FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~FORM 10-Q~~

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

For the quarterly period ended ~~November 2, 2019.~~October 31, 2020

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

For the transition period from __________ to __________

Commission file number 001-37404

DAVIDsTEA Inc.

(Exact name of registrant as specified in its charter)

Canada

98-1048842

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

5430 Ferrier

Mount-Royal, Québec, Canada, H4P 1M2

(Address of principal executive offices) (zip code)

(888) 873-0006

(Registrant’s telephone number, including area code)

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~~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	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 ~~20, 2019, 26,079,662~~11, 2020, 26,230,907 common shares of the registrant were outstanding.

DAVIDsTEA Inc.

TABLE OF CONTENTS

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Table of Contents

DAVIDsTEA Inc. (the “Company”), a corporation incorporated under the Canada 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 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,~~Quarterly Report, unless otherwise specified, all monetary amounts are in Canadian dollars, all references to “$,” “C$,” “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 ~~13, 2019,~~11, 2020, the ~~noon buying rate certified for customs purposes by the U.S. Federal Reserve~~ Bank of ~~New York~~Canada closing average exchange rate was US$1.00 = CAD$~~1.3196.~~1.2769

3
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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]

As at

November 2,

February 2,

2019

2019

$

$

ASSETS

Current

Cash

28,044

42,074

Accounts and other receivables

[Note 12]

5,430

3,681

Inventories

[Note 5]

32,638

34,353

Income tax receivable

1,195

4,107

Prepaid expenses and deposits

6,906

8,819

Total current assets

74,213

93,034

Property and equipment

20,557

23,788

Intangible assets

6,454

5,678

Right-of-use assets

[Notes 3 and 6]

44,825

—

Total assets

146,049

122,500

LIABILITIES AND EQUITY

Current

Trade and other payables

21,155

20,951

Deferred revenue

5,619

6,241

Current portion of provisions

[Note 3]

—

3,714

Current portion of lease liabilities

[Note 3]

16,291

—

Total current liabilities

43,065

30,906

Deferred rent and lease inducements

[Note 3]

—

8,698

Provisions

[Note 3]

—

15,440

Non-current portion of lease liabilities

[Note 3]

74,074

—

Total liabilities

117,139

55,044

Commitments and contingencies

Equity

Share capital

[Note 8]

112,835

112,519

Contributed surplus

1,294

1,400

Deficit

(86,575 )

(47,960 )
Accumulated other comprehensive income

1,356

1,497

Total equity

28,910

67,456

Total liabilities and equity

146,049

122,500

As at
October 31,
February 1,
2020
$
2020
$
Current
Cash
21,925
46,338
Accounts and other receivables
7,669
6,062
Inventories
[Note 5]
26,176
22,363
Income tax receivable
222
1,196
Prepaid expenses and deposits
13,400
4,542
Total current assets
69,392
80,501
Property and equipment
[Note 6]
2,905
17,737
Intangible assets
4,311
6,339
Right-of-use assets
[Note 6]
816
35,082
Total assets
77,424
139,659
LIABILITIES AND EQUITY
Current
Trade and other payables
3,621
20,794
Deferred revenue
5,766
6,852
Liabilities subject to compromise
[Note 7]
71,653
—
Current portion of lease liabilities
519
16,434
Total current liabilities
81,559
44,080
Non-current portion of lease liabilities
403
72,230
Total liabilities
81,962
116,310
Commitments and contingencies
Equity
Share capital
[Note 8]
113,139
112,843
Contributed surplus
1,761
1,577
Deficit
(120,836
)
(92,278
)
Accumulated other comprehensive income
1,398
1,207
Total equity (deficiency)
(4,538
)
23,349
Total liabilities and equity
77,424
139,659

See accompanying ~~notes.~~ Notes.

Table of Contents

DAVIDsTEA Inc.

Incorporated under the laws of Canada

INTERIM CONSOLIDATED STATEMENTS OF INCOME (LOSS)

AND COMPREHENSIVE INCOME (LOSS)

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

For the three months ended

For the nine months ended

November 2,

November 3,

November 2,

November 3,

2019

2018

2019

2018

$

$

$

$

Sales

[Note 13]

39,493

43,656

122,925

129,609

Cost of sales

18,139

25,275

53,430

71,193

Gross profit

21,354

18,381

69,495

58,416

Selling, general and administration expenses

[Note 10]

30,670

29,119

90,254

84,865

Results from operating activities

(9,316 )

(10,738 )

(20,759 )

(26,449 )
Finance costs

1,699

80

5,305

237

Finance income

(185 )

(122 )

(570 )

(574 )
Loss before income taxes

(10,830 )

(10,696 )

(25,494 )

(26,112 )
Provision for income tax (recovery)

[Note 9]

—

(1,635 )

—

(5,851 )
Net loss

(10,830 )

(9,061 )

(25,494 )

(20,261 )
Other comprehensive loss

Items to be reclassified subsequently to income:

Unrealized net gain on forward exchange contracts

[Note 14]

—

—

—

794

Realized net loss on forward exchange contracts reclassified to inventory

—

(425 )

—

(565 )
Provision for income tax recovery

—

113

—

(62 )
Cumulative translation adjustment

(26 )

(62 )

(141 )

(473 )
Other comprehensive income (loss), net of tax

(26 )

(374 )

(141 )

(306 )
Total comprehensive loss

(10,856 )

(9,435 )

(25,635 )

(20,567 )
Net loss per share:

Basic and fully diluted

[Note 11]

(0.42 )

(0.35 )

(0.98 )

(0.78 )
Weighted average number of shares outstanding

Basic and fully diluted

[Note 11]

26,068,435

25,992,339

26,048,239

25,862,086

		For the three months ended						For the nine months ended
		October 31,			November 2,			October 31,			November 2,
		2020 $			2019 $			2020 $			2019 $

Sales	[Note 14]		26,225			39,493			81,497			122,925
Cost of sales			15,399			18,139			47,409			53,430
Gross profit			10,826			21,354			34,088			69,495
Selling, general and administration expenses	[Note 9]		7,120			30,670			35,883			90,254
Restructuring plan activities, net	[Note 10]		(10,743	)		—			24,017			—
Results from operating activities			14,449			(9,316	)		(25,812	)		(20,759	)
Finance costs			35			1,699			3,260			5,305
Finance income			(53	)		(185	)		(361	)		(570	)
Net income (loss)			14,467			(10,830	)		(28,711	)		(25,494	)

Other comprehensive income (loss)
Items to be reclassified subsequently to income:
Cumulative translation adjustment			209			(26	)		191			(141	)
Other comprehensive earnings (loss), net of tax			209			(26	)		191			(141	)
Total comprehensive income (loss)			14,676			(10,856	)		(28,520	)		(25,635	)
Net income (loss) per share:
Basic	[Note 12]		0.55			(0.42	)		(1.10	)		(0.98	)
Fully diluted	[Note 12]		0.54			(0.42	)		(1.10	)		(0.98	)
Weighted average number of shares outstanding
Basic	[Note 12]		26,214,573			26,068,435			26,143,963			26,048,239
Fully diluted	[Note 12]		26,767,470			26,068,435			26,143,963			26,048,239

See accompanying ~~notes.~~Notes.

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Table of Contents

DAVIDsTEA Inc.

~~DAVIDsTEA Inc.~~

Incorporated under the laws of Canada

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

[Unaudited and in thousands of Canadian dollars]

	For the three months ended						For the nine months ended
	November 2,			November 3,			November 2,			November 3,			For the three months ended						For the nine months ended
	2019			2018			2019			2018			October 31,			November 2,			October 31,			November 2,
	$			$			$			$			2020			2019			2020			2019
													$			$			$			$
OPERATING ACTIVITIES
Net loss		(10,830	)		(9,061	)		(25,494	)		(20,261	)
Net Income (loss)														14,467			(10,830	)		(28,711	)		(25,494	)
Items not affecting cash:
Depreciation of property and equipment		1,313			1,785			3,997			5,193			237			1,313			1,781			3,997
Amortization of intangible assets		517			377			1,372			905			420			517			1,503			1,372
Amortization of right-of-use assets		2,938			—			9,153			—			189			2,938			2,882			9,153
Loss on disposal of property and equipment		—			—			22			14
Impairment of property, equipment and right-of-use assets		2,051			725			7,076			3,285
Gain on modification of lease liabilities														(20,385	)		—			(75,121	)		—
Liabilities subject to compromise														2,633			—			71,653			—
Interest on lease liabilities		1,699			—			5,305			—			29			1,699			3,216			5,305
Deferred rent		—			74			—			(17	)
Recovery for onerous contracts		—			3,414			—			5,306
Loss on disposal of property and equipment and right-of-use assets														18			—	��		1,560			22
Impairment of property and equipment and right-of-use assets														—			2,051			39,960			7,076
Stock-based compensation expense		256			91			526			(7	)		198			256			778			526
Amortization of financing fees		—			21			—			61
Accretion on provisions		—			60			—			177
Deferred income taxes		—			(2,575	)		—			(3,921	)
Sub-total		(2,056	)		(5,089	)		1,957			(9,265	)		(2,194	)		(2,056	)		19,501			1,957
Net change in other non-cash working capital balances related to operations		6,842			(12,948	)		6,272			(28,316	)		(9,822	)		6,842			(39,397	)		6,272
Cash flows related to operating activities		4,786			(18,037	)		8,229			(37,581	)
Cash flows from (used in) operating activities														(12,016	)		4,786			(19,896	)		8,229
FINANCING ACTIVITIES
Proceed from issuance of common shares pursuant to exercise of stock options		9			8			9			82
Proceeds from issuance of common shares pursuant to exercise of stock options														—			9			3			9
Payment of lease liabilities		(5,720	)		—			(17,342	)		—			(250	)		(5,720	)		(5,824	)		(17,342	)
Cash flows related to financing activities		(5,711	)		8			(17,333	)		82
Cash flows used in financing activities														(250	)		(5,711	)		(5,821	)		(17,333	)
INVESTING ACTIVITIES
Additions to property and equipment		(44	)		(1,752	)		(778	)		(3,420	)		(91	)		(44	)		(402	)		(778	)
Additions to intangible assets		(485	)		(1,128	)		(2,148	)		(3,851	)		(3	)		(485	)		(320	)		(2,148	)
Loan advance to a Company controlled by an executive employee		(227	)		—			(2,000	)		—
Cash flows related to investing activities		(756	)		(2,880	)		(4,926	)		(7,271	)
Repayment (issuance) of loan from a Company controlled by an executive employee														—			(227	)		2,026			(2,000	)
Cash flows from (used in) investing activities														(94	)		(756	)		1,304			(4,926	)
Decrease in cash during the period		(1,681	)		(20,909	)		(14,030	)		(44,770	)		(12,360	)		(1,681	)		(24,413	)		(14,030	)
Cash, beginning of the period		29,725			39,623			42,074			63,484			34,285			29,725			46,338			42,074
Cash, end of the period		28,044			18,714			28,044			18,714			21,925			28,044			21,925			28,044
Supplemental Information
Cash paid for:
Interest		—			—			—			—			—			—			—			—
Income taxes (classified as operating activity)		—			7			—			9			—			—			—			—
Cash received for:
Interest		217			120			622			563			50			217			329			622
Income taxes (classified as operating activity)		2,780			—			2,948			—			—			2,780			870			2,948

See accompanying ~~notes.~~Notes.

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DAVIDsTEA Inc.

Incorporated under the laws of Canada

INTERIM CONSOLIDATED STATEMENTS OF EQUITY ~~(DEFICIT)~~(DEFICIENCY)

[Unaudited and in thousands of Canadian dollars]

Accumulated Other Comprehensive Income

Accumulated

Accumulated

Derivative

Foreign

Accumulated

Financial

Currency

Other

Share

Contributed

Instrument

Translation

Comprehensive

Total

Capital

Surplus

Deficit

Adjustment

Adjustment

Income

Equity

$

$

$

$

$

$

$

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 loss

—

—

—

167

(473 )

(306 )

(306 )
Total comprehensive loss

—

—

(20,261 )

167

(473 )

(306 )

(20,567 )
Issuance of common shares

164

(82 )

—

—

—

—

82

Common shares issued on vesting of restricted stock units

643

(1,322 )

286

—

—

—

(393 )
Stock-based compensation expense

—

(7 )

—

—

—

—

(7 )
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, 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

112,519

1,400

(61,293 )

—

1,497

1,497

54,123

Net loss for the nine months ended November 2, 2019

—

—

(25,494 )

—

—

—

(25,494 )
Other comprehensive loss

—

—

—

—

(141 )

(141 )

(141 )
Total comprehensive loss

—

—

(25,494 )

—

(141 )

(141 )

(25,635 )
Issuance of common shares

13

(4 )

—

—

—

—

9

Common shares issued on vesting of restricted stock units

303

(628 )

212

—

—

—

(113 )
Stock-based compensation expense

—

526

—

—

—

—

526

Balance, November 2, 2019

112,835

1,294

(86,575 )

—

1,356

1,356

28,910

~~(1) Restated - Note 3~~

				Accumulated
				Other	Total
	Share	Contributed		Comprehensive	Equity
	Capital	Surplus	Deficit	Income	(Deficiency)
	$	$	$	$	$
Balance, February 1, 2020	112,843	1,577	(92,278)	1,207	23,349
Net loss for the nine months ended October 31, 2020	—	—	(28,711)	—	(28,711)
Other comprehensive loss	—	—	—	191	191
Total comprehensive loss	—	—	(28,711)	191	(28,520)
Issuance of common shares	4	(1)	—	—	3
Common shares issued on vesting of restricted stock units	292	(593)	153	—	(148)
Stock-based compensation expense	—	778	—	—	778
Balance, October 31, 2020	113,139	1,761	(120,836)	1,398	(4,538)

Balance, February 2, 2019	112,519	1,400	(61,293)	1,497	54,123
Net loss for the nine months ended November 2, 2019	—	—	(25,494)	—	(25,494)
Other comprehensive loss	—	—	—	(141)	(141)
Total comprehensive loss	—	—	(25,494)	(141)	(25,635)
Issuance of common shares	13	(4)	—	—	9
Common shares issued on vesting of restricted stock units	303	(628)	212	—	(113)
Stock-based compensation expense	—	526	—	—	526
Balance, November 2, 2019	112,835	1,294	(86,575)	1,356	28,910

See accompanying ~~notes.~~Notes.

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DAVIDsTEA Inc.

~~DAVIDsTEA Inc.~~

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine-month periods ended October 31, 2020 and November 2, 2019 ~~and November 3, 2018~~ [Unaudited]

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

1. CORPORATE INFORMATION

The unaudited condensed interim consolidated financial statements of DAVIDsTEA Inc. and its subsidiary (collectively, the “Company”) for the three and nine-month periods ended ~~November 2, 2019~~October 31, 2020 were authorized for issue in accordance with a resolution of the Board of Directors on December ~~20, 2019.~~15, 2020. The Company is incorporated and domiciled in Canada and its shares are publicly traded on the ~~NASDAQ~~Nasdaq Global Market under the symbol “DTEA”. The registered office is located at 5430 Ferrier St., Town of Mount-Royal, ~~Quebec,~~Québec, Canada, H4P 1M2.

The Company is ~~engaged~~a branded retailer and growing mass wholesaler of specialty tea, offering a differentiated selection of proprietary loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts and accessories through its e-commerce platform at www.davidstea.com and in ~~the~~18 Company-owned and operated retail stores in Canada. A selection of DAVIDsTEA products is also available in more than 2,500 grocery stores and ~~online sale of tea, tea accessories and food and beverages in Canada and the United States.~~pharmacies across Canada. 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~~highest in the fourth fiscal quarter due to the year-end holiday season and tend to be lowest in the second and third fiscal ~~quarter~~quarters because of lower customer ~~traffic~~engagement during the summer months.

