Officer (the chief operating decision maker or “CODM”) makes decisions about ~~resource~~resources allocation and assesses performance at the country level, and for which discrete financial information is available.

~~Table of Contents~~

The Company derives revenue from the following products:


	For the three months ended		For the nine months ended		For the three months ended
	November 3,	October 28,	November 3,	October 28,	May 4,		May 5,
	2018	2017	2018	2017	2019		2018
	$	$	$	$	$		$
Tea	31,348	30,098	92,167	93,958		33,424		33,230
Tea accessories	8,478	8,636	25,979	30,315		7,655		8,714
Food and beverages	3,830	4,263	11,463	13,080		3,186		3,842
	43,656	42,997	129,609	137,353		44,265		45,786

Property and equipment and intangible assets by country are as follows:

			May 4,		February 2,
	November 3,	February 3,	2019 (1)		2019
	2018	2018	$		$
	$	$	(Restated - Note 3)
Canada	35,342	37,234		73,033		27,996
US	3,748	3,763		14,075		1,470
Total	39,090	40,997		87,108		29,466

_________

(1) Includes Right-of-use assets of $45,589 in Canada and $12,619 in US.

During the fourth quarter of Fiscal 2017, the Company changed the measure of profit used by the CODM in measuring performance. Management believes that the new measure, being results from operating activities before corporate expenses by country, excluding intercompany profit, is the most relevant in evaluating results. The Company has retroactively revised the results by segment for the three and nine-month periods ended October 28, 2017. Results from operating activities before corporate expenses per country are as follows:


	For the three months ended			For the nine months ended			For the three months ended May 4, 2019
	November 3, 2018			November 3, 2018			(Restated - Note 3)
	Canada	US	Consolidated	Canada	US	Consolidated	Canada		US		Consolidated
	$	$	$	$	$	$	$		$		$
Sales	34,709	8,947	43,656	103,091	26,518	129,609		34,190		10,075		44,265
Cost of sales	19,520	5,755	25,275	55,060	16,133	71,193		14,114		3,815		17,929
Gross profit	15,189	3,192	18,381	48,031	10,385	58,416		20,076		6,260		26,336
Selling, general and administration expenses (allocated)	13,872	4,513	18,385	40,794	12,907	53,701		14,876		4,815		19,691
Impairment of property and equipment	725	—	725	3,096	189	3,285
Impact of onerous contracts	133	1,155	1,288	1,129	(643)	486
Results from operating activities before corporate expenses	459	(2,476)	(2,017)	3,012	(2,068)	944		5,200		1,445		6,645
Selling, general and administration expenses (non-allocated)			8,721			27,393						8,329
Results from operating activities			(10,738)			(26,449)						(1,684	)
Finance costs			80			237						1,827
Finance income			(122)			(574)						(191	)
Loss before income taxes			(10,696)			(26,112)						(3,320	)

22
Table of Contents

~~Table of Contents~~


	For the three months ended			For the nine months ended			For the three months ended
	October 28, 2017			October 28, 2017						May 5, 2018
	Canada	US	Consolidated	Canada	US	Consolidated	Canada			US			Consolidated
	$	$	$	$	$	$	$			$			$
Sales	35,495	7,502	42,997	112,803	24,550	137,353		36,532			9,254			45,786
Cost of sales	19,475	5,150	24,625	59,046	15,548	74,594		17,816			5,278			23,094
Gross profit	16,020	2,352	18,372	53,757	9,002	62,759		18,716			3,976			22,692
Selling, general and administration expenses (allocated)	12,414	4,319	16,733	37,806	13,265	51,071		13,384			4,158			17,542
Impairment of property and equipment	595	2,063	2,658	595	4,376	4,971
Impact of onerous contracts	(150)	(988)	(1,138)	(101)	(3,812)	(3,913)		(192	)		(1,324	)		(1,516	)
Results from operating activities before corporate expenses	3,161	(3,042)	119	15,457	(4,827)	10,630		5,524			1,142			6,666
Selling, general and administration expenses (non-allocated)			8,782			26,875								8,370
Results from operating activities			(8,663)			(16,245)								(1,704	)
Finance costs			327			615								79
Finance income			(149)			(420)								(237	)
Income before income taxes			(8,841)			(16,440)
Loss before income taxes														(1,546	)

~~15.~~13. FINANCIAL RISK MANAGEMENT

The Company’s activities expose it to a variety of financial risks, including risks related to foreign exchange, interest rate, liquidity and credit.

Currency ~~risk~~Risk — ~~foreign exchange risk~~Foreign Exchange Risk

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Given that some of its purchases are denominated in U.S. dollars, the Company is exposed to foreign exchange risk. The Company’s foreign exchange risk is largely limited to currency fluctuations between the Canadian and U.S. dollars. The Company is exposed to currency risk through its cash, accounts receivable and accounts payable denominated in U.S. dollars.

Assuming that all other variables remain constant, a revaluation of these monetary assets and liabilities due to a 5% rise or fall in the Canadian dollar against the U.S. dollar would have resulted in an increase or decrease to net ~~income (loss)~~loss in the amount of ~~$32.~~$6.

The Company’s foreign exchange exposure is as follows:


	November 3,	February 3,	May 4,		February 2,
	2018	2018	2019		2019
	US$	US$	US$		US$
Cash	1,963	5,686		810	267
Accounts receivable	1,639	882		736	1,142
Accounts payable	4,247	2,555		1,667	3,869

23
Table of Contents

The Company’s U.S. subsidiary’s transactions are denominated in U.S. dollars.

In order to protect itself from the risk of losses should the value of the Canadian dollar decline in relation to the U.S. dollar, the Company entered into forward contracts to fix the exchange rate of 80% to 90% of its expected U.S. dollar inventory purchasing requirements, through September 2018. A forward foreign exchange contract is a contractual agreement to buy a specific currency at a specific price and date in the future. The Company designated the forward contracts as cash flow hedging instruments under IFRS 9. This has resulted in mark-to-market foreign exchange adjustments, for qualifying hedged instruments, being recorded as a component of other comprehensive income (loss) for the three and nine-month periods ended November 3, 2018.

~~Table of Contents~~

The Company had no foreign exchange contracts outstanding as at ~~November 3, 2018.~~May 4, 2019.

~~The nominal and contract values of foreign exchange contracts outstanding as at October 28, 2017 are as follows:~~

Nominal

Nominal

Unrealized

Contractual

value

value

gain


exchange rate

US$

C$

Term

C$
Purchase contracts

U.S. dollar

1.2221 - 1.3098

35,400

44,796

November 2017 to September 2018

628

Market ~~risk~~Risk — ~~interest rate risk~~Interest Rate Risk

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Financial instruments that potentially subject the Company to cash flow interest rate risk include financial assets with variable interest ~~rates and consists of cash.~~rates. The Company is exposed to cash flow risk ~~on its Amended~~under the Revolving Facility which bears interest at variable interest rates (Note 8)6). As at ~~November 3, 2018,~~May 4, 2019, the Company did not have any borrowings ~~under~~on the ~~Amended~~ Revolving Facility.

Liquidity ~~risk~~Risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company’s approach to managing liquidity risk is to ensure, to the extent possible, that it will always have sufficient liquidity to meet liabilities when due. The Company’s liquidity follows a seasonal pattern based on the timing of inventory purchases and capital expenditures. The Company is exposed to this risk mainly in respect of its trade and other payables.

As at ~~November 3, 2018,~~May 4, 2019, the Company had ~~$18,714~~$35,491 in cash. In addition, the Company has a Revolving Facility of $15,000, the full amount of which remained un-drawn as at May 4, 2019. Access to this Facility is further described in Note 6.

The Company expects to finance its ~~growth in store base, its~~working capital needs, store renovations, and investments in infrastructure ~~investments~~ through cash flows from operations and cash on hand. The Company expects that its trade and other payables will be discharged within 90 days.

Credit ~~risk~~Risk

The Company is exposed to credit risk resulting from the possibility that counterparties may default on their financial obligations to the Company. The Company’s maximum exposure to credit risk at the reporting date is equal to the carrying value of accounts ~~receivable and derivative financial instruments.~~receivable. Accounts receivable primarily ~~consist~~consists of receivables from retail customers who pay by credit card, recoveries of credits from suppliers for returned or damaged products, and receivables from other companies for sales of products, gift cards and other services. Credit card payments have minimal credit risk and the limited number of corporate receivables is closely monitored. The terms of foreign currency forward contracts included in derivative financial instruments have been negotiated to match the terms of the forecasted inventory purchase transactions. Both contractual parties have fully cash-collateralized the foreign currency forward contracts, and therefore, effectively eliminated any credit risk associated with the contracts (both the counterparty’s and the Company’s own credit risk).

