Kits Eyecare Ltd. — Management Reports 2024

Mar 6, 2024

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2023

The following Management’s Discussion and Analysis (" MD&A ") dated March 5, 2024, provides information concerning the financial condition and results of operations of Kits Eyecare Ltd. (together with its consolidated subsidiaries, referred to herein as “KITS”, the “Company”, “we”, “us” or “our”). This MD&A should be read in conjunction with our audited consolidated financial statements for the years ended December 31, 2023, and 2022, including the related notes thereto. This discussion contains forward-looking information that involves risks and uncertainties. Our actual results, performance and achievements could differ materially from those implied by such forward-looking information as a result of various factors discussed below, particularly under "Forward-Looking Information" and "Risk Factors". Unless otherwise noted, all dollar amounts in this MD&A are in C$'000s.

Forward-Looking Information

This MD&A contains "forward-looking information" within the meaning of applicable securities laws in Canada. Forward-looking information may relate to our future financial outlook and anticipated events or results and may include information regarding our financial position, business strategy, growth strategies, budgets, operations, financial results, taxes, dividend policy, plans and objectives. Particularly, information regarding our expectations of future results, performance, achievements, prospects or opportunities or the markets in which we operate is forward-looking information. In some cases, forward-looking information can be identified by the use of forward-looking terminology such as "plans", "targets", "expects" or "does not expect", "is expected", "an opportunity exists", "budget", "scheduled", "estimates", "outlook", "forecasts", "projection", "prospects", "strategy", "intends", "anticipates", "does not anticipate", "believes", or variations of such words and phrases or state that certain actions, events or results "may", "could", "would", "might", "will", "will be taken", "occur" or "be achieved". In addition, any statements that refer to expectations, intentions, projections or other characterizations of future events or circumstances contain forward-looking information. Statements containing forward-looking information are not historical facts but instead represent management’s expectations, estimates and projections regarding future events or circumstances.

This forward-looking information and other forward-looking information are based on our opinions, estimates and assumptions in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we currently believe are appropriate and reasonable in the circumstances. Despite a careful process to prepare and review the forward-looking information, there can be no assurance that the underlying opinions, estimates and assumptions will prove to be correct. Certain assumptions in respect of the expansion and enhancement of our optical laboratory for glasses and warehouse facilities; the growth of our business and launch of new technologies; our ability to drive sales growth; our ability to maintain, enhance, and grow within our addressable market; our ability to drive ongoing development and innovation of our exclusive brands and product categories; our ability to continue directly sourcing from third party suppliers and manufacturers; our ability to retain key personnel; our ability to maintain and expand distribution capabilities; our ability to continue investing in infrastructure to support our growth; our ability to obtain and maintain existing financing on acceptable terms; currency exchange and interest rates; the impact of competition; the changes and trends in our industry or the global economy; and the changes in laws, rules, regulations, and global standards are material factors made in preparing forward-looking information and management’s expectations.

Forward-looking information is necessarily based on a number of opinions, estimates and assumptions that we considered appropriate and reasonable as of the date such statements are made, are subject to known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, level of activity, performance or achievements to be materially different from those expressed or implied by such forward-looking information, including but not limited to the risk factors described in greater detail in the Company’s annual information form for the year ended December 31, 2023, which was filed on March 6, 2024 (the “AIF”). A copy of the AIF and the Company’s other publicly filed documents can be accessed under the Company’s profile on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com.

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We caution that the list of risk factors and uncertainties described in the MD&A and the AIF is not exhaustive and other factors could also adversely affect our results. Readers are urged to consider the risks, uncertainties and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such information. The forward-looking information contained in this MD&A represents our expectations as of the date of this MD&A (or as of the date they are otherwise stated to be made) and are subject to change after such date. However, we disclaim any intention or obligation or undertaking to update or revise any forward-looking information whether as a result of new information, future events or otherwise, except as required under applicable securities laws. If we do update certain forward-looking information, no inference should be made that we will further update such or other forward-looking information.

Overview

KITS makes eyecare easy. KITS is a fast growing, vertically integrated, vision brand providing eyecare for eyes everywhere. We offer our KITS community access to a vast selection of the highest-quality contact lenses and eyeglasses, including our own exclusive KITS designed products, and an advanced suite of online vision tools. Our efficient digital platform, backed by our in-house design, distribution, and state-of-the-art manufacturing, removes intermediaries and enables us to offer the highest quality products, vast selection, fast service, great prices, and deliver made-to-order personalized products with incredible care and accuracy. We strive to delight our core customers with competitive prices, a convenient digital shopping experience, fast and reliable delivery options – including our convenient "Autoship" subscription program for contact lenses – and an unrelenting focus on earning our customers’ lifelong loyalty.

Recent Key Events

KITS achieves record-breaking revenue in 2023 of $120.5 million, reaching several significant milestones: year-over-year revenue growth of 31.5% and gross margin expansion of 193 basis points

KITS continues to achieve record setting results within the dynamic eyewear market and e-commerce industry, achieving significant milestones throughout 2023. Our 2023 revenue grew 31.5% to $120.5 million, delivering record fourth quarter of $31.7 million. Additionally, Q4 2023 saw quarter-over-quarter revenue growth of 20.7%, coupled with glasses revenue growth of 29.5%. Concluding the year on a strong note, we also attained a record gross margin of 35.0% in the fourth quarter, marking consistent progress towards our goal of establishing long-term gross margins of 40-45%. This achievement holds particular significance as our glasses business and returning contact lens customers make increasingly substantial contributions to our overall revenue stream.

Our 2-year Active Customers surpassed 840,000 as of December 31, 2023, representing a 7.7% year-overyear increase. Our recurring core customers were pivotal to our revenue growth, contributing over 63.5% of revenue for the year and 66.5% in the fourth quarter. The lifetime value of these recurring customers contributes significantly to our success, as their average order sizes and order frequency continue to increase. As these annuity-like core customer revenues continue to grow over time, we recognize this consistent recurring annuity has the potential to compound and scale in the years ahead, further reinforcing our financial resilience. Our eyecare solutions resonate strongly with both new and returning customers, as evidenced by our service to over 300,000 new customers in the year ended December 31, 2023, a key driver behind our record-breaking top-line performance.

