Root
Annual Report 2023

Plain-text annual report

Fiscal Year 2023 Report 53-Week period ended February 3, 2024 ROOTS CORPORATION MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Fiscal Year Ended February 3, 2024) The following Management’s Discussion and Analysis (“MD&A”) dated April 9, 2024 is intended to assist readers in understanding the business environment, strategies and performance and risk factors of Roots Corporation (together with its consolidated subsidiaries, referred to herein as “Roots”, the “Company”, “us”, “we” or “our”). This MD&A provides the reader with a view and analysis, from the perspective of management, of the Company’s financial results for the fourth quarter and the fiscal year ended February 3, 2024. This MD&A should be read in conjunction with our audited consolidated financial statements for the fiscal year ended February 3, 2024, including the related notes thereto (the “Annual Financial Statements”). BASIS OF PRESENTATION Our Annual Financial Statements have been prepared in accordance with IFRS Accounting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”), using the accounting policies described therein. All amounts are presented in thousands of Canadian dollars, unless otherwise indicated. All references in this MD&A to “Q4 2023” are to our fiscal quarter for the 14-week period ended February 3, 2024, and all references to “Q4 2023” are to our fiscal quarter for the 13-week period ended January 28, 2023. All references in this MD&A to “F2023” are to the 53-week fiscal year ended February 3, 2024, “F2022” are to the 52-week fiscal year ended January 28, 2023, and “F2021” are to the 52-week fiscal year ended January 29, 2022. The Annual Financial Statements and this MD&A were reviewed by our Audit Committee and approved by our Board of Directors (the “Board”) on April 9, 2024. Certain totals, subtotals, and percentages throughout this MD&A may not reconcile due to rounding. 2 CAUTIONARY NOTE REGARDING NON-IFRS MEASURES AND INDUSTRY METRICS This MD&A makes reference to certain non-IFRS measures including certain metrics specific to the industry in which we operate. These measures are not recognized measures under IFRS, do not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing a further understanding of our results of operations from management’s perspective. Accordingly, these measures are not intended to represent, and should not be considered as alternatives to, net income or other performance measures derived in accordance with IFRS as measures of operating performance or operating cash flows or as a measure of liquidity. In addition to our results determined in accordance with IFRS, we use non-IFRS measures including “Adjusted DTC Gross Profit”, “Adjusted DTC Gross Margin”, “EBITDA”, “Adjusted EBITDA”, “Adjusted Net Income”, and “Adjusted Net Income per Share”. This MD&A also refers to “Comparable Sales Growth (Decline)”, a commonly used metric in our industry but that may be calculated differently compared to other companies. We believe these non-IFRS measures and industry metrics provide useful information to both management and investors in measuring our financial performance and condition and highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS measures. Management also uses non-IFRS measures to exclude the impact of certain expenses and income that management does not believe reflect the Company’s underlying operating performance and that make comparisons of underlying financial performance between periods difficult. Management also uses non-IFRS measures 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. We may exclude additional items, from time to time, if we believe doing so would result in a more effective analysis of our underlying operating performance. “Adjusted DTC Gross Profit” is a non-IFRS measure and is defined as gross profit in our direct- to-consumer (“DTC”) segment, adjusted for the impact of non-cash provisions on inventory that are no longer aligned with our strategic product direction and other non-cash items and/or items that are non-recurring, infrequent, or unusual in nature and would make comparisons of underlying financial performance between periods difficult. The IFRS measurement most directly comparable to Adjusted DTC Gross Profit is gross profit for the DTC segment. “Adjusted DTC Gross Margin” is a non-IFRS ratio and is defined as Adjusted DTC Gross Profit, divided by sales in our DTC segment. “EBITDA” is a non-IFRS measure and is defined as net income before interest expense, income taxes expense and depreciation and amortization. The IFRS measurement most directly comparable to EBITDA is net income. “Adjusted EBITDA” is a non-IFRS measure and is defined as EBITDA, adjusted for the impact of certain items, including share-based compensation expense, asset impairment expense, purchase price accounting adjustments, executive recruitment and severance costs, legal costs outside the normal course of operations, provisions on inventory no longer aligned with our strategic product direction, and other non-cash items and/or items that are non-recurring, infrequent, or unusual in nature and would make comparisons of underlying financial performance between periods difficult. Adjusted EBITDA also excludes the impact of IFRS 16 – Leases (“IFRS 16”) and includes rent expense, a significant expense for our corporate retail stores. We believe that Adjusted EBITDA is useful, to both management and investors, in assessing the underlying performance of our ongoing operations and our ability to generate cash flows to fund our cash 3 requirement. The IFRS measurement most directly comparable to Adjusted EBITDA is net income. “Adjusted Net Income” is a non-IFRS measure and is defined as net income, adjusted for the impact of certain items, including share-based compensation expense, asset impairment expense, purchase price accounting adjustments, executive recruitment and severance costs, legal costs outside the normal course of operations, provisions on inventory no longer aligned with our strategic product direction, and other non-cash items and/or items that are non-recurring, infrequent, or unusual in nature and would make comparisons of underlying financial performance between periods difficult, net of related tax effects. Adjusted Net Income also excludes the impact of IFRS 16 and includes rent expense, a significant expense for our corporate retail stores. We believe that Adjusted Net Income is useful, to both management and investors, in assessing the underlying performance of our ongoing operations. The IFRS measurement most directly comparable to Adjusted Net Income is net income. “Adjusted Net Income per Share” is a non-IFRS ratio and is defined as Adjusted Net Income, divided by the weighted average Shares (as defined herein) outstanding during the periods presented. We believe that Adjusted Net Income per Share is useful, to both management and investors, in assessing the underlying performance of our ongoing operations, on a per share basis. “Comparable Sales Growth (Decline)” is a retail industry metric used to compare the percentage change in sales derived from mature stores and eCommerce, in a certain period, compared to the prior year sales from the same stores and eCommerce, over the same time period of the prior fiscal year. We believe Comparable Sales Growth (Decline) helps explain changes to our sales in established stores and eCommerce, which may not otherwise be apparent when relying solely on year-over-year sales comparisons. Comparable Sales Growth (Decline) is considered a supplementary financial measure under applicable securities law and may be calculated differently compared to other companies. Comparable Sales Growth (Decline) is calculated based on sales (net of a provision for returns) from stores that have been open for at least 52 weeks in our DTC segment, including eCommerce sales (net of a provision for returns) in our DTC segment, and excludes sales fluctuations during store renovations and circumstances that make comparisons of year-over-year results less meaningful. In malls where we have opened secondary pop-up locations, the sales from both the permanent and pop-up stores will be excluded from the calculation of Comparable Sales Growth (Decline) until both stores have been open for at least 52 weeks. Comparable Sales Growth (Decline) also excludes the impact of foreign currency fluctuations by applying the prior year’s U.S. dollar to Canadian dollar exchange rates to both current year and prior year comparable sales to achieve a consistent basis for comparison. As a result of the 53rd week in F2023, sales during Q4 2023 were compared to sales during Q4 2022 plus sales during the first week of F2023, and sales during F2023 were compared to sales during F2022 plus sales during the first week of F2023, for the purposes of Comparable Sales Growth (Decline) only. Due to the impacts that COVID-19 had on the apparel retail operating environment, including periods of temporary store closures, phased re-openings and retail store operating limitations, the Company did not report Comparable Sales Growth (Decline) during F2021 or F2022. With the impacts of COVID-19 having substantially dissipated, the Company resumed reporting Comparable Sales Growth (Decline) beginning the 13 week period ended April 29, 2023 (“Q1 2023”). See “Reconciliation of Non-IFRS Measures” for a reconciliation of certain of the foregoing non- IFRS measures to their most directly comparable measures calculated in accordance with IFRS. 4 CAUTIONARY NOTE REGARDING 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 anticipated events or results and may include information regarding our business, financial position, results of operations, business strategy, growth plans and strategies, budgets, operations, financial results, taxes, 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”, “should”, “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 facts but instead represent management’s expectations, estimates and projections regarding future events or circumstances. Many factors could cause our actual results, level of activity, performance or achievements or future events or developments to differ materially from those expressed or implied by the forward- looking information, including, without limitation, the factors discussed in the “Risks and Uncertainties” section of this MD&A and in the “Risk Factors” section of our annual information form (“AIF”). A copy of the AIF can be accessed under our profile on the System for Electronic Document Analysis and Retrieval (“SEDAR+”) at www.sedarplus.ca and on our website at www.roots.com. These factors are not intended to represent a complete list of the factors that could affect us; however, these factors should be considered carefully. The purpose of the forward-looking information is to provide the reader with a description of management’s current expectations regarding the Company’s financial performance and may not be appropriate for other purposes; readers should not place undue reliance on forward-looking information contained herein. To the extent any forward-looking information in this MD&A constitutes future-oriented financial information, within the meaning of applicable securities laws, such information is being provided to demonstrate the potential of the Company and readers are cautioned that this information may not be appropriate for any other purpose. Future-oriented financial information, as with forward-looking information generally, are based on current assumptions and subject to risks, uncertainties and other factors. Furthermore, unless otherwise stated, the forward-looking information contained in this MD&A is made as of the date of this MD&A, and we have no intention and undertake no obligation to update or revise any forward- looking statements, whether as a result of new information, future events or otherwise, except as required under applicable securities laws in Canada. The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement. 5 OVERVIEW Established in 1973, Roots is a global lifestyle brand. Starting from a small cabin in northern Canada, Roots has become a global brand, which as of February 3, 2024, operated 104 corporate retail stores and 11 temporary pop-up locations in Canada, two corporate retail stores in the United States, and an eCommerce platform, roots.com. We have more than 100 partner-operated stores in Asia, and we also operate a dedicated Roots-branded storefront on Tmall.com in China. We design, market, and sell a broad selection of products in different departments, including women’s, men’s, children’s, and gender-free apparel, leather goods, footwear, and accessories. Our products are built with uncompromising comfort, quality, and style that allows you to feel At Home With NatureTM. We offer products designed to meet life’s everyday adventures and provide you with the versatility to live your life to the fullest. We also wholesale through business-to- business channels and license the brand to a select group of licensees selling products to major retailers. On October 14, 2015, Searchlight Capital Partners, L.P. (“Searchlight”) incorporated Roots Corporation under the laws of Canada and its subsidiary, Roots USA Corporation, under the laws of the State of Delaware. Pursuant to a purchase and sale agreement dated October 21, 2015, Roots and its subsidiaries acquired substantially all of the assets of Roots Canada Ltd., former wholly-owned subsidiary Roots U.S.A., Inc., Roots America L.P., entities controlled by our founders Michael Budman and Don Green (the “Founders”), and all of the issued and outstanding shares of Roots International ULC, effective December 1, 2015 (the “Acquisition”). Roots Corporation is a Canadian corporation doing business as “Roots” and “Roots Canada”. The Company’s common shares (the “Shares”) are listed on the Toronto Stock Exchange (“TSX”) under the trading symbol “ROOT”. KEY BUSINESS DEVELOPMENTS Current Operating Environment Macroeconomic Conditions During F2023 and F2022, the Company was impacted by higher inflation in the markets in which we operate, including increased costs of inventory, third-party services, and personnel expenses. Central banks have continued to maintain higher interest rates which, along with the higher inflation rates, may weaken consumer sentiment, decrease discretionary spending levels, increase consumer price sensitivity, and negatively impact sales in the short-term. The elevated interest rates have also increased the interest paid on debt of the Company. Global Supply Chain Although the disruptions in our global supply chain have largely normalized in F2023, we were negatively impacted by the elevated freight cost incurred during the comparable F2022 period. During that period, we implemented many initiatives, including the following: • Worked with suppliers to prioritize production of key product collections; • Utilized air freight and premium-rate ocean freight to reduce lead times for key programs; 6 • Leveraged existing freight contracts to secure freight capacity and reduce freight cost volatility; and • Strategically managed on-hand inventory and adjusted promotional tactics. During Q4 2023 and F2023, we recorded $56 and $141 respectively, of air freight costs in cost of sales (Q4 2022 and F2022 – $634 and $2,530, respectively). At the end of F2023, there remains $59 of capitalized air freight costs that we expect to record in cost of sales, as the goods sell through in the following year. We have seen signs of recovery in the freight market, as shipping times shorten towards pre- pandemic levels, the need for air freight reduces, and market ocean freight rates reduce from peak levels seen in late F2022. Investment in Saturday Industries Limited During Q1 2023, the Company appointed Joey Gollish as Creative Director in Residence for a period expected to extend through 2025, pursuant to the terms of a Creative Director Residency Agreement. Mr. Gollish is the founder and creative director of Saturday Industries Limited (“Mr. Saturday”), an acclaimed fashion label known as “Mr. Saturday”, who will continue to lead its design and creative direction during this period. In connection with this arrangement, the Company issued 100,000 common share purchase warrants (the “Warrants”) to Mr. Saturday, on a private placement basis. In addition, the Company made a minority equity investment in Mr. Saturday. Real Estate The following table summarizes the change in our corporate retail store count for the periods indicated. Number of stores, beginning of period . . . . . . . . . . . . New stores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Permanently closed stores . . . . . . . . . . . . . . . . . . . . . Number of stores, end of period . . . . . . . . . . . . . . . Stores renovated or relocated . . . . . . . . . . . . . . . . . . . Temporary pop-up locations, in addition to above store count . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Q4 2023 Q4 2022 F2023 F2022 108 – (2) 106 2 11 110 – (1) 109 1 12 109 2 (5) 106 7 11 109 1 (1) 109 6 12 We also have more than 100 partner-operated stores in Asia. 7 FACTORS AFFECTING OUR PERFORMANCE We believe that our performance and future success depend on a number of factors that present significant opportunities for us. These factors are also subject to a number of inherent risks and challenges, some of which we discuss below. See the “Risks and Uncertainties” section of this MD&A and the “Risk Factors” section of our AIF. Brand Awareness The Roots brand is well-known in Canada and Taiwan, with locations also in the United States and a growing digital presence in China. Any loss of brand appeal from factors such as changing consumer trends and increased competition may adversely affect our business and financial results. To address this, we focus on building our brand and strengthening our brand voice through innovative, impactful brand initiatives as well as delivering customer insight-driven product designs. In addition, we work to best position our brand and business globally by leveraging the operational investments that we have made and strengthening our omni-channel footprint. Our Omni-Channel Business Our corporate retail stores and eCommerce platform are integrated, providing our customers with a seamless omni-channel shopping experience whether they are shopping online from a desktop or mobile device, or in one of our retail stores. This includes the ability to: locate your desired store online; • • order online and collect in-store; • order in-store for home delivery; • shop anytime, anywhere at roots.com; • obtain in-store inventory display on roots.com; and • return goods seamlessly via any channel. The success of our business is heavily dependent on our ability to continue to drive profitable sales in our DTC segment and to grow our omni-channel footprint. This includes enhancing our eCommerce capabilities and optimizing our corporate retail store footprint. Our ability to successfully execute our omni-channel strategy is an important driver of our longer-term growth. We depend on third-party logistics partners to fulfill sales transactions with our customers in a dependable and timely manner. Changes in geographic coverage, service levels, capacity levels, and labour disruptions at our logistics partners may adversely affect our business and financial results. We continue to work with our third-party logistics partners to ensure that options are available in order to mitigate the risk of a disruption to delivery services. Retail store distribution and eCommerce fulfillment are both completed at one single Roots- operated distribution centre. Being able to fulfill centrally enables us to more effectively scale and execute our omni-channel strategy. Conversely, any failure of our distribution facility to meet the demands of the Company, or to keep pace with our growth, could have a material adverse effect on our business and financial results. 8 Our International Operating Partner Much of the success of our international business is dependent on the performance of our international operating partner’s retail operations. Our ability to continue to recognize wholesale sales of Roots-branded products to our partner depends on our partner continuing to grow its business. Our partner’s ability to successfully execute on its multi-channel strategy and our ability to support our partner in this growth will impact the performance of our business. Our partner’s sales are also impacted by shifts in economic conditions in the regions in which it operates that are beyond our and our partner’s control, including: employment rates; consumer confidence levels; consumer debt; and interest rates, all of which could limit the disposable income and discretionary spending levels of consumers. Product Development and Merchandising Our sales are driven primarily from major Canadian markets during the fall and winter months. However, we are not defined by one product, sales channel, season, geography, or demographic. With five decades of product leadership, our product range is diversified and comprised of apparel, leather goods, accessories, and footwear. Serving as the foundation of our distinct identity, many of our enduring icons have been in our product assortment for decades and remain favourites among customers today. We continue to execute our broader merchandising strategy of bringing better products and assortments to our diverse and global consumer base. Through our formalized and analytical approach to product line development and our distribution channel upgrades, we are able to deliver coordinated collections across all lines of products, bringing the right products through the right channels to our broadening base of customers. Our business is affected by our ability to continue to develop products that resonate with consumers and we are working to accelerate our product development as we continue to introduce products to mitigate the seasonal nature of our business (as further described below) and expand our addressable geographic market. Foreign Exchange We generate the majority of our revenues in Canadian dollars, while a significant portion of our cost of goods sold is denominated in U.S. dollars, which exposes us to fluctuations in foreign currency exchange rates. We enter into hedging arrangements to mitigate a portion of the risk associated with fluctuations in the U.S. dollar relative to the Canadian dollar. See “Financial Instruments” for a further discussion of our hedging arrangements. Seasonality We experience seasonal fluctuations in our retail business, as we generate a meaningful portion of our sales and earnings in our third and fourth fiscal quarters. Our working capital requirements generally increase in the periods preceding these peak periods, and it is not uncommon for our EBITDA to be negative in the first two fiscal quarters. 