Fair ~~values~~Values

Financial assets and financial liabilities are measured on an ongoing basis at fair value or amortized cost, based on the guidance provided in IFRS 9 ~~and as disclosed in Note 3 in these unaudited condensed interim consolidated financial statements for the three and nine-month periods ended November 3, 2018.~~. The fair values of derivative financial instruments have been determined by reference to forward exchange rates at the end of the reporting period and classified in Level 2 of the fair value hierarchy.

~~Table of Contents~~

~~The Company enters into its foreign currency forward contracts with~~ There are no outstanding derivative financial institutions with investment grade credit ratings. Foreign currency forward contracts are valued using valuation techniques with market observable inputs. The most frequently applied valuation techniques include forward pricing, using present value calculations. The models incorporate various inputs including the credit quality of counterparties, foreign exchange spot and forward rates, yield curves of the respective currencies, currency basis spreads between the respective currencies, interest rate curves and forward rate curves of the underlying commodity. All foreign currency forward contracts are fully cash collateralized, thereby mitigating both the counterparty and the Company’s non-performance risk.instruments at May 4, 2019.

There were no transfers between Level 1, Level 2 and Level 3 of the fair value hierarchy during the ~~nine-month period~~three-month periods ended ~~November 3, 2018 or the nine-month period ended October 28, 2017.~~May 4, 2019 and May 5, 2018.

~~16. COMPARATIVE FIGURES~~
24
Table of Contents

~~Certain comparative figures have been reclassified to conform to the presentation adopted in the current quarter.~~

~~Table of Contents~~

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

~~Certain statements contained herein include~~This Quarterly Report on Form 10-Q/A includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and there are, or may be deemed to be, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). The following cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the “safe harbor” provisions of the Act. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms ~~“believes”, “expects”, “may”, “will”, “should”, “could”, “seeks”, “projects”, “approximately”, “intends”, “plans”,~~“believes,” “expects,” “may,” “will,” “should,” “could,” “seeks,” “projects,” “approximately,” “intends,” “plans,” “estimates” or ~~“anticipates”,~~“anticipates,” or, in each case, their negatives or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this Quarterly Report on Form ~~10-Q~~10-Q/A and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, ~~our turnaround strategy, our store renovation plans, expansion into new sales channels,~~ financial condition, liquidity, prospects, ~~new store opening projections,~~competitive strengths and differentiators, strategy, long-term Adjusted EBITDA margin potential, dividend policy, impact of the macroeconomic environment, properties, outcome of litigation and legal proceedings, use of cash and operating and capital expenditures, impact of new accounting pronouncements, ~~and the~~ impact of improvements to internal control and financial reporting. ~~These~~

While we believe these expectations and projections are based on reasonable assumptions, such forward-looking statements are inherently subject to risks, uncertainties and ~~uncertainties include,~~assumptions about us, including the risk factors listed under Item 1A. Risk Factors, as well as other cautionary language in Form 10-K filed with the SEC on May 5, 2019.

Actual results may differ materially from those in the forward-looking statements as a result of various factors, including but ~~are~~ not limited to, the following:

	·	Our ability to manage significant changes to our Board of Directors and leadership team;

	·	Our efforts to expand beyond retail stores;

	·	Our ability to maintain our brand image;

	·	Significant competition within our industry;

	·	The effect of a decrease in customer traffic to the shopping malls, centers and street locations where our stores are located;

	·	The results of our transfer pricing audit;

	·	Our ability to attract and retain employees that embody our culture, including Tea Guides and store and district managers and regional directors;

	·	Changes in consumer preferences and economic conditions affecting disposable income;

	·	Our ability to source, develop and market new varieties of teas, tea accessories, food and beverages;

	·	Our reliance upon the continued retention of key personnel;

	·	The impact from real or perceived quality or safety issues with our teas, tea accessories, food and beverages;

	·	Our ability to obtain quality products from third-party manufacturers and suppliers on a timely basis or in sufficient quantities;

	·	The impact of weather conditions, natural disasters and manmade disasters on the supply and price of tea;

	·	Actual or attempted breaches of data security;

	·	The costs of protecting and enforcing our intellectual property rights and defending against intellectual property claims brought by others;

	·	Adverse publicity as a result of public disagreements with our shareholders;

	·	Fluctuations in exchange rates; and

	·	The seasonality of our business.

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Table of Contents

All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. These statements are based upon information available to us as of the date of this Form 10-Q/A, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially-available relevant information. In light of these risks, ~~referred to under~~uncertainties and assumptions, the ~~section entitled “Risk Factors” elsewhere~~forward-looking events discussed in this Quarterly Report on Form ~~10-Q.~~ 10-Q/A might not occur, and investors are cautioned not to unduly rely upon these statements.

Forward-looking statements speak only as of the date ~~hereof.~~of this Form 10-Q/A. Except as required under federal securities laws and the rules and regulations of the SEC, we do not have any intention to update any forward-looking statements to reflect events or circumstances arising after the date of this Form ~~10-Q,~~10-Q/A, whether as a result of new information, future events or otherwise. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements included in this Form ~~10-Q~~10-Q/A or that may be made elsewhere from time to time by, or on behalf of, us. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

Restatement of Condensed Interim Consolidated Financial Statements

We have restated our unaudited condensed interim consolidated financial statements for (i) the quarterly period ended May 4, 2019 and (ii) the quarterly period ended August 3, 2019, including applicable notes as reflected in this Form 10-Q/A, to reflect our restatement resulting from accounting errors identified in the assessment of impairment indicators upon completing the store impairment analysis under IAS 36, subsequent to the adoption of IFRS 16. Additionally upon further review, management determined that, pursuant to IFRS standards, its financial statements would be more relevant had they applied IAS 36 as of the date of initial adoption, instead of applying an available practical expedient. As a result, management elected to voluntarily change their accounting policy with respect to the initial transition elections under IFRS 16. For additional information about the restatement, please see the Explanatory Note immediately preceding Part I, Item 1 of this Form 10-Q/A and Note 3 to the interim condensed consolidated financial statements, “Changes in Accounting Policies and Restatement of Previously-Issued Financial Statements” in Part I, Item 1 of this Form 10-Q/A.

The following discussion and analysis of our financial condition and results of operations incorporates the restated amounts.

Accounting Periods

All references to “Fiscal 2019” are to the Company’s fiscal year ending February 1, 2020. All references to “Fiscal 2018” are to the Company’s fiscal year ~~ending~~ended February 2, 2019. ~~All references to “Fiscal 2017 ” are to the Company’s fiscal year ended February 3, 2018. All references to “Fiscal 2016 ” are to the Company’s fiscal year ended January 28, 2017.~~

The Company’s fiscal year ends on the Saturday closest to the end of January, typically resulting in a 52-week year, but occasionally giving rise to an additional week, resulting in a 53-week year. ~~Fiscal 2017 covers a 53-week fiscal period. Fiscal 2018~~The year ended February 2, 2019 and ~~Fiscal 2016 each~~year ending February 1, 2020 both cover a 52-week ~~fiscal~~ period.

Overview

We are a retailer of specialty tea, offering a differentiated selection of proprietary loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts, accessories and food and beverages, primarily through ~~238~~234 company-operated DAVIDsTEA stores as of ~~November 3, 2018,~~May 4, 2019, and through our ~~website, davidstea.com.~~online store at www.davidstea.com. We are building a brand that seeks to expand the definition of tea with innovative products that consumers can explore in an open and inviting retail environment and online. We strive to make tea a multi-sensory experience in our stores by facilitating interaction with our products through education and sampling so that our customers appreciate the compelling attributes of tea as well as the ease of preparation.

Factors Affecting Our Performance

~~Table~~We believe that our performance and future success depend on a number of ~~Contents~~factors that present significant opportunities for us and may pose risks and challenges, as discussed in the “Risk Factors” section of Form 10-K filed with the SEC and on SEDAR and available at www.sec.gov and www.sedar.com, respectively.

26
Table of Contents

How ~~we assess our performance~~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 consist primarily of sales from our retail stores, our online store and ~~e-commerce site.~~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~~quarter because of lower customer traffic in our locations ~~during~~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. ~~There has been a decline in customer traffic at many malls in which our stores are located. This reduction in foot traffic has had an impact on our sales at such stores.~~ Sales also include gift card breakage income.

Comparable Sales. Comparable sales refer to period-over-period comparison information for comparable ~~stores and e-commerce.~~stores. Our stores are added to the comparable sales calculation in the beginning of their thirteenth month of operation. As a result, data regarding comparable sales may not be comparable to similarly titled data from other retailers.

Measuring the change in period-over-period comparable sales allows us to evaluate how our business is performing. Various factors affect comparable sales, including:

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 to our stores and online;

the customer experience we provide in our stores and online;

the level of customer traffic near ~~the~~our locations in which we operate;

the number of customer transactions and average ticket ~~amount~~ in our stores and online;

the pricing of our tea, tea accessories, and food and beverages;

our ability to obtain and distribute product efficiently;

our opening of new stores in the vicinity of our existing stores; and

the opening or closing of competitor stores in the vicinity of our stores.

