Item 4.02. Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review
On December 12, 2019 the Board of Directors (the “Board”) of DAVIDsTEA Inc., a corporation incorporated under the Canada Business Corporations Act (the “Company”), upon the recommendation of the Company’s Audit Committee, determined that the Company will restate its unaudited condensed interim consolidated financial statements and related footnote disclosures for the quarters ended May 4, 2019 and August 3, 2019 contained in its Quarterly Reports on Form 10-Q (the “Affected Financial Statements”). In light of the restatement, investors should no longer rely upon the Affected Financial Statements.
Description of Error
During the course of management’s financial statement close process for the quarter ended November 2, 2019, accounting errors were identified in the assessment of impairment indicators upon completing the store impairment analysis under IAS 36, Impairment of Assets (“IAS 36”), subsequent to the adoption of IFRS 16, Leases (“IFRS 16”). Upon further review, management determined that, pursuant to IFRS standards, its financial statements would be more relevant and reliable had they applied IAS 36 as of the date of initial adoption, instead of applying an available practical expedient. In addition, when appropriately performing the assessment of impairment indicators with respect to the right-of-use assets (“ROU assets”) as at May 4, 2019 and August 3, 2019, certain impairment charges were identified related to the second quarter ended August 3, 2019.
The changes to the Affected Financial Statements result in (i) a non-cash impact on the opening deficit within total equity upon the initial adoption of IFRS 16 and (ii) impairment charges for the three and six-month periods ended August 3, 2019, offset by the ongoing impact related to lower depreciation of the ROU assets, respectively. The Company determined that these changes have a material impact on the as filed condensed interim consolidated financial statements as at and for the three-month period ended May 4, 2019, and the three and six-month periods ended August 3, 2019, and as a result, the Affected Financial Statements are being restated.
Based on the impairment test performed at February 3, 2019 as part of the restatement, the Company’s restated ROU assets impairment was understated as compared to the application of the practical expedient, which resulted in the previously-recognized onerous lease provisions of $19,154,000 being offset against the ROU assets recognized on transition. 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. As a result of these differences, in connection with the restatement, the Company will increase the deficit within total equity, reduce the initial value of the ROU assets, and decrease amortization expense in the three-month periods ended May 4, 2019 and August 3, 2019.
Internal Control Over Financial Reporting
The Board has also, upon recommendation of the Audit Committee, concluded that the Company has a material weakness in its internal control over financial reporting as of May 4, 2019 related to a design deficiency in the assessment of impairment indicators upon completing the store impairment analysis under IAS 36, subsequent to the adoption of IFRS 16. As a result of the material weakness, the Board, upon recommendation of the Audit Committee, has concluded that the Company’s internal control over financial reporting and disclosure controls and procedures were ineffective as of May 4, 2019.
Timing of Restatement
The Company is working diligently to complete the restatement of its financial statements. Substantially concurrently with this Form 8-K, the Company is filing a Form 12b-25 seeking an extension of the deadline for its Quarterly Report on Form 10-Q for the period ended November 2, 2019 (the “Q3 Form 10-Q”).
The Company intends to file the following as soon as practicable (i) an amendment to its Quarterly Report on Form 10-Q for the period ended May 4, 2019 to restate its unaudited condensed consolidated financial statements and related financial information at May 4, 2019 and to amend certain other items within that report, (ii) an amendment to its Quarterly Report on Form 10-Q for the period ended August 3, 2019 to similarly restate its unaudited condensed consolidated financial statements and related financial information at August 3, 2019 and to amend certain other items within that report, and (iii) the Q3 Form 10-Q.
The Company’s management and the Audit Committee have discussed the matters disclosed in this Form 8-K with the Company’s independent registered public accounting firm, Ernst & Young LLP.