Kits Eyecare Ltd. — Interim / Quarterly Report 2021

Aug 12, 2021

KITS EYECARE LTD.

Condensed Interim Consolidated Financial Statements For the Three and Six Months ended June 30, 2021 and June 30, 2020 (in thousands of Canadian Dollars, except share and per share data) (Unaudited)

KITS EYECARE LTD. CONDENSED INTERIM CONSOLIDATED STATEMENTS OF INCOME/(LOSS)

(in thousands of Canadian Dollars, except share and per share data) (Unaudited)

Revenue (Note 3) Cost of sales Gross profit Fulfillment (Note 4) Marketing (Note 4) General and administrative (Note 4) Depreciation and amortization Operating (loss) income Finance costs - net (Note 5(c)) Fair value accrual for Class A and Class C preferred shares Other expenses (Note 4) (Loss)/income before income taxes Income taxes Net (loss)/income for the period (Loss)/income per share (Note 11) Basic Diluted	2021 2020 21,669 $ 20,322 $ 16,983 13,912 4,686 $ 6,410 $ 3,199 $ 2,028 $ 4,344 2,209 2,596 549 493 512 (5,946) 1,112 290 $ 515 $ - 110 55 113 (6,291) 374 (1,433) 153 (4,858) $ 221 $ (0.16) $ 0.02 $ (0.16) $ 0.02 $ Three months ended June 30,	2021 2020 42,101 $ 34,733 $ 32,511 24,022 9,590 $ 10,711 $ 5,998 $ 3,261 $ 8,783 3,378 5,151 1,250 1,001 1,006 (11,343) 1,816 1,026 $ 1,132 $ - 398 76 127 (12,445) 159 (4,019) 394 (8,426) $ (235) $ (0.29) $ (0.03) $ (0.29) $ (0.03) $ Six months ended June 30,	2021 2020 42,101 $ 34,733 $ 32,511 24,022 9,590 $ 10,711 $ 5,998 $ 3,261 $ 8,783 3,378 5,151 1,250 1,001 1,006 (11,343) 1,816 1,026 $ 1,132 $ - 398 76 127 (12,445) 159 (4,019) 394 (8,426) $ (235) $ (0.29) $ (0.03) $ (0.29) $ (0.03) $ Six months ended June 30,
			34,733 $ 24,022
			10,711 $ 3,261 $ 3,378 1,250 1,006
			1,816 1,132 $ 398 127
			159 394
			(235) $
			(0.03) $
			(0.03) $

The accompanying notes to the condensed interim consolidated financial statements are an integral part of these condensed interim consolidated financial statements.

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KITS EYECARE LTD.

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(in thousands of Canadian Dollars, except share and per share data) (Unaudited)

Net (loss)/income for the period Other comprehensive income for the period: Items that may be reclassified to profit or loss Currency translation differences Total comprehensive (loss) / income for the period	2021 2020 (4,858) $ 221 $ 603 (2,251) (4,255) $ (2,030) $ Three months ended June 30,	2021 2020 (8,426) $ (235) $ 1,133 2,027 (7,293) $ 1,792 $ Six months ended June 30,

The accompanying notes to the condensed interim consolidated financial statements are an integral part of these condensed interim consolidated financial statements.

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KITS EYECARE LTD.

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in thousands of Canadian Dollars, except share and per share data) (Unaudited)

Assets Current assets Cash and cash equivalents Accounts and other receivables Inventory Prepaids, deposits and other assets Total current assets Property and equipment (Note 7) Right-of-use asset Deferred tax asset Intangible assets Goodwill Total assets Liabilities and shareholders' equity Current liabilities Accounts payable and accrued liabilities Tax payable Deferred revenue (Note 3) Loan (Note 5(a)) Lease liability Total current liabilities Loan (Note 5(a)) Promissory Note (Note 5(b)) Preferred shares (Note 5(b)) Deferred tax liability Lease liability Total liabilities Shareholders' equity Share capital (Note 8) Contributed surplus (Note 9) Retained deficit Accumulated other comprehensive loss Total shareholders' equity Total liabilities and shareholders' equity	June 30, 2021 23,790 $ 594 15,369 3,222 42,975 3,329 1,364 2,614 5,182 35,478 90,942 $ 11,639 $ 260 2,241 3,067 216 17,423 12,810 1,678 - - 942 32,853 75,238 1,248 (14,956) (3,441) 58,089 90,942 $	December 31, 2020
		2,308 $ 1,109 5,805 1,086
		10,308 391 1,176 210 6,127 36,445
		54,657 $ 10,393 $ 397 2,248 21,322 210
		34,570 - - 18,347 1,513 800
		55,230 7,324 941 (6,530) (2,308)
		(573)
		54,657 $