In March 2020, the outbreak of a novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization and on March 17, 2020, in response to the COVID-19 pandemic, the Company announced the temporary closure of all of its retail stores in Canada and the United States. On August 21, 2020, the Company re-opened 18 stores across Canada.

The Company qualifies for the Canada Emergency Wage Subsidy (“CEWS”) under the COVID-19 Economic Response Plan of the Government of Canada. During the three and nine-month periods ended October 31, 2020, the Company recognized payroll subsidies of $1.4 million and $3.4 million, respectively under this wage subsidy program as a reduction in the associated wage costs which the Company incurred, which was recognized in Selling, general and administration expenses.

On July 8, 2020, the Company announced that it was implementing a restructuring plan (the “Restructuring Plan”) under the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”) in order to accelerate its transition to predominantly an online retailer and wholesaler of high-quality tea and accessories and that during the restructuring process, the Company would continue to operate its online business through its e-commerce platform at www.davidstea.com and its wholesale distribution channel, through which it sells a selection of DAVIDsTEA products in grocery stores and pharmacies across Canada. Following a careful review of available options to stem the losses from its brick-and-mortar footprint, the Company’s management and Board of Directors determined that the formal Restructuring Plan was the best option in the context of an increasingly challenging retail environment, further exacerbated by the COVID-19 pandemic.

On July 8, 2020, the Company obtained an Initial Order pursuant to the CCAA from the Québec Superior Court in order to implement the Restructuring Plan (the “Initial Order”).

On July 9, 2020, the United States Bankruptcy Court for the District of Delaware entered an order in favor of the Company under Chapter 15 of the United States Bankruptcy Code. The order of the United States Bankruptcy Court provisionally recognized the proceedings under the CCAA and enforced the Initial Order, in effect providing protection to the Company from creditor action against its assets in the United States.

As part of its Restructuring Plan and further to obtaining the Initial Order, the Company, on July 10, 2020, sent notices to terminate leases for 82 of its stores in Canada and all 42 of its stores in the United States. These lease terminations were effective on August 9, 2020.

On July 16, 2020, the Company obtained an Amended and Restated Initial Order from the Québec Superior Court, extending to September 17, 2020 the application of the Initial Order. The Amended and Restated Initial Order also dealt with certain administrative matters, particularly with regards to the lease terminations.

On July 30, 2020, the Company sent notices to terminate leases for an additional 82 of its stores in Canada. These lease terminations were effective on August 29, 2020.

On September 17, 2020, the Québec Superior Court extended the stay of all proceedings against the Company to December 15, 2020 and issued a Claims Process Order establishing the claims procedures for the Company’s creditors under the CCAA. This Order, among other things set November 6, 2020 as the time by which creditors had to submit their claims to PwC, the Court-appointed Monitor.

Table of Contents

2. ~~STATEMENT OF COMPLIANCE AND~~ BASIS OF PREPARATION AND GOING CONCERN UNCERTAINTY

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 ~~2, 2019,~~1, 2020, 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~~Note 3 of the consolidated financial statements for the year ended February ~~2, 2019,~~1, 2020, other than as disclosed in ~~note~~Note 3 below.

~~3. CHANGES IN ACCOUNTING POLICIES~~Going Concern Uncertainty

~~During~~In December 2019, a novel strain of coronavirus, responsible for COVID-19, was first reported and was subsequently declared a pandemic by the ~~course~~World Health Organization in March 2020. The measures adopted by the federal, provincial and state governments in order to mitigate the spread of the ~~Company’s financial statement~~outbreak required the Company to temporarily close ~~process~~all of its retail locations across North America effective March 17, 2020.

On July 8, 2020, the Company announced that it was implementing the Restructuring Plan under applicable laws in both Canada and the United States in order to accelerate its transition to predominantly an online retailer and wholesaler of high-quality tea and accessories. As part of the Restructuring Plan, the Company sent notices to terminate leases for ~~the quarter ended November 2, 2019, accounting errors were identified~~82 of its stores in Canada and all 42 of its stores in the ~~assessment~~United States.On July 30, 2020, the Company sent notices to terminate leases for an additional 82 of ~~impairment indicators upon completing~~its stores in Canada and on August 21, 2020, re-opened 18 of its stores throughout Canada.

Although the Company continues to offer its products directly to consumers through its online store ~~impairment analysis under IAS 36,~~ ~~Impairment~~and in supermarkets and drugstores across Canada, it is unlikely that customers will purchase its products at previous volumes through these alternative channels. Furthermore, the duration and impact of ~~Assets~~ ~~(“IAS 36”), subsequent~~the COVID-19 pandemic is unknown and may influence consumer shopping behavior and consumer demand including online shopping. Notwithstanding that the Company expects to emerge from the ~~adoption~~Restructuring Plan as a leaner organization, there is no assurance that the Restructuring Plan will be successful and that all relevant and required regulatory, creditor and court approvals will be obtained.

For the three and nine-month periods ended October 31, 2020, the Company reported a net income of ~~IFRS 16,~~ ~~Leases~~ ~~(“IFRS 16”). When appropriately performing the assessment~~$14.5 million and incurred a net loss of ~~impairment indicators with respect to the right-of-use assets (“ROU assets”)~~$28.7 million, respectively. The Company’s current liabilities total $81.6 million 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,October 31, 2020. As at October 31, 2020, the Company ~~also determined that, pursuant to IFRS standards, its financial statements would be more relevant had they applied IAS 36 to assess impairment~~held cash and accounts and other receivables 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.$29.6 million. The Company ~~believes this change is more relevant because it more faithfully depicts the performance of the Company. Subsequent~~does not currently have any third-party financing available with which to ~~the retrospective application of the change in accounting policy, the impairment charges were nil and $5,025 for the quarter ended May 4, 2019 and the two quarters ended August 3, 2019, respectively.~~

~~Effects of the restatement~~

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.

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meet any future financial obligations.

The ~~following table illustrates~~Company’s ability to continue as a going concern is dependent on its ability to stabilize its business from unfavorable trend lines, and by focusing on how to grow its product portfolio including sales and customer service execution. The Company expects to restructure its operations to successfully emerge with a leaner, more sustainable physical presence that complements a growing world-class online and grocery business, supported by a right-sized support organization.

Management believes that there is material uncertainty surrounding the ~~effect~~Company’s ability to execute the strategy necessary to return to profitability in the current environment, including the unpredictability surrounding the recovery from the COVID-19 pandemic, changes in consumer behavior and the ability to successfully emerge from the Restructuring Plan.

As a result, these events and conditions indicate that a material uncertainty exists that raises substantial doubt about the Company’s ability to continue as a going concern and, therefore, realize its assets and discharge its liabilities in the normal course of business.

These interim condensed consolidated financial statements have been prepared on a going concern basis, which assumes the ~~voluntary change~~Company will continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in ~~accounting policy on~~ the ~~adoption~~normal course of ~~IFRS 16~~business. These interim condensed consolidated financial statements as at ~~February 3, 2019:~~and for the three and nine-month periods ended October 31, 2020 do not include any adjustments to the carrying amounts and classification of assets, liabilities and reported expenses that may otherwise be required if the going concern basis was not appropriate. Such adjustments could be material.

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

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3. CHANGES IN ACCOUNTING POLICIES

~~IFRS 16 – Leases~~Recently Issued Accounting Pronouncements

On May 28, 2020, the IASB issued an amendment to IFRS 16, ~~“Leases’’ (“IFRS 16’’) replaces IAS 17, “Leases’’ and related interpretations. The standard introduces a single on-balance sheet recognition and measurement model~~“Leases” to make it easier for lessees ~~eliminating the distinction between operating~~to account for COVID-19-related rent concessions such as rent holidays and finance leases. The lessee recognizes a right-of-use asset representing its control of and right to use the underlying asset and a lease liability representing its obligation to make future lease payments. Lessors continue to classify leases as finance and operating leases. Certain exemptions will apply for short-term leases and leases of low value assets. The new standard became effective for annual periods beginning on or after January 1, 2019.

~~a) Nature of the effect of adoption of IFRS 16 (restated)~~temporary rent reductions.

The ~~Company has adopted IFRS 16~~amendment exempts lessees from having to consider individual lease contracts to determine whether rent concessions occurring as ~~at February 3, 2019. Substantially all~~a direct consequence of the ~~Company’s existing leases~~COVID-19 pandemic are ~~real estate leases~~lease modifications and allows lessees to account for ~~its retail stores, warehouse and corporate head office. The adoption of IFRS 16 had a significant impact~~such rent concessions as ~~the Company recognized new assets and liabilities. In addition, the nature and timing of expenses related~~if they were not lease modifications. It applies 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 elected to apply the modified retrospective method 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 accruedCOVID-19-related rent concessions that reduce lease payments ~~with no restatement of the prior comparative period. Upon adoption of IFRS 16, the Company has applied the following practical 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.~~

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~~Table of Contents~~
due on or before June 30, 2021.

The ~~effect~~amendment is effective as of ~~adoption~~June 1, 2020 but can be applied immediately in any financial statements—interim or annual—not yet authorized for issue. The Company applied the practical expedient to all rent concessions meeting the criteria as set out in the amendment, as of ~~IFRS 16, including~~February 2, 2020. With respect to rent concessions not meeting the ~~voluntary change in accounting policy applied retroactively, 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,~~definition of a lease modification, the Company ~~recorded the right-of-use assets based on the amount equal~~elected to ~~the lease liabilities, adjusted~~account for ~~any related prepaid and accrued lease payments previously recognized. Due~~such concessions by continuing 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.~~

~~The excess of onerous lease provision under IAS 37 over right-of-use asset at the date of transition (mainly due to the higher discount rate used to calculate~~account for the lease liability and ~~related right-of-use asset) amounted to $1,280 and was included in deficit.~~

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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 using the rights 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~~obligations of the existing lease ~~(i.e., the date the underlying asset is available for use). Right-of-use assets are initially measured at cost, which includes the initial amount of~~and recognizing a separate lease ~~liabilities adjusted for any initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received.~~

The right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term unless the Company is reasonably certain to obtain ownership of the leased asset at the end of the lease term. In addition the right-of-use assets are subject to impairment and adjusted for any remeasurement of lease liabilities. 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 expensepayable in the period onin which the ~~event or condition that triggers~~allocated lease cash payment is due. As a result of the ~~payment occurs.~~Initial Order obtained from the Québec Superior Court on July 8, 2020, any rent concessions provided by landlords are accordingly nullified.

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.

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~~Table of Contents~~

~~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).

~~c) Amounts recognized 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

$

$

Balance, February 3, 2019

60,983

102,168

Amortization expense

(9,153 )

—

Impairment of right-of-use assets

(7,076 )

—

Interest Expense

—

5,305

Payments

—

(17,342 )
CTA

71

234

Balance, November 2, 2019

44,825

90,365

Presented as:

Current

—

16,291

Non-Current

44,825

74,074

~~The Company recognizes variable lease payments of $409 and $839 respectively for the three and nine months ended November 2, 2019.~~

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~~IFRS 23 – Uncertainty over Income Tax Treatments~~

IFRIC 23, “Uncertainty over Income Tax Treatments” (the “Interpretation”), was issued by the IASB in June 2017. 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. The Interpretation is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted. 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 adoption of this interpretation did not have a significant impact on the Company’s financial statements.~~

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

The preparation of condensed interim consolidated financial statements requires management to make estimates and assumptions using ~~judgment~~judgments 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.

In preparing these unaudited condensed interim consolidated financial statements, critical ~~judgements~~judgments 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~~Note 5 of the consolidated financial statements for the year ended February 1, 2020. As of February 2, ~~2019.~~2020, the Company also considered the impacts related to COVID-19 and the Restructuring Plan to its use of estimates and judgments, as appropriate, within its unaudited interim condensed consolidated financial statements. Estimates and assumptions are subject to inherent uncertainty, which may result in actual amounts differing from reported amounts.

~~5. INVENTORIES~~Key sources of estimation uncertainty

November 2,

February 2,

2019

2019

$

$

Finished goods

28,391

28,991

Goods in transit

1,597

3,262

Packaging

2,650

2,100

32,638

34,353

Lease termination

The unaudited interim consolidated statement of income (loss) includes amounts for net Restructuring Plan activities (Note 10). As a result of the termination of leases pursuant to the Restructuring Plan, included in these net Restructuring Plan activities amounts are estimates the Company has made for allowed claims in the three and nine-months ended October 31, 2020 amounting to $6.7 million and $49.6 million, respectively. The estimate for the allowed claim is based on the Company’s best estimate and is based on the total undiscounted lease liability offset by an estimate of the losses that affected landlords will be able to successfully mitigate, informed by proofs of claim submitted by creditors. This provision is subject to significant estimation uncertainty, as proceedings are in a preliminary stage. Changes to the provision in future periods may be material and will be recorded through earnings.

Recoverability and impairment of non-financial assets

The temporary store closures as a result of COVID-19, as well as the permanent closure of a majority of our retail stores resulting from the Restructuring Plan, and the related reduction in operating income during fiscal 2020 are considered to be indicators of impairment and the Company performed an assessment of recoverability for the property and equipment and right-of-use assets associated with its retail locations.

Key judgments in applying accounting principles

Lease liabilities

The temporary store closures as a result of COVID-19, and the resulting non-payment of rent for the months of April, May, June and part of July as well as the Restructuring Plan led the Company to make significant judgments with respect to the impacts of these events on the lease liabilities as of October 31, 2020. These include considerations such as the accounting for rent concessions, and the timing of termination of leases.

For all leases terminated as a result of the Restructuring Plan and for which the notice period had expired, lease liabilities under IFRS 16 were determined to have been modified.

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5. INVENTORIES

During the three and nine-month periods ended October 31, 2020, inventories recognized as cost of sales amounted to $6,738 and $21,498, respectively [November 2, 2019 - $10,635 and $34,252, respectively]. During the three and nine-month periods ended October 31, 2020, the cost of inventory includes write-downs of $386 and $1,305, respectively [November 2, 2019 – reversal of write downs of $5 and $498, respectively] recorded as a result of net realizable value being lower than cost.

	October 31,		February 1,
	2020		2020
	$		$
Finished goods		22,141		18,590
Goods in transit		1,294		2,059
Packaging		2,741		1,714
		26,176		22,363

6. PROPERTY AND EQUIPMENT AND RIGHT-OF-USE ASSETS

~~For the three and nine months ended November 2, 2019, an~~An assessment of impairment indicators was performed which caused the Company to review the recoverable amount of the property and equipment, and right-of-use assets for certain cash generating units (“CGUs”) with an indication of impairment. CGUs reviewed included stores ~~performing~~that were permanently closed as part of the Restructuring Plan and the remaining stores that are expected to perform below the Company’s ~~expectations.~~

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~~Table of Contents~~
previous projections.

As a result, for the three and ~~nine months~~nine-month periods ended ~~November 2, 2019,~~October 31, 2020, the Company recorded an impairment loss ~~for the~~of nil and $13,167, respectively, related to property and equipment, [November 2, 2019 - nil and nil, respectively] and nil and $26,793, respectively, related to right-of-use assets [November 2, 2019 - 2,051 and 7,076, respectively].

