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2020 Reportannual report eve S leep plc 201 9 4 e v e S l e e p p l c 2 0 1 9 a n n u a l r e p o r t good morning! welcome to eve’s 2019 annual report 5 c o n t e n t s 6 8 c o m p a n y i n f o r m a t i o n c h a i r m a n ’ s s t a t e m e n t 10 s t r a t e g i c r e p o r t 2 7 g o v e r n a n c e r e p o r t 48 a u d i t o r ’ s r e p o r t 54 g r o u p f i n a n c i a l s t a t e m e n t s 81 c o m p a n y f i n a n c i a l s t a t e m e n t s 6 c o m p a n y information directors Paul Pindar (Non-executive Chairman) James Sturrock (Chief Executive Officer) Tim Parfitt (Chief Financial Officer) Nikki Crumpton (Senior Non-executive Director) Thomas Enraght-Moony (Non-executive Director) secretary Link Company Matters Limited The Registry 34 Beckenham Road Beckenham Kent BR3 4TU auditor Nexia Smith & Williamson Statutory Auditor 25 Moorgate London EC2R 6AY registered office 29A Kentish Town Road Camden London NW1 8NL registered number 09261636 7 8 g r o u p chairman’s statement We are confident that we have a winning product, the right strategy and the team to build a sleep wellness brand of size and strength that delights our customers and delivers value to all of our stakeholders. Pau l P inda r delivering the rebuild strategy The focus in 2019 has been on the continued execution of the rebuild strategy through the prioritisation of reducing losses and stemming cash flows, over chasing sales growth at any cost. To effect this we have sharpened our focus on profitable sales, removing unprofitable channels, while further improving our marketing efficiency. We remain confident that this is the right strategy for the business, particularly given the continued challenging retail backdrop and the ongoing discount–reliant competition in the mattress market. To fund the execution of the strategy and to strengthen the statement of financial position we successfully raised £11.7m (net of expenses) plus £0.9m of advertising credits with Channel 4 in February 2019. As at 31 December 2019 eve has £8.0m of cash and cash equivalents, £0.3m of advertising credits available for use and no debt (excluding the lease liability arising under IFRS 16). The team has made good strategic and financial progress in the year. Product development which is central to our aim of building a sleep wellness brand, was strong in both mattress and wider sleep range products. The eve premium hybrid mattress, which was launched in June 2019 was announced as the top scoring mattress by Which? in December 2019, giving eve’s full mattress range a Which? Best Buy rating. Good progress was also made with the expansion of wider sleep products including the launch of new bed frames and bedding, all of which has driven a 140 bps and 590 bps year–on–year increase in the contribution from non-mattress sales in the UK&I and France respectively. Range expansion has also supported an improvement in the customer repeat rate, increasing 230 bps in the UK&I and 360 bps in France. We continue to develop our multi– channel offering through partnerships with leading retailers where the relationship is strategically and commercially value creating for both parties. During the year we signed and launched partnerships with Argos, Homebase and Dunelm and in addition to creating more sales opportunities, these partnerships help to raise eve’s brand awareness. Elevating the brand position above our peers has always been a core strength at eve and it remains so. In July 2019 we launched a new and highly successful brand campaign featuring the eve sloth and in September we signed a three year deal with British Rowing to be their official sleep partner, including managing the sleep environment of the GB Rowing Team athletes both at home and overseas. Together, these marketing initiatives have driven a 50% increase in unprompted brand awareness to 15%. improving financial performance As planned, Group revenues from Core Markets reduced year on year, declining by 19% to £23.8m (2018: £29.4m) as we optimised our DTC marketing, scaling back marketing investment by 32% across UK&I and France in order to prioritise profitable revenues over revenue growth alone. Year-on-year gross profit margin improved from 52.8% to 53.1% reflecting margin prioritisation over revenue growth. Group underlying EBITDA losses¹ reduced by 44% to £10.7m, supported by a 24% reduction in administrative expenses (excluding marketing expenses, fundraise-related expenditure, depreciation, amortisation and impairment charges) for the year. The reduction in the cash outflow from operating activities was even greater, down 55% year– on–year. Our results in the last four months of the year showed further progress on our path to profit, reaching for the first time break- even at the operating level, defined as a positive margin contribution after all direct costs and marketing but before overheads. The attainment of this milestone follows further significant cost savings in Q4 as well as the benefits flowing through from earlier initiatives. Accordingly, we see our results for the final four months of the year as more indicative of our prospects for 2020. our people This has been the second year of considerable change for our people, which has included a move to new local offices as well as an organizational restructure. Whilst this has been the right course of action strategically for the business, I understand that it is both difficult and unsettling and I would like to thank them all personally for their continued loyalty, positivity and commitment to rebuilding eve. We are confident that we have a winning product, the right strategy and the team to build a sleep wellness brand of size and strength that delights our customers and delivers value to all of our stakeholders. 9 current trading and outlook Trading in the first two months of the year has started well and is in-line with the Board’s expectations, with demand for the premium hybrid mattress proving particularly strong. The business has now generated a positive marketing contribution2 for the six months to 29 February 2020. Wider market uncertainty increased further in the first two weeks of March with the advent of COVID-19 but at that time there had been no noticeable impact on demand, our operations or our supply chain. Since mid-March 2020, we have seen some impact on traffic and consumer demand attributable to the fast changing COVID-19 situation, and believe it is reasonable to expect somewhat subdued demand for a period of time whilst the COVID-19 situation prevails. The Board has reviewed planning scenarios and has prepared a number of appropriate measures to conserve the Group’s cash balance and ensure the robustness of the business should it be required. Given eve’s business model as a direct to consumer (DTC) led retailer, its most significant costs are marketing rather than the costs associated with a store estate, and we have significant flexibility to control our spending and therefore cash outflows in this regard. The Company’s marketing spend will continue to be kept under constant review, with adjustments to plans made where appropriate and in line with the fast changing economic situation. To date we have seen only a small impact upon our supply chain, and where we have seen impact, we have taken precautionary measures including stronger stock holding of products to ensure adequate coverage for the coming months, and hence we currently envisage being able to meet customer demand for our products, albeit at reduced levels. Further interventions by governments in the jurisdictions in which we operate may have a material impact on our supply chain and/ or delivery capability going forward. Paul Pindar Chairman 23 March 2020 Notes 1. 2. Underlying EBITDA is calculated as earnings before interest, taxation, depreciation, amortisation, impairment, share-based payment charges connected with employee remuneration, fundraise-related expenditure (2019 only) and staff and country exit costs (2018 only). It should be noted that the application of IFRS 16 in 2019 has resulted in a depreciation charge recognised in 2019 of £0.2m (2018: £0.0m); this charge is excluded from underlying EBITDA. Under IAS 17 however, expenditure relating to operating lease rentals (presented within administrative expenses) would have totalled £0.2m and would have been included within underlying EBITDA. In this way, £0.2m of the year on year improvement to underlying EBITDA is attributable to the application of IFRS 16. Marketing contribution is defined as the profit after marketing expenditure but before payroll and overhead costs.. 10 s t r a t e g i c r e p o r t strategic review Building customer loyalty and ultimately driving repeat sales is at the centre of the eve model and is essential to attaining profitability. on trend in a large and growing market Wellness is a mega trend, transcending age and geography. Within the wellness sphere there is an increasing understanding and recognition that sleep sits alongside nutrition and physical fitness as the foundations of wellness. There is also a growing body of research and evidence which testifies to the importance of sleep and the risks to physical and mental health of insufficient sleep. In a recent poll of 2,000 UK adults commissioned by eve, 58% of respondents expressed worry about the potential impact a lack of sleep can have on mental and physical health and 75% of customers tell us they are better slept simply by having one of our products. With the increasing understanding of the importance of sleep has come consumer change. Consumers are spending more on wellness and the sleep market has been a beneficiary of this. Not only are consumers spending more on sleep wellness related products but they are willing to spend more on the central element of a good night’s sleep; the mattress. The strong sales performance of eve’s most recently launched premium hybrid mattress testify to this point. Data from Euromonitor estimates that the European sleep market is worth £26bn, with the Core Markets that eve is focused on (UK&I and France) being worth £6bn. The market is however highly fragmented, populated by many traditional operators offering a proposition that has changed little in the last fifty years. There is also an increasing willingness on the part of consumers to purchase big ticket items online, with Euromonitor predicting that the online furniture market will be the second fastest growing retail category, with online purchase penetration expected to increase by 55% between 2018 and 2023. In terms of the competitive landscape there are a limited number of well branded new digital offerings. However, no company is yet to break through in terms of establishing a sleep wellness brand which commands widespread recognition and brand loyalty. eve’s ambition is to achieve just this; to be seen as the go to brand for sleep wellness products. business model eve is a digitally native business, with a direct to consumer (DTC) led proposition, supported by partnerships with leading retailers. This omni-channel approach reflects how consumers increasingly identify, research and purchase items, moving seamlessly between online and offline channels. By being where the customer is, eve increases its potential sales opportunities and grows its brand awareness and product understanding. Building customer loyalty and ultimately driving repeat sales is at the centre of the eve model and is essential to attaining profitability. To achieve this goal eve is focused on establishing itself as a go to brand for sleep wellness products, which would provide the authority and consumer trust to sell a broader range of products in the category. As a DTC focused business, eve maintains close relationships with its customers and leverages a rich data set from which to better target repeat customers and attribute purchases to the many touchpoints eve has in the marketplace. eve has worked to greatly expand its collection and use of such data during 2019 culminating in detailed econometric and attribution insight now at the forefront of the business. The insights gained from customer feedback also power new product development and refinements to existing ranges. The continued growth in eve’s customer repeat rate which in the UK has more than doubled to 17.3% in the second half of 2019 from just 8.0% in the first half of 2016, demonstrates that eve is succeeding in 11 s t r a t e g i c r e p o r t building brand loyalty amongst its customers. As a brand led business, resources in terms of investment and talent are focused on the key operations of product development, branding, marketing and customer experience. As is common in the industry, manufacturing and fulfilment, which require heavy fixed cost investment, are outsourced to leading third party suppliers in the UK and Continental Europe. This set-up has proved to be highly scalable and flexible, enabling significant seasonal variations in monthly product demand to be met without any noticeable margin impact or the requirement to hold large amounts of product stock. There is also a close working relationship with eve’s manufacturing partners to innovate and develop new products that work better in terms of function and design and that differentiate eve from peers, without a premium price tag. The outsourced manufacturing and fulfilment model, coupled with the DTC led setup, enables a lower and more flexible cost base than a traditional retailer. Although marketing costs are one of the largest costs for eve, they are more flexible in nature and it is easy to scale them up and down quickly and switch between marketing channels. 