SLEEP COUNTRY CANADA HOLDINGS INC.
ANNUAL INFORMATION FORM
For the year ended December 31, 2020
March 2, 2021
TABLE OF CONTENTS
INTRODUCTION ...... 1
CAUTION REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION ...... 1
NON-IFRS MEASURES ...... 2
DEVELOPMENT OF THE BUSINESS ...... 3
DESCRIPTION OF THE BUSINESS ...... 6
RISK FACTORS ...... 14
MATERIAL CONTRACTS ...... 26
DIRECTORS AND EXECUTIVE OFFICERS ...... 28
MARKET FOR SECURITIES ...... 32
TRANSFER AGENT AND REGISTRAR ...... 32
INTERESTS OF EXPERTS ...... 32
ADDITIONAL INFORMATION ...... 32
AUDIT COMMITTEE ...... 33
APPENDIX A CHARTER OF THE AUDIT COMMITTEE ...... A-1
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INTRODUCTION
Unless otherwise stated, the information contained in this Annual Information Form (“AIF”) is given as of December 31, 2020 and all dollar amounts are expressed in Canadian dollars.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION
This AIF contains "forward looking information" within the meaning of applicable Canadian securities laws. Forward-looking information may relate to the future outlook of Sleep Country Canada Holdings Inc. ("Sleep Country" or the "Company") and anticipated events or results and may include information regarding the financial position, business strategy, growth strategy, budgets, operations, financial results, taxes, dividends, plans and objectives of the Company. Particularly, information regarding future results, performance, achievements, prospects or opportunities of the Company or the Canadian market is forward-looking information. In some cases, but not necessarily in all 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", "is positioned", "estimates", "intends", "assumes", "anticipates" or "does not anticipate" or "believes", or variations of such words and phrases or statements that certain actions, events or results "may", "could", "would", "might", "will" or "will be taken", "occur" or "be achieved". In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances contain forward-looking information. Statements containing forward-looking information are not historical facts but instead represent management's expectations, estimates and projections regarding future events.
Discussions containing forward-looking information may be found, among other places, under "Description of the Business", "Dividend Policy" and "Risk Factors". These forward-looking statements include, among other things, statements relating to:
the impact of the novel coronavirus (“COVID-19”) pandemic; the Company's expectations regarding its revenue, expenses and operations; the Company's future growth plans, including new store openings, relocations, renovations and closures in new and existing markets in addition to acquisitions; the Company's expectations with respect to growth resulting from its marketing and advertising efforts; the Company's expectations with respect to growth resulting from the continued implementation of the enhanced store design; the Company's expectations with respect to performance resulting from the implementation of the new ERP; the Company's expectations with respect to growth resulting from the continued implementation of its sales associate training programs; the Company's intention to declare dividends and the anticipated timing and quantum of any dividends; the Company's expectations with respect to its relationships with its suppliers; the Company's expectations with respect to its ability to leverage its scale to improve margins; the Company’s expectations of realized benefits as a result of its acquisition of the Endy brand; the Company’s expectation of trends and challenges that may occur in the market and/or industry in which it operates; and the market price of the Company’s common shares ("Common Shares").
These statements and other forward-looking information are based on opinions, assumptions and estimates made by the Company in light of its experience and perception of historical trends, current conditions and expected future developments, as well as other factors that the Company believes are appropriate and reasonable in the circumstances, but there can be no assurance that such estimates and assumptions will prove to be correct. In addition, if any of the assumptions or estimates made by management prove to be incorrect, actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this AIF and the documents incorporated by reference herein. Accordingly, prospective purchasers are cautioned not to place undue reliance on such statements.
Forward-looking information is necessarily based on a number of opinions, assumptions and estimates that, while considered reasonable by the Company as of the date such statements are made, are subject to known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, level of activity, performance or achievements to be materially different from those expressed or implied by such forward-looking
- 2 - information. Information about factors or assumptions that could cause actual results to differ materially from expectations and that are applied in making forward-looking statements may be found in this AIF under "Risk Factors": COVID-19 emerging risk; enterprise risks and risk management; industry risk and economic sensitivity; effectiveness and efficiency of advertising expenditures; ability to maintain profitability and implement growth strategy; fluctuations in same store sales; liquidity risk; damage to the Company's reputation; competition; seasonality and weather; business continuity; real estate; remote work; workplace health and safety; dependence on key personnel; employee attraction, development and succession planning; labour relations; relationship with suppliers; service providers; intellectual property; dependence on distribution centres and timely delivery to customers; inventory management; dependence on enterprise resource planning system; IT systems implementations and data management; internet, privacy, confidentiality and cyber security; governance, change management, process and efficiency; insurance; comfort and price guarantees; debt covenants in Credit Facility; dependence on operating subsidiary; risks relating to Endy acquisition; fluctuations in product cost, inflation and foreign currency; legal proceedings; government regulation; third- party consumer financing arrangements; price volatility of the Common Shares; forward-looking information; payment of dividends; internal control over financial reporting; dilution; and securities analysts' research or reports could impact price of Common Shares. These factors and assumptions are not intended to represent a complete list of the factors and assumptions that could affect the Company or the forward-looking information provided herein. These factors and assumptions, however, should be considered carefully.
All of the forward-looking information in this AIF is qualified by these cautionary statements. Statements containing forward-looking information contained or incorporated by reference herein are made only as of the date of this AIF. The Company expressly disclaims any obligation to update or alter statements containing any forward-looking information, or the factors or assumptions underlying them, whether as a result of new information, future events or otherwise, except as required by law.
For additional information with respect to certain of these and other risks or uncertainties, reference should be made to the section entitled "Risk Factors" on pages 14 to 26 of this AIF and to Sleep Country's continuous disclosure materials filed from time to time with Canadian Securities Regulatory Authorities, which are available on the System for Electronic Document Analysis and Retrieval ("SEDAR") at www.sedar.com. Additional risks and uncertainties not presently known to the Company or that Sleep Country currently believes to be less significant may also adversely affect the Company.
NON-IFRS MEASURES
This AIF makes reference to certain non-International Financial Reporting Standards ("IFRS") measures such as “Same Store Sales” (“SSS”), “EBITDA”, “Operating EBITDA”, “Operating EBITDA Margin”, “Adjusted Net Income”, “Adjusted Basic EPS”, “Adjusted Diluted EPS“ and “Operating Days”. These measures are not recognized measures under IFRS and do not have a standardized meaning prescribed by IFRS. They are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement IFRS measures by providing further understanding of the Company's results of operations from management's perspective. Accordingly, they should not be considered in isolation or as a substitute for analysis of the Company's financial information reported under IFRS. These non-IFRS measures are used to provide investors with supplemental measures of the Company's operating performance and thus highlight trends in its core business that may not otherwise be apparent when relying solely on IFRS financial measures. The Company also believes that securities analysts, investors and other interested parties frequently use non-IFRS measures in the evaluation of issuers and to compare the Company's performance against others in the retail industry. The Company's management also uses non-IFRS measures in order to facilitate operating performance comparisons from period to period, to prepare annual operating budgets and to determine components of management compensation.
Prospective investors should review this information in conjunction with the Company's consolidated financial statements, including the notes thereto, as well as the related management's discussion and analysis of financial condition and results of operations.
For further details concerning how the Company calculates these non-IFRS measures, and for a reconciliation to the most comparable IFRS measure, please refer to the management's discussion and analysis for the fiscal year ended December 31, 2020 which is available on SEDAR at www.sedar.com.
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DEVELOPMENT OF THE BUSINESS
History In 1994, Sleep Country, a mattress retailer, was founded by Christine Magee, Stephen K. Gunn and Gordon Lownds with four stores in Vancouver. The Company continued to expand its operations and footprint by investing in new stores and distribution centers across Canada.
In 2003, Sleep Country was listed on the Toronto Stock Exchange (the "TSX") as an income fund.
In January 2006, Sleep Country entered the Québec market through the acquisition of Dormez-vous? Sleep Centres Inc.’s five stores and one distribution centre. After the acquisition, the Company continued to expand its operations in Quebec under its banner “Dormez-vous?”TM.
In March 2006, the Company acquired Sleep America, LLC, a mattress retailer located in the State of Arizona and began operating in the United States under the banner "Sleep America". In January 2015, the Company divested its interest in Sleep America to a national U.S. mattress retailer and exited the U.S. market.
In 2008, the Sleep Country Canada Income Fund was acquired by a group of investors led by Birch Hill Equity Partners Management Inc., together with members of management including co-founding partners Stephen Gunn and Christine Magee, the Company's Chief Executive Officer - David Friesema, and Chief Business Development Officer and President of Dormez-vous? - Stewart Schaefer.
On July 16, 2015, the Company completed its initial public offering (the "IPO") of 17,650,000 Common Shares for aggregate gross proceeds of $300,050,000 and the Common Shares began trading on the TSX under the ticker symbol "ZZZ". Immediately following completion of the IPO, the Company acquired (the "Acquisition") all of the issued and outstanding shares of Sleep Country Canada Inc. ("SCCI"), Sleep Country US Holdco Canada Inc. ("SC US Holdco") and SC Management Holding Inc. ("SC Management", and together with SCCI and SC US Holdco, the "Acquired Entities") not already owned by it pursuant to the terms and conditions of the share purchase agreement dated July 10, 2015 among the Company, SCCI, SC US Holdco, SC Management and the shareholders of SCCI, SC US Holdco and SC Management (the "Purchase Agreement"). The Acquired Entities previously carried on, directly or indirectly, the business of Sleep Country.
Pursuant to the Purchase Agreement, the purchase price payable by the Company to the existing shareholders of the Acquired Entities for the purchased shares was $461,673,036 which was satisfied by (a) an aggregate cash payment of $193,512,214, (b) the issuance to the existing shareholders of an aggregate of 13,126,666 Common Shares, and (c) the issuance to certain selling shareholders of an aggregate of $45,007,500 principal amount of certain promissory notes, all of which were converted on August 31, 2015 into an aggregate of 2,647,500 Common Shares. A business acquisition report was filed in respect of the Acquisition in compliance with National Instrument 51- 102 – Continuous Disclosure Obligations and is available online on SEDAR at www.sedar.com,
On December 6, 2018, the Company acquired the business of Overwater Limited, operating under the brand name Endy, Canada’s leading online bed-in-a-box mattress company. This acquisition was made by Endy Canada Inc. (“Endy”), a newly formed subsidiary of the Company, by purchasing a majority of the assets of Overwater Limited, net of designated liabilities assumed.
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Three-Year History of the Business
The following table sets out selected IFRS and certain non-IFRS financial measures of the Company and should be read in conjunction with the audited annual consolidated financial statements of SCC for fiscal years ended December 31, 2020, December 31, 2019 and December 31, 2018.
(C$ thousands unless otherwise stated) 2020 2019 2018
Consolidated Income Statement Revenues $ 757,699 $ 712,372 $ 622,977 Cost of sales 513,203 489,082 442,615 Gross profit 244,496 223,290 180,362 General and administrative expenses 134,926 125,826 93,760 Income before finance related expenses, interest income and other expenses (income) and income taxes 109,570 97,464 86,602 Finance related expenses 25,363 21,149 4,475 Interest income and other expenses (income) - net 200 (788) (89) Net Income before provision for income taxes 84,007 77,103 82,216 Provision for Income taxes 20,700 21,643 22,575 Net income $ 63,307 $ 55,460 $ 59,641 EBITDA(1) $ 166,443 $ 151,914 $ 101,422 Operating EBITDA(1) $ 171,469 $ 155,932 $ 105,775 Operating EBITDA Margin 22.6% 21.9% 17.0% Adjusted Net Income(1) $ 72,148 $ 59,251 $ 63,861 Earnings per share - Basic $ 1.73 $ 1.50 $ 1.61 Earnings per share - Diluted $ 1.71 $ 1.49 $ 1.59 Adjusted earnings per share - Basic(1) $ 1.97 $ 1.60 $ 1.72 Adjusted earnings per share - Diluted(1) $ 1.95 $ 1.59 $ 1.71 Dividends declared per share $ 0.390 $ 0.770 $ 0.720
31-Dec-20 31-Dec-19 31-Dec-18 Total assets $ 902,351 $ 917,052 $ 602,106 Lease liabilities and long-term debt $ 345,575 $ 446,196 $ 170,036
Notes:
(1) See the section entitled “Non-IFRS Measures” for further details concerning how the Company calculates EBITDA, Operating EBITDA, Adjusted Net Income and Basic and Diluted Adjusted EPS and for a reconciliation to the most comparable IFRS measure in the Company’s management’s discussion and analysis as at December 31, 2020.
Impact of COVID-19 Pandemic on the Company On January 30, 2020, the World Health Organization (“WHO”) declared the COVID-19 outbreak a global public health emergency. Within a few weeks, the number of confirmed COVID-19 cases escalated exponentially in many countries around the world. The Company actively monitored the progress of the virus and continuously assessed its impact on the business and its environment while taking the necessary corrective actions, as required. On March 11, 2020, the WHO declared the outbreak as a global pandemic. During March 2020, Canada experienced a rapid increase in the number of verified COVID-19 cases thereby confirming the pandemic onset in Canada.
To address the COVID-19 global outbreak, governments around the world enacted emergency measures to contain the spread of the virus. These measures included the implementation of travel bans, self-imposed quarantine periods, self-isolation, physical distancing, requirement of wearing masks in public areas and the temporary closure of non-essential businesses. These measures materially disrupted businesses, both in Canada and worldwide, resulting in an uncertain and challenging environment.
As a result, in March 2020, the Company enacted its business continuity measures to support ongoing operations, liquidity and financial flexibility. The Company continued using these measure, throughout the remaining fiscal year as required. The primary focus of these measures was to keep associates safe, to secure business continuity
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Some of the specific measures the Company undertook in response to the pandemic include:
1. Closing its retail stores on March 21, 2020 while its delivery and eCommerce services were permitted to continue operations. Beginning May 11, 2020, as provincial and municipal restrictions eased, the Company began to re-open its store network. All of the Company’s stores reopened and resumed operations by June 24, 2020.
2. In Fall 2020, as the number of verified COVID-19 cases grew significantly across Canada, closing its retail stores in certain locations as required by municipal and provincial governments to contain the spread of the virus. As a result, in November 2020, the Company was required to temporarily close 16% of its retail stores which, as restrictions continued to increase across Canada, grew to 65% of its retail stores as at December 31, 2020.
The Company’s municipal and provincial mandated store closures are:
Regions Lockdown Start Date Stores Reopened Date # of Stores Manitoba 12-Nov-20 23-Jan-21 7 Toronto and Peel 23-Nov-20 TBD 38 York 14-Dec-20 22-Feb-21 13 Windsor -Essex 14-Dec-20 10-Feb-21 2 Hamilton 21-Dec-20 16-Feb-21 6 Quebec 25-Dec-20 8-Feb-21 61 North Bay 26-Dec-20 TBD 1 Remaining Ontario 26-Dec-20 16-Feb-21 54
3. Implementing new safety protocols in its stores, offices and delivery services which include a contactless delivery option;
4. Retaining its furloughed associates with reduced pay during the mandated temporary closure of its stores in Winter, with the financial support provided by the Canada Emergency Wage Subsidy “CEWS” federal government program;
5. In Fall 2020, during the mandated partial lockdown of its retail stores, putting the affected sales associates on temporary leave without pay;
6. Continuing to have open dialogues with key suppliers, landlords and partners;
7. Actively managing liquidity to be prudent and ensure financial flexibility through various measures including the following:
Securing an incremental $50 million accordion on its senior secured credit agreement; Temporarily deferring 25% to 50% of the base salaries of Sleep Country’s Named Executive Officers, as defined in the Company’s Management Information Circular available on SEDAR, which was reinstated by the Company’s board of directors (the “Board”) on November 9, 2020; Temporarily deferring the Board’s remaining 2020 cash compensation which was reinstated by the Board on November 9, 2020; Cancelled dividend payments in Q2 2020 and Q3 2020. Dividends payments were restored by the Board on November 9, 2020. Temporarily suspending the purchase of shares under the Company’s Normal Course Issuer Bid (“NCIB”) program which was reinstated by the Board on November 9, 2020.