These impairment losses are further broken down as follows:

	For the nine months
	ended October 31, 2020
	Stores
	permanently		Stores that
	closed		remain open		Total
	$		$		$
Property and equipment		12,966		201		13,167
Right-of-use assets		24,433		2,360		26,793
		37,399		2,561		39,960

The impairment loss taken in the first quarter of ~~$2,051 and $7,076, respectively, [November 3, 2018 — $725 and $3,285~~2020 related to ~~store leasehold improvements, furniture and equipment, computer hardware]~~the stores that remain open was recorded in the Canada and U.S. segments for $949 and $1,102, respectively, for the three months ended November 2, 2019 and $3,429 and $3,647, respectively, for the nine months ended November 2, 2019, respectively [November 3, 2018 — $725 and nil, respectively, for the three months and $3,096 and $189, 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~~use for 7 of the 18 stores. This value in use of ~~$1,613~~$791 [November ~~3, 2018 —nil]~~2, 2019 – $1,613] was determined based on management’s best estimate of expected future cash flows from use over the remaining lease ~~terms, considering~~terms. This determination considered historical experience as well as current economic conditions, including the expected reopening date and the timeframe to foot traffic recovery in those location, and was then discounted using a ~~pre-tax~~pre‑tax discount rate of ~~11.9%~~13.0% for the first quarter of 2020 [November ~~3, 2018 —~~2, 2019 – 11.9%]. ~~A reversal~~

Depreciation and amortization expenses are broken down as follows:

	For the three months								For the nine months
	ended October 31, 2020								ended October 31, 2020
	Stores								Stores
	permanently		Stores that						permanently		Stores that
	closed		remain open		Head office		Total		closed		remain open		Head office		Total
	$		$		$		$		$		$		$		$
Canada		6		170		250		426		2,246		1,214		873		4,333
US		—		—		—		—		330		—		—		330
		6		170		250		426		2,576		1,214		873		4,663

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Depreciation expense, and impairment losses related to stores that remain open are reported in the consolidated statement of ~~impairment occurs when previously impaired CGUs see improved financial results.~~ income (loss) and comprehensive income (loss) under Selling, general and administration expenses (Note 9). Impairment losses related to stores that were permanently closed as a result of the Company’s Restructuring Plan are reported in Restructuring plan activities, net (Note 10).

For the three and ~~nine months~~nine-month periods ended November 2, 2019, ~~no impairment losses were reversed [November 3, 2018 — nil]. Impairment losses~~the depreciation expense was $1,313 and $3,997 respectively; with $3,444 recorded in the Canada segment, $164 recorded in the U.S. segment, and $389 recorded in corporate selling, general and administration expenses.

For Right-of-use assets, for the three and nine-month periods ended November 2, 2019, the depreciation expense was $2,938 and $9,153, respectively; with $7,538 recorded in the Canada segment, and $1,615 recorded in the U.S. segment.

7. LIABILITIES SUBJECT TO COMPROMISE

As a result of the Initial Order obtained on July 8, 2020 and subsequent amendments (Note 1), the payment of liabilities owing as of July 8, 2020 is stayed, and the outstanding liabilities, as well as any additional outstanding claims by creditors are ~~reversed only~~subject to compromise pursuant to a plan of arrangement that is expected to be presented to creditors. Obligations for goods and services provided to the ~~extent that~~Company after the ~~carrying amounts~~filing date of July 8, 2020 are discharged based on negotiated terms and conditions.

Liabilities subject to compromise may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determination of secured status of certain claims, the determination as to the value of any collateral securing claims, proof of claims or other events.

	Estimate for allowed claims			Trade and other payables			Severance Costs			Liabilities subject to compromise
	$			$			$			$
Balance as at February 1, 2020 and May 2, 2020		—			—			—			—
Reclassification of trade and other payables		—			21,202			—			21,202
Additions		42,878			—			4,940			47,818
Balance as at August 1, 2020		42,878			21,202			4,940			69,020
Additions		16,937			419			—			17,356
Reversals		(10,227	)		(3,380	)		(407	)		(14,014	)
Effect of foreign currency exchange		(378	)		(331	)		—			(709	)
Balance as at October 31, 2020		49,210			17,910			4,533			71,653

As a result of the ~~CGU’s net assets do not exceed~~termination of leases pursuant to the ~~carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognized.~~

~~7. REVOLVING FACILITY~~

~~On June 11, 2018,~~Restructuring Plan in the three and nine-month periods ended October 31, 2020, the Company ~~amended its existing Credit Agreement (the “Amended Credit Agreement”)~~has recorded an estimate for allowed claim in the amount of $6.7 million and $49.6 million, respectively, in Restructuring plan activities, net in the unaudited interim consolidated statement of income (loss) (Note 10). The Amended Credit Agreement provides for a two year revolving 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 Revolving Facility may not exceed the lesser of the total commitmentestimate 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. 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. 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 $15,000. The Amended Revolving Facility bears interestallowed claim is based on the Company’s ~~adjusted leverage ratio, at~~best estimate and is determined based on the ~~bank’s prime rate, U.S. bank rate or LIBOR plus a range from 0.5% to 2.5% per annum. A standby fee range~~total undiscounted lease liability offset by an estimate of ~~0.3% to 0.5%~~the losses that affected landlords will be ~~paid on~~able to successfully mitigate, informed by proofs of claim submitted by creditors. This provision is subject to significant estimation uncertainty, as proceedings are in a preliminary stage. Changes to the ~~daily principal amount of the unused portion of the Amended Revolving Facility.~~provision in future periods may be material and will be recorded through earnings.

The credit facility also contains 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.8. SHARE CAPITAL

~~As at November 2, 2019, the Company did not have any borrowings under the Amended Revolving Facility.~~

As at November 2, 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 current lending agreement will be terminated on the earlier of (a) January 24, 2020, (b) the Company securing new financing. The Company is in good faith discussions with BMO to install an asset based lending facility that will provide a revolving facility at commercially reasonable terms.

~~8. SHARE CAPITAL~~

Authorized

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

~~Issued and outstanding~~

November 2,

February 2,

2019

2019

$

$

Share Capital - 26,079,662 Common shares (February 2, 2019 - 26,011,817)

112,835

112,519

1512
Table of Contents

Issued and outstanding

	October 31,		February 1,
	2020		2020
	$		$
Share Capital - 26,216,560 Common shares (February 1, 2020 - 26,086,162)		113,139		112,843

During the three and nine-month periods ended ~~November 2, 2019 12,000~~October 31, 2020, nil and 4,000 stock options, respectively were exercised for common shares for cash proceeds of $9nil and $3, respectively [November ~~3, 2018~~2, 2019 – ~~10,000~~12,000 and ~~88,135~~12,000 stock options, ~~for 88,135 common shares~~respectively, for cash proceeds of $8$9 and ~~$82, respectively and 36,418 common shares for a non-cash settlement of nil and $121~~$9, respectively].

In addition, during the three and nine-month periods ended ~~November 2, 2019, 6,877~~October 31, 2020, 8,431 and ~~55,845~~126,398 common shares, respectively [November ~~3, 2018~~2, 2019 – ~~1,128~~6,877 and ~~70,668~~55,845 common shares respectively] were issued in relation to the vesting of restricted stock units (“RSU”), resulting in an increase in share capital of ~~$30~~$20 and ~~$303,~~$292, net of tax [November ~~3, 2018~~2, 2019 — $7$30 and ~~$643,~~$303, net of tax, respectively] and a reduction in contributed surplus of $39 and $593, respectively [November 2, 2019 — $67 and $628, ~~respectively [November 3, 2018 — $18 and $1,322,~~ respectively].

Stock-based compensation

As at October 31, 2020, 1,088,729 [November 2, 2019, 1,744,529] common shares remain available for issuance under the 2015 Omnibus Plan.

No stock options were granted during the three and nine-month periods ended October 31, 2020 and November 2, 2019.

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

For the nine months ended

November 2,

November 3,

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

(12,000 )

0.77

(88,135 )

2.76

Forfeitures

(35,001 )

6.77

(220,791 )

8.92

Outstanding, end of period

90,539

8.17

138,853

7.23

Exercisable, end of period

89,120

8.07

75,837

4.84

~~No stock options were granted during the three and nine-month periods ended November 2, 2019 and November 3, 2018.~~

16
~~Table of Contents~~

For the nine months ended

October 31,

November 2,

2020

2019

Weighted

average

Options

exercise

Options

exercise

outstanding

price

outstanding

price

Outstanding, beginning of year

76,350

8.96

137,540

7.17

Issued

—

Exercised

(4,000

)

0.77

(12,000

)

0.77

Forfeitures

—

(35,001

)

6.77

Outstanding, end of period

72,350

9.41

90,539

8.17

Exercisable, end of period

72,350

9.41

89,120

8.07

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

	For the nine months ended										For the nine months ended
	November 2,					November 3,					October 31,						November 2,
	2019					2018					2020						2019
				Weighted					Weighted					Weighted						Weighted
				average					average					average						average
	RSUs			fair value		RSUs			fair value		RSUs			fair value			RSUs			fair value
	outstanding			per unit (1)		outstanding			per unit (1)		outstanding			per unit (1)			outstanding			per unit (1)
	#			$		#			$		#			$			#			$
Outstanding, beginning of year		270,976			5.26		289,416			9.70		749,522			2.17			270,976			5.26
Granted		804,710			1.93		476,450			4.48		1,177,222			1.44			804,710			1.93
Forfeitures		(112,746	)		3.46		(327,479	)		6.45		(313,229	)		(1.67	)		(112,746	)		3.46
Vested		(78,345	)		5.52		(70,668	)		9.08		(126,398	)		(2.28	)		(78,345	)		5.52
Vested, withheld for tax		(59,134	)		5.37		(69,017	)		8.91		(128,760	)		(2.31	)		(59,134	)		5.37
Outstanding, end of period		825,461			2.22		298,702			5.26		1,358,357			1.63			825,461			2.22

_____________

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

~~(1) Weighted average fair value per unit as at date~~During the three and nine-month periods ended October 31, 2020, the Company recognized a stock-based compensation expense of ~~grant~~$198 and $778, respectively [November 2, 2019 — $256 and $526].

Table of Contents

9. SELLING, GENERAL AND ADMINISTRATION EXPENSES

	For the three months ended					For the nine months ended
	October 31,			November 2,		October 31,			November 2,
	2020			2019		2020			2019
	$			$		$			$
Wages, salaries and employee benefits		3,496			15,690		15,879			46,999
Depreciation of property and equipment		237			1,313		1,781			3,997
Amortization of intangible assets		420			517		1,503			1,372
Amortization right-of-use asset		189			2,938		2,882			9,153
Impairment of property and equipment and right-of-use assets		—			2,051		2,561			7,076
Loss on disposal of property and equipment		—			—		—			22
Marketing expenses		1,209			1,618		2,848			3,974
IT expenses		736			1,080		2,190			3,059
Credit card fees		547			618		1,736			1,839
Professional fees		611			377		1,682			1,256
Stores supplies		178			1,862		1,254			3,487
Stock-based compensation		198			256		778			526
Government emergency wage subsidy		(1,446	)		—		(3,445	)		—
Other selling, general and administration		745			2,350		4,234			7,494
		7,120			30,670		35,883			90,254

10. RESTRUCTURING PLAN ACTIVITIES, NET

During the three and nine-month periods ended ~~November 2, 2019,~~October 31, 2020, the Company, ~~recognized stock-based compensation expense~~in connection with the termination or modification of ~~$256~~leases pursuant to the Restructuring Plan, reduced its lease liabilities by $20.4 million and ~~$526~~$75.1 million, respectively, ~~[November 3, 2018 — expense~~resulting in a gain on the modification of ~~$91 and a net reversal of stock based compensation of $7, respectively].~~lease liabilities.

~~As at November 2, 2019, 1,744,529 common shares remain available for issuance under the 2015 Omnibus Plan.~~

	For the three months ended			For the nine months ended
	October 31,			October 31,
	2020			2020
	$			$
Gain on modification of lease liabilities		(20,385	)		(75,121	)
Estimate for allowed claim		6,710			49,588
Loss on disposal of property and equipment and right-of-use assets		18			1,560
Impairment of property and equipment and right-of-use assets		—			37,399
Severance costs		(337	)		4,832
Interest and penalties related to unpaid occupancy charges		146			1,147
Professional fees		856			1,829
Store closure related costs		2,249			2,783
Restructuring plan activities, net		(10,743	)		24,017

9.11. 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 nine months ended												For the three months ended												For the nine months ended
	November 2,						November 3,						November 2,						November 3,						October 31,						November 2,						October 31,						November 2,
	2019						2018						2019						2018						2020						2019						2020						2019
	%			$			%			$			%			$			%			$			%			$			%			$			%			$			%			$
Income tax recovery — statutory rate		26.8			(2,902	)		26.9			(2,873	)		26.8			(6,832	)		26.9			(7,015	)
Increase (decrease) in provision for income tax (recovery) resulting from:
Income tax provision (recovery) — statutory rate																										26.8			3,878			26.8			(2,902	)		26.8			(7,694	)		26.8			(6,832	)
Non-deductible items		(0.7	)		72			(0.4	)		38			(0.6	)		148			0.1			(31	)		0.4			54			(0.7	)		72			(0.6	)		180			(0.6	)		148
Unrecognized deferred income tax assets		(26.1	)		2,830			(8.8	)		940			(26.2	)		6,684			(3.6	)		940			(27.2	)		(3,932	)		(26.1	)		2,830			(26.2	)		7,514			(26.2	)		6,684
Other		—			—			(2.4	)		260			—			—			(1.0	)		255
Income tax provision (recovery) — effective tax rate		—			—			15.3			(1,635	)		—			—			22.4			(5,851	)		—			—			—			—			—			—			—			—

1714
Table of Contents

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

For the three months ended

For the nine months ended

November 2,

November 3,

November 2,

November 3,

2019

2018

2019

2018

$

$

$

$

Income tax provision (recovery)

Current

—

940

—

(1,930 )
Deferred

—

(2,575 )

—

(3,921 )

—

(1,635 )

—

(5,851 )

~~10. SELLING, GENERAL AND ADMINISTRATION EXPENSES~~

For the three months ended

For the nine months ended

November 2,

November 3,

November 2,

November 3,

2019

2018

2019

2018

$

$

$

$

Wages, salaries and employee benefits

15,690

16,767

46,999

49,031

Depreciation of property and equipment

1,313

1,785

3,997

5,193

Amortization of intangible assets

517

377

1,372

905

Amortization right-of-use asset

2,938

—

9,153

—

Loss on disposal of property and equipment

—

—

22

14

Impairment of property, equipment and right-of-use assets

2,051

725

7,076

3,285

Utilization of onerous contract

—

(2,126 )

—

(4,820 )
Recovery of provision for onerous contracts

—

3,414

—

5,306

Stock-based compensation

256

91

526

(7 )
Executive separation cost related to salary

—

123

—

840

Strategic review and proxy contest

—

27

—

3,538

Other selling, general and administration

7,905

7,936

21,109

21,580

30,670

29,119

90,254

84,865

18
~~Table of Contents~~

~~11.~~12. 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 income and share data used in the basic and diluted EPS computations:

For the three months ended

For the nine months ended

November 2,

November 3,

November 2,

November 3,

2019

2018

2019

2018

$

$

$

$

Net loss for basic EPS

(10,830 )

(9,061 )

(25,494 )

(20,261 )
Weighted average number of shares outstanding:

Basic and fully diluted

26,068,435

25,992,339

26,048,239

25,862,086

Net loss per share:

Basic and fully diluted

(0.42 )

(0.35 )

(0.98 )

(0.78 )

	For the three months ended					For the nine months ended
	October 31,		November 2,			October 31,			November 2,
	2020		2019			2020			2019
	$		$			$			$
Net income (loss) for basic EPS		14,467		(10,830	)		(28,711	)		(25,494	)
Weighted average number of shares outstanding:
Basic		26,214,573		26,068,435			26,143,963			26,048,239
Fully diluted		26,767,470		26,068,435			26,143,963			26,048,239
Net income (loss) per share:
Basic		0.55		(0.42	)		(1.10	)		(0.98	)
Fully diluted		0.54		(0.42	)		(1.10	)		(0.98	)

As a result of the net loss during the three and nine-month periods ended November 2, 2019 and November 3, 2018, the stock options and restricted stock units disclosed in Note 8 were anti-dilutive. Accordingly, diluted net loss per share for each period was the same as basic net loss per share.

~~12.~~13. RELATED PARTY DISCLOSURES

Transactions with related parties are measured at the exchange amount, being the consideration established and agreed to by the related parties.

