Sleep Country Canada Holdings Inc

Sleep Country Canada Holdings Inc.

Consolidated Financial Statements

December 31, 2020 and December 31, 2019

(in thousands of Canadian dollars)

Independent auditor’s report

To the Shareholders of Sleep Country Canada Holdings Inc.

Our opinion

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Sleep Country Canada Holdings Inc. and its subsidiaries (together, the Company) as at December 31, 2020 and 2019, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS).

What we have audited

The Company’s consolidated financial statements comprise:

●●●●●

the consolidated statements of financial position as at December 31, 2020 and 2019; the consolidated statements of income and comprehensive income for the years then ended; the consolidated statements of changes in shareholders’ equity for the years then ended; the consolidated statements of cash flows for the years then ended; and the notes to the consolidated financial statements, which include significant accounting policies and other explanatory information.

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 consolidated financial statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements.

PricewaterhouseCoopers LLP PwC Centre, 354 Davis Road, Suite 600, Oakville, Ontario, Canada L6J 0C5 T: +1 905 815 6300, F: +1 905 815 6499

“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended December 31, 2020. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Key audit matter

How our audit addressed the key audit matter

Impairment assessment of goodwill and indefinite life intangible assets

●

Evaluated how management determined the recoverable amounts of the goodwill and indefinite life intangible assets for each CGU,

which included the following:

Refer to note 3 – Summary of significant

accounting policies, note 4 – Critical accounting estimates and judgments and note 9 – Goodwill and intangible assets to the consolidated financial statements.



Tested the appropriateness of the method used and the mathematical accuracy of the discounted cash flow models.



Tested the reasonableness of the significant assumptions applied by management in the discounted cash flow models by:
The Company had goodwill of $300.9 million and indefinite life intangible assets of $101.5 million as at December 31, 2020. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows. Goodwill and indefinite life intangible assets (brands) are allocated to cash generating units (CGUs) for the purpose of impairment testing. Management tests goodwill and brands for impairment annually on December 31 or more frequently if events or changes in circumstances indicate the asset might be impaired. The impairment tests are performed by comparing the carrying value of the CGUs with their recoverable amount, which is the higher of their fair value less costs of disposal and their value in use. Management used discounted cash flow models to determine the CGUs’ value in use. Significant assumptions used in the discounted cash flow models included revenue growth rates, terminal growth rates and discount rates. No impairment was recognized as a result of the 2020 impairment tests.

o

comparing the revenue growth rates to the budget approved by the Board of Directors and historical trends, and considering consistency with available third party published industry data;

oo

comparing the terminal growth rates to historical trends and considering consistency with available third party published industry data; and

comparing discount rates to externally derived data.



Tested the underlying data used in the discounted cash flow models.

Tested the disclosures made in the consolidated financial statements.

We considered this a key audit matter due to (i) the significance of the goodwill and indefinite life intangible assets balances; (ii) the significant judgments made by management in determining the recoverable amounts of the CGUs, including the use of significant assumptions; and (iii) the audit effort and auditor’s judgment involved in testing those significant assumptions.

Other information

Management is responsible for the other information. The other information comprises the Management’s Discussion and Analysis, which we obtained prior to the date of this auditor’s report and the information, other than the consolidated financial statements and our auditor’s report thereon, included in the annual report, which is expected to be made available to us after that date.

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated 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 consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

If, based on the work we have performed on the other information obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the information, other than the consolidated financial statements and our auditor’s report thereon, included in the annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance.

Responsibilities of management and those charged with governance for the consolidated financial statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Company’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 Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

Auditor’s responsibilities for the audit of the consolidated financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated 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 these consolidated 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 consolidated 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 Company’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 Company’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 consolidated 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 Company to cease to continue as a going concern.

●●

Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We 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.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated 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 report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditor’s report is Adam Boutros.

/s/ PricewaterhouseCoopers LLP

Chartered Professional Accountants, Licensed Public Accountants Oakville, Ontario March 2, 2021

Consolidated Statements of Financial Position

As at December 31, 2020 and December 31, 2019

2020
$
2019
$
Assets

Current assets

Cash

38,317

9,668
68,717
6,611
44,040 20,899 65,361
6,008
Trade and other receivables (note 5) Inventories (note 6) Prepaid expenses and deposits (note 13)

123,313
68,151
136,308
71,486

Property and equipment (note 7) Right-of-use assets (note 8) Deferred tax assets (note 13) Intangible assets (note 9) Goodwill (note 9)

258,231
4,338
263,777
3,029
147,434 300,884 902,351
141,568 300,884 917,052

Liabilities Current liabilities

Trade and other payables (note 10) Customer deposits Lease liabilities (note 8) Other liabilities (note 11)
91,741 26,145 35,671 25,000
68,156 24,415 33,309

—

178,557
867
125,880
18,406

Other liabilities (note 11) Deferred tax liabilities (note 13) Lease liabilities (note 8)

18,810
268,302
77,273
543,809
21,060
271,112 175,084 611,542

Long-term debt (note 3 and 12) Shareholders’ Equity Share capital and other (note 15) Retained earnings (deficit)