9 The average portion of our annual sales generated during each quarter of a fiscal year over the last three completed fiscal years is outlined in the following table: First fiscal quarter . . . . . . . . . . . . . . . . . . . . . . Second fiscal quarter . . . . . . . . . . . . . . . . . . . Third fiscal quarter . . . . . . . . . . . . . . . . . . . . . Fourth fiscal quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15% 15% 25% 45% 100% Weather Our corporate retail stores could be adversely impacted by extreme weather conditions in regions in which they operate. For example, severe or abnormal snowfall, rainfall, ice storms, or other adverse weather conditions could decrease customer traffic in our stores and could adversely impact our results. Our omni-channel presence helps to mitigate the impact of extreme weather conditions as customers are able to order products through our eCommerce platform. Severe weather may also negatively impact our supply chain and result in delays in receiving inventory and fulfilling orders. Furthermore, we are subject to risks relating to unseasonable weather patterns, such as warmer temperatures in the fall and winter seasons and cooler temperatures in the spring and summer seasons, which could cause our inventory to be incompatible with prevailing weather conditions and could diminish demand for seasonal merchandise. Consumer Trends Our success largely depends on our ability to anticipate and respond to shifts in consumer trends, demands and preferences in a timely manner. Our products are subject to changing consumer preferences that cannot be predicted with certainty. If we are unable to adequately respond to changing consumer trends, our sales could be adversely impacted, or we could experience higher inventory markdowns which could decrease our profitability. This is mitigated by our focus on continuous product development to create products that resonate with our consumers, our diverse product range across multiple categories, and the fact that our enduring icons have remained favourites of our customers for decades and continue to be customer favourites today. Global Geopolitical and Economic Environment Our business is also impacted by changes in the global geopolitical and economic landscapes that are beyond our control. Changes in geopolitical conditions could cause disruption in our ability to operate in, and/or source from, the affected markets. Worsening of economic conditions within the markets in which we operate, including increases in inflation rates, unemployment rates, interest rates, and consumer debt could limit the disposable income available to our customers. Volatility and uncertainty in both the geopolitical and economic landscapes could also reduce consumer confidence and reduce discretionary spending levels of consumers. We continue to closely monitor geopolitical and global economic developments and will adjust our operations, where possible, to minimize the impact to our business. See “Key Business Developments – Current Operating Environment”. 10 SEGMENTS We report our results in two segments: (1) DTC and (2) Partners and Other. We measure each reportable operating segment’s performance based on sales and segment gross profit. Our DTC segment comprises sales through our corporate retail stores and eCommerce. Our Partners and Other segment consists primarily of the wholesale of Roots-branded products to our international operating partner. Our Partners and Other segment also includes the Company’s sales from its Roots-branded storefront on business-to-consumer marketplace website Tmall.com in China, royalties earned through the licensing of our brand to select manufacturing partners, the wholesale of Roots-branded products to select retail partners, and the sale of custom Roots- branded products to select business clients. Our DTC and Partners and Other segments contributed 84.7% and 15.3% of our sales, respectively, in F2023 (F2022 – 85.0% and 15.0% of our sales, respectively). 11 SUMMARY OF FINANCIAL PERFORMANCE We refer the reader to the sections entitled “Components of our Results of Operations”, “Factors Affecting our Performance” and “Cautionary Note Regarding Non-IFRS Measures and Industry Metrics” in this MD&A for the definition of the items discussed below and, when applicable, to the section entitled “Reconciliation of Non-IFRS Measures” for reconciliations of non-IFRS measures with the most directly comparable IFRS measure. The following table summarizes our results of operations for the periods indicated: CAD $000s (except per Share data) Statement of Net income Data: Q4 2023 Q4 2022 F2023 F2022 Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,234 111,461 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general and administrative expenses . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings per Share . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per Share . . . . . . . . . . . . . . . . . . . . . . . . . Non-IFRS Measures and Other Performance Measures: Corporate retail stores, end of period . . . . . . . . . . . . . . . . . Adjusted DTC Gross Profit (1) . . . . . . . . . . . . . . . . . . . . . . . Adjusted DTC Gross Margin (1) . . . . . . . . . . . . . . . . . . . . . . Comparable Sales Growth (Decline) (1) (2) . . . . . . . . . . . . . . EBITDA (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted EBITDA (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted Net Income (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted Net Income per Share (1) . . . . . . . . . . . . . . . . . . . _______________ Note: 63,416 58.6% 41,199 14,621 $0.36 $0.36 106 58,517 59.9% (1.8%) 29,677 23,164 14,581 $0.36 62,984 56.5% 42,864 12,980 $0.31 $0.31 109 58,825 59.7% n/a 27,756 23,524 14,501 $0.35 262,668 152,456 58.0% 140,331 1,840 $0.05 $0.04 106 136,035 61.6% (3.7%) 41,831 19,855 4,270 $0.11 272,116 156,976 57.7% 138,625 6,693 $0.16 $0.16 109 141,453 61.2% n/a 47,675 26,967 9,775 $0.23 (1) Adjusted DTC Gross Profit, Adjusted DTC Gross Margin, Comparable Sales Growth (Decline), EBITDA, Adjusted EBITDA, Adjusted Net Income, and Adjusted Net Income per Share are non-IFRS measures. See “Cautionary Note Regarding Non-IFRS Measures and Industry Metrics” for a description of these measures and “Reconciliation of Non-IFRS Measures” for reconciliation of these measures. (2) Comparable Sales Growth (Decline) was not calculated for Q4 2022 or F2022 as a result of the impacts of COVID-19. Please see “Cautionary Note Regarding Non-IFRS Measures and Industry Metrics”. 12 RECONCILIATION OF NON-IFRS MEASURES The tables below provide a reconciliation of DTC gross profit to Adjusted DTC Gross Profit, net income to EBITDA, Adjusted EBITDA, Adjusted Net Income, and Adjusted Net Income per Share for the periods presented: CAD $000s DTC gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add the impact of: Q4 2023 Q4 2022 F2023 F2022 58,517 57,848 136,035 140,476 COGS: Inventory provision (b) . . . . . . . . . . . . . . . . . . . . . . . . – Adjusted DTC Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,517 977 58,825 – 977 136,035 141,453 CAD $000s Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjust for the impact of: Interest expense (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes expense (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization (a) . . . . . . . . . . . . . . . . . . . . . . . EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjust for the impact of: COGS: Inventory provision (b) . . . . . . . . . . . . . . . . . . . . . . . . SG&A: Rent expense excluded from net income due to IFRS 16 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SG&A: IFRS 16: Impairment of ROU assets (a) . . . . . . . . . . SG&A: Purchase accounting adjustments (c) . . . . . . . . . . . . SG&A: Stock option expense (d) . . . . . . . . . . . . . . . . . . . . . . SG&A: Fixed asset impairment (e) . . . . . . . . . . . . . . . . . . . . SG&A: Changes in key personnel (f) . . . . . . . . . . . . . . . . . . . SG&A: Non-recurring legal fees (g) . . . . . . . . . . . . . . . . . . . SG&A: Other non-recurring items (h) . . . . . . . . . . . . . . . . . . . Adjusted EBITDA (j) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Q4 2023 Q4 2022 F2023 F2022 14,621 12,980 1,840 6,693 2,346 5,250 7,460 29,677 2,320 4,820 7,636 27,756 9,470 815 29,706 41,831 8,756 2,902 29,324 47,675 – 977 – 977 (7,901) 61 (14) 122 – 1,133 41 45 23,164 (5,789) 79 (13) (29) 356 130 57 – 23,524 (25,253) 61 (47) 454 – 2,586 128 95 19,855 (23,194) 79 (18) 380 356 125 587 – 26,967 13 CAD $000s Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjust for the impact of IFRS 16: Rent expense excluded from net income (a) . . . . . . . . . . . . . Depreciation on ROU assets (a) . . . . . . . . . . . . . . . . . . . . . . . Impairment on ROU assets (a) . . . . . . . . . . . . . . . . . . . . . . . Interest on lease liabilities (a) . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax impact (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total IFRS 16 impacts reversed . . . . . . . . . . . . . . . . . . . . . . . Adjust for the impact of: COGS: Inventory provision (b) . . . . . . . . . . . . . . . . . . . . . . . . SG&A: Purchase accounting adjustments (c) . . . . . . . . . SG&A: Stock option expense (d) . . . . . . . . . . . . . . . . . . . . . . SG&A: Fixed asset impairment (e) . . . . . . . . . . . . . . . . . . . . . SG&A: Changes in key personnel (f) . . . . . . . . . . . . . . . . . . . SG&A: Non-recurring legal fees (g) SG&A: Other non-recurring items (h) . . . . . . . . . . . . . . . . . . . SG&A: Amortization of intangible assets acquired by Searchlight (i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax effect of adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted Net Income(k) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted Net Income per Share (l) . . . . . . . . . . . . . . . . . . . . . _____________ Notes: Q4 2023 Q4 2022 F2023 F2022 14,621 12,980 1,840 6,693 (7,901) 4,448 61 1,346 543 (1,503) – (14) 122 – 1,133 41 45 620 1,947 (484) 14,581 $0.36 (5,789) 4,547 79 1,189 (7) 19 977 (13) (29) 356 130 57 – 576 2,054 (552) 14,501 $0.35 (25,253) 17,915 61 4,854 642 (1,781) – (47) 454 – 2,586 128 95 2,346 5,562 (1,351) 4,270 $0.11 (23,194) 17,690 79 4,771 173 (481) 977 (18) 380 356 125 587 – 2,302 4,709 (1,146) 9,775 $0.23 (a) The impact of IFRS 16 in Q4 2023 and Q4 2022 was: (i) a decrease to selling, general, and admin (“SG&A”) expenses of $3,392 and $1,163, respectively, which comprised the impact of depreciation, lease modifications and impairment on the right-of-use (“ROU") assets, net of the exclusion of rent payments from SG&A expenses, (ii) an increase in interest expense of $1,346 and $1,189, respectively, arising from interest expense recorded on the lease liabilities in the period, and (iii) a deferred tax impact of $543 and $(7), respectively, based on tax attributes on the ROU assets and lease liabilities balances recorded. The impact of IFRS 16 in F2023 and F2022 was: (i) a decrease to SG&A expenses of $7,277 and $5,425, respectively, which comprised the impact of depreciation, lease modifications and impairment on the ROU assets, net of the exclusion of rent payments from SG&A expenses, (ii) an increase in interest expense of $4,854 and $4,771, respectively, arising from interest expense recorded on the lease liabilities in the period, and (iii) a deferred tax impact of $642 and $173, respectively, based on tax attributes on the ROU assets and lease liabilities balances recorded. (b) Represents the portion of non-cash inventory provision on items that no longer align with the Company's strategic product direction. In Q4 2022 and F2022, this provision relates to specific footwear that was no longer part of strategic product designs. In Q4 2023 and F2023, the inventory provision captured items that were part of normal operations and was not included in the reconciliation of Adjusted DTC Gross Profit, Adjusted EBITDA and Adjusted Net Income. (c) As a result of the Acquisition, the Company recognized an intangible asset for lease arrangements in the amount of $6,310, which when excluding the impacts of IFRS 16, is amortized over the life of the leases and included in SG&A expenses. (d) Represents non-cash share-based compensation expense in respect of our Legacy Equity Incentive Plan, Legacy Employee Option Plan, and Omnibus Equity Incentive Plan. (e) Represents a non-cash impairment charge (net of reversals) taken against certain fixed assets for stores where the recoverable amount is deemed to be below the carrying value. (f) Represents expenses incurred in respect of the Company’s efforts to recruit for vacancies in key management positions and severance costs associated with reorganizations of key functional areas, such as at our leather factory, marketing, and product teams. (g) Represents non-recurring legal costs that are outside the scope of normal operations. (h) Represents one-time costs incurred that do not reflect the underlying profitability of the business, including consulting fees related to inventory and brand valuations used to explore alternative financing options with lower interest costs. (i) As a result of the Acquisition, intangibles relating to customer relationships of $7,766 with a useful life of 10 years and licensing arrangements of $25,910 with useful lives ranging from four to 13 years were recognized in accordance with IFRS 3, Business Combinations. The amortization expense resulting from the recognition of these intangible assets are non-cash in nature and 14 are a direct result of the Acquisition. If the Acquisition had not occurred, such intangibles would not have been recognized and, consequently, the associated expenses would not have been incurred. (j) Adjusted EBITDA excludes the impact of IFRS 16. If the impact of IFRS 16, net of impairments on the ROU assets, was included for Q4 2023 and F2023, Adjusted EBITDA would have been $31,018 and $45,094, respectively. If the impact of IFRS 16, net of impairments on the ROU assets, was included for Q4 2022 and F2022, Adjusted EBITDA would have been $29,247 and $50,100, respectively. (k) Adjusted Net Income excludes the impact of IFRS 16. If the impact of IFRS 16, net of impairments on the ROU assets, was included for Q4 2023 and F2023, Adjusted Net Income would have been $16,094 and $6,086, respectively. If the impact of IFRS 16, net of impairments on the ROU assets, was included for Q4 2022 and F2022, Adjusted Net Income would have been $14,363 and $10,140, respectively. (l) Adjusted Net Income per Share has been calculated based on the weighted average number of Shares outstanding during the period. The weighted average number of Shares during Q4 2023 and F2023 was 40,250,213 and 40,657,335, respectively. The weighted average number of Shares during Q4 2022 and F2022 as 41,668,491 and 41,739,504, respectively. 15 Selected Financial Results for Q4 2023 Compared to Q4 2022 • Total sales decreased by $3,227, or 2.9%, to $108,234 in Q4 2023, from $111,461 in Q4 2022. • DTC sales decreased by $778, or 0.8%, to $97,755 in Q4 2023, from $98,533 in Q4 2022. • Partners and Other sales decreased by $2,449, or 18.9%, to $10,479 in Q4 2023, from $12,928 in Q4 2022. • Comparable Sales Growth (Decline)(1)(2) was (1.8%) in Q4 2023. • Gross profit increased by $432, or 0.7%, to $63,416 in Q4 2023, from $62,984 in Q4 2022. • DTC gross profit increased by $669, or 1.2%, to $58,517 in Q4 2023, from $57,848 in Q4 2022, and as a percentage of sales (“DTC gross margin”) increased to 59.9% in Q4 2023, from 58.7% in Q4 2022. • Adjusted DTC Gross Profit decreased $308, or 0.5%, to $58,517 in Q4 2023, from $58,825 in Q4 2022, and Adjusted DTC Gross Margin increased to 59.9% in Q4 2023, from 59.7% in Q4 2022. • SG&A expenses decreased by $1,665 or 3.9%, to $41,199 in Q4 2023, from $42,864 in Q4 2022. • Adjusted EBITDA(1) decreased by $360, or 1.5%, to $23,164 in Q4 2023, from $23,524 in Q4 2022. • Net income increased by $1,641, or 12.6%, to $14,621 in Q4 2023, from $12,980 in Q4 2022. • Adjusted Net Income(1) increased by $80, or 0.6%, to $14,581 in Q4 2023, from $14,501 in Q4 2022. • Basic earnings per Share increased to $0.36 in Q4 2023, from $0.31 in Q4 2022. • Adjusted Net Income per Share(1) increased to $0.36 in Q4 2023, from $0.35 in Q4 2022. 16 Selected Financial Results for F2023 Compared to F2022 • Total sales decreased by $9,448, or 3.5%, to $262,668 in F2023, from $272,116 in F2022. • DTC sales decreased by $8,763, or 3.8%, to $222,467 in F2023, from $231,230 in F2022. • Partners and Other sales decreased by $685, or 1.7%, to $40,201 in F2023, from $40,886 in F2022. • Comparable Sales Growth (Decline)(1)(2) was (3.7%) in F2023. • Gross profit decreased by $4,520, or 2.9%, to $152,456 in F2023, from $156,976 in F2022. • DTC gross profit decreased by $4,441, or 3.2%, to $136,035 in F2023, from $140,476 in F2022, and DTC gross margin increased to 61.1% in F2023, from 60.8% in F2022. • Adjusted DTC Gross Profit decreased $5,418, or 3.8%, to $136,035 in F2023, from $141,453 in F2022, and Adjusted DTC Gross Margin decreased to 61.1% in F2023, from 61.2% in F2022. • SG&A expenses increased by $1,706, or 1.2%, to $140,331 in F2023, from $138,625 in F2022. • Adjusted EBITDA(1) decreased by $7,112, or 26.4%, to $19,855 in F2023, from $26,967 in F2022. • Net income decreased by $4,853, or 72.5%, to $1,840 in F2023, from $6,693 in F2022. • Adjusted Net Income(1) decreased by $5,505, or 56.3%, to $4,270 in F2023, from $9,775 in F2022. Adjusted Net Income was 1.6% of sales in F2023, decreasing from 3.6% of sales in F2022. • Basic earnings per Share decreased to $0.05 in F2023, from $0.16 in F2022. • Adjusted Net Income per Share(1) decreased to $0.11 in F2023 from $0.23 in F2022. _______________ Note: (1) Comparable Sales Growth (Decline), Adjusted EBITDA, Adjusted Net Income , and Adjusted Net Income per Share are non-IFRS measures. See “Cautionary Note Regarding Non-IFRS Measures and Industry Metrics” for a description of these measures and “Reconciliation of Non- IFRS Measures” for reconciliation of these measures. (2) Comparable Sales Growth (Decline) was not calculated for Q4 2022 or F2022 as a result of the impacts of COVID-19. Please see “Cautionary Note Regarding Non-IFRS Measures and Industry Metrics”. 17 COMPONENTS OF OUR RESULTS OF OPERATIONS In assessing our results of operations, we consider a variety of financial and operating measures that affect our operating results. Sales Sales in our DTC segment includes sales through our corporate retail stores in North America and through our eCommerce operations. Sales to customers through our corporate retail stores are recognized at the time of purchase, net of a provision for returns. eCommerce sales are recognized at the time of delivery, net of a provision for returns. The provision for returns is estimated based on the historical return rate for retail stores and eCommerce sales, respectively. Sales in our Partners and Other segment consist primarily of the wholesale of Roots-branded products to our international operating partner. The Partners and Other segment also includes the Company’s sales from its Roots-branded storefront on business-to-consumer marketplace website Tmall.com in China, royalties earned through the licensing of our brand to select manufacturing partners, the wholesale of Roots-branded products to select retail partners, and the sale of custom Roots-branded products to select business clients. Wholesale sales are recognized when the performance obligations of goods delivery have been passed to the customer which, depending on the specific contractual terms of each customer, is either at the time of shipment by Roots or receipt by the customer. Contractually, our international partner and wholesale partners are unable to return goods purchased from us. Royalty sales are earned and recognized on an accrual basis in accordance with the various contractual agreements, at the later of (i) sales of licensed goods as reported by our international partner and other third-party licensees, and (ii) when all performance obligations pertaining to the royalty have been satisfied. Gross Profit Gross profit is sales less cost of goods sold. Cost of goods sold includes the cost of purchasing products from manufacturers, including direct purchase costs, freight costs, and duty and non- refundable taxes. For select leather products manufactured by us in-house, cost of goods sold includes the cost of manufacturing our products, including raw materials, direct labour and overhead, plus freight costs. Cost of goods sold also includes variable distribution centre costs incurred to prepare our inventory for sale. Gross margin measures our gross profit as a percentage of sales. Products purchased from our manufacturers are predominantly sourced in U.S. dollars which exposes our cost of goods sold to foreign currency fluctuations. The Company utilizes a hedging program to manage its foreign currency risk related to U.S. dollar inventory purchases. See “Financial Instruments”. Selling, General and Administrative Expenses SG&A expenses consist of selling costs to market and deliver our products, depreciation of store and eCommerce assets, non-cash fixed asset and ROU asset impairments, and costs incurred to support the relationships with our retail partners, wholesale distributors, and licensees. SG&A expenses also include our marketing and brand investment activities, and the corporate infrastructure required to support our ongoing business. 