KITS Eyecare Ltd. Canadian Equity Research Consumer Products 7 February 2021

Initiation of Coverage KITS Eyecare Ltd. Canadian Equity Research Consumer Products 7 February 2021

Price Growth clearly in focus KITS-TSX C$8.20 Investment Recommendation

We are initiating coverage of KITS Eyecare Ltd. with a BUY rating and $17.00 target Market Data price. We believe KITS offers investors attractive exposure to the highly fragmented, 52-Week Range (C$) : 7.55 - 10.20 Market Cap (C$M) : 254.2 high-margin eyecare market. The company’s unique, 100% online-only business Shares Out. (M) : 31.0 model should allow KITS to exceed the average industry growth rate, as e-commerce Dividend /Shr (C$) : 0.00 eyecare penetration is set to accelerate, in our view. The company is run by a Dividend Yield (%) : 0.0 seasoned management team, which together owns ~74% of the shares outstanding Implied Return to Target (%) : 107.3 and has demonstrated prior success in the online eyecare market. We believe the Net Debt (Cash) (C$M) : (36.9) current valuation of 1.3x our 2022E revenue estimate, vs. peers which trade at 2.9x, Enterprise Value (C$M) : 217 represents an attractive entry point. FYE Dec 2019A 2020E 2021E 2022E Revenue Investment highlights 36.9 74.9 116.2 162.2 (C$M) • We believe KITS is well positioned on the precipice of what will be an acceleration EBITDA (C$M) 3.6 6.1 6.1 16.9 of the penetration of e-commerce within the retail eyecare market. KITS operates EPS (C$) 0.02 (0.10) (0.07) 0.10 a unique, 100% online-only business, selling both private label and well known EV/Sales (x) 5.9 2.9 1.9 1.3 third-party branded contact lenses and eyeglasses. While the eyecare market is EV/EBITDA (x) 59.7 35.8 35.7 12.9 highly fragmented, only 13% of eyewear sales in North America during 2020 were generated through online channels. This is well below other discretionary retail 9.5 categories, which tend to have online penetration of 25-35%, a gap which we expect to close over the course of our forecast period. 9 • While growth in e-commerce penetration should help drive a larger TAM for KITS, we believe this will be further augmented by aging population demographics in the US and Canada. As consumers age, the need for vision correction increases, with over 8.5 75% of the population eventually needing some form of vision correction. Adding to this secular tailwind is that many people are now spending more time in front of computer, phone, and TV screens, particularly given the new work-from-home trends, 8 which has helped drive a greater need for vision correction products. • We believe KITS in particular is set to achieve an inflection in revenue growth and 7.5 margin expansion, as the company increases its exposure to higher-margin eyeglass revenue, which on average carries almost double the gross margin of contact lenses. Currently, eyeglasses represent only 2% of KITS revenue, but following an expansion Feb-21 KITS of the company’s optical lab this year and next, we believe KITS eyeglass revenue S&P/TSX Composite Index (rebased) will grow toward 25% of consolidated revenue, helping drive EBITDA margins Source: FactSet higher. With growth ready to accelerate, KITS is well capitalized to make incremental Priced intraday 5 February 2021 investments to improve brand awareness and add production capacity. We estimate the company will have a net cash position of $37 million at the end of Q1/21, leaving KITS is a rapidly growing digital eyecare platform KITS well positioned to invest in organic growth opportunities. founded in October 2018, operating as a platform of optical e-commerce websites including • We expect revenue to grow to $116 million in 2021 (reflecting YoY growth of 55%) KITS.com, KITS.ca, OptiContacts.com and and $162 million in 2022 (YoY growth of 40%) as KITS ramps up production of ContactsExpress.ca. eyeglass products. We also expect improving product mix as KITS increases its eyeglass product exposure. Coupled with a larger marketing budget and increased public company costs, we expect the company to generate $6 million of EBITDA in 2021 and $17 million in 2022. Valuation Our $17.00 target represents 3.0x our 2022E revenue estimate of $162 million and 29.1x our 2022E EBITDA estimate of $17 million. While there are no perfect public comparable companies to KITS, we believe the broader eyewear retail peer set is an appropriate barometer, with the group trading at an average of 2.9x 2022 sales. In our view, KITS should trade at a premium to these peers, given its earlier stage in the growth cycle, higher expected revenue growth, healthy balance sheet, and strong management team.

Canaccord Genuity is the global capital markets group of Canaccord Genuity Group Inc. (CF : TSX) The recommendations and opinions expressed in this research report accurately reflect the research analyst's personal, independent and objective views about any and all the companies and securities that are the subject of this report discussed herein.

For important information, please see the Important Disclosures beginning on page 29 of this document. KITS Eyecare Ltd. Initiation of Coverage

Table of Contents Executive Summary ...... 4 Company Overview ...... 7 Investment Thesis ...... 8 Competition ...... 18 Financial analysis and outlook ...... 19 Valuation ...... 23 Appendix A: Key risks to our investment thesis ...... 27 Appendix B: Management team ...... 28 Appendix C: Board of Directors ...... 28

2 Buy Target Price C$17.00 | 7 February 2021 Consumer Products 2

KITS Eyecare Ltd. Initiation of Coverage

Figure 1: Company snapshot

COMPANY DESCRIPTION CASH FLOW ANALYSIS KITS is a rapidly growing digital eyecare platform founded in October 2018, operating as a Year end Dec (C$mm) 2019 2020E 2021E 2022E platform of optical e-commerce websites including KITS.com, KITS.ca, OptiContacts.com and ContactsExpress.ca. Cash flow from operations 3.4 2.8 6.8 15.7 Cash from operating activities 4.1 1.8 7.7 16.8 SHARE INFORMATION Capital expenditures, net (1.0) (0.2) (15.0) (2.0) Free cash flow 2.4 2.6 (8.2) 13.7 Ticker KITS-TSE Free cash flow (inc. wc) 3.2 1.6 (7.3) 14.8 CG rating BUY Cash flow from operations per share 0.34 0.69 0.22 0.51 Target price $17.00 Cash flow from operating activities per share 0.41 0.45 0.25 0.54 Free cash flow per share (exc. wc) 0.24 0.65 (0.26) 0.44 Current price $8.20 Free cash flow per share (inc wc) 0.32 0.41 (0.24) 0.48 Dividend per share $0.00 Dividend yield 0.0% FCF yield 2.9% 7.9% (3.2%) 5.4% Total return to target 107.3% FCF yield including working capital 3.8% 5.0% (2.9%) 5.8% Shares O/S f.d.(mm) 31.0 Market cap (mm) $254.2 YEAR-OVER-YEAR GROWTH ANALYSIS Net Debt (mm) -$36.9 Year end Dec 2020E 2021E 2022E Enterprise Value $217.3 Revenue 103.1% 55.0% 39.7% CONDENSED INCOME STATEMENT Gross profit 106.4% 49.6% 57.4% Year end Dec (C$mm) 2019 2020E 2021E 2022E SG&A 178.8% 7.4% 29.7% Adj. EBITDA 120.0% 116.6% 28.9% Revenue 36.9 74.9 116.2 162.2 Adj. EPS, FD -503.6% 65.5% -150.4% COGS 26.1 52.6 82.8 109.7 Gross profit 10.8 22.3 33.4 52.5 VALUATION Gross margin 29.3% 29.8% 28.7% 32.4% Year end Dec 2019 2020E 2021E 2022E SG&A 7.5 17.1 29.0 38.1 as a % of revenue 20.2% 22.8% 25.0% 23.5% At current share price: Adj. EBITDA 3.6 6.1 6.1 16.9 Enterprise value/Revenue 5.9x 2.9x 1.9x 1.3x Adj. EBITDA margin 9.9% 8.1% 5.2% 10.4% Enterprise value/EBITDA 59.7x 35.8x 35.7x 12.9x SBC - 0.9 2.9 4.1 Depreciation 1.3 2.0 3.1 4.6 At target share price: Interest 1.8 2.6 2.9 4.1 Enterprise value/Revenue 13.3x 6.5x 4.2x 3.0x Earnings before taxes 0.1 0.1 (2.8) 4.2 Enterprise value/EBITDA 134.5x 80.6x 80.5x 29.1x Taxes 0.0 0.5 (0.7) 1.1 Adj. net earnings 0.1 (0.4) (2.0) 3.1 LEVERAGE RATIOS Adj. net profit margin 0.1% (0.5%) (1.8%) 1.9% Year end Dec 2019 2020E 2021E 2022E Basic shares outstanding 4 4 31 31 FD shares outstanding 10 4 31 31 Net debt/Equity 3.3x nmf -3.9x -2.1x Adj. EPS, FD 0.02 (0.10) (0.07) 0.10 Net debt/Total capital 0.4x nmf 1.5x 3.1x Debt/EBITDA 8.8x nmf 1.6x 0.6x CONDENSED BALANCE SHEET Net debt/EBITDA 7.6x nmf -3.9x -2.1x Year end Dec (C$mm) 2019 2020E 2021E 2022E Interest coverage 0.9x nmf 1.5x 3.1x