354,210
4,332
350,858 (45,348) 305,510 917,052
358,542 902,351

Contingent liabilities and unrecognized contractual commitments (note 17)

Approved by the Board of Directors

(Signed) Douglas Bradley - Director

(Signed) David Shaw - Director

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Statements of Income and Comprehensive Income

For the years ended December 31, 2020 and December 31, 2019

(in thousands of Canadian dollars, except per share amounts)

2020
$
2019
$

Revenues

757,699 513,203 244,496 134,926
712,372 489,082 223,290 125,826

Cost of sales (note 6 and 14) Gross profit General and administrative expenses (note 14) Income before finance related expenses, interest and other expenses and income taxes

109,570
25,363
200
97,464 21,149
(788

Finance related expenses (note 12) Interest and other expenses (income) – net

)

25,563 84,007
20,361 77,103

Income before provision for income taxes Provision for income taxes (note 13)

Current Deferred
24,259 (3,559)
18,294
3,349

20,700 63,307
21,643 55,460

Net income and comprehensive income for the year Earnings per share attributed to common shareholders

Basic earnings per share (in dollars) (note 16) Diluted earnings per share (in dollars) (note 16)
1.73 1.71
1.50 1.49

Consolidated Statements of Changes in Shareholders’ Equity

Share Capital and other
Retained Earnings (Deficit)
$
Common
Shares
$
Contributed surplus
$
Total equity
$
Number of shares

Balance – January 1, 2019

37,059,430

346,206

6,982

(66,357)

286,831

Net income for the year

——
——
——

55,460
(29,208)
55,460

(29,208)

Dividends declared and paid

Shares issued on exercise of sharebased compensation option/unit Share-based compensation (note 19) Share repurchase (note 15) Excess of purchase price over average cost
93,584

—

(510,829)
1,707

—

(10,005)
(1,707)
2,432

—
———
—

2,432
(10,005)

—

36,642,185 36,642,185
5,243
343,151 343,151

—

7,707 7,707
(5,243)
(45,348) (45,348)

—

305,510 305,510

Balance – December 31, 2019 Balance – January 1, 2020

Net income for the year Dividends declared and paid

——
——
——

63,307
(13,627)
63,307
(13,627)
Shares issued on exercise of sharebased compensation option/unit Share-based compensation (note 19)

58,579

2,096

(2,096)

3,352

——
—

3,352

—

Balance – December 31, 2020

36,700,764

345,247

8,963

4,332

358,542

Consolidated Statements of Cash Flows

2020
$
2019
$
Cash provided by (used in)

Operating activities

Net income for the year

63,307

55,460

Items not affecting cash
Depreciation of property and equipment (note 7) Depreciation of right-of-use assets (note 8) Amortization of intangible assets (note 9) Share-based compensation (note 19) Finance related expenses (note 12) Warranty liability
15,306 36,576
4,991 3,352
25,363
(23)
14,252 35,724
4,473 2,432
21,149
(26)
(Gain) loss on disposal of property and equipment Decommissioning liabilities
(42)
37
45 28

Deferred income taxes (note 13)

(3,559)

3,349

145,308

136,886

Changes in non-cash items relating to operating activities
Trade and other receivables Inventories
12,381 (3,356)
(603)
18,240
1,730
(6,749)
(10,632)
(464)
11,055
1,964
Prepaid expenses and deposits Trade and other payables Customer deposits

28,392

(4,826)

173,700

132,060

Investing activities

Purchase of property and equipment Purchase of right-of-use assets Purchase of intangible assets
(10,838)
(58)
(6,761)
(17,657)
(17,595)
(35)
(17,819) (35,449)

Financing activities

Shares repurchased (note 15)

—

34,200
(132,000)
(358)
(13,627) (17,416) (32,565)
(161,766)
(5,723)
(10,005)
26,700
(19,500)
(28)
(29,208) (18,489) (32,029) (82,559)
14,052
Increase in senior secured credit facility (note 12) Repayment of senior secured credit facility (note 12) Financing costs on senior secured credit facility Dividends paid Interest paid Repayment of principal portion of lease liabilities (note 8)

(Decrease) increase in cash during the year Cash – Beginning of the year

44,040 38,317
29,988 44,040

Cash – End of the year Supplementary information

Additions to property and equipment included in trade and other payables Additions to intangibles included in trade and other payables
1,091 4,096
831
4,958

Notes to Consolidated Financial Statements

(in thousands of Canadian dollars, except earnings per share)

1 Organization

Sleep Country Canada Holdings Inc. (the Company or SCC) was incorporated by articles of incorporation under the Canada Business Corporations Act on May 27, 2015. The Company is authorized to issue an unlimited number of common shares and Class A common shares without par value. The common shares are voting and are entitled to dividends if and when declared by the Board of Directors.

As at December 31, 2020, the Company has two subsidiaries, Sleep Country Canada Inc. (SCCI) and Endy Canada (Endy). The Company and its subsidiaries operate as an omnichannel specialty sleep retailer under three retail banners, Sleep Country, Dormez-vous? and Endy. The Company operates through its corporate-owned network of 281 stores, 17 distribution centers and its eCommerce platforms. The address of its registered office is 7920 Airport Road, Brampton, Ontario.