Non-Comparable Sales. Non-comparable sales include sales from stores prior to the beginning of their thirteenth fiscal month of ~~operation and from our wholesale sales channel, which includes sales to groceries, hotels, restaurants and institutions, office and workplace locations and food services, as well as corporate gifting.~~operation.

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 and distribution costs.

27
Table of Contents

Selling, General and Administration Expenses. Selling, general and administration expenses consist of store operating expenses and other general and administration expenses, including store impairments including ROU assets and provision (recovery) for onerous contracts. 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, plant and equipment, amortization of intangible, amortization of right-of-use assets and other operating costs.

~~Table of Contents~~

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 ~~beginning~~ on page 2327 of this Quarterly Report on Form ~~10-Q.~~10-Q/A.

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

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 ~~beginning~~ on page 2428 of this Quarterly Report on Form ~~10-Q.~~10-Q/A.

Finance Costs. Finance costs consist of cash and imputed non-cash charges related to our credit ~~as well as the~~facility, accretion expense on the provisions for onerous ~~contracts.~~contracts and interest expense from lease liabilities.

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

Provision for Income Tax. Provision for income tax consists of federal, provincial, state and local current and deferred income taxes.

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 non-cash charges, such as depreciation, amortization, finance costs, deferred rent, non-cash compensation expense, costs (recovery) related to onerous contracts or contracts where we expect the costs of the obligations to exceed the economic benefit, loss on disposal of property and equipment, impairment of property and equipment and ROU 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 ~~beginning~~ on page 2428 of this Quarterly Report on Form ~~10-Q.~~10-Q/A.

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Selected Operating and Financial Highlights

Results of Operations

The Company has adopted IFRS 16 as at February 3, 2019. As fully described in Note 3 of our unaudited condensed consolidated interim financial statements for the first quarter of 2019, IFRS 16 provides a single model for leases abolishing the current distinction between finance and operating leases, with most leases being recognized on the consolidated balance sheet. The adoption of IFRS 16 had a significant impact as the Company recognized new assets and liabilities for its operating leases of retail stores. In addition, the nature and timing of expenses related to those leases will change as IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. Comparative figures for the first quarter of 2019 have not been restated and continue to be reported under IAS 17, Leases and Related interpretations.

As a result, operating lease payments which were previously included in cost of sales on the consolidated statement of loss are replaced with depreciation expenses (included in selling, general and administrative expenses) from the right-of-use asset and interest expense (included under finance costs) from the lease liability. For analysis purposes only, this MD&A also shows where applicable, amounts for the first quarter of 2019 as if the Company continued to report under IAS 17, Leases and Related interpretations, and did not adopt IFRS 16, other than for differences related to testing long-lived assets for impairment and accounting for onerous store leases pursuant to the guidance of IAS 37, Provisions, which could have had an impact on the EBITDA and net loss of the Company under accounting standards applicable prior to February 3, 2019.

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

For the three months ended

For the nine months ended

November 3,

October 28,

November 3,

October 28,

2018

2017

2018

2017

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Consolidated statement of income (loss) data:








Sales

$
43,656

$
42,997

$
129,609

$
137,353

Cost of sales

25,275

24,625

71,193

74,594

Gross profit

18,381

18,372

58,416

62,759

Selling, general and administration expenses

29,119

27,035

84,865

79,004

Results from operating activities

(10,738)

(8,663)

(26,449)

(16,245)

Finance costs

80

327

237

615

Finance income

(122)

(149)

(574)

(420)

Loss before income taxes

(10,696)

(8,841)

(26,112)

(16,440)

Recovery of income tax

(1,635)

(2,356)

(5,851)

(4,030)

Net loss

$
(9,061)

$
(6,485)

$
(20,261)

$
(12,410)

Percentage of sales:

Sales

100.0%

100.0%

100.0%

100.0%

Cost of sales

57.9%

57.3%

54.9%

54.3%

Gross profit

42.1%

42.7%

45.1%

45.7%

Selling, general and administration expenses

66.7%

62.9%

65.5%

57.5%

Results from operating activities

(24.6%)

(20.2%)

(20.4%)

(11.8%)

Finance costs

0.2%

0.7%

0.1%

0.4%

Finance income

(0.3%)

(0.3%)

(0.4%)

(0.3%)

Loss before income taxes

(24.5%)

(20.6%)

(20.1%)

(11.9%)

Recovery of income tax

(3.7%)

(5.5%)

(4.5%)

(2.9%)

Net loss

(20.8%)

(15.1%)

(15.6%)

(9.0%)

Other financial and operations data:

Adjusted EBITDA (1)

$
(6,248)

$
(2,887)

$
(12,212)

$
(3,578)

Adjusted EBITDA as a percentage of sales

(14.3%)

(6.7%)

(9.4%)

(2.6%)

Number of stores at end of period

238

236

238

236

Comparable sales decline for period (2)

(4.7%)

(6.8%)

(8.8%)

(4.5%)

	For the three months ended
				May 4, 2019
	May 4,			Excluding impact			May 5,
	2019			of IFRS 16			2018
	(Restated-Note 3)
Consolidated statement of loss data:
Sales	$	44,265		$	44,265		$	45,786
Cost of sales		17,929			23,752			23,094
Gross profit		26,336			20,513			22,692
Selling, general and administration expenses		28,020			24,918			24,396
Results from operating activities		(1,684	)		(4,405	)		(1,704	)
Finance costs		1,827			—			79
Finance income		(191	)		(191	)		(237	)
Loss before income taxes		(3,320	)		(4,214	)		(1,546	)
Provision for income tax recovery		—			—			(344	)
Net loss	$	(3,320	)	$	(4,214	)	$	(1,202	)
Percentage of sales:
Sales		100.0	%		100.0	%		100.0	%
Cost of sales		40.5	%		53.7	%		50.4	%
Gross profit		59.5	%		46.3	%		49.6	%
Selling, general and administration expenses		63.3	%		56.3	%		53.3	%
Results from operating activities	(3.8		%)	(10.0		%)	(3.7		%)
Finance costs		4.1	%		0.0	%		0.2	%
Finance income	(0.4		%)	(0.4		%)	(0.5		%)
Loss before income taxes	(7.5		%)	(9.5		%)	(3.4		%)
Provision for income tax recovery		0.0	%		0.0	%	(0.8		%)
Net loss	(7.5		%)	(9.5		%)	(2.6		%)
Other financial and operations data:
Adjusted EBITDA⁽¹⁾	$	3,269		$	(2,554	)	$	(400	)
Adjusted EBITDA as a percentage of sales		7.4	%	(5.8		%)	(0.9		%)
Number of stores at end of period		234			234			240
Comparable sales decline for period ⁽²⁾	(6.1		%)	(6.1		%)	(10.6		%)

____________

(1)

For a reconciliation of Adjusted EBITDA to net income see “—Non-IFRS ~~Metrics”~~Financial Measures” below.

(2)

Comparable sales refer to period-over-period comparison information for comparable ~~stores and e-commerce.~~stores. Our stores are added to the comparable sales calculation in the beginning of their thirteenth month of operation.

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Table of Contents

Non-IFRS ~~Metrics~~Financial Measures

Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA, before and after adjustments for the impact of IFRS 16, are not ~~presentations~~a presentation made in accordance with IFRS, and the use of the terms Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA, before and after adjustments for the impact of IFRS 16, may differ from similar measures reported by other companies. We believe that Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA, ~~provide~~before and after adjustments for the impact of IFRS 16, provides investors with useful information with respect to our historical operations. Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA are not measurements of our financial performance under IFRS and should not be considered in isolation or as an alternative to net income, net cash provided by operating, investing or financing activities or any other financial statement data presented as indicators of financial performance or liquidity, each as presented in accordance with IFRS. We understand that although Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA are frequently used by securities analysts, lenders and others in their evaluation of companies, they have limitations as an

~~Table of Contents~~

analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under IFRS. Some of these limitations are:

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, before and after adjustments for the impact of IFRS 16, does not reflect any cash requirements for such replacements.