During the three and nine-month periods ended ~~November 2, 2019,~~October 31, 2020, the Company purchased merchandise for resale amounting to $50 and $76, respectively [November 2, 2019 – $33 and $48, ~~respectively [November 3, 2018 - $125 and $222,~~ respectively], and provided infrastructure and administrative services of $5 and $80, respectively [November 2, 2019 - $163 and $222, ~~respectively [November 3, 2018 - nil and nil,~~ respectively] ~~from and~~ to a company controlled by one of its executive ~~employees, respectively.~~employees.

~~During~~The Company also spent nil and $53, respectively [November 2, 2019 — $96 and $164, respectively] for consulting services from a related party of the ~~three and nine-month periods~~principal shareholder. As well during the three-month period ended November 2, 2019, the Company purchased a perpetual license rights to a reporting data model and associated intellectual property for ~~nil and~~ $200 ~~[November 3, 2018 – nil and nil] and spent $96 and $164 [November 3, 2018 – nil] for consulting services~~ from a related party of the principal shareholder.

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

During the second quarter of 2019, the Company entered into a secured loan agreement with Oink Oink Candy Inc., doing business as “Squish”, as borrower, and Rainy Day Investments Ltd. (“RDI”), as guarantor, pursuant to which the Company agreed to lend to Squish an amount of up to $4$4.0 million, amended on September 13, 2019 to reflect a maximum amount available under the facility of $2.0 million and 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%.million. RDI ~~has~~ guaranteed all of Squish’s obligations to the Company and, as security in full for the guarantee, ~~has given~~gave a movable hypothec (or lien) in ~~favour~~favor of the Company on its shares of ~~DAVIDsTEA.~~the Company. Squish is a company controlled by Sarah Segal, an officer of ~~DAVIDsTEA.~~the Company. RDI, the principal shareholder of ~~DAVIDsTEA,~~the Company, is controlled by Herschel Segal, ~~Executive~~ Chairman, Interim Chief Executive Officer and a director of ~~DAVIDsTEA.~~the Company. 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.

~~For~~During the ~~period ended November 2, 2019,~~first quarter of 2020, the ~~Company received $36 [November 3, 2018 – nil] as~~loan of $2.0 million along with accrued interest ~~on the secured loan.~~of $45 were fully repaid.

19
~~Table of Contents~~

~~13.~~14. 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 revenues from the online, retail and ~~online~~wholesale 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 resources allocation and assesses performance at the country level, and for which discrete financial information is available.

The Company derives revenue from the following products:

	For the three months ended				For the nine months ended				For the three months ended				For the nine months ended
	November 2,		November 3,		November 2,		November 3,		October 31,		November 2,		October 31,		November 2,
	2019		2018		2019		2018		2020		2019		2020		2019
	$		$		$		$		$		$		$		$
Tea		30,038		31,348		92,770		92,167		22,989		30,038		69,004		92,770
Tea accessories		6,199		8,478		20,482		25,979		3,183		6,199		10,868		20,482
Food and beverages		3,256		3,830		9,673		11,463		53		3,256		1,625		9,673
		39,493		43,656		122,925		129,609		26,225		39,493		81,497		122,925

Table of Contents

Property and equipment, right-of-use assets and intangible assets by country are as follows:

November 2,

February 2,

2019 (1)

2019

$

$

Canada

62,840

27,996

US

8,996

1,470

Total

71,836

29,466

October 31,

February 1,

~~(1) Includes Right-of-use assets of $37,136 in Canada and $7,689 in US.~~

20
2020
2020
$
$
~~Table of Contents~~
Canada
8,032
52,116
US
-
7,042
Total
8,032
59,158

Results from operating activities before corporate expenses per country are as follows:

For the three months
ended November 2, 2019

For the nine months ended November 2,
2019 (Restated - Note 3)

Canada

US

Consolidated

Canada

US

Consolidated

$

$

$

$

$

$

Sales

30,909

8,584

39,493

95,439

27,486

122,925

Cost of sales

14,060

4,079

18,139

42,099

11,331

53,430

Gross profit

16,849

4,505

21,354

53,340

16,155

69,495

Selling, general and administration expenses (allocated)

16,057

4,433

20,490

45,628

13,712

59,340

Impairment of property, equipment and right-of-use assets

949

1,102

2,051

3,429

3,647

7,076

Results from operating activities before corporate expenses

(157 )

(1,030 )

(1,187 )

4,283

(1,204 )

3,079

Selling, general and administration expenses (non-allocated)

8,129

23,838

Results from operating activities

(9,316 )

(20,759 )
Finance costs

1,699

5,305

Finance income

(185 )

(570 )
Loss before income taxes

(10,830 )

(25,494 )

For the three months ended

For the nine months ended

October 31, 2020

Canada

Consolidated

Canada

Consolidated

Sales

20,280

5,945

26,225

61,276

20,221

81,497

Cost of sales

12,164

3,235

15,399

36,812

10,597

47,409

Gross profit

8,116

2,710

10,826

24,464

9,624

34,088

Selling, general and administration expenses (allocated)

2,765

487

3,252

14,173

3,845

18,018

Impairment of property and equipment and right-of-use assets

—

2,561

—

2,561

Results from operating activities before corporate expenses

5,351

2,223

7,574

7,730

5,779

13,509

Selling, general and administration expenses (non-allocated)

3,868

15,304

Restructuring plan activities, net

(10,743

)

24,017

Results from operating activities

14,449

(25,812

)

Finance costs

3,260

Finance income

(53

)

(361

)

Net Income (loss) before income taxes

14,467

(28,711

)

	For the three months ended									For the nine months ended
	November 2, 2019									November 2, 2019
	Canada			US			Consolidated			Canada		US			Consolidated
	$			$			$			$		$			$
Sales		30,909			8,584			39,493			95,439		27,486			122,925
Cost of sales		14,060			4,079			18,139			42,099		11,331			53,430
Gross profit		16,849			4,505			21,354			53,340		16,155			69,495
Selling, general and administration expenses (allocated)		16,057			4,433			20,490			45,628		13,712			59,340
Impairment of property and equipment and right-of-use assets		949			1,102			2,051			3,429		3,647			7,076
Results from operating activities before corporate expenses		(157	)		(1,030	)		(1,187	)		4,283		(1,204	)		3,079
Selling, general and administration expenses (non-allocated)								8,129								23,838
Results from operating activities								(9,316	)							(20,759	)
Finance costs								1,699								5,305
Finance income								(185	)							(570	)
Net Loss before income taxes								(10,830	)							(25,494	)

2116

Table of Contents

For the three months ended
November 3, 2018

For the nine months ended
November 3, 2018

Canada

US

Consolidated

Canada

US

Consolidated

$

$

$

$

$

$

Sales

34,709

8,947

43,656

103,091

26,518

129,609

Cost of sales

19,520

5,755

25,275

55,060

16,133

71,193

Gross profit

15,189

3,192

18,381

48,031

10,385

58,416

Selling, general and administration expenses (allocated)

13,872

4,513

18,385

40,794

12,907

53,701

Impairment of property, equipment and right-of-use assets

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

Selling, general and administration expenses (non-allocated)

8,721

27,393

Results from operating activities

(10,738 )

(26,449 )
Finance costs

80

237

Finance income

(122 )

(574 )
Loss before income taxes

(10,696 )

(26,112 )

~~14.~~15. 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 — 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 ~~loss~~income (loss) in the amount of ~~$68.~~

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$587.

The Company’s foreign exchange exposure is as follows:

November 2,

February 2,

2019

2019

US$

US$

Cash

1,431

267

Accounts receivable

1,396

1,142

Accounts payable

4,388

3,869

	October 31,		February 1,
	2020		2020
	US$		US$
Cash		470		1,928
Accounts and other receivables		889		455
Prepaid expenses and deposits		3,675		323
Trade and other payables		397		6,090
Liabilities subject to compromise		16,385		-

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

The Company had no foreign exchange contracts outstanding as at ~~November 2, 2019.~~October 31, 2020.

Market 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 and liabilities with variable interest ~~rates. The Company is exposed to~~rates and consist primarily of cash ~~flow risk under the Revolving Facility which bears interest at variable interest rates (Note 7). As at November 2, 2019, the Company did not have any borrowings~~ on ~~the Revolving Facility.~~hand.

Liquidity Risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. ~~The~~On July 8, 2020, the Company announced it was implementing the Restructuring Plan in order to stabilize its operations and eventually generate free cash-flow to sustain the business. Considering the Company does not have access to financing and needs to operate the business and fund its restructuring activities, 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~~as they become 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.~~payables, lease and purchase obligations.

As at ~~November 2, 2019,~~October 31, 2020, the Company had ~~$28,044~~$21.9 million in cash.

The Company expects to finance its working capital needs ~~store renovations,~~ and investments in infrastructure through cash flows from operations and cash on hand. ~~The~~At October 31, 2020, Trade and other payables amounted to $3.6 million (February 1, 2020 - $20.8 million), liabilities subject to compromise amounted to $71.7 million and purchase obligations amounted to $12.3 million (February 1, 2020 - $11.5 million). As part of its Restructuring Plan, Liabilities subject to compromise, as disclosed in Note 7, are subject to a plan of arrangement to be proposed by the Company ~~expects that~~to its creditors. All trade and other payables ~~will~~from July 9, 2020 onwards are expected to be ~~discharged within 90 days.~~paid according to negotiated vendor terms.

Refer to Note 2 for details with respect to the going concern uncertainty.

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Credit 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.~~receivables. Accounts receivable primarily ~~consists~~consist of receivables from retail customers who pay by credit card, receivables from wholesale channel sales, recoveries of credits from suppliers for returned or damaged products, and receivables from other companies for sales of products, gift cards and other ~~services and a loan advance to Squish.~~services. Credit card payments have minimal credit risk and the limited number of corporate receivables is closely ~~monitored and the risk for the loan advance is limited, as~~monitored. As a result, ~~of the pledge of DAVIDsTEA’s shares as security.~~expected credit loss on these financial assets is not significant.

~~Fair Values~~16. COMPARATIVE FIGURES

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. The fair values of derivative financial instrumentsCertain comparative figures have been ~~determined by reference~~reclassified to ~~forward exchange rates at~~conform to the ~~end~~current year presentation in the consolidated statement of income (loss) with respect to the ~~reporting period and classified in Level 2 of the fair value hierarchy. There are no outstanding derivative financial instruments at November 2, 2019.~~Company’s Restructuring Plan.

~~There were no transfers between Level 1, Level 2 and Level 3 of the fair value hierarchy during the three and nine-month periods ended November 2, 2019 and November 3, 2018.~~

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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

This Quarterly Report on Form 10-Q 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”, “intend”, “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 and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our Restructuring Plan, our results of operations, financial condition, liquidity, prospects, 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 impact of improvements to internal control and financial reporting.

While we believe these expectations and projections are based on reasonable assumptions, such forward-looking statements are inherently subject to risks, uncertainties and assumptions about us, including the risk factors listed under Item 1A. Risk Factors, as well as other cautionary language in Form 10-K ~~for the fiscal year ended February 2, 2019,~~ filed with the SEC on ~~May 2, 2019.~~June 16, 2020, as well as the additional Risk Factors set out in our Form 10-Q filed with the SEC on July 31, 2020, as well as the additional Risk Factor set out in our Form 10-Q filed with the SEC on September 21, 2020.

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

·
☐
~~Our ability~~
The effects of our Restructuring Plan pursuant to ~~manage significant changes to our Board~~the CCAA in Canada and recognition of ~~Directors and leadership team;~~the CCAA proceedings in the United States under Chapter 15 of the United States Bankruptcy Code;

·
☐
Our ~~efforts~~ability to ~~expand beyond~~successfully pivot our business to a digital-first strategy, supported by our wholesale distribution capabilities and our retail ~~stores;~~operations, including our ability to attract and retain employees that are instrumental to growing our online and wholesale channel businesses;

·
☐
~~Our ability to maintain~~
The duration and impact of the global COVID-19 pandemic, which has disrupted the Company’s business and has adversely affected the Company’s financial condition and operating results, and may further impact our ~~brand image;~~workforce and operations, the operations of our customers, and those of our respective vendors, suppliers, and partners;

·
☐
~~Significant competition within~~
Our ability to avoid the delisting of the Company’s common stock by Nasdaq due to the Restructuring Plan or our ~~industry;~~inability to maintain compliance with Nasdaq listing requirements;

·
☐
~~The effect of a decrease in customer traffic~~
Our ability to ~~the shopping malls, centers and street locations where~~manage significant changes to our ~~stores are located;~~leadership team;

·
☐
~~The results of~~
Our ability to maintain and enhance our ~~transfer pricing audit;~~brand image;

·
☐
~~Our ability to attract and retain employees that embody~~
Significant competition within our ~~culture, including Tea Guides and store and district managers and regional directors;~~industry;

·
☐
~~Changes~~
The effect of a decrease in ~~consumer preferences and economic conditions affecting disposable income;~~customer traffic where our stores are located;

·
☐
Our ability to attract and retain employees that embody our entrepreneurial culture;
☐
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;

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	☐
	·	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;~~quantities, in particular in light of supply chain disruption due to the COVID-19 pandemic;

	· ☐	The impact of weather conditions, natural disasters and ~~manmade~~man-made 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;

	· ☐	Fluctuations in exchange rates; and

	· ☐	The seasonality of our business.

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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, 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, uncertainties and assumptions, the forward-looking events discussed in this Quarterly Report on Form 10-Q might not occur, and investors are cautioned not to unduly rely upon these statements.

Forward-looking statements speak only as of the date of this Form 10-Q. 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, 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 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.

Accounting Periods

All references to “Fiscal 2020” are to the Company’s fiscal year ending January 30, 2021. All references to “Fiscal 2019” are to the Company’s fiscal year ~~ending~~ended February 1, 2020. ~~All references to “Fiscal 2018” are to the Company’s fiscal year ended February 2, 2019.~~

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. ~~The year ended February 2,~~Fiscal 2019 and ~~year ending February 1,~~ 2020 both cover a 52-week period.

Overview

We are a branded retailer and growing mass wholesaler of specialty tea, offering a differentiated selection of proprietary loose-leaf teas, pre-packaged teas, tea sachets and tea-related gifts and accessories through our e-commerce platform at www.davidstea.com and in 18 Company-owned and operated retail stores in Canada. A selection of DAVIDsTEA products is also available in more than 2,500 grocery stores and pharmacies across Canada. The Company is headquartered in Montréal, Canada.

We believe that our proprietary loose-leaf tea assortment and related product suite differentiates us from competitors in North America and resonates with our target customer base. Our strategy is to stabilize our business from unfavorable trend lines by playing to our core strengths and strengthening our business by focusing on how to grow our product portfolio. This includes migrating sales to a virtual experience and best-in-class customer service execution. Our Restructuring Plan is focused on effectively optimizing our retail footprint to emerge as a leaner, more sustainable physical presence that complements a growing world-class online and grocery business, all supported by a right-sized support organization.

On March 17, 2020, we closed all of our stores in North America, as subsequently mandated by the governments in both Canada and the United States in light of the COVID-19 pandemic. Due to the degree of uncertainty in connection with the scope and extent of the COVID-19 pandemic and the resulting impact to our business, and considering that significant losses were historically incurred in our brick-and-mortar operations which are anchored by commercial leases that are difficult to modify, we concluded that our transformation objectives would be better achieved through a formal restructuring process.

On July 8, 2020, the Company announced that it was implementing the Restructuring Plan under the CCAA in order to accelerate its transition to an online retailer and wholesaler of high-quality tea and accessories and ~~food~~that during the restructuring process, the Company would continue to operate its online business through its e-commerce platform at www.davidstea.com and ~~beverages, primarily~~its wholesale distribution channel, through ~~233 company-operated~~which it sells a selection of DAVIDsTEA products in grocery stores and pharmacies across Canada. Following a careful review of available options to stem the losses from its brick-and-mortar footprint, the Company’s management and Board of Directors determined that a formal restructuring process was the best option in the context of an increasingly challenging retail environment, further exacerbated by the COVID-19 pandemic.