The accompanying notes to the condensed interim consolidated financial statements are an integral part of these condensed interim consolidated financial statements.

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KITS EYECARE LTD. CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(in thousands of Canadian Dollars, except share and per share data)

(Unaudited)

Balance at December 31, 2019 Share-based payments Net loss and comprehensive income Balance as at June 30, 2020 Balance at December 31, 2020 Conversion of Class A, B and C preferred shares into common shares (Note 5(b,c)) Shares issued in connection with initial public offering (Note 8) Shares issuance costs Share-based payments (Note 9) Shares issued Option exercise RSR exercise		Share	Capital	Capital	Contributed surplus	Retained earnings (deficit)	Accumulated other comprehensive (loss)	Total
	Commo	n shares	Class B preferred shares
	Shares	Amount	Shares	Amount	130 $ 178 -	53 $ - (235)	(1,302) $ - 2,027	6,205 $ 178 1,792
	9,200,000 - -	3,824 $ - -	7,000 - -	3,500 $ - -
	9,200,000 9,200,000 15,314,709 6,485,294 - - 93,916 - 30,965	3,824 $ 3,824 $ 19,875 55,125 (4,252) - 312 91 263	7,000 7,000 (7,000) - - - - - -	3,500 $ 3,500 $ (3,500) - - - - - -	308 $ 941 $ - - - 661 - (91) (263)	(182) $ (6,530) $ - - - - - - -	725 $ (2,308) $ - - - - - - -	8,175 $ (573) $ 16,375 55,125 (4,252) 661 312 - -
Net loss and comprehensive loss	-	-	-	-	-	(8,426)	(1,133)	(9,559)
Balance as at June 30, 2021	31,124,884	75,238 $	-	-	1,248 $	(14,956) $	(3,441) $	58,089 $

The accompanying notes to the condensed interim consolidated financial statements are an integral part of these condensed interim consolidated financial statements.

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KITS EYECARE LTD. CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of Canadian Dollars, except share and per share data) (Unaudited)

Operating activities Net loss / (income) Items not affecting cash:	2021 2020 (4,858) $ 221 $ Three months ended June 30,	2021 2020 (4,858) $ 221 $ Three months ended June 30,	2021 2020 (8,426) $ (235) $ Six months ended June 30,	2021 2020 (8,426) $ (235) $ Six months ended June 30,
				(235) $
Share-based payments Depreciation of property and equipment Amortization of intangible assets Finance costs (Note 5(c)) Fair value accrual for Class A and Class C preferred shares Income taxes Foreign exchange (loss) gain Other expense Changes in non-cash operating working capital: Accounts receivable Inventory Prepaid expenses and other assets Accounts payable and accrued liabilities Deferred revenue	322 94 399 334 - (1,433) - (12) 667 (5,882) (177) 3,822 (108)	49 61 451 525 110 153 (379) - (761) (1,462) (93) 370 (630)	661 190 811 1,065 - (4,019) (1) (12) 516 (9,563) (2,310) 1,245 (7)	178 119 887 1,147 398 394 (142) - (609) (2,042) (83) 2,180 (20)
Cash (used in) / provided by operating activities Financing activities	(6,832) $	(1,385) $	(19,850) $	2,172 $
Repayment of lease obligation	(90)	(45)	(241)	(91)
Repayment of loan (Note 5(a)) Net proceeds from issuance of share capital (Note 8)	(1,051) -	(1,109) -	(6,753) 51,047	(2,299) -
Net proceeds from excerise of stock options	312	-	312	-
Cash provided by / (used in) financing activities Investing activities	(829) $	(1,154) $	44,365 $	(2,390) $
Purchase of property and equipment	(2,943)	(17) $	(3,028)	(96) $
Cash used in investing activities Increase in cash and cash equivalents	(2,943) $ (10,604) $	(17) $ (2,556) $	(3,028) $ 21,487 $	(96) $
				(314) $
Foreign exchange effect on cash and cash equivalents	6	(354)	(5)	(180)
Cash and cash equivalents, beginning of period	34,388	5,814	2,308	3,398
Cash and cash equivalents, end of period	23,790 $	2,904 $	23,790 $	2,904 $