12 s t r a t e g i c r e p o r t chief executive’s report What is certain is that eve has closed out 2019 in a stronger position than it started the year. There is still much that can and will be done to drive further improvements and this work will continue through 2020. James Sturro ck introduction In 2019 we completed the restructuring of to attain our stated goal of profitability and the management team, made significant positive cash generation in the near term. progress in professionalising internal There is still much that can and will be done to operations, processes and reporting, drive further improvements and this work will optimised our supplier and logistics footprint, continue through 2020 and beyond. and significantly reduced the operating What is certain is that eve has closed costs of the business. These things, alongside out 2019 in a stronger position than it started the progress of our customer facing rebuild the year. We have a broader, award-winning strategy have significantly improved EBITDA product range. Operational KPIs, including results on the path to profitability and the customer repeat rate and the sale of put eve on a steadier footing to deliver non-mattress products improved during our plans for the long–term health of the the year, while our financial performance business. We consider that headwinds in strengthened considerably, evidenced by a the competitor landscape and discounting reduction in administrative expenses excluding pressure will continue, but the premium marketing costs, fundraise-related expenditure, positioning of the brand and the work we depreciation, amortisation and impairment have completed to create a stable and of 24%. We reduced our underlying EBITDA lean platform, along with a healthy cash losses by 44% and trimmed our cash outflows balance, will aid the execution against our from operating activities by 55%, which is all plans in order to succeed in the future. the more pleasing given the challenging retail The first few months of my tenure, which backdrop and ongoing price led competition commenced in September 2018, were spent in the mattress market. Our cash position has evaluating the business and formulating also improved, with a year–end net cash what we refer to as the rebuild strategy. position of £8.0m plus £0.3m of advertising Although implementation of the rebuild credits with Channel 4, compared with £6.0m strategy commenced in late 2018, work has as at 31 December 2018, owing to the fund continued throughout 2019 on effecting raising in February 2019. and embedding change and improvement throughout all areas of the business in order 13 s t r a t e g i c r e p o r t The rebuild strategy The rebuild strategy focuses on three core pillars: • differentiated brand positioning; • expanded product range; and • lower friction customer experience. differentiated brand positioning To differentiate eve from the plethora of existing marketing campaigns whilst testing mattress in a box brands, where competition new promotional strategies and channel mix, is largely price led, our strategy is to establish as well as carrying out analysis on a granular eve as a trusted go to destination for sleep level of marketing return on investment. This wellness products. To achieve this we have supported the development of the new brand, been refocusing and aligning our marketing communications and the creative strategy, investment and communications on the which launched in the UK&I at the start of H2 benefits that eve can bring consumers in 2019 with the ‘wake up dancing’ campaign, sleep wellness. This is best exemplified in the featuring the eve sloth. The campaign three–year partnership deal we signed in has proved immensely successful, raising 2019 with British Rowing to be their official unprompted brand awareness by 50% to 15% sleep partner. As part of the deal we will between January 2019 and August 2019. It be managing the sleep environment of the has also driven increased engagement with GB Rowing Team athletes as they train and customers, so much so that in response to compete both at home and overseas. customer demand we have produced and During the first half of the year we ran sold circa. 6,000 soft toy eve sloths at the close of 2019. 14 s t r a t e g i c r e p o r t : chief executive's report In France, the investment and media strategy has been adapted to make better use of expanded product range the peak sales periods, driving more efficient In 2019 we stepped up new product spend with an optimised creative strategy development, building out a range of sleep and revitalised positioning. This positioning, products to complement our successful next which launched with the ‘reborn again generation foam mattress. Range expansion each morning’ (‘renaissez chaque matin’) gives eve a clear trajectory to dominating campaign in July 2019 is designed to elevate the ecommerce sleep wellness space in our eve to be the premium brand in the nascent chosen markets and provides the opportunity direct-to-consumer mattress category in to grow the frequency of customer purchases. France, premium mattress sales making up In the mattress category we launched 44.9% of total mattress sales in December the premium hybrid mattress, which received 2019. a Which? Best Buy rating, scoring the highest The success of our marketing to date is rating ahead of all competitor mattresses in demonstrated in our unprompted UK brand the UK in December 2019. At the close of 2019, awareness, which has increased from 11.2% eve now has a suite of four mattress products in November 2018 to approximately 15% at sold via its DTC channel – the premium foam, August 2019. the premium hybrid, the original foam and the In addition to refocusing the positioning hybrid, as well as the baby mattress. of our marketing, considerable effort has The rate of new product development gone into improving marketing efficiency, increased significantly in the period, with the including the development of a bespoke-built launch of new bedframes and expanded optimisation model. Subsequently, marketing ranges of bedding, pillows, sleep accessories investment has been substantially reviewed, and the baby category. Sales of bedframes, with the removal of channels that were not including two new storage bedframes, have generating a sufficient return, in line with performed particularly well. our strategy of focusing on profitable sales The improvements in this pillar of the and margin positive first orders. The success strategy are evident in our KPIs. In 2019 the of this strategy is best evidenced in the customer repeat rate in the UK&I grew 230bps efficiency of our marketing spend, which has to 16.7% and in France increased 360bps to improved in all three of our core markets in 17.0%. This growth was underpinned by an tandem with growing awareness. In the UK&I increase in sales of non-mattress products in marketing efficiency has improved from 54.1% each of the core markets. In the UK&I, the in 2018 to 52.3% in 2019; marketing efficiency contribution from non-mattress DTC sales being defined as marketing expenditure as increased by 130bps to 24.8% and in France a percentage of revenue. This is the third improved by 590bps to 28.2%. successive year of improvement and we To measure our success in delivering on see scope to further reduce this percentage this strategic pillar we will continue to monitor in 2020. In France, marketing efficiency and report on the KPIs of conversion rates and improved from 82.9% in 2018 to 44.1% in 2019. the growth in non-mattress sales. To measure our success in delivering on this strategic pillar we will continue to monitor and report on the KPI of unprompted brand awareness in the UK and marketing efficiency, lower friction customer experience given its importance for the pathway to Enhancing the customer experience profitability. throughout the online journey and in our service proposition to enable stronger site conversion and customer satisfaction metrics is central to our rebuild strategy. Improved conversion will not only drive higher revenues but also greater marketing efficiency, which is key to achieving profitability. The entire customer journey through the eve website prior to purchase has been substantially upgraded during the year. This includes a 50% plus increase in the speed of loading the website plus a redesigned home page with more focus on inspiring customers, building out category pages to help users more easily discover products within our expanded ranges and new imagery, with copy/zoom functionality. Improvements have also been made to how promotions are presented on the website. To improve the purchase process, the basket and checkout have been rebuilt to make them faster and more intuitive, resulting in an improvement in the basket completion rate. The delivery proposition has also been improved with a move to a new carrier portfolio and warehouse consolidation, which is expected to result in improved delivery experience for customers and efficiencies in distribution costs. In addition to better communications with customers around 15 s t r a t e g i c r e p o r t : chief executive's report responsible business As a business we recognise our responsibility to our stakeholders and the wider community at large. We continue to strive to make improvements throughout our operations in order to reduce our environmental footprint. Our localised production facilities mean that we are not trucking or airfreighting long distances, while our mattress boxes used for packaging are produced in the UK and made from Forest Stewardship Council approved card. When customers return mattresses they are either broken down and the materials recycled or refurbished, depending on their condition. We do not send mattresses to landfill. Within the Corporate Governance statement on page 44, an overview of Board-level decision making processes is presented and demonstrates the interactions with stakeholders during 2019. culture and diversity confirmation, delivery tracking and product We thrive on individuality at eve. We believe care guides, customers are now able to select that irrespective of age, gender, ethnic a nominated delivery day for larger orders. origin, religion, sexual orientation, gender The changes made to the website and identity, gender expression, or disability, customer proposition have driven a 30bps eve is a place of opportunity, respect and year-on-year improvement in the conversion support for individuals to bring their best to rate. work and do their best work. We recognise the importance of providing eve are pleased to present the following an omnichannel approach, for consumers metrics relating to gender balance as at 31 that freely move between online and offline December 2019. The following breakdown channels, when researching and purchasing shows the number of persons of each sex products. During the year we have extended who were: our reach with three new retail partnerships with Argos, Homebase and Dunelm, all of which have subsequently launched. (i) (ii) directors of the company; senior managers of the company (other than those falling within category (i)); To measure our success in delivering on (iii) and employees of the company. this strategic pillar we will be monitoring and reporting on the KPIs of conversion rates and eve’s new sleep wellness score, a measure of customers reporting improved sleep as a result Directors of purchasing an eve product. Senior Managers Employees Male Female 4 3 28 1 4 33 16 s t r a t e g i c r e p o r t : chief executive's report 2020 focus In the second half of 2019 we took the decision to accelerate our move to profitability and positive cash generation by making additional significant cost efficiencies in the business, primarily in the areas of marketing and overheads. These changes were made in the fourth quarter of the year. The cumulative benefits of management initiatives and efficiencies made throughout 2019 as part of the rebuild strategy are coming through in an improved financial performance. I am delighted to report that in the final four months of the year we reached a milestone in terms of achieving operational breakeven, after all direct costs and marketing but before overheads. We enter 2020 with a sizeable year-on-year reduction in both overheads and planned marketing investment, which we expect to drive a further substantial reduction in losses and cash burn. We are well placed to make further significant progress in 2020, with a differentiated brand position, a broader product range than peers and ongoing improvements to the customer experience, supported by a lower cost base, a substantial cash balance of £7.8m as at 29 Feburary 2020 and no debt (excluding the lease liability arising under IFRS 16). James Sturrock Chief Executive Officer 23 March 2020 17 s t r a t e g i c r e p o r t Key performance indicators In 2019, the key performance indicators (KPIs) used to evaluate and monitor the performance of the business were as follows designed to support the three core pillars of the rebuild strategy (differentiated brand positioning, extended product range and lower friction customer experience). There are three financial KPIs and five operational KPIs. Financial KPIs1 Overall revenue growth Marketing efficiency Underlying EBITDA Operational KPIs1 UK brand awareness Product return rates eve website conversion rate eve customer sleep wellness score Non-mattress revenue growth Notes 1. Definitions of Financial and Operational KPIs, see page 19. 