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On July 8, 2020, the Company obtained the Initial Order pursuant to the CCAA from the Québec Superior Court in order to implement the Restructuring Plan. Among other things, the Initial Order provided for the appointment of PwC as Monitor in the CCAA proceedings.

On July 9, 2020, the United States Bankruptcy Court for the District of ~~November 2, 2019,~~Delaware entered an order in favor of the Company under Chapter 15 of the United States Bankruptcy Code. The order of the United States Bankruptcy Court provisionally recognized the proceedings under the CCAA and ~~through our online store at www.davidstea.com. Additionally, we currently operate five seasonal kiosks, located~~enforced the Initial Order, in ~~high-traffic~~effect providing protection to the Company from creditor action against its assets in the United States.

As part of its Restructuring Plan and ~~high profile malls~~further to obtaining the Initial Order, the Company, on July 10, 2020, sent notices to terminate leases for 82 of its stores in Canada and all 42 of its stores in the United States. These lease terminations were effective on August 9, 2020.

On July 30, 2020, the Company sent notices to terminate leases for an additional 82 of its stores in Canada. These ~~kiosks offer~~lease terminations were effective on August 29, 2020.

On August 21, 2020, the Company re-opened 18 stores across Canada.

On September 17, 2020, the Québec Superior Court extended the stay of all proceedings against the Company to December 15, 2020 and issued a ~~streamlined assortment of pre-packaged teas, hard goods, accessories, and gifting items. We are building a brand that seeks to expand~~Claims Process Order establishing 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 appreciateclaims procedures for the ~~compelling attributes of tea as well~~Company’s creditors under the CCAA. This Order, among other things set November 6, 2020 as the ~~ease of preparation.~~time by which creditors had to submit their claims to PwC, the Court-appointed Monitor.

Management believes that there is material uncertainty surrounding the Company’s ability to execute the strategy necessary to return to profitability in the current environment, including the unpredictability surrounding the recovery from the COVID-19 pandemic, changes in consumer behavior and the ability to successfully emerge from the Restructuring Plan. As a result, these events and conditions indicate that a material uncertainty exists that raises substantial doubt about the Company’s ability to continue as a going concern and, therefore, realize its assets and discharge its liabilities in the normal course of business.

Factors Affecting Our Performance

We believe that our performance and future success depend on a number of factors that present significant opportunities for us and may pose risks and challenges, as discussed in the “Risk Factors” section under “Item 1A. Risk Factors” of this Form ~~10-K filed with the SEC and on SEDAR and available at www.sec.gov and www.sedar.com, respectively.~~10-Q.

How 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~~are generated from our online store, retail stores, ~~our online store~~ and 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 ~~quarter~~quarters because of lower customer ~~traffic~~engagement in both our online store and physical locations 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. ~~Sales also include gift card breakage income.~~

~~Comparable Sales.~~ Comparable sales refer to period-over-period comparison information for comparable 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.

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~~Measuring~~As we transition to generating sales primarily from our online store, measuring the change in period-over-period comparable same store sales, ~~allows us to evaluate~~although still a valid measure within our retail sales channel, loses its significance in the overall evaluation of how our business is performing. ~~Various factors affect comparable~~Other measures such as sales ~~including:~~performance in total and in our e-commerce and wholesale channels begin to influence how we direct resources and evaluate our performance. Factors affecting our performance include:

	·☐	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 toonline and in our ~~stores and online;~~other channels;

	·
	☐	the customer experience we provide online and in our ~~stores and online;~~other channels;

	·
	☐	the level of customer traffic ~~near~~to our ~~locations in which we operate;~~website and our online presence more generally;

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

	·
	☐	the pricing of our tea, tea ~~accessories,~~accessories; and ~~food and beverages;~~

	·
	☐	our ability to obtain, manufacture 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.~~efficiently.

~~Non-Comparable Sales.~~ ~~Non~~-~~comparable sales include sales from stores prior to the beginning of their thirteenth fiscal month of 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, assembly and distribution costs.

Selling, General and Administration Expenses. Selling, general and administration expenses (“SG&A”) consist of store operating expenses and other general and administration ~~expenses, including store impairments and provision (recovery) for onerous contracts.~~expenses. 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 assets, amortization of right-of-use assets, any store or other asset impairment taken in the normal course of business and other operating costs.

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 ~~on page 28~~under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, of this ~~Quarterly Report on~~ Form ~~10-Q.~~10-Q (the “MD&A”).

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

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 ~~on page 29 of this Quarterly Report on Form 10-Q.~~in our MD&A.

Finance Costs. Finance costs consist of cash and imputed non-cash charges related to ~~our~~any credit facility, ~~accretion expense on the provisions for onerous 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 right-of-use 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 ~~on page 29 of this Quarterly Report on Form 10-Q.~~in our MD&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~~Our financial ~~statements~~results for the third quarter include the impact of ~~2019, IFRS 16 provides a single model for leases abolishing~~our Restructuring Plan which began on July 8, 2020 and July 9, 2020 when we obtained 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 nine-month 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 assets 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 nine-month 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 leasesInitial Order pursuant to the ~~guidance~~CCAA from the Québec Superior Court and when we received protection from creditor action against our assets in the United States from the United States Bankruptcy Court for the District of ~~IAS 37,~~ ~~Provisions~~,Delaware, respectively. On July 10, 2020, we sent notices to terminate leases for 82 of our stores in Canada and all 42 of our stores in the United States. These lease terminations were effective on August 9, 2020. On July 30, 2020, we sent notices to terminate leases for an additional 82 of our stores in Canada. These lease terminations were effective on August 29, 2020. Our retail footprint now includes 18 stores in Canada which ~~could have had an impact~~we reopened on August 21, 2020.

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Sales during the third quarter of $26.2 million declined by $13.3 million or 33.6% over the prior year quarter due to the reduction in our retail store footprint. Adjusted EBITDA ~~and net loss~~in the third quarter of Fiscal 2020 was $3.3 million compared to negative $2.2 million in the ~~Company under accounting standards applicable~~ prior ~~to February 3, 2019.~~year quarter.

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

	For the three months ended									For the nine months ended									For the three months ended						For the nine months ended
				November 2, 2019									November 2, 2019
	November 2,			Excluding impact			November 3,			November 2,			Excluding impact			November 3,			October 31,			November 2,			October 31,			November 2,
	2019			of IFRS 16			2018			2019			of IFRS 16			2018			2020			2019			2020			2019

Consolidated statement of loss data:
Consolidated statement of income (loss) data:
Sales	$	39,493		$	39,493		$	43,656		$	122,925		$	122,925		$	129,609		$	26,225		$	39,493		$	81,497		$	122,925
Cost of sales		18,139			23,859			25,275			53,430			70,772			71,193			15,399			18,139			47,409			53,430
Gross profit		21,354			15,634			18,381			69,495			52,153			58,416			10,826			21,354			34,088			69,495
Selling, general and administration expenses		30,670			27,733			29,119			90,254			81,101			84,865			7,120			30,670			35,883			90,254
Restructuring plan activities, net																				(10,743	)		—			24,017			—
Results from operating activities		(9,316	)		(12,099	)		(10,738	)		(20,759	)		(28,948	)		(26,449	)		14,449			(9,316	)		(25,812	)		(20,759	)
Finance costs		1,699			—			80			5,305			—			237			35			1,699			3,260			5,305
Finance income		(185	)		(185	)		(122	)		(570	)		(570	)		(574	)		(53	)		(185	)		(361	)		(570	)
Loss before income taxes		(10,830	)		(11,914	)		(10,696	)		(25,494	)		(28,378	)		(26,112	)
Provision for income tax recovery		—			—			(1,635	)		—			—			(5,851	)
Net loss	$	(10,830	)	$	(11,914	)	$	(9,061	)	$	(25,494	)	$	(28,378	)	$	(20,261	)
Net income (loss)																			$	14,467		$	(10,830	)	$	(28,711	)	$	(25,494	)
Percentage of sales:
Sales		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		45.9	%		60.4	%		57.9	%		43.5	%		57.6	%		54.9	%		58.7	%		45.9	%		58.2	%		43.5	%
Gross profit		54.1	%		39.6	%		42.1	%		56.5	%		42.4	%		45.1	%		41.3	%		54.1	%		41.8	%		56.5	%
Selling, general and administration expenses		77.7	%		70.2	%		66.7	%		73.4	%		66.0	%		65.5	%		27.1	%		77.7	%		44.0	%		73.4	%
Restructuring plan activities, net																				(41.0	)%		0.0	%		29.5	%		0.0	%
Results from operating activities		(23.6	%)		(30.6	%)		(24.6	%)		(16.9	%)		(23.5	%)		(20.4	%)		55.1	%		(23.6	)%		(31.7	)%		(16.9	)%
Finance costs		4.3	%		0.0	%		0.2	%		4.3	%		0.0	%		0.1	%		0.1	%		4.3	%		4.0	%		4.3	%
Finance income		(0.5	%)		(0.5	%)		(0.3	%)		(0.5	%)		(0.5	%)		(0.4	%)		(0.2	)%		(0.5	)%		(0.4	)%		(0.5	)%
Loss before income taxes		(27.4	%)		(30.2	%)		(24.5	%)		(20.7	%)		(23.1	%)		(20.1	%)
Provision for income tax recovery		0.0	%		0.0	%		(3.7	%)		0.0	%		0.0	%		(4.5	%)
Net loss		(27.4	%)		(30.2	%)		(20.8	%)		(20.7	%)		(23.1	%)		(15.6	%)
Net income (loss)																				55.2	%		(27.4	)%		(35.2	)%		(20.7	)%
Other financial and operations data:
Adjusted EBITDA⁽¹⁾	$	(2,241	)	$	(7,962	)	$	(6,248	)	$	1,387		$	(15,955	)	$	(12,212	)	$	3,304		$	(2,241	)	$	4,265		$	1,387
Adjusted EBITDA as a percentage of sales		(5.7	%)		(20.2	%)		(14.3	%)		1.13	%		(13.0	%)		(9.4	%)		12.6	%		(5.7	) %		5.2	%		1.1	%
Number of stores at end of period		233			233			238			233			233			238
Comparable sales decline for period ⁽²⁾		(14.1	%)		(14.1	%)		(4.7	%)		(10.0	%)		(10.0	%)		(8.8	%)
Adjusted SG&A⁽¹⁾																			$	8,566		$	28,619		$	36,767		$	83,178
Adjusted results from operating activities ⁽¹⁾																			$	2,260		$	(7,265	)	$	(2,679	)	$	(13,661	)
Adjusted net income (loss) ⁽¹⁾																			$	2,278		$	(8,779	)	$	(5,578	)	$	(18,396	)

~~_______________~~

⁽¹⁾	For a reconciliation of Adjusted EBITDA, toAdjusted SG&A, Adjusted results from operating activities, and Adjusted net income ~~see “—Non-IFRS Financial Measures” below.~~
⁽²⁾	~~Comparable sales refer to period-over-period comparison information for comparable stores. Our stores are added~~(loss), to the most directly comparable ~~sales calculation~~measure calculated in ~~the beginning of their thirteenth month of operation.~~accordance with IFRS, see “Non-IFRS financial measures” below.

27
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Non-IFRS financial measures

~~Non-IFRS Financial Measures~~

The Company uses certain non-IFRS financial measures for purposes of comparison to prior periods, to prepare annual operating budgets, and for the development of future projections. These measures are not recognized measures under IFRS, do not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similarly titled measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of our results of operations from management’s perspective. Accordingly, they should not be considered in isolation nor as a substitute for analysis of our financial information reported under IFRS. We use non-IFRS financial measures to provide supplemental measures of our operating performance and thus highlight trends in our business that may not otherwise be apparent when relying solely on IFRS financial measures. These non-IFRS financial measures include; Adjusted ~~selling, general and administration expenses,~~SG&A, Adjusted results from operating activities, Adjusted net ~~loss~~income (loss), Adjusted EBITDA and Adjusted EBITDA, before and after adjustments for the impact of IFRS 16, are not a presentation made in accordance with IFRS, and the use of the terms Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjustedfully diluted net ~~loss and Adjusted EBITDA, before and after adjustments for the impact of IFRS 16, may differ from similar measures reported by other companies.~~ income (loss) per common share.

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We believe that 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, providesthese non-IFRS financial measures provide investors with useful information with respect to our historical ~~operations. Adjusted selling, general~~operations 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 analytical ~~tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under IFRS.~~tool. Some of these limitations are:

·☐	Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net ~~loss~~income (loss) and Adjusted EBITDA ~~before and after adjustments for the impact of IFRS 16,~~ do not reflect changes in, or cash requirements for, our working capital needs;

·☐

Adjusted selling, general and administration expenses, Adjusted results from operating activities, Adjusted net ~~loss~~income (loss) and Adjusted EBITDA ~~before and after adjustments for the impact of IFRS 16,~~ do not reflect the cash requirements necessary to ~~service interest or principal payments on our debt;~~fund capital expenditures; and

·☐	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,~~these non-IFRS financial measures 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~~provide reconciliations of our non-IFRS financial measures to the most directly comparable measure calculated in accordance with IFRS:

Reconciliation of Selling, general and administration expenses to Adjusted selling, general and administration expenses

	For the three months ended					For the nine months ended
	October 31,		November 2,			October 31,			November 2,
	2020		2019			2020			2019
Selling, general and administration expenses	$	7,120	$	30,670		$	35,883		$	90,254
Impairment of property and equipment and right-of-use assets		—		(2,051	)		(2,561	)		(7,076	)
Government emergency wage subsidy		1,446		—			3,445			—
Adjusted selling, general and administration expenses	$	8,566	$	28,619		$	36,767		$	83,178

Reconciliation of Results from operating activities to Adjusted results from operating activities ~~Adjusted net loss and Adjusted EBITDA before and after adjustments for the impact of IFRS 16, to our Net loss determined in accordance with IFRS:~~

	For the three months ended						For the nine months ended
	October 31,			November 2,			October 31,			November 2,
	2020			2019			2020			2019
Results from operating activities	$	14,449		$	(9,316	)	$	(25,812	)	$	(20,759	)
Impairment of property and equipment and right-of-use assets		—			2,051			2,561			7,076
Loss on disposal of property and equipment and right-of-use assets		—			—			—			22
Restructuring plan activities, net		(10,743	)		—			24,017			—
Government emergency wage subsidy		(1,446	)		—			(3,445	)		—
Adjusted results from operating activities	$	2,260		$	(7,265	)	$	(2,679	)	$	(13,661	)

Reconciliation of Net income (loss) to Adjusted ~~selling, general and administration expenses~~EBITDA

For the three months ended

For the nine months ended

November 2, 2019

November 2, 2019

November 2,

Excluding impact

November 3,

November 2,

Excluding impact

November 3,

2019

of IFRS 16

2018

2019

of IFRS 16

2018

Selling, general and administration expenses

$ 30,670

$ 27,733

$ 29,119

$ 90,254

$ 81,101

$ 84,865

Executive separation costs related to salary (a)

—

—

(123 )

—

—

(840 )
Impairment of property, equipment and right-of-use assets (b)

(2,051 )

(2,051 )

(725 )

(7,076 )

(7,076 )

(3,285 )
Impact of onerous contracts (c)

—

—

(1,288 )

—

—

(486 )
Strategic review and proxy contest costs (d)

—

—

(27 )

—

—

(3,538 )
Adjusted selling, general and administration expenses

$ 28,619

$ 25,682

$ 26,956

$ 83,178

$ 74,025

$ 76,716

~~_____________~~

~~(a)~~	~~Executive separation costs represent mainly salary owed to certain former executives as part of their separation of employment from the Company.~~
~~(b)~~	~~Represent costs related to impairment of property, equipment and right-of-use assets for stores.~~
~~(c)~~	Represents 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)~~	~~Represents costs related to the corporate strategic review process as well as costs related to the proxy contest.~~