18 General and administrative expenses represent costs incurred in our corporate offices, primarily related to personnel costs, including salaries, variable-incentive compensation, benefits, share- based compensation, and marketing costs. It also includes rent and depreciation and amortization expenses for all office support assets and intangible assets. SG&A expenses as a percentage of sales is usually higher in the lower-volume first and second quarters of a fiscal year, and lower in the higher-volume third and fourth quarters of a fiscal year because a substantial portion of these costs are relatively fixed. Foreign exchange gains and losses, excluding changes in the fair value of foreign currency forward contracts (“forward contracts”), are recorded in SG&A expenses and comprise translation of monetary assets and liabilities denominated in currencies other than the functional currency of the entity. See “Financial Instruments”. Interest Expense Interest expense relates to interest accrued on our lease liabilities and our Credit Facilities (as defined below). See “Indebtedness”. Interest accrued relating to our Credit Facilities is exposed to fluctuations in variable interest rates. The Company utilizes a hedging program to manage its interest rate risk related to the underlying bankers’ acceptance reference rate. See "Financial Instruments”. Income Taxes We are subject to income taxes in the jurisdictions in which we operate and, consequently, income taxes expense or recovery is a function of the allocation of taxable income by jurisdiction and the various activities that impact the timing of taxable events. Over the long-term, we expect our annual effective income tax rate to be, on average, approximately 27% to 28%, subject to changes to income tax rates and legislation in the jurisdictions in which we operate. 19 RESULTS OF OPERATIONS Analysis of Results for Q4 2023 as compared to Q4 2022 and F2023 as compared to F2022 The following section provides an overview of our financial performance during Q4 2023 compared to Q4 2022 and during F2023 compared to F2022. Sales The following table presents our sales by segment for each of the periods indicated: CAD $000s DTC . . . . . . . . . . . . . . . . . . . . . . . . . . . Partners and Other . . . . . . . . . . . . . . . 97,755 10,479 98,533 12,928 Total Sales . . . . . . . . . . . . . . . . . . . . . 108,234 111,461 (0.8%) (18.9%) (2.9%) 222,467 40,201 262,668 231,230 40,886 272,116 (3.8%) (1.7%) (3.5%) Q4 2023 Q4 2022 % Change F2023 F2022 % Change Total sales were $108,234 in Q4 2023 as compared to $111,461 in Q4 2022, representing a decrease of $3,227, or 2.9%. DTC sales decreased $778, or 0.8%, in Q4 2023 as compared to Q4 2022. The year-over-year decrease was primarily driven by lower conversion while basket size remained flat, reflecting tighter consumer discretionary spending in the current macroeconomic environment (see – “Key Business Developments – Current Operating Environment”). These were partially offset by traffic growth across both channels, and the impact of the 53rd week of F2023, which accounted for $2,219 in DTC sales. Sales in the Partners and Other segment decreased by $2,449, or 18.9%, in Q4 2023 as compared to Q4 2022. The year-over-year decrease was primarily driven by Roots decision to not continue a wholesale of Roots-branded products to select retail partners that took place last year. Total sales were $262,668 in F2023 as compared to $272,116 in F2022, representing a decrease of $9,448, or 3.5%. DTC sales decreased by $8,763, or 3.8%, in F2023 as compared to F2022. While traffic trends improved towards the back half of the year and the average basket size remained flat year-over- year, conversion was lower, reflecting the impact of the challenging macroeconomic conditions on consumers in Canada (see – “Key Business Developments – Current Operating Environment”). The 53rd week of F2023 accounted for $2,219 in DTC sales. Sales in the Partners and Other segment decreased by $685, or 1.7%, during F2023 as compared to F2022. The decrease in sales includes the favourable impact of $657 in foreign exchange on U.S. dollar sales in F2023, relative to F2022. Excluding foreign exchange impacts, F2023 would have decreased $1,342, or 3.3%, as compared to F2022. The decrease was primarily driven by Roots decision to not continue a wholesale of Roots-branded products to select retail partners that took place last year, partially offset by growth in wholesale sales to our international operating partner. 20 Gross Profit The following tables present our gross profit and gross margin by segment for each of the periods indicated: CAD $000s DTC . . . . . . . . . . . . . . . . . . . . . . . . . . . Partners and Other . . . . . . . . . . . . . . . Total Gross Profit . . . . . . . . . . . . . . . . Q4 2023 Q4 2022 % Change F2023 F2022 % Change 58,517 4,899 63,416 57,848 5,136 62,984 1.2% (4.6%) 0.7% 136,035 16,421 152,456 140,476 16,500 156,976 (3.2%) (0.5%) (2.9%) Gross Margin DTC . . . . . . . . . . . . . . . . . . . . . . . . . . . Partners and Other . . . . . . . . . . . . . . . Total Gross Margin . . . . . . . . . . . . . . Q4 2023 Q4 2022 F2023 F2022 59.9% 46.8% 58.6% 58.7% 39.7% 56.5% 61.1% 40.8% 58.0% 60.8% 40.4% 57.7% Gross profit was $63,416 in Q4 2023, as compared to $62,984 in Q4 2022, representing an increase of $432, or 0.7%. DTC gross profit increased $669, or 1.2%, in Q4 2023 as compared to Q4 2022. The increase was driven by higher gross margin, partially offset by lower sales volumes. DTC gross margin was 59.9% in Q4 2023, as compared to 58.7% in Q4 2022, or an increase of 120 bps. Excluding the impact of a lower inventory position in Q4 2023 from the improved inventory position, DTC gross margin was flat year-over-year. This was driven by lower freight costs, including 60 bps from lower air freight, and 30 bps from improved product costing, partially offset by a higher mix of sales during discount periods and unfavourable impacts of foreign exchange on U.S. dollar purchases. Gross profit in the Partners and Other segment decreased by $237, or 4.6%, in Q4 2023 as compared to Q4 2022. The decrease was primarily driven by a reduction in wholesale orders for Roots-branded products to select retail partners that did not repeat this year, partially offset by higher royalties earned through the licensing of our brand to select manufacturing partners which improved gross margin. Gross profit was $152,456 in F2023, as compared to $156,976 in F2022, representing a decrease of $4,520, or 2.9%. DTC gross profit decreased by $4,441, or 3.2%, in F2023 as compared to F2022. The decrease was driven by lower sales volumes, partially offset by higher gross margin on those sales. DTC gross margin was 61.1% in F2023, as compared to 60.8% in F2022, or an increase of 30 bps. Excluding the impact of a lower inventory position in Q4 2023 from the improved inventory position, DTC gross margin was flat year-over-year. This was primarily driven by lower freight costs, including 100 bps from lower air freight, fully offset by higher promotional activity, higher product costs associated with the transition to sustainable materials and unfavourable impacts of foreign exchange on U.S. dollar purchases. Gross profit in the Partners and Other segment decreased by $79, or 0.5%, in F2023 as compared to F2022. The decrease was primarily driven by a reduction in wholesale orders for Roots- branded products to select retail partners that did not repeat this year, partially offset by higher wholesale orders of Roots-branded products to our international operating partner. 21 Selling, General and Administrative Expenses SG&A expenses were $41,199 in Q4 2023 as compared to $42,864 in Q4 2022, representing a decrease of $1,665, or 3.9%. This decrease was primarily driven by gains arising from lease modifications under IFRS 16 and lower variable selling costs. This was partially offset by higher corporate and store compensation costs, including the impact of the Ontario minimum wage increase that took effect in October 2023, and impacts from the 53rd week in F2023. SG&A expenses were $140,331 during F2023 as compared to $138,625 in F2022, representing an increase of $1,706, or 1.2%. This increase was primarily driven by higher personnel costs, including the impact of the Ontario minimum wage increase and impacts from the 53rd week in F2023. These were partially offset by lower shipping rates and lower variable selling costs. Interest Expense Interest expense was $2,346 in Q4 2023 as compared to $2,320 in Q4 2022, representing an increase of $26, or 1.1%. Interest expense was $9,470 in F2023 as compared to $8,756 in F2022, representing an increase of $714, or 8.2%. The increase in interest expense in Q4 2023 and F2023 was primarily driven by an increase in the weighted average effective interest rate in comparison to Q4 2022 and F2022, and higher interest costs on lease liabilities, partially offset by reduced debt carried under the Credit Facilities (as defined below). See “Indebtedness”. Income Taxes Expense Income taxes expense was $5,250 in Q4 2023 as compared to $4,820 in Q4 2022, representing an increase of $430. The effective income tax rates for Q4 2023 and Q4 2022 were 26.4% and 27.1%, respectively. Income taxes expense was $815 in F2023 as compared to $2,902 in F2022, representing a decrease of $2,087. The effective income tax rates for F2023 and F2022 were 30.7% and 30.3%, respectively. The decrease in the effective tax rate during Q4 2023 as compared to Q4 2022 was due to lower non-deductible legal fees. The increase in the effective tax rate during F2023 as compared to F2022, was primarily attributed to higher share based compensation expense and against a lower net income before taxes. Net Income Net income was $14,621 in Q4 2023 as compared to $12,980 in Q4 2022, representing an increase of $1,641 or 12.6%. Net income was $1,840 in F2023 as compared to $6,693 in F2022, representing a decrease of $4,853 or 72.5%. 22 QUARTERLY FINANCIAL INFORMATION The following table summarizes the results of our operations for the eight most recently completed fiscal quarters. This unaudited quarterly information has been prepared in accordance with IFRS. Due to seasonality, the results of operations for any quarter are not necessarily indicative of the results of operations for the fiscal year. CAD $000s (except per Share data) Q4 2023 Q3 2023 Q2 2023 Q1 2023 Q4 2022 Q3 2022 Q2 2022 Q1 2022 (Unaudited) Sales . . . . . . . . . . . . . . . . . . . . . . . . . . Net Income (Loss) . . . . . . . . . . . . . . . Net Earnings (Loss) per Share: 108,234 14,621 111,461 12,980 49,404 (5,334) 47,801 (3,235) 41,496 (7,966) 69,782 2,209 63,534 519 43,072 (5,261) Basic earnings (loss) per Share . . . . Diluted earnings (loss) per Share . . $ 0.36 $ 0.36 $ 0.01 $ 0.01 $ (0.13) $ (0.13) $ (0.19) $ (0.19) $ 0.31 $ 0.31 $ 0.05 $ 0.05 $ (0.08) $ (0.13) $ (0.08) $ (0.13) Other Performance Measures Comparable Sales Growth (Decline)(1) Corporate retail stores, end of period Short-term pop-up locations, end of period. . . . . . . . . . . . . . . . . . . . . . . . . . Note: (3.7%) 106 (7.4%) 108 (4.2%) 107 (3.8%) 108 n/a 109 n/a 110 n/a 109 n/a 109 11 13 13 12 12 13 12 9 (1) Comparable Sales Growth (Decline) was not calculated for any fiscal quarters during F2022 as a result of the impacts of COVID-19. Please see “Cautionary Note Regarding Non-IFRS Measures and Industry Metrics”. See “Result of Operations” for discussion on Q4 2023 results. 23 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Inventory Inventory was $36,157 at the end of F2023, compared to $54,990 at the end of F2022, representing a decrease of $18,833, or 34.2%. The year-over-year decrease in inventory was driven by a $12,003 reduction of on-hand inventory as we strategically managed our inventory buys to leverage existing core and pack-and-hold collections, and $6,830 lower in-transit goods, partially due to the later timing of shipments from our vendors in F2023. Cash Flows We principally use our funds for operating expenses, capital expenditures and debt service requirements. We believe that cash generated from operations, together with amounts available under our Credit Facilities, will be sufficient to meet our future operating expenses, capital expenditures, and debt service requirements. In addition, these resources will enable us to comply with our financial covenants (see “Indebtedness”). We believe that our capital structure provides us with sufficient financial flexibility to pursue our future growth strategies. However, our ability to fund future operating expenses, capital expenditures and debt service requirements, and to comply with financial covenants, will depend on, among other things, our future operating performance, which will be affected by general economic conditions and other factors, including those beyond our control. See “Key Business Developments – Current Operating Environment”, “Risks and Uncertainties”, “Factors Affecting our Performance” and “Contractual Obligations and Off-Balance Sheet Arrangements” for additional information. The following table presents our cash flows for each of the periods presented: CAD$000s Q4 2023 Q4 2022 F2023 F2022 Cash flows from operating activities . . . . . . . . . . . . . . . . . Cash flows used in financing activities . . . . . . . . . . . . . . . Cash flows used in investing activities . . . . . . . . . . . . . . . Change in cash during the period . . . . . . . . . . . . . . . . . 44,188 (19,234) (1,507) 23,447 41,279 (10,213) (1,676) 29,390 38,695 (37,449) (5,134) (3,888) 29,298 (25,190) (6,348) (2,240) 24 Analysis of Cash Flows for Q4 2023 and F2023 compared to Q4 2022 and F2022 Cash Flows from Operating Activities For Q4 2023 and F2023, cash flows generated from operating activities totalled $44,188 and $38,695, respectively, compared to $41,279 and $29,298 in Q4 2022 and F2022, respectively. The increase in cash flows from operating activities in Q4 2023 and F2023 as compared to Q4 2022 and F2022 is primarily attributable to changes in our working capital position as a result of reduced inventory levels. Cash Flows used in Financing Activities For Q4 2023 and F2023, cash flows used in financing activities amounted to $19,234 and $37,449 respectively, compared to $10,213 and $25,190 in Q4 2022 and F2022, respectively. The year-over-year increase in cash flows used in financing activities in Q4 2023 and F2023 was largely driven by higher net repayments against the Term Credit Facility (see “Indebtedness”). Additionally, higher cash was paid on lease liabilities and the higher purchase of Shares for cancellation under our normal course issuer bid (“NCIB”), as described in note 11 of the Annual Financial Statements. Cash Flows used in Investing Activities For Q4 2023 and F2023, cash flows used in investing activities amounted to $1,507 and $5,134, respectively, compared to $1,676 and $6,348 in Q4 2022 and F2022, respectively. The decrease in cash flows used in financing activities in Q4 2023 as compared to Q4 2022 was a result of lower investment in capital projects. The decrease in cash used in F2023 as compared F2022 was primarily due lower capital expenditures for projects, partially offset by the investment in Mr. Saturday in the first quarter of F2023. See “Key Business Developments – Investment in Saturday Industries Limited”. 25 INDEBTEDNESS The Company has a secured credit agreement (“Credit Agreement”) with a syndicate of lenders consisting of a term loan (the “Term Credit Facility”) and a revolving credit loan (the “Revolving Credit Facility” and, together with the Term Credit Facility, the “Credit Facilities”). On April 4, 2023, the Company amended and restated the Credit Agreement to extend the maturity date of September 6, 2024 to September 6, 2026. In addition, the amendment introduced fallback provisions for the Canadian benchmark given the expected transition from the Canadian Dollar Offered Rate (“CDOR”) to the Canadian Overnight Repo Rate Average (“CORRA”). The terms of the Credit Agreement have also transitioned from LIBOR and now utilize SOFR. There were no changes to the $60,000 Revolving Credit Facility limit or the $10,000 swing loan as part of the amendment. As at the end of F2023, the Company had a total amount outstanding under its Credit Facilities of $46,204 (F2022 – $57,635) and had total liquidity of $88,033 (F2022 – $91,921), including net cash and borrowing capacity available under the Company’s Revolving Credit Facility. The Company has financial and non-financial covenants under the Credit Facilities. The key financial covenants include covenants for total debt to Adjusted EBITDA ratio (“Leverage Ratio”), and fixed charge coverage ratio. Adjusted EBITDA used in the calculation of our key financial covenants may differ from the Adjusted EBITDA non-IFRS measure as defined in this MD&A. As at the end of F2023, the Company was in compliance with all covenants. The Credit Facilities bear interest according to the type of borrowing advanced, which may be based on a reference rate of the U.S. base rate or the Canadian prime rate, plus a margin that ranges from 175 to 300 bps or the SOFR rate or bankers’ acceptances rate, plus a margin that ranges from 275 to 400 bps. The applicable margins are derived from our Leverage Ratio, as follows: (i) where the U.S. base rate or a Canadian prime rate is used, the margins range from 175 bps at less than 2.0x Leverage Ratio, to 300 bps at greater than or equal to 3.5x Leverage Ratio; and (ii) where the SOFR rate or bankers’ acceptances rate is used, the margins range from 275 bps at less than 2.0x Leverage Ratio, to 400 bps at greater than or equal to 3.5x Leverage Ratio. During F2023, the weighted average effective interest rate of the Credit Facilities was 7.7%, increasing from 5.5% during F2022 due to increases in the underlying market interest rates. The following table sets out the mandatory repayment of the Credit Facilities: CAD $000s Within 1 year . . . . . . . . . . . . . . . . Between 1 - 2 years . . . . . . . . . . Between 2 - 3 years . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . Term Credit Facility 4,024 4,024 38,156 46,204 26 CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS The following table summarizes our significant contractual obligations and other obligations as well as our off-balance sheet arrangements as at February 3, 2024: CAD$000s Term Credit Facility (1) . . . . . . . . Interest commitments relating to long-term debt (2) . . . . . . . . . . Payments on lease liabilities . . Inventory purchase commitments (3) . . . . . . . . . . . . . Total commitments and obligations . . . . . . . . . . . . . . . . . __________ Notes: FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Thereafter Total 4,024 4,024 38,156 – – – 46,204 3,271 24,164 3,062 21,205 2,097 18,561 – 14,068 – 9,885 – 11,600 8,430 99,483 30,788 – – – – – 30,788 62,247 28,291 58,814 14,068 9,885 11,600 184,905 (1) The repayment of the Term Credit Facility may occur prior to the mandatory repayment time if certain events occur and/or at the discretion of the Company. (2) Based on the interest rate in effect as at February 3, 2024, and assuming no prepayments are made to the Term Credit Facility. Incorporates the impact of interest rate swap contracts (see “Financial Instruments”). (3) Inventory purchase commitments reflect the cost (excluding duties and shipping) of outstanding inventory purchases ordered from our vendors and expected to be received within the period, excluding in-transit purchases that have already been recognized. Inventory purchases are part of the normal course of our business and will be primarily funded through sales in our DTC segment. Due to the seasonal fluctuations of our retail business (see “Factors Affecting our Performance – Seasonality”), our net debt position may be higher during the first three fiscal quarters when working capital requirements peak and will generally decrease in the fourth fiscal quarter. Historically, contractual obligations and commitments during the first three fiscal quarters were funded primarily through cash, draws on our Revolving Credit Facility (see “Indebtedness”), and, to a lesser extent, sales generated from our operations and our management of working capital. In the fourth fiscal quarter, we have historically generated positive cash flow from operations to fund our remaining contractual obligations and commitments and would make repayments against draws on our Revolving Credit Facility made during the first three fiscal quarters. We will continue to fund our upcoming commitments and obligations using our Revolving Credit Facility and cash flow from operations. We believe that we will continue to generate sufficient cash flow from operations over the course of a fiscal year to fund our contractual obligations and commitments and the cost of our growth and development activities incurred during such fiscal year. 27 FINANCIAL INSTRUMENTS We have designated derivative financial instruments as cash flow hedges to manage our exposure to 1) foreign exchange on a portion of our U.S. dollar denominated purchases and 2) variable interest rates on our Credit Facilities. At the inception of a hedging relationship, the Company designates and formally documents the relationship between the hedging instrument and the hedged item, the risk management objective, and the strategy in undertaking the hedge transaction. At inception and each fiscal quarter-end thereafter, the Company formally assesses the effectiveness of the cash flow hedges. To the extent the hedging relationship is assessed as effective, the change in the fair value of the derivative financial instruments, net of taxes, is recognized in other comprehensive income and presented in accumulated other comprehensive income. Any ineffective portion of changes in the fair value of the derivative financial instruments is recognized immediately in profit or loss. The fair value of forward contracts and interest rate swap contracts (“swap contracts”) are determined using a valuation technique that employs the use of market observable inputs and is based on the differences between the contract rates and the market rates as at the period-end date, taking into consideration discounting to reflect the time value of money. As of the end of F2023, the Company has recorded derivative assets of $203 (F2022 – $139), representing forward contracts to buy US$30,745 (F2022 – $26,790) at an average rate of 1.34 (F2022 – 1.32) and swap contracts to affix its bankers’ acceptance rate at 4.4% per annum, on $40,000 of its Credit Facilities. As of the end of F2023, the exchange rate was 1.35 (F2022 – 1.33). The forward contracts have maturity dates between February 5, 2024 and January 6, 2025 and the swap contracts are effective until September 6, 2024. All other financial assets and financial liabilities are measured at amortized cost using the effective interest method, except for cash which is measured at fair value through profit and loss. SHARE INFORMATION As of April 9, 2024, there were 40,250,213 Shares issued and outstanding (April 4, 2023 – 41,247,951). There were no preferred shares issued and outstanding as of April 9, 2024 and April 4, 2023. During F2023: • 1,438,318 Shares were purchased for cancellation, under the Company’s NCIB; • 226,668 stock options were exercised; • 350,000 stock options were granted under the Omnibus Equity Incentive Plan; • 100,000 Warrants were issued; and • 253,577 stock options were forfeited and cancelled. 