18 s t r a t e g i c r e p o r t : key performance indicators The results of the KPIs are set out below. Financial KPIs focus on both Group and Core Markets results whilst the operational KPIs focus on measures tracked in the Core Markets of UK&I and France. Whilst lower than original expectations (due to the reasons set out in the Strategic Report), both financial and operational KPIs show broadly positive trends against 2018: Group and Core Markets Financial KPIs¹ • Group revenue decreased by 31% to £23.9m (2018: £34.8m); • Core Markets revenue decreased by 19% to £23.9m (2018: £29.4m); • Improvement in Group marketing efficiency by 1313bps to 50.5% (2018: 63.7%); • Improvement in Core Markets marketing efficiency of 1030bps to 50.5% (2018: 60.8%); • Group underlying EBITDA losses reduced by 44% to £10.7m loss (2018: £19.1m loss). Core Markets Operational KPIs¹ • Increase in non-mattress Core Markets sales as a proportion of total sales by 230bps to 22.0% (2018: 19.0%); • Unprompted UK brand awareness: 380bps increase in unprompted UK brand awareness (August 2019: 15.0%; November 2018: 11.2%); • eve customer sleep wellness score: 8/10 (2018: n/a as a new metric in 2019) • 40bps year-on-year improvement in the returns rate to 8.9% (2018: 9.3%); • 30bps year-on-year improvement in the eve website conversion rate. Notes 1. Definitions of Financial and Operational KPIs, see page 19. Glossary Definitions of Financial and Operational KPIs: Overall revenue growth – % change in value of reported revenue for the specified segment of the latest period vs the previous period. Marketing efficiency – total reported marketing cost divided by the reported revenue for the specified segment, thus as the reported percentage falls marketing efficiency improves. Underlying EBITDA – earnings before interest, tax, depreciation, amortisation and impairment, share-based payment charges connected with employee remuneration (2018 and 2019), fundraise-related expenditure (2019 only) and staff and country exit costs (2018 only). Underlying EBITDA reflects what management believe to demonstrate the underlying performance of the business in a given year. s t r a t e g i c r e p o r t : key performance indicators 19 Non-mattress sales as a proportion of total sales – % of reported sales attributable to non-mattress products for the specified financial period. The Group track this Operational KPI in addition to the Financial KPI of overall revenue growth as returns and deferrals are not tracked in isolation for non–mattress sales. Total sales represents all sales after discounts and VAT and before deferred revenue, refunds processed and the refunds provision. Non- mattress sales represents the value of sales from non-mattress products. UK Brand awareness – when asked the question “What mattress brands can you think of?” the % of total respondents that answer eve (externally assessed using industry polling agencies). Product return rates – return rate % is calculated by dividing the total value of sales returns by the value of net sales of goods including freight (all excluding VAT). eve website conversion rate – the percentage of website traffic in a specific period that complete a purchase. Calculated by dividing the number of completed sales orders divided by the total website traffic. This figure is compared on a bps movement between periods. eve customer sleep wellness score – the average number of customers out of every ten customers that report improved sleep as a result of purchasing an eve product (internally assessed using post–purchase email campaigns). 20 21 s t r a t e g i c r e p o r t financial review While Core Markets revenue fell by 19% from £29.4m in 2018 to £23.9m in 2019, eve achieved a 70% reduction in group losses after distribution costs, payment fees and marketing expenses with losses falling from (£8.6m) in 2018 to (£2.5m) in 2019. Tim Parfitt Group financial performance £m Core Markets revenue Other revenue Group revenue Core Markets gross profit Other gross profit Gross profit Distribution expenses Profit after distribution expenses Payment fees Marketing costs¹ Loss after distribution expenses, payment fees and marketing costs Wages & Salaries (excluding share-based payment charges) Other administrative expenses Share-based payment charges connected to employee remuneration Operating loss Net finance income Loss before tax Taxation Loss after tax Reconcilliation to underlying EBITDA Taxation Net finance income Fundraise-related expenditure Share-based payment charge connected with employee remuneration Staff and country exit costs Depreciation and amortisation Impairment Underlying EBITDA Notes 2019 23.9 (0.0) 23.9 12.8 (0.1) 12.7 (2.7) 9.9 (0.4) (12.1) (2.5) (4.4) (5.0) (0.5) (12.5) 0.0 (12.5) 0.4 (12.1) (0.4) (0.0) 0.2 0.5 - 0.5 0.6 2018 Restated Movement (19%) (101%) (31%) (18%) (103%) (31%) +33% (31%) +41% +46% +70% (18%) (17%) +76% (39%) (60%) (38%) +82% (40%) 29.4 5.5 34.8 15.5 2.9 18.4 (4.1) 14.3 (0.7) (22.2) (8.6) (5.4) (6.1) (0.3) (20.3) 0.0 (20.3) 0.2 (20.1) (0.2) (0.0) - 0.3 0.8 0.1 0.0 (10.7) (19.1) (44%) 1. In 2019, management modified the classification of marketing expenditure to include both direct and indirect costs of marketing, whereas in 2018 only direct costs of marketing were included as marketing expenditure. Indirect marketing costs include PR and the production costs of creating advertising assets such as the Sloth campaign in 2019. This has resulted in the restatement of marketing costs and marketing efficiency metrics for 2018. The impact of this restatement solely impacts management information (direct and indirect marketing costs being included in administrative expenses in both the current and prior period) and therefore there is no impact of the restatement on the statutory statement of profit and loss and other comprehensive income. In 2019, marketing costs include a £0.6m share-based payment charge relating to equity issued to Channel Four in exchange for marketing services (2018: £nil) 22 s t r a t e g i c r e p o r t : financial review group financial performance as a % of revenue % of Revenue Gross Profit Distribution Profit after distribution Marketing Administrative expenses excluding marketing Administrative expenses excluding marketing, fundraise-related expenditure, depreciation, amortisation and impairment expenditure UK&I financial performance £m Revenue Gross Profit Distribution Profit after distribution Payment fees Marketing Loss after distribution, payment fees and marketing (before overhead allocation) France financial performance £m Revenue Gross Profit Distribution Profit after distribution Payment fees Marketing 2019 53.1% (11.4%) 41.7% (50.5%) (41.4%) (35.9%) 2018 Restated Movement 52.8% (11.6%) 41.1% (63.7%) (35.0%) +37bps +21bps +57bps +1313bps (634bps) (34.6%) (135bps) 2019 2018 Restated Movement 18.5 10.2 (1.8) 8.4 (0.4) (9.7) (1.7) 22.5 11.8 (1.7) 10.1 (0.4) (12.2) (2.5) (18%) (14%) +7% (17%) (13%) (20%) (31%) 2019 2018 Restated Movement 5.3 2.6 (1.0) 1.6 (0.1) (2.4) 6.8 3.7 (1.2) 2.5 (0.1) (5.7) (22%) (29%) (16%) (36%) (34%) (58%) Loss after distribution, payment fees and marketing (before overhead allocation) (0.9) (3.3) (74%) Other financial performance £m Revenue Gross Profit Distribution Profit after distribution Payment fees Marketing Loss after distribution, payment fees and marketing (before overhead allocation) 2019 (0.0) (0.1) 0.1 0.0 0.0 0.0 0.0 2018 Restated Movement 5.5 2.9 (1.2) 1.7 (0.2) (4.3) (101%) (103%) (108%) (99%) (103%) (100%) (2.8) (101%) 23 s t r a t e g i c r e p o r t : financial review revenue Revenue in Core Markets decreased by 19% to In addition to cash and cash equivalents, the £23.9m in 2019 (2018: £29.4m). Group revenues Group had £0.3m of advertising credits with during 2018 totalled £34.8m, reflecting nine Channel 4 available at the year-end date, months in the year of operating on a wider following a placing of shares in February international footprint. Direct to consumer 2019, which raised £11.7m (net of expenses) remains the dominant revenue channel, with from investors and secured £0.9m in future revenues from omni-channel contributing 27% advertising with Channel 4, which will be of the group total (2018: 22%). Reflecting a satisfied through the issuance of new shares strategic focus on profitable revenues and when fully utilised. a reduction in marketing investment, UK&I revenues decreased by 18% and in France by 22% during 2019 as expected. gross margins Gross margins in Core Markets have remained at attractive levels, supported by a focus on profitable sales. Core Markets gross profit margin increased by 70bps to 53.4% in 2019 (2018: 52.7%). administrative expenses (excluding marketing) Wages & Salaries (excluding share-based payment charges connected with employee remuneration) are the largest component of administrative expenses, contributing 36.2% (2018: 36.8%) of total administrative expenses excluding marketing costs in the year. The cost of Wages & Salaries decreased by 18% to £4.4m (2018: £5.4m) primarily reflecting a lower headcount. distribution costs Distribution costs as a percentage of revenue underlying EBITDA loss (earnings before interest, tax, depreciation, reduced by 20bps to 11.4% in 2019 (2018: amortisation, impairment charges, share- 11.6%). Core Markets profit after distribution based payment charges relating to employee fell by 130bps to 41.6% in 2019 (2018: 42.8%) remuneration, fundraise-related expenditure in reflecting increased outbound logistics and 2019 and staff and country exit costs in 2018) The Directors consider that they are best able to monitor Group financial performance via underlying EBITDA by removing fundraise– related expenditure, share-based payment charges relating to employee remuneration and staff and country exit costs from EBITDA on the basis that these items do not occur evenly year on year. warehousing costs in H2 2019. marketing investment Marketing is an important driver of growth in the business. In 2019, marketing investment in Core Markets was reduced by 32% to £12.1m (2018: £17.8m). The efficiency of marketing investment is closely monitored and is an important KPI for the business. In 2019 Core Markets marketing efficiency, defined as marketing costs as a percentage of revenues, improved by 1030 bps to 50.5% (2018: 60.8%). In the UK&I marketing efficiency improved by 176bps to 52.3% (2018: 54.1%). In France, marketing efficiency improved significantly by 3876bps to 44.1% (2018: 82.9%). 24 s t r a t e g i c r e p o r t : financial review The underlying Group EBITDA loss decreased by £8.5m to (£10.7m) loss in 2019 (2018: (£19.1m) loss). The 44% reduction in the loss reflects the increased focus on profitable sales, greater efficiency in marketing spend, substantial overhead reductions and losses in 2018 relating to the wider international footprint for part of the year. UK&I performance for the year demonstrated improved efficiency, where the loss after distribution expenses, payment fees and marketing costs (before overhead allocation) totalled (£1.7m) loss (2018: (£2.5m) loss). This was achieved on lower revenues down 18% to £18.5m (2018: £22.5m). share-based payment In accordance with IFRS, a share-based payment charge for 2019 has been calculated and charged to the statement of profit and loss. The fair value of options granted is recognised as an expense over the vesting period with a corresponding credit being recognised in equity. The charge for 2019 was £1.1m (2018: £0.3m) of which £0.6m related to equity issued in exchange for marketing services and £0.5m relating to employee remuneration. loss after tax France, whilst at an earlier stage The loss after tax reduced to £12.1m loss of development for eve compared to (2018: £20.1m loss) as a result of the 44% UK&I, made headway in reducing losses reduction in the underlying EBITDA loss. after distribution expenses, payment fees and marketing costs (before overhead allocation) by 74% to (£0.9m) loss (2018: (£3.3m) loss) despite revenues falling 22% to £5.3m (2018: £6.8m). It should be noted that the application of IFRS 16 in 2019 has resulted in a depreciation charge recognised in 2019 of £0.2m (2018: £0.0m); this charge is excluded from underlying EBITDA. Under IAS 17 however, expenditure relating to operating lease rentals (presented within administrative expenses) would have totalled £0.2m and would have been capital expenditure Due to the Group’s outsourced business model, capital expenditure requirements remain low. The main area of capital expenditure in 2019 related to ERP systems infrastructure. Total capital expenditure in 2019 in the form of intangible software assets totalled £0.5m (2018: £0.4m). cash position included within underlying EBITDA. In this The Group had cash and cash equivalents way, £0.2m of the year on year improvement of £8.0m at the year-end (2018: £6.0m). to underlying EBITDA is attributable to the application of IFRS 16. Tim Parfitt Chief Financial Officer 23 March 2020 25 s t r a t e g i c r e p o r t principal risks and uncertainties Risk management is an important part of the