With these accomplishments and significant expansions in both gross margin and customer base, KITS has deepened its leadership position. Through strategic utilization of cutting-edge technology, innovative marketing strategies, and an unwavering dedication to unparalleled customer experiences, KITS consistently challenges traditional norms and is transforming the eyewear landscape. Our vertically integrated, high-capacity onshore optical lab allows us to deliver prescription glasses with a “wow” experience to customers in as fast as a few hours. We have constructed a highly scalable manufacturing and distribution foundation that will require minimal investment as revenues continue to scale. Upholding our mission of making eyecare easy and providing accessible, high-quality eyewear to consumers, KITS implemented simplified pricing, offering all KITS glasses for just $28 per pair including prescription lenses in the last quarter of 2023. This attractive pricing structure reflects KITS' commitment to delivering exceptional value to its customers while remaining true to its core mission. Eyeglasses

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units delivered increased by 14.6% year-over-year to a record of more than 275,000 eyeglasses in 2023. Over 82.5% of these glasses were KITS branded frames, underscoring KITS’ enduring appeal and recognition in the market. Revenue from eyeglasses delivered increased by 29.5% to $15.0 million for the year ended December 31, 2023 from $11.5 million for the year ended December 31, 2022 driven by higher unit volumes and increasing average order value. Glasses delivered to repeat eyeglasses customers increased year over year from over 73,000 to over 152,000 glasses in 2023, an increase of 108.2% The positive response accelerated to 38.7% year-over-year growth in glasses revenue, which reached $4.1 million in the fourth quarter of 2023 compared to $3.0 million in the same period in 2022. We fulfilled 37,000 glasses to repeat glasses customers in the fourth quarter of 2023, representing an impressive 76.2% year-over-year growth, and indicating the strength of our customer loyalty and satisfaction as our initial glasses customers return.

For the year ended December 31, 2023, we generated positive free cash flow from operations of $2.4 million and maintained a cash balance of $16.0 million. Our commitment to profitability is rewarded by our fifth consecutive positive Adjusted EBITDA which was $0.9 million for the fourth quarter and $2.3 million for the year ending December 31, 2023.

Financial Highlights

We measure our business using both financial and operating data and use the following metrics and measures to assess the near term and long-term performance of our overall business, including identifying trends, formulating financial projections, making strategic decisions, assessing operational efficiencies, and monitoring our business. See the sections in this MD&A entitled “Components of Our Results of Operations and Trends Affecting Our Business” and “Non-IFRS Measures and Industry Metrics”. The following table summarizes our financial highlights for the three months and year ended December 31, 2023 and December 31, 2022.

		Three Months Ended	Three Months Ended	Three Months Ended		Year	Ended	Ended
		December 31,	December 31,			December 31,		December 31,
		2023		2022		2023		2022
Financial and Operating Data		(unaudited)		(unaudited)
Revenue ..........................................................	$	31,663	$	26,239	$	120,510	$	91,639
Net income (loss).............................................	$	(491)	$	(1,385)	$	(2,215)	$	(4,552)
Net income (loss) per share.............................
Basic ............................................................	$	(0.02)	$	(0.04)	$	(0.07)	$	(0.15)
Diluted.........................................................	$	(0.02)	$	(0.04)	$	(0.07)	$	(0.15)
Non-IFRS Measures (a):
Constant currency revenue.........................	$	31,546	$	26,239	$	117,593	$	91,639
EBITDA .......................................................	$	(121)	$	(295)	$	807	$	(827)
Adjusted EBITDA ........................................	$	862	$	441	$	2,284	$	(1,828)
Adjusted EBITDA Margin % ........................		2.7%		1.7%		1.9%		(2.0)%

Notes:

(a) Refer to “Non-IFRS Measures and Industry Metrics” section

Non-IFRS Measures and Industry Metrics

In addition to our results determined in accordance with IFRS, we believe the following non-IFRS measures and industry metrics provide useful information both to management and investors in measuring the financial performance and financial condition of the Company for the reasons outlined below. These measures do not have a standardized meaning prescribed by IFRS and therefore they may not be comparable to similarly titled measures presented by other publicly traded companies, and they should not be construed as an alternative to other financial measures determined in accordance with IFRS.

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Non-IFRS Measures

Management uses these non-IFRS financial measures to exclude the impact of certain expenses and income that management does not believe are reflective of the Company’s underlying operating performance and make comparisons of underlying financial performance between periods difficult. From time to time, the Company may exclude additional items if it believes doing so would result in a more effective analysis of underlying operating performance.

“ Constant Currency Revenue ” As a majority of our sales are transacted in U.S. dollars, the comparability of revenue reported in Canadian dollars is affected by foreign currency exchange rate fluctuations of U.S. dollars compared to the Canadian dollar over time. The rate fluctuations can have a significant impact on our reported results. Therefore, in addition to financial measures prepared in accordance with IFRS, our revenue discussions may contain references to constant currency measures, which are calculated by translating current period results in local currency using the conversion rates from the comparative period. This measure should not be considered in isolation or as a substitute for any standardized measure under IFRS and the most directly comparable financial measure that is disclosed in our financial statements is revenue. We present constant currency financial information, which is a non-IFRS financial measure, as a supplement to our reported operating results. We use constant currency information to provide a framework to assess how our business performed excluding the effects of foreign currency exchange rate fluctuations. We believe this information is useful to investors to facilitate comparisons of operating results and better identify trends in our businesses. Other companies in our industry may calculate this measure differently than we do, limiting its usefulness as a comparative measure. The following table provides a quantitative reconciliation of reported revenue to revenue on a constant currency basis for the periods presented:

		Three Months Ended	Three Months Ended	Three Months Ended			Year	Ended	Ended
		December 31,	December		31,		December 31,		December	31,
		2023		2022			2023		2022
		(unaudited)		(unaudited)
Reconciliation of constant currency revenue
Revenue ..........................................................	$	31,663	$	26,239		$	120,510	$	91,639
Foreign exchange impact ................................		117			-		2,917			-
Constant Currency Revenue............................	$	31,546	$	26,239		$	117,593	$	91,639
Change in constant currency ..........................	$	5,307				$	25,954
Change in constant currency % ......................		20.2%					28.3%

" Adjusted EBITDA " is defined as EBITDA, adjusted for the impact of certain items, including non-cash items such as stock-based compensation, unrealized foreign exchange gains or losses and other items we consider nonrecurring and not representative of our ongoing operating performance. The most directly comparable financial measure that is disclosed in our financial statements is net income (loss).

" Adjusted EBITDA Margin " is defined as Adjusted EBITDA divided by revenue from the same period.

" EBITDA " is defined as consolidated net income (loss) before depreciation and amortization, finance cost and provision for income taxes.

EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin are financial measures that are not defined under IFRS. We use these non-IFRS financial measures, and believe they enhance an investor’s understanding of our financial and operating performance from period to period, because they exclude certain material non-cash items and certain other adjustments, we believe are not reflective of our ongoing operations and our performance. Accordingly, we use these metrics to measure our core financial and operating performance for business planning purposes and as a component in the determination of incentive compensation for salaried employees.

In addition, we believe EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin are measures commonly used by investors to evaluate companies in the e-commerce industry. However, they are not presentations made in

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accordance with IFRS and the use of the terms Adjusted EBITDA and Adjusted EBITDA Margin vary from others in our industry. These financial measures are not intended to represent and should not be considered as alternatives to net income, operating income or any other performance measures derived in accordance with IFRS as measures of operating performance or operating cash flows or as measures of liquidity.