28 As at February 3, 2024, 2,164,828 stock options, 100,000 Warrants, and 15,985 restricted share units (“RSUs”) were granted and outstanding, and 1,503,332 options and 15,985 RSUs were vested. Each stock option, Warrant, and RSU is, or will become, exercisable for one Share. During F2023, the Company also granted 131,830 deferred share units (“DSUs”) under the Company’s deferred share unit plan (the “DSU Plan”). As of February 3, 2024, 911,525 DSUs were outstanding under the DSU Plan. No Shares will be issued upon the settlement of DSUs. RELATED PARTY TRANSACTIONS The Company’s related parties include key management personnel and key shareholders of the Company, including other entities under common control. Investment funds managed by Searchlight beneficially own approximately 51.0% of the total issued and outstanding Shares and the Founders beneficially own approximately 13.0% of the total issued and outstanding Shares. All transactions described below are in the normal course of business and have been accounted for at their exchange value. The Company leases the building for its leather factory, from a company that is under common control of the Founders. For Q4 2023 and F2023, the rent paid as it relates to the lease of this property was $145 (Q4 2022 – $71) and $358 (F2022 – $284), respectively. RISKS AND UNCERTAINTIES For a detailed description of risk factors relating to the Company, please refer to the “Risk Factors” section of our AIF, which is available on SEDAR+ at www.sedarplus.ca. In addition, we are exposed to a variety of financial risks in the normal course of our business, including foreign currency exchange, interest rate, credit and liquidity risk, as summarized below. Our overall risk management program and business practices seek to minimize any potential adverse effects on our consolidated financial performance. Financial risk management is carried out under practices approved by our Board. This includes identifying, evaluating and hedging financial risks based on the requirements of our organization. Our Board provides guidance for overall risk management, covering many areas of risk including foreign currency exchange risk, interest rate risk, credit risk, and liquidity risk. Foreign Currency Exchange Risk Our consolidated financial statements are expressed in Canadian dollars. However, a portion of our operations are transacted in U.S. dollars and we are exposed to foreign exchange risk on financial assets and liabilities denominated in foreign currencies. Sales and expenses of all foreign operations are translated into Canadian dollars at the foreign currency exchange rates that approximate the rates in effect at the dates which such items are recognized. Changes in the value of foreign currencies relative to the Canadian dollar in respect of sales and costs would result in a foreign currency gain or loss impact in net income . A five-percentage point change in the Canadian dollar against the U.S. dollar, assuming that all other variables are constant, would have changed pre-tax net income by $200 as at the end of F2023 as a result of the revaluation of financial assets and liabilities denominated in foreign currencies. 29 We are also exposed to fluctuations in the prices of U.S. dollar denominated purchases resulting from changes in U.S. dollar exchange rates. A weakening Canadian dollar relative to the U.S. dollar would have a negative impact on year-over-year changes in reported net income by increasing the cost of finished goods and raw materials while a strengthening Canadian dollar relative to the U.S. dollar would have the opposite impact. As described above, we entered into certain qualifying foreign currency forward contracts that are designated as cash flow hedges. Interest Rate Risk We are exposed to changes in interest rates on our cash and long-term debt. Debt issued at variable rates exposes us to cash flow interest rate risk. Debt issued at fixed rates exposes us to fair value interest rate risk. As of February 3, 2024, we have only variable interest rate debt. In the fourth quarter of F2022, we entered into swap contracts to hedge the volatility of the underlying bankers’ acceptance reference rate on $40,000 of our long-term debt, through September 2024. Based on the outstanding borrowings as discussed under “Indebtedness”, a one percentage point change in the average interest rate on our borrowings would have changed interest expense by $36 in Q4 2023 and $170 in F2023. The impact of future interest rate expense resulting from changes in interest rates will depend largely on the gross amount of unhedged borrowings at such time. Credit Risk Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company’s financial instruments that are exposed to concentrations of credit risk are primarily accounts receivable. The Company’s accounts receivable consist primarily of receivables from our business partners in the Partners and Other segment, which are settled in the following fiscal quarter. Liquidity Risk Liquidity risk is the risk that the Company will be unable to fulfill its obligations on a timely basis or at a reasonable cost. We manage liquidity risk by continuously monitoring actual and projected cash flows, taking into account the seasonality of our sales, income and working capital needs. The Revolving Credit Facility is also used to maintain liquidity, allowing the Company to access funds for operations. Continued compliance with the covenants under the Credit Facilities is dependent on the Company achieving certain financial results. Market conditions are difficult to predict and there is no guarantee that the Company will achieve certain results. In the event of non-compliance, the Company’s lenders have the right to demand repayment of the amounts outstanding under the current lending agreements or pursue other remedies including provision of waivers for financial covenants. The Company will continue to carefully monitor its compliance with its covenants and seek waivers if such need arises. 30 DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in the securities legislation and include controls and procedures designed to ensure that information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted under securities legislation is accumulated and communicated to the Company’s management, including its certifying officers, namely the CEO and CFO, as appropriate to allow timely decisions regarding public disclosure. An evaluation of the design of the Company’s disclosure controls and procedures, as defined under National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings (“NI 52-109”), was carried out under the supervision of the CEO and CFO and with the participation of the Company’s management. Based on that evaluation, the CEO and CFO have concluded that the design and operation of these controls were effective as of February 3, 2024. Although the Company’s disclosure controls and procedures were operating effectively as of February 3, 2024, there can be no assurance that the Company’s disclosure controls and procedures will detect or uncover all failures of persons within the Company to disclose material information otherwise required to be set forth in the Company’s regulatory filings. Internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS. Management is responsible for establishing adequate internal controls over financial reporting for the Company. As required by NI 52-109, the CEO and the CFO have caused the effectiveness of the internal controls over financial reporting to be evaluated using the framework and criteria established in “Internal Control – Integrated Framework’ published by The Committee of Sponsoring Organizations of the Treadway Commission, 2013”. Based on that evaluation, the CEO and the CFO have concluded that the design and operation of the Company’s internal controls over financial reporting, as defined by NI 52-109, were effective as at February 3, 2024. In designing such controls, it should be recognized that due to inherent limitations, any controls, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and may not prevent or detect misstatements. Additionally, management is required to use judgement in evaluating controls and procedures. Therefore, even when determined to be designed effectively, disclosure controls and internal control over financial reporting can provide only reasonable assurance with respect to disclosure, reporting and financial statement preparation. 31 CHANGES IN DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING There were no changes in our disclosure controls and internal controls over financial reporting in F2023 that materially affected, or are likely to materially affect, the reliability of our financial reporting and preparation of our financial statements. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The Annual Financial Statements have been prepared in accordance with IFRS. The preparation of our financial statements requires us to make estimates and judgements that affect the reported amounts of assets, liabilities, sales and expenses. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are more fully described in our Annual Financial Statements, we believe that the following accounting policies and estimates are critical to our business operations and understanding our financial results. The following are the key judgements and sources of estimation uncertainty that we believe could have the most significant impact on the amounts recognized in our consolidated financial statements. Inventory valuation Merchandise inventories are valued at the lower of average cost, using the retail method, and net realizable value, which requires the Company to utilize estimates related to fluctuations in shrinkage, future retail prices, future sell-through of units, seasonality, and costs necessary to sell the inventory. The Company records a write-down to reflect management’s best estimate of the net realizable value of inventory based on the above factors. Impairment of non-financial assets The Company is required to use judgement in determining the grouping of assets to identify their cash generating unit (“CGU”) for the purpose of testing store related fixed assets, including ROU assets. Judgement is further required to determine appropriate groupings of CGUs for the level at which non-store related assets are tested for impairment including intangible assets and goodwill. The Company has determined that each store location is a separate CGU for the purpose of fixed assets and ROU assets impairment testing. For purposes of non-store related non-financial assets, CGUs are grouped at the lowest level that these assets are monitored for internal management purposes or the lowest level where cash inflows are generated. In addition, judgement is used to determine whether a triggering event has occurred requiring an impairment test to be completed. In determining the recoverable amount, defined as the higher of fair value less cost to sell (“FVLCS”) and the value-in-use (“VIU”) of a CGU or a group of CGUs, various estimates are used. FVLCS for fixed assets and ROU assets is determined using estimates such as market rental rates of comparable properties and discount rates. VIU for fixed assets and ROU assets is determined using estimates such as projected future sales and earnings, and a discount rate consistent with external industry information, reflecting the risk associated with the specific cash flows. The Company determines FVLCS for goodwill and indefinite life intangible assets using 32 estimates such as projected future sales, gross profit margin and earnings, a terminal growth rate and a discount rate. Share-based compensation The Company measures the value of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date on which they are granted. Estimating fair value for share-based compensation requires determining the most appropriate valuation model for a grant of equity instruments, which is dependent on the terms and conditions of the grant. The Company is also required to determine the most appropriate inputs to the valuation model, including estimates and assumptions with respect to expected life, risk-free interest rate, volatility, distribution yield, and forfeiture rate. Gift card breakage The Company recognizes revenue from unredeemed gift cards (“breakage”) if the likelihood of gift card redemption by the customer is considered to be remote. The Company estimates its average gift card breakage rate based on historical redemption rates. The resulting revenue from breakage is recognized as redemptions are actualized. Income taxes The calculation of current and deferred income taxes requires management to make certain judgements regarding the tax rules in jurisdictions where the Company performs activities. Application of judgements is required regarding classification of transactions and in assessing probable outcomes of claimed deductions including expectations of future operating results, the timing and reversal of temporary differences, and possible audits of income tax and other tax filings by the tax authorities. Leases The Company has applied judgement to determine the lease term for lease contracts that include renewal or termination options. The assessment of whether the Company is reasonably certain to exercise such options impacts the lease term, which significantly affects the amount of lease liabilities and ROU assets recognized. The Company is required to estimate the incremental borrowing rates used to discount lease liabilities if the interest rate implicit in the lease is not readily determined. In determining the incremental borrowing rates, management considers the Company’s creditworthiness, the security, the term, the value of the underlying leased asset and the economic operational environment of the leased asset. The incremental borrowing rates are subject to change primarily due to macroeconomic factors. 33 NEW ACCOUNTING STANDARDS AND INTERPRETATIONS NOT YET ADOPTED In January 2020, the IASB issued Classification of Liabilities as Current or Non-current, which amends International Accounting Standard 1 – Presentation of Financial Statements (“IAS 1”). The narrow scope amendments affect only the presentation of liabilities in the statement of financial position and not the amount or timing of its recognition. It clarifies that the classification of liabilities as current or non-current is based on rights that are in existence at the end of the reporting period and specifies that classification is unaffected by expectations about whether an entity will exercise its right to defer settlement of a liability. It also introduces a definition of ‘settlement’ to make clear that settlement refers to the transfer to the counterparty of cash, equity instruments, other assets, or services. The amendments are effective for annual reporting periods beginning on or after January 1, 2024. Earlier application is permitted. The Company is currently assessing the potential impact of these amendments. ADDITIONAL INFORMATION Additional information relating to the Company, including the AIF, is available on SEDAR+ at www.sedarplus.ca. The Company’s Shares are listed for trading on the TSX under the symbol “ROOT”. 34 ROOTS CORPORATION Consolidated Financial Statements For the 53-week period ended February 3, 2024 and The 52-week period ended January 28, 2023 (In Canadian dollars) Table of Contents Table of Contents ............................................................................................................................... 36 Consolidated Statement of Financial Position ...................................................................................... 42 Consolidated Statement of Net Income ................................................................................................ 43 Consolidated Statement of Comprehensive Income ............................................................................ 44 Consolidated Statement of Changes in Shareholders’ Equity ............................................................. 45 Consolidated Statement of Cash Flows ............................................................................................... 46 1. 2. 3. 4. 5. 6. 7. 8. 9. Nature of operations and basis of presentation ..................................................................... 47 Material accounting policies ................................................................................................... 51 Operating segments ............................................................................................................... 60 Accounts receivable ............................................................................................................... 61 Inventories ............................................................................................................................. 61 Fixed assets ........................................................................................................................... 62 Intangible assets and Goodwill .............................................................................................. 64 Financial instruments ............................................................................................................. 66 Leases.................................................................................................................................... 68 10. Long-term debt ....................................................................................................................... 70 11. Share capital .......................................................................................................................... 72 12. Earnings per Share ................................................................................................................ 74 13. Share-based compensation ................................................................................................... 75 14. Financial risk management .................................................................................................... 77 15. 16. Income taxes expense ........................................................................................................... 79 Interest expense .................................................................................................................... 81 17. Contingencies ....................................................................................................................... 81 18. Personnel expenses .............................................................................................................. 81 19. Related party transactions ..................................................................................................... 82 20. Other assets ........................................................................................................................... 