management process for the Group. Regular reviews are undertaken to assess the nature of risks faced, the magnitude of the risk presented to business performance and the manner in which the risk may be mitigated. Where controls are in place, their adequacy is regularly monitored. The risks considered to be particularly important at the current time are set out below. marketing Marketing is an important investment area for cost of materials which may adversely impact on the Group and there is a risk that this expenditure the Group’s profit margins. may not result in the targeted increase in sales or The Group primarily manufactures its EU brand awareness levels. mattress in the EU and its UK mattress in the UK eve constantly monitors and analyses for its main product (the eve original mattress), financial performance and key business metrics creating a natural hedge against currency to ensure up to date and accurate forecasting. movement for its key products. For other products The Group also supplements its in-house marketing and markets the Group looks to agree prices for a expertise with third party media and marketing period of time with manufacturers where possible agencies to monitor and advise on the effective to provide a degree of certainty over currency implementation and roll out of marketing and fluctuations. advertising campaigns to meet targeted KPIs with especial focus on marketing efficiency. product The Group is responsible for the design of eve operations As the Group relies on outsourced partners, there is a risk that the business may be unable to cope with rapid demand or disruption occurring with its products and could face exposure to product manufacturing or logistics partners. liability claims or claims against health and safety The Group maintains a close working procedures or practices in different territories. relationship with its outsourced partners and There could also be high return rates owing to the regularly reviews and communicates forecasts 100–night trial offered on the eve mattress. to ensure capacity constraints are managed. In The Group has a robust product and supplier addition, the Group maintains a list of alternative onboarding process to ensure new products and product suppliers who can be onboarded to suppliers are of the highest standards. The Group supplement supply, reducing the risk of relying on also retains insurance brokers to review and any specific supplier. analyse insurance coverage to ensure sufficient insurance coverage for product liability and associated losses. In addition, return rates is a KPI which is monitored closely. The Group is subject to fluctuations in the 26 s t r a t e g i c r e p o r t : principle risks and uncertainties During 2019, investment in automation across ERP outcome. The Group is already registered as a sponsoring infrastructure particularly across supply chain and logistics entity with the relevant UK authorities and also has a French functions, has delivered greater visibility of logistics partner subsidiary, which combined with the expected transitional performance and mitigates the risk of disruption and allows period provides the foundations for mitigating the for logistics partners to easily be switched between. immediate effect of Brexit on the Group in this regard. competition The Group operates in the highly competitive mattress and COVID–19 virus The Group manufactures core mattress products in the pillow industries and may not be able to grow, or maintain, territories in which it sells them. However, our supply chain its existing marketing share. has some reliance on sourcing from China, the Far East and The Group constantly reviews and analyses its European countries outside the Core Markets for the wider performance against its business plan and against market sleep range products. competitors. The Group has both internal talent and There is the risk of reduced consumer demand as external advisors who can advise on and respond to any well as disruption to the supply chain from global events changes in the competitive environment. and pandemics such as the COVID–19 virus. Management brexit As with all UK companies involved in intra-community cross border trade the impact of Brexit is a potential risk for the Group. The board of directors and senior management regularly review developments surrounding Brexit throughout the organisation and in addition to this the operations team has a dedicated task force focused on Brexit planning within the supply and logistics chain. The Group has a natural Brexit hedge with its UK and French companies and its main product, the eve original mattress, is manufactured in both the UK and the EU providing a hedge for its most significant product. As with most UK based companies leveraging technology to deliver its value proposition, eve employs a significant non-UK workforce in the UK and thus the outcome of Brexit with regards to freedom of movement will have an effect on our workforce planning and recruitment. For this reason, during 2019, regular communication for EU nationals has been established and in-house support provided for those considering applications for settled status or visas. At present the precise details of Brexit; how it relates to freedom of movement between the EU and UK; how it will impact goods movement across borders between the EU and UK; and how it will affect currency exchange rates following the transition period (currently expected to end on 31 December 2020) are under negotiation and therefore not fully clarified. However, the Group continuously monitors the situation to ensure it is as prepared as possible for any have assessed the availability of stock on hand and are in close communication with suppliers to mitigate any adverse impact of planned supply chain movements in order to fulfil consumer demand during this period. The Group’s employees are able to work remotely from eve’s main office as a result of laptop computers and the use of multiple communication channels including email, direct messaging and video conferencing. In the event of restricted movement around London and the UK, the work force would be able to continue working and would be able to communicate across teams and key stakeholders ensuring business continuity. To date we have seen only a small impact upon our supply chain, and where we have seen impact, we have taken precautionary measures including stronger stock holding of products to ensure adequate coverage for the coming months, and hence we currently envisage being able to meet customer demand for our products, albeit at reduced levels. Approved and signed on behalf of the board. Tim Parfitt Chief Financial Officer 23 March 2020 27 g o v e r n a n c e r e p o r t Directors’ Governance Statement The Board had dedicated significant time in 2019 toward overseeing and scrutinising the development and delivery of eve’s long-term strategy. Pau l P inda r Dear Shareholders, The Board recognises the importance of High standards of corporate governance achieving the highest possible standards of remain pivotal to, and complementary to, corporate governance. our long-term strategy. Our commitment to As detailed elsewhere in this Annual good corporate governance is based on a Report, the Board has dedicated significant recognition that good governance allows time in 2019 toward overseeing and us as Board to identify and to focus on scrutinising the development and delivery of supporting the drivers of long-term growth; it eve’s long-term strategy. As we also reflect allows us to take into account the full range elsewhere, we have as a Board had to make of our stakeholders, including investors, a number of important decisions to shape employees, customers and those in our the ways in which our company continues supply chain; and facilitates constructive to grow and provides long-term value to our discussions between the Board and shareholders. management on the Company’s strategic and operational priorities. 28 As a Board, we are pleased with the progress we have made on a range of corporate governance actions in 2019, of Further information on each of the above points is set out subsequently in this report. which I would particularly like to highlight The Board decided in 2018 to formally adopt the following: • We have successfully supported the on– boarding of Tim Parfitt as the Company’s new Chief Financial Officer. • We have spent greater time in 2019 looking at our corporate culture, the ways in which our culture helps us to recruit and retain some of the very best talent, and the ways in which our culture can underpin the development and delivery of our long-term strategy. • We have also ensured that we focus on succession planning at senior management, and are pleased with the strength and depth of talent we are developing at all levels of the business. • We received and challenged a number of detailed updates on a number of our core operational functions, including product development and marketing functions. • We undertook an internally facilitated Board evaluation in 2019, which was a very positive exercise in ‘taking the temperature’ of how we function as a Board and how we perform our roles and responsibilities as a group and as individuals. the QCA Code (the “Code”), and reported in September 2018 on the Company’s compliance with the Code. The Board was briefed on the revisions made to the Code for the 2019 reporting year, as well as additional legislation introduced by the Government. We remain fully committed to the principles and spirit of the Code, and disclose both in our compliance statement, and in this governance statement, on how we have applied the Code’s principles. Approved and signed on behalf of the board. Paul Pindar Chairman 23 March 2020 29 g o v e r n a n c e r e p o r t board of directors Paul Pindar Chairman of the Board appointed: November 2016 experience Paul joined the eve Board in November 2016. Prior to this, Paul spent 26 years at Capita Plc, retiring in February 2014. Paul was one of the UK's longest serving CEO's of a FTSE100 company. During his tenure, the market value of Capita grew to £7.5bn and employee numbers grew from 33 to 62,000. Paul is Chairman of and was a founder investor in online estate agent Purplebricks which originally launched in April 2014 and is now AIM-listed on the London Stock Exchange. Paul is also Chairman of Literacy Capital Plc, an investment company focused on investing in and supporting early stage and small companies whilst also providing charitable funding in order to materially improve child literacy in the UK. committee membership: Audit Committee (Chair) Nomination Committee Remuneration Committee (Chair) James Sturrock Chief Executive Officer appointed: September 2018 experience James joined eve in September 2018 having previously been Managing Director of Moonpig, the UK’s leading online greetings card, flower and gift company, where he delivered four consecutive years of double-digit revenue and EBITDA growth, expanded the product offering, and led the successful rebranding of the business in 2017. Prior to Moonpig, James was part of Direct Line Group and formerly Direct Line Insurance for more than seven years where he held a number of senior divisional and marketing roles across the Group before becoming General Manager of Commercial Direct in 2012. committee membership: None 30 g o v e r n a n c e r e p o r t : board of directors Tim Parfitt Chief Financial Officer appointed: June 2019 experience Tim joined eve in June 2019. Prior to this, he spent six years as Finance Director with privately–owned, multi– channel furniture retailer, Loaf, during which turnover grew from £8m to £50m. Before Loaf, Tim held finance director roles with early stage businesses including Benugo and Deliverance. He also spent four years as a portfolio finance director helping owner-managers to grow their business. committee membership: None Nikki Crumpton Senior Independent Non-Executive Director appointed: September 2018 experience Nikki joined eve in September 2018. Nikki is founder of brand and communications consultancy The Active Strategist and has previously held senior roles within international agencies including McCann Worldgroup where she was Regional Planning Director EMEA, and as Chief Strategy Officer for McCann London for seven years. committee membership: Audit Committee Nomination Committee Remuneration Committee Thomas Enraght-Moony Independent Non-Executive Director appointed: April 2017 experience Tom joined Eve in April 2017. Tom has nearly 20 years of executive experience in leading brand transformation and growth for tech–enabled consumer businesses including Leisure Pass Group, Match.com, E*TRADE, AT&T Wireless, Clearwire, and McArthurGlen. He holds an undergraduate degree from The University of Glasgow and an MBA from INSEAD in France. committee membership: Audit Committee Nomination Committee (Chair) Remuneration Committee 31 g o v e r n a n c e r e p o r t corporate governance report The Board is committed to achieving high standards of corporate governance, integrity and business ethics, which it believes in turn serve to drive growth over the long term. Under the AIM Rules for Companies, the Company has decided to apply the QCA Corporate Governance Code for Small and Mid-Size Quoted Companies (the “Code”) and provides details to shareholders, both through this Annual Report and in an annually updated