Because of these limitations, Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA before and after adjustments for the impact of IFRS 16, 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 present reconciliations of Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net loss and Adjusted EBITDA before and after adjustments for the impact of IFRS 16, to ~~their most comparable IFRS figures.~~our Net loss determined in accordance with IFRS:

Reconciliation of Adjusted selling, general and administration expenses

For the three months ended

For the nine months ended

November 3,

October 28,

November 3,

October 28,

(in thousands)

2018

2017

2018

2017

Selling, general and administration expenses

29,119

27,035

84,865

79,004

Executive separation costs (a)

(123)

(1,112)

(840)

(2,074)

Impairment of property and equipment (b)

(725)

(2,658)

(3,285)

(4,971)

Impact of onerous contracts (c)

(1,288)

1,138

(486)

3,913

Strategic review and proxy contest costs (d)

(27)

—

(3,538)

—

Adjusted selling, general and administration expenses

$
26,956

$
24,403

$
76,716

$
75,872

	For the three months ended
			May 4, 2019
	May 4,		Excluding impact		May 5,
	2019		of IFRS 16		2018
	(Restated-Note 3)
Selling, general and administration expenses	$	28,020	$	24,918	$	24,396
Impact of onerous contracts (a)		—		—		1,516
Strategic review and proxy contest costs (b)		—		—		(794	)
Adjusted selling, general and administration expenses	$	28,020	$	24,918	$	25,118

__________

(a)

Executive separation costs represent mainly salary owed to certain former executives as part of their separation of employment from the Company. The three and nine-month periods ended October 28, 2017 include $42 and $192, respectively, of non-cash stock-based compensation expenses relating to the vesting of equity awards pursuant to the separation agreements.

~~(b)~~

Represents ~~non-cash provisions related to impairment of property and equipment for stores.~~

~~(c)~~

~~Represents non-cash provisions,~~provision, non-cash reversals, and utilization related to certain stores where the unavoidable costs of meeting the obligations under the lease agreements are expected to exceed the economic benefits expected to be received from the contract.

~~(d)~~

(b)

Represents costs related to athe corporate strategic review process as well as costs related to the proxy contest which culminated at the 2018 Annual Meeting. Costs for the three and nine months ended November 3, 2018 include nil and $389, respectively, related to the strategic review process, nil and $868 for incremental directors’ and officers’ run-off insurance costs incurred prior to the 2018 Annual Meeting, and $27 and $2,281, respectively, for costs incurred in connection with the proxy contest, including nil and $957, respectively, paid to Rainy Day Investments, a controlling shareholder, for third-party costs incurred by it, as approved by the independent members of the Board of Directors of the Company.contest.

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~~Table of Contents~~

Reconciliation of Adjusted results from operating activities

For the three months ended

For the nine months ended

November 3,

October 28,

November 3,

October 28,

(in thousands)

2018

2017

2018

2017

Results from operating activities

(10,738)

(8,663)

(26,449)

(16,245)

Executive separation costs (a)

123

1,112

840

2,074

Impairment of property and equipment (b)

725

2,658

3,285

4,971

Impact of onerous contracts (c)

1,288

(1,138)

486

(3,913)

Strategic review and proxy contest costs (d)

27

—

3,538

—

Adjusted results from operating activities

$
(8,575)

$
(6,031)

$
(18,300)

$
(13,113)

	For the three months ended
				May 4, 2019
	May 4,			Excluding impact			May 5,
	2019			of IFRS 16			2018
	(Restated-Note 3)
Results from operating activities	$	(1,684	)	$	(4,405	)	$	(1,704	)
Impact of onerous contracts (a)		—			—			(1,516	)
Strategic review and proxy contest costs (b)		—			—			794
Adjusted results from operating activities	$	(1,684	)	$	(4,405	)	$	(2,426	)

___________

(a)

~~Executive separation costs related to salary represent mainly salary owed to the former executives~~ ~~as part of their separation of employment from the Company.~~ The three and nine-month periods ended October 28, 2017 include $42 and $192, respectively, of non-cash stock-based compensation expenses relating to the vesting of equity awards pursuant to the separation agreements.

~~(b)~~

Represents ~~non-cash provisions related to impairment of property and equipment for stores.~~

~~(c)~~

~~(d)~~

(b)

Represents costs related to athe corporate strategic review process as well as costs related to the proxy ~~contest which culminated at~~contest.

Reconciliation of Net loss to Adjusted EBITDA

	For the three months ended
				May 4, 2019
	May 4,			Excluding impact			May 5,
	2019			of IFRS 16⁽¹⁾			2018
	(Restated-Note 3)
Net loss	$	(3,320	)	$	(4,214	)	$	(1,202	)
Finance costs		1,827			—			79
Finance income		(191	)		(191	)		(237	)
Depreciation and amortization		4,826			1,724			1,868
Recovery of income tax		—			—			(344	)
EBITDA	$	3,142		$	(2,681	)	$	164
Additional adjustments :
Stock-based compensation expense (a)		127			127			295
Impact of onerous contracts (b)		—			—			(1,516	)
Deferred rent (c)		—			—			(137	)
Strategic review and proxy contest costs (d)		—			—			794
Adjusted EBITDA	$	3,269		$	(2,554	)	$	(400	)

____________

(1)

Adjusted EBITDA for May 4, 2019 excluding impact of IFRS 16 assumes the ~~2018 Annual Meeting. Costs for~~Company continued to report under IAS 17, Leases and did not adopt IFRS 16. Under IFRS 16, the ~~three~~nature and ~~nine months ended November 3, 2018 include nil and $389, respectively,~~timing of expenses related to operating leases have changed as the ~~strategic review process, nil~~straight-line operating leases expenses have been replaced with a depreciation charge for right-of-use assets and ~~$868~~interest expense on lease liabilities. Accordingly, IFRS 16 had a favourable impact of approximately $5.8 million on adjusted EBITDA for ~~incremental directors’~~May 4, 2019 as operating lease expenses have been replaced with deprecation and ~~officers’ run-off insurance costs incurred prior to~~interest expense, which are not included in the 2018 Annual Meeting, and $27 and $2,281, respectively, for costs incurred in connection with the proxy contest, including nil and $957, respectively, paid to Rainy Day Investments, a controlling shareholder, for third-party costs incurred by it, as approved by the independent memberscalculation of ~~the Board of Directors of the Company.~~adjusted EBITDA.

~~Reconciliation of Adjusted EBITDA to our net loss~~

For the three months ended

For the nine months ended

November 3,

October 28,

November 3,

October 28,

(in thousands)

2018

2017

2018

2017

Net loss

$
(9,061)

$
(6,485)

$
(20,261)

$
(12,410)

Finance costs

80

327

237

615

Finance income

(122)

(149)

(574)

(420)

Depreciation and amortization

2,162

2,632

6,098

7,564

Loss on disposal of property and equipment

—

18

14

48

Recovery of income tax

(1,635)

(2,356)

(5,851)

(4,030)

EBITDA

$
(8,576)

$
(6,013)

$
(20,337)

$
(8,633)

Additional adjustments:

Stock-based compensation expense (reversal) (a)

91

362

(7)

1,738

Executive separation costs related to salary (b)

123

1,070

840

1,882

Impairment of property and equipment (c)

725

2,658

3,285

4,971

Impact of onerous contracts (reversals) (d)

1,288

(1,138)

486

(3,913)

Deferred rent (e)

74

174

(17)

377

Strategic review and proxy contest costs (f)

27

—

3,538

—

Adjusted EBITDA

$
(6,248)

$
(2,887)

$
(12,212)

$
(3,578)

(a)

Represents non-cash ~~net~~ stock-based compensation ~~expense (reversal).~~expense.

(b)

~~Executive separation costs related to salary represent salary owed to former executives as part of their separation of employment from the Company.~~

~~(c)~~

Represents ~~non-cash provisions related to impairment of property and equipment for stores.~~

~~Table of Contents~~

~~(d)~~

~~(e)~~

(c)

Represents the extent to which ~~the Company’s~~our annual rent expense has been above or below ~~its~~our cash rent payments.

~~(f)~~

(d)

Represents costs related to athe corporate strategic review process as well as costs related to the proxy ~~contest which culminated at~~contest.

31
Table of Contents

Reconciliation of reported results to Adjusted net loss

	For the three months ended
				May 4, 2019
	May 4,			Excluding impact			May 5,
	2019			of IFRS 16			2018
	(Restated-Note 3)
Net loss	$	(3,320	)	$	(4,214	)	$	(1,202	)
Impact of onerous contracts (a)		—			—			(1,516	)
Strategic review and proxy contest costs (b)		—			—			794
Adjusted net loss	$	(3,320	)	$	(4,214	)	$	(1,924	)

___________

(a)

Represents provision, non-cash reversals, and utilization related to certain stores where the ~~2018 Annual Meeting. Costs for~~unavoidable costs of meeting the ~~three and nine months ended November 3, 2018 include nil and $389, respectively,~~obligations under the lease agreements are expected to exceed the economic benefits expected to be received from the contract.

(b)

Represents costs related to the corporate strategic review process ~~nil and $868 for incremental directors’ and officers’ run-off insurance~~as well as costs ~~incurred prior~~related to the ~~2018 Annual Meeting, and $27 and $2,281, respectively, for costs incurred in connection with the~~ proxy contest, including nil and $957, respectively, paid to Rainy Day Investments, a controlling shareholder, for third-party costs incurred by it, as approved by the independent members of the Board of Directors of the Company.contest.