The accompanying notes to the condensed interim consolidated financial statements are an integral part of these condensed interim consolidated financial statements.

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KITS EYECARE LTD. Notes to the Condensed Consolidated Interim Financial Statements (in thousands of Canadian Dollars, except share and per share data) (Unaudited)

1. Nature of operations

Kits Eyecare Ltd. (the "Company") is vertically integrated, digitally native eyecare platform, with sales primarily in the United States and Canada. The Company was incorporated under the Business Corporations Act (British Columbia) on October 19, 2018 with its registered headquarters located at 1020 - 510 Seymour Street, Vancouver, BC, V6B 3J5.

On January 19, 2021, the Company completed its initial public offering and is listed on the Toronto Stock Exchange (the “TSX”) under the symbol “KITS”. On May 7, 2021, the Company’s common shares is also listed on the OTCQX market in the United States under the ticker symbol “KTYCF.

2. Basis of preparation and statement of compliance

The Company prepares its annual consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). These condensed interim consolidated financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting (IAS 34).

These condensed interim consolidated financial statements should be read in conjunction with the Company’s most recent annual financial statements for the year ended December 31, 2020 as some disclosures from the annual consolidated financial statements have been condensed or omitted. There are no IFRS or International Financial Reporting Interpretations Committee interpretations that are not yet effective that would be expected to have a material impact on the Company’s consolidated financial statements.

On August 11, 2021, the Board of Directors authorized these financial statements for issuance.

Critical accounting estimates and judgements

In preparing these condensed interim financial statements management has made judgements and estimates that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

The significant estimates and judgements made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty were the same as those described in the most recent annual financial statements.

3. Segment information and deferred revenue

The Company operates in a single reportable operating segment, being the sale of eyewear products to consumers.

Geographic information

The Company determines the geographic location of revenue based on the location of its customers.

	Three mo ended Jun	nths e 30,	Six mon ended Jun	ths e 30,
	2021	2020	2021	2020
United States Canada Total	16,305 $ 5,364 21,669 $	16,891 $ 3,431 20,322 $	31,816 $ 10,285 42,101 $	28,604 $ 6,129
				34,733 $

All of the Company’s non-current assets are located in Canada.

Deferred revenue

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Deferred revenue consists of credit vouchers of $713 (December 31, 2020: $569), unfulfilled orders of $1,309 (December 31, 2020: $1,482) and allowance for estimated returns of $219 (December 31, 2020: $197). Credit vouchers relate to vouchers that have been issued or sold to customers. Revenue from credit vouchers is recognized when the vouchers are redeemed, when the likelihood of redemption becomes remote, or when the vouchers expire.

4. Expenses

Fulfillment

Fulfillment costs primarily consist of those costs incurred in operating and staffing the Company’s fulfillment, optical lab, and customer service centers, third party fulfillment costs, and payment processing costs. During the three and six months ended June 30, 2021, the Company incurred $1,973 and $3,581 (2020: $1,103 and $1,738) of shipping expenses, $578 and $1,248, (2020: $461 and $719) of wages, salaries and benefits, payment processing fees of $516 and $970, (2020: $427 and $757) and other expenses of $132 and $199 (2020: $37 and $47).