compliance statement available on the Company’s website, on eve’s compliance with the Code. our governance structure The Board Responsible for setting the tone from the top, determining strategic direction and monitoring operational delivery Chief Executive Officer Responsible for day- to-day management of eve Audit Committee Nomination Committee Remuneration Committee Responsible for Responsible for ensuring Responsible for reviewing the integrity that the board and determining executive of eve's financial, risk senior management has remuneration and for management and the right balance of reviewing the overall reporting processes and skills, experience approach to pay across oversight of the external and diversity eve audit function The Board has adopted a Board Governance document, which sets out Board membership and processes alongside powers reserved for the Board. This document was last reviewed by the Board in February 2020. The Board is collectively responsible to shareholders and to our wider stakeholders for the overall direction and control of the company and delegates the day–to–day management of the business to the executive directors and senior management. For details of who we consider to be our key stakeholders, and the ways in which we engage with them, please see page 44. We see the Board as having the following main roles: setting our purpose, strategy, values and culture By setting the tone at the top, establishing the core values of the Group and demonstrating our leadership, management are able to implement key policies and procedures in a manner that clearly sets an expectation that every employee acts ethically and transparently in all of their dealings. setting and oversight of execution of strategy Among our responsibilities are setting and overseeing the execution of eve’s strategy within a framework of effective risk management and internal controls. oversight of operations We monitor management’s execution of strategy and financial performance. While our ultimate focus is long-term growth, the Group also needs to deliver on short-term objectives and we seek to ensure that management strikes the right balance between the two. shareholder and stakeholder engagement We actively engage with shareholders throughout the year to ensure that the Board understands the views of shareholders and our key stakeholders on some of our most critical decisions and incorporates these into its decision-making process. 32 g o v e r n a n c e r e p o r t : corporate governance report The Board also delegates certain matters to its Board committees so that it can operate efficiently and give the right level of attention and consideration to relevant matters. The composition, responsibilities and activities of each of the Board Committees are set out on pages 35 to 42. The terms of reference of each committee are available from our website found at https://investor.evesleep.co.uk/corporate- governance#governance-docs. board composition The successful delivery of our strategy depends upon attracting and retaining the right talent. This starts with having a high–quality Board. Balance is an important requirement for the composition of the Board, not only in terms of the number of Executive and Non–executive Directors, but also in terms of skill, knowledge and expertise each Director brings. The Board comprises a non-executive chairman, two executive directors and two other independent non–executive directors. A short biography of each of the directors in office at the year-end is set out on pages 29 and 30. The role of Chairman is to run the business of the Board, ensuring appropriate strategic focus and direction in the Board’s discussions, and to facilitate relationships and engagement with shareholders. The Chairman also holds responsibility for ensuring that the Company is appropriately governed and that eve embraces not just the principles of good corporate governance but also the values that underpin those principles. Nikki Crumpton and Thomas Enraght–Moony are considered by the Board to be independent. The Board are of the opinion that both act in an independent and objective manner and are free from any relationship that could affect their judgement. Paul Pindar, as non-executive chairman, was considered to be independent upon appointment. Notwithstanding any cross-directorships, the Board is satisfied that it has a suitable balance between independence (of both character and judgement) on the one hand, and knowledge of the Company on the other, to enable it to discharge its duties and responsibilities effectively. There are effective procedures in place to monitor and deal with conflicts of interest, with Directors’ other current commitments being disclosed at each and every Board meeting. As such, the Board is aware of the other commitments and interests of its directors, and changes to these commitments and interests are reported to and, where appropriate, agreed with the rest of the Board. board and committee meetings The table below sets out the Board and Committee attendance for 2019. Attendance is shown as the number of meetings attended out of the total number of meetings possible for the individual Director during the year. If any Directors are unable to attend a meeting, they are encouraged to communicate their opinions and comments on the matters to be considered via the Chairman of the Board or the relevant committee chairman. attendance at Board and Commitee meetings during 2019 Paul Pindar James Sturrock Abid Ismail (resigned 17 May 2019) Tim Parfitt (appointed 17 June 2019) Board Audit Remuneration Committee Committee Nomination Committee 6 of 6 3 of 3 3 of 3 2 of 2 6 of 6 3 of 3 3 of 3 N/A N/A N/A N/A N/A N/A N/A N/A N/A Nikki Crumpton 5 of 6 2 of 3 2 of 3 2 of 2 Thomas Enraght-Moony 6 of 6 3 of 3 3 of 3 2 of 2 g o v e r n a n c e r e p o r t : corporate governance report 33 board and committee effectiveness The Board continually strives to improve its effectiveness and recognises that an annual evaluation process is an important tool in reaching that goal. The Directors are aware of the importance to monitor performance through Board evaluations and that feedback from these evaluations leads to improving Board effectiveness. During the year, an internally facilitated performance evaluation of the Board, committees and individual directors was undertaken. The evaluation was informed in part by a tailored questionnaire that each Director responded to, which focused on Board composition, Board dynamics and behaviours, the ways in which the Board was fulfilling its remit and responsibilities and suggested focal areas for the Board in 2020. Overall, the Board was pleased with the findings. The evaluation found strong general agreement amongst respondents that the Board and Committees have the right membership, that the focus and dynamics of Board and Committee meetings are strong and the support mechanisms in place to support Directors are appropriate. Helpful suggestions were provided in terms of the support processes in place for new Non- Executive Directors, and in terms of the quality and timeliness of Board meeting materials, which will both be taken forward over 2020 between management and the Company Secretary. A number of other suggestions were received in respect of the focal areas for the Board in 2020. internal controls and risk management The Group has a comprehensive system of internal controls in place, designed to ensure that risks are mitigated and that the Group’s objectives are attained. The Board recognises its responsibility to present a fair, balanced and understandable assessment of the Group’s position and prospects. It is accountable for reviewing and approving the effectiveness of internal controls operated by the Group, including financial, operational and compliance controls, and risk management. The Board recognises its responsibility in respect of the Group’s risk management process and system of internal control and oversees the activities of the Group’s external auditors and the Group’s risk management function (supported by the Audit Committee). A review of the Group’s risk management review and mitigation of principal risks and uncertainties is discussed in the Strategic Report on pages 25 and 26. our corporate culture The Board believes that our corporate culture continues to serve as one of our key competitive advantages. We encourage all of our employees at all levels of the Group to take responsibility for their work and to actively contribute toward the development and delivery of our strategy. In respect of the Board’s role, we recognise the importance of setting a tone from the top, and have met with a number of staff over 2019 at various levels of the business to understand different perceptions of the culture that we are developing. Our aim is to promote a culture within the Group of ethical values and behaviours, and we also have a number of due diligence processes in place to ensure that all suppliers meet our standards and our values. We have internal policies covering a range of ethical behaviours, such as an anti– bribery and anti-corruption policy and an anti–money laundering policy, which serve to promote and preserve the right corporate behaviours. As part of our induction process, new employees receive training on all corporate policies and the expectations of the Company when it comes to ethical values and behaviours and this is refreshed on a regular basis for all employees. We have an active programme of employee engagement, including regular employee engagement surveys, throughout the year. Such engagement shapes both the way in which we develop our products and deliver services. We also have a whistleblowing policy and hotline available for all employees. In 2019, there were no instances of the anti-bribery and anti-corruption policy or whistleblowing policy being invoked. In respect of our forthcoming priorities for 2020, the Board will be looking to develop metrics for measuring and monitoring culture and employee engagement. 34 g o v e r n a n c e r e p o r t : corporate governance report relations with shareholders our engagement with stakeholders We are committed to communicating openly with shareholders to ensure that the Group’s strategy and performance are clearly understood. We communicate with shareholders through the Annual Report and Accounts, full–year and half–year announcements, trading updates and the annual general meeting (AGM); and we encourage shareholders’ participation in face-to-face meetings. A range of corporate information (including all announcements and presentations) is also available to shareholders, investors and the public on our corporate website, at https://investor.evesleep.co.uk/. The Board places due weight on stakeholder awareness and engagement. It assesses stakeholders according to the definition of stakeholders set out in the Global Reporting Initiative (Standard 101 paragraph 1.1) as organisations or individuals who have “a reasonable expectation of being significantly affected” by the Group’s activities or products. In addition to our shareholders, the Board has identified the Group’s other major stakeholders, and approved a strategy for engaging with these groups as follows: Stakeholder Channel of engagement Employees • • • • • Quarterly performance reviews; Weekly feedback exercises; Exit interviews; Mental health awareness and training and employee support; and Continuing personal development plans. Local communities through selective partnerships and the regular review of additional ways it can provide support to the local The Company has a range of initiatives including volunteer days for employees, support of relevant charities community and relevant charitable organisations. Key suppliers Regular meetings and reviews with key contact within Company and senior management team. 35 audit committee report g o v e r n a n c e r e p o r t committee composition The Committee comprises Paul Pindar (Chair), Nikki Crumpton and Thomas Enraght–Moony. committee responsibilities The Committee reports to the Board on how it discharges its responsibilities and makes recommendations to the Board, all of which have been accepted during the year 2019. The main responsibilities of the Committee are set out below: financial reporting • review the integrity of the interim and annual financial statements; • review the appropriateness of accounting policies and practices; and • review the significant issues and judgements considered in relation to the financial state- ments, including how each was addressed. external audit • review and monitor the objectivity and independence of the External Auditor, including the policy to govern the provision of non-audit services; • review and monitor the effectiveness of the external audit process and the on-going relationship with the External Auditor; and • review and make recommendations to the Board on the tendering of the external audit contract, and the appointment, remuneration and terms of engagement of the External Auditor. risk management and internal control • review and monitor the effectiveness of the management of risk and internal control and appropriate systems; • review the framework and analysis to support both the going concern and ongoing viability statement; and • oversee appropriate whistleblowing and fraud prevention arrangements. The Terms of Reference for the Audit Committee are available on our website: https://investor.evesleep.co.uk/corporate- governance#committee-composition. These were last reviewed and approved by the Board on 21 November 2019. key activities in 2019 The main focus of the Committee in 2019 has been to: • review and recommend the reappointment to shareholders of the Company’s external auditor at the 2019 AGM and to recommend the appointment of Nexia Smith & Williamson as external auditor to the Board in October 2019; • review and approve the 2018 FY preliminary results; • review and approve the 2019 interim results; • assess the company’s risk management systems and the risk register and conducted an annual review of the Committee’s Terms of Reference. 