We have updated our Adjusted EBITDA to exclude any non-cash unrealized foreign exchange gains or losses as these are not reflective of our ongoing operations or our performance. Comparatives for Adjusted EBITDA have been updated to reflect the above.

EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin have important limitations as analytical tools and you should not consider them in isolation or as substitutes for analysis of our results as reported under IFRS. For example, these financial measures:

• exclude certain tax payments that may reduce cash available to us;

• do not reflect any cash capital expenditure requirements for the assets being depreciated and amortized that may have to be replaced in the future;

• do not reflect changes in, or cash requirements for, our working capital needs; and

• do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt.

The following table provides a quantitative reconciliation of net loss to EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin for the periods presented:

		Three Months Ended	Three Months Ended	Three Months Ended		Year	Ended	Ended
		December 31,	December 31,			December 31,		December 31,
		2023		2022		2023		2022
		(unaudited)		(unaudited)
Reconciliation of Adjusted EBITDA
Net income (loss) for the period......................	$	(491)	$	(1,385)	$	(2,215)	$	(4,552)
Add back:..............................................
Income taxes ...................................................		(208)		(176)		(676)		(1,324)
Finance (income) costs – net...........................		(216)		339		509		1,524
Depreciation and amortization........................		794		927		3,189		3,525
EBITDA.............................................................	$	(121)	$	(295)	$	807	$	(827)
Add back
Share-based compensation (a)........................	$	119	$	343	$	513	$	1,319
Exchange loss / (gain) .....................................		861		390		950		(2,344)
One-time costs (b)..........................................		3		3		14		24
Adjusted EBITDA..............................................	$	862	$	441	$	2,284	$	(1,828)
Revenue ..........................................................	$	31,663	$	26,239	$	120,510	$	91,639
Adjusted EBITDA Margin % (c).........................		2.7%		1.7%		1.9%		(2.0)%

Notes:

(a) Represents non-cash share-based compensation expense associated with restricted share rights (“RSRs”) and options recognized in the period.

(b) One-time IPO directors’ and officers’ insurance costs which are expensed over the insurance coverage period.

(c) Represents Adjusted EBITDA divided by revenue from the same period. Industry Metrics

“ Active Customers ” As of the last date of each reporting period, we determine our number of active customers by counting the total number of individual customers who have ordered, and for whom an order has shipped, at least once during the preceding stated period. We introduced this number for a 2-year period to provide greater visibility in measuring our business performance as a 2-year period more closely reflects the frequency of repeat purchases in the eyecare sector. The change in active customers in a reporting period captures both the inflow of new customers and the outflow of customers who have not made a purchase in the stated period. We view

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the number of active customers as a key indicator of our growth—acquisition and retention of customers— and, as such, an indicator of the results of our marketing efforts and the value we provide to our customers.

Summary of Factors Affecting Performance

We believe that our performance and future success depend on a number of factors that present significant opportunities. These factors are also subject to a number of inherent risks and challenges, some of which are discussed below and in the "Risk Factors" section of the AIF.

Repeat Customer Behaviour

As of December 31, 2023, we had over 840,000 2-year Active Customers, up from 780,000 as of December 31, 2022. We continue to successfully attract a record number of new customers and serve past customers. In the fourth quarter, repeat revenue reached a consecutive record high of over $21.0 million, representing a $5.0 million increase from the corresponding period in 2022. For the fiscal year ended December 31, 2023, repeat revenue was $76.5 million and accounted for 63.5% of total revenue, reflecting a 29.5% year-over-year increase. Throughout the year, our marketing efforts remained concentrated on attracting higher-value new orders as well as fostering repeat business from our loyal customer base.

A significant component of our repeat business is driven by our Autoship subscription program. We believe that our recurring revenues anchored in our subscription program gives KITS a unique and substantial competitive advantage over other eyecare providers. Our Autoship subscription delivery program delivered $18.2 million in revenue for the year and represents an increase of 14.5% year over year. Autoship offers the “set it and forget it” convenience to our community of customers, free upgraded shipping, and complimentary vision perks. Q4 2023 Autoship revenues increased to $5.0 million, a 34.0% year-over-year increase. We believe that our Autoship program is a differentiated competitive advantage over traditional optical providers and ecommerce providers alike. With a now $20 million dollar annuity and minimal costs associated with maintaining these customers, we will continue to deliver value and convenience to our customers with minimal acquisition costs and provide higher lifetime customer value.

Growth of Our Glasses Business

The North American glasses market is experiencing a secular change away from the highly fragmented traditional retailers to those who provide more value, selection and savings. This dynamic provides an attractive opportunity for KITS to deliver fast, direct to consumer experiences and the highest quality products at remarkable prices. We believe that by designing and manufacturing our glasses in-house we can deliver fast, affordable, robust selection, and superior customer experiences. Our direct-to-consumer model combined with our vertically integrated manufacturing operations enable KITS to control both the cost of acquisition and the cost of production and pass along these savings and convenience, and category leading selection to our customers. We believe we are the most efficient model in the category given we are not burdened with legacy infrastructure and have built highly automated, large scale manufacturing facilities. We also believe we deliver a broader selection,

Revenue from eyeglasses delivered increased by 29.7% to $15.0 million for the year ended December 31, 2023 from $11.5 million for the year ended December 31, 2022 driven by higher unit volumes and average order value. Eyeglasses delivered increased by 14.6% year-over-year to a record of more than 275,000 eyeglasses in 2023, a remarkable achievement for our relatively young glasses business, which is just three years old. Over 82.5% of these glasses were KITS branded frames, underscoring KITS’ enduring appeal and recognition in the market.

We believe the market is undergoing a secular change away from the expensive traditional optical retailers to those with a compelling direct to consumer offering. At KITS, our current emphasis is on capturing the interest of early adopters who are open to exploring online glasses purchasing. We firmly believe that by providing exceptional customer experiences, these initial customers will not only become loyal patrons but also serve as enthusiastic advocates for the KITS brand. This growing momentum is evident in the remarkable 108% year-overyear growth in our recurring glasses customer base. Our overarching goal at KITS is to cultivate a sustainable

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community of satisfied customers who not only cherish their experiences but also eagerly share them with others, fostering long-term relationships and trust in our brand. We recently launched a social program we call “share a pair” designed to allow existing customers to literally share a pair of eyeglasses with a friend or family member as a means of helping spread the KITS experience and enabling shareability. Although it's early in the life cycle of this program we look forward to updating stakeholders as the program continues to generate positive results.

Glasses delivered to repeat eyeglasses customers increased year over year from over 73,000 to over 152,000 glasses in 2023, an increase of 108.2% The increase in glasses revenue this year was driven by returning customers opting for higher value orders and an increase in higher value lens orders compared to 2022 and contributing to an increase in our customer lifetime value. The convenience, quality, and affordability of our eyeglasses offering compel our existing customers to return, underpinning our positive revenue trends and affirming the strong appeal of our products. In the fourth quarter of 2023, we streamlined our pricing structure for glasses, a move that proved successful as returning customers significantly contributed to revenue growth through higher order values and increased units per order. We ended the year with over 272,000 frames in stock and over 2,122 styles, this compares to the standard optical chains who would have about 250- 400 frame styles to choose from.