Cash 3 3 46 61 PROFITABILITY RATIOS Other current assets 4 7 13 17 Year end Dec 2019 2020E 2021E 2022E Long-term assets 46 46 58 56 Total assets 53 56 117 134 Return on equity 0.9% -5.1% -2.9% 3.8% Return on assets 0.1% -0.7% -1.7% 2.3% Current portion of long-term debt 23 3 3 3 Return on invested capital 9.1% 13.3% 3.7% 11.1% Current portion of lease liabilities 0 0 0 0 Other current liabilities 7 10 17 22 Long-term debt - 18 10 10 Lease liabilities 1 1 1 1 Other long-term liabilities 16 17 17 17 Shareholders equity 6 8 71 82 Total liabilities & S/E 53 56 117 134 Source: Company Reports, Canaccord Genuity estimates

3 Buy Target Price C$17.00 | 7 February 2021 Consumer Products 3

KITS Eyecare Ltd. Initiation of Coverage

Executive Summary

Kits Eyecare (KITS) was founded in 2018 by online eyewear industry veteran Roger Hardy and an impressive team of partners to capitalize on what the group viewed as an acceleration of demand for eyewear e-commerce solutions, in what is a highly fragmented market. The company manufactures and sells contact lenses and glasses through its own e-commerce platforms, and operates an in-house production facility, allowing KITS to fulfill and ship orders within 24 hours of an order being placed. In our view, the company benefits from strong secular tailwinds, such as an aging In our view, the company benefits population, accelerated consumer vision challenges due to an increase in screen from strong secular tailwinds, such time, and a growing acceptance of online shopping, which has been magnified as an aging population, accelerated throughout the COVID-19 pandemic. Furthermore, KITS CEO Roger Hardy has consumer vision challenges due to already proven successful in the online eyecare space, founding and selling Clearly an increase in screen time, and a Contacts to industry giant Essilor in 2014 for 2.0x sales or $435 million. growing acceptance of online Management is well aligned with shareholders, with insiders owning 74.1% of the shopping, which has been magnified shares outstanding. throughout the COVID-19 pandemic. Figure 2: Numerous tailwinds in KITS' favour

Current Projected % of pop. over 55 years old 26%1 37%1 Eyecare online sales penetration 13% 36%2 KITS glasses % of total sales 2% 25%3

1Statistics Canada. 2Based on 2020 online footwear and apparel penetration according to Euromonitor.

3 M anagement estimates. Source: Statscan, Euromonitor The company has generated robust revenue growth over the last year, with pro forma revenue increasing from $50 million in 2019 to an expected $74 million in 2020. Furthermore, unlike Clearly Contacts at the time of its acquisition, KITS is already EBITDA positive, having generated ~$5 million in adjusted EBITDA during the first 9 months of 2020. Investment highlights Below we highlight six key investment drivers: 1. E-commerce exposure in an underpenetrated, fragmented market 2. Aging population supports increased eyecare spending 3. Low CAC and high lifetime customer value leads to impressive return economics 4. Opportunity to expand product set 5. Asset light business model leads to earnings and FCF leverage 6. Valuation

E-commerce exposure in an underpenetrated market We believe KITS offers investors unique 100% e-commerce exposure to the growing North American eyecare market. The North American eyecare market generates $35 billion in revenue annually and is expected to grow at a 3.0% compound annual growth rate (CAGR). E-commerce accounts for approximately 13% of the overall market, growing at a 13% CAGR since 2008. In our view, KITS’ online-only offering provides investors with exposure to a unique e-commerce-focused eyecare platform.

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KITS Eyecare Ltd. Initiation of Coverage

Given management’s strong track record of success in the online eyecare arena, we believe KITS is well positioned to capitalize on increasing e-commerce penetration within the eyecare market. Aging population supports increased eyecare spending The eyecare market should benefit from an aging North American population, in our view. As people age, the need for vision correction increases, with 75% of adults eventually needing some form of vision correction, according to the Vision Council of America. As a result, we believe as the percentage of the North American population aged 55 or higher accelerates over the next 30 years, the eyecare market will benefit from a structural demographic tailwind. Coupled with many people increasing their exposure to screens, which has been amplified by the work from home trend, we expect this to lead to a greater need for vision correction products going forward. Low CAC and high lifetime customer value leads to impressive return economics We believe a key differentiating factor for KITS compared to many brick-and- mortar-focused retailers, is the company’s low customer acquisition costs. KITS operates an asset-light online model and historically has spent minimally on marketing costs. This has led to an average CAC of only $40. With the average KITS customer generating ~$450 of revenue over their average customer life, we calculate a robust customer lifetime ROI of 191%. Furthermore, as the company adds new product lines, increases its scale, and expands its private label offering, we believe these returns could become more impressive over time. Opportunity to expand products and geography Core to our margin expansion thesis for KITS is the company’s ability to increase its Importantly, while we expect this to exposure to higher-margin eyeglass revenue. Today, eyeglasses represent only 2% help drive revenue growth, of sales at KITS, with the company targeting 25-30% exposure over the medium eyeglasses offer up to two times term. As the company scales up its eyeglass manufacturing capability, we believe it higher gross margins than contact will focus on driving an increased revenue contribution from eyeglasses. lens sales, which provides earnings Importantly, while we expect this to help drive revenue growth, eyeglasses offer up leverage to KITS over the course of to two times higher gross margins than contact lens sales, which provides earnings our forecast period. leverage to KITS over the course of our forecast period. Asset-light business model leads to high FCF conversion KITS’ lack of an owned brick-and-mortar retail presence, and the lack of accompanying capital expenditures required to build out and support this footprint, should allow the company to realize material free cash flow growth over the course of our forecast period. The company’s main asset is its British Columbia-based production facility, which we expect the company will invest in throughout the course of 2021. Afterwards, we believe the company will be well positioned to generate cash moving forward, and we are forecasting ~88% EBITDA to free cash flow conversion in 2022. Valuation We are initiating coverage of KITS with a BUY rating and $17.00 target price. Our target represents 3.0x our 2022E revenue estimate of $162 million, and 29.1x our 2022E EBITDA estimate of $17 million. While there are no perfect public comparable companies to KITS, we believe that the broader eyewear retail peer set is an appropriate barometer, with the group trading at an average of 2.9x 2022 sales. We note our target multiple, which we view as conservative given it is in line with peers, implies a 107% return from current levels. In our view, KITS should trade at a premium to these peers, given its earlier stage in the growth cycle, higher expected revenue growth, healthy balance sheet, and strong management team.