8. Continually evaluating and using available eligible government programs that are beneficial to the Company. The Company qualified for wage subsidies under the CEWS government program from March 15, 2020 to July 4, 2020, which provided the Company with a 75% wage subsidy, on eligible remuneration for eligible associates to a weekly maximum of $847.
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9. Deferring certain capital expenditures and implementing certain cost-saving measures across the business.
The duration and continued impact of the COVID-19 pandemic is unknown at this time. Any estimate of the length and severity of these developments is therefore subject to significant uncertainty, and accordingly estimates of the extent to which the COVID-19 pandemic may materially and adversely affect the Company’s operations, financial results and condition in future periods are also subject to significant uncertainty. Refer to the section entitled “Risk Factors” for certain specific risks and uncertainties related to COVID-19.
DESCRIPTION OF THE BUSINESS
Business Overview
Sleep Country is Canada’s leading omnichannel specialty sleep retailer with a national brick-and-mortar footprint and robust eCommerce platforms dedicated to supporting the health and wellbeing of Canadians by matching each customer to their best night’s sleep. Sleep Country operates under three retail banners (the “Banners”):
“Sleep Country Canada™”, with omnichannel operations in Canada excluding Québec; “Dormez-vous?™”, with omnichannel operations in Québec; and “Endy™”, Canada’s leading online mattress-in-a-box retailer. Sleep Country continues to grow its customer base and take greater market share across the country with new and renovated stores, expanding eCommerce platforms, strategic partnerships, a growing product assortment and targeted marketing. On December 31, 2020, Sleep Country had 281 stores and 17 distribution centres across Canada. Sleep Country’s stores are, on average, approximately 5,000 square feet and offer customers Canada’s largest selection of mattresses, both made in Canada and imported from countries around the world, along with bases, metal frames and lifestyle bases. Sleep Country also sells a wide assortment of complementary sleep related products (“Accessories”) which include pillows, pillowcases, sheets, blankets, throws, duvets, duvet covers, mattress toppers, mattress protectors, pet beds, sleep essentials, weighted blankets, headboards, footboards and platforms. Each store is staffed by the Company’s Sleep Experts who are dedicated to supporting the health and wellbeing of Canadians by matching each customer to their best night’s sleep. All the Company’s stores are corporate-owned thereby enabling it to develop and maintain a strong culture resulting in a consistent and superior in-store and home delivery customer experience. The Company continues to grow and optimize its eCommerce platforms through continued investment in the Company’s Sleep Country, Dormez-vous? and Endy websites. In addition, the Company retails through the Walmart.ca marketplace as the exclusive vendor of traditional mattresses. The Company continues to invest in omnichannel capabilities to seamlessly link the physical and digital shopping experiences. These investments enable the Company to evolve alongside the Canadian consumer and holistically serve the sleep needs of Canadians across channels and brands. Sleep Country Canada Sleep Country Canada launched its concept in the Vancouver market with four stores in 1994 and has since expanded across Canada. As at December 31, 2020, the banner has 220 corporately owned stores and 14 distribution centres in British Columbia, Alberta, Manitoba, Saskatchewan, Ontario, Nova Scotia, New Brunswick and Prince Edward Island. The Company’s regional footprint includes the following distribution centres: Victoria, BC; Richmond, BC; Kelowna, BC; Calgary, AB; Edmonton, AB; Winnipeg, MB; Regina, SK; Brampton, ON; London, ON; Ancaster, ON; Cobourg, ON; Ottawa, ON; Moncton, NB and Halifax, NS. The banner also has a robust eCommerce platform that retails its entire assortment of sleep products. Dormez-vous? In Quebec, Sleep Country operates under the “Dormez-vous?” banner. Dormez-vous? launched its first store in April 1994 and has continued to expand over the last 26 years. As of December 31, 2020, the Dormez-vous? banner has 61 stores with three distribution centres in Montréal and Québec City. The banner also has a robust eCommerce platform that retails its entire assortment of sleep products.
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Endy Launched in 2015, Endy is Canada’s leading mattress-in-a-box eCommerce retailer. The brand’s award- winning Endy mattress-in-a-box is engineered to offer the perfect balance of comfort and support. Endy’s product assortment includes The Endy Pillow, The Endy Sheets, The Endy Mattress Protector, The Endy Duvet, The Endy Duvet Cover, The Endy Bed Frame and The Endy Weighted Blanket. In December 2018, the Company acquired substantially all the operating assets of Endy, further strengthening its position as Canada’s leading omnichannel specialty sleep retailer. The acquisition diversified the Company’s brand portfolio and channel structure, added best-in-class eCommerce and digital marketing capabilities and positioned the Company to expand its customer reach and meet the evolving sleep needs of Canadians.
Corporate Structure The Company was incorporated under the Canada Business Corporations Act (the "CBCA") on May 27, 2015.
As December 31, 2020, SCCI and Endy are the two subsidiaries of the Company. The Company beneficially owns, controls or directs, directly or indirectly, 100% of the votes attaching to all voting securities of SCCI and Endy.
The Company manages its business on the basis of two operating segments, which is consistent with the internal reporting provided to the chief operating decision-maker, the Chief Executive Officer. The Company has only one reportable segment as the operating segments meet the aggregation criteria of IFRS 8. The Company operates in Canada, which is its country of domicile.
The registered and head office of the Company is located at 7920 Airport Road, Brampton, ON, L6T 4N8.
The Industry The Company believes that the Canadian mattress industry is characterized by steady, stable long-term growth. The Company believes the industry is well-positioned to continue its growth trajectory given favourable fundamentals and long-term trends driven by the following key factors:
Necessity item: Mattresses are a necessity rather than a fashion purchase. During an economic downturn, purchases are typically deferred and not lost.
Replacement cycle: Customers typically replace their mattresses every 8 to 12 years, generating a steady flow of recurring demand.
Demographic trends: Unit demand is further driven by steady long-term demographic trends, including general population increases, the formation of new households, the growth in recreational properties and the trend towards a larger number of rooms in homes.
Consumer preferences for high-quality sleep: In recent years, the mattress industry has experienced an increase in the demand for larger size mattresses and for premium quality products, due in some measure to the aging North American population, its relative affluence and its growing health awareness. The Company believes that this increase in demand for larger and better quality products has resulted in a shift to higher-priced mattress sets.
Shift toward specialty retailers: There has been a shift in consumer preference toward specialty retailers given the unique consumer needs, the big-ticket purchase and lack of consumer familiarity with developments in product offerings.
Inflation: There is less price sensitivity, manufacturer price increases - mainly due to inflation, are typically passed through to customers.
Health and Wellbeing: Canadians are increasingly prioritizing and investing in their health and sleep is increasingly recognized as a pillar of health and wellbeing.
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Online research: Consumers often conduct online research to gain product knowledge and perform general price comparison. Although many consumers want to test and purchase the product in-store, there is an increasing percentage of consumers who are choosing to purchase mattresses online. o In fiscal 2020, the Company experienced a significant acceleration in its eCommerce sales fueled by its temporary store closures in response to the COVID-19 pandemic. As of the date of this AIF, the Company‘s eCommerce platforms continue to experience significant growth in comparison to the prior year, though no assurance can be provided regarding the sustainability of this demand. Investors should also refer to the Company's description of certain impacts of the ongoing pandemic described under “Impact of COVID-19 Pandemic on the Company”. For risks and uncertainties related to COVID- 19, refer to the section “Risk Factors – COVID-19 emerging risk” in this AIF.
Competitors
The retail mattress and sleep accessories industry is highly competitive and includes national and regional full-line furniture retailers, departmental retailers, mass merchants, small regional specialty bedding retailers, online mattress-in-a-box retailers and online marketplaces. The eight leading retailers in the industry include Sleep Country / Dormez-vous?, Leon's Furniture Limited ("Leon's") / The Brick Ltd. ("The Brick"), The Hudson's Bay Company ("Hudson's Bay”), BMTC Group Inc. ("BMTC"), IKEA, Amazon.com, Inc ("Amazon"), Casper Sleep Inc. ("Casper") and Costco Wholesale Canada Ltd. ("Costco"). Of these eight retailers, Sleep Country is the leading omnichannel sleep retailer in Canada. The remaining industry sales are highly fragmented amongst a number of smaller specialty mattress stores, other furniture stores, discounters and warehouse clubs and small independent retailers. See "Risk Factors — Competition".
Omnichannel Leader in the Sleep Industry Sleep Country is Canada’s leading omnichannel specialty sleep retailer with a national brick-and-mortar footprint and robust eCommerce platforms dedicated to supporting the health and wellbeing of Canadians by matching each customer to their best night’s sleep. The Company believes it can maintain a leading position through its key success factors which include a highly differentiated service and operating model that has been unrivalled in execution over the last 26 years in Canada and continues to serve as competitive advantage. Management continues to add strategic layers to this successful model across infrastructure, channel, partnership and experience, in order to predict and serve Canadians’ sleep needs.
Strong Brand Recognition The Company’s Banners are Sleep Country, Dormez-vous? and Endy. These brands have strong recognition in the Canadian marketplace. The Company continues to invest in marketing and brand development to create "top- of-mind" unaided brand awareness which has provided it with a significant competitive advantage in the sleep industry.
Strategic Store Locations and Distribution Centers
As at December 31, 2020, the Company had 281 stores and 17 distribution centers across Canada. The Company continues to expand its store network reaching new customers, both in existing and new markets. Stores are, on average, approximately 5,000 square feet providing the Company with the optimal space to maximize its product displays and its return per square foot rented. These stores are located in prominent and convenient locations making it easy for customers to visit a store when they are shopping for their sleep needs.
Stores are strategically located in each regional market close to residential areas, in high-traffic, highly visible locations with prominent signage and convenient access. Even with growing sales from the Company’s eCommerce platforms, the majority of sales are repeatedly generated at the Company’s store locations. While customers may research mattresses online, majority of customers continue to visit the Company’s retail stores to make a purchase.
The Company’s established store and distribution network across Canada provides the Company with the ability and the flexibility in introducing new products efficiently and effectively either nationally or regionally. The Company’s network, which continues to expand, provides the Company with key access points to engage customers in the market.
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All retail store and distribution centre premises are leased and typically have a term from five to 15 years including renewal options or permit continuation of the lease on a month-to-month basis. The Company believes that it has a good relationship with each of its landlords and that the business carried on at these leased locations is relocatable and that no individual lease or location is material.
Robust eCommerce Platforms The Company continues to grow and optimize its eCommerce platforms through continued investment in the Company’s Sleep Country, Dormez-vous? and Endy websites. In addition, the Company retails through the Walmart.ca marketplace as the exclusive vendor of traditional mattresses. The Company continues to invest in omnichannel capabilities to seamlessly link the physical and digital shopping experiences. These investments enable the Company to evolve alongside the Canadian consumer and holistically serve the sleep needs of Canadians across channels and brands.
To support the growth of its eCommerce sales, as well as provide customers with a truly omnichannel experience, in 2020, the Company created an exclusive online Sleep Experts team to service its valued customers. Customers are able to get live support with the Company’s Sleep Experts through a dedicated phone line or live chat available on the Company’s eCommerce platforms.
In 2020, the Company experienced a significant acceleration of eCommerce sales fueled by its temporary store closures in response to the COVID-19 pandemic. As of the date of this Annual Information Form, the Company‘s eCommerce platforms continue to experience significant growth in comparison to the prior year, though no assurance can be provided regarding the sustainability of this demand.
Superior Assortment of the World’s Leading Sleep Products The Company offers customers a superior and extensive assortment of mattresses and accessories, including a wide range of brands, comfort choices, styles, sizes and price points in order to meet its customers’ sleep needs.
One of the Company’s goals is to build market share of its Banners and to grow its revenue by strategically continuing to expand its product assortment in the sleep ecosystem, including mattresses and Accessories categories.
Over the last few years, the Company has continued to drive significant growth in Accessories through launching exciting new products, brands and categories such as cushions, throws, duvets, pillows, headboards, sheets, silk pillowcases, baby mattresses and pet beds. The Company will continue to expand its product assortment through in-house innovations and exclusive strategic partnerships with the world’s most innovative sleep brands such as Purple Innovation, Malouf and Simba. These partnerships allow Sleep Country to serve as the exclusive Canadian retailer of premier international sleep brands.
Highly Trained and Dedicated Workforce with a Strong Culture of Customer Service The Company has a comprehensive approach to human resource management, whether it’s the Company’s stores, distribution centers or offices. The Company is built on a foundation of family values, commitment to training and development and competitive compensation and benefits. This has resulted in a workforce dedicated to delivering superior customer service throughout the organization, underpinned by excellent relations between management and associates and reinforced by high retention rates.
Unrivalled Customer Experience The Company distinguishes itself through a superior customer experience both, in-store and its eCommerce platforms, that results in high sales conversion and repeat customers.
A mattress is a big-ticket infrequent purchase and it is difficult to compare between models and brands. Customers require a knowledgeable and effective sales associate, the Company’s Sleep Experts, to aid them in their mattress purchases. The Sleep Experts also help customers in selecting the right accessories to help meet the customers’ sleep needs and optimize their wellbeing. As a result, Sleep Country invests heavily in initial and ongoing training to ensure it delivers a highly informative, friendly and helpful customer experience. This experience is further enhanced by the cumulative knowledge and abilities of a long tenured full-time sales team with low turnover.
In 2020 the Company launched the Sleep Expert Chat capability to offer customers access to its Sleep Experts on its eCommerce sites.
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As part of the customers’ experience, the Company provides a 100-day price or product return guarantee on its mattresses.
The “white-glove” home delivery experience is a critical part of the customer’s journey. It plays an important role in customer satisfaction, repeat sales and word-of-mouth advertising. The Company offers delivery seven days a week within a specified three-hour time frame. Delivery personnel are uniformed, wear shoe covers to protect the customer's home and are trained to be courteous. New mattresses are set-up, packaging materials are removed and the replaced mattress set is either donated to charity or recycled. The entire customer experience is complemented by a well-trained, in-house customer service department and a complete enterprise-wide information technology system to support delivery logistics and provide a seamless customer experience.
Experienced and Committed Management Team The Company is led by a highly experienced management team with a proven track record. On average, the Company's executives have over 15 years of experience with Sleep Country and over 20 years of relevant industry experience. The Company’s Chief Executive Officer, David Friesema, joined the Company in 1995 and, along with Stewart Schaefer, President of Dormez-vous? and Chief Business Development Officer, and other members of senior management, have been instrumental in driving the Company’s growth strategy. In addition, the Company's co-founder, Christine Magee, serves as Chair of the Board.
Suppliers The Company's overall size, regional market leadership and its approach to supplier relations result in strong partnerships with its leading suppliers, Tempur-Sealy Canada, Serta Simmons Bedding Canada, Kingsdown Canada, Primo International, Purple Innovation, Simba Sleep Incorporated, Dormeo North America and Springwall Sleep Products, which yield many advantages. These advantages include better product cost, the ability to obtain unique products, product features and high supplier service levels.
Trademarks The Company's trademarks, such as Sleep Country CanadaTM, Dormez-vous?TM, EndyTM, Why buy a mattress anywhere else?TM, All for SleepTM, Sleep Well. Stay Well.TM, BloomTM, PloomTM, Tout le monde devrait bien dormirTM, and Tous pour le sommeilTM are protected under applicable intellectual property laws and are the property of the Company. The Company believes that its brands and trademarks are important to its competitive position and marketing of its merchandise. The Company takes a proactive approach to protecting its brand and trademarks.
Environment and Social Responsibility Reducing Environmental Impacts The Company is committed to environmental sustainability. The Company has formed a Sustainability Team consisting of cross-functional leaders from across the organization. The team’s objective is to provide updates and escalate opportunities for the Company’s environmental responsibility and social accountability initiatives. The team has prioritized the areas below to mitigate the environmental impacts that are most material to the business.