Components of Our Results of Operations and Trends Affecting Our Business

Revenue

We derive revenue primarily from sales of our own brand of KITS contact lenses and glasses, as well as thirdparty contact lenses and glasses. Revenue is recognized when products are delivered, net of promotional discounts and refund allowances. Revenue is primarily driven by the number of Active Customers and the frequency with which customers repurchase products from KITS. We deferred revenue from 2023 into 2024 from orders placed in late December when seasonal demand increases due to use of insurance and health spending benefits which were delivered in January 2023.

Cost of Sales

Cost of goods sold consists of the cost of materials, assembly, KITS and third-party products sold to customers, inventory freight, inventory shrinkage costs, and inventory valuation adjustments, offset by reductions for promotions and percentage or volume rebates offered by our suppliers, which may depend on reaching minimum purchase thresholds.

Fulfillment

Fulfillment costs primarily consist of those costs incurred in operating and staffing our fulfillment, optical lab, and customer service centers, third party fulfillment costs, and payment processing costs. Fulfillment costs as a percentage of revenue may vary due to several factors, such as payment processing and related transaction costs, our level of productivity and accuracy, changes in volume, size, and weight of units received and fulfilled, the timing of fulfillment network and optical lab expansion, the extent to which we utilize fulfillment services provided by third parties, mix of products and services sold, and our ability to increase efficiency per shipment by implementing improvements in our operations and enhancements to our customer self-service features.

We continue to expand our fulfillment network to accommodate a greater selection and facilitate faster delivery times. We regularly evaluate our facility and lab requirements. The team did a phenomenal job managing fulfillment expenses throughout 2023 as macro factors affected the vast majority of providers. We have completed the consolidation of our distribution and manufacturing centers, and we are continuing to automate and optimize our consolidated, state of the art manufacturing and distribution center.

Marketing

We believe the most powerful marketing forces are the shared experiences of our customers, and are focused on providing exceptional selection, savings and convenience to drive customer amplification, loyalty and brand advocacy. Organic word-of-mouth and our loyal repeat customers are essential to our growth. We were especially encouraged by the sustained momentum evident in this quarter, which highlights the growing strength of

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the enduring relationships we're fostering through our glasses business. Our steadfast commitment remains on refining our offering to establish an unparalleled glasses solution in the market. The notable surge in glasses delivered to repeat eyeglasses customers is striking—rising from over 73,000 to over 152,000 glasses in 2023, representing an impressive 108.2% increase year over year. This compounding growth significantly impacts our overall performance, as we believe returning customers drive our value creation. As we continue to enhance our product selection and delivery efficiency, we anticipate further acceleration in this growth trajectory in the upcoming quarters.

We believe that the company with the highest net promoter score, or NPS, in any category ultimately derives the highest value in the category. Accordingly, we work hard to ensure we deliver exceptional service to customers and actively invest in their long-term and lifetime value. We believe this allows our customers to become advocates for our brand and share their KITS experience with friends and family. Most of our customers arrive at our sites directly, which we believe is fueled by word-of-mouth and customer engagement. Since launching glasses, we have continued to see our NPS increase steadily. Our goal is to maintain the highest customer satisfaction metrics in the category.

Marketing includes brand development, advertising and payroll and related expenses for personnel engaged in marketing and selling activities. We direct customers to our platforms through marketing channels, such as media advertising, performance search, third-party customer referrals, social media influencers, online advertising, and other initiatives. Our marketing costs are largely variable and can be adjusted to align with growth objectives. To the extent there is increased or decreased competition for these traffic sources, or to the extent our mix of these channels shifts, we would expect to see a corresponding change in our marketing costs. As most of our business is repeat or subscription-based, and most of our store traffic and customers come to us via word of mouth, we expect to become less reliant on external forms of marketing over time. We believe our return on invested capital is among the highest in the category and that our lifetime value metrics demonstrate that the investments we are making in sales and marketing are balanced to ensure long-term sustainable growth. We specifically design differentiated and relevant marketing programs to accelerate word-of-mouth adoption and to decrease reliance on large providers such as Google and Facebook.

Selected Annual and Quarterly Consolidated Financial Information

The following table summarizes our recent results of operations for the periods indicated. The selected consolidated financial information set out below for the three months and years ended December 31, 2023 and December 31, 2022 has been derived from our consolidated financial statements and related notes.

CAD $000s, unless otherwise noted Revenue .......................................................... $ Cost of sales................................................. Gross profit.................................................. Fulfillment.................................................... Marketing .................................................... General and administrative ......................... Exchange (gain)/loss.................................... Depreciation and amortization.................... Operating income............................................ Finance (income) costs, net............................. Income before income taxes........................... $ Income tax expense (recovery).................... Net loss ........................................................... $ Non-IFRS measures (a) .................................... Constant currency revenue.......................... $	Three Months Ended December 31, 2023 (unaudited) December 31, 2022 (unaudited) 31,663 $ 26,239 $ 20,584 17,335 11,079 8,904 3,990 3,458 4,509 3,585 2,107 2,090 861 390 527 603 (915) (1,222) (216) 339 (699) $ (1,561) $ (208) (176) (491) $ (1,385) $ 31,546 $ 26,239 $	Year Ended December 31, 2023 (audited) December 31, 2022 (audited) 120,510 $ 91,639 79,718 62,392 40,792 29,247 15,180 12,582 16,865 12,959 8,044 8,104 950 (2,344) 2,135 2,298 (2,382) (4,352) 509 1,524 (2,891) $ (5,876) (676) (1,324) (2,215) $ (4,552) 117,593 $ 91,639	Year Ended December 31, 2023 (audited) December 31, 2022 (audited) 120,510 $ 91,639 79,718 62,392 40,792 29,247 15,180 12,582 16,865 12,959 8,044 8,104 950 (2,344) 2,135 2,298 (2,382) (4,352) 509 1,524 (2,891) $ (5,876) (676) (1,324) (2,215) $ (4,552) 117,593 $ 91,639
			29,247 12,582 12,959 8,104 (2,344) 2,298
			(4,352) 1,524
			(5,876) (1,324)
			(4,552)
			91,639

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		Three Months Ended	Three Months Ended	Three Months Ended		Year	Ended	Ended
		December 31,	December 31,			December 31,		December 31,
		2023		2022		2023		2022
CAD $000s, unless otherwise noted		(unaudited)		(unaudited)		(audited)		(audited)
EBITDA..............................................	$	(121)	$	(295)	$	807	$	(827)
Adjusted EBITDA..........................................	$	862	$	441	$	2,284	$	(1,828)
Adjusted EBITDA Margin %..........................		2.7%		1.7%		1.9%		(2.0) %

Notes: (a) Refer to “Non-IFRS Measures and Industry Metrics” section.