1. financial reporting A principal responsibility of the Committee is to consider the significant areas of complexity, management judgement and estimations that have been applied in the preparation of the financial statements. Significant issues considered in relation to the financial statements One of the focal areas for the Committee was in considering the most significant financial reporting for the Company. These are set out below, alongside details of how such risks are mitigated which are detailed below, and details of how those risks are mitigated: Significant Risk What? How this is mitigated Going concern meet liabilities as financial forecasts and Risk of inability to Review of 24-month rolling they fall due cash projections Revenue recognition Fraud risk related to misstatement of revenues Review of methodology to define risk and reward transfer criteria for recognition as revenue Inventory Risk of error in Review of gross profit valuation and stock costing and margins and bi-annual existence provisioning inventory counts Fraud risk related Management to unpredictable override of way management controls override of controls may occur Review of control processes and permission structures within Finance and the wider business 36 g o v e r n a n c e r e p o r t : audit committee report Fair, balanced and understandable In line with the best practice, the Committee has reviewed the 2019 Annual Report to consider whether it provided a true and fair view of the group’s affairs at the end of the year and provided shareholders with the necessary information in a fair, balanced and understandable way in order to enable them to assess the Group’s position, performance, business model and strategy. When forming its opinion, the Committee considered the following questions in order to encourage challenge and assess whether the Annual Report and Accounts was fair, balanced and understandable: Conclusion After completion of its detailed review, the Committee is satisfied, when taken as a whole, the Group’s Annual Report and Accounts are fair, balanced and understandable, and provide the information necessary for shareholders to assess eve’s performance, business model and strategy. 2. risk management and internal control The Group has a comprehensive system of internal controls in place, designed to ensure that risks are mitigated and that the Group’s objectives are attained. The committee has had regard to a number of sources of assurance over the course of the year on the adequacy of the risk management and internal control processes in place across eve, including the following: • Reviewed and scrutinised the corporate risk register, including the approach toward assessing the impact and likelihood of these risks and the ways in which management has proposed to manage the risks; • Reviewed the anti-fraud and bribery policies and procedures in place across the Company and the ways in which such policies are implemented; and • Reviewed the external audit plan for the 2019 financial year and findings from the 2018 external audit. As in previous years, the Group did not adopt an internal audit function. The Committee remains of the view that, due to the size and current complexity of the Group, the adoption of such a function would not be appropriate, and that the existing control environment remains robust. Is the report fair? • Is the whole story presented? • Have any sensitive material areas been omitted? Is the report balanced? • Is the whole story presented? • Have any sensitive material areas been omitted? Is the report • Is there a clear and understandable understandable? framework to the Annual Report? • Is the Annual Report presented in straightforward language and a user-friendly and easy to understand manner? 3. external audit tendering for a new audit provider One of the Committee’s key roles in 2019 has been in its involvement in securing a new external audit provider for eve following the resignation of KPMG LLP as the company’s auditor during 2019. The tender process that was followed was broadly as follows: Requests for proposal Focused on two key areas: 1) To secure high quality external audit services from a reputable and credible provider 2) To secure excellent value for money Evaluation and assessment The assessment process focused on the following key areas: 1) Capability and competence 2) Communication 3) Behaviour and deliverables 4) Pricing Decision Following engagement with members of the Audit Committee, a decision was made to appoint Nexia Smith & Williamson as eve’s external auditor Following a competitive tender process, we were delighted to announce the appointment of Nexia Smith & Williamson as our external auditor. The Committee is confident that the relationship between the external auditor, management and the Audit Committee is developing positively, and we detail in the following sections our processes for reviewing the effectiveness and independence of the external auditor. external audit effectiveness We have an established framework for assessing the effectiveness of the external audit process. This includes: • a review of the audit plan, including the materiality level set by the auditors and the process they have adopted to identify financial statement risks and key areas of audit focus; • regular communications between the external auditor and both the Committee and management, including discussion of regular reports prepared by the external auditor; and • a review of the final audit report, noting the conclusions reached by the auditors and the reasoning behind such conclusions. The Committee held a meeting with Nexia Smith & Williamson (without management present) and management (without the external auditor present) in order to discuss the external audit process and to identify any potentials for improvement for the forthcoming audit process. We are confident that the evaluation process is effective, allowing for an objective assessment against the principal focus areas. After carefully considering the outcome of the above review, we concluded, in conjunction with management, and reported to the Board that in our opinion: g o v e r n a n c e r e p o r t : audit committee report 37 • the audit team was sound and reliable; • the quality of the audit service provided was of a high standard; • that Nexia Smith & Williamson were, and are, effectively able to challenge man- agement when required; and • that productive discussions were held with the Committee throughout the audit planning process. objectivity and independence of the external audit process It is the Committee’s responsibility to monitor the performance, objectivity and independence of the Auditor and this is evaluated by the Committee each year. In evaluating their performance, the Committee examines five main criteria – robustness of the audit process, independence and objectivity, quality of delivery, quality of people and service, and value–added advice. Having carried out the review the Committee is satisfied with Nexia Smith & Williamson’s performance, objectivity and independence. Taking all of the above into account, The Committee has recommended to the Board that Nexia Smith & Williamson be re-appointed under a new external audit contract and the Directors will be proposing the re-appointment and the determination of Nexia Smith & Williamson’s remuneration to shareholders at the 2020 AGM. Following a tender for the provision of external audit services in 2019, the Group will put the external audit contract out to tender no later than 2029. The Committee is comfortable that this period is appropriate for the Group and that there are a number of measures in place to monitor and assure the external auditor’s independence, as set out in this Audit Committee report. Approved and signed on behalf of the committee Paul Pindar Chairman 23 March 2020 38 g o v e r n a n c e r e p o r t nomination committee committee composition The Committee comprises Thomas Enraght– Moony (Committee chair), Paul Pindar and Nikki Crumpton. committee responsibilities The main responsibilities of the Nomination Committee are: • Reviewing the size structure and composi- tion of the Board; • Considering succession plans for Directors and senior management; • Satisfying itself that plans are in place for orderly succession for appointments to the Board; • Identifying and nominating to the Board candidates for Board vacancies. The Terms of Reference for the Nomination Committee are available on our website: https://investor.evesleep.co.uk/corporate- governance#committee-composition These were last reviewed and approved by the Board on 21 November 2019. key activities in 2019 succession planning Paul Pindar and Tom Enraght-Moony, as Chairman of the Nomination Committee, were closely involved with the appointment of Tim Parfitt as Chief Financial Officer. Further, the Committee spent significant time in 2019 in reviewing the strength of management talent in each area of the business along with information from management on the ways in which talent is managed in the business. The Committee is of the view that it is important to develop career pathways for each individual in the business, including those identified as having potential to in future occupy senior management positions within the business. The Committee considers that succession needs to involve a combination of internal talent with external hires, which balances creating internal expertise and retention incentives with fresh perspectives. Following the report from the Committee this year, we are pleased with the ways in which careers opportunities and pathways are being developed and with the overall strength of our talent pool across the business. The Committee will maintain succession planning and talent management as focal areas for 2020. board composition A further focus of the Committee in 2019 has been to review the size, structure and composition of the Board and Board Committees to ensure these remained appropriate. Following consideration, the Committee remains of the view that the size of the Board, and structure for the Board and committees of the Board, remains appropriate in view of the Company’s current size and scale. As detailed in the Board evaluation section earlier in this report, each Director was asked to review the current Board composition, and considers there to be a good balance of skills, background, experience and diversity of thought that each contribute to the overall effectiveness of the Board. The Committee therefore consider that the Board composition remains appropriate, but this will be an area that will be kept under continued review. Our AGM Notice includes details of the contributions of each Director to the Board and to the Company more widely, and the reason for the recommendation from the Board to re-elect each Director. The Committee also conducted an annual review of the Committee Terms of Reference. Approved and signed on behalf of the committee. Thomas Enraght-Moony Chairman 23 March 2020 39 g o v e r n a n c e r e p o r t remuneration report committee composition key activities in 2019 The Remuneration Committee comprises three non-executive directors: Paul Pindar (Chairman of the Committee), Thomas Enraght-Moony and Nikki Crumpton. Members of the management team are invited to attend meetings as appropriate, unless there is an actual or potential conflict of interest. The main focus of the Committee in 2019 has been to review proposals around Executive Directors’ remuneration arrangements for 2019 and scrutinise management bonus scheme proposals. The Committee will continue to focus in 2020 on ensuring that executive remuneration and shareholder interests remain closely aligned. responsibilities of the committee renumeration policy The role of the Committee is to assist the Board to fulfil its responsibility to shareholders to ensure that the remuneration policy and practices of the Company reward fairly and responsibly, with a clear link to corporate and individual performance, having regard to statutory and regulatory requirements. The Terms of Reference for the Remuneration Committee are available on our website: https://investor.evesleep. co.uk/corporate-governance#committee- composition These were last reviewed and approved by the Board on 21 November 2019. The Company’s policy is that the remuneration package of the Executive Directors should be sufficiently competitive to attract, retain and motivate those directors to achieve the Company’s objectives without making excessive payments. The Board determines the terms and conditions of the Non-Executive directors. We have summarised the main principles behind Executive Directors’ remuneration in the table below: 40 g o v e r n a n c e r e p o r