	For the three months ended						For the nine months ended

	October 31,			November 2,			October 31,			November 2,
	2020			2019			2020			2019
Net income (loss)	$	14,467		$	(10,830	)	$	(28,711	)	$	(25,494	)
Finance costs		35			1,699			3,260			5,305
Finance income		(53	)		(185	)		(361	)		(570	)
Depreciation and amortization		846			4,768			6,166			14,522
EBITDA	$	15,295		$	(4,548	)	$	(19,646	)	$	(6,237	)
Additional adjustments :
Stock-based compensation expense		198			256			778			526
Impairment of property and equipment and right-of-use assets		—			2,051			2,561			7,076
Loss on disposal of property and equipment		—			—			—			22
Restructuring plan activities, net		(10,743	)		—			24,017			—
Government emergency wage subsidy		(1,446	)		—			(3,445	)		—
Adjusted EBITDA	$	3,304		$	(2,241	)	$	4,265		$	1,387

2824
Table of Contents

~~Reconciliation of Adjusted results from operating activities~~

For the three months ended
For the nine months ended

November 2, 2019

November 2, 2019

November 2,

Excluding impact

November 3,

November 2,

Excluding impact

November 3,

2019

of IFRS 16

2018

2019

of IFRS 16

2018

Results from operating activities

$ (9,316 )

$ (12,099 )

$ (10,738 )

$ (20,759 )

$ (28,948 )

$ (26,449 )
Executive separation costs related to salary (a)

—

—

123

—

—

840

Impairment of property, equipment and right-of-use assets (b)

2,051

2,051

725

7,076

7,076

3,285

Impact of onerous contracts (c)

—

—

1,288

—

—

486

Strategic review and proxy contest costs (d)

—

—

27

—

—

3,538

Adjusted results from operating activities

$ (7,265 )

$ (10,048 )

$ (8,575 )

$ (13,683 )

$ (21,872 )

$ (18,300 )

~~_____________~~

~~(a)~~	~~Executive separation costs represent mainly salary owed to certain former executives as part of their separation of employment from the Company.~~
~~(b)~~	~~Represent costs related to impairment of property, equipment and right-of-use assets for stores.~~
~~(c)~~	Represents 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)~~	~~Represents costs related to the corporate strategic review process as well as costs related to the proxy contest.~~

Reconciliation of Net ~~loss to Adjusted EBITDA~~

For the three months ended
For the nine months ended

November 2, 2019

November 2, 2019

November 2,

Excluding impact

November 3,

November 2,

Excluding impact

November 3,

2019

of IFRS 16⁽¹⁾

2018

2019

of IFRS 16⁽¹⁾

2018

Net loss

$ (10,830 )

$ (11,914 )

$ (9,061 )

$ (25,494 )

$ (28,378 )

$ (20,261 )
Finance costs

1,699

—

80

5,305

—

237

Finance income

(185 )

(185 )

(122 )

(570 )

(570 )

(574 )
Depreciation and amortization

4,768

1,830

2,162

14,522

5,369

6,098

Recovery of income tax

—

—

(1,635 )

—

—

(5,851 )
EBITDA

$ (4,548 )

$ (10,269 )

$ (8,576 )

$ (6,237 )

$ (23,579 )

$ (20,351 )
Additional adjustments :

Stock-based compensation expense (a)

256

256

91

526

526

(7 )
Executive separation costs related to salary (b)

—

—

123

—

—

840

Impairment of property, equipment and right-of-use assets (c)

2,051

2,051

725

7,076

7,076

3,285

Impact of onerous contracts (d)

—

—

1,288

—

—

486

Deferred rent (e)

—

—

74

—

—

(17 )
Loss on disposal of property and equipment

—

—

—

22

22

14

Strategic review and proxy contest costs (f)

—

—

27

—

—

3,538

Adjusted EBITDA

$ (2,241 )

$ (7,962 )

$ (6,248 )

$ 1,387

$ (15,955 )

$ (12,212 )
~~_____________~~
⁽¹⁾
Adjusted EBITDA for November 2, 2019 excluding impact of IFRS 16 assumes the Company continued to report under IAS 17, Leases and did not adopt IFRS 16. Under IFRS 16, the nature and timing of expenses related to operating leases have changed as the straight-line operating leases expenses have been replaced with a depreciation charge for right-of-use assets and interest expense on lease liabilities. Accordingly, for the three months and nine months ended November 2, 2019, IFRS 16 had a favourable impact of approximately $5.7 million and $17.3 million respectively, on adjusted EBITDA as operating lease expenses have been replaced with depreciation and interest expense, which are not included in the calculation of adjusted EBITDA.
~~(a)~~
~~Represents non-cash stock-based compensation expense.~~
~~(b)~~
~~Executive separation costs represent mainly salary owed to certain former executives as part of their separation of employment from the Company.~~
~~(c)~~
~~Represent costs related to impairment of property, equipment and right-of-use assets for stores.~~
~~(d)~~
Represents 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.
~~(e)~~
~~Represents the extent to which our annual rent expense has been above or below our cash rent payments.~~
~~(f)~~
~~Represents costs related to the corporate strategic review process as well as costs related to the proxy contest.~~
29
~~Table of Contents~~

~~Reconciliation of reported results~~income (loss) to Adjusted net ~~loss~~income (loss)

For the three months ended
For the nine months ended

November 2, 2019

November 2, 2019

November 2,

Excluding impact

November 3,

November 2,

Excluding impact

November 3,

2019

of IFRS 16

2018

2019

of IFRS 16

2018

Net loss

$ (10,830 )

$ (11,914 )

$ (9,061 )

$ (25,494 )

$ (28,378 )

$ (20,261 )
Executive separation costs related to salary (a)

—

—

123

—

—

840

Impairment of property, equipment and right-of-use assets (b)

2,051

2,051

725

7,076

7,076

3,285

Impact of onerous contracts (c)

—

—

1,288

—

—

486

Strategic review and proxy contest costs (d)

—

—

27

—

—

3,538

Recovery of income tax (e)

—

—

(1,635 )

—

—

(5,851 )
Adjusted net loss

$ (8,779 )

$ (9,863 )

$ (8,533 )

$ (18,418 )

$ (21,302 )

$ (17,964 )

~~_____________~~

~~(a)~~
~~Executive separation costs represent mainly salary owed to certain former executives as part of their separation of employment from the Company.~~
~~(b)~~
~~Represent costs related to impairment of property, equipment and right-of-use assets for stores.~~
~~(c)~~
Represents 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)~~
~~Represents costs related to the corporate strategic review process as well as costs related to the proxy contest.~~
~~(e)~~
~~Represents the setup of deferred income tax assets resulting from the probability of using operating tax loss carry forwards~~

	For the three months ended						For the nine months ended
	October 31,			November 2,			October 31,			November 2,
	2020			2019			2020			2019
Net income (loss)	$	14,467		$	(10,830	)	$	(28,711	)	$	(25,494	)
Impairment of property and equipment and right-of-use assets		—			2,051			2,561			7,076
Loss on disposal of property and equipment		—			—			—			22
Restructuring plan activities, net		(10,743	)		—			24,017			—
Government emergency wage subsidy		(1,446	)		—			(3,445	)		—
Adjusted Net income (loss)	$	2,278		$	(8,779	)	$	(5,578	)	$	(18,396	)

Reconciliation of fully diluted ~~loss~~net income (loss) per common share to ~~adjusted~~Adjusted fully diluted ~~loss~~net income (loss) per common share

	For the three months ended					For the nine months ended

	October 31,		November 2,			October 31,			November 2,
	2020		2019			2020			2019

Weighted average number of shares outstanding, fully diluted		26,767,470		26,068,435			26,143,963			26,048,239

Net income (loss)	$	14,467		(10,830	)	$	(28,711	)	$	(25,494	)

Adjusted net income (loss)	$	2,278		(8,779	)	$	(5,578	)	$	(18,396	)

Net income (loss) per share, fully diluted	$	0.54		(0.42	)	$	(1.10	)	$	(0.98	)

Adjusted Net income (loss) per share, fully diluted	$	0.09		(0.34	)	$	(0.21	)	$	(0.71	)

For the three months ended

For the nine months ended

November 2, 2019

November 2, 2019

November 2,

Excluding impact

November 3,

November 2,

Excluding impact

November 3,

2019

of IFRS 16

2018

2019

of IFRS 16

2018

Weighted average number of shares outstanding, fully diluted

26,068,435

26,068,435

25,992,339

26,048,239

26,048,239

25,862,086

Adjusted weighted average number of shares outstanding, fully diluted

26,068,435

26,068,435

25,992,339

26,048,239

26,048,239

25,862,086

Net loss

$ (10,830 )

$ (11,914 )

$ (9,061 )

$ (25,494 )

$ (28,378 )

$ (20,261 )

Adjusted net loss

$ (8,779 )

$ (9,863 )

$ (8,533 )

$ (18,418 )

$ (21,302 )

$ (17,964 )

Net loss per share, fully diluted

$ (0.42 )

$ (0.46 )

$ (0.35 )

$ (0.98 )

$ (0.98 )

$ (0.78 )

Adjusted net loss per share, fully diluted

$ (0.34 )

$ (0.38 )

$ (0.33 )

$ (0.71 )

$ (0.71 )

$ (0.69 )

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~~Table of Contents~~

Three Months Ended October 31, 2020 compared to Three Months Ended November 2, 2019 ~~Compared to Three Months Ended November 3, 2018~~

~~Sales~~.Sales. Sales for the three months ended ~~November 2, 2019~~October 31, 2020 decreased ~~9.5%~~33.6%, or ~~$4.2~~$13.3 million, to ~~$39.5~~$26.2 million from ~~$43.7~~$39.5 million in the prior year quarter. On March 17, 2020, in response to the COVID-19 pandemic, the Company temporarily closed all its retail stores in Canada and the United States, and subsequently, as part of its formal Restructuring Plan, exited all of its brick and mortar stores except for 18 Canadian stores which were reopened on August 21, 2020. Accordingly, brick and mortar sales for the quarter declined when compared to the prior year quarter by $26.4 million or 86.5% to $4.1 million. Sales from ~~our~~ e-commerce and wholesale channels increased ~~$1.1~~by $13.1 million or ~~by 14.1%, driven primarily by greater online adoption as well as by increased demand~~145.5% to $22.1 million, from $9.0 million in ~~our grocery distribution channel. Offsetting this was a decline~~the prior year quarter. E-commerce and wholesale sales represented 84.3% of sales compared to 22.8% of sales in ~~retail sales of $5.3 million and a decline of $5.0 million, or 14.1%, in comparable store sales.~~the prior year quarter.

Gross ~~Profit~~. profit. Gross profit ~~increased by 16.2%, or $3.0 million, to $21.4~~of $10.8 million for the three months ended ~~November 2, 2019,~~October 31, 2020 decreased by $10.5 million or 49.3% from the prior year ~~quarter. IFRS 16 replaces~~quarter due primarily to a decline in sales during the ~~straight-line operating lease expense with~~period. As the Company pivots to a ~~depreciation charge for right-of-use assets and interest expense on lease liabilities. Accordingly, straight-line operating lease expense is no longer included in~~digital-first strategy, the cost of ~~sales in arriving at gross profit. Prior to the adoption of IFRS 16, straight-line operating lease expense amounting to $5.7 million would have been~~delivery and distribution that is included in arriving at gross ~~profit. Excluding the impact~~profit will compare unfavorably to prior periods that were predominantly focused on retail sales distribution. The significant increase in e-commerce sales resulted in an increase of ~~IFRS 16,~~$4.2 million in delivery and distribution costs, thereby negatively impacting gross profit ~~decreased by $2.7 million to $15.6 million, representing~~percentage. As a result, gross profit of 39.6% for the three months ended November 2, 2019, a decrease of 2.5% from the prior year quarter resulting from a shift in product sales mix and the deleveraging of fixed costs due to negative comparable store sales.

~~Selling, General and Administration Expenses (“SG&A”).~~ SG&A increased to $30.7 million for the three months ended November 2, 2019 from the prior year quarter. Under IFRS 16, SG&A includes $2.9 million of depreciation in connection with our right-of-use assets. Excluding the impact of IFRS 16, SG&A would have amounted to $27.7 million, a decrease of $1.4 million, or 4.8%, from the prior year quarter and as a percentage of sales ~~would~~declined to 41.3% for the three-month period ended October 31, 2020 from 54.1% in the prior year quarter. We expect that the increased cost to deliver online purchases will be less than the selling expenses incurred in a brick and mortar environment that have ~~amounted~~been historically included as part of Selling, general and administration expenses.

Selling, general and administration expenses. Selling, general and administration expenses decreased by $23.6 million or 76.8% to ~~70.2% representing an increase of 3.5% over~~$7.1 million in the three months ended October 31, 2020 from the prior year quarter. Excluding the impact of ~~IFRS 16~~the $1.4 million wage subsidy received under the Canadian government COVID-19 Economic Response Plan in Fiscal 2020, and the impact in Fiscal 2019 of the impairment of property and equipment and ~~right-of-use~~right-of use assets ~~for the three months ended November 2, 2019 and the impact of onerous contracts, impairment of property, equipment and right-of-use assets, executive separation cost related~~amounting to ~~salary and costs related to the strategic review and proxy contest for the three months ended November 3, 2018,~~$2.1 million, Adjusted SG&A decreased by ~~$1.3~~$20.1 million. In connection with our Restructuring Plan, we terminated the leases for all of our stores in North America except for 18 Canadian stores which reopened on August 21, 2020. As a result, wages, salaries and employee benefits were reduced by $12.2 million, ~~for~~and we realized a reduction of $3.8 million in amortization expenses due to a lower right-of-use asset value at the ~~three months ended November 2, 2019. As~~beginning of the period. Adjusted SG&A as a percentage of sales ~~and excluding~~in the ~~impact of IFRS 16, Adjusted SG&A increased~~quarter decreased to ~~65.0%~~32.7% from ~~61.7% due to higher selling expenses.~~72.5% in the prior year quarter.

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~~Operating Activities~~~~. Loss~~

Results from operating activities. Income from operating activities was ~~$9.3~~$14.4 million as compared to a loss of ~~$10.7~~$9.3 million in the prior year quarter. Excluding the impact of ~~IFRS 16,~~the Restructuring Plan announced on July 8, 2020, the wage subsidy received from the Canadian government under the COVID-19 Economic Response Plan, the impact of the impairment of property and equipment and right-of-use assets and the loss on disposal of property and equipment, Adjusted results from operating activities ~~would have~~ amounted to ~~$12.1~~$2.3 million in the three-month period ended October 31, 2020 compared to a loss of $7.3 million in the prior year quarter. This resulting improvement of $9.6 million is explained by a reduction in wages, salaries and employee benefits from stores and head office, amounting to $12.2 million, a reduction of $3.8 million in amortization expense due to a lower right-of-use asset value at the beginning of the period, and a reduction of other brick and mortar selling expenses of $3.5 million, partially offset by the reduction of gross profit of $10.5 million.

Finance costs. Finance costs amounted to almost nil in the three months ended October 31, 2020, a decrease of ~~$1.4~~$1.7 million from the prior year quarter. ~~This decrease is mainly explained by the absence of executive separation cost related~~The interest expense relates to ~~salary, the impact of onerous contracts,~~lease liabilities and costs related to the strategic review and proxy contest of incurred in the same period of 2018 offset by the increase in the impairment of property, equipment and right-of-use assets in 2019. Adjusted resultshas decreased slightly from operating activities, which excludes any impact of executive separation cost related to salary, impairment of property, equipment and right-of-use assets, impact from onerous contracts, and costs related to the strategic review and proxy contest, was $10.0 million compared to $8.6 million in the prior year quarter.