Three Months and Year Ended December 31, 2023, Compared to Three Months and Year Ended December 31, 2022

The following section provides an overview of our financial performance during the three months and year ended December 31, 2023 to the three months and year ended December 31, 2022 The selected consolidated financial information contained herein for these periods has been derived from our consolidated financial statements and related notes.

Revenue

Revenue was $31,663 in the three months ended December 31, 2023, an increase of 20.7% or $5,424, compared to $26,239 in the three months ended December 31, 2022. On a Constant Currency Revenue basis, revenue increased by 20.2% in the three months ended December 31, 2023, compared to the three months ended December 31, 2022.

Revenue increased by 31.5% to $120,510 in the year ended December 31, 2023, compared to $91,639 in the year ended December 31, 2022. On a Constant Currency Revenue basis, revenue increased by 28.3% in the year ended December 31, 2023, compared to the year ended December 31, 2022. The growth in our year ended December 31, 2023, revenue and Constant Currency Revenue is attributable to the combined effort of expanding our customer base through the acquisition of new customers and the consistent focus on serving the needs of our existing loyal customer base. In 2023, we remained committed to delivering exceptional service to our contact lens customers, ensuring prompt fulfillment of their orders. We have also significantly upgraded our glasses manufacturing, fulfillment process and lens offerings, resulting in improved selection and reduced service times, to provide a differentiated experience for our glasses customers.

Gross Profit

Gross profit increased to $11,079 in the three months ended December 31, 2023, compared to $8,904 in the three months ended December 31, 2022. In the fourth quarter of 2023, we continued to balance discounts and promotions targeting new customers with an emphasis on serving higher value new customers and returning customers. Consequently, gross margin expanded to 35.0% in the fourth quarter of 2023 compared to 33.9% in the fourth quarter of 2022.

Gross profit increased by $11,545 to $40,792 in the year ended December 31, 2023, compared to $29,247 in the year ended December 31, 2022. Gross profit margin was 33.8% of revenue in the year ended December 31, 2023, compared to 31.9% in the year ended December 31, 2022. We are pleased with the nearly 200 basis point expansion in gross margin, while the market remained under extreme pressure, demonstrating the strength of our offering and brand resonance. We continued to progress towards our goal of generating long-term gross margins of 40-45% as our glasses business and returning contact lens customers become a larger portion of total revenue.

Fulfillment

Fulfillment expenses increased by $532 to $3,990 in the three months ended December 31, 2023, compared to $3,458 in the three months ended December 31, 2022. Fulfillment expense as a percentage of revenue decreased to 12.6% in the three months ended December 31, 2023, compared to 13.2% in the three months ended December 31, 2022 driven by operating and scale efficiencies.

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The fulfillment team continued to execute as fulfillment expense as a percentage of revenue decreased to 12.6% in the year ended December 31, 2023, compared to 13.7% in the year ended December 31, 2022 Fulfillment expenses increased by $2,598 to $15,180 in the year ended December 31, 2023, compared to $12,582 in year ended December 31, 2022. In 2023, we added automation to our consolidated, state-of-the-art manufacturing and distribution center and achieved shipping efficiencies. Our KITS vertically integrated onshore optical lab produces customized digital progressive lenses, enabling us to deliver incredible quality, service and value to our customers. Our meticulously crafted logistics approach has shielded us from the supply chain disruptions encountered by numerous others in the industry, showcasing the effectiveness of both our operations team and our onshore production strategy.

Marketing

Marketing expenses increased by $924 to $4,509 in the three months ended December 31, 2023 compared to $3,585 in the three months ended December 31, 2022. Marketing expenses as a percentage of revenue was 14.2% in the three months ended December 31, 2023, compared to 14.1% in the three months ended December 31, 2022. This nominal increase reflects our disciplined marketing efforts as we continued to expand and enhance brand awareness.

Marketing expenses increased by $3,906 to $16,865 in the year ended December 31, 2023, compared to $12,959 in the year ended December 31, 2022. Marketing expenses as a percentage of revenue declined to 14.0% in the year ended December 31, 2023, compared to 14.1% in the year ended December 31, 2022. In 2023, we maintained our disciplined focus on optimizing marketing spend efficiency and executing targeted brand marketing campaigns to build KITS’ brand awareness.

General and administrative

General and administrative expenses declined as a percentage of revenue from 8.0% to 6.7% as we continued to grow our top line and leverage our existing infrastructure. General and administrative expenses were $2,107 in the three months ended December 31, 2023, consistent with the $2,090 recorded in the corresponding period of 2022. For the fiscal year ending December 31, 2023, these expenses decreased marginally by $60 to $8,044, compared to $8,104 in the prior year. The consistent level of general and administrative expenses in the three months and year ended December 31, 2023, primarily reflects our focus on optimizing resource allocation and maintaining disciplined spending on administrative functions. These efforts have enabled us to effectively manage our operational costs while supporting our business objectives. We continue to expect that as a percentage of revenue, general administrative expenses will decline as we continue to scale.

Exchange (gain)/loss

Exchange loss was $861 in the three months ended December 31, 2023, compared to an exchange loss of $390 in the three months ended December 31, 2022. The increase in exchange loss was due to the appreciation of the US dollar against the Canadian dollar in the same period.

Exchange loss was $950 in the year ended December 31, 2023, compared to an exchange gain of $2,344 in the year ended December 31, 2022 as the US dollar strengthened against the Canadian dollar in 2023. This is attributable mainly due to our operating entity’s functional currency is the US dollar and have significant liabilities that are denominated in Canadian dollar.

EBITDA and Adjusted EBITDA

EBITDA was $(121) in the three months ended December 31, 2023, compared to $(295) in the three months ended December 31, 2022. EBITDA as a percentage of revenue was (0.4)% in the three months ended December 31, 2023, compared to (1.1)% in the three months ended December 31, 2022.

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Adjusted EBITDA was $862 in the three months ended December 31, 2023, compared to $441 in the three months ended December 31, 2022. Adjusted EBITDA as a percentage of revenue was 2.7% in the three months ended December 31, 2023, compared to 1.7% in the three months ended December 31, 2022.

EBITDA was $807 in the year ended December 31, 2023, compared to $(827) in the year ended December 31, 2022. EBITDA as a percentage of revenue was 0.7% in the year ended December 31, 2023, compared to (0.9)% in the year ended December 31, 2022.

Adjusted EBITDA was $2,284 in the year ended December 31, 2023, compared to $(1,828) in the year ended December 31, 2022. Adjusted EBITA as a percentage of revenue is 1.9% in the year ended December 31, 2023, compared to (2.0)% in the year ended December 31, 2022.

The improvement in EBITDA and Adjusted EBITDA was driven by our continued focus on returning to profitability in fiscal year 2023. Our strategic focus on optimizing returns for every order fulfilled, coupled with the factors outlined above, contributed significantly to this improvement.