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KITS Eyecare Ltd. Initiation of Coverage

Potential risks (see Risks section on page 27):  Operates in a highly competitive industry  Maintaining strong relationships with key private label and third-party suppliers  Ability to procure raw materials  Changing consumer preferences  Potential for unexpected management departures

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KITS Eyecare Ltd. Initiation of Coverage

Company Overview

KITS is a leading online retailer of eyewear products, including contact lenses, eyeglasses and sunglasses, selling products through its well-known network of e- commerce websites, which include KITS.com, KITS.ca, OptiContacts.com and ContactsExpress.ca. The company ships products throughout North America, with roughly 80% of 2020 sales coming from the US and 20% from Canada, and is able to offer one-day or two-day shipping to over 85% of its customers. KITS operates in a unique niche of the highly fragmented optical retail market, selling both private label and branded products through its online platform. Further, the company has developed numerous relationships with smaller overseas suppliers that allow it to procure raw materials for their products at favourable prices.

During Q3/20, KITS generated revenue of $20 million, which represented a 68% increase YoY. We are expecting continued robust growth over the course of our With the recent acceleration of e- forecast period, with revenue increasing to $116 million in 2021 compared to the commerce due to the COVID-19 company’s $74 million expectation for 2020. With the recent acceleration of e- pandemic, we believe KITS’ online commerce due to the COVID-19 pandemic, we believe KITS’ online platform is well platform is well positioned to attract positioned to attract new customers over the near and medium term. new customers over the near and medium term. Furthermore, KITS has built up a unique infrastructure to support its high growth e- commerce offering. The company operates its own optical lab in Richmond, BC, which is capable of producing up to 2,000 eyeglass pairs per day, and a fulfillment network capable of fulfilling over 3,500 contact orders per day. Our calculations suggest the current capacity is equivalent to that of a 200-store optical chain. KITS intends to use a portion of the proceeds from its IPO to expand capacity to over 10,000 eyeglass pairs per day over the next 24 months, while slightly increasing its investment in marketing and customer retention. Management well aligned with shareholders KITS is led by a seasoned management team, with impressive experience in online retail, consumer products, and capital markets. Co-founder and CEO Roger Hardy is a well-known retail executive, having previously founded Clearly Contacts in 2000, a similar online eyecare business which was then sold to Essilor in 2014 for $435 million. Furthermore, Mr. Hardy was a key investor in eyewear retailer Privé Revaux, an eyewear retailer with a large celebrity influencer following, which sold a 61% interest to Italian eyewear retailer Safilo Group in early 2020 for ~$88 million. Additionally, the leadership team is well stocked with former partners of Mr. Hardy from Clearly Contacts, along with Co-founder and CFO Sabrina Liak, who previously worked at Goldman Sachs, and Co-founder and COO Joseph Thompson, who previously served at Amazon and Procter & Gamble. Together, management and insiders own 74.1% of KITS’s shares outstanding, leaving the management team well aligned with investors, in our view.

Figure 3: Pro forma insider ownership

Insider ownership Roger Hardy, CEO 8,487,723 27.4% Sabrina Liak, CFO 3,680,762 11.9% Joseph Thompson, COO 191,962 0.6% LD Vision Group 10,611,766 34.2% Insider ownership 22,972,213 74.1% Other shareholders 8,027,790 25.9% Total 31,000,003 100.0% Source: KITS IPO Prospectus

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KITS Eyecare Ltd. Initiation of Coverage

Investment Thesis

Highly fragmented retail eyewear market The retail eyewear market in both Canada and the US is highly fragmented. We estimate that 50% of the market is controlled by independent retailers in both countries. This, in our view, signals that the market is ripe for disruption. The total eyewear market in North America is expected to generate revenue of $35 billion in 2020, of which ~$7 billion will come from contact lenses, $24 billion from eyeglasses, and $4 billion from sunglasses. According to Euromonitor, e-commerce sales account for 12.6% of this market, or $4.6 billion in revenue, which is up dramatically from a decade ago at 3.5%, and even from 2019 at 9.4%. While we certainly believe that much of the penetration growth in 2020 was due the COVID- 19 pandemic, we nevertheless believe the growth in e-commerce penetration is here to stay.

Figure 4: North American Retail Eyewear Market by Product (US$ billions)

Source: Euromonitor, Canaccord Genuity

While the broader North American eyewear market has grown at a CAGR of 2.5% from 2008-2019, the e-commerce eyewear market grew over five times faster, at a Following the COVID-19 pandemic, CAGR of 13.2% over the same time period. Following the COVID-19 pandemic, we we believe e-commerce eyewear believe e-commerce eyewear growth is set to accelerate, with 2020 projections growth is set to accelerate, with suggesting US market growth of over 16%. We anticipate this growth rate will 2020 projections suggesting US remain elevated as more consumers become accustomed to transitioning a portion market growth of over 16%. of their shopping to the on-line channel.

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KITS Eyecare Ltd. Initiation of Coverage

Figure 5: North American Retail Eyewear Market Forecast (US$ billions)

Source: Euromonitor, Canaccord Genuity E-commerce penetration is higher in the US, at 13.2%, while in Canada, e- commerce eyewear sales account for 7.2% of the overall market. Similar to other categories, retail e-commerce penetration in Canada lags that of the US; however, given KITS’ Western Canadian based footprint, we believe the company will be able to accelerate its growth in Canada over the course of our forecast period, in what we view is an underpenetrated market. When we compare online eyewear sales to other industries, it is apparent to us that the market is underpenetrated, particularly as COVID-19 has increased the consumer willingness to purchase new categories through e-commerce channels. To this end, we would highlight the grocery industry, which in 2019 had e-commerce penetration of only 3.4%. Online grocery was generally regarded as one of the last bastions of retail to convert to an online or omnichannel platform. That said, in 2020 e-commerce penetration tripled to 10.2% of the overall market, with industry sources suggesting this could grow to over 20% penetration over the next 5 years.

Figure 6: Online grocery penetration trends

Source: Mercatus/Incisiv

If consumers are willing to rapidly adapt to online grocery, we believe online eyewear is ready for a transformation into greater e-commerce penetration. While e-commerce eyewear sales penetration is expected to increase to 12.6% in 2020, this represents only a 34% YoY increase in 2020, despite the impact of COVID.

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KITS Eyecare Ltd. Initiation of Coverage

Additionally, we note there remains a significant gap between eyewear e-commerce penetration and apparel & footwear e-commerce penetration, the latter of which stood at 36% for 2020 according to Euromonitor. We view apparel & footwear as a similar category to eyewear given consumer emphasis on style/fit for both categories. Accordingly, we expect the gap between the two penetration rates to close as more consumers recognize the value proposition (i.e. time/money saved, brand selection, speed of delivery) inherent in online eyewear is akin to other retail categories. As a result, we believe there remains ample runway for growth in eyewear e-commerce penetration over the course of our forecast period. We believe KITS is uniquely positioned to be at the forefront of this change, given its well developed shipping infrastructure, its 100% online-only retail strategy, its wide offering of contact lenses, eyeglasses and sunglasses, and its strong relationships with a number of third-party suppliers and brands. Online vision test to allow for additional customer capture over time Over time, we believe the company’s proprietary vision test technology will further increase the company’s e-commerce total addressable market (TAM). In its current form, customers must have an existing prescription, which can be updated through the company’s online vision exam. We believe that consumer adoption of this tool will be slow initially, but as KITS builds up a recurring customer base, more consumers will gravitate to this offering, leveraging the technology offered by KITS and improving the company’s growth flywheel. We note customers who use KITS proprietary vision test have an average conversion rate of 44%, and we believe KITS is one of only a handful of online operators offering a vision tool. Aging population supports increased eyecare spending We believe KITS will benefit from the secular trend of an aging population in North We believe KITS will benefit from the America. As people age, the prevalence of visual refractive errors grows, increasing secular trend of an aging population the need for prescription eyewear. The population in the 65 years and older cohort in North America. has the highest incidence of visual refractive errors. Therefore, as the aging population demographics in both Canada and the US accelerate as the Baby Boomer cohort moves into the 55 years and above age category, we believe the need for eyecare products is set to accelerate. In Canada, the percentage of the population aged 55 years and above is projected to increase from 31.2% in 2018 to 36.6% by 2058.