82 36 KPMG LLP 100 New Park Place, Suite 1400 Vaughan, ON L4K 0J3 Tel 905-265 5900 Fax 905-265 6390 www.kpmg.ca INDEPENDENT AUDITOR’S REPORT To the Shareholders of Roots Corporation Opinion We have audited the consolidated financial statements of Roots Corporation (“the Entity”), which comprise: • • • • • • the consolidated statements of financial position as at February 3, 2024 and January 28, 2023 the consolidated statements of net income for the 53-week and 52-week periods then ended the consolidated statements of comprehensive income for the 53-week and 52- week periods then ended the consolidated statements of changes in shareholders’ equity for the 53-week and 52-week periods then ended the consolidated statements of cash flows for the 53-week and 52-week periods then ended and notes to the consolidated financial statements, including a summary of material accounting policy information (Hereinafter referred to as the “financial statements”). In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Entity as at February 3, 2024 and January 28, 2023, and its consolidated financial performance and its consolidated cash flows for the for the 53-week and 52-week periods then ended in accordance with IFRS Accounting Standards as issued by the International Accounting Standards Board. Basis for Opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the “Auditor’s Responsibilities for the Audit of the Financial Statements” section of our auditor’s report. We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. KPMG LLP, an Ontario limited liability partnership and member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. KPMG Canada provides services to KPMG LLP. Document classification: KPMG Confidential Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements for the 53-week period ended February 3, 2024. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We have determined the matters described below to be the key audit matters to be communicated in our auditor’s report. Evaluation of Impairment of Indefinite Life Intangible Assets for the Direct- to-Consumer Segment Description of the matter We draw attention to Notes 1(f)(ii), 2(f) and 7 to the financial statements. Indefinite life intangible assets are tested for impairment at least annually at the year-end reporting date, and whenever there is an indication that the asset may be impaired. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The Entity has recorded indefinite life intangible assets of $175,044 thousand. For the purpose of impairment testing, indefinite life intangible assets are allocated to the grouping of cash generating units (“CGUs”), which represent the lowest level within the Entity at which these assets are monitored for internal management purposes. Management has determined this grouping to be consistent with the two reportable operating segments: Direct-to-Consumer and Partners and Other. The recoverable amount is based on the greater of the CGU group’s fair value less cost to sell (“FVLCS”) and its value-in-use (“VIU”). The Entity’s significant estimates used in determining the FVLCS include projected future sales, gross profit margin and earnings, terminal growth rate and discount rate. Why the matter is a key audit matter We identified the evaluation of impairment of indefinite life intangible assets for the Direct- to-Consumer segment as a key audit matter. This matter represented an area of significant risk of material misstatement given the magnitude of the balance and the high degree of estimation uncertainty in determining the recoverable amount. Significant auditor judgement and the involvement of professionals with specialized skills and knowledge was required to evaluate the evidence supporting the Entity’s significant estimates due to the sensitivity of the recoverable amount to minor changes in significant estimates. How the matter was addressed in the audit The primary procedures we performed to address this key audit matter included the following: We evaluated the design and tested the operating effectiveness of the control over the Entity’s review of the recoverable amount of the Direct-to-Consumer segment. This control included the review of estimates used to determine the recoverable amount. We compared the Entity’s projected future sales, gross profit margin and earnings used in the prior year estimate to actual results to assess the Entity’s ability to predict projected future sales, gross profit margin and earnings used in the current year impairment testing. We evaluated the appropriateness of the projected future sales, gross profit margin and earnings to the actual historical sales, gross profit margin and earnings generated by the Direct-to-Consumer segment. We took into account changes in conditions and events affecting the segment to assess the adjustments or lack of adjustments made in arriving at the projected future sales, gross profit margin and earnings estimates. We involved valuation professionals with specialized skills and knowledge, who assisted in: • Evaluating the appropriateness of the terminal growth rate by comparing it against long-term estimates of inflation in Canada • Evaluating the appropriateness of the discount rate by comparing it against a discount rate range that was independently developed using publicly available market data for comparable entities. Other Information Management is responsible for the other information. Other information comprises: • the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions. Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit and remain alert for indications that the other information appears to be materially misstated. We obtained the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions as at the date of this auditor’s report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in the auditor’s report. We have nothing to report in this regard. Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS Accounting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Entity’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Entity or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Entity’s financial reporting process. Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity's internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. • Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Entity to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. • Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. • Determine, from the matters communicated with those charged with governance, those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our auditor’s report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Chartered Professional Accountants, Licensed Public Accountants The engagement partner on the audit resulting in this auditor’s report is Bryant William Ramdoo. Vaughan, Canada April 9, 2024 ROOTS CORPORATION Consolidated Statement of Financial Position (In thousands of Canadian dollars) As at February 3, 2024 and January 28, 2023 Assets Current assets Cash Accounts receivable Inventories Prepaid expenses Derivative assets Total current assets Non-current assets: Fixed assets Right-of-use assets Intangible assets Goodwill Other assets Total non-current assets Total assets Liabilities and Shareholders’ Equity Current liabilities: Accounts payable and accrued liabilities Deferred revenue Income taxes payable Current portion of lease liabilities Current portion of long-term debt Total current liabilities Non-current liabilities: Deferred tax liabilities Long-term portion of lease liabilities Long-term debt Total non-current liabilities Total liabilities Shareholders’ equity: Share capital Contributed surplus Accumulated other comprehensive income Retained earnings (deficit) Total shareholders’ equity Total liabilities and shareholders’ equity Contingencies Note February 3, 2024 January 28, 2023 $ 4,14 5 8,14 6 9 7 7 20 $ 14 $ 15 9,14 10,14 15 9,14 10,14 11 13 8 $ 17 28,033 $ 6,074 36,157 5,323 203 75,790 31,921 5,684 54,990 3,421 139 96,155 34,556 67,444 183,866 7,906 300 294,072 369,862 $ 39,170 62,484 186,177 7,906 – 295,737 391,892 24,880 $ 5,301 1,764 21,146 4,024 57,115 38,414 6,049 3,098 22,858 4,613 75,032 22,218 58,726 40,986 121,930 179,045 19,130 57,575 52,113 128,818 203,850 187,544 4,708 149 (1,584) 190,817 369,862 $ 189,338 4,380 102 (5,778) 188,042 391,892 On behalf of the Board of Directors: “Erol Uzumeri” “Richard P. Mavrinac” See accompanying notes to consolidated financial statements. Director Director 42 ROOTS CORPORATION Consolidated Statement of Net Income (In thousands of Canadian dollars, except per share amounts) For the 53-week period ended February 3, 2024 and the 52-week period ended January 28, 2023 Sales Cost of goods sold Gross profit Note February 3, 2024 January 28, 2023 $ 262,668 $ 272,116 5 110,212 115,140 152,456 156,976 Selling, general and administrative expenses 13 140,331 138,625 Income before interest expense and income taxes expense 12,125 18,351 Interest expense Income before income taxes Income taxes expense Net income Basic earnings per Share Diluted earnings per Share 16 15 9,470 2,655 815 $ 1,840 $ 12 $ 12 $ 0.05 $ 0.04 $ 8,756 9,595 2,902 6,693 0.16 0.16 See accompanying notes to consolidated financial statements. 43 ROOTS CORPORATION Consolidated Statement of Comprehensive Income (In thousands of Canadian dollars) For the 53-week period ended February 3, 2024 and the 52-week period ended January 28, 2023 Net income Other comprehensive income, net of taxes: Items that may be subsequently reclassified to profit or loss: Effective portion of changes in fair value of cash flow hedges Gain (cost) of hedging excluded from cash flow hedges Tax impact of cash flow hedges Total other comprehensive income Note February 3, 2024 January 28, 2023 $ 1,840 $ 6,693 8,14 935 839 8,14 8,14 80 (49) (268) 747 (209) 581 Total comprehensive income $ 2,587 $ 7,274 See accompanying notes to consolidated financial statements. 44 ROOTS CORPORATION Consolidated Statement of Changes in Shareholders’ Equity (In thousands of Canadian dollars) For the 53-week period ended February 3, 2024 and the 52-week period ended January 28, 2023 February 3, 2024 Note Share capital Contributed surplus Retained earnings (deficit) Accumulated other comprehensive income Total Balance, January 28, 2023 $ 189,338 $ 4,380 $ (5,778) $ 102 $ 188,042 1,840 – 1,840 Net income Net gain from change in fair value of cash flow hedges, net of income taxes Transfer of net realized gain (loss) on cash flow hedges, net of income taxes Share-based compensation 13 – – – – Issuance of Shares 11,13 437 – – – 454 (126) Purchase of Shares 11 (2,231) – 2,354 Balance, February 3, 2024 $ 187,544 $ 4,708 $ (1,584) $ 149 $ 190,817 January 28, 2023 Note Share capital Contributed surplus Retained earnings (deficit) Accumulated other comprehensive income Total Balance, January 30, 2022 $ 195,070 $ 4,107 $ (13,466) $ 346 $ 186,057 6,693 – 6,693 – – – – – – – – 747 747 (700) (700) – – – 454 311 123 581 581 (825) (825) – – – 380 26 (4,870) Net income Net gain from change in fair value of cash flow hedges, net of income taxes Transfer of net realized gain (loss) on cash flow hedges to inventories, net of income taxes Share-based compensation 13 – – – – Issuance of Shares 11,13 133 – – – 380 (107) Purchase of Shares 11 (5,865) – 995 Balance, January 28, 2023 $ 189,338 $ 4,380 $ (5,778) $ 102 $ 188,042 See accompanying notes to consolidated financial statements. 45 ROOTS CORPORATION Consolidated Statement of Cash Flows (In thousands of Canadian dollars) For the 53-week period ended February 3, 2024 and the 52-week period ended January 28, 2023 Cash provided by (used in): Operating activities: Net income Items not involving cash: Depreciation and amortization Share-based compensation expense Impairment, net of reversals, of fixed assets and right-of-use assets Gain on lease modifications Rent concessions related to practical expedient Interest expense Income taxes expense Interest paid Payment of interest on lease liabilities Income taxes refund (paid) Change in non-cash operating working capital: Accounts receivable Inventories Prepaid expenses Accounts payable and accrued liabilities Deferred revenue Financing activities Long-term debt financing costs Repayment of Term Credit Facility Proceeds from issuance of Shares Purchase of Shares Payment of principal on lease liabilities, net of lease incentives receivable Investing activities Additions to right-of-use assets Additions to fixed assets Additions to intangible assets Investment in other assets Decrease in cash Cash, beginning of period Cash, end of period Note February 3, 2024 January 28, 2023 $ 1,840 $ 6,693 6,7,9 13 29,706 454 29,324 380 6,9 61 435 9 9 16 15 9 4 5 10 10 11 11 9 9 6 7 20 (2,326) – 9,470 815 (4,133) (4,854) 922 (953) (24) 8,756 2,902 (3,425) (4,771) (4,674) (390) 18,833 (1,902) (9,053) (748) 38,695 (768) (11,431) 311 (4,358) (21,203) (37,449) (185) (4,608) (41) (300) (5,134) (3,888) 31,921 933 (13,734) 548 7,197 (289) 29,298 – (4,613) 26 (1,959) (18,644) (25,190) (315) (6,033) – – (6,348) (2,240) 34,161 $ 28,033 $ 31,921 See accompanying notes to consolidated financial statements. 46 ROOTS CORPORATION Notes to Consolidated Financial Statements For the 53-week period ended February 3, 2024 and the 52-week period January 28, 2023 (In thousands of Canadian dollars, except share and per share amounts) 1. Nature of operations and basis of presentation Nature of operations Established in 1973, Roots is a global lifestyle brand. Starting from a small cabin in northern Canada, Roots has become a global brand, which as of February 3, 2024, operated 104 corporate retail stores and 11 temporary pop-up locations in Canada, two corporate retail stores in the United States, and an eCommerce platform, roots.com. We have more than 100 partner-operated stores in Asia, and we also operate a dedicated Roots-branded storefront on Tmall.com in China. We design, market, and sell a broad selection of products in different departments, including women’s, men’s, children’s, and gender- free apparel, leather goods, footwear, and accessories. Our products are built with uncompromising comfort, quality, and style that allows you to feel At Home With NatureTM. We offer products designed to meet life's everyday adventures and provide you with the versatility to live your life to the fullest. We also wholesale through business-to-business channels and license the brand to a select group of licensees selling products to major retailers. Roots Corporation is a Canadian corporation doing business as “Roots” and “Roots Canada”, incorporated under the Canada Business Corporations Act on October 14, 2015. Its head office and registered office is located at 1400 Castlefield Avenue, Toronto, Ontario M6B 4C4. Roots Corporation and its subsidiaries are collectively referred to in these consolidated financial statements as the “Company” or “Roots Corporation”. The Company’s common shares (“Shares”) are listed on the Toronto Stock Exchange (“TSX”) under the trading symbol “ROOT”. Basis of preparation (a) Fiscal period The fiscal year of the Company consists of a 52 or 53 week period ending the closest Saturday to January 31 of each year. The current and comparative fiscal periods for the consolidated financial statements contain 53 and 52 weeks, respectively. (b) Statement of compliance The consolidated financial statements have been prepared in accordance with IFRS Accounting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and using the accounting policies described herein. The consolidated financial statements were authorized for issuance by the Company’s Board of Directors (“Board”) on April 9, 2024. 47 ROOTS CORPORATION Notes to Consolidated Financial Statements For the 53-week period ended February 3, 2024 and the 52-week period January 28, 2023 (In thousands of Canadian dollars, except share and per share amounts) (c) Basis of measurement The consolidated financial statements were prepared on a historical cost basis, except for derivative financial instruments consisting of forward hedging contracts, other assets consisting of non-derivative equity securities, and share-based compensation, which are measured at fair value. The material accounting policies set out below have been applied consistently in the preparation of the consolidated financial statements for the periods presented. (d) Functional currency The consolidated financial statements are presented in Canadian dollars, the Company’s functional currency, unless otherwise stated. All financial information presented in Canadian dollars has been rounded to the nearest thousand, unless otherwise stated. (e) Basis of consolidation The consolidated financial statements include the accounts of Roots Corporation and its wholly- owned subsidiaries, Roots International ULC and Roots Leasing Corporation. An entity is controlled when the Company has the ability to direct the relevant activities of the entity, has exposure or rights to variable returns from its involvement with the entity, and is able to use its power over the entity to affect its returns from the entity. Transactions and balances between the Company and its consolidated subsidiaries have been eliminated on consolidation. (f) Use of estimates and judgements The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income, and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. (i) Inventory valuation Merchandise inventories are valued at the lower of cost and net realizable value, which requires the Company to utilize estimates related to fluctuations in shrinkage, future retail prices, future sell-through of units, seasonality, and costs necessary to sell the inventory. 48 ROOTS CORPORATION Notes to Consolidated Financial Statements For the 53-week period ended February 3, 2024 and the 52-week period January 28, 2023 (In thousands of Canadian dollars, except share and per share amounts) The Company records a write-down to reflect management’s best estimate of the net realizable value of inventory based on the above factors. (ii) Impairment of non-financial assets The Company is required to use judgement in determining the grouping of assets to identify their cash generating units (“CGUs”) for the purpose of testing store related fixed assets, including right-of-use assets (ROU). Judgement is further required to determine appropriate groupings of CGUs for the level at which non-store related assets are tested for impairment, including intangible assets and goodwill. The Company has determined that each store location is a separate CGU for the purpose of fixed assets and right-of- use assets impairment testing. For purposes of non-store related non-financial assets, CGUs are grouped at the lowest level that these assets are monitored for internal management purposes, or at the lowest level where cash inflows are generated. In addition, judgement is used to determine whether a triggering event has occurred requiring an impairment test to be completed. In determining the recoverable amount, defined as the higher of the fair value less cost to sell (“FVLCS”) and the value-in-use (“VIU”) of a CGU or a group of CGUs, various estimates are used. FVLCS for fixed assets and ROU assets is determined using estimates such as market rental rates of comparable properties and discount rates. VIU for fixed assets and ROU assets is determined using estimates such as projected future sales and earnings, and a discount rate consistent with external industry information, reflecting the risk associated with the specific cash flows. The Company determines FVLCS for goodwill and intangible assets using estimates such as projected future sales, gross profit margin and earnings, a terminal growth rate, and a discount rate. (iii) Share-based compensation The Company measures the value of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date on which they are granted. Estimating fair value for share-based compensation requires determining the most appropriate valuation model for a grant of equity instruments, which is dependent on the terms and conditions of the grant. The Company is also required to determine the most appropriate inputs to the valuation model, including estimates and assumptions with respect to expected life, risk-free interest rate, volatility, distribution yield, and forfeiture rate. (iv) Gift card breakage The Company recognizes revenue from unredeemed gift cards (“breakage”) if the likelihood of gift card redemption by the customer is considered to be remote. The Company estimates its average breakage rate based on historical redemption rates since the inception of its gift card program. The resulting revenue from breakage is recognized as redemptions are actualized. 49 ROOTS CORPORATION Notes to Consolidated Financial Statements For the 53-week period ended February 3, 2024 and the 52-week period January 28, 2023 (In thousands of Canadian dollars, except share and per share amounts) (v) Leases The Company has applied judgement to determine the lease term for lease contracts that include renewal or termination options. The assessment of whether the Company is reasonably certain to exercise such options impacts the lease term, which significantly affects the amount of lease liabilities and ROU assets recognized. The Company is required to estimate the incremental borrowing rates used to discount lease liabilities if the interest rate implicit in the lease is not readily determined. In determining the incremental borrowing rates, management considers the Company’s creditworthiness, the security, the term, the value of the underlying leased asset, and the economic operational environment of the leased asset. The incremental borrowing rates are subject to change primarily due to macroeconomic factors. (vi) Income taxes The calculation of current and deferred income taxes requires management to make certain judgements regarding the tax rules in jurisdictions where the Company performs activities. Application of judgements is required regarding classification of transactions and in assessing probable outcomes of claimed deductions, including expectations of future operating results, the timing and reversal of temporary differences, and possible audits of income tax and other tax filings by tax authorities. 