Finance income (costs)

Finance income was $216 in the three months ended December 31, 2023, compared to $(339) for the three months ended December 31, 2022, representing a change of $555. The change was primarily due to the recognition of a one-time gain of $466 (2022: $nil) due to a revision in estimates related to the one-time payment to BDC upon the maturity of the BDC Loan.

Finance costs decreased by $1,015 to $509 in the year ended December 31, 2023, compared to $1,524 in the year ended December 31, 2022. The change was primarily due to a decrease in interest expenses recorded on lease liabilities and an increase in the variable BDC interest rate during the period, offset by lower interest expenses on the BDC Loan due to decreased principal outstanding and a one-time finance gain incurred in the three months ended of December 31, 2023 of $466.

Income Taxes

Income taxes changed by $32 to an income tax recovery of $208 in the three months ended December 31, 2023, compared to an income tax recovery of $176 in the three months ended December 31, 2022. Income taxes changed by $648 to an income tax recovery of $676 in the year ended December 31, 2023, compared to an income tax recovery of $1,324 in the year ended December 31, 2022. These changes were primarily driven by lower losses recognized during the respective corresponding periods.

Net Income (loss)

Net loss was $(491) in the three months ended December 31, 2023, a positive change of $894 compared to a net loss of $(1,385) in the three months ended December 31, 2022.

Net Loss was $(2,215) in the year ended December 31, 2023, positive change of $2,337 compared to a net loss of $(4,552) in the year ended December 31, 2022.

The change in net income was primarily due to an improvement in our revenue and gross margin offset by exchange differences recognized in 2023. Refer to the factors discussed above related to the variance in the costs incurred.

Quarterly Results and Performance Measures

The following table summarizes the results of KITS’ operations for the last eight most recently completed quarters. This unaudited quarterly information, other than comparable sales growth, has been prepared in accordance with IFRS.

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							Summary of Quarterly Results	Summary of Quarterly Results	Summary of Quarterly Results	Summary of Quarterly Results
	December 31,		September 30,			June 30,		March 31,	December 31,		September 30,			June 30,		March 31,
CAD $000s, unless otherwise noted		2023		2023		2023		2023		2022		2022		2022		2022
Revenue…..............................................................................	$	31,663	$	31,150	$	30,030	$	27,667	$	26,239	$	23,578	$	21,770	$	20,052
Net income (loss)….............................................................	$	(491)	$	480	$	(1,184)	$	(1,020)	$	(1,385)	$	20	$	(923)	$	(2,264)
Weighted average number of shares
Basic…...............................................................................	31,437,460		31,398,691			31,382,798		31,366,932		31,311,166		31,283,213		31,344,634		31,241,716
Diluted …..….....................................................................	31,437,460		33,234,812			31,382,798		31,366,932		31,311,166		31,283,213		31,344,634		31,241,716
Net income per share
Basic…...............................................................................	$	(0.02)	$	0.02	$	(0.04)	$	(0.03)	$	(0.04)	$	0.00	$	(0.03)	$	(0.07)
Diluted…............................................................................	$	(0.02)	$	0.01	$	(0.04)	$	(0.03)	$	(0.04)	$	0.00	$	(0.03)	$	(0.07)
Average US$/Canadian dollar exchange rate (a) ….....	$	1.3607	$	1.3413	$	1.3434	$	1.3528	$	1.3580	$	1.3050	$	1.2765	$	1.2666

Notes:

(a) Average US$/Canadian dollar exchange rate is the average of Bank of Canada daily noon rates based on calendar days within the quarter.

Revenue

Over the last eight quarters, revenue has been impacted by the following:

• the growth in orders and increased new and returning customers;

• the accelerated secular change to ordering eyewear products online;

• the successful growth of our Kits.com and Kits.ca sites and amalgamation of some of our other web properties;

• the rollout of our own KITS-branded glasses offering and expanded lens offering;

• the introduction and continued focus to grow our Autoship subscription program; and

• the continual increase in branded eyeglass frames selection and inventory.

Net Income (loss)

Net income (loss) has been affected by the following factors over the last eight quarters:

• the impact of the items noted in revenue above;

• the increased investment in our Autoship subscription business and glasses offering;

• the increased brand, marketing, and personnel costs to support our brand and corporate growth, and expanded operating capabilities including the optical lab expansion;

• the opening of our fulfillment and optical lab center; and

• the impact of foreign exchange on our revenue and costs.

Financial Condition, Liquidity and Capital Resources

Overview

The objectives of our capital management strategy are to invest in growing our business while maintaining our financial and operating flexibility, provide benefits to our stakeholders, and provide an adequate return on investment to our shareholders. We allocate capital based on our assessment of the expected risk and return profile of each investment. This strategy is adjusted with changes in the economic environment and risks of the underlying investments. We are currently subject to working capital and minimum cash requirements through the BDC Loan agreement.

Our primary need for liquidity is to fund working capital requirements of our business, capital expenditures, debt service, and general corporate purposes. Our primary source of liquidity is funds generated by operating activities and proceeds from our IPO. Our ability to fund our operations, to make planned capital expenditures, to make scheduled debt payments, and to repay or refinance indebtedness depends on our future operating performance and cash flows, which are subject to prevailing economic conditions and financial, business, and other factors, some of which are beyond our control.

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Working Capital

The Company’s objectives in managing capital are to ensure sufficient liquidity to pursue its growth strategy, to establish a strong capital base to satisfy its obligations towards its creditors, and to provide an adequate return to shareholders.

Our primary sources of cash flow are from operations, debt financing, and equity issuances. Our approach to managing liquidity is to ensure, to the extent possible, that we optimize the working capital funded by our operations and maintain sufficient liquidity to meet our liabilities as they become due. We do so by monitoring cash flow and performing budget-to-actual analysis on a regular basis.

The working capital as at December 31, 2023 was $9,456 compared to $12,558 as at December 31, 2022. Similar to other e-commerce businesses, customers pay for purchases upfront, and we deliver goods from inventory or from suppliers. Overall, regarding purchase and expenses, we have favorable payment terms from suppliers, which typically provides a net source of cash from working capital. We believe that cash generated from our operations and our current cash balance will adequately meet our capital requirements and operational needs for the next 12 months. Additionally, our growth-focused marketing budget provides a lever the Company can use to increase cash generated from operations. Our goal is to produce capital as we grow and remain an asset-light eyecare company.

Indebtedness

The Company entered into a secured loan agreement (the “BDC Loan”) for $23.4 million with BDC Capital Inc. ("BDC") on March 26, 2019, with a repayment date of April 15, 2026 and a monthly contractual principal payment of $250. As at December 31, 2023, the carrying amount of the BDC Loan is $7,685 (2022: $11,257). The change is due to the monthly principal repayment made during the period.