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KITS Eyecare Ltd. Initiation of Coverage

Figure 7: Canadian population demographics

<55 55+

2008 74.4% 25.6%

2018 68.8% 31.2%

2028 66.3% 33.7%

2038 65.2% 34.8%

2048 63.9% 36.1%

2058 63.4% 36.6%

Source: Statistics Canada, Canaccord Genuity Similarly, in the US, according to data from the US Census Bureau, the number of Americans aged 65 or older is expected to double from 48 million in 2015 to 98 million by 2060, providing a similar secular tailwind to what we are witnessing in Canada. As a percentage of the population, the aged 65 and above cohort is expected to account for 24% of the US population in 2060, compared to 15% in 2015. More specifically, presbyopia, which is the inability to focus on nearby objects, impacts the majority of people over the age of 45, which leads to higher corrective eyewear sales to this demographic. As the population ages, we believe the need for corrective eyewear will increase, creating a strong secular tailwind for eyewear manufacturers and retailers such as KITS. Over time, on average 75% of the North American population will need some form of vision correction, providing a steady secular tailwind for KITS. Increased screen time leading to early needs for corrective eyewear More recently, school aged children and teenagers have experienced a growing incidence of myopia, or nearsightedness, which some believe is due to the increased usage of electronic products and more “screen time”, which may be damaging to vision at an earlier age. With screen time showing no signs of slowing, and in fact increasing as more people work virtually, we believe this will lead to corrective eyewear needs at an early age.

11 Buy Target Price C$17.00 | 7 February 2021 Consumer Products 11

KITS Eyecare Ltd. Initiation of Coverage

Opportunity to expand product set

Eyeglass sales expected to jump Looking ahead, KITS will be ramping During 2020, almost all of KITS revenue was driven by the sale of contact lenses, up its eyeglass production capacity, with only ~40,000 pairs of eyeglasses sold, which represented approximately 2% of which should allow the company to the company’s revenue. Looking ahead, KITS will be ramping up its eyeglass grow its number of eyeglasses sold production capacity, which should allow the company to grow its number of almost eight-fold to over 300,000 eyeglasses sold almost eight-fold to over 300,000 pairs in 2021. The company has a pairs in 2021. target of increasing its eyeglass revenue to 25-30% of consolidated sales over the medium term. This is a significant part of our growth thesis, as the North American eyeglass market is approximately five times bigger than the contact lens market. Furthermore, a key inflection point in the revenue growth at Coastal Contacts came right after the company introduced an eyeglass offering to complement its contact lens offering. We view the introduction of more meaningful eyeglass sales as a similar inflection point in KITS’ revenue growth algorithm. Over time, we expect eyeglasses will represent over one quarter of the company’s revenue. Currently, KITS has capacity within its owned factory to produce up to 2,000 eyeglasses per day. The company currently produces roughly 350 glasses per day as it looks to ramp eyeglass sales in 2021. At an average value of US$69, we calculate once fully ramped, this represents a revenue opportunity of over $50 million. Furthermore, on average, individuals with moderate to high annual incomes purchase a new pair of eyeglasses every 1.7 years. Given KITS’ value offering, we believe the company’s customers tend to have a quicker repurchase cycle than the market average.

Figure 8: Current eyeglass production capacity

Eyeglass capacity ($000s, excluding eyeglass price) Base eyeglass selling price (USD) $69 Selling price in CAD $88 Eyeglasses produced per day 2,000 Revenue per day 176 Production days per year 300 Annual revenue contribution $52,899

Source: Company Reports, Canaccord Genuity estimates While eyeglasses today make up only 2% of the company’s revenue, KITS intends to increase its production capacity fivefold over the next 24 months, with a goal of increasing its eyeglass revenue contribution to more than 25% over the medium term. We note when Coastal Contacts was sold in 2014, eyeglass sales accounted for ~24% or revenue, up from only 6% five years earlier. Eyeglass sales generate higher gross margins Furthermore, eyeglass sales tend to carry much higher margins than contact lens sales. On average, eyeglass sales generate gross margins in the 50-55% range, compared to contact lens sales, which generate gross margins of around 30%. Even today, as KITS is in the process of scaling its eyeglass business, the company is generating 40% gross margins on its eyeglass sales, and we expect this to trend

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KITS Eyecare Ltd. Initiation of Coverage

upwards as the company increases its processing capacity utilization. For context, we expect consolidated gross margin as a percentage of revenue to increase from 28.7% in 2021E to 35.8% in 2025E as eyeglasses mix increases to ~25% of KITS’ total revenues over the course of our forecast period. As KITS increases its exposure to eyeglass sales, and we expect a meaningful As KITS increases its exposure to increase in 2021, we believe consolidated gross margins at KITS will trend higher eyeglass sales, and we expect a over time. Furthermore, over 75% of the company’s current eyeglass sales are meaningful increase in 2021, we private label branded, providing another margin expansion opportunity for the believe consolidated gross margins company as it increases its eyeglass exposure. at KITS will trend higher over time. Figure 9: Brands available through Kits.ca

Source: Kits.ca

We assume KITS can generate a 20% EBITDA margin from eyeglass sales, driven by the roughly 40% gross margins achieved on eyeglass sales and holding other expense ratios constant. This maps to an over $10 million EBITDA opportunity once production is ramped to 2,000 units per day, and clearly much higher as the company adds production capacity to 10,000 units per day.

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KITS Eyecare Ltd. Initiation of Coverage

Figure 10: Eyeglass mix as a percentage of revenue

35% 35% 32%

21%

2020E 2021E 2022E 2023E 2024E

Source: Company Reports, Canaccord Genuity estimates

Figure 11: Consolidated gross margin forecast

34.8% 35.6% 32.4% 29.8% 28.7%

2020E 2021E 2022E 2023E 2024E

Source: Company Reports, Canaccord Genuity estimates

Daily disposable lenses taking market share One notable trend within the contact lens market over the last decade has been the increasing shift towards disposable contact lenses, more specifically, daily disposable lenses. Daily disposables now account for 46% of the North American contact lens market, or roughly $2.7 billion, up from 12% share in 2009, and are expected to grow at a 9% CAGR to 2025, and account for 55% of the market, or $3.4 billion. We believe the convenience factor of not having to sterilize these lenses after each use has led to increasing consumer demand. Furthermore, daily disposables lend

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KITS Eyecare Ltd. Initiation of Coverage

themselves well to a subscription replenishment model, which KITS recently launched and should help drive a more recurring revenue stream. Geographic expansion likely over the medium term Today, approximately 80% of KITS revenue is derived from the US, with the remaining 20% coming from Canada. As the company ramps up its production facility capacity from 2,000 glasses per day to 10,000 glasses per day, we believe this will allow KITS to look towards further international expansion. Impressive customer return metrics leave KITS well positioned to scale In our view, some of the keys to success for KITS have been the company’s ability to offer (1) same-day shipping on most products; (2) a robust selection of brands, including its own private label offering; and (3) a better value offering than many of its peers. While intuitively the combination of these three factors may lead investors to question how the company can be profitable, we believe the answer lies in the company’s low customer acquisition cost, coupled with its high average lifetime value per customer. To date, the bulk of KITS marketing efforts have been focused on word-of-mouth advertising, and some social media fanfare. Yet, despite this minimal advertising effort, the company has witnessed robust revenue and new customer growth of 68% and 80%, respectively, YoY during Q3/20. This has culminated in 2020E revenue of $74 million, and over 600,000 customers as of the end of Q3/20. Impressively, KITS customer acquisition cost (CAC) equates to only $40 per new customers, which we compute by dividing the company’s marketing spend by new customer additions.