50 ROOTS CORPORATION Notes to Consolidated Financial Statements For the 53-week period ended February 3, 2024 and the 52-week period January 28, 2023 (In thousands of Canadian dollars, except share and per share amounts) 2. Material accounting policies The accounting policies described below have been applied consistently to the periods presented in the consolidated financial statements: (a) Foreign currency Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency at the exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rates prevailing at the respective transaction dates. Revenue and expenses denominated in foreign currencies are translated into Canadian dollars at average exchange rates prevailing during the period. The resulting gains or losses on translation are included in the determination of net income for the period. (b) Revenue recognition Revenue includes sales to customers through retail stores operated by the Company and through its eCommerce channels. Sales through retail stores are recognized at the time of purchase, net of a provision for returns. eCommerce sales are recognized at the time of delivery, net of a provision for returns. The provision for returns is estimated based on the historical return rate trends for retail stores and eCommerce sales, respectively. Revenue also includes sales to the Company’s international partner and other corporate customers, which are recognized at the time of shipment or receipt, depending on the specific contractual terms with each customer. Contractually, the Company’s international partner and wholesale partners are unable to return goods purchased from the Company. Royalty revenue is included in sales and is recognized on an accrual basis in accordance with the various contractual agreements, based on the financial results as reported by the Company’s international partner and other third-party licensees, and when collectability is determined to be probable. The Company sells gift cards to customers and recognizes revenue as gift cards are redeemed. The Company also recognizes gift card breakage if the likelihood of gift card redemption by the customer is considered to be remote. The liability associated with gift cards is recognized as a contract liability and recorded in deferred revenue on the consolidated statement of financial position. 51 ROOTS CORPORATION Notes to Consolidated Financial Statements For the 53-week period ended February 3, 2024 and the 52-week period January 28, 2023 (In thousands of Canadian dollars, except share and per share amounts) (c) Inventories Finished goods are comprised of merchandise inventories which are valued at the lower of cost and net realizable value. Cost is measured using weighted average cost. For inventories purchased from third party vendors, cost includes the cost of purchase, freight, import taxes and duties that are directly incurred to bring inventories to their present location and condition. For inventories manufactured by the Company, cost includes direct labour, raw materials, manufacturing, and overhead costs. Raw materials inventories are recorded at the lower of cost and net realizable value. Work in progress is recorded at the lower of costs incurred in the manufacturing process and net realizable value. The Company estimates the net realizable value as the amount at which inventories are expected to be sold, taking into account fluctuations in retail prices due to seasonality, age, excess quantities, condition of the inventory, nature of the inventory, and the estimated variable costs necessary to make the sale. Inventories are written down to net realizable value when the cost of inventories is not estimated to be recoverable due to obsolescence, damage, or declining selling prices. When circumstances that previously caused inventories to be written down below cost no longer exist, the amount of the write-down previously recorded is reversed. (d) Fixed assets Fixed assets are recorded at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. When components of an item of fixed assets have different useful lives, they are accounted for as separate items (major components) of fixed assets. Depreciation is primarily recognized in selling, general and administrative expenses in the consolidated statement of net income, on a diminishing-balance or straight-line basis, over the estimated useful lives of each component of an item of fixed assets from the date that they are available for use. Depreciation methods, useful lives and residual values are reviewed at each annual reporting date and adjusted, prospectively, if appropriate. 52 ROOTS CORPORATION Notes to Consolidated Financial Statements For the 53-week period ended February 3, 2024 and the 52-week period January 28, 2023 (In thousands of Canadian dollars, except share and per share amounts) Fixed assets are depreciated over the estimated useful lives of the assets, from the date they are available for use, based on the following annual rates: Asset Basis Rate Computer hardware Furniture and fixtures Equipment Computer software Leasehold improvements Diminishing-balance Diminishing-balance Diminishing-balance Diminishing-balance Straight-line 20% 20% 10% 20% Term of lease to a maximum of 10 years (e) Intangible assets Intangible assets that have a definite useful life are measured at cost less any accumulated amortization and accumulated impairment losses. Intangible assets with definite lives are amortized over their useful economic life on a straight-line basis from the date that they are available for use. Amortization relating to licence agreements and customer relationships is recognized in selling, general and administrative expenses in the consolidated statement of net income. The estimated useful lives for the current period are as follows: Licence agreements Customer relationships Intellectual property Trade names Goodwill 4 - 13 years 10 years 5 – 10 years Indefinite life Indefinite life Amortization methods, useful lives and residual values are reviewed at each annual reporting date and adjusted, prospectively, if appropriate. Intangible assets with indefinite lives, comprising of trade names, are not amortized but are tested annually for impairment, or more frequently, if events or changes in circumstances indicate that the asset might be impaired, as detailed in the accounting policy note on impairment of non-financial assets. (f) Impairment of non-financial assets Assets with finite lives are tested for impairment at each reporting date whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill and indefinite life intangibles are tested for impairment at least annually at the year-end reporting date, and whenever there is an indication that the asset may be impaired. 53 ROOTS CORPORATION Notes to Consolidated Financial Statements For the 53-week period ended February 3, 2024 and the 52-week period January 28, 2023 (In thousands of Canadian dollars, except share and per share amounts) Events or changes in circumstances which may indicate impairment include a significant change to the Company’s operations, a significant decline in performance, or a change in market conditions which adversely affect the Company. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is based on the greater of the CGU’s FVLCS and its VIU. For purposes of measuring recoverable amounts, store assets are grouped at the lowest levels for which there are largely independent cash flows, which is referred to as a CGU, being at the individual store level for the Company. The Company’s corporate assets do not generate separate cash inflows. If there is an indication that a corporate asset may be impaired, then the recoverable amount is determined for the CGU or group of CGUs to which the corporate asset belongs. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indication that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. (g) Leased assets The Company assesses whether a contract is, or contains, a lease at the inception of the applicable contract. The Company recognizes a ROU asset and a lease liability as the present value of future lease payments when the lessor makes the leased asset available for use by the Company. Lease liabilities include the net present value of fixed payments, variable lease payments that are based on an index or a rate, amounts expected to be payable by the Company under residual value guarantees, and the exercise price of a purchase option or penalties for terminating the lease, if the Company is reasonably certain to exercise those purchase or termination options. Lease liabilities are recognized net of lease incentives receivable. The lease payments are discounted using the interest rate implicit in the lease, or, if that rate cannot be readily determined, the lessee’s incremental borrowing rate. Subsequent to initial measurement, the Company measures lease liabilities at amortized cost using the effective interest rate method. Lease terms applied are the contractual non-cancellable periods of the lease, plus periods covered by renewal options or termination options, if the Company is reasonably certain to exercise those options. Lease liabilities are remeasured when there is a change in lease term, a change in the assessment of an option to purchase the leased asset, a change in expected 54 ROOTS CORPORATION Notes to Consolidated Financial Statements For the 53-week period ended February 3, 2024 and the 52-week period January 28, 2023 (In thousands of Canadian dollars, except share and per share amounts) residual value guarantee, or a change in future lease payments resulting from a change in an index or a rate used to determine those payments. ROU assets are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes the amount of the initial measurement of the related lease liability, plus any lease payments made at or before the commencement date and any initial direct costs and future restoration costs, less any lease incentives received. ROU assets are depreciated on a straight-line basis from the date that the underlying asset is available for use. Depreciation is recorded over the shorter of the lease term and the useful life of the underlying asset, unless the lease transfers ownership of the underlying asset to the lessee by the end of the lease term, in which case depreciation is recorded over the useful life of the underlying asset. Lease payments for assets that are exempt through the short-term exemption and variable payments not based on an index or rate continue to be recognized in selling, general and administrative expenses. (h) Income taxes Income taxes expense comprises current and deferred income taxes. Current income taxes and deferred income taxes are recognized in net income for the period, except for items recognized directly in equity or in other comprehensive income (loss). Current income tax is the expected tax payable on the taxable income or net income for the period, using tax rates enacted or substantively enacted at the reporting date. Deferred income tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred income tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss. In addition, deferred income tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred income tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity. A deferred tax asset is recognized for unused tax losses, tax credits, and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. 55 ROOTS CORPORATION Notes to Consolidated Financial Statements For the 53-week period ended February 3, 2024 and the 52-week period January 28, 2023 (In thousands of Canadian dollars, except share and per share amounts) (i) Share-based compensation The grant date fair value of share-based compensation awards granted to employees is recognized as an employee expense, with a corresponding increase in contributed surplus, over the period that the employees unconditionally become entitled to the awards. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. (j) Earnings per Share (“EPS”) Basic EPS is calculated by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of Shares outstanding during the period. Diluted EPS is calculated by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of Shares outstanding, plus the weighted average number of Shares that would be issued on exercise of dilutive securities granted to employees, as calculated under the treasury stock method, so long as the result would not reduce the loss per Share. (k) Financial instruments Non-derivative financial assets are initially measured at fair value and subsequently measured at amortized cost using the effective interest method, net of any impairment losses. Non-derivative financial liabilities are initially recognized at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these liabilities are measured at amortized cost using the effective interest method. The Company uses derivative financial instruments to manage its exposure to fluctuations in foreign exchange rates and interest rates. The Company designates foreign currency forward contracts (“forward contracts”) under a cash flow hedge for its foreign currency exposure on a portion of its U.S. dollar denominated purchases and designates interest rate swap contracts (“swap contracts”) under a cash flow hedge for its interest rate exposure on a portion of its Credit Facilities (as defined in Note 10). On initial designation of the hedge, the Company formally documents the relationship between the hedging instruments and hedged items, including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. At inception and each quarter-end thereafter, the Company formally assesses the effectiveness of its cash flow hedges. 56 ROOTS CORPORATION Notes to Consolidated Financial Statements For the 53-week period ended February 3, 2024 and the 52-week period January 28, 2023 (In thousands of Canadian dollars, except share and per share amounts) For a cash flow hedge in respect of a forecasted transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately affect reported net income. The time value component of forward contracts designated as cash flow hedges is excluded from the hedging relationship, recorded in other comprehensive income as a cost of hedging and presented separately. The forward contracts and swap contracts used for hedging are recognized at fair value. Subsequent to initial recognition, the forward contracts and swap contracts are measured at fair value and changes therein are accounted for as described below. When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecasted transaction that could affect net income, the effective portion of change in the fair value of the derivative is recognized in other comprehensive income and presented in accumulated other comprehensive income, net of deferred taxes. Amounts accumulated in other comprehensive income are reclassified to net income when the hedged item is recognized in net income. Any ineffective portion of changes in the fair value of the forward contracts or swap contracts is recognized immediately in net income. If the hedging instrument no longer meets the criteria for hedge accounting, expires, or is sold, terminated, or exercised, then hedge accounting is discontinued prospectively. If the forecasted transaction is no longer expected to occur, then the balance in accumulated other comprehensive income is recognized immediately in net income. The Company has classified its financial assets and financial liabilities as follows: Classification Measurement Financial assets: Cash Accounts receivable Lease receivable Derivative assets Other assets Financial liabilities Accounts payable and accrued liabilities Derivative obligations Long-term debt Finance lease obligation (1) Other Comprehensive Income 57 Fair value through profit or loss Amortized cost Amortized cost Fair value through OCI(1) Fair value through OCI(1) Amortized cost Fair value through OCI(1) Amortized cost Amortized cost ROOTS CORPORATION Notes to Consolidated Financial Statements For the 53-week period ended February 3, 2024 and the 52-week period January 28, 2023 (In thousands of Canadian dollars, except share and per share amounts) The Company measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements: • • • Level 1 – inputs that are quoted market prices (unadjusted) in active markets for identical instruments; Level 2 – inputs other than quoted market prices included within Level 1 that are observable either directly (i.e., as prices) or indirectly (i.e., derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data; and Level 3 – inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs that are not observable and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect the difference between the instruments. (l) Recently adopted accounting standards and policies: Equity Investments Equity investments are non-derivative financial assets and are recorded in Other Assets. The Company elects, upon initial recognition and on an instrument-by-instrument basis, to present the fair value of the equity investments in other comprehensive income if they are determined not to be held for trading. The Company determines if these financial assets are held for trading if they are acquired principally for the purpose of selling for short-term profit taking. Subsequent to initial recognition, equity investments are measured at fair value and changes therein are recognized in other comprehensive income (loss). When an investment is derecognized, the accumulated gain or loss in other comprehensive income (loss) is transferred to profit or loss. Amendments to IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors (“IAS 8”) In February 2021, the IASB issued Definition of Accounting Estimates, which amends IAS 8. The amendments introduce a new definition for accounting estimates, clarifying that they are monetary amounts in the financial statements that are subject to measurement uncertainty. The amendments also clarify the relationship between accounting policies and accounting estimates by specifying that a company develops an accounting estimate to achieve the objective set out by an accounting policy. 58 ROOTS CORPORATION Notes to Consolidated Financial Statements For the 53-week period ended February 3, 2024 and the 52-week period January 28, 2023 (In thousands of Canadian dollars, except share and per share amounts) The Company adopted the amendments to IAS 8 effective January 29, 2023. The adoption of amendments to IAS 8 did not have a material impact on the Company’s consolidated financial statements. Amendments to IAS 1 and IFRS Practice Statement 2, Making Material Judgements (“IFRS Practice Statement 2”) In February 2021, the IASB issued Disclosure of Accounting Policies, which amends IAS 1 and IFRS Practice Statement 2. The amendments are intended to help preparers in deciding which accounting policies to disclose in their financial statements. The amendments to IAS 1 require companies to disclose their material accounting policy information rather than their significant accounting policies. The amendments also clarify that accounting policies related to immaterial transactions, other events or conditions are themselves immaterial and as such need not be disclosed, and not all accounting policy information that relates to material transactions, other events or conditions is material to the financial statements. The Company adopted the amendments to IAS 1 and IFRS Practise Statement 2 prospectively effective January 29, 2023. The adoption of amendments to IAS 1 and IFRS Practise Statement 2 did not have a material impact on the Company’s consolidated financial statements. (m) New standards and interpretations not yet adopted Amendments to IAS 1, Presentation of Financial Statements (“IAS 1”) In January 2020, the IASB issued Classification of Liabilities as Current or Non-current, which amends IAS 1, Presentation of Financial Statements. The narrow scope amendments affect only the presentation of liabilities in the statement of financial position and not the amount or timing of its recognition. It clarifies that the classification of liabilities as current or non-current is based on rights that are in existence at the end of the reporting period and specifies that classification is unaffected by expectations about whether an entity will exercise its right to defer settlement of a liability. It also introduces a definition of ‘settlement’ to make clear that settlement refers to the transfer to the counterparty of cash, equity instruments, other assets, or services. The amendments are effective for annual reporting periods beginning on or after January 1, 2024. Earlier application is permitted. The adoption of amendments to IAS 1 will not have a material impact on the Company’s consolidated financial statements. 59 ROOTS CORPORATION Notes to Consolidated Financial Statements For the 53-week period ended February 3, 2024 and the 52-week period January 28, 2023 (In thousands of Canadian dollars, except share and per share amounts) 3. Operating segments The Company has two reportable operating segments: (a) The “Direct-to-Consumer” segment comprises sales through corporate retail stores and the Company’s eCommerce website roots.com; and (b) The “Partners and Other” segment consists primarily of the wholesale of Roots-branded products to our international operating partner. The Partners and Other segment also includes the Company’s sales from its Roots-branded storefront on business-to-consumer marketplace website Tmall.com in China, royalties earned through the licensing of our brand to select manufacturing partners, the wholesale of Roots-branded products to select retail partners, and the sale of custom Roots-branded products to select business clients. The Company defines an operating segment on the same basis that the Chief Operating Decision Maker (the “CODM”) uses to evaluate performance internally and to allocate resources. The Company has determined that the President and Chief Executive Officer is its CODM. The accounting policies of the reportable segments are the same as those described in the Company’s material accounting policies (see Note 2). The Company measures each reportable operating segment’s performance based on sales and gross profit, which is the profit metric used by the CODM for assessing performance of each segment. The Company does not report total assets or total liabilities based on its operating segments. Information for each reportable operating segment, as presented to the CODM, is included below: February 3, 2024 Direct-to- Consumer Partners and Other Total Direct-to- Consumer Partners and Other January 28, 2023 Total Sales $ 222,467 $ 40,201 $ 262,668 $ 231,230 $ 40,886 $ 272,116 Cost of goods sold 86,432 23,780 110,212 90,754 24,386 115,140 Gross profit 136,035 16,421 152,456 140,476 16,500 156,976 Selling, general and administrative expenses(1) Income before interest expense and income taxes expense Interest expense(1) 140,331 12,125 9,470 138,625 18,351 8,756 Income before income taxes expense $ 9,595 (1) These unallocated items represent income and expenses which management does not report when $ 2,655 analyzing segment underlying performance. 