Finance ~~Costs~~. Finance costs amounted to $1.7 million in the three months ended November 2, 2019, an increase of $1.6 million 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 lease liability of $102.2 million on initial application of IFRS 16. Excluding the impact of IFRS 16, interest expense would have been nil in the current year quarter.

~~Finance Income~~. income. Finance income of ~~$0.2~~$0.1 million is derived ~~primarily~~mainly from interest on cash on hand and has ~~increased~~decreased slightly from the prior year quarter.

EBITDA. EBITDA ~~and Adjusted EBITDA~~~~. EBITDA, which excludes non-cash and other items~~was $15.3 million in the ~~current and prior periods, was~~quarter ended October 31, 2020 compared to a negative $4.5 million in the ~~quarter ended November 2, 2019 compared to a negative $8.6 million in the~~ prior year ~~quarter. Excluding the impact~~quarter, representing an increase of ~~IFRS 16, EBITDA would have amounted to a negative $10.3 million, representing a decrease of $1.7~~$19.8 million over the prior year quarter. Adjusted EBITDA for the quarter ended October 31, 2020, which excludes the impact of stock-based compensation expense, Restructuring plan activities, the subsidy received from the Canadian government under the COVID-19 Economic Response Plan, and the impairment of property and equipment and right-of-use assets amounted to ~~a negative $2.2~~$3.3 million compared to a negative ~~$6.2~~$2.2 million in the prior year quarter. ~~Excluding~~As the ~~impact~~Company pivots to a digital-first strategy, we are seeing an improvement in EBITDA driven from our focus on e-commerce and wholesale channels. In this quarter, EBITDA also improved as a result of ~~IFRS 16, impairment of property, equipment~~a reduced general and ~~right-of-use assets and stock-based compensation for~~administrative infrastructure to support the three months ended November 2, 2019 and the impact of stock-based compensation, executive separation costs related to salary, impairment of property, equipment and right-of-use assets, onerous contracts, deferred rent and costs related to the strategic review and proxy contest for the three months ended November 3, 2018, Adjusted EBITDA decreased by $1.7 million to 8.0 million.on-going business.

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Net ~~Loss~~income (loss). Net ~~loss~~income was ~~$10.8~~$14.5 million in the quarter ended ~~November 2, 2019~~October 31, 2020 compared to a ~~net~~Net loss of ~~$9.1~~$10.8 million in ~~the prior year quarter. Excluding the impact of IFRS 16, Net loss would have amounted to $11.9 million, representing an increase of $2.9 million in net loss over~~ the prior year quarter. Adjusted net loss, which excludes the ~~impact~~Restructuring plan activities, the subsidy received from ~~executive separation cost related to salary,~~the Canadian Government under the COVID-19 Economic Response Plan, and the impairment of property and equipment and right-of-use assets ~~impact of onerous contracts and costs related~~amounted to ~~strategic review and proxy contest, and the setup of deferred income tax assets resulting from the probability of using operating tax loss carry forwards, was $9.9~~$2.3 million compared to ~~$8.5~~a loss of $8.8 million in the prior year quarter. This $11.1 million improvement is driven by the same reasons mentioned above in “Results from operating activities”.

Fully diluted income (loss) per common share. Fully diluted income per common share was $0.54 compared to a loss of $0.42 in the third quarter of Fiscal 2019. Adjusted fully diluted income per common share, which is adjusted net income (loss) on a fully diluted weighted average shares outstanding basis, was $0.09 per share compared to a loss of $0.34 per share.

Nine Months Ended October 31, 2020 compared to Nine Months Ended November 2, 2019

Sales. Sales for the nine months ended October 31, 2020 decreased 33.7%, or $41.4 million, to $81.5 million from $122.9 million in the same period in the prior year. On March 17, 2020, in response to the COVID-19 pandemic, the Company announced the temporary closures of all its retail stores in Canada and the United States, and subsequently, as part of its Restructuring Plan, exited all of its brick and mortar stores except for 18 Canadian stores which were reopened on August 21, 2020. Accordingly, brick and mortar sales declined by $78.9 million or 80.3% when compared to the same period in the prior year. Sales from our e-commerce and wholesale channels increased $37.5 million or 152.0% to $62.1 million, from $24.7 million in the same period in prior year as we shifted to a digital first strategy to address consumers changing shopping habits. For the nine-month period ended October 31, 2020, e-commerce and wholesale sales represented 76.2% of total sales as opposed to 20.1% in the same period in the prior year.

Gross profit. Gross profit of $34.1 million for the nine-month period ended October 31, 2020 decreased by $35.4 million or 50.9% from the same period of the prior year due primarily to a decline in sales during the period. Gross profit as a percentage of sales declined to 41.8% for the nine-month period ended October 31, 2020 from 56.5% in the same period in the prior year. As the Company pivots to a digital first strategy, the cost of delivery and distribution that is included in arriving at gross profit will compare unfavorably to prior periods that were predominantly focused on retail sales distribution. The significant increase in e-commerce sales during the period ended October 31, 2020 resulted in an increase of $9.3 million in delivery and distribution costs. Our margins were also impacted by an increase in inventory obsolescence of $2.6 million in Fiscal 2020 caused by the consolidation of merchandise from our closed retail stores during the first quarter and the permanent closure of the majority of our stores.

Selling, general and administration expenses. SG&A decreased by $54.4 million or 60.2%, to $35.9 million in the nine months ended October 31, 2020 from the same period in the prior year. Excluding the impact of the impairment of property and equipment and right-of-use assets, and the wage subsidy received from the Canadian Government under the COVID-19 Economic Response Plan in the nine-month period ended October 31, 2020 which amounted to $0.9 million, Adjusted SG&A decreased by $46.4 million for the nine months ended October 31, 2020. This is mostly explained by the temporary closure of our stores effective March 17, 2020 and the reopening of 18 stores on August 21, 2020. As a result, wages, salaries and employee benefits were reduced by $31.1 million and we realized a reduction of $8.5 million in amortization expense due to a lower right-of-use asset value at the beginning of Fiscal 2020. As a percentage of sales, Adjusted SG&A decreased to 45.1% from 67.7% due to lower selling expenses resulting from the now permanent closure of our 206 stores effective March 17, 2020 and the reopening of 18 stores on August 21, 2020.

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Results from operating activities. Loss from operating activities was $25.8 million compared to a loss of $20.8 million in the same period in Fiscal 2019. Excluding the impact of the impairment of property and equipment and right-of-use assets, the Restructuring plan activities, the wage subsidy received from the Canadian Government under the COVID-19 Economic Response Plan, and the loss on disposal of property and equipment, Adjusted results from operating activities was a loss of $2.7 million compared to a loss of $13.7 million in the same period in the prior year. This resulting improvement of $11.0 million is explained by reduction in wages, salaries and employee benefits, from stores and head office, amounting to $31.1 million and an $8.5 million reduction in amortization expense due to a lower right-of-use asset value at the beginning of Fiscal 2020, and a reduction of other selling expenses, partially offset by the reduction of gross profit of $35.4 million.

Finance costs. Finance costs amounted to $3.3 million in the nine-month period ended October 31, 2020, a decrease of $2.0 million from the prior year quarter. The interest expense relates to lease liabilities and has decreased from the prior year period due to the store closures.

Finance income. Finance income of $0.4 million is derived mainly from interest on cash on hand and has decreased slightly from the prior year period.

EBITDA.EBITDA was negative $19.6 million in the nine-month period ended October 31, 2020 compared to negative $6.2 million in the same period in the prior year, representing a decrease of $13.4 million over Fiscal 2019. Adjusted EBITDA for the nine months ended October 31, 2020, which excludes the impact of stock-based compensation expense, the impairment of property and equipment and right-of-use assets, the Restructuring plan activities, the wage subsidy received from the Canadian Government under the COVID-19 Economic Response Plan, and the loss on disposal of property and equipment amounted to $4.3 million compared to $1.4 million in the same period in the prior year. The increase in Adjusted EBITDA, of $2.9 million, is an outcome of the reduction in SG&A that was partially offset by the decline in gross profit.

Net loss. Net loss was $28.7 million in the nine months ended October 31, 2020 compared to a net loss of $25.5 million in the same period in prior year. Adjusted net loss, which excludes the impact from the impairment of property and equipment and right-of-use assets, the Restructuring plan activities, the subsidy received from the Canadian Government under the COVID-19 Economic Response Plan, and loss on disposal of property and equipment was $5.6 million compared to $18.4 million in the same period in the prior year. This $12.8 million improvement is driven by the same reasons mentioned above in Results from operating activities.

Fully diluted loss per common ~~share~~. share. Fully diluted loss per common share was ~~$0.42~~negative $1.10 compared to ~~$0.35~~negative $0.98 in the ~~third quarter of Fiscal 2018.~~nine months ended October 31, 2020. Adjusted fully diluted loss per common share, which is adjusted net loss on a fully diluted weighted average shares outstanding basis, was ~~$0.34~~negative $0.21 per share compared to ~~$0.33 per share for the same period in the prior year.~~

~~Nine Months Ended November 2, 2019 Compared to Nine Months Ended November 3, 2018~~

~~Sales.~~ Sales for the nine months ended November 2, 2019 decreased 5.2%, or $6.7 million, to $122.9 million from $129.6 million in the same period in the prior year. Sales from our e-commerce and wholesale channels increased $4.5 million, or by 22.7%, 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 $11.2 million and a decline of $10.8 million, or 10.0%, in comparable store sales.

~~Gross Profit.~~ Gross profit increased by 19.0%, or $11.1 million, to $69.5 million for the nine months ended November 2, 2019, from the same period in the prior year. IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-use assets and 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 adoption of IFRS 16, straight-line operating lease expense amounting to $17.3 million would have been included in arriving at gross profit. Excluding the impact of IFRS 16, gross profit decreased by $6.3 million to $52.2 million, representing a gross profit of 42.4% for the nine months ended November 2, 2019, a decrease of 2.7% compare to the nine months ended November 3, 2018 driven by a shift in product sales mix and the deleveraging of fixed costs due to negative ~~comparable store sales.~~

~~Selling, General and Administration Expenses.~~ SG&A increased by 6.4%, or $5.4 million, to $90.3 million in the nine months ended November 2, 2019 from the same period in the prior year. Under IFRS 16, SG&A includes $9.2 million of depreciation in connection with our right-of-use assets. Excluding the impact of IFRS 16, SG&A would have amounted to $81.1 million, a decrease of $3.8 million, or 4.4%, from the prior year quarter and as a percentage of sales would have amounted to 66.0% representing an increase of 0.5% over the prior year quarter. Excluding the impact of IFRS 16 and impairment of property, equipment and right-of-use assets for the nine months ended November 2, 2019 and the impact of executive separation cost related to salary, impairment of property, equipment and right-of-use assets, onerous contracts and costs related to the strategic review and proxy contest for the nine months ended November 3, 2018, Adjusted SG&A decreased by $2.7 million for the nine months ended November 2, 2019. As a percentage of sales, Adjusted SG&A increase to 60.2% from 59.2% due to higher selling expenses.

~~Operating Activities.~~ Loss from operating activities was $20.8 million as compared to a loss of $26.4 million in the same period in 2018. Excluding the impact of IFRS 16, loss from operating activities would have amounted to $28.9 million, an increase of $2.5 million from the same period in 2018. This is mainly due to the absence of costs related to executive separation costs related to salary, the impact of onerous contracts and the costs related to the strategic review and proxy contest incurred in the period in 2018 offset by increase in impairment of property, equipment and right-of-use assets in 2019. Adjusted results from operating activities, which excludes any impact from executive separation costs related to salary, impairment of property, equipment and right-of-use assets, onerous contracts, and costs related to the strategic review and proxy contest, was negative $21.9 million compared to negative $18.3 million in the same period in the prior year.

~~Finance Costs.~~ Finance costs amounted to $5.3 million in the nine months ended November 2, 2019, an increase of $5.1 million from the same period in 2018. 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 lease liability of $102.2 million on initial application of IFRS 16. Excluding the impact of IFRS 16, interest expense would have been nil in the current nine-month period.

~~Finance Income.~~ ~~Finance income of $0.6 million is derived primarily from interest on cash on hand stayed stable from the same period in the prior year.~~

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~~EBITDA and Adjusted EBITDA~~. EBITDA, which excludes non-cash and other items in the current and prior periods, was negative $6.2 million in the nine-month period ended November 2, 2019 compared to negative $20.4 million in the same period in the prior year. Excluding the impact of IFRS 16, EBITDA would have amounted to a negative $24.6 million, representing a decrease of $3.2 million over the same period in the prior year. Adjusted EBITDA for the nine-month period amounted to $1.4 million compared to a negative $12.2 million in the same period in the prior year. Excluding the impact of IFRS 16, impairment of property, equipment and right-of-use assets and stock-based compensation for the nine months ended November 2, 2019 and the impact of stock-based compensation, executive separation costs related to salary, impairment of property, equipment and right-of-use assets, onerous contracts, deferred rent and costs related to the strategic review and proxy contest for the nine months ended November 3, 2018, Adjusted EBITDA decreased by $3.7 million, to $16.0 million.

~~Net Loss.~~ Net loss was $25.5 million in the nine-month period ended November 2, 2019 compared to a net loss of $20.3 million in the same period in the prior year. Excluding the impact of IFRS 16, Net loss would have amounted to $28.4 million, representing an increase of $8.1 million in net loss over the same period in the prior year. Adjusted net loss, which excludes the impact of IFRS 16 and the impact from executive separation costs related to salary, impairment of property, equipment and right-of-use assets, onerous contracts and costs related to strategic review and proxy contest, and the setup of deferred income tax assets resulting from the probability of using operating tax loss carry forwards, was $21.3 million compared to $18.0 million in the prior year period.

~~Fully diluted loss per common share.~~ Fully diluted loss per common share in the nine-month period ended November 2, 2019 was $0.98 compared to $0.78 in the same period of Fiscal 2018. Adjusted fully diluted loss per common share, which is adjusted net loss on a fully diluted weighted average shares outstanding basis, was $0.71 ~~per share compared to $0.69~~ per share.

Liquidity and Capital Resources

As at ~~November 2, 2019,~~October 31, 2020 we had ~~$28.0~~$21.9 million of cash primarily held by major Canadian financial institutions. ~~Total current assets less the sum of Trade and other payables and Deferred revenue~~Working capital was ~~$47,439 and $65,842, for the periods ended November 2, 2019 and~~negative $12.2 million as at October 31, 2020, compared to $36.4 million as at February ~~2, 2019, respectively.~~1, 2020.

Our primary source of liquidity is cash on ~~hand.~~hand as we have no access to any form of debt financing. Our primary cash needs are to finance working capital ~~investments in infrastructure~~ and ~~for~~ capital expenditures ~~related to store renovations.~~

~~Capital expenditures typically vary depending on~~in connection with enhancing the ~~timing~~functions and features of ~~new store openings, store renovations and infrastructure-related investments.~~

our online store. Our ~~primary~~ working capital requirements are for the purchase of ~~store~~ inventory and payment of payroll ~~rent~~ and other ~~store~~ operating costs. Furthermore, in light of implementing the Restructuring Plan, the Company expects to use cash on hand to pay for professional fees and for the settlement of obligations upon acceptance, if any, of a plan of arrangement that will be presented to creditors. Our working capital requirements fluctuate during the year, rising in the second and third fiscal quarters as we take title to increasing quantities of inventory in anticipation of our peak selling season in the fourth fiscal quarter. We ~~funded~~fund our capital expenditures and working capital requirements from a combination of cash on hand and ~~net~~ cash provided by ~~our~~ operating activities.