Reconciliation of fully diluted loss per common share to adjusted fully diluted loss per common share

	For the three months ended
				May 4, 2019
	May 4,			Excluding impact			May 5,
	2019			of IFRS 16			2018
	(Restated-Note 3)
Weighted average number of shares outstanding, fully diluted		26,019,594			26,019,594			25,893,327

Adjusted weighted average number of shares outstanding, fully diluted		26,019,594			26,019,594			25,893,327

Net loss	$	(3,320	)	$	(4,214	)	$	(1,202	)

Adjusted net loss	$	(3,320	)	$	(4,214	)	$	(1,924	)

Net loss per share, fully diluted	$	(0.13	)	$	(0.16	)	$	(0.05	)

Adjusted net loss per share, fully diluted	$	(0.13	)	$	(0.16	)	$	(0.07	)

32
Table of Contents

Three Months Ended ~~November 3, 2018 Compared~~May 4, 2019 restated compared to Three Months Ended ~~October 28, 2017~~May 5, 2018

Sales. Sales for the three months ended ~~November 3, 2018 increased 1.6% and $0.7~~May 4, 2019 decreased 3.3%, or $1.5 million, to ~~$43.7~~$44.3 million from ~~$43.0~~$45.8 million in the prior year quarter. Sales from our e-commerce and wholesale channels increased $0.6 million, or by 9.3%, driven primarily by greater online adoption as well as by increased demand in our grocery distribution channel. Offsetting this was a decline in retail sales of $2.5 million and a decline of $2.3 million, or 6.1%, in comparable store sales.

Gross Profit. Gross profit increased by 16.1%, or $3.6 million, to $26.3 million for the three months ended ~~October 28, 2017. E-commerce~~May 4, 2019, from the prior year quarter. IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-use assets and ~~wholesale channels increased $2.0 million and 35.1% compared~~interest expense on lease liabilities. Accordingly, straight-line operating lease expense is no longer included in cost of sales in arriving at gross profit. Prior to the ~~three months ended October 28, 2017 driven primarily~~adoption of IFRS 16, straight-line operating lease expense amounting to $5.8 million would have been included in arriving at gross profit. Excluding the impact of IFRS 16, gross profit decreased by ~~greater online adoption in both Canada and the U.S. and our entry into grocery chain distribution earlier this year. Non-comparable sales~~$2.2 million to $20.5 million, representing a gross profit of ~~$1.6 million from stores opened for less than thirteen months, helped to partially offset decreases of $2.9 million and 7.9% in comparable sales.~~

~~Gross Profit.~~ Gross profit remained consistent at $18.4 million for both the three months ended November 3, 2018 and the three months ended October 28, 2017. Gross profit as a percentage of sales decreased slightly to 42.1%46.3% for the three months ended ~~November 3, 2018~~May 4, 2019, a decrease of 3.3% from ~~42.7% for~~ the ~~three months ended October 28, 2017 respectively,~~prior year quarter resulting from a shift in product sales mix and athe deleveraging of fixed costs due to negative comparable store sales.

Selling, General and Administration Expenses. Selling, general and administration expenses (“SG&A”) increased by 14.9%, or $3.6 million, to $28.0 million in the three months ended May 4, 2019 from the prior year quarter. Under IFRS 16, SG&A includes $3.1 million of depreciation in connection with our right-of-use assets. Excluding the impact of IFRS 16, SG&A would have amounted to $24.9 million, an increase of $0.5 million, or 2%, from the prior year quarter and as a percentage of sales would have amounted to 56.3% representing an increase of 3.0% over the prior year quarter. Excluding the impact of IFRS 16 for the three months ended ~~November 3, 2018 increased by 7.7%,~~May 4, 2019 and $2.1 million, to $29.1 million from $27.0 million for the three months ended October 28, 2017. As a percentage of sales, selling, general and administration expenses increased to 66.7% for the three months ended November 3, 2018 compared to 62.9% for the three months ended October 28, 2017. Excluding the impact of ~~executive separation costs, impairment of property and equipment,~~ onerous contracts and costs related to the strategic review and proxy contest for the three months ended ~~November 3,~~May 5, 2018, ~~and October 28, 2017, selling, general and administration expenses increased to $27.0~~Adjusted SG&A decreased by $0.2 million for the three months ended November 3, 2018 from $24.4 million for the three months ended October 28, 2017. The increase of $2.6 million and 10.4% was attributable primarily to a $1.7 million increase in staff compensation, partly attributable to minimum wage increases, and a $0.8 million increase in foreign currency translation losses.May 4, 2019. As a percentage of sales, ~~selling, general and administration expenses excluding these items~~Adjusted SG&A increased to ~~61.7%~~56.3% from ~~56.7%,~~54.9% due to the deleveraging of fixed costs as a result of ~~the~~ negative comparable ~~sales this quarter.~~store sales.

Results from Operating Activities. ~~Losses~~Loss from operating activities ~~increased by $2.1~~remained stable at $1.7 million ~~to $10.7 million for~~compared from the ~~three months ended November 3, 2018 from a loss of $8.7 million for the three months ended October 28, 2017.~~prior year quarter. Excluding the impact of ~~executive separation costs, impairment of property and equipment, onerous contracts and the strategic review and proxy contest for the three months ended November 3, 2018, losses~~IFRS 16, loss from operating activities ~~increased by $2.6~~would have amounted to $4.4 million, ~~to $8.6~~an increase of $2.7 million from the prior year quarter. This is explained by a ~~loss~~decline in gross profit of ~~$6.0~~$2.2 million ~~for the three months ended October 28, 2017.~~

~~Recovery~~resulting from a decline in sales of ~~Income Taxes.~~ ~~Recovery~~$ 1.5 million, an increase in cost of ~~income taxes decreased by~~sales of $0.7 million ~~to $1.6 million for the three months ended November 3, 2018~~and an increase in SG&A of $0.5 million. Adjusted results from ~~$2.4 million for the three months ended October 28, 2017. The decrease was due primarily to lower~~ operating activities, and a provision recorded of $0.9 million in connection with an uncertainty in the eventual outcome of a tax position the Company has taken. The Company’s effective tax rates were 15.3% and 24.7% for the three months ended November 3, 2018 and October 28, 2017, respectively. Adjusting the November 3, 2018

~~Table of Contents~~

~~effective tax rate for the provision taken on uncertain tax position, the Company’s effective tax rate would have been 26.5%.~~

~~Nine Months Ended November 3, 2018 Compared to Nine Months Ended October 28, 2017~~

~~Sales.~~ ~~Sales for the nine months ended November 3, 2018 decreased 5.7%, or $7.8 million, to $129.6 million~~which excludes any impact from $137.4 million for the nine months ended October 28, 2017. E-commerce and wholesale channel sales increased $3.0 million and 19.4% compared to the nine months ended October 28, 2017 driven primarily by greater online adoption in both Canada and the U.S. and our entry into grocery chain distribution. Non-comparable sales of $2.5 million from stores opened for less than thirteen months, helped to partially offset decreases of $13.3 million and 11.7% in comparable sales.

~~Gross Profit.~~ Gross profit decreased by 7.0%, or $4.4 million, to $58.4 million for the nine months ended November 3, 2018 from $62.8 million for the nine months ended October 28, 2017. Gross profit as a percentage of sales decreased slightly to 45.1% for the nine months ended November 3, 2018 from 45.7% for the nine months ended October 28, 2017.

~~Selling, General and Administration Expenses.~~ Selling, general and administration expenses increased by 7.4%, or $5.9 million, to $84.9 million for the nine months ended November 3, 2018 from $79.0 million for the nine months ended October 28, 2017. As a percentage of sales, selling, general and administration expenses increased to 65.5% for the nine months ended November 3, 2018 compared to 57.5% for the nine months ended October 28, 2017. Excluding the impact of separation costs, impairment of property and equipment, onerous contracts, and costs related to the strategic review and proxy contest, ~~for~~was $4.4 million compared to $2.4 million in the ~~nine~~prior year quarter.

Finance Costs. Finance costs amounted to $1.8 million in the three months ended November 3, 2018 and October 28, 2017, selling, general and administration expenses increased to $76.7 million for the nine months ended November 3, 2018 from $75.9 million for the nine months ended October 28, 2017. The netMay 4, 2019, an increase of ~~$0.8 million and 1.1% was attributable to a $1.9 million increase in salaries, partly attributable to minimum wage increases, a $0.5 million increase in foreign exchange translation losses and a~~ $1.7 million ~~decrease in non-cash stock-based compensation expense. As~~from the prior year quarter. Finance costs under IFRS 16 includes interest expense from lease liabilities measured at the present value of lease payments to be made over the lease term. The Company recognized a ~~percentage~~lease liability of ~~sales, selling, general and administration expenses excluding the impact~~$102.2 million on initial application of ~~these items increased to 59.2% from 55.2%, due to deleveraging of fixed costs as a result of the negative comparable sales.~~

~~Results from Operating Activities.~~ ~~Losses from operating activities increased by $10.2 million, to $26.4 million for the nine months ended November 3, 2018 from a loss of $16.2 million for the nine months ended October 28, 2017.~~IFRS 16. Excluding the impact of ~~executive separation costs, impairment~~IFRS 16, interest expense would have been $nil in the current year quarter.