With an average order value of over $100, we believe there is good visibility into the operating leverage available to KITS as the company is able to scale up its customer The average 5-year lifetime over base. Furthermore, the average 5-year lifetime order value per repeat customer is value per repeat customer is over over $600, which generates a robust 15x LTV/CAC ratio. If we assume 69% of $600, which generates a robust 15x customers shop at KITS more than once, we derive an overall lifetime value of LTV/CAC ratio. ~$450 per customer, including one time only customers.

Put another way, we calculate KITS is able to generate a 191% ROI on new customers using the company’s current margin structure on CAC, both of which we estimate are conservative, particularly as KITS increases its exposure to higher margin eyeglass sales. Or, looking solely one year out, and fully accounting for the CAC in year one, we calculate a two-year payback period for each new KITS customer, with an average customer life today exceeding five years.

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KITS Eyecare Ltd. Initiation of Coverage

Figure 12: Customer return economics

Customer return economics Customer return economics (per customer) (per customer) Lifetime value 450 First time order 120 Gross margin 27% Gross margin 27% Gross profit dollars 121.5 Gross profit dollars 32.4 G&A margin 10% G&A margin 10% G&A cost 45 G&A cost 12 EBITDA ex CAC 77 EBITDA ex CAC 20

Customer acquisition cost 40 Customer acquisition cost 40

Customer lifetime ROI 191% Customer first year ROI 51% Source: Company Reports, Canaccord Genuity estimates

Getting more out of each customer KITS had an active customer base of roughly 600,000 customers, up 20% YoY. Active customers are defined as individuals who have made at least one purchase over the last four years. More importantly, in our view, is the fact that repeat customers accounted for 69% of KITS revenue in 2019, demonstrating the strength of the value proposition, and the consumer acceptance of online eyecare. Furthermore, approximately 35% of revenue is driven by customers who have made more than five purchases from KITS. In our view, this is a healthy endorsement of the positive consumer perception of KITS once customers are introduced to the company’s offering. As customers become more familiar with the KITS offering, over time they tend to gravitate towards KITS private label offering, which generate higher margins for the company than third-party brands. Meanwhile, new customer additions in 2019 and 2020 have generated on average a higher initial average spend than customers added in 2015-2018, which should lead to a higher lifetime value per customer over time. Finally, we believe as KITS expands its eyeglass offering and production, the company will be able to focus on cross-selling eyeglass products to its contact lens customers, further leveraging its existing loyal customer base.

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KITS Eyecare Ltd. Initiation of Coverage

Figure 13: Customer purchase behaviour

2019 customer purchase behaviour

35% 31%

11% 23%

New customer 2nd purchase 3rd-5th purchase 6th or greater purchase

Source: Company Reports Currently, 63% of the company’s customer base is female, with almost 50% being in the 25-45 year old category, a highly targeted demographic across almost all of retail. In our view, the company’s focus on this demographic lends well to the company’s value eyeglass offering, as typically this demographic owns more than one pair of eyeglasses. We believe this target customer demographic will be receptive to an increasing eyeglass offering, both private label and third party from KITS.

Figure 14: Customer demographic profile

30%

19% 16% 13% 13%

18-24 25-34 35-44 45-54 55-65 65+

Source: KITS December 2020 investor presentation

Subscription program leads to recurring revenue In February 2020, KITS introduced its Autoship subscription program, centered around the company’s contact lens offering. Through this program, customers can sign up for automatic contact lens shipments at predetermined intervals. Though in

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KITS Eyecare Ltd. Initiation of Coverage

its infancy, the program has had strong uptake thus far, with roughly 10% of contact lens customers opting into the program. Management has a goal of increasing this penetration to over 25%. Given the convenience factor behind this offering and the increasing usage of daily contact lenses, we believe the Autoship program will provide KITS with a high margin stream of recurring revenue going forward.

Figure 15: Net Autoship subscriber growth

Source: KITS December 2020 investor presentation

Competition

KITS operates in the highly fragmented North American eyecare market, where KITS operates in the highly 51% of the market consists of independent eyecare retailers, the vast majority of fragmented North American eyecare which do not have a defined e-commerce strategy. The remainder of the market market, where 51% of the market consists of a number of larger brick and mortar mass retailers, such as Costco and consists of independent eyecare Wal-Mart and pharmacy players, eyecare-focused retailers such as LensCrafters and retailers, the vast majority of which National Vision, and online-focused players such as Warby Parker and Clearly do not have a defined e-commerce Contacts. strategy While the market does have a number of well-known eyewear retailers, we believe KITS 100% online offering, product selection in both the contact lens and eyeglass categories, and processing and shipping infrastructure act as key differentiating factors compared to its peers. The company has a well defined and growing customer base, and we believe as KITS adds scale, the KITS brand will become a destination brand for consumers looking for high-quality eyewear at a reasonable price.

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KITS Eyecare Ltd. Initiation of Coverage

Financial analysis and outlook

Increased e-commerce penetration and eyeglass sales to drive top line We believe KITS will benefit from a number of previously defined tailwinds over the course of our forecast period, the most important of which, in our view, is continued consumer adoption of e-commerce eyewear sales. We believe the COVID-19 pandemic has increased the propensity of many consumers to alter their shopping behaviour and embrace e-commerce retail to a greater extent than pre-COVID. This helped drive an expected 34% increase in eyewear e-commerce penetration to 12.6% in 2020 from 9.4% in 2019. However, while the growth is impressive, e- commerce eyewear penetration remains only one-third of that of other discretionary retail categories such as apparel and footwear. We believe the market is ripe for disruption and believe we are on the precipice of what will be secular growth in e- commerce eyewear sales.

Furthermore, looking at KITS specifically, the company will be materially expanding We believe KITS will be able to grow its exposure to eyeglass sales during 2020, as it ramps up its internal production of eyeglass products. We believe KITS will be able to grow its eyeglass sales from its eyeglass sales from approximately 40,000 pairs in 2020, to 300,000 pairs in 2021, an approximate 7.5x approximately 40,000 pairs in 2020, increase YoY. This, in turn, should help drive incremental revenue growth for KITS, to 300,000 pairs in 2021, an well above the general e-commerce eyewear market. As a result, we are forecasting approximate 7.5x increase YoY. revenue to grow 55% YoY in 2021 to $116 million, and 40% YoY in 2022 to $162

million.

Figure 16: Annual revenue estimates (C$M)

$242.8

$204.7

$162.2

$116.2

$74.9

2020E 2021E 2022E 2023E 2024E

Source: Company Reports, Canaccord Genuity estimates

Gross margin expansion led by higher eyeglass exposure As KITS increases its exposure to eyeglass sales, which generate higher margins compared to contact lens sales, combined with a higher proportion of private label sales, and the positive impact of revenue scaling, we expect gross margins will move higher in the near and medium term. That said, we expect a modest decrease in 2021 as KITS employs first-order incentives to acquire new customers. We are forecasting gross profit as a percentage of revenue to come in at 29.8% for 2020, before slightly dipping to 28.7% in 2021 and subsequently increasing to 32.4% in 2022.

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KITS Eyecare Ltd. Initiation of Coverage

Figure 17: Annual gross margin estimates

34.8% 35.6% 32.4% 29.8% 28.7%

2020E 2021E 2022E 2023E 2024E

Source: Company Reports, Canaccord Genuity estimates

Expecting a step-up in marketing and G&A expense to drive brand awareness Historically, the vast majority of KITS marketing has consisted of “word of mouth” advertising and a very modest marketing budget. Heading into 2021, following the receipt of proceeds from the company’s IPO, we believe KITS will increase its marketing budget, helping drive greater brand awareness and, in turn, revenue growth going forward. Therefore, we are forecasting marketing as a percentage of revenue to rise to 13% in 2021 from 8.6% in 2019. We expect this, coupled with an increase in G&A expense due to increased public company costs, to lead to our adjusted EBITDA margin forecasts declining from our 8.1% estimate for 2020 to 5.2% in 2021. We are forecasting EBITDA of $6 million in 2021, growing to $17 million in 2022, representing EBITDA margins of 5.2% and 10.4%, respectively.