Marketing

Marketing costs include advertising and payroll and related expenses for personnel engaged in marketing and selling activities. During the three and six months ended June 30, 2021, marketing expense comprises of $4,080 and $8,310 (2020: $2,163 and $3,300) of advertising and promotion, $207 and $391 (2020: $46 and $78) of wages, salaries and benefits and, $57 and $82 (2020: $nil and $nil) of other expenses.

General and administrative

General and administrative expenses consist of payroll and related expenses for employees involved in general corporate functions, costs associated with use by these functions of facilities and equipment, professional fees, technology expenses, and other general corporate costs. During the three and six months ended June 30, 2021, general and administrative expenses include one-time costs related to the acquisition of Kits.com of $nil and $nil (2020: $71 and $168), one-time fees incurred for the Company’s initial public offering of $752 and $1,456 (2020: $nil and $nil), rental expenses of $48 and $97 (2020: $56 and $112), share-based payments of $288 and $616 (2020: $49 and $178), technology expense of $117 and $554 (2020: $129 and $217), wages, salaries and benefits of $745 and $1,498 (2020: $260 and $548), foreign exchange gain(loss) of $(93) and $61 (2020: $64 and $70), professional and corporate regulatory fees of $464 and $843 (2020: $27 and $30) and, other expense of $89 and $148 (2020: $21 and $67).

Other expense

For the three and six months ended June 30, 2021, the Company had accrued $67 and $88 (2020: $23 and $37) of estimated sales taxes payable, recorded $12 and $12 (2020: $nil and $nil) of gain from an early termination of a warehouse lease and $nil and $nil (2020: $90 and $90) of estimated bonus fees payable to BDC.

5. Financial liabilities

(a) Loan

The Company entered into a secured loan agreement for $23.4 million with BDC Capital Inc. ("BDC") on March 26, 2019, with a repayment date of March 15, 2026. Effective of January 15, 2021, the loan bears interest at BDC floating rate minus 1%, plus a variance of 4.45% per annum and is payable on a monthly basis. As at June 30, 2021, BDC floating rate was 4.55% (2020: 4.55%). The BDC Loan is secured by a first ranking security interest in all present and after acquired personal property and all present and future intellectual property of the Company.

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The Company is subject to various covenants under the BDC Loan, including requirements to maintain certain financial ratios. As at June 30, 2021, the loan is in good standing and the Company is in compliance with the debt covenants.

As at June 30, 2021, the carrying amount of the loan is $15,877 (2020: $21,322). The Company made a prepayment of $4,500 in January 2021 towards the BDC loan principal. The repayment schedule of the loan was revised accordingly to reflect this prepayment and the balloon payment was reduced by the prepayment amount and the Company recognized a modification loss of $590 due to the change in repayment schedule of the loan and $135 of prepayment penalties. For the three and six months ended June 30, 2021, the Company recognized $275 and $583 (2020: $373 and $841) of interest expense in finance costs. Interest expense is calculated by applying the effective interest rate of 6.95% (2020: 6.95%)

(b) Preferred shares and Promissory note

As at June 30, 2021, there are no longer any preferred shares outstanding. On January 18, 2021, the Company issued 15,314,709 common shares in connection with the conversion of all the Company’s Class A, B and C preferred shares and a promissory note of $2,412 which are the accrued dividends payable to the holders of the preferred shares. The note bears no interest and matures on the earlier of January 31, 2026 or the date after the Company’s current loan from BDC has been repaid in full (the “Maturity Date”). Unpaid principal shall be payable in quarterly installments beginning on March 31, 2021 of $121, subject to the consent of BDC. Any unpaid principal shall be payable in full upon the Maturity Date.

The fair value of the promissory note at initial recognition is $1,621 and the Company recognized a gain on extinguishment of $350 (2020: $nil) from its preferred share liabilities. During the three and six months ended June 30, 2021, no quarterly principal was paid to the promissory holders and the Company recorded accretion expense of $32 and $57 (2020: $nil and $nil). Accretion expense is calculated by applying the effective interest rate of 8.00%.