60 ROOTS CORPORATION Notes to Consolidated Financial Statements For the 53-week period ended February 3, 2024 and the 52-week period January 28, 2023 (In thousands of Canadian dollars, except share and per share amounts) 4. Accounts receivable February 3, 2024 January 28, 2023 0-90 days 91-120 days >120 days Total 0-90 days 91-120 days >120 days Total Accounts receivable $5,767 $ 87 $ 220 $6,074 $5,283 $ 136 $ 265 $5,684 For the periods ended February 3, 2024 and January 28, 2023, the Company recorded $nil allowance for doubtful accounts receivable. 5. Inventories February 3, 2024 January 28, 2023 Raw materials Work in progress Finished goods – On hand Finished goods – In-transit $ 5,410 $ 517 27,888 2,342 5,274 552 39,895 9,269 $ 36,157 $ 54,990 The cost of merchandise inventories recognized as an expense and included in cost of goods sold for the period ended February 3, 2024 was $103,722 (period ended January 28, 2023 – $108,051). Cost of inventories includes the cost of merchandise and all costs incurred to deliver inventory to the Company’s distribution centre and stores including freight, import taxes and duties. During the period ended February 3, 2024, the Company recorded a $107 provision for inventories with net realizable values below cost (period ended January 28, 2023 – $1,399). For the period ended February 3, 2024, the Company had inventory purchase obligations of $30,788 (January 28, 2023 - $31,224), which represents commitments for the cost, excluding duties and shipping, of outstanding inventory purchases ordered from our vendors and expected to be received within the following fiscal period. These exclude in-transit purchases that have already been recognized. Inventory purchases are part of the normal course of our business. 61 ROOTS CORPORATION Notes to Consolidated Financial Statements For the 53-week period ended February 3, 2024 and the 52-week period January 28, 2023 (In thousands of Canadian dollars, except share and per share amounts) 6. Fixed assets Cost Computer hardware Furniture and fixtures Equipment Computer software Leasehold improvements Total Balance, January 29, 2022 $ 1,907 $ 4,488 $ 3,677 $ 19,561 $ 36,071 $ 65,704 Additions Disposals/adjustments(1) Reclassifications to ROU assets 221 – – 186 (69) – 224 – – 3,178 – – 2,224 (507) (225) 6,033 (576) (225) Balance, January 28, 2023 $ 2,128 $ 4,605 $ 3,901 $ 22,739 $ 37,563 $ 70,936 Additions Disposals/adjustments(1) Balance, February 3, 2024 Accumulated depreciation and impairment losses Balance, January 29, 2022 Depreciation Disposals/adjustments(1) Reclassifications to ROU assets Impairment losses Reversal of impairment losses $ $ 156 (16) 473 (72) 344 – 833 – 2,802 (672) 4,608 (760) 2,268 $ 5,006 $ 4,245 $ 23,572 $ 39,693 $ 74,784 963 $ 1,981 $ 755 $ 9,298 $ 9,860 $ 22,857 209 – – 2 – 463 (69) – – – 292 – – – – 2,142 – – – – 6,061 (507) (38) 596 (242) 9,167 (576) (38) 598 (242) Balance, January 28, 2023 $ 1,174 $ 2,375 $ 1,047 $ 11,440 $ 15,730 $ 31,766 Depreciation Disposals/adjustments(1) Balance, February 3, 2024 Carrying amount January 28, 2023 February 3, 2024 $ $ 180 (16) 472 (72) 279 – 2,160 – 6,131 (672) 9,222 (760) 1,338 $ 2,775 $ 1,326 $ 13,600 $ 21,189 $ 40,228 954 930 $ 2,230 2,231 $ 2,854 2,919 $ 11,299 9,972 $ 21,833 18,504 $ 39,170 34,556 (1) Disposals/adjustments includes the write-off of fully depreciated fixed assets which have no impact to the carrying amount of fixed assets as at February 3, 2024 and January 28, 2023. 62 ROOTS CORPORATION Notes to Consolidated Financial Statements (continued) Year ended January 28, 2017 For the period ended February 3, 2024, the Company recorded $nil of impairment losses (period ended January 28, 2023 – $598). Impairment losses for the period ended January 28, 2023 were in respect of two CGUs using a VIU test in the Direct-to-Consumer operating segment, recorded as part of selling, general and administrative expenses. For the period ended February 3, 2024, the Company recorded $nil of impairment reversals on fixed assets (period ended January 28, 2023 – $242). Impairment reversals for period ended January 28, 2023 were in respect of two CGUs using a VIU test in the Direct-to-Consumer operating segment, recorded as part of selling, general and administrative expenses. The recoverable amount of fixed assets for a store location is based on the VIU of the related CGU. When determining the VIU of a store location, the Company develops a discounted cash flow model for each CGU. The duration of the cash flow projections for individual CGUs varies based on the remaining lease term. Sales forecasts for cash flows are based on actual operating results, operating budgets, and long-term growth rates. The estimate of the VIU of the relevant CGUs was determined using a pre-tax discount rate of 13.0% at February 3, 2024 (January 28, 2023 – 13.0%). 63 ROOTS CORPORATION Notes to Consolidated Financial Statements (continued) Year ended January 28, 2017 7. Intangible assets and Goodwill Trade names License arrangements Customer relationships Intellectual property(1) Total intangible assets Goodwill Cost Balance, January 29, 2022 $ 175,044 $ 25,910 $ 7,766 $ – $ 208,720 $ 52,705 Balance, January 28, 2023 Additions 175,044 – 25,910 – 7,766 – – 41 208,720 41 52,705 – Balance, February 3, 2024 Accumulated amortization and impairment losses $ 175,044 $ 25,910 $ 7,766 $ 41 $ 208,761 $ 52,705 Balance, January 29, 2022 Amortization $ Balance, January 28, 2023 Amortization – – – – $ 15,448 1,527 $ 4,793 775 $ 16,975 1,557 5,568 789 – – – 6 $ 20,241 2,302 $ 22,543 2,352 44,799 – 44,799 – Balance, February 3, 2024 Carrying amount $ – $ 18,532 $ 6,357 $ 6 $ 24,895 $ 44,799 January 28, 2023 February 3, 2024 2,198 1,409 (1) Intellectual property consists of logo designs and registrations. 175,044 175,044 8,935 7,378 $ $ $ $ $ – 35 186,177 183,866 $ 7,906 7,906 Amortization expenses, impairment losses and reversals are recorded in selling, general and administrative expenses in the consolidated statement of net income in the period in which they occur. No impairment losses or reversals were recognized on definite life intangible assets for the period ended February 3, 2024 (period ended January 28, 2023 – $nil). Amortization expense on definite life intangible assets of $2,352 for the period ended February 3, 2024 (period ended January 28, 2023 – $2,302) has been recognized in the consolidated statement of net income. The Company has determined that trade names, primarily consisting of the Roots brand, have an indefinite life based on the brand’s long history and the continued investment being made to support the brand, which is the key value contributor to the ongoing success of the business. Trade names are not amortized and are instead tested for impairment annually or when such changes in events or circumstances indicate a trigger for impairment or a change in its future economic benefits that would result in assessing the appropriateness of its useful life. The goodwill balance was previously recognized as a result of the Company’s acquisition of assets from Roots Canada Ltd., former wholly-owned subsidiary Roots U.S.A., Inc., Roots America L.P., entities controlled by the Company’s founders Michael Budman and Don Green (the “Founders”), and all of the issued and outstanding shares of Roots International ULC, completed on December 1, 2015. 64 ROOTS CORPORATION Notes to Consolidated Financial Statements (continued) Year ended January 28, 2017 The Company performs an annual impairment assessment of indefinite life trade names and goodwill by comparing the carrying value of each CGU group to the recoverable amount of the CGU group. The recoverable amount is based on the higher of the FVLCS and VIU. For the purpose of impairment testing, indefinite life trade names and goodwill are allocated to the grouping of CGUs, which represent the lowest level within the Company at which these assets are monitored for internal management purposes. Management has determined this grouping to be as follows: Indefinite life trade names Direct-to- Consumer Partners and Other Total Direct-to- Consumer Goodwill Partners and Other Total $ 161,040 $ 14,004 $ 175,044 $ – – – – $ – 7,906 $ – 7,906 – $ 161,040 $ 14,004 $ 175,044 $ – $ 7,906 $ 7,906 Balance, January 28, 2023 Impairment Balance, February 3, 2024 As at February 3, 2024, the recoverable amount of each CGU group was based on FVLCS and was determined by discounting the future cash flows generated from the CGU group. The Company included five years of cash flows in its discounted cash flow model. Cash flows for the five years were based on past experiences, actual operating results, and management’s budget projections. The cash flow forecasts were extrapolated beyond the five-year period using an estimated terminal growth rate. Key assumptions used in the Company’s annual impairment assessment as at February 3, 2024 include: • Annual sales growth rates • Terminal growth rate of 2.0% (January 28, 2023 – 2.0%) • After-tax discount rate of 14.5% (January 28, 2023 – 14.5%) Sales growth rates are based on management’s best estimates considering past experiences, actual operating results, budgeted projections and the general outlook for the industry and markets in which the CGU group operates. The projections are prepared separately for each of the Company’s CGU groups to which the individual assets are allocated and are based on the Company’s most recent projections. The after-tax discount rate is based on a risk-free rate, an equity risk premium adjusted for betas of comparable publicly traded companies, an entity-specific risk premium, an after-tax cost of debt based on corporate bond yields, and the capital structure of the Company. A change in the assumptions used in testing the Direct-to-Consumer intangible assets could cause the carrying amount to exceed the estimated recoverable amount. As Direct-to-Consumer is the most sensitive to changes in assumptions, the following mutually excusive changes in the assumptions would result in the carrying value being equal to the recoverable amount: 65 ROOTS CORPORATION Notes to Consolidated Financial Statements (continued) Year ended January 28, 2017 • Increase in the discount rate of 0.2% • Decrease in the average sales growth rates of 0.1% For both periods ended February 3, 2024 and January 28, 2023, the Company completed its annual impairment tests for indefinite life trade names and goodwill and concluded that the recoverable amount exceeded the carrying amount of CGU groups and, therefore, no goodwill and indefinite life intangible asset impairment losses were recorded. 8. Financial instruments The Company’s financial instruments consist of cash, accounts receivable, other assets, accounts payable and accrued liabilities, long-term debt, derivative assets and derivative obligations. The Company has determined that the carrying amount of its short-term financial assets and financial liabilities approximates its fair value due to the short-term maturity of these financial instruments. The fair value of long-term debt approximates its carrying value, as determined based on Level 2 of the fair value hierarchy (see Note 2). The fair value of other assets, which consist of common shares of Saturday Industries Limited (“Mr. Saturday”), are determined using valuation techniques based on unobservable inputs. This has been determined using Level 3 of the fair value hierarchy (see Note 20). The fair value of derivative assets and derivative obligations resulting from forward contracts and swap contracts are determined using a valuation technique that employs the use of market observable inputs and are based on the differences between the contract rates and the market rates as at the period-end date, taking into consideration discounting to reflect the time value of money. This has been determined using Level 2 of the fair value hierarchy. There were no transfers between levels of the fair value hierarchy for the periods ended February 3, 2024 and January 28, 2023. The Company enters into forward contracts to hedge a portion of its exposure to purchases denominated in U.S. dollars. As at February 3, 2024, the Company had outstanding forward contracts to buy US$30,745 (January 28, 2023 – US$26,790) at an average forward rate of 1.34 (January 28, 2023 – 1.32). As at February 3, 2024, the maturity dates on the forward contracts were between February 5, 2024 and January 6, 2025. For the periods ended February 3, 2024 and January 28, 2023, the effective portion of changes in the fair value of all matured forward contracts and outstanding forward contracts resulted in a gain of $397 (net of tax – $292) and a gain of $885 (net of tax – $651), respectively, which were recorded in other comprehensive income. 66 ROOTS CORPORATION Notes to Consolidated Financial Statements (continued) Year ended January 28, 2017 The Company enters into swap contracts to hedge its exposure to changes in the market interest rates for a portion of the Credit Facilities (see Note 10). As at February 3, 2024, the Company had outstanding swap contracts to affix its bankers’ acceptance rate at 4.4% per annum, through September 2024, on $40,000 of its long-term debt under its Credit Facilities (January 28, 2023 - $40,000, through September 2024). For the period ended February 3, 2024, the effective portion of changes in the fair value of swap contracts resulted in a gain of $538 (net of tax - $396), which was recorded in other comprehensive income (January 28, 2023 – loss of $46 (net of tax $34)). 67 ROOTS CORPORATION Notes to Consolidated Financial Statements (continued) Year ended January 28, 2017 9. Leases The Company leases various corporate retail store locations, its head office, a distribution warehouse, a manufacturing facility, and equipment under non-cancellable operating lease agreements. New corporate retail stores typically have a contractual lease period of 5 to 10 years with additional renewal terms available thereafter. Temporary pop-up locations typically have a contract lease period less than two years. Any leases less than 12 months qualify for the short-term exemption discussed in Note 2. (a) Right-of-use assets The following table reconciles the changes in ROU assets for the periods ended February 3, 2024 and January 28, 2023: Cost Balance, beginning of period $ 146,547 $ 134,091 February 3, 2024 January 28, 2023 Additions Adjustments Reclassifications from fixed assets (Note 6) Lease incentives receivable Balance, end of period Accumulated amortization and impairment losses Balance, beginning of period Depreciation Reclassifications from fixed assets (Note 6) Impairment losses Balance, end of period Carrying amount $ $ $ $ 3,264 19,975 – (86) 6,161 6,187 225 (117) 169,700 $ 146,547 84,063 $ 18,132 – 61 102,256 $ 66,091 17,855 38 79 84,063 67,444 $ 62,484 68 ROOTS CORPORATION Notes to Consolidated Financial Statements (continued) Year ended January 28, 2017 For the period ended February 3, 2024, the Company recorded $61 of impairment losses on ROU assets (period ended January 28, 2023 - $79). Impairment losses were in respect of two CGUs (period ended January 28, 2023 – two CGUs) using a VIU test in the Direct-to-Consumer operating segment, recorded as part of selling, general and administrative expenses. The recoverable amount for the ROU assets of a store location is based on the higher of the FVLCS of the lease and the VIU of the related CGU. When determining the VIU of a store location, the Company develops a discounted cash flow model for each CGU. The duration of the cash flow projections for individual CGUs varies based on the remaining lease term. Sales forecasts for cash flows are based on actual operating results, operating budgets, and long-term growth rates. The estimate of the VIU of the relevant CGUs was determined using a pre-tax discount rate of 13.0% at February 3, 2024 (January 28, 2023 – 13.0%). When determining the FVLCS of the lease, the Company assess market rental rates of comparable properties and discount rates. (b) Lease liabilities The following table reconciles the changes in lease liabilities for the periods ended February 3, 2024 and January 28, 2023: February 3, 2024 January 28, 2023 Balance, beginning of period $ 80,433 $ 88,137 Additions Adjustments Lease incentives receivable Interest expense on lease liabilities Rent concessions Repayment of interest and principal on lease liabilities, net of lease incentives receivable 3,079 17,649 (86) 4,854 – 5,846 5,234 (117) 4,771 (24) (26,057) (23,414) Balance, end of period $ 79,872 $ 80,433 Recorded in the consolidated statement of financial position as follows: Current portion of lease liabilities Long-term portion of lease liabilities $ $ 21,146 $ 58,726 79,872 $ 22,858 57,575 80,433 (c) Commitments The Company also has future undiscounted cash flows of $3,120 (period ended January 28, 2023 – $1,833) related to leases not yet commenced but committed to. 69 ROOTS CORPORATION Notes to Consolidated Financial Statements (continued) Year ended January 28, 2017 (d) Variable Lease Payments The Company makes variable lease payments for property tax and insurance charges on leased properties. The Company also has certain retail store leases where portions of the lease payments are contingent on a percentage of sales earned in the retail store. During the period ended February 3, 2024, $9,568 was recognized in selling, general and administrative expenses related to these variable lease arrangements (period ended January 28, 2023 – $10,009). (e) Rent Concessions For the period ended January 28, 2023, the Company received $24 of base rent concessions, which qualified for the practical expedient and were recorded as a reduction in selling, general and administrative expenses. The practical expedient was not applicable during the period ended February 3, 2024. 10. Long-term debt The Company has a secured credit agreement (“Credit Agreement”) with a syndicate of lenders consisting of a term loan (“Term Credit Facility”) and a revolving credit loan (“Revolving Credit Facility”) (together with the Term Credit Facility, the “Credit Facilities”). On April 4, 2023, the Company amended and restated its Credit Agreement to extend the maturity from September 6, 2024 to September 6, 2026. The amendment introduced fallback provisions for the Canadian benchmark given the expected transition from the Canadian Dollar Offered Rate (“CDOR”) to the Canadian Overnight Repo Rate Average (“CORRA”) and transitioned from LIBOR as the U.S benchmark to the secured overnight financing rate (“SOFR”). There were no changes to the $60,000 Revolving Credit Facility limit, which includes the $10,000 swing loan as part of the amendment. The Company has financial and non-financial covenants under the Credit Facilities which allow for certain adjustments to EBITDA (“Adjusted EBITDA”) for purposes of compliance with those covenants. The key financial covenant includes a total debt to Adjusted EBITDA ratio (“Leverage Ratio”) and a fixed charge coverage ratio. As at February 3, 2024, the Company was in compliance with its covenants under the Credit Facilities. The Credit Facilities bear interest according to the type of borrowing advanced, which may be based on a reference rate of the U.S. base rate or the Canadian prime rate, plus a margin that ranges from 175 to 300 bps or the SOFR rate or bankers’ acceptances rate, plus a margin that ranges from 275 to 400 bps. The applicable margins are derived from our Leverage Ratio, as follows: (i) where the U.S. base rate or a Canadian prime rate is used, the margins range from 175 bps at less than 2.0x Leverage Ratio, to 300 bps at greater than or equal to 3.5x Leverage Ratio; and (ii) where the SOFR rate or bankers’ acceptances rate is used, the margins range from 275 bps at less than 2.0x Leverage Ratio, to 400 bps at greater than or equal to 3.5x Leverage Ratio. The Company uses interest rate swap contracts to hedge the volatility of the underlying bankers’ acceptance reference rate on $40,000 of its long-term debt, through September 2024 (see Note 8). 70 ROOTS CORPORATION Notes to Consolidated Financial Statements (continued) Year ended January 28, 2017 As at February 3, 2024 and January 28, 2023, there were no amounts drawn on the Revolving Credit Facility. During the period ended February 3, 2024, the weighted average effective interest rate of the Credit Facilities was 7.7% (period ended January 28, 2023 – 5.5%). The following table reconciles the changes in cash flows from financing activities for long-term debt for the periods ended February 3, 2024 and January 28, 2023: February 3, 2024 January 28, 2023 Long-term debt, beginning of period $ 56,726 $ 60,779 Long-term debt repayments of Term Credit Facility Long-term debt financing costs paid Total cash flow from long-term debt financing activities Amortization of long-term debt financing costs Total non-cash long-term debt activity (11,431) (768) 44,527 483 483 (4,613) – 56,166 560 560 Total long-term debt, end of period (1) 56,726 (1) As at February 3, 2024, total long-term debt of $45,010 was net of $1,194 unamortized long-term debt financing costs. As at January 28, 2023, total long-term debt of $56,726 was net of $909 unamortized long-term debt financing costs. 