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KITS Eyecare Ltd. Initiation of Coverage

Figure 18: Annual EBITDA and margin estimates (C$M)

$50.0 $46.4 25.0% $45.0 19.1% 20.0% $40.0 15.3% 15.0% $35.0 $31.2 10.4% $30.0 8.1% 10.0% $25.0 5.2% 5.0% $20.0 $16.9

$15.0 0.0% $10.0 $6.1 $6.1 (5.0%) $5.0

$- (10.0%) 2020E 2021E 2022E 2023E 2024E

Source: Company Reports, Canaccord Genuity estimates

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KITS Eyecare Ltd. Initiation of Coverage

Figure 19: Income statement summary KITS Eyecare Ltd. Income Statement (C$000s) Change Change Change Year ended Dec 31 2019 2020E 2021E 2022E 20/19 21/20 22/21

Revenue 36,897 74,934 116,156 162,236 103.1% 55.0% 39.7% COGS 26,085 52,622 82,769 109,688 101.7% 57.3% 32.5% Gross profit 10,812 22,312 33,387 52,549 106.4% 49.6% 57.4%

Fulfillment 2,717 7,574 8,131 10,545 178.8% 7.4% 29.7% Marketing 3,168 6,970 15,100 19,468 120.0% 116.6% 28.9% G&A 1,581 2,573 5,808 8,112 62.7% 125.7% 39.7% D&A 1,327 2,013 3,066 4,559 51.7% 52.3% 48.7% Other expenses 108 484 1,162 1,622 348.1% 140.0% 39.7% EBIT 1,911 2,698 120 8,242 Add: D&A 0 2,013 3,066 4,559 n.a. 52.3% 48.7% SBC 0 854 2,904 4,056 n.a. 240.0% 39.7% One-time costs 0 513 0 0 n.a. n.a. n.a. Adjusted EBITDA 3,643 6,078 6,090 16,857 66.8% 0.2% 176.8%

Finance (income)/costs, net 1,821 2,555 2,904 4,056

EBT 90 143 -2,784 4,186

Income tax provision 37 546 -738 1,109

Net earnings 53 -403 -2,046 3,077

Basic EPS $0.02 ($0.10) ($0.07) $0.10 Diluted EPS $0.02 ($0.10) ($0.07) $0.10

Basic shares outstanding (mm) 4.0 4.0 31.0 31.0 Diluted shares outstanding (mm) 10.0 4.0 31.0 31.0

Ratios Gross margin 29.3% 29.8% 28.7% 32.4% SG&A / revenue 20.2% 22.8% 25.0% 23.5% Effective tax rate 41.1% 381.3% 26.5% 26.5% EBITDA margin 9.9% 8.1% 5.2% 10.4% EBIT margin 5.2% 3.6% 0.1% 5.1% Profit margin 0.1% -0.5% -1.8% 1.9% Source: Company Reports, Canaccord Genuity estimates

Free cash flow Looking to 2021, we expect free cash flow generation from KITS to be relatively muted, as we view 2021 as more of an investment year. The company intends to spend ~$15 million in capex to expand its processing infrastructure in British Columbia. KITS will be adding two surfacing lines, and two edging lines to its Richmond facility, which will allow the company to add more sophisticated lens processing (for items like photochromatic and blue-light filtering lenses) to its in- house capabilities.

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KITS Eyecare Ltd. Initiation of Coverage

However, looking ahead to 2022, as KITS continues to increase its customer base and product set, coupled with the heavier investments in capex being completed in 2021, we are forecasting free cash flow of $15 million, which represents an impressive EBITDA/free cash flow conversion of 88%.

Figure 20: Cash flow analysis Cash flow analysis 2019 2020E 2021E 2022E Cash flow from operations 3,369 2,758 6,828 15,747 Cash from operating activities 4,146 1,811 7,694 16,794 Capital expenditures, net -993 -166 -15,000 -2,000 Free cash flow 2,376 2,592 -8,172 13,747 Free cash flow (inc. wc) 3,153 1,645 -7,306 14,794 Cash flow from operations per share 0.34 0.69 0.22 0.51 Cash flow from operating activities per share 0.41 0.45 0.25 0.54 Free cash flow per share (exc. wc) 0.24 0.65 -0.26 0.44 Free cash flow per share (inc wc) 0.32 0.41 -0.24 0.48 Source: Company Reports, Canaccord Genuity estimates

Flexible balance sheet position After receiving ~$59 million of net proceeds from the IPO, including our estimate of corporate finance related expenses, KITS will have a healthy balance sheet. We calculate the company will finish Q1/21 with a net cash position of $37 million after paying off a portion of its outstanding debt. We expect the company to use the proceeds of the IPO to fund capital expansion related to its optical lab in Richmond and for incremental marketing expenses. Valuation

We are initiating coverage of KITS with a BUY rating and $17.00 target price. Our target represents 3.0x our 2022E revenue estimate of $162 million, and 29.1x our 2022E EBITDA estimate of $17 million. While there are no perfect public comparable companies to KITS, we believe that the broader eyewear retail peer set is an appropriate barometer, with the group trading at an average of 2.9x 2022E sales. We note our target multiple, which we view as conservative given it is in line with peers, implies a 107% return from current levels. In our view, KITS should trade at a premium to these peers, given its earlier stage in the growth cycle, higher expected revenue growth, healthy balance sheet, and strong management team. Comparable valuations We believe KITS deserves to trade at a premium to the broader eyecare retail peer set, due to the company’s higher growth rate, strong management team, and healthy balance sheet. Furthermore, the company’s focus on e-commerce only sales should command a higher multiple than brick-and-mortar peers, in our view, particularly in the challenging brick-and-mortar COVID-19 environment. Figure 21: Comparable valuations

Share and Earnings Information By Company Shrs Market Book Enterprise Value / Enterprise Value / Price O/S Cap. P/E Ratios Value/ Price/ Net Debt/ EBITDA/Revenue EBITDA Ratios Revenue Ratios Company Name TK 2021-02-05 (mln) (mln) LFY FY1 FY2 FY3 Share Book EBITDA LFY FY1 FY2 FY3 LFY FY1 FY2 FY3 LFY FY1 FY2 FY3

Optical retailers Cooper Companies, Inc. COO $386.30 49.1 $18,984 80.4 30.7 27.4 24.7 $77.89 5.0 2.2 25.7% 32.5% 33.7% 31.9% 33.5 23.2 21.1 20.7 8.6 7.6 7.1 6.6 EssilorLuxottica SA EL-FR $128.75 439.0 $56,521 51.9 70.7 31.5 26.6 n.m. n.m. 1.7 24.2% 16.5% 23.2% 24.5% 14.4 25.3 15.4 13.8 3.5 4.2 3.6 3.4 Fielmann AG FIE-DE $71.30 84.0 $5,989 34.8 54.1 33.0 30.8 $9.49 7.5 0.0 24.1% 21.1% 24.6% 24.8% 16.3 19.9 14.8 13.9 3.9 4.2 3.6 3.5 GrandVision NV GVNV-NL $25.40 254.4 $6,463 36.1 n.a. 30.3 25.6 n.m. n.m. 3.1 23.7% 19.7% 21.3% 22.0% 9.0 12.5 10.3 9.5 2.1 2.5 2.2 2.1 National Vision Holdings, Inc. GVNV-NL $49.03 81.0 $3,972 n.a. 88.4 55.7 45.6 $10.68 4.6 3.7 10.1% 10.4% 11.3% 11.4% 26.7 26.4 20.9 19.1 2.7 2.7 2.4 2.2 New Look Vision Group Inc. ClassBCI-CA A $34.20 15.7 $536 28.5 35.1 18.1 20.4 $9.22 3.7 4.0 17.5% 25.7% 26.6% 27.1% 15.4 11.9 9.2 8.4 2.7 3.1 2.5 2.3 Safilo Group S.p.A. SFL-IT $0.97 275.7 $266 n.a. n.a. n.a. n.a. n.m. n.m. n.a. 6.4% n.a. 3.2% 6.1% 5.7 n.a. 13.3 6.6 0.4 0.4 0.4 0.4 Group average 46.3 55.8 32.6 28.9 5.2 2.4 18.8% 21.0% 20.6% 21.1% 17.3 19.9 15.0 13.1 3.4 3.5 3.1 2.9