Finance Income. Finance income of ~~property~~$0.2 million is derived from interest on cash on hand and ~~equipment,~~has decreased slightly from prior year quarter.

EBITDA and Adjusted EBITDA. EBITDA, which excludes non-cash and other items in the current and prior periods, was $3.1 million in the quarter ended May 4, 2019 compared to $0.2 million in the prior year quarter. Excluding the impact of IFRS 16, EBITDA would have amounted to a negative $2.7 million, representing a decrease of $2.8 million over the prior year quarter. Adjusted EBITDA for the quarter amounted to $3.3 million compared to a negative $0.4 million in the prior year quarter. Excluding the impact of IFRS 16 and stock-based compensation for the three months ended May 4, 2019 and the impact of stock-based compensation, onerous contracts, deferred rent and costs related to the strategic review and proxy contest for the ~~nine~~three months ended ~~November 3,~~May 5, 2018, ~~and October 28, 2017, results from operating activities increased~~Adjusted EBITDA decreased by ~~$5.2 million, to $18.3~~$2.2 million from the prior year quarter.

Net Loss. Net loss was $3.3 million in the quarter ended May 4, 2019 compared to a net loss of ~~$13.1~~$1.2 million ~~for~~in the ~~nine months ended October 28, 2017.~~prior year quarter. Excluding the impact of IFRS 16, Net loss would have amounted to $4.2 million, representing an increase of $3.0 million in net loss over the prior year quarter. Adjusted net loss, which excludes the impact from onerous contracts and costs related to strategic review and proxy contest, was $3.3 million compared to $1.9 million in the prior year quarter.

~~Recovery of Income Taxes.~~ ~~Recovery of income taxes increased by $1.8 million,~~Fully diluted loss per common share. Fully diluted loss per common share was $0.13 compared to a recovery of $5.9 million for the nine months ended November 3, 2018 from a recovery of $4.0 million for the nine months ended October 28, 2017. The increase was due primarily to an increase in recovery of income taxes attributable primarily to lower results from operating activities, partially offset by a $0.9 million tax provision in connection with an uncertainty$0.05 in the ~~eventual outcome~~first quarter of Fiscal 2018. Adjusted fully diluted loss per common share, which is adjusted net loss on a tax position the Company has taken. The Company’s effective tax rates were 22.4% and 24.6% for the nine months ended November 3, 2018 and October 28, 2017, respectively. Adjusting the November 3, 2018 effective tax rate for the provision taken on uncertain tax position, the Company’s effective tax rate would have been 27.0%.fully diluted weighted average shares outstanding basis, was $0.13 per share compared to $0.07 per share.

33
Table of Contents

Liquidity and Capital Resources

As at ~~November 3, 2018, the Company~~May 4, 2019 we had ~~$18.7~~$35.5 million of cash primarily held ~~with~~by major Canadian financial institutions. ~~Working capital~~Total current assets less the sum of Trade and other payables and Deferred revenue was ~~$55.1 million as at November 3, 2018, compared to $77.2 million as at~~$62,446 and $65,842, for the periods ended May 4, 2019 and February ~~3, 2018.~~2, 2019, respectively.

~~Table of Contents~~

~~The Company’s~~Our primary ~~sources~~source of liquidity ~~are~~is cash on ~~hand and cash flows from operations. The Company’s~~hand. Our primary cash needs are to ~~support the increase~~finance working capital, investments in ~~inventories~~infrastructure and for capital expenditures related to ~~new stores,~~ store ~~renovations and infrastructure investments.~~renovations.

Capital expenditures typically vary depending on the timing of new store openings, store renovations and infrastructure-related investments.

~~The Company’s~~Our primary working capital requirements are for the purchase of store inventory and payment of payroll, rent and other store operating costs. ~~The Company’s~~Our working capital requirements fluctuate during the year, rising in the second and third fiscal quarters as ~~the Company takes~~we take title to increasing quantities of inventory in anticipation of ~~its~~our peak selling season in the fourth fiscal quarter. ~~The Company funds its~~We funded our capital expenditures and working capital requirements from cash on hand and net cash provided by ~~its~~our operating activities.

~~The Company believes~~We believe that ~~its~~our cash position, ~~and~~ net cash provided by ~~its~~our operating activities will be adequate to finance ~~its~~our planned capital expenditures and working capital requirements for the ~~foreseeable future.~~next twelve months.

Cash Flow

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

									For the three months ended
	For the three months ended				For the nine months ended							May 4, 2019
	November 3,		October 28,		November 3,		October 28,		May 4,			Excluding impact			May 5,
	2018		2017		2018		2017		2019			of IFRS 16			2018
Cash flows provided by (used in):
Cash flows provided by (used in) :
Operating activities	$	(18,037)	$	(16,134)	$	(37,581)	$	(19,976)	$	360		$	(5,463	)	$	(7,106	)
Financing activities										(5,823	)		—			—
Investing activities		(2,880)		(3,498)		(7,271)		(9,295)		(1,120	)		(1,120	)		(2,510	)
Financing activities		8		90		82		1,696
Decrease in cash	$	(20,909)	$	(19,542)	$	(44,770)	$	(27,575)	$	(6,583	)	$	(6,583	)	$	(9,616	)

Cash Flows ~~Provided by (Used in)~~Used in Operating Activities

. Net cash ~~used in~~provided by operating activities ~~decreased~~amounted to ~~$18.0~~$0.4 million for the three months ended ~~November 3, 2018~~May 4, 2019 from ~~$16.1~~net cash used of $7.1 million for the three months ended ~~October 28, 2017. The decrease in~~May 5, 2018. Excluding the ~~cash flows used in operating activities was due primarily to lower results from operations and to an increase in working capital attributed to prepaid rents, due to the timing~~impact of ~~quarter end, and higher investments in inventory to support the sales for the holiday season.~~

~~Net~~IFRS 16, net cash used in operating activities ~~decreased~~amounted to ~~$37.6~~$5.5 million, ~~for~~an improvement of $1.6 million from the ~~nine months ended November 3, 2018~~prior year quarter. Net change in other non-cash working capital balances related to operations improved by $5.7 million primarily from ~~$20.0~~reduction in accounts receivables, inventories and prepaids, and an increase in accounts payables and accrued liabilities, offset by an increase of $4.1 million ~~for the nine months ended October 28, 2017. The decrease~~used in ~~the~~operating activities resulting primarily from lower results from operations.

Cash Flows Used in Financing Activities. Net cash flows used in ~~operating~~financing activities was due primarily to lower results from operations and to an increase in working capital attributed to prepaid rents, due to the timing of quarter end, and higher investments in inventory in comparison to the nine months ended October 28, 2017.

~~Cash Flows Provided by (Used in) Investing Activities~~

~~Capital expenditures decreased by $0.6 million, to $2.9~~$5.8 million for the three months ended ~~November 3, 2018 from $3.5~~May 4, 2019, compared to $nil for the three months ended May 5, 2018. Excluding the impact of IFRS 16, n.et cash used in financing activities amounted to $nil in both periods.

Cash Flows Used in Investing Activities. Capital expenditures decreased by $1.4 million, to $1.1 million for the three months ended ~~October 28, 2017. The~~May 4, 2019, from $2.5 million for the three months ended May 5, 2018. This decrease was primarily due to a lower ~~number of new store build-outs and store renovations.~~investment in both leasehold improvements as well as software.

Capital expenditures decreased by $2.0 million, to $7.3 million for the nine months ended November 3, 2018 from $9.3 million for the nine months ended October 28, 2017. The decrease was primarily due to a lower numberCredit Facility with Bank of ~~new store build-outs and store renovations.~~Montreal

~~Table of Contents~~

~~Cash Flows Provided By Financing Activities~~

Net cash flows provided by financing activities were $0.0 million and $0.1 million for the three and nine months ended November 3, 2018, compared to $0.1 million and $1.7 million, respectively, for the three and nine months ended October 28, 2017.

~~Credit Facility~~

InOn June 11, 2018, the Company ~~entered into~~amended its existing Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provides for a two year revolving ~~credit~~ facility (“Amended Revolving Facility”) in the principal amount of $15,000 or the equivalent in U.S. dollars, repayable at any time, two years from June 11, 2018, with no accordion feature. Borrowings under the Amended ~~Credit Agreement, with a major Canadian financial institution, it lender.~~Revolving Facility may not exceed the lesser of the total commitment for the revolving facility and the borrowing base, calculated as 75% of the face value of all eligible receivables plus 50% of the estimated value of all eligible inventory, less any priority payables.