Effective as of January 15, 2021, the BDC Loan bears interest at the BDC floating rate plus a variance of 4.45% per annum and is payable on a monthly basis. The Company is required to make a one-time payment to BDC equal to 0.45% of the Company's annual gross sales at maturity. As at December 31, 2023, the interest rate was 12.75% (2022: 12.0%). 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. The Company is subject to various covenants under the BDC Loan, including requirements to maintain certain financial ratios. As at December 31, 2023, the BDC Loan is in good standing and the Company is in compliance with its debt covenants.

On January 18, 2021, in connection with the conversion of all the Company’s then outstanding preferred shares, the Company issued a promissory note of $2,412 (the “Promissory Note”) which represents the accrued dividends payable to the former holders of the preferred shares. The Promissory Note bears no interest and matures on the earlier of January 31, 2026 or the date after the BDC Loan has been repaid in full (the “Maturity Date”). Unpaid principal shall be payable in quarterly installments of $121 beginning on March 31, 2021, subject to the consent of BDC. Any unpaid principal shall be payable in full upon the Maturity Date. As at December 31, 2023, the carrying amount of the Promissory Note is $2,035 (2022: $1,884) and the change is due to accretion expenses recognized. No quarterly principal has been paid to the Promissory Note holders.

Cash Flows

The following table presents cash and cash equivalents as at December 31, 2023 and December 31, 2022:

		Three Months Ended	Three Months Ended	Three Months Ended		Year	Ended	Ended
		December 31,		December 31,		December 31,		December 31,
		2023		2022		2023		2022
		(unaudited)		(unaudited)		(audited)		(audited)
Net cash provided by (used in) operating activities....	$	(2,338)	$	(406)	$	2,405	$	4,677
Net cash provided by (used in) financing activities....		(1,207)		(1,295)		(5,072)		(5,128)
Net cash provided by (used in) investing activities....		(164)		(61)		(563)		(258)

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Increase (decrease) in cash................................. Cash and cash equivalents, end of period............... $	Three Months Ended December 31, 2023 (unaudited) December 31, 2022 (unaudited) (3,709) (1,762) 16,040 $ 18,790 $	Year Ended December 31, 2023 (audited) December 31, 2022 (audited) (3,230) (709) 16,040 $ 18,790	Year Ended December 31, 2023 (audited) December 31, 2022 (audited) (3,230) (709) 16,040 $ 18,790
			(709) 18,790

Analysis of Cash Flows for the year ended December 31, 2023, compared to the year ended December 31, 2022 and three months ended December 31, 2023, compared to three months ended December 31, 2022

Cash Provided by Operating Activities

Cash flow used in operating activities was $2,338 in the three months ended December 31, 2023, compared to cash used in operating activities of $406 in the three months ended December 31, 2022, representing an increase of $1,932.

Cash flow provided by operating activities was $2,405 in the year ended December 31, 2023, compared to cash provided by operating activities of $4,677 in the year ended December 31, 2022, changes of $2,272. The change in cash generated in operating activities for the three months and year ended December 31, 2023 is primarily due to the change in our working capital in 2023 as result of our continued efforts to increase the profitability of our operations while managing the timing of vendor payments. We expect cash flows from changes in working capital to vary from quarter to quarter as our business changes and due to the timing of ordinary course receipts and payments.

Cash Used in Financing Activities

Cash flow used in financing activities decreased by $88 to $1,207 in the three months ended December 31, 2023, compared to $1,295 of cash flow used in the three months ended December 31, 2022. Cash flow used in financing activities was $5,072 in the year ended December 31, 2023, compared to $5,128 of cash flow provided by financing activities in the year ended December 31, 2022.

The change in the cash flows used in financing activities in the three months and year ended December 31 2023, due to a lower interest expense on the BDC Loan because of lower principal outstanding offset by a higher interest rate on the BDC Loan.

Cash Used in Investing Activities

Cash flow used in investing activities increased by $103 to $164 in the three months ended December 31, 2023, compared to $61 of cash flow used in the three months ended December 31, 2022. Cash flow used in investing activities increased to $563 in the year ended December 31, 2023 compared to $258 in the year ended December 31, 2022. The increase in cash flow used in investing activities in 2023 is primarily due to capital equipment purchases.

Off-Balance Sheet Arrangements and Commitments

We have no off-balance sheet arrangements or commitments.

Contractual Obligations

The following table summarizes certain of our significant contractual obligations and other obligations as at December 31 2023:

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Contractual obligations Accounts payable and accrued liabilities....... $ Loan Principal amount .................................. Loan Interest ................................................ Promissory note ........................................... Lease liability ................................................ Total Contractual obligations $	Contractual cash flows 15,964 $ 10,620 1,049 2,412 7,713 37,758 $	Payments Due by Period ($ in thousands) Less than 1 year 1-3 years 4-5 years 15,964 $ - $ - $ 3,000 7,620 - 705 344 - - 2,412 - 1,096 1,951 1,493 20,765 $ 12,327 $ 1,493 $	After 5 years - - - - 3,173 3,173

As of December 31, 2023, we had additional liabilities which included pending or in-transit orders and sales returns. These liabilities have not been included in the table above as the timing and amount of future payments are uncertain.

Financial Instruments

The Company’s financial instruments comprise of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, the BDC Loan and the Promissory Note.

The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of the short-term nature of these financial instruments. These financial instruments, the BDC Loan and the Promissory Note are classified as financial assets and liabilities at amortized cost. There were no financial liabilities that are measured at fair value as at December 31, 2023.

BDC Loan

As at December 31, 2023, the carrying amount of the BDC Loan was $7,685. For the year ended December 31, 2023, the Company made interest and principal repayments of $4,061, recognized finance costs comprising of $995 of accretion expense and $466 of one-time gain in estimates in loan payments. Accretion expense is calculated by applying an effective interest rate of 12.75%.

Promissory Note

As at December 31, 2023, the carrying value of the promissory note was $2,035. During the year ended December 31, 2023, no quarterly principal was paid to the promissory holders and the Company recorded accretion expense of $151 in finance costs. Accretion expense is calculated by applying an effective interest rate of 8.00%.

Risk Factors

For a detailed description of risk factors associated with the Company, refer to the “Risk Factors” section of the AIF, which is available on SEDAR at www.sedar.com.

In addition, we are exposed to a variety of financial risks in the normal course of operations including foreign exchange, interest rate, credit, liquidity and equity price risk, as summarized below. We believe that our overall risk management program and business practices help minimize any potential adverse effects on our consolidated financial performance.

Risk management is carried out under practices approved by our board of directors (the “Board”). This includes reviewing the adequacy of our risk management policies and procedures with regard to identifying the Company’s principal risks and implementing appropriate systems and controls to manage these risks. Risk management covers many areas of risk including, but not limited to, foreign exchange risk, interest rate risk, credit risk, liquidity risk and equity price risk.