Kits Eyecare Ltd. KITS-CA $8.20 31.0 $254 n.a. n.a. n.a. n.a. $1.10 7.4 0.0 9.9% 8.1% 5.2% 10.4% 59.7 35.8 35.7 12.9 5.9 2.9 1.9 1.3 Source: FactSet, Company Reports, Canaccord Genuity estimates

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KITS Eyecare Ltd. Initiation of Coverage

Taking a look at Warby Parker In our view, one of the most relevant peers is private omni-channel eyewear retailer Warby Parker. The company, which was founded 10 years ago and sells both eyeglasses and sunglasses online and through a growing network of over 125 brick- and-mortar locations, is perhaps the best known online eyecare retailer. In August 2020, the company completed a private US$245 million funding round, which valued Warby Parker at US$3.0 billion. Industry contacts have suggested to us that Warby Parker will generate sales of US$400 million in 2020. If we apply a 50% growth rate to that, we arrive at US$600 million of revenue the 2021, which equates to a 2021 EV/Sales metric of 5.0x. While we are not arguing that KITS has the same amount of brand power as Warby Parker today, the company is competing in a similar pocket of the online eyecare market. KITS today has a broader product set offering, albeit with a less recognizable house brand. That being said, we believe the implied valuation for Warby Parker is helpful in guiding us to our target multiple of 3.0x 2022 EV/Sales for KITS. Free cash flow While 2021 will be an investment year for KITS, as it increases capacity and adds surfacing and edging lines to its Richmond optical lab, looking forward given the asset-light nature of the company’s operations, KITS should have a strong EBITDA to free cash flow conversion ratio. The company’s e-commerce focus, and lack of capital intensive brick-and-mortar infrastructure should lead to EBITDA-to-FCF conversion of ~88% in 2022. Historical valuation of peers Given the relatively limited trading period of KITS thus far, we elected to analyse the historical valuation of the company’s eyecare retail peers. When comparing KITS current 1.3x EV/2022 revenue valuation to peers’ 2.9x, we believe the shares look inexpensive. Meanwhile, KITS currently trades at or slightly above the high end of its peers peak EV/2022 EBITDA range, as KITS is ramping up its EBITDA margins as it continues to generate robust top-line growth.

Figure 22: Peer historical valuations - FY+2 EV/Revenue

3.3x Max = 3.2x

3.1x

2.9x Avg = 2.7x

2.7x

2.5x

2.3x

2.1x

1.9x Min = 2.2x

1.7x

1.5x Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

Source: FactSet

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KITS Eyecare Ltd. Initiation of Coverage

Figure 23: Peer historical valuations - FY+2 EV/EBITDA

15.0x Max = 14.3x

14.0x Avg = 12.4x 13.0x

12.0x

11.0x

10.0x

9.0x Min = 9.8x

8.0x Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

Source: FactSet

Discounted cash flow valuation In deriving our discounted cash flow valuation for KITS, we assigned a terminal growth rate of 2.0% and a WACC of 7.0%, which results in a discounted cash flow value per share of $17.40.

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KITS Eyecare Ltd. Initiation of Coverage

Figure 24: Discounted cash flow Free cash flow DCF ($000s)

2021E 2022E 2023E 2024E 2025E

EBIT 120 8,242 22,131 36,814 44,308 Less: cash taxes -32 -2,184 -5,865 -9,756 -11,742 Add: D&A 3,066 4,559 3,998 3,560 3,218 Add/(less): NWC changes 866 1,047 849 907 1,015 Less: capex -15,000 -2,000 -2,000 -2,000 -2,000

Free cash flow to firm -10,979 9,663 19,113 29,524 34,800

Terminal value growth rate Sum of PV of FCF 44,093 Terminal Value 508,990 92.0% $17.40 1.0% 1.5% 2.0% 2.5% 3.0% Total PV 553,083 5.0% 23.30 26.63 31.06 37.27 46.59 Less: Debt to be repaid 13,564 5.5% 20.36 22.89 26.15 30.50 36.60 PV of cash flows to shareholders 539,519 6.0% 18.02 20.00 22.49 25.69 29.96 W Shares Outstanding 31,000 6.5% 16.11 17.71 19.66 22.10 25.24 A WACC 7.0% 7.0% 14.53 15.84 17.40 19.32 21.72 C DCF per share $17.40 7.5% 13.20 14.29 15.57 17.11 18.99 C 8.0% 12.07 12.98 14.05 15.31 16.82 8.5% 11.10 11.87 12.77 13.82 15.05 Long-term growth rate 2.0% 9.0% 10.25 10.92 11.68 12.56 13.59

Cost of Equity Government of Canada 10 yr bond 0.5% Market Risk Premium 10.0% Beta 1.50 Total Cost of Equity 15.45%

Cost of Debt 8.0% Tax Rate 26.5% After Tax Cost of Debt 5.9%

Weighting Assumptions Equity 11.6% Debt 88.4%

WACC 7.0% Source: Company Reports, Canaccord Genuity estimates

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KITS Eyecare Ltd. Initiation of Coverage

Key risks to our investment thesis

Operate in a highly competitive industry The eyecare industry is highly fragmented, yet highly competitive. Key competitors to KITS include optical chains, mass market and general retailers, pharmacies, online retailers, and independent eyewear chains. As a result, customers have a wide range of options when choosing where to shop for eyecare products. We believe the high quality, reasonable value, and convenience of KITS online platform has allowed the company to succeed in what is and will remain a highly competitive environment. Maintaining strong relationships with key private label and third-party suppliers We believe a competitive advantage for KITS is its long-term relationships with suppliers for both its private label and third-party products. The company has established healthy relationships with lens and frames manufacturers both domestically and overseas, which allows for access to third-party brands, as well as the latest trends and technology to be used by KITS in its own private label offering. The loss of any of these relationships would be challenging to the company going forward. Ability to procure raw materials KITS relies on a small number of contact lens and eyeglass frames suppliers, some of which compete with KITS by selling directly to their own customer base. In the event that a supplier refuses to sell to KITS, or experiences supply chain disruption, this could negatively impact KITS’ ability to source and sell products to its end users. Changing consumer preferences KITS success hinges on its ability to capitalize and adapt to changing consumer preferences. The company’s eyeglass business carries a form of fashion risk, particularly given its focus on the female aged 25-45 demographic. The company must remain able to adapt to changing consumer preference trends or else may be left with excess inventory and reduced brand loyalty. Potential for unexpected management departures We believe the core management team at KITS is viewed as critical to the success of the business, given the team’s expertise in the eyecare industry, the online commerce industry, and the financial and capital markets. The departure of key executives could negatively impact the company’s growth profile. That said, with insiders owning 74.1% of the shares outstanding, we believe management and shareholders are well aligned.