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

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Cash Flow

A summary of our cash flows ~~from~~provided by (used in) operating, investing and financing activities is presented in the following table:

	For the three months ended									For the nine months ended
				November 2, 2019									November 2, 2019						For the three months ended						For the nine months ended
	November 2,			Excluding impact			November 3,			November 2,			Excluding impact			November 3,			October 31,			November 2,			October 31,			November 2,
	2019			of IFRS 16			2018			2019			of IFRS 16			2018			2020			2019			2020			2019
Cash flows provided by (used in) :
Operating activities	$	4,786		$	(934	)	$	(18,037	)	$	8,229		$	(9,113	)	$	(37,581	)	$	(12,016	)	$	4,786		$	(19,896	)	$	8,229
Financing activities		(5,711	)		9			8			(17,333	)		9			82			(250	)		(5,711	)		(5,821	)		(17,333	)
Investing activities		(756	)		(756	)		(2,880	)		(4,926	)		(4,926	)		(7,271	)		(94	)		(756	)		1,304			(4,926	)
Decrease in cash	$	(1,681	)	$	(1,681	)	$	(20,909	)	$	(14,030	)	$	(14,030	)	$	(44,770	)	$	(12,360	)	$	(1,681	)	$	(24,413	)	$	(14,030	)

Three Months Ended October 31, 2020 compared to Three Months Ended November 2, 2019 ~~Compared to Three Months Ended November 3, 2018~~

Cash ~~Flows Used in~~flows provided by (used in) Operating ~~Activities~~activities. Net cash ~~provided by operating~~flows used in Operating activities during the quarter ended October 31, 2020 amounted to ~~$4.8~~$12.0 million and represented a change of $16.8 million from the prior year quarter. The change is primarily due to the impact of the Restructuring Plan, wherein cash was used to make vendor deposits for both services and inventory related purchases.

Cash flows used in Financing activities. Net cash flows used in Financing activities of $0.3 million compares to $5.7 million used in the prior year quarter. This net reduction in use of cash was primarily due to the Restructuring Plan and the termination of our store lease agreements.

Cash flows used in Investing activities. Cash flows used in Investing activities decreased from $0.8 million to $0.1 million for the three months ended ~~November 2, 2019 from net cash used of $18.0~~October 31, 2020. The decrease is primarily due to the capital expenditures and the loan advance that was made in the prior year quarter. Capital expenditures decreased by $0.4 million, to $0.1 million for the three months ended October 31, 2020, from $0.5 million in the prior year quarter. This decrease was primarily due to lower investment in software enhancements.

Nine Months Ended October 31, 2020 compared to Nine Months Ended November ~~3, 2018. Excluding the impact of IFRS 16, net~~2, 2019

Cash flows (used in) provided by Operating activities. Net cash flows used in ~~operating~~Operating activities during the nine-month period ended October 31, 2020 amounted to ~~$0.9~~$19.9 million ~~an improvement~~and represented a change of ~~$17.1~~$28.1 million from the prior ~~year quarter. Net~~year. The change ~~in other non-cash working capital balances~~is primarily due to the impact of our Restructuring PlanA, wherein we have used cash to make vendor deposits for both services and purchases of inventory related to operations improved by $19.8 million primarily from a reduction in cash used for inventories, the decrease in prepaid and deposits, the collection of accounts receivables, collection of income tax receivables and the increase in accounts payable and accrued liabilities.goods.

Cash ~~Flows Used~~flows used in Financing ~~Activities~~activities. Net cash flows used in financing activities ~~was $5.7~~of $5.8 million during the nine-month period ended October 31, 2020 represents a reduction of $11.5 million compared to the prior year corresponding period and due primarily to the non-payment of lease obligations from April 1, 2020 to July 8, 2020 and the termination of our store lease agreements.

Cash flows provided by (used in) Investing activities. Cash flows provided by investing activities of $1.3 million during the nine-month period ended October 31, 2020 increased by $6.2 million. The increase is primarily due to the receipt of cash from repayment of the loan from a Company controlled by an executive employee, partially offset by capital expenditures. Capital expenditures decreased by $2.2 million to $0.7 million for the ~~three months~~nine-month period ended ~~November 2, 2019, compared to nil for the three months ended November 3, 2018. Excluding the impact of IFRS 16, net cash used in financing activities amounted to nil.~~

~~Cash Flows Used in Investing Activities~~~~. Cash flows used in investing activities was $0.8 million for the three months ended November 2, 2019, compared to~~October 31, 2020, from $2.9 million ~~for the three months ended November 3, 2018. The decrease in net cash used in investing activities relates to the decrease in capital expenditures~~

~~Nine Months Ended November 2, 2019 Compared to Nine Months Ended November 3, 2018~~

~~Cash Flows Used in Operating Activities~~. Net cash provided by operating activities amounted to $8.2 million for the nine months ended November 2, 2019 from net cash used of $37.6 million for the nine months ended November 3, 2018. Excluding the impact of IFRS 16, net cash used in operating activities amounted to $9.1 million, an improvement of $28.5 million from the same period in the prior ~~year. Net change~~year period. This decrease was primarily due to lower investment in other non-cash working capital balances related to operations improved by $34.6 million primarily from a reduction in cash used for inventories, the decrease in prepaid and deposits, the collection of accounts receivables, collection of income tax receivables and the increase in accounts payable and accrued liabilities.both leasehold improvements as well as software enhancements.

~~Cash Flows Used in Financing Activities~~. Net cash flows used in financing activities was $17.3 million for the nine months ended November 2, 2019, compared to net cash provided of $0.1 million for the nine months ended November 3, 2018. Excluding the impact of IFRS 16, net cash used in financing activities amounted to nil.

~~Cash Flows Used in Investing Activities~~. Cash flows used in investing activities was $4.9 million for the nine months ended November 2, 2019, compared to $7.3 million for the nine months ended November 3, 2018. The decrease in net cash used in investing activities relates to the decrease in capital expenditures partially offset by the loan advance made in the second quarter.

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~~Credit Facility with Bank of Montreal~~

On June 11, 2018, the Company amended its existing Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provides for a two year revolving 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 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.

~~As at November 2, 2019, the Company did not have any borrowings under the Amended Revolving Facility.~~

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Off-Balance Sheet Arrangements

We have no off-balance sheet obligations.

Contractual Obligations and Commitments

~~There~~We enter into contractual obligations and commitments that require us to disburse cash over future periods. All commitments have been norecorded in our consolidated balance sheet, except for future purchase obligations. Given the nature of our Restructuring Plan, and as mentioned in Note 7, we anticipate that there will be significant changes to ~~our~~previously reported contractual obligations ~~as disclosed~~ in ~~our consolidated financial statements for the fiscal year ended February 2, 2019, other than those which occur in the normal course of business.~~future periods and when reasonably estimable, will be recorded through earnings.

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Critical Accounting Policies and Estimates

Our discussion and analysis of operating results and financial condition are based upon our financial statements. The preparation of financial statements requires 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 ~~judgement~~judgment involved and its potential impact on 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 our financial position, changes in financial position or results of operations. Our significant accounting policies are discussed under Note 3 to our consolidated financial statements for the year ended February ~~2, 2019~~1, 2020 included in our Annual Report on Form 10-K dated ~~May 2, 2019.~~June 16, 2020. There have been no material changes to the critical accounting policies and estimates since February ~~2, 2019,~~1, 2020, other than ~~with respect to IFRS 16 as described~~those disclosed in Note 34 to ~~the~~our interim consolidated financial ~~statements.~~statements for the three and nine-month periods ended October 31, 2020.

Recently Issued Accounting Standards

Refer to Note 3, “Changes in Accounting Policies” for a discussion of recent accounting pronouncements.

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 our Annual Report on Form 10-K dated ~~May 2, 2019.~~June 16, 2020.

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our Chairman and Interim Chief Executive Officer and Chief Financial ~~Officer~~ and ~~Chief~~ Operating Officer, evaluated the effectiveness of our disclosure controls and procedures as of ~~November 2, 2019.~~October 31, 2020. 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~~an assessment of our disclosure controls and procedures, as a result of ~~November 2,~~the identification of a material weakness in connection with our non-financial asset impairment testing processes identified in the close process for the fourth quarter of Fiscal 2019, ~~our Chairman and Interim Chief Executive Officer and Chief Financial Officer and Chief Operating Officer concluded that,~~ as ~~of such date, our disclosure controls and procedures were not effective.~~

~~During~~well as the ~~course of~~material weakness identified in the Company’s financial statement close process for the quarter ended November 2, 2019 related to 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~~“Leases”, our management concluded that, considering the ~~assessment~~significant extent of ~~impairment indicators with respect~~change driven largely by the implementation of our Restructuring Plan, remediation efforts continue and our disclosure controls and procedures continue 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~~not 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 assetseffective 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.October 31, 2020.

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

~~In light of the restatement,~~The COVID-19 pandemic could negatively affect our ~~Chief Executive Officer and Chief Financial Officer have reassessed their evaluation of the effectiveness of the design and operation of its disclosure~~internal controls over financial reporting, asincluding our ongoing process of ~~May 4, 2019 and concluded that~~remediating the ~~Company did not maintain effective~~material weakness in our disclosure control and procedures, ~~due~~as a portion of our workforce is required to ~~a material weakness~~work remotely and standard processes are disrupted. New processes, procedures, and controls, which may increase the overall inherent risk in the ~~Company’s~~business, may be required to ensure an effective control environment.

With the exception of the material weaknesses identified there were no other changes in our internal control over financial reporting during our fiscal quarter ended October 31, 2020 that ~~existed at that date in the monitoring of impairment triggers upon completing a store impairment analysis under IAS 36 subsequent~~materially affected, or were reasonably likely to ~~the adoption of IFRS 16.. Furthermore, the CEO and CFO have made the same assessment and arrived at the same conclusion for the~~materially affect, our internal control over financial ~~statements as of November 2, 2019.~~ reporting.

3729
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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Except as noted above, we are not ~~presently~~at present a party to any legal proceedings, government actions, administrative actions, investigations or claims that are pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business, financial condition or operating results. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

Pursuant to an Order from the Québec Superior Court, there is currently a stay of all proceedings against or in respect of the Company or affecting the Company’s business operations and activities, except with the leave of the Québec Superior Court, until December 15, 2020.

Item 1A. Risk Factors

~~There have been no material changes~~In addition to the ~~risk~~other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors ~~previously disclosed~~discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended February 1, 2020 filed with the SEC on June 16, 2020, Part II, “Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended May 2, ~~2019.~~2020 filed with the SEC on July 31, 2020 and Part II, “Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended August 1, 2020 filed with the SEC on September 21, 2020, which could materially affect 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 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 and uncertainties that are not currently known to us or that are currently deemed immaterial that may adversely affect our business and financial condition.

~~Item~~Item 2. Unregistered Sales of Equity Securities

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

3830
Table of Contents

Item 6. Exhibits

(a) Exhibits:

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.

3931
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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.

Date: December ~~20, 2019~~15, 2020	By:	/s/ Herschel Segal
	Name:	Herschel Segal
	Title:	Chairman and Interim Chief Executive Officer

~~Date: December 20, 2019~~	~~/s/ Frank Zitella~~
	~~Frank Zitella~~
	~~Chief Financial Officer and Chief Operating Officer~~	32

PART I. FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2419


Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3629


Item 4.	Controls and Procedures	3729


PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	3830


Item 1A.	Risk Factors	3830


Item 2.	Unregistered Sales of Equity Securities	3830


Item 3.	Defaults Upon Senior Securities	3830


Item 4.	Mine Safety Disclosures	3830


Item 5.	Other Information	3830

		��
Item 6.	Exhibits	3931

		As at
		November 2,			February 2,
		2019			2019
		$			$
ASSETS
Current
Cash			28,044			42,074
Accounts and other receivables	[Note 12]		5,430			3,681
Inventories	[Note 5]		32,638			34,353
Income tax receivable			1,195			4,107
Prepaid expenses and deposits			6,906			8,819
Total current assets			74,213			93,034
Property and equipment			20,557			23,788
Intangible assets			6,454			5,678
Right-of-use assets	[Notes 3 and 6]		44,825			—
Total assets			146,049			122,500
LIABILITIES AND EQUITY
Current
Trade and other payables			21,155			20,951
Deferred revenue			5,619			6,241
Current portion of provisions	[Note 3]		—			3,714
Current portion of lease liabilities	[Note 3]		16,291			—
Total current liabilities			43,065			30,906
Deferred rent and lease inducements	[Note 3]		—			8,698
Provisions	[Note 3]		—			15,440
Non-current portion of lease liabilities	[Note 3]		74,074			—
Total liabilities			117,139			55,044
Commitments and contingencies
Equity
Share capital	[Note 8]		112,835			112,519
Contributed surplus			1,294			1,400
Deficit			(86,575	)		(47,960	)
Accumulated other comprehensive income			1,356			1,497
Total equity			28,910			67,456
Total liabilities and equity			146,049			122,500

		As at
		October 31,			February 1,
		2020 $			2020 $

Current
Cash			21,925			46,338
Accounts and other receivables			7,669			6,062
Inventories	[Note 5]		26,176			22,363
Income tax receivable			222			1,196
Prepaid expenses and deposits			13,400			4,542
Total current assets			69,392			80,501
Property and equipment	[Note 6]		2,905			17,737
Intangible assets			4,311			6,339
Right-of-use assets	[Note 6]		816			35,082
Total assets			77,424			139,659
LIABILITIES AND EQUITY
Current
Trade and other payables			3,621			20,794
Deferred revenue			5,766			6,852
Liabilities subject to compromise	[Note 7]		71,653			—
Current portion of lease liabilities			519			16,434
Total current liabilities			81,559			44,080
Non-current portion of lease liabilities			403			72,230
Total liabilities			81,962			116,310
Commitments and contingencies
Equity
Share capital	[Note 8]		113,139			112,843
Contributed surplus			1,761			1,577
Deficit			(120,836	)		(92,278	)
Accumulated other comprehensive income			1,398			1,207
Total equity (deficiency)			(4,538	)		23,349
Total liabilities and equity			77,424			139,659

									Accumulated Other Comprehensive Income
									Accumulated			Accumulated
									Derivative			Foreign			Accumulated
									Financial			Currency			Other
	Share		Contributed						Instrument			Translation			Comprehensive			Total
	Capital		Surplus			Deficit			Adjustment			Adjustment			Income			Equity
	$		$			$			$			$			$			$
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 loss		—		—			—			167			(473	)		(306	)		(306	)
Total comprehensive loss		—		—			(20,261	)		167			(473	)		(306	)		(20,567	)
Issuance of common shares		164		(82	)		—			—			—			—			82
Common shares issued on vesting of restricted stock units		643		(1,322	)		286			—			—			—			(393	)
Stock-based compensation expense		—		(7	)		—			—			—			—			(7	)
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, 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		112,519		1,400			(61,293	)		—			1,497			1,497			54,123
Net loss for the nine months ended November 2, 2019		—		—			(25,494	)		—			—			—			(25,494	)
Other comprehensive loss		—		—			—			—			(141	)		(141	)		(141	)
Total comprehensive loss		—		—			(25,494	)		—			(141	)		(141	)		(25,635	)
Issuance of common shares		13		(4	)		—			—			—			—			9
Common shares issued on vesting of restricted stock units		303		(628	)		212			—			—			—			(113	)
Stock-based compensation expense		—		526			—			—			—			—			526
Balance, November 2, 2019		112,835		1,294			(86,575	)		—			1,356			1,356			28,910

							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

	Right-of use			Lease
	assets			liability
	$			$
Balance, February 3, 2019		60,983			102,168
Amortization expense		(9,153	)		—
Impairment of right-of-use assets		(7,076	)		—
Interest Expense		—			5,305
Payments		—			(17,342	)
CTA		71			234
Balance, November 2, 2019		44,825			90,365

Presented as:
Current		—			16,291
Non-Current		44,825			74,074

	November 2,		February 2,
	2019 (1)		2019
	$		$
Canada		62,840		27,996
US		8,996		1,470
Total		71,836		29,466