(i) Products: (a) Adoption of more sustainable materials across key raw materials and packaging and (b) promoting and improving environment stewardship in suppliers. (ii) Transportation: (a) Driving efficiencies across the Company’s entire network; (b) finding new ways of transporting more goods while consuming less energy and (v) establishing emissions reduction targets. (iii) Buildings: Continuously improving the Company’s energy efficiency in its real estate portfolio and incorporating innovative new technologies into the Company’s store prototypes. (iv) Waste: (a) Increasing the Company’s diversion rate and reducing waste generated to lessen its impact on the environment and (b) paying fees to applicable provincial stewardship programs to help fund the costs of collecting, transporting, recycling and safely disposing of consumer waste that results from the Company’s selling activities. These fee contributions vary across provinces.
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Bed Donation & Recycling Program The Company is proud to be the only national sleep retailer offering a comprehensive Mattress Recycling Program. For every new mattress delivered, the Company’s team picks up the old mattress for a nominal green fee. When collected, mattresses are examined and are either donated or recycled based on their condition. Donation beneficiaries include Canadian Mental Health Association, Covenant House, Welcome Collective, Dans la Rue, Women’s Centre of Calgary, Children’s Services – Edmonton, Furniture Bank, Women in Need Society (WINS) and Matthew House. In 2020, over 155,000 mattress and foundation units were diverted from landfills through donation or recycling.
Sleep Country Cares From the very beginning, it has always been a privilege to give back to the communities where the Company operates. Through the Sleep Country Cares Program, the Company is committed to supporting local charities that focus on helping children and families in need. As a company that embraces the diversity and inclusiveness that makes Canada great, Sleep Country works with charitable partners who support people of all ethnic backgrounds, sexual orientation and gender identity.
Caring through the COVID-19 Pandemic During the COVID-19 pandemic, the Company provided $1.5 million worth of essential sleep products. The Company donated mattresses, beds, frames, sheets and pillows to create healthy sleeping arrangements for vulnerable and at-risk communities, as well as, frontline medical workers. More than 70 organizations and hospitals have received help from Sleep Country, including organizations like the Journey Home in Vancouver, YWCA in Regina, Toronto Community Housing and Yellowhead Youth Centre in Edmonton. The Company worked closely with these organizations and many others in cities, big and small, across this country to provide support to its most vulnerable communities.
Associates As at December 31, 2020, the Company and its subsidiaries had 1,462 associates. Of this group, 1,434 were full-time associates and the remainder were part-time associates. As at December 31, 2020, 90 associates were unionized, comprising approximately 6.0% of the total workforce. All of the unionized associates are employed at the Company's Greater Vancouver, Victoria and Brampton distribution centres. The current agreement with Retail Wholesale Union Local 580 covering the Greater Vancouver and Victoria sites was renewed on January 1, 2018 for a
- 12 - four-year term expiring on December 31, 2021. The current agreement with the Workers United Canada Council, on its own behalf and on behalf of its Local 2757, in respect of the Brampton site was ratified January 28, 2019 retroactive to January 14, 2019 for a three-year term expiring on January 13, 2022. The Company believes its relations with its associates are excellent and experiences turnover rates well below industry norms. The Company has never experienced a work stoppage and has been successful in renegotiating its collective agreements.
In 2020, Sleep Country/Dormez-vous? and Endy were certified as a Great Place to Work (in Canada). Additionally, in 2020, Sleep Country/Dormez-vous? won recognition for Best Workplaces in Ontario.
Legal Proceedings The Company is not party to any legal proceedings other than ordinary course, routine litigation which is not material to its business, results of operations or financial condition.
Dividend Policy Subject to financial results, capital requirements, available cash flow and any other factors that the Board may consider relevant, the Company intends to continue to declare a quarterly dividend on an ongoing basis. All dividends to be paid by the Company, unless otherwise indicated, are designated as eligible dividends in accordance with subsection 89(14) of the Income Tax Act (Canada) and any applicable corresponding provincial or territorial provisions. See "Risk Factors — Payment of dividends".
In response to the risks and uncertainties caused by the COVID-19 pandemic since its onset in Q1 2020, the Company temporarily suspended dividends with an intent to reinstate payments at a time and payment level considered prudent by the Company's Board. The Company intended to reinstate the dividends at a future date with the resumption of normal operating conditions and when the Board considered the risks and uncertainties associated with COVID-19 to be unlikely to have a material ongoing impact. As at November 9, 2020, the Board approved and restored the Company’s dividend. As the COVID-19 pandemic continues, the Company may consider it advisable to reduce or suspend dividends in the future.
The Company declared and paid the following dividends on its Common Shares:
Date of declaration Record date Payment date Dividend declared per share January 29, 2016 February 16, 2016 February 26, 2016 $ 0.130 May 10, 2016 May 20, 2016 May 30, 2016 $ 0.130 July 28, 2016 August 16, 2016 August 26, 2016 $ 0.150 November 1, 2016 November 18, 2016 November 28, 2016 $ 0.150 January 26, 2017 February 17, 2017 February 27, 2017 $ 0.150 May 9, 2017 May 19, 2017 May 29, 2017 $ 0.165 August 2, 2017 August 18, 2017 August 28, 2017 $ 0.165 November 1, 2017 November 17, 2017 November 27, 2017 $ 0.165 January 26, 2018 February 16, 2018 February 26, 2018 $ 0.165 May 7, 2018 May 22, 2018 May 31, 2018 $ 0.185 August 2, 2018 August 20, 2018 August 30, 2018 $ 0.185 November 1, 2018 November 19, 2018 November, 29, 2018 $ 0.185 February 5, 2019 February 15, 2019 February 26, 2019 $ 0.185 May 6, 2019 May 21, 2019 May 31, 2019 $ 0.195 August 8, 2019 August 20, 2019 August 29, 2019 $ 0.195 October 31, 2019 November 19, 2019 November 29, 2019 $ 0.195 February 4, 2020 February 14. 2020 February 25, 2020 $0.195 November 9, 2020 November 20, 2020 November 30, 2020 $0.195
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Subsequent to December 31, 2020, on February 9, 2021, the Board declared a dividend on the Common Shares in the amount of $0.195 per share, payable on February 26, 2021 to shareholders of record at the close of business on February 18, 2021.
The Credit Facility restricts the Company's ability to declare dividends in certain circumstances. The amount and timing of the payment of any dividends are not guaranteed and are subject to the discretion of the Board. See "Material Contracts" and "Risk Factors".
Normal Course Issuer Bid In the first quarter of 2020, the Company received approval from the TSX to commence, effective March 9, 2020, a NCIB and purchase through the facilities of the TSX up to 1,368,363 of the Company’s common shares, representing approximately 4.8% of the public float as of February 29, 2020. Purchases were permitted to commence through the TSX on March 9, 2020 and will conclude on the earlier of the date on which purchases under the bid have been completed and March 8, 2021. In accordance with the rules and by-laws of the TSX, the Company has been permitted to purchase up to a daily maximum of 28,010 Shares (representing 25% of the average daily trading volume of the Shares on the TSX for the six months prior to commencement of the NCIB), except where such purchases are made in accordance with the "block purchase" exception under the applicable TSX rules and policies.
In Q2 2020, in response to the risks and uncertainties caused by the onset of the COVID-19 pandemic onset, the Board suspended the purchase of any shares under the Company’s NCIB to preserve liquidity and financial resources. As at November 9, 2020, the Board reinstated the option for the Company to purchase common shares for cancellation under the NCIB. As at December 31, 2020, the Company had not purchased any shares under the NCIB program for cancellation.
Subsequent to year end, the Company submitted a Notice of Intention to the TSX to pursue a NCIB. Pursuant to the NCIB, the Company proposes to purchase through the facilities of the TSX, from time to time over the next 12 months, if considered advisable, up to a maximum of 928,933 common shares of the Company, being approximately 3.0% of its public float as of February 28, 2021. Purchases may commence through the TSX on March 9, 2021 and will conclude on the earlier of the date on which purchases under the bid have been completed and March 8, 2022. The Company may purchase up to a daily maximum of 30,661 shares (representing 25% of the average daily trading volume of the Shares on the TSX for the six months prior to commencement of the NCIB), except where such purchases are made in accordance with the "block purchase" exception under applicable TSX rules and policies.
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Description of Share Capital The authorized capital of the Company consists of an unlimited number of Common Shares and an unlimited number of Class A Common Shares. The summary below of the rights, privileges, restrictions and conditions attaching to the Common Shares and to the Class A Common Shares, respectively, is subject to, and qualified in its entirety by reference to, the Company's articles which are available on SEDAR at www.sedar.com.
Common Shares Holders of Common Shares are entitled to receive notice of any meetings of shareholders, to attend and to cast one vote per Common Share at all such meetings. Holders of Common Shares do not have cumulative voting rights with respect to the election of directors and, accordingly, holders of a majority of the Common Shares entitled to vote in any election of directors may elect all directors standing for election. Holders of Common Shares are entitled to receive on a pro rata basis such dividends, if any, as and when declared by the Board at its discretion from funds legally available therefore and upon the liquidation, dissolution or winding-up of the Company are entitled to receive on a pro rata basis the net assets of the Company after payment of debts and other liabilities, in each case subject to the rights, privileges, restrictions and conditions attaching to any other series or class of shares ranking senior in priority to or on a pro rata basis with the Common Shares with respect to dividends or liquidation. The Common Shares do not carry any pre-emptive, subscription, redemption or conversion rights, nor do they contain any sinking or purchase fund provisions.
Class A Common Shares Holders of Class A Common Shares are entitled to the same rights and privileges as holders of the Common Shares described above under "— Common Shares" and rank equally with the holders of Common Shares upon the liquidation, dissolution or winding-up of the Company. The Class A Common Shares do not carry any pre-emptive or subscription rights, nor do they contain any sinking or purchase fund provisions.
Certain Class A Common Shares were issued as part of the pre-closing transactions undertaken by the Company prior to the completion of the IPO and all such Class A Common Shares were redeemed immediately following completion of the IPO on July 16, 2015. Accordingly, as at December 31, 2020, there are no Class A Common Shares issued and outstanding, nor does the Company intend to issue any Class A Common Shares in the future.
RISK FACTORS
In addition to the risks described elsewhere in this AIF, this section describes the principal risks that could have a material and adverse effect on the Company’s financial condition, results of operations or business, cash flows or the trading price of its common shares, as well as cause actual results to differ materially from the Company’s expectations expressed in or implied by forward-looking statements. The Company cautions that the following discussion of risk factors that may affect future results is not exhaustive, including those related to the impact of COVID- 19 on the Company’s business, operations and performance. The risks listed below are not the only risks that could affect the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deem to be immaterial may also materially adversely affect the Company’s financial condition, results of operations, cash flows, or business.
COVID-19 emerging risk The COVID-19 pandemic creates a number of risks and uncertainties for the Company's business, which could significantly impact the Company’s results of operations going forward and the forward-looking statements made herein. As an emerging risk, the duration and impact of the COVID-19 pandemic is unknown at this time, as is the efficacy of any current or future government and central bank interventions. Any estimate of the length and severity of these developments is therefore subject to significant uncertainty, and accordingly estimates of the extent to which the COVID-19 pandemic may, directly or indirectly, materially and adversely affect the Company’s operations, financial results and condition in future periods are also subject to significant uncertainty.
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Enterprise risks and risk management To ensure its continued growth and success, the Company is committed to maintaining a framework that ensures risk management is integral to its activities and has developed an Enterprise Risk Management (“ERM”) program to identify and manage risks.
The ERM program assists all areas of the business in managing risks within appropriate levels of tolerance by bringing a systematic approach and methodology for identifying risks, assessing and measuring the identified risks and then implementing a response and action plan. Risks cannot be eliminated through the ERM program, but rather, are identified, assessed and managed in line with the Company’s risk tolerances.
Risk identification, measurement and assessments are integral elements of the Company’s ERM framework approach. An annual ERM assessment is undertaken to assist in the update and identification of all risks, internal or external, applicable to the Company and its operations. This assessment is carried out in parallel with strategic planning with management and the Board to align stakeholder views. This assessment is completed for each business unit and aggregated where appropriate. Risks are assessed and evaluated first based on their inherent risk to the Company, meaning the level of risk without considering any actions or controls that have been put into place. The risks are then assessed for the residual risk, being the risk that remains after mitigating actions have been implemented. These are each measured on a scale of one to five for both the impact of the risk and the likelihood of the risk. Using these scores, the risks are then rated as extreme, high, medium or low. Once the risks have been measured and rated, the Company develops a response to optimize risk management which can involve avoiding the risk, transferring it or mitigating it.
On a quarterly basis, management provides an update to the Board on the status of key risks based on significant changes from the prior update, anticipated impacts in future periods and significant changes in key risk indicators. Any of the key risks has the potential to negatively affect the Company and its financial performance. The Company has risk management strategies in place for key risks. However, there can be no assurance that the risks will be mitigated or will not materialize or that events or circumstances will not occur that could adversely affect the reputation, operations or financial condition or performance of the Company.
Industry risk and economic sensitivity The Company's revenues depend, in part, on discretionary spending by its customers. Pressure on discretionary income brought on by economic downturns and slow recoveries, including housing market declines, changing energy prices, fiscal uncertainty and weak labour markets, may cause consumers to reduce the amount they spend on discretionary items. If recovery from any economic downturn is slow or prolonged, the Company's growth, prospects, results of operations, cash flows and financial condition could be adversely impacted. In addition, a significant percentage of the Company's stores are located in the Provinces of Ontario and Québec. Any economic downturns in these provinces would have a disproportionately greater negative impact on the Company than other retailers with a lower concentration of stores in the Provinces of Ontario and Québec.
General economic conditions and discretionary spending are beyond the Company's control and are affected by, among other things: consumer confidence in the economy; federal, provincial and local political climates; unemployment trends; consumer debt levels; consumer credit availability; the housing market; gasoline and fuel prices; interest rates and inflation; price deflation, which may result from the introduction of low-cost imports; slower rates of growth in real disposable personal income; natural disasters; national security concerns; tax rates and tax policy; currency fluctuations and other matters that influence consumer confidence and spending. Increasing volatility in financial markets may cause some of the above factors to change with an even greater degree of frequency and magnitude.
Health pandemics, such as the current COVID-19 pandemic, and the related governmental, private sector and individual consumer responses could reduce retail traffic and consumer spending, result in temporary or permanent closures of stores, offices, and factories, and could disrupt the material flow of goods, which could have an adverse effect on the Company’s financial situation.
Effectiveness and efficiency of advertising expenditures The Company's advertising expenditures, which are the largest component of its marketing expenses, are expected to continue to increase for the foreseeable future. A significant portion of the Company's advertising expenditures are made in the radio, television, print and online formats. The Company's future growth and profitability will depend, in part, on the effectiveness and efficiency of advertising expenditures, including the ability to: (i) create greater brand awareness of each of the Banners; (ii) determine the appropriate creative message and media mix for
- 16 - future advertising expenditures; and (iii) effectively manage advertising costs to maintain acceptable operating margins. The Company cannot assure that the advertising message that it selects will result in increased customer traffic, sales and levels of brand name awareness or market share. Should the Company fail to realize the anticipated benefits of its advertising program, or should the Company fail to effectively manage advertising costs, this could have a material adverse effect on its growth strategy and profitability.
Ability to maintain profitability and implement growth strategy There can be no assurance that the Company's businesses and growth strategy will enable it to sustain profitability in future periods. The Company's future operating results will depend on a number of factors, including: (i) the Company's ability to continue to successfully execute its growth strategy; (ii) the efficiency and effectiveness of each of the Banners’ advertising expenditures in building product and brand awareness, driving traffic to stores and increasing sales; (iii) the ability to realize increased sales and greater levels of profitability; (iv) the ability of the Company to effectively grow and promote the sleep related products and accessories category of its business; (v) the ability to hire, train, manage and retain qualified management and sales associates; (vi) the ability to continuously improve its service to achieve new and enhanced customer satisfaction; (vii) the ability to maintain cost-effective delivery of its products, (viii) the ability to successfully identify and respond to emerging trends in the mattress industry; (ix) the level of competition in the mattress industry; and (x) general economic conditions and consumer confidence.