(c) Finance costs

(c) Finance costs
	Three mo ended Jun	nths e 30,	Six mon ended Jun	ths e 30,
	2021	2020	2021	2020
Interest expense/ (income) net of bank charges Interest expense on loan (note 5(a)) Modification loss and prepayment penalities related to loan principal (note 5(a)) Gain on extinguishment of Class A,B,C preferred shares (note 5(b)) Accretion expense on promissory note (note 5(b)) Fair value loss relating to Class A and C preferred shares and interest expense on Class B preferred shares Interest expense on lease liability	(44) $ 275 - - 32 - 27	(10) $ 373 - - - 249 13	(40) $ 583 725 (350) 57 - 51	(14) $ 841 - - - 677 26
Total finance costs	290 $	625 $	1,026 $	1,530 $

6. Financial instruments and fair values

The Company characterizes fair value measurements using a hierarchy that prioritizes inputs depending on the degree to which they are observable. The three levels of the fair value hierarchy are as follows:

• Level 1: fair value measurements are quoted prices (unadjusted) in active markets for identical assets or liabilities,

• Level 2: fair value measurements are those derived from inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices), and

• Level 3: fair value measurements are those derived from valuation techniques that include significant inputs for the asset or liability that are not based on observable market data (unobservable inputs).

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The carrying value of cash and cash equivalents, account receivables, accounts payable, and accrued liabilities approximate their fair value because of the short-term nature of these financial instruments. These financial instruments are classified as financial assets and liabilities at amortized cost.

The following table shows the carrying amount and the fair values of financial liabilities, including their levels in the fair value hierarchy as at June 30, 2021 and December 31, 2020.

		June 30, 2021		D	ecember 31, 2020
Financial liabilities Class A and Class C preferred shares Loan	Carrying value - $ 15,877	Level 2 - $ 15,418	Level 3 - $ -	Carrying value 14,049 $ 21,322	Level 2 Level 3 - $ 14,049 $ 21,457 -
Promissory Note	1,678	1,655	-	-	- -
Class B preferred shares (dividends payable component) Total	- 17,555 $	- 17,073 $	- - $	4,298 39,669 $	- 4,298 21,457 $ 18,347 $

During the three and six months ended June 30, 2021, there have been no transfers of amounts between Level 1, Level 2, and Level 3 of the fair value hierarchy.

The classification of the financial instruments as well as their carrying values as at June 30, 2021 and December 31, 2020 is shown in the table below.

		June 30,	2021			December	31, 2020
Financial assets	Amortized cost (Financial asset)	Amortized cost (Financial liabilities)	FVTPL	Total	Amortized cost (Financial asset)	Amortized cost (Financial liabilities)	FVTPL	Total
Cash and cash equivalents Accounts and other receivables Total financial assets Financial liabilities Account payable and accrued liabilities Loan Promissory Note Class A and Class C preferred shares Class B preferred shares (dividends payable component) Total financial liabilities	23,790 $ 547 24,337 $ - $ - - - - $	- $ - - $ 11,639 $ 15,877 1,678 - - 29,194 $	- $ - - $ - $ - - - - - $	23,790 $ 547 24,337 $ 11,639 $ 15,877 1,678 - - 29,194 $	2,308 $ 1,001 3,309 $ - $ - - - - - $	- $ - - $ 10,393 $ 21,322 - - 4,298 36,013 $	- $ - - $ - $ - - 14,049 - 14,049 $	2,308 $ 1,001
								3,309 $ 10,393 $ 21,322 - 14,049 4,298
								50,062 $

Valuation techniques and significant unobservable inputs

To determine the fair value of financial liabilities at initial recognition, the Company considered the present value of expected payments, discounted using a risk-adjusted discount rate. As at June 30, 2021, none of the Company’s financial liabilities are subsequently measured at fair value after initial recognition.

7. Property and equipment

The Company purchases equipment for its fulfillment and manufacturing activities. During the six months ended June 30, 2021, the Company purchased $2,486 of equipment and made $494 of store leasehold improvements.