45,010 $ $ Recorded in the consolidated statement of financial position as follows: Current portion of long-term debt Long-term portion of long-term debt $ 4,024 40,986 $ 4,613 52,113 $ 45,010 $ 56,726 As at February 3, 2024, principal repayments due on long-term debt were as follows: Within 1 year Between 1 – 3 years Total Term Credit Facility $ $ 4,024 42,180 46,204 71 ROOTS CORPORATION Notes to Consolidated Financial Statements (continued) Year ended January 28, 2017 11. Share capital The Company’s authorized share capital consists of an unlimited number of Shares and an unlimited number of preferred shares, issuable in series. The holders of Shares are entitled to receive distributions as declared from time to time by the Board. Shareholders are entitled to one vote per Share at shareholder meetings of the Company. Preferred shares of each series, if and when issued, will be entitled to preference over Shares with respect to the payment of dividends. Except as provided in any special rights or restrictions attaching to any series of preferred shares issued from time to time, the holders of preferred shares will not be entitled to vote at any shareholder meetings of the Company. As at February 3, 2024, there were 40,250,213 Shares (January 28, 2023 – 41,461,863 Shares) and nil preferred shares (January 28, 2023 – nil preferred shares) issued and outstanding. All issued Shares are fully paid. There were no dividends or distributions declared during the periods ended February 3, 2024 and January 28, 2023. The following table provides a summary of changes to the Company’s share capital: Outstanding Shares, beginning of period February 3, 2024 January 28, 2023 Number of Shares Share capital Number of Shares Share capital 41,461,863 $ 189,338 42,054,061 $ 95,070 Issuance of Shares Purchase of Shares(1) 226,668 (1,438,318) 437 (2,231) 39,671 (631,869) 133 (5,865) Outstanding Shares, end of period 40,250,213 $ 187,544 41,461,863 $ 189,338 (1) Reduction to share capital includes the reversal of the $4,481 prior year obligation to repurchase shares under the ASPP, less $6,712 for the purchase of 1,438,318 shares for cancellation. During the period ended February 3, 2024, 226,668 Shares (January 28, 2023 – 39,671 Shares) were issued from treasury as a result of the exercise of 226,668 stock options (January 28, 2023 – 18,334 stock options) and nil restricted share units (“RSUs”) (January 28, 2023 – 21,337 RSUs) granted under the Company’s Omnibus Equity Incentive Plan (the “Omnibus Plan”), see Note 13. 72 ROOTS CORPORATION Notes to Consolidated Financial Statements (continued) Year ended January 28, 2017 Share Purchase On December 14, 2021, the TSX accepted the Company’s notice of intention to commence a Normal Course Issuer Bid (“NCIB”), allowing the Company to purchase, at its discretion, up to 2,172,928 Shares. The program commenced on December 16, 2021 and terminated on December 15, 2022. On December 9, 2022, the Company renewed its NCIB to purchase, at its discretion, up to 2,119,667 Shares. The program commenced on December 16, 2022 and terminated on December 15, 2023. On January 3, 2022, the Company entered into an Automatic Share Purchase Plan (“ASPP”) that allowed the purchase of Shares for cancellation under the NCIB, under previously determined parameters, at any time, including during trading blackout periods. As at January 28, 2023, an obligation of $4,481 was recognized in accounts payable and accrued liabilities for the purchase of Shares under the ASPP and recorded against share capital. The ASPP was terminated upon the termination of the NCIB on December 15, 2023. During the period ended February 3, 2024, 1,438,318 Shares were purchased for cancellation, for aggregate consideration of $4,358, resulting in a decrease to share capital of $6,712 and an increase to retained earnings (deficit) of $2,354. During the period ended January 28, 2023, 631,869 Shares were purchased for cancellation, for aggregate consideration of $1,959, resulting in a decrease to share capital of $2,954 and an increase to retained earnings (deficit) of $995. 73 ROOTS CORPORATION Notes to Consolidated Financial Statements (continued) Year ended January 28, 2017 12. Earnings per Share The Company presents basic and diluted earnings per Share (“EPS”) data for its Shares. Basic EPS is calculated by dividing net income by the weighted average number of Shares outstanding during the period. Diluted EPS is determined by adjusting net income and the weighted average number of Shares outstanding, for the effects of all dilutive potential Shares, which comprise share-based compensation granted to employees. Weighted average Shares outstanding Dilutive share-based compensation February 3, 2024 January 28, 2023 40,657,335 381,479 41,739,504 528,399 Dilutive weighted average Shares outstanding 41,038,814 42,267,903 February 3, 2024 January 28, 2023 Net income $ 1,840 $ 6,693 Basic earnings per Share Diluted earnings per Share $ 0.05 $ $ 0.04 $ 0.16 0.16 For the periods ended February 3, 2024 and January 28, 2023, 1,333,328 and 1,236,905 stock options, respectively, were not included in the calculation of dilutive weighted average Shares outstanding, as they were not “in-the-money” and therefore anti-dilutive. For the periods ended February 3, 2024 and January 28, 2023, no RSUs were excluded in the calculation of diluted EPS. For the period ended February 3, 2024, 100,000 common share purchase warrants (“Warrants”) were not included in the calculation of diluted EPS as they were anti-dilutive. There were no Warrants during the period ended January 28, 2023. 74 ROOTS CORPORATION Notes to Consolidated Financial Statements (continued) Year ended January 28, 2017 13. Share-based compensation Under the various share-based compensation plans, the Company may grant stock options or other security-based instruments to buy up to 3,445,745 Shares. As at February 3, 2024, 2,164,828 stock options, 100,000 Warrants and 15,985 RSUs were granted and outstanding. The following is a summary of the Company’s stock option activity: For the period ended February 3, 2024 Outstanding options, beginning of period Granted(1) Exercised Forfeited Outstanding options, end of period Exercisable options, end of period Legacy Employee Option Plan Number of options Weighted average exercise price Omnibus Plan Omnibus Plan Total Weighted average exercise price Number of warrants Weighted average exercise price Number of options & warrants Number of options 214,186 – – (58,902) $ 6.26 – – 6.26 2,080,887 350,000 (226,668) (194,675) $ 2.76 3.00 1.37 4.00 – 100,000 – – – $2.98 – – 2,295,073 450,000 (226,668) (253,577) Weighted average exercise price $ 3.09 3.00 1.37 4.52 155,284 $ 6.26 2,009,544 $ 2.84 100,000 $2.98 2,264,828 $ 3.08 155,284 $ 6.26 1,348,048 $ 2.84 – – 1,503,332 $ 3.08 (1) The granted Warrants were issued against the Omnibus plan, reducing the available instruments to issue. For the period ended January 28, 2023 Legacy Employee Option Plan Omnibus Plan Total Number of options Weighted average exercise price Number of options Weighted average exercise price Number of options Weighted average exercise price Outstanding options, beginning of period Granted Exercised Forfeited Outstanding options, end of period Exercisable options, end of period 321,282 – – (107,096) $ 6.26 – – 6.26 2,210,181 150,000 (18,334) (260,960) $ 2.84 2.47 1.41 3.36 2,531,463 150,000 (18,334) (368,056) $ 3.28 2.47 1.41 4.20 214,186 $ 6.26 2,080,887 $ 2.76 2,295,073 $ 3.09 214,186 $ 6.26 1,177,392 $ 2.73 1,391,578 $ 3.28 The fair value of stock options granted during the period ended February 3, 2024 was $394 (period ended January 28, 2023 – $145). During the period ended February 3, 2024, the Company issued 100,000 Warrants to Mr. Saturday as part of the Company’s appointment of Mr. Saturday and its principal Joey Gollish as Creative Director in Residence. The Warrants are subject to adjustment under customary anti-dilution provisions and time vesting conditions and will expire ten years from the date of issuance. Each Warrant can be exercised to purchase one Share at a price of $2.98 per Share. The fair value of the Warrants granted is $113. 75 ROOTS CORPORATION Notes to Consolidated Financial Statements (continued) Year ended January 28, 2017 The fair value of the stock options and Warrants issued in the year are estimated at the date of grant using the Black Scholes model and using the following assumptions: February 3, 2024 January 28, 2023 Expected volatility Share price at grant date Exercise price Risk-free interest rate Expected term Fair value per option 33.0% – 33.6% $3.00 – $3.00 $2.98 – $3.00 2.77% – 2.86% 34.4% – 35.5% $2.47 – $2.47 $2.47 – $2.47 2.84% – 2.95% 5.5 years – 6.5 years 5.5 years – 6.5 years $0.93 – $0.99 $1.09 – $1.17 The computation of expected volatility was based on the historical volatility of comparable companies from a representative peer group selected based on industry. The risk-free interest rate is based on Government of Canada bond yields with maturities that coincide with the exercise period and terms of the grant. The expected life estimate was determined by management based on a number of factors including vesting terms, exercise behaviour and the contractual term of the options. The following is a summary of the Company’s RSU and deferred share unit (“DSU”) activity: For the period ended February 3, 2024 Legacy Equity Incentive Plan Omnibus Plan Number of RSUs Number of RSUs DSU Plan Number of DSUs Total Number of RSUs Number of DSUs Units, beginning of period Granted Units, end of period 15,985 – 15,985 – – – 779,695 131,830 15,985 – 779,695 131,830 911,525 15,985 911,525 For the period ended January 28, 2023 Legacy Equity Incentive Plan Omnibus Plan Number of RSUs Number of RSUs DSU Plan Number of DSUs Total Number of RSUs Number of DSUs Units, beginning of period Granted Exercised Units, end of period 15,985 – – 15,985 21,337 – (21,337) 549,948 229,747 – 37,322 – (21,337) 549,948 229,747 – – 779,695 15,985 779,695 There were 15,985 RSUs vested as at February 3, 2024 (January 28, 2023 – 15,985). The fair value of DSUs granted during the period ended February 3, 2024 was $360 (period ended January 28, 2023 – $587). The fair values of RSUs and DSUs granted are calculated based on the closing price of a Share on the TSX on the last trading date immediately prior to the date of grant. 76 ROOTS CORPORATION Notes to Consolidated Financial Statements (continued) Year ended January 28, 2017 The Company’s DSUs are cash-settled instruments, such that when exercised, participants will receive a payment in cash equal to the fair market value of the Shares represented by the DSUs on the exercise date. The Company records the fair market value of potential cash-settlement obligations from existing DSUs in accounts payable and accrued liabilities. All changes to the fair value of the liability are recorded in the consolidated statement of net income. For the period ended February 3, 2024, the fair market value of future DSU cash-settlement obligations was $2,142 (period ended January 28, 2023 – $2,230). During the periods ended February 3, 2024 and January 28, 2023, the Company recorded a gain of $448 and a gain of $94, respectively, from the changes to fair market value of DSU cash- settlement obligations. The grant date fair value of share-based compensation awards granted to employees is recognized as share-based compensation expense, recorded in selling, general and administrative expenses with a corresponding increase to contributed surplus, over the period that the employees unconditionally become entitled to the awards. For the period ended February 3, 2024, the Company recorded share- based compensation expense of $454 (period ended January 28, 2023 - $380). 14. Financial risk management The Company has exposure to the following risks from its use of financial instruments: (a) Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with its financial liabilities. The Company prepares cash flow forecasts to ensure it has sufficient funds through operations and access to debt facilities to meet its financial obligations. The Company maintains the Credit Facilities, as described in Note 10, allowing it to access funds for operations. Continued compliance with the covenants under the Credit Facilities is dependent on the Company achieving financial forecasts. Market conditions are difficult to predict and there is no assurance that the Company will achieve its forecasts. In the event of non-compliance, the Company’s lenders have the right to demand repayment of the amounts outstanding under the current lending agreements or pursue other remedies. The contractual maturities of the Company’s current and long-term financial liabilities as at February 3, 2024, excluding interest payments, are as follows: Carrying amount Contractual cash flows Under 1 year 1 – 3 years 3 – 5 years More than 5 years Remaining to maturity Non-derivative financial liabilities Accounts payable and accrued liabilities Long-term debt Lease liabilities $ 24,880 $ 24,880 $ 24,880 $ – $ – $ – 45,010 79,872 46,204 96,363 4,024 24,041 42,180 39,174 – 23,344 – 9,804 $ 149,762 $ 167,447 $ 52,945 $ 81,354 $ 23,344 $ 9,804 77 ROOTS CORPORATION Notes to Consolidated Financial Statements (continued) Year ended January 28, 2017 (b) Currency risk The Company is exposed to foreign exchange risk on foreign currency denominated financial assets and liabilities. A five-percentage point change in the Canadian dollar against the U.S. dollar, assuming that all other variables are constant, would have changed pre-tax net income for the period ended February 3, 2024 by $200 (period ended January 28, 2023 – $224), as a result of the revaluation on these financial assets and liabilities. The Company purchases a significant amount of its merchandise in U.S. dollars and enters into forward contracts to reduce the foreign exchange risk with respect to these U.S. dollar denominated purchases. A five-percentage point change in the Canadian dollar against the U.S. dollar, assuming that all other variables remain constant, would have changed other comprehensive income for the period ended February 3, 2024 by $2,018 (period ended January 28, 2023 – $1,743), as a result of the revaluation on the Company’s forward contracts. (c) Interest rate risk Market fluctuations in interest rates impact the Company’s earnings with respect to cash borrowings under the Credit Facilities. During the period ended February 3, 2024, the Company hedged its exposure to the volatility of the interest rate on $40,000 of its long-term debt under its Credit Facilities (January 28, 2023 - $40,000), reducing the impact of market fluctuations in interest rates on pre-tax net income. A one-percentage point change in the applicable interest rate would have changed pre-tax net income for the period ended February 3, 2024 by $170 (period ended January 28, 2023 – $581). (d) Credit risk Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company’s financial instruments that are exposed to concentrations of credit risk are primarily cash, accounts receivable and derivative contracts used to hedge market risks. The Company limits its exposure to credit risk with respect to cash and derivative contracts by dealing primarily with large Canadian and U.S. financial institutions. The Company’s accounts receivable consists primarily of receivables from business partners in the Partners and Other segment, which are settled in the following fiscal quarter. As at February 3, 2024, the Company’s maximum exposure to credit risk for accounts receivable was $6,074 (January 28, 2023 - $5,684). 78 ROOTS CORPORATION Notes to Consolidated Financial Statements (continued) Year ended January 28, 2017 (e) Capital management The Company manages its capital and capital structure with the objective of ensuring that sufficient liquidity is available to support its financial obligations and to execute its strategic plans. The Company considers net income before interest expense, income taxes expense and depreciation and amortization (“EBITDA”) as a measure of its ability to service its debt and meet other financial obligations as they become due. 15. Income taxes expense The Company’s income taxes expense comprises the following: February 3, 2024 January 28, 2023 Current income taxes expense (recovery) $ (2,258) $ 1,066 Deferred income taxes expense relating to the origination and reversal of temporary differences: 3,073 1,836 Total income taxes expense $ 815 $ 2,902 The effective income tax rate in the consolidated statement of net income and consolidated statement of comprehensive income was reported at rates different than the combined basic Canadian federal and provincial average statutory income tax rates, as follows: Combined basic federal and provincial average statutory tax rate Non-deductible expenses Effective tax rate February 3, 2024 January 28, 2023 26.5% 26.5% 4.2% 30.7% 3.8% 30.3% The non-deductible expenses for income tax purposes primarily relate to non-deductible expenses share based compensation expenses. 79 ROOTS CORPORATION Notes to Consolidated Financial Statements (continued) Year ended January 28, 2017 For the period ended February 3, 2024, the Company does not have any unrecognized deferred tax assets. The unrecognized deferred tax asset for the period January 28, 2023, related to $18,201 of capital losses expired during the year. The following tables outline the movements in the deferred tax liabilities: As at January 28, 2023 Expense (Recovery) Other Comprehensive Income (Loss) As at February 3, 2024 Deferred financing costs Fixed assets ROU assets and lease liabilities Intangible assets and goodwill Derivative obligations Timing of reserve deductibility $ 88 $ (211) (9) $ – – 980 $ (1,296) 21,178 55 (684) 641 1,480 (105) 86 – – 15 – 79 769 (655) 22,658 (35) (598) $ 19,130 $ 3,073 $ 15 $ 22,218 As at January 29, 2022 Expense (Recovery) Other Comprehensive Income (Loss) As at January 28, 2023 Deferred financing costs Fixed assets ROU assets and lease liabilities Intangible assets and goodwill Derivative obligations Timing of reserve deductibility $ 74 $ 14 $ – $ (410) (1,490) 19,674 120 (585) 199 194 1,504 24 (99) – – – (89) – 88 (211) (1,296) 21,178 55 (684) $ 17,383 $ 1,836 $ (89) $ 19,130 80 ROOTS CORPORATION Notes to Consolidated Financial Statements (continued) Year ended January 28, 2017 16. Interest expense The Company’s interest expense comprises the following: February 3, 2024 January 28, 2023 Interest on lease liabilities (note 9) Interest on Credit Facilities (note 10) Amortization of deferred financing fees (note 10) Interest revenue $ 4,854 4,702 483 (569) $ 4,771 3,688 560 (263) Total interest expense $ 9,470 $ 8,756 17. Contingencies During the normal course of business, the Company, from time to time, becomes involved in various claims and legal proceedings. Although such matters cannot be predicted with certainty, management currently considers the Company’s exposure to such claims and litigation, to the extent not covered by the Company’s insurance policies or otherwise provided for, not to be material to the Company’s financial position. In addition, the Company is subject to tax audits from various tax authorities on an ongoing basis. As a result, from time to time, tax authorities may disagree with the positions and conclusions taken by the Company in its tax filings or legislation could be amended or interpretations of current legislation could change, any of which events could lead to reassessments. The Company is not aware of any potential liabilities from any reassessments, nor any other liabilities that may arise from the tax positions taken. 18. Personnel expenses Wages and salaries Benefits and other incentives Total personnel expenses February 3, 2024 January 28, 2023 $ $ 52,748 12,493 $ 50,278 9,456 65,241 $ 59,734 81 ROOTS CORPORATION Notes to Consolidated Financial Statements (continued) Year ended January 28, 2017 19. Related party transactions The Company’s related parties include key management personnel and key shareholders of the Company, including other entities under common control. Investment funds managed by Searchlight Capital Partners, L.P. (“Searchlight”) beneficially own approximately 51.0% of the total issued and outstanding Shares and the Founders, through their wholly-owned entities, beneficially own approximately 13.0% of the total issued and outstanding Shares. All transactions described below are in the normal course of business and have been accounted for at their exchange value. (a) Transactions with shareholders The Company leases the building for its leather factory from companies that are under common control of the Founders. The rent paid on this property was $358 for the period ended February 3, 2024 (January 28, 2023 - $284). (b) Transactions with key management personnel Key management of the Company includes members of the Board, as well as members of the Company’s executive team. Key management personnel remuneration includes the following: Salaries, benefits and incentives, and consulting fees Management share-based compensation Director fees $ 4,625 $ 332 648 4,129 345 648 February 3, 2024 January 28, 2023 Total 20. Other assets $ 5,605 $ 5,122 During the period ended February 3, 2024, the Company made a minority equity investment in Mr. Saturday by acquiring common shares in Mr. Saturday (“Mr. Saturday Shares”), for a total of $300, as part of the Company’s appointment of Mr. Saturday and its principal Joey Gollish as Creative Director in Residence. The Company elected, upon initial recognition, to present changes in the fair value of the Mr. Saturday Shares in other comprehensive income as the Company determined they are not held-for-trading. As at February 3, 2024, the Mr. Saturday Shares had a fair value of $300, resulting in no gain or loss for the period ended February 3, 2024. There were $nil other assets for the period ended January 28, 2023. 82 83 84 

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