While the Company believes that the methodology it employs for identifying new store locations in existing, satellite and new markets has been successful in the past, there can be no assurance that it will continue to be successful in the future. Although cannibalization of sales from existing stores has historically been minimal, as the Company executes on its planned growth strategy, increasing saturation of existing markets may occur which may increase cannibalization of sales at existing stores or make in-fill stores less profitable, which can have a material adverse effect on the Company's business, financial condition, liquidity and results of operations. New stores typically experience an adjustment period before sales levels and operating margins normalize, and even sales at successful newly-opened stores generally do not make a significant contribution to profitability in their initial months of operation.
The success of any expansion strategy will be dependent upon many factors, including the ability of the Company to: (i) successfully open additional retail stores in existing and satellite markets; (ii) successfully enter new markets in which the Company has no previous retail experience; (iii) negotiate acceptable lease terms for additional store locations; (iv) effectively hire, train, manage and retain qualified management and other personnel; (v) successfully grow and optimize eCommerce platforms; and (vi) successfully integrate acquisitions into the Company’s business and operations. There can be no assurance that the Company will be able to grow at the rate contemplated by its growth strategy, that new stores and eCommerce growth will be effectively integrated into the Company's existing operations and that such network growth through stores and eCommerce will be profitable.
There can be no assurance that the Company will be successful in implementing its growth strategy or, even if implemented, that it will have the intended results. Failure to successfully execute any material part of the Company's growth strategy could have a material adverse effect on the Company's business, financial condition, liquidity and results of operations.
Fluctuations in same store sales The Company's same store sales, which is inclusive of revenues from both existing stores and eCommerce channels, have fluctuated in the past for its Banners. There can be no assurance that the Company's same store sales results will not decline in the future. A variety of factors affect the same store sales, including: (i) levels of consumer awareness of products, brand name, store locations and eCommerce channels; (ii) same store sales performance in prior periods; (iii) the timing of new and relocated store openings, the relative proportion of new and relocated stores to mature stores and cannibalization resulting from the opening of new stores in existing markets; (iv) the amount, timing and relative success of promotional events, advertising expenditures, new product introductions and product line extensions; (v) the quality and tenure of regional and store-level managers and sales associates; (vi) the amount of competitive activity; (vii) the evolution of store operations and eCommerce platforms; and (viii) general economic conditions and consumer confidence.
Decreases in same store sales could have a material adverse effect on the Company's business, financial condition, liquidity and results of operations.
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Liquidity Risk Based on the Company’s current business plan, liquidity position, cash flow forecast and factors known to date, including the current known impacts of COVID-19, it is expected that the Company's current cash position and future cash flows generated from operations will be sufficient to meet its working capital requirements for fiscal 2021. However, the Company's ability to fund future cash requirements will depend on its future operating performance, which could be affected by risks associated with the COVID-19 pandemic. The COVID-19 pandemic creates a number of additional risks such as the negative impact on debt and equity capital markets, including the ability to access capital at a reasonable cost and the trading price of the Company’s securities, which could impact future capital raising efforts if required by the Company. See “COVID-19 emerging risk”
Damage to the Company's reputation Consumers associate the Company with a high level of customer service and quality. Failure to maintain merchandise quality and integrity, or ethical and socially responsible operations could adversely affect the brand image and reputation of the Company and its Banners. Any negative publicity about, or significant damage to the Company's brand or reputation could negatively impact revenues, reduce employee morale and productivity and diminish customer trust, any of which could harm the Company's business, financial condition and results of operations. In those circumstances, it may be difficult and costly for the Company to regain customer confidence. Furthermore, damage to the reputation of any supplier or manufacturer of the Company's products, could negatively impact consumer opinion of the Company and its Banners, which could have a material adverse effect on the Company’s business and results of operations.
There has been a marked increase in the use of social media platforms and similar channels, including web logs (blogs), social media websites and other forms of Internet-based communications that provide individuals with access to a broad audience of consumers and other interested persons. The availability and impact of information on social media platforms is virtually immediate and many social media platforms publish user-generated content without filters or independent verification as to the accuracy of the content posted. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available. Information concerning the Company or its Banners may be posted on such platforms at any time. Information posted may be adverse to the Company's interests or may be inaccurate, each of which may harm the Company's performance, prospects, reputation or business. The harm may be immediate without affording the Company an opportunity for redress or correction. Ultimately, the risks associated with any such negative publicity or incorrect information cannot be completely eliminated or mitigated and may materially harm the Company's reputation, business, financial condition and results of operations.
Competition The retail mattress and complementary sleep related products and accessories industry in Canada is highly competitive. Participants in the bedding industry compete primarily based on store location and/or eCommerce platform, service, price, product selection, brand name recognition and advertising. There can be no assurance that the Company will be able to continue to compete favourably with its competitors in these areas. The top eight retailers in the industry in Canada include Sleep Country / Dormez-vous?, Leon's / The Brick, Hudson's Bay, BMTC, IKEA, Amazon, Casper and Costco. The remaining industry sales are highly fragmented amongst a number of smaller mattress specialty stores, other furniture stores and small independent retailers. Additionally, retail furniture stores may open retail locations specifically targeted for specialty bedding as a way to directly compete with the Company and other specialty retailers. Certain of the Company's competitors may have substantially greater financial, marketing and other resources. Accordingly, the Company may face periods of intense competition in the future that could have a material adverse effect on its planned growth and future results of operations. Competition in existing and new markets may also prevent or delay the Company's ability to gain relative market share. Any of the developments described above could have a material adverse effect on the Company's planned growth and future results of operations.
The Company currently experiences competition from Amazon Canada, Casper Sleep Inc., and Novosbed Inc., as well as a number of other online mattress companies in the USA, that ship their product into Canada. The Company launched its eCommerce platforms in May 2017 and completed the Endy acquisition in December 2018. Existing competitors may start offering mattresses, boxsprings and complementary sleep related products and accessories online or may expand their existing internet-based businesses. New competitors that offer online sales may also enter the market. An increase in internet-based competition for mattresses, boxsprings and complementary sleep related products and accessories could have a material adverse effect on the Company's business, financial condition, liquidity and results of operations.
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In addition, U.S. and international retailers are increasingly entering the Canadian retail market, which has created additional competitive challenges for Canadian-based retailers like the Company that are principally dependent upon the Canadian market. If new competitors enter the Canadian retail mattress and complementary sleep related products and accessories market, it may adversely affect the Company's sales and reduce the Company's market share, which could in turn have a material adverse effect on the Company's business, financial condition, liquidity and results of operations.
Seasonality and weather Retail mattress sales are subject to seasonal fluctuations in demand with the highest levels of sales occurring in the third and fourth quarters. Variable costs, including certain selling costs and expenses, and to some extent, employee wages, can be managed to match seasonal patterns. However, a significant portion of retail costs, including rent, are fixed and cannot be adjusted for seasonality. Unusual weather patterns may also affect sales.
For fiscal 2020 and 2021, revenue and net earnings (losses) may not follow historic patterns of seasonality due to the impact of the COVID-19 pandemic Additionally, the impact of the COVID-19 pandemic, if any, on the Company’s revenue and net earnings generated in fiscal 2020 may not be representative of future revenue and net earnings results.
Business Continuity The Company’s ability to continue critical operations and processes could be negatively impacted by adverse events resulting from various incidents, including severe weather, work stoppages, prolonged IT systems failure, terrorist activity, power failures, border closures or disease outbreaks such as the COVID-19 pandemic or other national or international catastrophe. The Company has business continuity plans in place to manage any such events. Despite this, ineffective contingency planning, business interruptions, crises or potential disasters could adversely affect the reputation, operations or financial performance of the Company.
Real estate The Company faces competition for retail locations from other retail market participants. All of the Company's store locations and distribution centres are leased. The Company's ability to re-negotiate favourable terms on an expiring lease or to negotiate favourable terms for a suitable alternate location and the Company's ability to negotiate favourable lease terms for additional store locations could depend on conditions in the real estate market, competition for desirable properties, the Company's relationships with current and prospective landlords or on other factors that are not within the Company's control. Any or all of these factors and conditions could negatively impact the Company's growth and profitability.
As a result of the COVID-19 pandemic, the Company temporarily closed its retail stores on March 21, 2020. Beginning in April 2020, the Company negotiated the deferral of rent payments of its real estate leases in response to business disruptions from COVID-19.
The inability of the Company to enter into suitable rent relief arrangements could potentially have a cumulative material effect, depending on the number of locations impacted, the materiality of such locations to the overall business, and any dispute under these leases that may result in litigation with the respective landlord.
Remote Work In addition to temporarily closing its retail locations, in response to the COVID-19 pandemic the Company also had to temporarily close its head office and implement a remote work program to maintain its operations. While associates are generally able to perform their functions in a remote setting from their homes or other locations, certain additional risk factors may negatively impact the Company’s ability to perform its operations efficiently, securely and without interruptions. These risk factors, any of which could have an adverse effect on the Company’s operations and financial performance , include: increased cybersecurity threats while duties are performed outside the Company’s regular offices, increased dependence on telecommunication links such as Internet access in associates’ homes, decreased efficiency due to the change in equipment and network speeds used for data processing and use, the timely dissemination and exchange of information in a remote workforce environment and the dependence on certain functions that are difficult to efficiently conduct outside a regular workplace.
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Workplace Health and Safety
The failure of the Company to adhere to appropriate health and safety procedures and to ensure compliance with applicable laws and regulations could result in employee injuries, productivity loss and liabilities to the Company. To reduce the risk of workplace incidents, the Company has health and safety programs in place and has established policies and procedures aimed at ensuring compliance with applicable legislative requirements.
During the COVID-19 pandemic, the health and safety of the Company’s customers, associates and communities remained a top priority in the face of evolving workplace risks and practices related to the pandemic. The Company put in place and employed extensive health and safety measures across all of it operations based on the guidance and direction from public health authorities. If government authorities introduce more stringent health and safety laws, the Company may incur additional costs to comply with these requirements, which may have an adverse impact on the Company’s financial results. Further, if the Company is unable to meet the current or future health and safety laws, regulations and industry standards related to COVID-19 or, despite the Company’s efforts and precautions, associates are exposed and infected by the COVID-19 virus, it could have an adverse effect on the Company’s abilities to re-open and operate its stores, maintain operations at its distribution centres, or reopen and operate its head office resulting in an impact on customer and employee engagement, all of which could have an adverse effect on the Company’s operations and financial performance.
Dependence on key personnel The Company's success depends in part on its ability to attract and retain key executive, merchandising, marketing and sales personnel. The Company's executive officers include David Friesema, the Chief Executive Officer, and Stewart Schaefer, President of Dormez-vous? and Chief Business Development Officer, each of whom has entered into an employment agreement with the Company. If these executive officers or other members of senior management cease to be employed by the Company, the Company would have to hire additional qualified professionals. The Company's ability to successfully hire other experienced and qualified professionals cannot be assured and may be difficult because the Company faces competition for these professionals from its competitors, its suppliers and other companies operating in its industry. As a result, the loss or unavailability of any of the Company's executive officers could have a material adverse effect on the Company.
Employee attraction, development and succession planning The Company’s operations and continued growth are dependent on its ability to hire, retain and develop its leaders and other key personnel. Any failure to effectively attract talented and experienced colleagues and to establish adequate succession planning and retention strategies could result in a lack of requisite knowledge, skill and experience. This could erode the Company’s competitive position or result in increased costs, competition for or high turn-over of colleagues. Any of the foregoing could negatively affect the Company’s ability to operate its business, which in turn could adversely affect the Company’s reputation, operations or financial performance.
Labour relations With the exception of unionized distribution centers in Greater Vancouver, Victoria and Brampton representing 90 individuals in the aggregate, the remaining Company's associates are not unionized. The current agreement with Retail Wholesale Union Local 580 covering the Greater Vancouver and Victoria sites was renewed on January 1, 2018 for a four-year term which expires this coming December 31, 2021. The current agreement with the Workers United Canada Council, on its own behalf and on behalf of its Local 2757, in respect of the Brampton site was ratified January 28, 2019 retroactive to January 14, 2019 for a three-year term expiring on January 13, 2022. Currently, labour relations are good. However, the maintenance of a productive and efficient labour environment or the successful renegotiation of the collective agreements cannot be assured. If protracted and extensive work stoppages occur, labour disruptions such as strikes or lockouts could have a material adverse effect on the Company's business and financial results.
Relationship with suppliers The Company's principal suppliers are Tempur-Sealy Canada, Serta Simmons Bedding Canada, Kingsdown Canada, Primo International, Purple Innovation, Simba Sleep Incorporated, Dormeo North America, and Springwall Sleep Products among others. The Company's current suppliers may not continue to sell products to it on acceptable terms or at all, and the Company may not be able to establish relationships with new suppliers to ensure delivery of products in a timely manner or on terms acceptable to it. The Company may not be able to acquire desired merchandise in sufficient quantities on terms acceptable to it in the future. The Company is also dependent on suppliers for assuring the quality of merchandise supplied to it. The Company's inability to acquire suitable merchandise in the future or the loss of one or more of the Company's suppliers and the Company's failure to replace them may harm the Company's
- 20 - relationship with its customers and the Company's ability to attract new customers, resulting in a decrease in revenue. Furthermore, the Company's ability to continue to attract and retain popular brands that are favoured by consumers is important to the Company's ability to respond to consumer preferences. If suppliers of popular brands cease doing business with the Company, or the terms and conditions with such suppliers (including supplier allowances and product cost) change materially, including the Company's ability to be an exclusive seller of certain brands, the Company's results could be adversely affected. The Company does not have long-term contracts with suppliers and therefore the Company's ability to continue to sell brands that are popular with consumers and, if applicable, to have exclusivity of certain brands, are dependent on ongoing positive relationships with its suppliers.
As a result of the large volume of the Company's business with a limited number of suppliers and the Company's use of their branding in its marketing initiatives, the Company's success depends on the continued popularity and reputation of these suppliers. Any (i) deterioration of their brand image, (ii) reduction in supplier incentives, (iii) an adverse change in their financial condition, production efficiency, product development or marketing capabilities, or (iv) deterioration in the Company's relationship with any of them could adversely affect the Company's own brand and the level of the Company's customers' satisfaction, among other things, which could have a material adverse effect on the Company's business, financial condition, liquidity and results of operations.
Merchandise is sourced domestically in Canada as well as from countries around the world (including the United States, China, Italy and Spain). The Company’s use of third-party suppliers outside of Canada exposes the Company to various risks, including currency fluctuations, political instability, civil unrest and economic instability, greater difficulty enforcing intellectual property rights and potentially weaker laws protecting such rights, requirements to comply with different laws in varying jurisdictions, which laws may dictate that certain practices that are acceptable in some jurisdictions are not acceptable in others, and changes in governmental policies, natural disasters and greater difficulty and expense in recovering from them, difficulties in moving materials and products from one country to another, including port congestion, strikes and other transportation delays and interruptions, difficulties in controlling the quality of raw materials and components used in the manufacturing of merchandise, which may lead to public health and other concerns regarding the merchandise, changes in international labour costs, labour strikes, disruptions or lock-outs, the imposition of tariffs or other protectionist measures, or the breakdown of trade relations and other factors, which more recently include the closure of national borders and disruption of merchandise deliveries due to the effects of the COVID-19 pandemic. To date, the Company has not experienced any significant difficulty in obtaining merchandise and considers its sources of supply to be adequate, however, the Company's flow of merchandise could be affected by the COVID-19 pandemic. Collectively and individually, these factors are beyond the Company’s control and a failure to maintain favourable terms and relationships with these suppliers, or the absence of key suppliers, may affect the Company’s ability to compete in the marketplace. If any of these risks were to materialize, the Company’s business, financial condition and performance could be significantly and materially harmed.