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KITS Eyecare Ltd. Initiation of Coverage

Management team

Roger Hardy, Chief Executive Officer & Chairman (9,216,414 shares, 29%) Mr. Hardy has served as CEO and Chairman of KITS since 2018. He was previously founder and CEO of Coastal Contacts, which was ultimately sold to Essilor in 2014. Mr. Hardy was awarded Ernst & Young Entrepreneur of the Year in 2006. Mr. Hardy currently serves on the Board of Directors for Bishop’s University Foundation. Sabrina Liak, Chief Financial Officer & Director (3,940,256 shares, 13%) Ms. Liak has served as a Co-Founder and CFO of KITS since 2018. Previously, Ms. Liak was a private equity Portfolio Manager at Goldman Sachs Investment Partners, where she also served on the Private Investment Committee and on the Physical Commodity Review Committee. Arshil Abdulla, Chief Technology Officer & Director (4,801,765 shares, 15%) Mr. Abdulla currently serves at CTO of KITS. Prior to joining the company, Mr. Abdulla was CEO and Founder of LD Vision Group, an online retailer of contact lenses which he founded in 2002 and was purchased by KITS in 2019. Mr. Abdulla oversees all aspects of the company’s technology offering. Joseph Thompson, Chief Operating Officer (205,542 shares held, 1%) Mr. Thompson oversees all operational functions for KITS, including supply chain, fulfillment, optical lab operations etc. Previously Mr. Thompson was General Manager of Retail at Amazon, where he managed a multi-billion-dollar division. Prior to that, Mr. Thompson spent 14 years with Procter & Gamble and Gillette. Board of Directors

Ted Goldthorpe Mr. Goldthorpe serves as Lead Director and Chair of the Nominating and Corporate Governance Committee. Mr. Goldthorpe also serves as the Managing Partner responsible for the Global Credit Business for BC Partners Lending Corporation since February 2017, and also serves on the board of directors of Crescent Point Energy Corp. Nick Bozikis Mr. Bozikis serves as the Chair of the Audit Committee. Previously, Mr. Bozikis was the CFO at Coastal prior to its acquisition by Essilor in 2014. He also held senior level finance roles in other direct-to-consumer retail businesses such as Lush Handmade Cosmetics and Shoes.com. Peter Lee Mr. Lee has over 20 years of experience at both small, hyper-growth focused companies and large global leaders. He served as Senior Directors, Engineering/Data Center Ops at Oracle Corporation, Director of IT at Netflix, Inc., and CEO of Lensway AB, one of Europe’s largest eyewear e-commerce companies. Anne Kavanagh Ms. Kavanagh is Chair of the Compensation Committee. She also has over 20 years of investment banking experience, holding titles such as the Head of Healthcare Investment Banking at Pain Webber, Co-Head of Healthcare Investment Banking at Salomon Brothers, and Executive Vice President and Drexel Burnham Lambert. She was also on the board of Privé Reveaux, leading the board’s review of the company’s sale to Safilo.

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KITS Eyecare Ltd. Initiation of Coverage

Appendix: Important Disclosures

Analyst Certification Each authoring analyst of Canaccord Genuity whose name appears on the front page of this research hereby certifies that (i) the recommendations and opinions expressed in this research accurately reflect the authoring analyst’s personal, independent and objective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoring analyst’s coverage universe and (ii) no part of the authoring analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the authoring analyst in the research, and (iii) to the best of the authoring analyst’s knowledge, she/he is not in receipt of material non-public information about the issuer. Analysts employed outside the US are not registered as research analysts with FINRA. These analysts may not be associated persons of Canaccord Genuity LLC and therefore may not be subject to the FINRA Rule 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Sector Coverage Individuals identified as “Sector Coverage” cover a subject company’s industry in the identified jurisdiction, but are not authoring analysts of the report.

Investment Recommendation Date and time of first dissemination: February 07, 2021, 15:30 ET Date and time of production: February 05, 2021, 14:49 ET Target Price / Valuation Methodology: KITS Eyecare Ltd. - KITS Our $17.00 target represents 3.0x our 2022E revenue estimate of $162 million. Risks to achieving Target Price / Valuation: KITS Eyecare Ltd. - KITS Operate in a highly competitive industry The eyecare industry is highly fragmented, yet highly competitive. Key competitors to KITS include optical chains, mass market and general retailers, pharmacies, online retailers, and independent eyewear chains. As a result, customers have a wide range of options when choosing where to shop for eyecare products. We believe the high quality, reasonable value, and convenience of KITS online platform has allowed the company to succeed in what is and will remain a highly competitive environment. Maintaining strong relationships with key private label and third-party suppliers We believe a competitive advantage for KITS is its long-term relationships with suppliers for both its private label and third-party products. The company has established healthy relationships with lens and frames manufacturers both domestically and overseas, which allows for access to third-party brands, as well as the latest trends and technology to be used by KITS in its own private label offering. The loss of any of these relationships would be challenging to the company going forward. Ability to procure raw materials KITS relies on a small number of contact lens and eyeglass frames suppliers, some of which compete with KITS by selling directly to their own customer base. In the event that a supplier refuses to sell to KITS, or experiences supply chain disruption, this could negatively impact KITS' ability to source and sell products to its end users. Changing consumer preferences KITS success hinges on its ability to capitalize and adapt to changing consumer preferences. The company’s eyeglass business carries a form of fashion risk, particularly given its focus on the female aged 25-45 demographic. The company must remain able to adapt to changing consumer preference trends or else may be left with excess inventory and reduced brand loyalty. Potential for unexpected management departures We believe the core management team at KITS is viewed as critical to the success of the business, given the team’s expertise in the eyecare industry, the online commerce industry, and the financial and capital markets. The departure of key executives could negatively impact the company’s growth profile. That said, with insiders owning 74.1% of the shares outstanding, we believe management and shareholders are well aligned.

Buy Target Price C$17.00 | 7 February 2021 Consumer Products 29 KITS Eyecare Ltd. Initiation of Coverage

Distribution of Ratings: Global Stock Ratings (as of 02/07/21) Rating Coverage Universe IB Clients # % % Buy 574 63.36% 59.58% Hold 168 18.54% 42.26% Sell 11 1.21% 27.27% Speculative Buy 135 14.90% 80.00% 906* 100.0% *Total includes stocks that are Under Review

Canaccord Genuity Ratings System BUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months. HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months. SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months. NOT RATED: Canaccord Genuity does not provide research coverage of the relevant issuer. “Risk-adjusted return” refers to the expected return in relation to the amount of risk associated with the designated investment or the relevant issuer. Risk Qualiﬁer SPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental criteria. Investments in the stock may result in material loss. 12-Month Recommendation History (as of date same as the Global Stock Ratings table) A list of all the recommendations on any issuer under coverage that was disseminated during the preceding 12-month period may be obtained at the following website (provided as a hyperlink if this report is being read electronically) http://disclosures- mar.canaccordgenuity.com/EN/Pages/default.aspx

Required Company-Specific Disclosures (as of date of this publication) KITS Eyecare Ltd. currently is, or in the past 12 months was, a client of Canaccord Genuity or its affiliated companies. During this period, Canaccord Genuity or its affiliated companies provided investment banking services to KITS Eyecare Ltd.. In the past 12 months, Canaccord Genuity or its affiliated companies have received compensation for Investment Banking services from KITS Eyecare Ltd. . In the past 12 months, Canaccord Genuity or any of its affiliated companies have been lead manager, co-lead manager or co- manager of a public offering of securities of KITS Eyecare Ltd. or any publicly disclosed offer of securities of KITS Eyecare Ltd. or in any related derivatives. Canaccord Genuity or one or more of its affiliated companies intend to seek or expect to receive compensation for Investment Banking services from KITS Eyecare Ltd. in the next three months.

KITS Eyecare Ltd. Rating History as of 02/04/2021 C$9.50

C$9.00

C$8.50

C$8.00

C$7.50 Apr 16Jul 16 Oct 16Jan 17Apr 17 Jul 17 Oct 17Jan 18Apr 18 Jul 18 Oct 18Jan 19Apr 19 Jul 19 Oct 19Jan 20Apr 20 Jul 20 Oct 20Jan 21

Closing Price Price Target

Buy (B); Speculative Buy (SB); Sell (S); Hold (H); Suspended (SU); Under Review (UR); Restricted (RE); Not Rated (NR)

Required Company-Specific Disclosures (as of date of this publication) Past performance

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Buy Target Price C$17.00 | 7 February 2021 Consumer Products 31 KITS Eyecare Ltd. Initiation of Coverage

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Buy Target Price C$17.00 | 7 February 2021 Consumer Products 32 KITS Eyecare Ltd. Initiation of Coverage

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