34
Table of Contents

The Amended Credit Agreement subjects the Company to certain financial ~~covenants entered into between the Company and its lender.~~covenants. Without the prior written consent of the lender, the Company’s fixed charge coverage ratio may not be less than 1.10:1.00 and the Company’s leverage ratio may not exceed 3.00:~~1:00.~~1.00. In addition, the Company’s net tangible worth may not be less than $65,000 and the Company’s minimum excess availability must not be less than ~~$15.0 million.~~$15,000. The Amended Revolving Facility bears interest based on the Company’s adjusted leverage ratio, at the ~~lender’s~~bank’s prime rate, U.S. bank rate ~~and~~or LIBOR plus a range from 0.5% to 2.5% per annum. A standby fee range of 0.3% to 0.5% will be paid on the daily principal amount of the unused portion of the Amended Revolving Facility.

The ~~Amended Credit Agreement~~credit facility also contains ~~non-financial~~nonfinancial covenants that, among other things and subject to certain exceptions, restrict the Company’s ability to become a guarantor or endorser or otherwise become liable upon any note or other obligation other than in the normal course of business. The Company also cannot make any dividend payments.

As at ~~November 3, 2018 and February 3, 2018,~~May 4, 2019, the Company did not have any borrowings under the Amended Revolving Facility.

As at May 4, 2019, the Company is in breach of its fixed charge coverage ratio and certain nonfinancial covenants. BMO has temporarily agreed to forbear from exercising remedies under the Credit Agreement, however the Company cannot borrow under the facility.

The Company is in good faith discussions with BMO to install an asset based lending facility that will provide a revolving facility at commercial reasonable terms.

Off-Balance Sheet Arrangements

~~Other than operating lease obligations, the Company has~~We have no off-balance sheet obligations.

Contractual Obligations and Commitments

There have been no significant changes to ~~the Company’s~~our contractual obligations as disclosed in our consolidated financial statements for the fiscal year ended February ~~3, 2018,~~2, 2019, other than those which occur in the normal course of business.

Critical Accounting Policies and Estimates

~~The Company’s~~Our discussion and analysis of operating results and financial condition are based upon ~~its~~our financial statements. The preparation of financial statements requires ~~the Company~~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~~judgement involved and its potential impact on ~~the~~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 ~~the Company’s~~our financial position, changes in financial position or results of operations. ~~The Company’s~~Our significant accounting policies are discussed under ~~note~~Note 3 to ~~its~~our consolidated financial statements for the year ended February ~~3, 2018~~2, 2019 included in ~~the~~our Annual Report on Form 10-K ~~filed with the SEC on April 19, 2018.~~dated May 2, 2019. There have been no material changes to the critical accounting policies and estimates since February ~~3, 2018,~~2, 2019, other than with respect to IFRS 16 as described ~~below.~~in Note 3 to the interim consolidated financial statements.

Recently Issued Accounting Standards

AsRefer to Note 3, “Changes in Accounting Policies” for a discussion of ~~February 4, 2018, the Company adopted the new~~recent accounting ~~standards described below.~~pronouncements.

~~Table of Contents~~

IFRS 9, “Financial Instruments” (“IFRS 9”), replaces IAS 39, “Financial Instruments: Recognition and Measurement” and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. With the exception of hedge accounting, which the Company applied prospectively, it has applied IFRS 9 retrospectively, with the initial application date of February 4, 2018. Overall, there was no material impact on the Company’s consolidated financial statements.

IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”), replaces IAS 11, “Construction Contracts”, and IAS 18, “Revenue”, as well as various interpretations regarding revenue. This standard introduces a single model for recognizing revenue that applies to all contracts with customers, except for contracts that are within the scope of standards on leases, insurance and financial instruments. This standard also requires enhanced disclosures. Adoption of IFRS 15 is mandatory and is effective for annual periods beginning on or after January 1, 2018. The implementation of IFRS 15 impacts the allocation of revenue that is deferred in relation to the Company’s customer loyalty award programs. Prior to adoption, revenue was allocated to the customer loyalty awards using the residual fair value method. Under IFRS 15, consideration is allocated between the loyalty program awards and the goods on which the awards were earned, based on their relative stand-alone selling prices. The change in allocation of revenue that is deferred in relation to the Company’s customer loyalty program does not have a material impact on retained earnings as at February 4, 2018. Overall, there was not a material impact on the Company’s consolidated financial statements.

IFRIC 22, “Foreign Currency Transactions and Advance Consideration” (“IFRIC 22”). In December 2016, the IASB issued IFRIC 22, which addresses how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) and on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency. IFRIC 22 is effective for annual periods beginning on or after January 1, 2018. There was no material impact on the Company’s consolidated financial statements.

~~Information on significant new accounting standards and amendments issued but not yet adopted is described below.~~

IFRS 16, “Leases” (“IFRS 16”) replaces IAS 17, “Leases”. This standard provides a single model for leases abolishing the current distinction between finance and operating leases, with most leases being recognized in the statement of financial position. Certain exemptions will apply for short-term leases and leases of low value assets. The new standard will be effective for annual periods beginning on or after January 1, 2019, with early application permitted. The Company has performed a preliminary assessment of the potential impact of the adoption of IFRS 16 on its consolidated financial statements. The Company expects the adoption of IFRS 16 will have a significant impact as the Company will recognize new assets and liabilities for its operating leases of retail stores. In addition, the nature and timing of expenses related to those leases will change as IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. The Company has not yet determined which transition method it will apply or whether it will use the optional exemptions or practical expedients under the standard. The Company expects to disclose additional detailed information, including its transition method, any practical expedients elected and estimated quantitative financial effects, before the adoption of IFRS 16.

IFRIC 23, “Uncertainty over Income Tax Treatments”, was issued by the IASB in June 2017. IFRIC 23 provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. IFRIC 23 is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted. IFRIC 23 requires an entity to:

~~Contemplate whether uncertain tax treatments should be considered separately, or together as a group, based on which approach provides better predictions of the resolution;~~

~~Reflect an uncertainty in the amount of income tax payable (recoverable) if it is probable that it will pay (or recover) an amount for the uncertainty; and~~

~~Measure a tax uncertainty based on the most likely amount or expected value depending on whichever method better predicts the amount payable (recoverable).~~

~~Table of Contents~~

~~The Company does not expect a material impact from the adoption of IFRIC 23 on its consolidated financial statements.~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There has been no material change in the foreign exchange and interest rate risk discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in ~~the Company’s~~our Annual Report on Form 10-K ~~for the year ended February 3, 2018 filed with the SEC on April 19, 2018.~~dated May 2, 2019.

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

~~The Company’s~~Our management, with the participation of ~~the~~our Chairman and Interim Chief Executive Officer and Chief Financial Officer and Chief Operating Officer, evaluated the effectiveness of ~~its~~our disclosure controls and procedures as of ~~November 3, 2018.~~May 4, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of ~~the Company’s~~our disclosure controls and procedures as of ~~November 3, 2018, the~~May 4, 2019, our Chairman and Interim Chief Executive Officer and Chief Financial Officer and Chief Operating Officer concluded that, as of such date, ~~the Company’s~~our disclosure controls and procedures were not effective.

During the course of the Company’s financial statement close process for the quarter ended November 2, 2019, accounting errors were identified in the assessment of impairment indicators upon completing the store impairment analysis under IAS 36, Impairment of Assets (“IAS 36”), subsequent to the adoption of IFRS 16, Leases (“IFRS 16”). When appropriately performing the assessment of impairment indicators with respect to the right-of-use assets (“ROU assets”) as at May 4, 2019 and August 3, 2019, impairment charges of $13,924 and $5,025 respectively were identified that would have been required to be recognized in the respective periods under the Company’s accounting policy for transition to IFRS 16, which included the use of the practical expedient for assessing impairment. Upon further review, the Company also determined that, pursuant to IFRS standards, its financial statements would be more relevant had they applied IAS 36 to assess impairment of ROU assets as of the date of initial adoption, instead of applying the available practical expedient. Accordingly, the Company elected to voluntarily change its accounting policy to perform an impairment assessment in accordance with IAS 36 at the date of transition to IFRS 16. The Company believes this change is more relevant because it more faithfully depicts the performance of the Company. Subsequent to the retrospective application of the change in accounting policy, the impairment charges were nil and $5,025 for the quarters ended May 4, 2019 and August 3, 2019, respectively.

As a result of the aforementioned analysis, a material weakness in the design of the monitoring of impairment triggers upon completing the store impairment analysis under IAS 36, subsequent to the adoption of IFRS 16 was identified. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim statements will not be prevented or detected on a timely basis.