Service Providers The Company has a wide range of key business relationships with third parties including vendors, suppliers, distributors and contractors. The Company relies on vendors, including offshore vendors in both mature and developing markets, to provide the Company with goods and services. Offshore sourcing increases certain risks to the Company, including risks associated with general merchandise product defects, non-compliance with ethical and safe business practices and inadequate supply of products. The Company has no direct influence over how vendors are managed. Negative events affecting vendors or inefficient, ineffective or incomplete vendor management strategies, policies and/or procedures could adversely impact the Company’s reputation and impair the Company’s ability to meet customer needs or control costs and quality, which could adversely affect the reputation, operations or financial performance of the Company.
The Company relies on service providers including transport carriers, logistic service providers and operators of warehouses and distribution facilities. Ineffective selection, contractual terms or relationship management could impact the Company’s ability to source merchandise, to have products available for customers, to market to customers or to operate efficiently and effectively. Disruption in services from suppliers could interrupt the delivery of merchandise to stores, which in turn could adversely affect the operations or financial performance of the Company.
Intellectual property The Company continually develops and improves its brand recognition, which has been an important factor in maintaining its competitive position. No assurance can be given that others will not independently develop substantially similar branding. The Company takes all commercially reasonable steps to protect its proprietary rights, trademarks, copyrights, trade secrets, confidentiality procedures, and contractual provisions. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to obtain and use information that the Company regards
- 21 - as proprietary. Stopping unauthorized use of the Company's proprietary rights may be difficult, time-consuming and costly. There can be no assurance that the Company will be successful in protecting its proprietary rights and, if it is not, its business, financial condition, liquidity and results of operations could be materially adversely affected.
Dependence on distribution centres and timely delivery to customers An important part of the Company's success is due to its ability to deliver mattresses and complementary sleep related products and accessories quickly to the Company's customers. This in turn is a result of the Company's successful planning and distribution infrastructure, including merchandise ordering, transportation and receipt processing, the ability of the Company's suppliers to meet its distribution requirements and the ability of the Company's associates to meet its delivery requirements. The Company's ability to maintain this success depends on the continued identification and implementation of improvements to its planning process, distribution infrastructure and supply chain. The Company also needs to ensure that its distribution infrastructure and supply chain keep pace with its anticipated growth and increased number of stores. The cost of these enhanced processes could be significant and any failure to maintain, grow or improve them could adversely affect the Company's operating results. The Company's business could also be adversely affected if there are delays in product shipments due to freight difficulties, difficulties of the Company's suppliers or contractors involving strikes or other difficulties at their principal transport providers or otherwise, including unforeseen disruptions in operations due to fire, severe weather conditions, natural disasters, or other catastrophic events. Additionally, freight cost is impacted by changes in fuel prices. Fuel prices affect freight cost both on inbound freight from suppliers to the distribution centres and outbound freight from the distribution centres to the Company's stores and customers.
Inventory management The Company is subject to risks associated with managing its inventory. Failure to successfully manage such risks could result in shortages of inventory, or excess or obsolete inventory which cannot be sold profitably or increases in levels of inventory shrink. Any of these outcomes could adversely affect the financial performance of the Company. Although the Company has implemented new IT systems that are intended to provide increased visibility to integrated costing and sales information at store level, the Company’s failure to effectively implement such new IT systems and applicable processes may increase the risks associated with managing inventory, including the risk that inaccurate inventory could result in inaccurate financial statements.
The Company is also examining its fundamental processes related to article lifecycle management, with the goal of making existing processes more efficient. This will impact existing workflow and system processes across procurement, supply chain and merchandising. Such simplification and efficiency processes are critical to the organization’s ability to integrate towards longer term system solutions and achieve efficiencies across its Banners. Any failure to effectively deliver this enterprise core solution could negatively impact the Company’s operations or financial performance.
Dependence on enterprise resource planning system The Company depends on its enterprise resource planning (“ERP”) system in each stage of the sale of its products, including entering the customer's order, determining availability of product, arranging the optimal delivery times, inventory management, and providing after-sales service. In addition, the ERP system forms the basis of the Company's financial reporting. If irreparable damage were caused to the ERP system and its databases or the information contained in the ERP system were lost, the business, financial condition, liquidity and results of operations could be adversely affected. The company has a disaster recovery plan in place to prevent loss of data and operational disruptions from an ERP system failure.
IT systems implementations and data management The Company continues to undertake investments in new IT systems to improve the operating effectiveness of the organization. Failure to successfully migrate from legacy systems to the new IT systems or a significant disruption in the Company’s current IT systems during the implementation of new systems could result in a lack of accurate data to enable management to effectively manage day-to-day operations of the business or achieve its operational objectives, causing significant disruptions to the business and potential financial losses.
Failure to successfully adopt or implement appropriate processes to support the new IT systems, or failure to effectively leverage or convert data from one system to another, may preclude the Company from optimizing its overall performance and could result in inefficiencies and duplication in processes, which in turn could adversely affect the reputation, operations or financial performance of the Company. Failure to realize the anticipated strategic benefits
- 22 - including revenue growth, anticipated cost savings or operating efficiencies associated with the new IT systems could adversely affect the reputation, operations or financial performance of the Company.
The Company also depends on relevant and reliable information to operate its business. As the volume of data being generated and reported continues to increase across the Company, data accuracy, quality and governance are required for effective decision making. Failure by the Company to leverage data, including customer data, in a timely manner may adversely affect the Company’s ability to execute its strategy and therefore its financial performance.
Internet, privacy, confidentiality and cyber security In the normal course of its business, the Company collects, processes and retains sensitive and confidential customer information. Despite the security measures the Company has in place, the Company's facilities and systems, and those of its third-party service providers, may be vulnerable to security breaches, hacking, computer viruses, misplaced or lost data, programming and/or human errors and other similar events. Any security breach involving the misappropriation, loss or other unauthorized use or disclosure of confidential information, whether by the Company or its vendors, could damage the Company's reputation and its relationships with its customers, expose the Company to risks of litigation and liability and may have a material adverse effect on the Company's business, including the inability to process customer transactions, inability to deliver products to customers and disruptions to inventory management. The company has a disaster recovery plan in place and has information technology security controls in place to prevent unauthorized access to the Company's internal network. The Company does not maintain insurance coverage for cyber security incidents. eCommerce Platforms
There can be no assurance that we will successfully manage and grow the Company’s eCommerce business as planned, and any failure to do so could have a negative impact on the Company and its share price.
Growing the Company’s eCommerce business is essential to its growth strategy, as is expanding its product offerings available through its eCommerce platforms. The usability of and client experience provided by its eCommerce platforms are critical to the success and growth of the Company’s eCommerce business. Any extended software disruption of its eCommerce business or the failure on the Company to provide an attractive, effective, reliable, user friendly eCommerce business that offers a wide assortment of merchandise with rapid delivery options and that continually meets the changing expectations of online clients could place the Company at a competitive disadvantage, result in the loss of revenue or harm the Company’s reputation with customers and could have a material adverse effect on the Company’s business and its results of operations. The Company also depends on third-party service providers for its eCommerce platform and any service disruption on their part can affect the customer’s ability to access the Company’s website resulting in loss of revenue or harm its reputation. The retail landscape is also quickly changing due to the rise of the digitally influenced shopping experience and the emergence of disruptive technologies, such as digital payments, drones, driverless cars and robotics. Any failure to adapt the business to recognize and manage this shift in a timely manner could adversely affect operations or financial performance. The growth of the Company’s eCommerce business is also dependent on its ability to successfully manage the costs, difficulties and competitive pressures associated with shipping, including inventory management and distribution, and compliance with governing statutes, laws, regulations and regulatory policies in the jurisdictions to which we ship, including laws governing the operating and marketing of eCommerce websites, as well as the collection, storage and use of information on consumers interacting with these websites. If the Company is unable to expand or update its eCommerce business commensurately with its competitors, manage shipping and delivery and successfully respond to the risks inherent to eCommerce, the Company’s growth of its eCommerce business maybe negatively impacted resulting in an adverse impact to the Company’s financial results and share price.
Governance, change management, process and efficiency Many initiatives are underway to reduce the complexity and cost of the Company’s business operations, ensuring a low cost operating structure that allows for continued investments in the Company’s strategic growth areas. These efforts include initiatives focused on improving processes and generating efficiencies across its administrative, store and distribution network infrastructures. The success of these initiatives is dependent on effective leadership and realizing intended benefits. Ineffective change management could result in a lack of integrated processes and procedures, unclear accountabilities and decision-making rights, decreased colleague engagement, ineffective communication and training or a lack of requisite knowledge. Any of the foregoing could disrupt operations, increase the risk of customer dissatisfaction, adversely affect the Company’s reputation or financial performance or adversely affect the ability of the Company to implement and achieve its long-term strategic objectives.
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Insurance The Company maintains insurance coverage in respect of its potential liabilities and the accidental loss of value of its assets from risks, in amounts, with such insurers, and on such terms as it considers appropriate, taking into account all relevant factors. However, there are certain types of losses, generally of a catastrophic nature, such as earthquakes and floods that may be uninsurable or not economically insurable. The Company will use its discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view to maintaining appropriate insurance coverage on the Company's assets and the business at a reasonable cost and on suitable terms. This may result in insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of the Company's lost investment. Certain factors also might make it unattractive to use insurance proceeds to replace the property after such property has been damaged or destroyed. Under such circumstances, the insurance proceeds received by the Company might not be adequate to restore its economic position with respect to such property. There are no assurances that the Company's insurance coverage will continue to be available to it on reasonable terms, including reasonable premium, deductible and co-insurance requirements or that the Company's insurer will not disclaim coverage of any future claim. The Company's business, financial condition, liquidity and results of operations could be materially adversely affected if any of the foregoing developments were to occur.
Comfort and price guarantees Generally, the Company provides its customers with a 100-day comfort guarantee whereby, within 100 days from the date of original purchase, if the customer is not satisfied with the new mattress, the Company will exchange it one time for a mattress of equal or similar quality with an exchange fee, subject to standard transportation charges. Additionally, the Company provides its customers with a low price guarantee whereby if a customer finds the same or comparable sleep set advertised for less than the Company's displayed or advertised price within 100 days of purchase, the Company will beat its competitor's advertised price on such comparable sleep set by 5% and refund the customer the difference. The Company establishes reserves relating to its customer satisfaction programs based on historical experience. An increase in comfort exchange return rates or refunds could have a material adverse effect on the Company's business, financial condition and results of operations.
Debt covenants in Credit Facility The Credit Facility contains negative covenants that limit the ability of the Company and SCCI to engage in specified types of transactions. These covenants limit the ability of the Company and SCCI to, among other things, incur indebtedness; create liens; engage in mergers or consolidations; sell assets (including pursuant to sale and leaseback transactions); pay dividends or repurchase securities; make investments, acquisitions, loans or advances; repay, prepay or redeem certain indebtedness; engage in certain transactions with affiliates; amend material agreements governing certain indebtedness; and change the Company's lines of business.
A breach of any of these covenants could result in an event of default under the Credit Facility. Upon the occurrence of an event of default under the Credit Facility, the lenders may have the ability to elect to declare all amounts outstanding under such facility to be immediately due and payable and terminate all commitments to extend further credit, or seek amendments to the debt agreements that would provide for terms more favourable to such lenders. If the Company or SCCI is unable to repay those amounts, the lenders under the Credit Facility may be entitled to proceed against the collateral granted to them to secure that indebtedness.
Dependence on operating subsidiary The Company is a holding company with no business operations of its own or material assets other than the shares of SCCI and Endy and intercompany borrowings to SCCI and Endy. Accordingly, all of the Company's operations are conducted by the Company's subsidiaries, namely SCCI and Endy. As a holding company, the Company requires dividends and other payments from its subsidiaries to meet cash requirements. While the Company presently intends to pay dividends to holders of Common Shares and anticipates that its subsidiaries will have sufficient cash flow to enable such subsidiaries to pay dividends or otherwise distribute cash to the Company, the terms of the Credit Facility contain restrictions on the ability of the Company’s subsidiaries from paying dividends and otherwise transferring to the Company cash or other assets in certain circumstances. As such, a decline in the Company's business, financial condition, cash flows or results of operation may result in, pursuant to the terms of the Credit Facility, restrictions on its subsidiaries ability to pay dividends or otherwise distribute cash to the Company. In such event, the Company may be unable to pay a dividend to holders of Common Shares. If there is an insolvency, liquidation or other reorganization of the Company’s subsidiaries, the Company’s shareholders will likely have no right to proceed against the assets of the subsidiaries. Creditors of the subsidiaries will be entitled to payment in full from the sale or other disposal of the assets of the respective subsidiaries before the Company, as an equity holder, would be entitled to
- 24 - receive any distribution from that sale or disposal. If the subsidiaries are unable to pay dividends or distributions or make other payments to the Company when needed, the Company will be unable to pay dividends or satisfy the Company's obligations.
Risks related to the Endy acquisition The Endy acquisition was based largely on economic assessments made by the Company and its financial advisors. These assessments include a series of assumptions regarding various factors many of which are subject to change and beyond the Company’s control. All such assessments involve a measure of uncertainty that could result in lower revenue or higher operating or capital expenditures than anticipated.
Although the Company conducted significant financial and legal due diligence in the course of its consideration of such acquisition, there may be liabilities that the Company failed to discover or was unable to appropriately quantify in the course of due diligence, and for which the Company may not be indemnified. The discovery or quantification of any material liabilities could have a material adverse effect on the Company’s business, financial condition or future prospects. In addition, the definitive agreement for the acquisition limits the amount for which the Company is indemnified, such that liabilities in respect of such acquisition may be greater than the amounts for which the Company is indemnified under the agreement.
The Company expects that the acquisition will provide a number of benefits to the Company. However, there is a risk that some or all of the expected benefits of the acquisition may fail to materialize, may cost more to achieve or may not occur within the time periods that the Company anticipates. The realization of such benefits may be affected by a number of factors, many of which are beyond the control of the Company.
Fluctuations in product cost, inflation and foreign currency The Company's results may be affected by the prices of the components used in the manufacture of the mattress and complementary sleep related products and accessories it sells. These prices may fluctuate based on a number of factors beyond the Company's control, including: oil prices and other energy related costs, changes in supply and demand, general economic conditions, labour costs, competition, import duties, tariffs, currency exchange rates and government regulation. These fluctuations may result in an increase in the Company's transportation costs for distribution, utility costs for retail stores and overall costs to purchase products from suppliers.
The Company may not be able to adjust the prices of its products, especially in the short-term, to recover these cost increases. A continual rise in product costs could adversely affect consumer spending and demand for the Company's products and increase its operating costs, both of which could have a material adverse effect on the Company's financial condition and results of operations. The Company's operating results are reported in Canadian dollars. A portion of the Company's merchandise purchases are denominated in U.S. dollars which results in foreign currency exposure related to fluctuations between the Canadian and U.S. dollars. The Company does not currently use foreign exchange option or forward contracts to hedge its foreign currency risk relating to merchandise purchases. A sudden increase in the U.S. dollar relative to the Canadian dollar could result in higher costs to the Company, which could in turn result in increased prices, reduced sales and decreased profit margins and could negatively impact the Company's business and financial results. The Company's revolving credit facility allows the Company to borrow in Canadian and U.S. dollars. To mitigate any foreign exchange risk related to its U.S. dollar denominated debt, the Company enters into forward foreign exchange contracts to sell U.S. dollars in an amount equal to the principal amount of its U.S. dollar denominated borrowings.
Legal proceedings The Company and its subsidiary may become, in the ordinary course of its business, a party to litigation. The existence of such claims against the Company or its affiliates, directors or executive officers could have various adverse effects, including the incurrence of significant legal expenses defending such claims, even those claims without merit. In general, litigation claims can be expensive and time consuming to bring and to defend against and could result in settlements for damages that could significantly impact the Company's business, results of operations or financial conditions. The Company's insurance coverage may not be sufficient to absorb the fees and costs related to legal proceedings and the Company may be exposed to lawsuits which could harm its reputation and keep management from growing the business. The Company from time to time is the subject of claims in respect of termination entitlements to former associates which, to date, have not been material to the Company either individually or in the aggregate.