8. Share capital

On January 18, 2021, the Company issued 15,314,709 common shares in connection with the conversion of all the Company’s Class A, B and C preferred shares (Note 5(b)). As at June 30, 2021, there are no longer any preferred shares outstanding.

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On January 19, 2021, the Company completed its oversubscribed and upsized initial public offering (the "IPO") and listing on the Toronto Stock Exchange ("TSX"). The IPO consisted of the issuance of 6,470,588 common shares of the Company (the "Shares") at a price of $8.50 per Share (the "Offering Price") for gross proceeds of $55,000. In connection with the completion of the IPO, the Company issued 14,706 common shares and paid $125 in cash to listing agents. In addition, the agents exercised 50% of their overallotment option in a transaction that closed on February 5, 2021. During the three and six months ended June 30, 2021, the Company recorded $nil and $4,252 of share issuance costs (2020: $nil and $nil).

During the three months ended June 30, 2021, 93,916 options were exercised at a weighted average exercise price of $3.32 and 30,965 restricted shares rights (“RSRs”) were delivered to its officers and directors.

9. Share-based compensation

During the three and six months ended June 30, 2021, the Company granted 6,436 and 24,950 RSRs to its officers and directors which vest immediately upon grant.

During the three months ended June 30, 2021, the Board of Directors approved an option grant by the Company of 246,330 options and expire seven years after initial grant date, subject to a vesting schedule and the terms of the Company’s option plan. These options have a weighted average exercise price of $7.77, a term of 7 years and vest over 3 years. The weighted average fair value of the options issued was estimated at $6.39 per share option at the grant date using the Black- Scholes option pricing model. The option valuations were based on an expected option life of 7 years, a risk-free interest rate of 1.34%, a dividend yield of 0% and an expected volatility of 100%.

Share-based compensation expense related to stock options and RSRs of $322 and $661 (2020: $48 and $178) was recorded for the three and six months ended June 30, 2021, respectively.

10. Related party transactions

During the three and six months ended June 30, 2021, the Company paid rent of $19 and $38 (2020: $19 and $38) to a company under common control of a major shareholder of the Company and paid rent of $30 and $60 (2020: $30 and $30) to a company under common control of another major shareholder of the Company. These amounts have been included in other general and administrative expense and are part of the Company’s ordinary course of business. The contract terms are based on market rates for these types of services and amounts are payable on a monthly basis for the duration of the contract. During the three and six months ended June 30, 2021, the Company recorded $28 and $52 (2020: $nil and $nil) of Board fees and advisory fees to its directors (the “Directors”) and $50 and $100 of share-based compensation. $28 of Board fees remain unpaid as at June 30, 2021.

Key management compensation

Key management consists of the Board of Directors, the Chief Executive Officer, and the executives who report directly to the Chief Executive Officer. Key management compensation comprises of wages and short-term employee benefits. For the three and six months ended June 30, 2021, the Company paid $366 and $628 (2020: $177 and $358) of wages and short-term employee benefits to key management and recorded $156 and $372 (2020: $44 and 169) of key management share-based compensation.

11. Earnings / (loss) per share

Weighted average number of ordinary shares used as the denominator in calculating basic and diluted earnings per share for the three and six months ended June 30, 2021 is 31,070,766 and 29,091,600 (2020: 9,200,000 and 9,200,000).

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Common share equivalents that could potentially dilute net income per basic share in the future, but were not included in the computation of diluted earnings per share because the impact would have been anti-dilutive comprised of all issued stock options of the Company.

12. Contingencies

The Company is, from time to time, involved in various claims, legal proceedings and complaints arising in the ordinary course of business. It does not believe that adverse decisions in any pending or threatened proceedings, or any amount it may be required to pay by reason thereof, will have a material adverse effect on the financial condition or future results of operations of the Company.

13. Commitments

As at June 30, 2021, we had outstanding capital commitments for equipment purchase of $742 (2020: $nil). During the three and six months ended June 30, 2021, we entered into a lease agreement to lease a warehouse facility. The warehouse facility lease commences on July 1, 2021 and includes escalating rent payments and an initial seven-year term.

14. Subsequent Events

None.

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