Certain remedial efforts were undertaken during the third quarter financial statement close process that resulted in effective design of the monitoring of impairment triggers under IAS 36 subsequent to the adoption of IFRS 16; however, we are unable to conclude that this control was operationally effective due to lack of sufficient extent of samples for testing.

Changes in Internal Control over Financial Reporting

~~There~~In light of the restatement, our Chief Executive Officer and Chief Financial Officer have ~~been no changes~~reassessed their evaluation of the effectiveness of the design and operation of its disclosure controls over financial reporting as of May 4, 2019 and concluded that the Company did not maintain effective disclosure control and procedures due to a material weakness in the Company’s internal control over financial reporting ~~(as defined~~that existed at that date in ~~Rule 13a-15(f)~~the monitoring of impairment triggers upon completing a store impairment analysis under IAS 36 subsequent to the Exchange Act) during the three and nine-month period ended November 3, 2018 that have materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting.adoption of IFRS 16.

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~~Table of Contents~~Part II. OTHER INFORMATION

Item 1. Legal Proceedings

~~The Company is, from~~From time to time, ~~subject to claims~~we may become involved in various lawsuits and ~~suits arising~~legal proceedings which arise in the ordinary course of business. ~~Although~~Except as noted above, we are not presently a party to any legal proceedings, government actions, administrative actions, investigations or claims that are pending against us or involve us that, in the ~~outcome~~opinion of ~~these and other claims cannot~~our management, could reasonably be ~~predicted with certainty, management does not believe that the ultimate resolution of any matters in which the Company is currently involved will~~expected to have a material adverse effect on ~~its~~our business, financial ~~position~~condition or ~~on its results of operations.~~

~~On June 1, 2018, certain investment funds managed by Porchlight Equity Management LLC (the “Porchlight Funds”) filed~~operating results. However, litigation is subject to inherent uncertainties, and an ~~Application for declaratory judgment~~adverse result in ~~the Superior Court in the District of Montreal, Province of Québec (the “Initial Action”) against Rainy Day Investments,~~these or other matters may arise from time to time that may harm our controlling shareholder, and Herschel Segal, who controls Rainy Day Investments. The Company and its directors were named as “mis en cause”, also referred to as an impleaded party. The Initial Action related to a 2013 settlement agreement between the Porchlight Funds and Rainy Day Investments. On July 20, 2018, the Initial Action was discontinued.business.

On July 24, 2018, the Porchlight Funds filed an “Application for declaratory judgment and for the issuance of orders for relief from oppression and to prohibit defendant Herschel Segal from holding the office of director and/or executive chairman and/or chief executive officer of [the Company]” in the Superior Court in the District of Montreal, Province of Québec against Rainy Day Investments and Herschel Segal (the “Second Action”). The Company and its directors were again named as impleaded parties. The allegations contained in the Second Action were similar to those contained in the Initial Action. In October 2018, the Second Action was discontinued.

Item 1A. Risk Factors

~~In addition~~Except as set forth below, there have been no material changes to the ~~other information set forth~~risk factors previously disclosed in ~~this Quarterly Report on~~our Form ~~10-Q, you should carefully consider~~10-K for our fiscal year ended February 2, 2019.

Risks Related to Material Weaknesses In Internal Control Over Financial Reporting

We have identified material weaknesses in our internal control over financial reporting which have resulted in material misstatements in our previously issued financial statements. If our remedial measures are insufficient to address the ~~factors~~material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to further restate our financial results, which could adversely affect our stock price and result in an inability to maintain compliance with applicable stock exchange listing requirements.

As discussed in Part I, ~~“Item 1A. Risk Factors”~~Item 4. “Controls and Procedures,” we have concluded that there were matters that constituted material weaknesses in internal control over financial reporting. We have also restated our financial statements as discussed in Note 3 to these unaudited condensed interim consolidated financial statements.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis. The existence of this issue could adversely affect us, our reputation or investors' perceptions of us. We plan to take additional measures to remediate the underlying causes of the material weaknesses. However, we have not completed all of the corrective processes, procedures and related evaluation or remediation that we believe are necessary. As we continue to evaluate and work to remediate the material weaknesses, we may determine to implement further measures to address the control deficiencies. The actions that we are taking are subject to ongoing senior management review, as well as audit committee oversight.

Although we plan to complete this remediation process as quickly as possible, we cannot at this time estimate how long it will take, and our measures may not prove to be successful in remediating the material weaknesses. If our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our ~~Annual Report on Form 10-K for~~internal control over financial reporting are discovered or occur in the ~~year ended February 3, 2018~~future, our consolidated financial statements may contain material misstatements and ~~in Part II, “Item 1A. Risk Factors”~~we could be required to further restate our financial results. In addition, if we are unable to successfully remediate the material weaknesses in our ~~Quarterly Report on Form 10-Q for the quarterly period ended November 3, 2018, as filed with the SEC, which could materially affect~~internal controls or if we are unable to produce accurate and timely financial statements, our ~~business, financial condition or future results.~~

~~If any of such risks actually occurs, our business, prospects, operating results and financial condition could suffer materially, the trading~~stock price of our common shares could decline and you could lose all or part of your investment in the Company. Although we believe that we have identified and discussed as referred to above the key risk factors affecting our business, there may be ~~additional risks~~adversely affected and ~~uncertainties that are not currently known~~we may be unable to ~~us or that are currently deemed immaterial that may adversely affect our business and financial condition.~~maintain compliance with applicable stock exchange listing requirements.

Item 2. Unregistered Sales of Equity Securities

~~Recent Sales of Unregistered Securities~~

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

~~Table of Contents~~

Item 5. Other Information

~~Indemnification Agreements~~None.

On December 10, 2018, the Company entered into an Indemnification Agreement with Frank Zitella, the Company’s recently appointed Chief Financial Officer. The Company also expects to enter into the Indemnification Agreement with its future officers and directors.
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The Indemnification Agreement requires the Company to indemnify these individuals to the fullest extent permitted by the laws of the Province of Québec and the federal laws of Canada applicable in the Province of Québec, for certain liabilities to which they may become subject as a result of their affiliation with the Company.

The foregoing summary description of the material terms of the Indemnification Agreement does not purport to be complete and is subject to, and qualified in its entirety by reference to, the full text of form of Indemnification Agreement, which was attached as Exhibit 10.2 to the Quarterly Report on Form 10-Q filed with the SEC on September 13, 2018 and incorporated herein by reference.

Item 6. Exhibits

(a) Exhibits:

Preferability Letter


31.1		Principal Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Principal Financial Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~Table of Contents~~

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	DAVIDsTEA ~~Inc.~~
	INC.


	By:	/s/ Herschel Segal
Date: December ~~13, 2018~~20, 2019	Name:	Herschel Segal
	Title:	Chairman and Interim Chief Executive Officer ~~(principal executive officer)~~

~~By:~~
~~/s/ Frank Zitella~~
~~Date: December 13, 2018~~
~~Name:~~
~~Frank Zitella~~
~~Title:~~
~~Chief Financial Officer (principal accounting officer and principal financial officer)~~39

	·	Part I, Item 1. Financial Statements

	·	Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

	·	Part I, Item 4. Controls and Procedures

	·	Part II, Item 1A. Risk Factors

	·	Part II, Item 6. Exhibits


PART I. FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements	3	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30	35

Item 4.	Controls and Procedures	30	36

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	31	37

Item 1A.	Risk Factors	31	37

Item 2.	Unregistered Sales of Equity Securities	31	37

Item 3.	Defaults Upon Senior Securities	31	37

Item 4.	Mine Safety Disclosures	31	37

Item 5.	Other Information	32	37

Item 6.	Exhibits	32	38


	February 3, 2018		February 3, 2018
	IAS 39		IFRS 9
	Measurement	Carrying	Measurement	Carrying
	category	Value	category	Value
		$		$
Cash	FVTPL	63,484	FVTPL	63,484
Credit card cash clearing receivables	Amortized cost	1,291	Amortized cost	1,291
Other receivables	Amortized cost	1,840	Amortized cost	1,840
Derivative financial instruments	FVTPL	229	FVTPL	229

	-	applying IFRS 16 exclusively to contracts that were previously identified as leases applying IAS 17 at the date of initial application;

	-	applying a single discount rate to a portfolio of leases with reasonably similar characteristics;

	-	excluding initial direct costs from the measurement of the right-of-use asset at the date of initial application; and

	-	not separating the lease component and its associated non-lease component.


		Nominal	Nominal		Unrealized
	Contractual	value	value		gain
	exchange rate	US$	C$	Term	C$
Purchase contracts
U.S. dollar	1.2221 - 1.3098	35,400	44,796	November 2017 to September 2018	628

	~~By:~~	~~/s/ Frank Zitella~~
~~Date: December 13, 2018~~	~~Name:~~	~~Frank Zitella~~
	~~Title:~~	~~Chief Financial Officer (principal accounting officer and principal financial officer)~~39