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Government regulation The Company's products and its marketing and advertising programs are and will continue to be subject to regulation by various Canadian federal, provincial and local regulatory authorities. Compliance with these regulations may have an adverse effect on the Company's business. In addition, the Company's operations are subject to Canadian federal, provincial and local consumer protection regulations, environmental laws and other laws relating specifically to the bedding industry. The Company and/or the Company's suppliers may be required to incur significant expense to the extent that these regulations change and require new and different compliance measures. For example, legislation may be enacted relating to the disposal of used mattresses which may have the effect of increasing the Company's cost of providing that service to its customers or may result in the Company being forced to discontinue that service. This may result in reduced sales and could negatively impact the Company's business and financial results. In addition, failure to comply with these various regulations may result in penalties, the inability to conduct business as previously conducted or at all, and/or adverse publicity, among other things.
The Company's ability to control its labour costs is subject to numerous external factors, including provincial legislation governing minimum wages, hours of work and termination and severance entitlements. If labour costs increase, the Company may not be able to hire or retain qualified sales associates or it may result in an increase in its operating expenses, which could negatively affect the Company's profitability.
Third-party consumer financing arrangements The Company offers financing to consumers through third-party consumer finance companies. Although the Company is not exposed to any customer credit risk, its business is affected by the availability and terms of financing to customers. A significant reduction of credit availability to the Company's customers could have a material impact on its business, financial condition, liquidity and results of operations.
Price volatility of the Common Shares The trading price of the Common Shares may be volatile and subject to wide price fluctuations in response to various factors, many of which are beyond the Company's control, including, but not limited to: (i) market conditions in the stock market generally or in any of its sub-sectors; (ii) actual or anticipated fluctuations in the Company's quarterly financial and operating results; (iii) developments or disputes concerning the Company's intellectual property or proprietary rights; (iv) introduction of new technologies, products or services by the Company or its competitors; (v) issuance of new or changed securities analysts' reports or recommendations; (vi) additions or departures of key personnel; (vii) regulatory developments; (viii) litigation and governmental investigations; and (ix) economic and political conditions or events.
These and other factors may cause the market price and demand for the Common Shares to fluctuate substantially, which may limit or prevent shareholders from readily selling Common Shares and may otherwise negatively affect the liquidity of the Common Shares. The trading price of the Common Shares may also decline in reaction to events that affect other companies in the retail mattress and complementary sleep related products and accessories industry or related industries, even if these events do not affect the Company. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of the Company's shareholders brought a lawsuit against it, the Company could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of management from the Company's business.
Forward-looking information The forward-looking information relating to, among other things, future results, performance, achievements, prospects or opportunities of the Company or the Canadian market included in this AIF is based on opinions, assumptions and estimates made by the Company in light of its experience and perception of historical trends, current conditions and expected future developments, as well as other factors the Company believes are appropriate and reasonable in the circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct. Actual results of the Company in the future may vary significantly from the historical and estimated results and those variations may be material. There is no representation by the Company that actual results achieved by the Company in the future will be the same, in whole or in part, as those included in this AIF. See "Forward-Looking Information".
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Payment of dividends Payment of dividends is dependent on cash flows of the business and is subject to change. The declaration and payment of future dividends will be at the discretion of the Board, are subject to restrictions under the Credit Facility and may be affected by various other factors, including the Company's earnings, financial condition, acquisitions and legal or contractual restrictions. There can be no assurance that the Company will be in a position to pay dividends at the same rate (or at all) in the future. Moreover, there are or may be statutory, contractual, tax or other limitations on the ability of the Company's subsidiary to make distributions to the Company. If the cash the Company receives from its subsidiaries (SCCI and Endy) pursuant to such distributions is insufficient, or if its subsidiaries are unable to make such distributions, the Company may be required to raise cash through the incurrence of debt, the issuance of additional equity or the sale of assets to fund its obligations. However, there can be no assurance that the Company would be able to raise cash by any of these means in a timely manner or on terms that are favourable to the Company.
In response to the risks and uncertainties caused by the COVID-19 pandemic since its onset in Q1 2020, the Company temporarily suspended dividends with an intent to reinstate payments at a time and payment level considered prudent by the Company's Board. The Company intended to reinstate the dividends at a future date with the resumption of normal operating conditions and when the Board considered the risks and uncertainties associated with COVID-19 to be unlikely to have a material ongoing impact. As at November 9, 2020, the Board approved and restored the Company’s dividend. As the COVID-19 pandemic continues, the Company may consider it advisable to reduce or suspend dividends in the future.
Internal control over financial reporting The Company is responsible for establishing and maintaining adequate internal control over financial reporting, which is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A failure to prevent or detect errors or misstatements may result in a decline in the Company stock price and harm the Company’s ability to raise capital.
Dilution The issuance of additional Common Shares may have a dilutive effect on the interests of shareholders. The number of Common Shares that the Company is authorized to issue is unlimited. The Company may, in its sole discretion, subject to applicable law and the rules of the TSX, issue additional Common Shares from time to time (including pursuant to its equity-based compensation plans), and the interests of shareholders may be diluted thereby.
Securities Analysts' Research or Reports Could Impact Price of Common Shares The trading market for the Common Shares will rely in part on the research and reports that industry or financial analysts publish about the Company or the Company's business. If one or more of the analysts covering the Company's business downgrade their evaluations of the Common Shares or share price, the price of the Common Shares could decline. If one or more of these analysts cease to cover the Common Shares, the Company could lose visibility in the market for its shares, which in turn could cause the Common Share price to decline.
MATERIAL CONTRACTS
The following is the only material contract entered into by the Company or its subsidiaries (a) during the most recently completed financial year, or (b) before the most recently completed financial year (but subsequent to January 1, 2002) that is still in effect.
Credit Agreement Concurrently with the IPO, SCCI entered into a senior secured credit agreement dated as of July 16, 2015 (the "Credit Agreement") with certain Canadian Schedule I chartered banks and other financial institutions as lenders pursuant to which a revolving credit facility was established (the "Credit Facility"). The Credit Facility was scheduled to mature on July 16, 2020 and was guaranteed by the Company.
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On June 29, 2016, the Credit Agreement was amended and restated and the Company became the borrower under the Credit Facility and SCCI, the wholly-owned subsidiary of the Company, became the sole guarantor. In addition, the credit limit under the Credit Facility was reduced to $150 million and the maturity date was extended to June 29, 2021. On August 30, 2017, the senior secured credit agreement was amended and the maturity date was extended to August 30, 2022.
On November 29, 2018, in connection with the purchase of substantially all of the operating assets of Endy, the Credit Agreement was further amended. Pursuant to this amendment, the facility was increased from $150 million to $210 million and the maturity date was extended to November 29, 2023.
On May 4, 2020, the Company secured additional liquidity to manage the impact of COVID-19 on the operations. The senior secured credit agreement was amended to include an incremental $50 million accordion. Pursuant to this amendment, the facility was increased from $210 million to $260 million. The maturity date was not extended at this time and remains as November 29, 2023.
The Credit Facility is secured by all of the present and after-acquired personal property of the Company. The Company pays a quarterly commitment fee to the lenders on the unused and un-cancelled portion of the commitments of each lender, as well as interest and certain other fees in respect of letters of credit under the Credit Agreement.
The Credit Agreement allows the Company to borrow in Canadian or US dollars. As at December 31, 2020, the debt is held in Canadian dollars and no forward foreign exchange contracts were outstanding. Interest on the senior secured credit facility is based on the prime or bankers’ acceptance rates plus applicable margins based on the achievement of certain targets, as defined by the amended and restated senior secured credit agreement. As at December 31, 2020, the applicable margin for bankers’ acceptances was 295 basis points and the applicable margin for prime rate loans was 195 basis points.
Under the terms of the senior secured credit facility, the Company is required to comply with certain financial and non-financial covenants. The Company is in compliance with all covenants as at December 31, 2020.
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DIRECTORS AND EXECUTIVE OFFICERS
As of the date of this AIF, the names and municipalities of residence of the current directors and executive officers of the Company, the offices held by them with the Company, their principal occupations during the five preceding years and the period each director has served as a director are set out in the table and accompanying text below. The present term of each director will expire immediately prior to the election of directors at the next annual meeting of shareholders of the Company or upon such director's successor being elected or appointed.
Common Name, Province and Shares Country of Residence Position / Title Principal Occupation(1) Held
Christine Magee Chair Chair of the Company 293,198 Ontario, Canada
J. Douglas Bradley(2) Director Corporate Director 9,610 Ontario, Canada
John Cassaday(3) Director Corporate Director 20,580 Ontario, Canada
Mandeep Chawla(4) Director CFO of Celestica Inc. - Ontario, Canada
Zabeen Hirji(5) Ontario, Canada Director Strategic Advisor 2,600 Andrew Moor(6) Director President and Chief Executive 11,800 Ontario, Canada Officer of Equitable Bank
Stacey Mowbray(7) Director Corporate Director 4,000 Ontario, Canada
David Shaw(8) Lead Director Founder and Chair of LHH 20,580 Ontario, Canada Knightsbridge and Chair of Axsium
David Friesema Director and Chief Chief Executive Officer of the 424,717 Ontario, Canada Executive Officer Company
Stewart Schaefer Chief Business Chief Business Development 291,213 Québec, Canada Development Officer and Officer of the Company and President of President of Dormez-vous? Dormez-vous?
Craig De Pratto Chief Financial Officer Chief Financial Officer of the - Ontario, Canada Company
David Howcroft Chief Sales Officer Chief Sales Officer of the Company 14,796 Ontario, Canada
Sieg Will Senior Vice-President, Senior Vice-President, Operations 67,167 Ontario, Canada Operations of the Company
Notes:
(1) See " – Biographical Information Regarding the Directors and Executive Officers of the Company" for the five-year history of each director and executive officer.
(2) Independent Director. Chair of the Audit Committee. Member of the HR & Compensation Committee and the Nominating & Corporate Governance Committee.
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(3) Independent Director. Chair of the Nominating & Corporate Governance Committee. Member of the Audit Committee and the HR & Compensation Committee. (4) Independent Director. Member of the Audit Committee, the HR & Compensation Committee and the Nominating & Corporate Governance Committee. (5) Independent Director. Member of the Audit Committee, the HR & Compensation Committee and the Nominating & Corporate Governance Committee. (6) Independent Director. Chair of the HR & Compensation Committee. Member of the Audit Committee and the Nominating & Corporate Governance Committee. (7) Independent Director. Member of the Audit Committee, the HR & Compensation Committee and the Nominating & Corporate Governance Committee. (8) Independent Director. Lead Director and member of the Audit Committee, the HR & Compensation Committee and the Nominating & Corporate Governance Committee.
Christine Magee and David Friesema were appointed to the Board when the Company was incorporated on May 27, 2015. Messrs. Doug Bradley, John Cassaday, Andrew Moor and David Shaw were appointed to the Board on July 16, 2015. Ms. Hirji was appointed to the Board on August 2, 2018. Ms. Mowbray was appointed to the Board on August 8, 2019. Mr. Chawla was appointed to the Board on August 20, 2020.
Biographical Information Regarding the Directors and Executive Officers of the Company The following is biographical information relating to each person who is a director or executive officer of the Company as of the date of this AIF. The directors of the Company shall be elected at each annual general meeting of the shareholders of the Company held to elect directors.
Christine Magee (61) — Ms. Magee is Chair of Sleep Country. She co-founded Sleep Country in 1994 and served as its President until November 2014. Ms. Magee worked in the industry as the Commercial Accounts Manager of Continental Bank from 1982 to 1985 and as a Senior Manager of Corporate and Commercial Lending with National Bank from 1985 to 1994. Ms. Magee serves on the Board of TELUS Corporation and Metro Inc. Ms. Magee is also on the Board of other private and not-for-profit organizations (Vice-Chair Trillium Health Partners, Chair of Woodbine Entertainment Group, Chair of the Talent Fund Advisory Committee, Plan International Canada and the University of Western Ontario Entrepreneurship Advisory Council). Ms. Magee previously served on the Board of SiriusXM Canada from January 2014 to May 2017, Richard Ivey School of Business Western University Advisory Board from June 2010 to 2017, Toronto General and Western Hospital Foundation Board from 2010 to 2015, Advisory Board for Adrenalys from May 2016 to December 2017, Cott Corporation from 2004 to 2008 and McDonald’s Restaurants from 1999 to 2004. Ms. Magee received a Honourary Doctorate of Commerce from Ryerson University on June 15, 2006. She holds an HBA (Honours) from the University of Western Ontario. On July 1, 2015, Ms. Magee was appointed as a member of the Order of Canada in recognition of her significant contributions to the Canadian business community.
J. Douglas Bradley (69) — Mr. Bradley is a member of the Board of Sleep Country. He is currently a corporate director. From 2005 to 2012, he was Managing Director of Westerkirk Capital Inc., a private equity firm. Prior to that, he was Managing Director, Corporate Development of TrizecHahn Corporation from 1995 to 2002. From 1982 to 1994, Mr. Bradley was a partner of Coopers & Lybrand Chartered Accountants, a predecessor firm of PricewaterhouseCoopers LLP. Mr. Bradley has served on numerous boards during his 45-year career. He holds a Bachelor of Mathematics degree from the University of Waterloo and he is a CPA, CA.
John Cassaday (67) — Mr. Cassaday is a member of the Board of Sleep Country. He is currently a corporate director. Prior to April 2015, Mr. Cassaday served as President and Chief Executive Officer and as a director of Corus Entertainment Inc., a position he held since its inception in 1999. Prior to Corus, Mr. Cassaday was Executive Vice President of Shaw Communications, President and Chief Executive Officer of CTV Television Network and President of Campbell Soup Company in Canada and the United Kingdom. Mr. Cassaday is currently Chairman of Manulife Financial Corporation and Director of Sysco Corporation. He is also active in community affairs, principally with St. Michael’s Hospital. Mr. Cassaday has an MBA from the Rotman School of Management at the University of Toronto, a degree of Doctor of Laws, honoris causa from the University of Toronto and is a member of the Order of Canada.
Mandeep Chawla (44) — Mr. Chawla is a member of the Board of Sleep Country. He is CFO at Celestica and is responsible for overseeing the financial, accounting, investor relations, M&A, legal and communication functions in order to protect and enhance the company’s shareholder value. Mandeep began his career at General Electric. He joined Celestica in 2010 and assumed the role of CFO in 2017. Mandeep holds a Master of Finance degree from Queen’s University and Bachelor of Commerce degree from McMaster University. Mandeep is also a CPA, CMA.
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Zabeen Hirji (60) — Ms. Hirji is a member of the Board of Sleep Country. She is Executive Advisor to Deloitte and an advisor to the public sector. Prior to that, Ms. Hirji held senior executive roles at RBC (Royal Bank of Canada),where from 2007 to 2017, she was Chief Human Resources Officer, a member of RBC’s Group Executive Committee responsible for setting its overall strategic direction and also held responsibility for Brand, Communications and Corporate Citizenship. She previously held numerous management roles in Retail Banking and Operations. Ms. Hirji has served on numerous not-for-profit Boards and currently Chairs Civic Action. Over her career, she has received numerous recognitions for Business Leadership and is a recipient of Canada’s Meritorious Service Medal. Ms. Hirji holds an MBA from Simon Fraser University, where she now serves as an Executive in Residence. .
Stacey Mowbray (59) — Ms. Mowbray is a member of the Board of Sleep Country. She most recently held the position of President North America with WW International (formerly Weight Watchers) where she oversaw and was a key member of the turnaround of the omnichannel health and wellness company. Prior to her work at WW, Ms. Mowbray held the position of President and CEO of Second Cup Limited from 2008 to 2014. She sat on the Second Cup Royalty Income Board 2007 to 2009. In addition, from 2008 to 2013, Ms. Mowbray was Chair and Board Director for the Coffee Association of Canada. Ms. Mowbray is currently a Board Director for Hydro One, Spärkel Beverage System, Currency Exchange International, the Exchange Bank of Canada, a volunteer Board Director for Trillium Health Partners. She is also on the International Advisory Board for the Schulich School of Business - York University and on the Dean’s Advisory Council for Wilfrid Laurier University. In addition, Ms. Mowbray has held volunteer Board Director positions at the LCBO, Association of Canadian Advertisers (ACA) and Kingsway College School. Over her career, she has received numerous recognitions including Diversity Champion, Inaugural CEO in Residence for Wilfrid Laurier, Top 100 Women’s Executive Network, Top 20 Women’s Post and Schulich School of Business Outstanding Progress and Achievement Award. She holds an MBA from the Schulich School of Business – York University.