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Quantitative and Qualitative Disclosures about Market Risk

We are exposed to a variety of financial risks in the normal course of operations including foreign exchange, interest rate, credit, and liquidity risk. Our overall risk management program and business practices seek to minimize any potential adverse effects on our consolidated financial performance. For a detailed description of risk factors associated with the Company, refer to the “Risk Factors” section of the AIF, which is available on SEDAR at www.sedar.com.

Foreign Exchange Risk

The presentation currency for our consolidated financial statements is the Canadian dollar. Because we recognize sales in the United States in U.S. dollars, if the U.S. dollar weakens against the Canadian dollar it would have a negative impact on our U.S. operating results upon translation of those results into Canadian dollars for the purposes of financial statement consolidation. We may face similar risks in other foreign jurisdictions where sales are recognized in foreign currencies. A 10% strengthening in the Canadian dollar against the U.S. dollar on net monetary accounts would, with all other variables being constant, have an approximate unfavorable impact of $472 on the year ended December 31, 2023 consolidated income.

Interest Rate Risk

We are exposed to changes in interest rates on our cash and cash equivalents, loans and borrowings. Debt issued at variable rates exposes us to cash flow interest rate risk. During the period, we had a variable interest rate loan from BDC. The principal amount outstanding under the loan was $6.9 million as December 31, 2023 which currently bears interest at 12.75%. A 1.00% increase in the floating interest rate would have increased interest paid by $117 and finance costs by $114 for the year ended December 31, 2023.

Credit Risk

Credit risk refers to the possibility that we can suffer financial losses due to the failure of our counterparties to meet their payment obligations. We are exposed to minimal credit risk. We do not extend credit to customers but do have some receivables exposure with respect to payment processors transferring customer funds to us and to rebates receivable from our vendors. The majority of accounts receivable are settled in under 30 days. To reduce this risk, we use industry leading payment processors, including Braintree Payment Gateway, Chase Paymentech, American Express, and PayPal. We deposit our cash and cash equivalents with major financial institutions that have been assigned high credit ratings by internationally recognized credit rating agencies. We do not have any derivative contracts.

Liquidity Risk

Liquidity risk is the risk that we cannot meet a demand for cash or fund our obligations as they come due. We manage liquidity risk by managing our balance sheet and monitoring actual and projected cash flows, considering the seasonality of our revenue, income and working capital needs.

Related Party Transactions

During the year ended December 31, 2023, the Company paid rent of $nil (2022: $0) to a company under common control of Arshil Abdulla (Chief Technology Officer of KITS), and recorded rent of $nil (2022: $120) to a company under the common control of Roger Hardy, (Chief Executive Officer and Director of KITS) of which $nil (2022: $21) is unpaid as at December 31, 2023. These amounts have been included in other general and administrative expenses 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 were terminated as of December 31, 2022. During the year ended December 31, 2023, the Company recorded $225 (2022: $213) of share-based compensation and $124 (2022: $99) of Board fees and advisory fees to the directors, of which $31 (2022: $31) is unpaid as at December 31, 2023. The Promissory Note holders are former holders of the preferred shares in the Company and include certain key management of the Company and their affiliates. For further details regarding the Promissory Note, see “Financial Condition, Liquidity and Capital Resources” and “Financial Instruments” above.

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Key management compensation

Key management consists of the Board and officers of the Company. As at December 31, 2023, the Company recorded a bonus payable of $450 (2022: $385) to key management. Key management compensation comprises of wages and short-term employee benefits. For the year ended December 31, 2023, the Company paid $2,277 (2022: $2,312) of wages and short-term employee benefits to key management and recorded $20 (2022: $834) of key management share-based compensation.

Critical Accounting Estimates and Judgments

Our financial statements have been prepared in accordance with IFRS as issued by the International Account Standards Board. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and are based on a set of underlying data that may include our historical experience, knowledge of current events and conditions and other factors that are believed to be reasonable under the circumstances. We continually evaluate the estimates and judgments used in the preparation of the financial statements. Actual results could differ from these estimates. Areas requiring the most significant estimates and judgments are outlined below.

Inventories

In estimating the net realizable value of inventory, we use estimates related to fluctuations in inventory levels, planned production, customer behavior, obsolescence, future selling prices, and costs necessary to sell the inventory.

Revenue

Revenue is recognized when the goods are delivered and have been accepted by customers. The critical assumptions and estimates used in determining the total revenue to be recognized for each reporting period are based on an estimated couriers’ average transit time it takes for the customer to accept the goods.

Leases

We exercise judgment when contracts are entered into that may give rise to a right-of-use asset that would be accounted for as a lease and determine the appropriate lease term on a lease-by-lease basis. Changes in the economic environment or changes in the retail industry may impact the assessment of the lease term and any changes in the estimate of lease terms may have a material impact on the Company’s consolidated statements of financial position.

The critical assumptions and estimates used in determining the present value of future lease payments require us to estimate the incremental borrowing rate specific to each leased asset or portfolio of leased assets. We determine the incremental borrowing rate of each leased asset or portfolio of leased assets by incorporating the Company’s creditworthiness, the security, term, and value of the underlying leased asset, and the economic environment in which the leased asset operates. The incremental borrowing rates are subject to change mainly due to macroeconomic changes in the environment.

Impairment of non-financial assets (goodwill, intangible assets, property, plant & equipment, and right-of-use assets)

We are required to exercise judgment in determining the grouping of assets to identify their cashgenerating units (CGUs) for the purposes of testing non-financial assets for impairment. In determining the recoverable amount of the CGU, various estimates are employed. Estimates including projected future revenues, margins, costs, and capital investment consistent with strategic plans presented to the Board and key management. Discount rates are consistent with external industry information reflecting the risk associated with the Company and its cash flows.

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Share-based payments

Compensation expense for share-based compensation granted is measured at the fair value at the grant date using the Black-Scholes option pricing model. The critical assumptions used under the option valuation model at the grant date are forfeiture rate, expected time to exercise in years, expected dividend yield, and volatility.

Income and other taxes

Key Sources of Estimation: In determining the recoverable amount of deferred tax assets, the Company forecasts future taxable income by legal entity and the period in which the income occurs to ensure that sufficient taxable income exists to utilize the attributes. Inputs to those projections are management’s financial forecasts and statutory tax rates.

Significant New Accounting Standards Not Yet Adopted

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.

Current Share Information

As at March 5, 2024, an aggregate of 31,439,781 Common Shares were issued and outstanding. There were no preferred shares issued and outstanding as of such date.

As at March 5, 2024, there were 2,669,140 options and 103,000 restricted share rights outstanding under the Company’s equity incentive plans, of which 2,329,617 options and 10,321 restricted share rights were vested as of such date. Each option is exercisable for one Common Share. We expect that vested restricted share rights will be paid at settlement through the issuance of one Common Share per restricted share right.

Additional Information

Additional information relating to the Company, including the AIF, is available on SEDAR at www.sedar.com. Our Common shares are listed for trading on the TSX under the symbol “KITS”.

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