t : remuneration committee report fixed remuneration elements Purpose How it operates Maximum opportunity Performance-related framework base salary Reflects an individual’s responsibilities, experience and performance in their role. There is no prescribed The performance of the maximum annual base salary individual in the period since or salary increase. the last review is considered The Committee is guided when their salary is being by the general increase reviewed. for the broader employee population but has discretion to decide to award a lower or higher increase to Executive Directors. Reviewed annually, normally with effect from 1 January, with any changes taking effect from that date. Salaries are normally paid monthly. Decisions on salary levels are influenced by: responsibilities, abilities, experience and performance of an individual the performance of the individual in the period since the last review the Company’s salary and pay structures and general workforce salary increases. pension To contribute financially post- Defined contribution The Company contributes Not applicable. retirement. arrangement. up to 3% of base salary on a Base salary and bonus “relief at source” basis. elements are pensionable. The Committee has Employees may opt out of discretion to amend the the scheme. contribution level should market conditions or legislation change. variable remuneration elements Purpose How it operates Maximum opportunity Performance-related framework Supports the strategy and Awards of share options to Not applicable. Not applicable. share plan business plan by incentivising certain employees, which and retaining the eve senior normally vest after three management team in a way years subject to length of that is aligned both with service conditions. the Company’s long-term financial performance and with the interests of shareholders. other benefits To support the personal Benefits include private There is no overall maximum Not applicable. health and wellbeing of medical insurance and level of benefits provided employees. To reflect and discount on eve products. to Executive Directors, and support the Company’s culture. the level of some of these benefits is not predetermined but may vary from year to year based on the overall cost to the Company. g o v e r n a n c e r e p o r t : remuneration committee report 41 Directors’ remuneration table The remuneration of the Directors for the year to 31 December 2019 is set out in the table below. Director Appointed Resigned Salary / fees £ Pension £ 2019 2018 2019 2018 Compensation for loss of office £ 2019 Total remuneration £ 2019 2018 Executive Directors 10 N/A 200,000 54,615 1,188 269 - 201,188 54,884 James Sturrock September 2018 Tim Parfitt 17 June 2019 N/A 66,523 - 658 - - 67,181 - 2 November 17 May 77,865 140,000 421 703 31,788 110,074 140,703 2016 2019 21 November N/A 26,667 30,000 - - 2016 Nikki Crumpton 3 September N/A 26,667 10,000 557 160 2018 28 April 2017 N/A 26,667 30,000 - - Thomas Enraght- Moony - - - 26,667 30,000 27,223 10,160 26,667 30,000 Abid Ismail Non-Executive Directors Paul Pindar There were no bonuses, long term incentives or other income awarded to directors. Details of directors interest in share plans is shown on the following page and details of the share-based payment charge attributable to directors is shown in note 6. Private medical insurance was provided to James Sturrock, Tim Parfitt and Abid Ismail, the value of which management have deemed immaterial to the users of these financial statements. 42 g o v e r n a n c e r e p o r t : remuneration committee report Directors interest in share plans The Directors who held office at 31 December 2019 had the following interests in the share plans of the Group. Director Date of Grant As at 31 December 2019 (no. of options) Service Conditions Exercise Price (pence) As at 31 December 2018 (no. of options) Sevice Conditions Exercise Price Executive Directors James Sturrock 23 May 2019 17 December 2019 4,400,000 4,400,000 Tim Parfitt 17 December 2019 2,000,000 Length of service Length of service 0.1p 0.1p Non-Executive Directors Paul Pindar n/a n/a n/a n/a Nikki Crumpton 1 April 2019 180,000 Length of service 0.1p - - - - n/a n/a n/a n/a n/a n/a n/a n/a Thomas Enraght-Moony 1 April 2019 180,000 Length of service 0.1p 99,000 Length of service 101.2p No directors exercised share options during 2019 therefore no gain on option exercise is presented here nor in note 6 to the financial statements. Directors shareholdings The Directors who held office at 31 December 2019 had the following interests in the shares of the Group. Director Executive Directors James Sturrock Tim Parfitt Non-Executive Directors Beneficially owned at 31 Beneficially owned at 31 December 2019 (no. of shares) December 2018 (no. of shares) 252,750 27,048 52,750 - Paul Pindar 15,334,885 6,527,126 Nikki Crumpton Thomas Enraght-Moony - - - - Approved and signed on behalf of the committee. Paul Pindar Chairman 23 March 2020 43 g o v e r n a n c e r e p o r t statement of directors’ responsibilities in respect of the annual report and the financial statements The directors are responsible for preparing the Annual Report alongside the Group and parent Company financial statements in accordance with applicable law and regulations. The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs). Under Company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs and profit or loss of the Company for the period. In preparing these financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgments and accounting estimates that are reasonable and prudent; • state whether applicable IFRSs have been followed, subject to any material depar- tures disclosed and explained in the finan- cial statements; and • prepare the financial statements on the go- ing concern basis unless it is inappropriate to presume that the Company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors confirm that: • the management report includes a fair review of the development and perf- ormance of the business and the position of the Group, together with a description of the principal risks and uncertainties. • so far as each director is aware, there is no relevant audit information of which the Company’s auditor is unaware; and • the directors have taken all steps that they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of that infor- mation. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. By order of the board: Paul Pindar and James Sturrock 44 g o v e r n a n c e r e p o r t section 172 reporting The directors have identified and selected the following Board-level decision making processes as those of greatest strategic significance made during 2019 and would like to highlight the consultation undertaken by eve across a range of stakeholders due to their business impact. people restructuring Our people power eve and the ingenuity and determination they bring to work every day made the decision that led to redundancies in the last quarter of 2019 especially complex. The process required three-stages of consultation; first with senior management to review the activities and priorities of their team, secondly, with those individuals identified as at risk of redundancy to describe and explain the proposed changes to the company’s people structure and finally, to evaluate proposals made by employees affected as to how their redundancy might be mitigated. In some cases, the consultation process ended with individuals choosing to continue their employment with eve under revised terms and at all times it was necessary to consider operational continuity including the management of supplier relationships. At an early stage, given the impact on individual livelihoods, it was judged by the Board and current employees to be necessary to support the future career objectives of affected employees an initiative led by eve’s Head of People. competitive tender of courier and warehouse supplier relationships Given the nature of eve’s business model, the health of third-party courier and warehouse relationships are a key component to eve’s success. Close monitoring of operational performance, value for money and the transparency of suppliers in this category is undertaken alongside mining the feedback customers provide as to the reliability and quality of their delivery experience. An impact assessment was conducted to assess how any transition of these supplier relationships would impact employee and customer satisfaction and a competitive tender process set up in order to measure short-term financial and operational considerations against longer-term goals for improved customer experience. long-term profitability of retail partnerships The mutual decision in the first quarter of 2019, to terminate the retail partnership agreement with Dreams reinforced eve’s continued commitment to its full cohort of retail partners, direct to consumer customer base, suppliers and shareholders, representing a decision to prioritise profitability over revenue growth at all costs and the need to act fairly to all partners. Prior to the decision being made, the known likely consequence was the loss of retail revenues planned with this partner during 2019, and while those were not planned to be material, what was less clear was the impact on brand awareness created via the partnership. However, in balancing these factors against the renegotiated terms of a future agreement were deemed to dilute the profitability and long-term sustainability of the company and thus mutual termination of the agreement was the preferred route. appointment of new CFO Following the resignation of Abid Ismail, eve’s Chief Financial Officer at the outset of the year, the subsequent recruitment and appointment of Tim Parfitt required the Board to consider the constellation of skills and experience that an incoming finance leader would require. The Nomination Committee led this process consulting closely with CEO, James Sturrock. The search for a complementary finance leader acknowledged the public-facing nature of eve’s listing on the Alternative Investments Market requiring a profile capable of managing retail investor relationships as well as an individual capable of operating beyond the confines of the traditional finance function including oversight of eve’s technology infrastructure and ambitions. sustainable packaging Following the consultation of both customer and employee groups and with a view to identifying profit-enhancing initiatives as part of the 2020 budgeting process; the Board performed a detailed review into the business’s environmental impact with the first focus identified to be the reduction and sustainable-sourcing of reduction, a project being implemented in early 2020. 45 g o v e r n a n c e r e p o r t directors’ report The Corporate Governance Report approved by the Board is provided on pages 27 and 28 and incorporated by reference into this Directors’ Report. information contained elsewhere in this Annual Report significant events since the end of the financial year Information required to be included in this Directors’ Report can be found elsewhere in the Annual Report as indicated in the table below and is incorporated into this report by reference: Information Page(s) future developments going concern statement risk management and principle risks corporate governance statement Information on the Group’s financial risk management objectives and policies, and its exposure to credit risk, liquidity risk, interest rate risk, foreign currency risk and financial instruments 9 46 25-26 27-28 75-77 The worldwide outbreak of the COVID–19 virus represents a significant event since the end of the financial period. In light of the impact of the virus upon supply chain and consumer demand, the Group has reviewed its cash flow forecasts and considered the impact on going concern, concluding that the going concern basis remains an appropriate basis of preparation for these financial statements given the likely cash flow impact of operations 12 months from the date of signing this report. presence outside of UK the company has the following subsidiaries outside of the UK: eve Sleep SASU eve Sleep Inc Trading Status Trading Dormant Principal place of 5 Rue Des business / registered Suisses, 75014, office address Paris 185 W. Broadway, Suite 101, PO Box 1150, Jackson, USA Registered number 823397419 R.C.S Paris EIN 47-4164566 Ownership 2019 100% 100% Ownership 2018 100% 100% 46 g o v e r n a n c e r e p o r t : director's report going concern IFRS 16). The financial statements are prepared on a going concern basis notwithstanding that the Group is still generating losses. The Group has reported an underlying EBITDA of (£10.7m) loss (2018: (£19.1m) loss) with an operating cash outflow of £9.3m (2018: £20.6m). The closing cash balance at 31 December 2019 was £8.0m (2018: £6.0m). The directors have prepared a business plan and financial model including cashflow forecasts covering a period of more than 12 months from the date of approval of these financial statements. The business plan makes the following key assumptions: • Economies in product and logistics costs; • Marketing efficiency within DTC is enhanced as a result of greater brand awareness and the focus on more profitable performance marketing activi- ties leading to a significant improvement in profit/loss after distribution expenses, payment fees and marketing costs; • The full-year