Andrew Moor (60) — Mr. Moor is a member of the Board of Sleep Country. He joined Equitable Bank and Equitable Group as President and Chief Executive Officer in 2007. Mr. Moor is also a Director of Equitable Bank and Equitable Group. Prior to Equitable, Mr. Moor was President and CEO of Invis Inc., President of SMED International and worked as an investment banker with CIBC. Mr. Moor is a member of the Business Council of Canada, Chairman of the Banks and Trust Companies Association, a member of the Executive Council of the Canadian Bankers Association and a member of the Advisory Board of the Smith School of Business at Queen's University. He received his Master of Business Administration from the University of British Columbia, his B.Sc. in Mechanical Engineering from University College London and holds the ICD.D designation.
David Shaw (67) — Mr. Shaw is a member and the independent lead director (the "Lead Director") of the Board of Sleep Country. He is the Founder of Knightsbridge Human Capital Solutions, a national human capital firm founded in 2001 and sold in 2015. Mr. Shaw currently is Chair of LHH Knightsbridge as well as Chair of Axsium Group Ltd. Prior to founding Knightsbridge, Mr. Shaw was President and Chief Executive Officer of Pepsi Cola Canada Beverages from 1996 to 1999. Mr. Shaw's career with PepsiCo spanned 22 years within Canada and abroad in Australia, Singapore and Turkey. Mr. Shaw is the former Chairman of the North York General Hospital Foundation. He currently sits on the Mother Parkers Tea & Coffee Inc. Board and the boards of directors of two publicly traded companies — Fiera Capital Corporation and Waterloo Brewing Limited.
David Friesema (54) — Mr. Friesema is the Chief Executive Officer and a member of the Board of Sleep Country, a position he has held since November 2014. He has been with Sleep Country since 1995 holding numerous senior positions, including Head of Sales, General Manager and Chief Operating Officer. During his tenure, Mr. Friesema has been involved in developing many of the sales training programs, creative marketing advertisements and influencing the advanced positioning that Sleep Country enjoys in the mattress industry today. Prior to joining Sleep Country, Mr. Friesema helped establish and manage mattress retail organizations in the United States. He is currently a director of Drug Free Kids Canada, formerly the Chairman of the Better Sleep Council of Canada and is a past board member of Shelternet for Abused Women. He attended the University of Detroit and the University of Missouri-St. Louis.
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Stewart Schaefer (55) — Mr. Schaefer is the Chief Business Development Officer for Sleep Country and President of Dormez-vous?. In his role, he is responsible to create and drive the strategic vision of the company by leading all growth platforms for the organization. He oversees and directs the Company's plans and goals for Merchandising, Marketing, eCommerce, Real Estate, Strategic Partnerships and all M&A opportunities. Mr. Schaefer plays a key role in the development and oversight of the entire leadership team, by guiding them to achieve the company’s goals. He founded Dormez-vous? in 1994 and grew the business to five stores before being acquired by Sleep Country in 2006. In 1992, Mr. Schaefer co-founded Heritage Classic Beds, a manufacturer and distributor of iron and brass beds. From 1986 to 1992, he worked as a commodity broker in Chicago, later returning to Montreal to work for Dean Witter Reynolds and Refco Futures. Mr. Schaefer studied Finance and Marketing at Concordia University in Montreal.
Craig De Pratto (37) — Mr. De Pratto is the Chief Financial Officer for Sleep Country. Formerly CFO for Freshii Inc. from 2014 to 2019; he played a central role throughout a period of rapid growth and successfully guided the company through their Initial Public Offering in 2017. Mr. De Pratto has held various progressive executive positions at Freeze-Dry Foods Limited (2011 – 2014) and the public accounting firm BDO Canada LLP (2006 to 2011). Mr. De Pratto is a graduate of Brock University. He is a CPA, CA.
David Howcroft (50) — Mr. Howcroft is the Chief Sales Officer for Sleep Country. He has been with Sleep Country since 1996 and during his tenure has created numerous programs to consistently build, develop and motivate a first-class sales team. He is also instrumental in developing and implementing various sales workshops, training programs / sales processes and is responsible for merchandising of the Mattress Division. Most recently he enhanced the online presence by creating “Dreamline”, a virtual sales chat line, which gives customers the opportunity to connect with a live Sleep Expert. Mr. Howcroft brings with him over 25 years of retail sales experience, with a well-recognized ability to mentor and motivate.
Sieg Will (55) — Mr. Will is the Senior Vice President of Operations for Sleep Country, a position he has held since 2012. He has been with Sleep Country since 2001 and during his tenure he has been promoted into positions of greater responsibility within the organization. He played an instrumental role in the development and implementation of standard operating policies and procedures across the organization while adopting a continuous improvement approach to conducting business. Prior to joining Sleep Country, he held senior positions with Canadian Tire and PepsiCo in the sales, operations and account management areas. Mr. Will sits on the Humber College Supply Chain Advisory Board as co-Chair. He is a Team Leader for Sleeping Children Around the World and an Ambassador for the Pinehurst Club Breakfast. He graduated from the University of Guelph with a B.A. (Honours), studied at Wilfrid Laurier for a business diploma and attended the Schulich School of Business for his Master's Certificate in Supply Chain Management. He also has a Professional Logistics Designation from the Logistics Institute.
As at the date of this AIF, the directors and executive officers of the Company, as a group, beneficially owned, or controlled or directed, directly or indirectly, 1,160,261 (3.2%) of the Common Shares.
To the best of the Company's knowledge, after having made due inquiry, other than as disclosed below:
(a) no director or executive officer of the Company was, as of the date of this AIF, or had been, within 10 years before the date of this AIF, a director, chief executive officer or chief financial officer of any company that, (i) was subject to a cease trade order, an order similar to a cease trade order, or an order that denied the relevant company access to any exemption under securities legislation, in each case for a period of more than 30 consecutive days (each an "order") that was issued while the director or executive officer was acting in the capacity as director, chief executive officer or chief financial officer; or (ii) was subject to an order that was issued after the director or executive officer ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer;
(b) no director, executive officer, or shareholder holding a sufficient number of shares of the Company to affect materially the control of the Company (a "Significant Shareholder") was, as of the date of this AIF, or had been within 10 years before the date of this AIF, a director or executive officer of any company that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets;
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(c) no director, executive officer or Significant Shareholder of the Company had, within 10 years before the date of this AIF, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director, executive officer or shareholder; and
(d) no personal holding company of any director, executive officer or Significant Shareholder of the Company was or had been, as applicable, subject to the foregoing during the applicable time periods.
MARKET FOR SECURITIES
The Company's common shares are listed on the TSX under the trading symbol "ZZZ". The following table sets forth, for the periods indicated, the reported high and low trading prices and the total trading volume of the Common Shares on the TSX on a monthly basis, for each of the months during the period commencing on January 1, 2020 and ending on December 31, 2020:
Period High Low Volume Traded January 2020…………… $21.60 $19.83 2,699,253 February 2020………….. $21.44 $17.60 2,021,605 March 2020…………….. $19.74 $7.75 8,035,939 April 2020……………… $14.05 $9.31 2,986,943 May 2020………………. $16.20 $11.89 4,413,808 June 2020………………. $17.45 $14.93 2,518,051 July 2020……………….. $19.64 $14.92 2,861,905 August 2020……………. $21.97 $19.08 1,375,294 September 2020………... $21.18 $19.13 1,759,024 October 2020…………... $24.98 $19.59 3,215,741 November 2020………... $26.76 $22.38 3,536,149 December 2020………... $27.63 $23.95 2,371,406 ______Source: Bloomberg
TRANSFER AGENT AND REGISTRAR
The Company's transfer agent and registrar for the Common Shares is Computershare Investor Services Inc., 100 University Avenue, 8th Floor, North Tower, Toronto, Ontario.
INTERESTS OF EXPERTS
The consolidated financial statements of the Company for the year ended December 31, 2020 have been audited by PricewaterhouseCoopers LLP. As at February 22, 2021, PricewaterhouseCoopers LLP has advised the Company that it is independent with respect to the Company in compliance with the Chartered Professional Accountants of Ontario CPA Code of Professional Conduct.
ADDITIONAL INFORMATION
Additional information relating to the Company may be found on SEDAR at www.sedar.com. Additional information, including with respect to directors' and officers' remuneration and indebtedness and principal holders of Common Shares is contained in the Company's management information circular with respect to the annual general meeting of shareholders of the Company to be held on May 11, 2021. Additional financial information is provided in the Company's audited consolidated financial statements and management's discussion and analysis for the year ended December 31, 2020. A copy of such documents and of this AIF may be obtained upon request from the Secretary of
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AUDIT COMMITTEE
Overview The Audit Committee of the Company (the "Audit Committee") oversees the accounting and financial reporting practices and procedures of the Company and the audits of the Company's financial statements. The Audit Committee's purpose and responsibilities include oversight of: (i) the integrity of Sleep Country's accounting and financial reporting systems, including those used in connection with the preparation of its financial statements, budgets and forecasts; (ii) the adequacy of Sleep Country's internal controls over financial reporting and disclosure controls and procedures; (iii) Sleep Country's compliance with legal and regulatory requirements; (iv) the appointment of the external auditor and the external auditor's qualifications and independence; and (v) the performance of Sleep Country's internal audit function and the external auditor; (vi) Sleep Country's risk management procedures; (vii) all related party transactions in which Sleep Country is involved or proposes to be involved; and (viii) improprieties or suspected improprieties with respect to accounting and other matters that affect financial reporting. The Board has delegated to the Audit Committee the approval of the Company's quarterly results, as permitted by applicable securities legislation. The Audit Committee has the authority to communicate directly with the external auditor of the Company.
Audit Committee Charter A copy of the charter of the Audit Committee is attached to this AIF as Appendix "A".
Composition of the Audit Committee The Audit Committee has been structured to comply with National Instrument 52-110 – Audit Committees ("NI 52-110"). The Audit Committee is comprised of Douglas Bradley (Chair), Andrew Moor, John Cassaday, Zabeen Hirji, Stacey Mowbray, David Shaw and Mandeep Chawla. Each member of the Audit Committee is financially literate within the meaning of NI 52-110. In addition, each member of the Audit Committee is independent within the meaning of NI 52-110.
Relevant Education and Experience For the relevant education and experience of each of the members of the Audit Committee, please see "Directors and Executive Officers — Biographical Information Regarding the Directors and Executive Officers of the Company".
Pre-Approval Policies and Procedures The Audit Committee Charter sets out procedures regarding the provision of non-audit services by the Company's independent registered chartered accountants. This policy encourages consideration of whether the provision of services other than audit services is compatible with maintaining the auditor's independence and requires Audit Committee pre-approval of permitted non-audit and non-audit-related services.
External Auditor Service Fees (By Category)
The following chart summarizes the aggregate fees billed by PricewaterhouseCoopers LLP, the external auditor of the Company, for professional services rendered to the Company for the fiscal years ended December 31, 2020 and December 31, 2019 for audit and non-audit related services:
Audit Fees Tax Fees Other Fees
2020…………………. 493,000 34,580 -
2019…………………. 692,800 - -
APPENDIX A
CHARTER OF THE AUDIT COMMITTEE OF SLEEP COUNTRY CANADA HOLDINGS INC.
GENERAL
1. PURPOSE AND RESPONSIBILITIES OF THE COMMITTEE
1.1 Purpose
The primary purpose of the Committee is to assist Board oversight of:
(a) the integrity of the Corporation's accounting and financial reporting systems, including those used in connection with the preparation of its financial statements, budgets and forecasts;
(b) the adequacy of the Corporation's internal controls over financial reporting and disclosure controls and procedures;
(c) the Corporation's compliance with legal and regulatory requirements;
(d) the appointment of the External Auditor and the External Auditor's qualifications and independence;
(e) the performance of the Corporation's internal audit function and the External Auditor;
(f) the Corporation's risk management procedures;
(g) all related party transactions the Corporation is involved or proposes to be involved in;
(h) improprieties or suspected improprieties with respect to accounting and other matters that affect financial reporting; and
(i) such other matters as are set out in this Charter or as may otherwise be assigned to the Committee by the Board from time to time.
2. DEFINITIONS AND INTERPRETATION
2.1 Definitions
In this Charter:
(a) "Board" means the board of directors of the Corporation;
(b) "Chair" means the chair of the Committee;
(c) "Committee" means the Audit Committee of the Board;
(d) "Nominating and Corporate Governance Committee" means the Nominating and Corporate Governance Committee of the Board;
(e) "Corporation" means Sleep Country Canada Holdings Inc.;
(f) "Director" means a member of the Board;
(g) "External Auditor" means the Corporation's independent auditor; and
(h) "Shareholders" means the shareholders of the Corporation.
Interpretation
The provisions of this Charter are subject to the provisions of the articles and by-laws of the Corporation and to the applicable provisions of the Canada Business Corporations Act and any other applicable legislation.
CONSTITUTION AND FUNCTIONING OF THE COMMITTEE
3. ESTABLISHMENT AND COMPOSITION OF THE COMMITTEE
3.1 Establishment of the Committee
The Committee is hereby established with the constitution, function and responsibilities set forth herein.
3.2 Appointment and Removal of Members of the Committee
(a) Appointment of Members. The members of the Committee shall be appointed by the Board, having considered the recommendation of the Nominating and Corporate Governance Committee.
(b) Annual Appointments. The appointment of members of the Committee shall take place annually at the first meeting of the Board after a meeting of the Shareholders at which Directors are elected; provided, however, that if the appointment of members of the Committee is not so made, the Directors who are then serving as members of the Committee shall continue as members of the Committee until their successors are appointed.
(c) Vacancies. The Board may appoint a member to fill a vacancy which occurs in the Committee between annual elections of Directors. If a vacancy exists on the Committee, the remaining members shall exercise all of their powers so long as a quorum remains in office.
(d) Removal of Member. Any member of the Committee may be removed from the Committee by a resolution of the Board.
(e) The Committee will develop a process for assessing the individual performance of each member.
3.3 Number of Members
The Committee shall consist of three or more Directors.
3.4 Independence of Members
Each member of the Committee shall be independent for the purposes of all applicable laws and stock exchange requirements.
3.5 Financial Literacy
(a) Financial Literacy Requirement. Each member of the Committee shall be financially literate or must become financially literate within a reasonable period of time after his or her appointment to the Committee.
(b) Definition of Financial Literacy. "Financially literate" means the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the Corporation's financial statements.
(c) Continuing education and orientation. The Committee shall: A - 2
(i) Ensure that new members receive robust orientation to enable them to understand their role and get up to speed quickly; and
(ii) Ensure that all members have access to continuing education on business and accounting developments and other matters relevant to new responsibilities or changes in the business.
3.6 Qualifications
The Board will appoint to the Committee at least one Director who has accounting or financial management expertise.
4. COMMITTEE CHAIR
4.1 Board to Appoint Chair
The Board shall appoint the Chair from the members of the Committee.
4.2 Chair to be Appointed Annually
The appointment of the Committee's Chair shall take place annually at the first meeting of the Board after a meeting of the Shareholders at which Directors are elected; provided, however, that if the appointment of Chair is not so made, the Director who is then serving as Chair shall continue as Chair until his or her successor is appointed. In the Chair's absence or in the case of a position vacancy, the Committee may select another member as Chair. The Chair may exercise all powers of the Committee between meetings. Nevertheless, the Chair will reasonably involve the other members prior to exercising any power and advise them of the decisions ensuing the exercised powers.
5. COMMITTEE MEETINGS
5.1 Quorum
A quorum of the Committee shall be a majority of the members.
5.2 Secretary
The Chair shall designate from time to time a person who may, but need not, be a member of the Committee, to act as secretary of the Committee. The secretary shall keep minutes of meetings that provide accurate descriptions of meetings, at the right level of detail. The Committee shall approve the minutes in a timely manner.
5.3 Time and Place of Meetings
The time and place of the meetings of the Committee and the calling of meetings and the procedure in all things at such meetings shall be determined by the Committee; provided, however, that the Committee shall meet at least quarterly.
5.4 In Camera Meetings
As part of each meeting of the Committee at which the Committee recommends that the Board approve the annual audited financial statements of the Corporation or at which the Committee approves the quarterly financial statements of the Corporation, the Committee shall meet separately with each of:
(a) the relevant members of the senior management team;
(b) the External Auditor;
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(c) the internal auditor;
(d) the Chief Financial Officer; and
(e) privately with just Committee members.
5.5 Right to Vote
Each member of the Committee shall have the right to vote on matters that come before the Committee.
5.6 Voting
Any matter to be determined by the Committee shall be decided by a majority of votes cast at a meeting of the Committee called for such purpose. Actions of the Committee may be taken by an instrument or instruments in writing signed by all of the members of the Committee, and such actions shall be effective as though they had been decided by a majority of votes cast at a meeting of the Committee called for such purpose.
5.7 Invitees
The Committee may invite any Directors, officers or employees of the Corporation or any other person to attend meetings of the Committee to assist in the discussion and examination of the matters under consideration by the Committee. The External Auditor shall receive notice of each meeting of the Committee and shall be entitled to attend any such meeting at the Corporation's expense.
5.8 Regular Reporting
The Committee shall report to the Board, at the Board's next meeting, the proceedings at the meetings of the Committee and all recommendations made by the Committee at such meetings.
6. AUTHORITY OF COMMITTEE
6.1 Retaining and Compensating Advisors
The Committee shall have the authority to retain independent counsel and any other advisors as the Committee may deem appropriate in its sole and absolute discretion and to set the compensation for any advisors employed by the Committee. The Committee shall not be required to obtain the approval of the Board in order to retain or compensate such counsel or other advisors.
6.2 Funding
(a) The Committee shall have the authority to authorize the payment of:
(b) compensation to any external auditor engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Corporation;
(c) compensation for any counsel or other advisors employed by the Committee; and
(d) ordinary administrative expenses of the Committee that are necessary or appropriate in carrying out its duties.
6.3 Subcommittees
The Committee may form and delegate authority to subcommittees if deemed appropriate by the Committee.
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6.4 Recommendations to the Board
The Committee shall have the authority to make recommendations to the Board, but shall have no decision-making authority other than as specifically contemplated in this Charter.
6.5 Communication
The Committee has the authority to communicate directly with the External Auditor and the internal auditor of the Corporation.
7. REMUNERATION OF COMMITTEE MEMBERS
7.1 Remuneration of Committee Members
Members of the Committee and the Chair shall receive such remuneration for their service on the Committee as the Board may determine from time to time, having considered the recommendation of the Nominating and Corporate Governance Committee.
7.2 Directors' Fees
No member of the Committee may earn fees from the Corporation or any of its subsidiaries other than Directors' fees (which fees may include cash and/or shares, options or other equity securities, or other in-kind consideration ordinarily available to Directors, as well as all of the regular benefits that other Directors receive). For greater certainty, no member of the Committee shall accept, directly or indirectly, any consulting, advisory or other compensatory fee from the Corporation.
SPECIFIC DUTIES AND RESPONSIBILITIES
8. INTEGRITY OF FINANCIAL STATEMENTS
8.1 Review and Approval of Financial Information
(a) Annual Financial Statements. The Committee shall review and discuss with the relevant members of the Corporation's senior management team and the External Auditor the Corporation's audited annual financial statements together with the notes thereto and the report of the External Auditor thereon and the related management's discussion and analysis ("MD&A") and, if appropriate, recommend to the Board that it approve the audited annual financial statements and the related MD&A.
(b) Interim Financial Statements. The Committee shall review and discuss with the relevant members of the Corporation's senior management team and the External Auditor the Corporation's interim unaudited financial statements, the notes thereto and the related MD&A and, if appropriate, approve the Corporation's interim unaudited financial statements and the related MD&A.
(c) Material Public Financial Disclosure. The Committee shall discuss with the relevant members of the Corporation's senior management team and the External Auditor:
(i) the types of information to be disclosed and the type of presentation to be made in connection with profit or loss or earnings press releases;
(ii) financial information and earnings guidance (if any) provided to analysts and rating agencies; and
(iii) press releases containing financial information.
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(d) Procedures for Review. The Committee shall be satisfied that adequate procedures are in place for the review of the Corporation's disclosure of financial information extracted or derived from the Corporation's financial statements (other than financial statements, MD&A and profit or loss or earnings press releases, which are dealt with elsewhere in this Charter) and shall periodically assess the adequacy of those procedures.
(e) General. The Committee shall review and discuss with the relevant members of the Corporation's senior management team and the External Auditor:
(i) major issues regarding accounting principles and financial statement presentations, including any significant changes in the Corporation's selection or application of accounting principles;
(ii) information from the External Auditor that is required to be communicated under auditing and regulatory standards and seek insight on how the company's practices compare to those of peers
(iii) major issues as to the adequacy of the Corporation's internal controls over financial reporting and any special audit steps adopted in light of material control deficiencies;
(iv) analysis prepared by management and/or the External Auditor setting forth significant financial reporting issues and judgments made in connection with the preparation of the financial statements including, but not limited to the volume rebate and co-operative advertising accruals. The analysis should include the effects of alternative accounting methods on the financial statements;
(v) areas involving management estimates that have a material impact on the financial statements and understands the reasonableness of the underlying assumptions;
(vi) transactions that are unusual, complex or have increased in volume near period ends and their accounting treatment, evaluating appropriateness and consistency with members' knowledge of the company
(vii) the effect on the financial statements of the Corporation of regulatory and accounting initiatives, as well as off-balance sheet transaction structures, obligations (including contingent obligations) and other relationships of the Corporation with unconsolidated entities or other persons that have a material current or future effect on the financial condition, changes in financial condition, results of operations, liquidity, capital resources, capital reserves or significant components of revenues or expenses of the Corporation;
(viii) the extent to which changes or improvements in financial or accounting practices, as approved by the Committee, have been implemented;
(ix) any financial information or financial statements in prospectuses and other offering documents;
(x) the management certifications of the financial statements as required under applicable securities laws;
(xi) litigations, claims and contingencies, or other significant issues and their impact on the financial statements;
(xii) how management captures all relevant information in the financial statements, including how the management disclosure committee functions;
(xiii) the impact of any identified subsequent events on financial disclosures;
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(xiv) any significant identified errors in previously issued financial statements and management conclusions regarding the need for restatement; and
(xv) any other relevant reports or financial information submitted by the Corporation to any governmental body or the public.
9. EXTERNAL AUDITOR
9.1 External Auditor
(a) Authority with Respect to External Auditor. The Committee shall be directly responsible for the appointment, compensation and oversight of the work of the External Auditor engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Corporation. In the discharge of this responsibility, the Committee shall:
(i) have sole responsibility for recommending to the Board the audit firm to be proposed to the Shareholders for appointment as External Auditor for the above-described purposes and recommending such External Auditor's compensation;
(ii) determine at any time whether the Board should recommend to the Shareholders that the incumbent External Auditor be removed from office;
(iii) review the terms of the External Auditor's engagement, discuss the audit fees with the External Auditor and be solely responsible for approving such audit fees;
(iv) require the External Auditor to confirm in its engagement letter each year that the External Auditor is accountable to the Board and the Committee as representatives of the Shareholders; and
(v) Review how management and the external auditors evaluate materiality, both quantitatively and qualitatively, for financial reporting purposes.
(b) Independence. The Committee shall satisfy itself as to the independence of the External Auditor. As part of this process the Committee shall:
(i) assure the regular rotation of the lead audit partner as required by law and consider whether, in order to ensure continuing independence of the External Auditor, the Corporation should rotate periodically the audit firm that serves as External Auditor;
(ii) require the External Auditor to submit on a periodic basis to the Committee a formal written statement delineating all relationships between the External Auditor and the Corporation and engage in a dialogue with the External Auditor with respect to any disclosed relationships or services that may impact the objectivity and independence of the External Auditor and recommend that the Board take appropriate action in response to the External Auditor's report to satisfy itself of the External Auditor's independence;
(iii) unless the Committee adopts pre-approval policies and procedures, it must approve any non-audit services provided by the External Auditor; provided, however, that the Committee may delegate such approval authority to one or more of its members who shall report promptly to the Committee concerning their exercise of such delegated authority; and
(iv) review and approve the policy setting out the restrictions on the Corporation hiring partners, employees and former partners and employees of the Corporation's current or former External Auditor.
(c) Issues between External Auditor and Management. The Committee shall:
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(i) review any problems experienced by the External Auditor in conducting the audit, including any restrictions on the scope of the External Auditor's activities or an access to requested information;
(ii) review any significant disagreements with management and, to the extent possible, resolve any disagreements between management and the External Auditor; and
(iii) review with the External Auditor:
(A) any accounting adjustments that were proposed by the External Auditor, but were not made by management;
(B) any communications between the audit team and audit firm's national office respecting auditing or accounting issues presented by the engagement;
(C) any management or internal control letter issued, or proposed to be issued by the External Auditor to the Corporation; and
(D) the responsibilities, budget and staffing of the Corporation's internal audit function.
(d) Non-Audit Services.
(i) Having regard to consideration of whether the provision of services other than audit services is compatible with maintain the auditor's independence, the Committee shall either:
(A) approve any non-audit services provided by the External Auditor to the Corporation or its subsidiaries; or
(B) adopt specific policies and procedures for the engagement of non-audit services, provided that such pre-approval policies and procedures are detailed as to the particular service, the Committee is informed of each non-audit service and the procedures do not include delegation of the Committee's responsibilities to management.
(ii) The Committee may delegate to one or more members of the Committee the authority to pre-approve non-audit services in satisfaction of the requirement in the previous subparagraphs, provided that such member or members must present any non-audit services so approved to the full Committee at its first scheduled meeting following such pre- approval.
(iii) The Committee shall instruct management to promptly bring to its attention any services performed by the External Auditor which were not recognized by the Corporation at the time of the engagement as being non-audit services.
(e) Evaluation of External Auditor. The Committee shall evaluate the External Auditor each year and present its conclusions to the Board. In connection with this evaluation, the Committee shall:
(i) obtain and review a report by the External Auditor describing:
(A) the External Auditor's internal quality-control procedures;
(B) any material issues raised by the most recent internal quality-control review, or peer review, of the External Auditor's firm or by any inquiry, review, inspection or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the External Auditor's firm, and any steps taken to deal with any such issues; and
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(C) all relationships between the External Auditor and the Corporation (for the purposes of assessing the External Auditor's independence);
(ii) review and evaluate the performance of the lead partner of the External Auditor; and
(iii) obtain the opinions of management and of the persons responsible for the Corporation's internal audit function with respect to the performance of the External Auditor.
(f) Review of Management's Evaluation and Response. The Committee shall:
(i) review management's evaluation of the External Auditor's audit performance;
(ii) review the External Auditor's recommendations, and review management's response to and subsequent follow-up on any identified weaknesses;
(iii) receive regular reports from management and receive comments from the External Auditor, if any, on:
(A) the Corporation's principal financial risks;
(B) the systems implemented to monitor those risks; and
(C) the strategies (including hedging strategies) in place to manage those risks; and
10. INTERNAL CONTROL AND AUDIT FUNCTION
10.1 Internal Control and Audit
In connection with the Corporation's internal audit function, the Committee shall:
(a) Review at least annually the organizational structure of the Internal Audit function and ensure the function has sufficient stature and authority within the Company and has unfettered access and a direct reporting line to the Audit Committee;
(b) review the terms of reference of the internal auditor and meet privately with the internal auditor as the Committee may consider appropriate to ensure that the role internal audit plays meets the Committee's needs for assurance and provides value to management and to discuss any concerns or issues;
(c) approve the internal audit's charter and review annual plans and any significant changes — ensuring appropriate coverage of risks and coordination of work with external auditors;
(d) approve the annual budget of internal audit and ensure that the internal audit department has adequate resources, including quality and continuity of staff, with ability to supplement skills as needed;
(e) approve the appointment or dismissal of the Internal Auditor;
(f) annually assess the effectiveness and performance of the Internal Auditor, taking into account any regulatory findings with respect to the Internal Audit function, and provide the results to the Chief Executive Officer as input into the compensation approval process;
(g) request at least every five years an independent quality assurance review of the Internal Audit function, review the results of such reviews and report such results to the Board;
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(h) in consultation with the External Auditor and the internal audit group, review the adequacy of the Corporation's internal control structure and procedures designed to ensure compliance with laws and regulations and any special audit steps adopted in light of material deficiencies and controls;
(i) review management's response to significant internal control recommendations of the internal audit group and the External Auditor;
(j) review (i) the internal control report prepared by management, including management's assessment of the effectiveness of the Corporation's internal control structure and procedures for financial reporting and (ii) the External Auditor's attestation, and report, on the assessment made by management; and
(k) periodically review with the internal auditor any significant difficulties, disagreements with management or scope restrictions encountered in the course of the work of the internal auditor.
11. FINANCE FUNCTION
In connection with the Corporation's finance function, the Committee shall:
(a) Review at least annually the organizational structure of the Finance function;
(b) Approve the appointment or dismissal of the Chief Financial Officer;
(c) Review and approve annually the mandate of the Chief Financial Officer; and
(d) Annually assess the effectiveness and performance of the Chief Financial Officer, and provide the results to the Chief Executive Officer as input into the compensation approval process
12. OTHER
12.1 Risk Assessment and Risk Management
The Committee shall:
(a) discuss the Corporation's major financial risk exposures and the steps management has taken to monitor and control such exposures; and
(b) satisfy itself that a crisis management plan exists that enables the company to respond quickly and appropriately to an emerging crisis.
12.2 Compensation and incentives
The Committee shall review the compensation and incentive plan for senior management to assess whether the compensation and incentive plan is influencing accounting policy choices and how changes in accounting standards influences financial metrics used in compensation and incentive plans.
12.3 Code of conduct, fraud, bribery and corruption
The Committee shall:
(a) review any factors that increase financial reporting fraud risk and how management addresses the risk;
(b) assess the risks of bribery and corruption and how management is minimizing those risks;
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(c) evaluate the "tone at the top" and the company's culture, understanding their relevance to financial reporting and compliance;
(d) understand the effectiveness of the company's programs for ensuring compliance with laws and regulations, considers any significant compliance issues identified, and is satisfied with management's actions;
(e) ensure that management has an appropriate code of conduct and that management provides the code, along with related training, to employees and periodically requires employees to certify their compliance;
(f) assess whether the company's ethics and conduct policies properly address culturally or regionally sensitive issues; and
(g) provide oversight for any investigations for possible fraud or illegal acts.
12.4 Related Party Transactions
The Committee shall review and approve all related party transactions in which the Corporation is involved or which the Corporation proposes to enter into.
12.5 Expense Accounts
The Committee Chair shall review and make recommendations with respect to:
(a) the expense account summaries submitted by the Chief Executive Officer on a quarterly basis; and
(b) the Corporation's expense account policy and rules relating to the standardization of the reporting on expense accounts.
12.6 Whistle Blowing
The Committee shall put in place procedures for:
(a) the receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal accounting controls or auditing matters; and
(b) the confidential, anonymous submission by employees of the Corporation of concerns regarding questionable or inappropriate accounting or auditing practices or other matters that relate to the Corporation generally.
13. ANNUAL PERFORMANCE EVALUATION
On an annual basis, the Committee shall follow the process established by the Board and overseen by the Nominating and Corporate Governance Committee for assessing the performance and effectiveness of the Committee.
14. CHARTER REVIEW
The Committee shall review and assess the adequacy of this Charter annually and recommend to the Board any changes it deems appropriate.
Approved by the Board of Sleep Country Canada Holdings Inc. on March 2, 2021.
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