benefit of savings made to overheads in 2019 generating a significant reduction in annual fixed costs; • Reduction in stock levels. These forecasts in the base case indicate that the group will have sufficient funds to meet its liabilities as they fall due until such point that it achieves sustainable profitability and cash generation. However, the delivery of the strategic plan is subject to uncertainty and these have been modelled through sensitivity analysis. Where sensitivity analysis indicates the possibility of a material impact to the ability of the group to meet liabilities as they fall due, the directors have considered what mitigating actions would be required and the timeframe within which those actions are needed. The key mitigating factors are centered around further reductions in controllable spend, including further marketing cost appraisal and reductions in other categories of discretionary spend. The directors also consider that it would be reasonable to target working capital improvements such as reducing stock days through lower stock levels and reducing debtor days through facilities such as debt factoring as the group does not presently have any debt (excluding the lease liability arising under Uncertainties are such that potential mitigating actions, which would be over and above the current strategic plan, may not be sufficient to mitigate all reasonably possible downsides in assumptions. In such downsides the Directors would need further funding and would consider ways of sourcing this, which could include debt or possible further equity funding. The Directors consider that such scenarios are possible, but not the likely outcome. Based on the above, the directors believe it remains appropriate to prepare the financial statements on a going concern basis. However, these circumstances represent a material uncertainty that may cast significant doubt upon the company’s ability to continue as a going concern and, therefore to continue realising its assets and discharging its liabilities in the normal course of business. The financial statements do not include any adjustments that would result from the basis of preparation being inappropriate. dividends The directors do not recommend the payment of a dividend. political donations No political donations have been made during this financial year. strategic report This is set out on pages 10 to 26 of the Annual Report and includes an indication of likely future developments, and forms part of this Directors’ Report. research and development The Group undertakes a continuous programme of development expenditure. Development expenditure is capitalised only when the end product is technically and commercially feasible and when sufficient resource is available to complete the development, as disclosed in note 2.10 to the accounts. g o v e r n a n c e r e p o r t : director's report 47 directors auditor The Directors who held office during the year were: • Nikki Crumpton • Thomas Enraght-Moony • Abid Ismail (resigned 17 May 2019) • Tim Parfitt (appointed 17 June 2019) • Paul Pindar • James Sturrock Biographical details of the Directors are shown on pages 29 and 30. The interests of the directors and their closely associated persons in the share capital of the Company, along with details of directors’ share options and awards, are contained in the Directors’ Remuneration Report on pages 39 to 42. At no time during the year did any of the directors have a material interest in any significant contract with eve Sleep plc. The Company’s policy is for all of the Executive Directors to have twelve month rolling service contracts. All Non-Executive Directors are salaried and are appointed for an initial term of three years from Admission to AIM which took place on 18 May 2017. eve maintains directors’ and officers’ liability insurance which gives appropriate cover for any legal action brought against its directors. The Company has also provided an indemnity for its directors, which is a qualifying third-party indemnity provision, for the purposes of section 234 of the Companies Act 2006. This was in place throughout the year and up to the date of approval of the financial statements. articles of association eve Sleep’s Articles of Association can only be amended by special resolution and are available on our website at https://investor.evesleep.co.uk/corporate- governance#governance-docs pursuant to AIM Rule 26. Nexia Smith & Williamson was appointed as auditor in November 2019 and is willing to continue in office. In accordance with s489(4) of the Companies Act 2006 a resolution for their reappointment will be proposed at the forthcoming Annual General Meeting. share capital The issued share capital of the Company at 31 December 2019 was 263,444,823 ordinary shares of 0.1p pence. Full details of the issued share capital, together with the details of shares issued during the year to 31 December 2019, are shown in Note 16 to the Group financial statements. statement on disclosure of information to auditors The directors confirm that, so far as each is aware, there is no relevant audit information of which the Group’s auditors are unaware. Each of the directors has taken all the steps he should have taken as a director to make himself aware of any relevant audit information and to establish that the Group’s auditors are aware of that information. annual general meeting The Annual General Meeting of the Company will be held at 10am on Friday 29 May 2020 at finnCap offices, 60 New Broad St, London, EC2M 1JJ. The Notice of Meeting has been sent to shareholders along with this Annual Report. Approved and signed on behalf of the Board Paul Pindar Chairman 23 March 2020 48 independent auditor’s report to the members of eve Sleep plc 49 i n d e p e n d e n t a u d i t o r ’ s r e p o r t We are independent of the Group and Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. material uncertainty related to going concern We draw attention to note 2.4 of the financial statements which indicates there is a material uncertainty relating to the Group and Parent Company’s ability to continue as a going concern. The Group has reported an operating cash outflow of £9.3m for the year to 31 December 2019 with cash on hand as at that date of £8.0m. The directors have prepared a business plan and financial model including cashflow forecasts covering a period of more than 12 months from the date of approval of these financial statements. These forecasts indicate the Group will have sufficient funds to meet its liabilities as they fall due until such point that it achieves sustainable profitability and cash generation. However, the achievement of the projections is subject to uncertainties, which have been modelled through sensitivity analysis. Where sensitivity analysis indicates the possibility of a material impact to the ability of the group to meet its liabilities as they fall due, the Directors have considered what mitigating actions would be required and the timeframe within which these actions are needed. The uncertainties are such that potential mitigating actions may not be sufficient to mitigate all reasonably possible downsides in assumptions, hence further funding may be required. These conditions, along with the other matters explained in note 2.4, represent a material uncertainty that may cast significant doubt on the Group’s and the Parent Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter. opinion We have audited the financial statements of eve Sleep plc (the ‘Parent Company’) and its subsidiary (the ‘Group’) for the year ended 31 December 2019 which comprise the Consolidated Statement of Profit and Loss and Other Comprehensive Income, the Consolidated and Company Statements of Financial Position, the Consolidated and Company Statements of Changes in Equity, the Consolidated and Company Statements of Cash Flows, and the notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2019 and of the Group’s loss for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. 50 i n d e p e n d e n t a u d i t o r ’ s r e p o r t key audit matters In addition to the matter described in the material uncertainty related to going concern section, we have determined the matters described below to be the key audit matters to be communicated in our report. Key audit matters include the most significant assessed risks of material misstatement, including those risks that had the greatest effect on our overall audit strategy, the allocation of resources in the audit and the direction of the efforts of the audit team. In addressing these matters, we have performed the procedures below which were designed to address the matters in the context of the financial statements as a whole and in forming our opinion thereon. Consequently, we do not provide a separate opinion on these individual matters. revenue recognition – Group and Parent Company Description of risk Under International Standards on Auditing there is a rebuttable presumption that revenue recognition gives rise to a material risk of fraud, and given that eve Sleep has a potential incentive to overstate its revenue to respond to market pressure, we have not rebutted this presumption with respect to cut–off of revenue at the statement of financial position date. Specifically, we identified the risk that revenue transactions recorded in the year may not have been delivered to the customer before year end and therefore may have been recorded in the incorrect period. How the matter was addressed in the audit and key observations arising with respect to that risk We reviewed management’s revenue recognition policy and ensured revenue was being measured and recognised in accordance with IFRS 15. As part of our procedures we: • Substantively tested revenue by agreeing amounts recognised in the year through to invoice and payment. • Substantively tested that revenue is complete, through ensuring that all orders from the sales ordering systems which have been fulfilled in the year have been included in revenue. • Ensured revenue has been recognised in the correct period, through agreeing a sample of revenue entries from either side of the year-end to goods delivered notes, to ultimate end customer if applicable. • Checked the revenue recognition policy for compliance against IFRS 15, through reference to the five-step revenue recognition policy. This included identifying the contract with the customer for each revenue stream; identifying performance obligations; determining the transaction price; allocating the price to relevant performance obligations; and ensuring revenue is then recognised as the above performance obligations are met, being delivery to the ultimate end customer. 51 i n d e p e n d e n t a u d i t o r ’ s r e p o r t provision for returns – Group and Parent Company Description of risk • Reviewed post year-end evidence of actual returns to gain comfort over the completeness of the provision. The Group offers a 100-night trial on the eve mattress, giving customers the option to return the mattress within 100 days of purchase and receive a full refund. A material provision is therefore recorded based on the expected number of returns post year end. The level of expected returns is subject to estimation uncertainty. There is a risk that the provision could be materially misstated due to the high degree of estimation uncertainty. The financial statements (note 2.19) disclose the sensitivity estimated by the Group. How the matter was addressed in the audit and key observations arising with respect to that risk We reviewed management’s policy for estimating the returns provision. We challenged the assumptions and assertions made by management in their assessment and considered the completeness of the provision with reference to post year-end actual returns. As part of our procedures we: • Confirmed the estimate was recognised and measured in accordance with IAS 37. • Confirmed the methods were consistent with the prior year. • Corroborated management’s inputs and assertions where reasonably practicable, through agreement to supporting documentation. • Performed sensitivity analysis on the key assumptions used in the model. • Confirmed appropriate disclosures have been made in the accounts. materiality The materiality for the Group financial statements as a whole was set at £475,000. This has been determined with reference to the benchmark of the Group’s revenues, which we consider to be one of the principal considerations for members of the Parent Company in assessing the performance of the Group. Materiality represents 2% of the Group’s revenues as presented on the face of the Consolidated Statement of Profit and Loss and Other Comprehensive Income. The materiality for the Parent Company financial statements as a whole was set at £308,750. This has been determined with reference to the benchmark of the Parent Company’s revenues, which we consider to be one of the principal considerations for members of the Parent Company in assessing the performance of the Company. Materiality represents 2% of revenue. an overview of the scope of our audit The audit team performed the audit of the Group as if it was a single aggregated set of financial information, given the financial information of all components is included within one accounting system and is subject to the same processes and controls. The audit was performed using the materiality levels set out above. 52 i n d e p e n d e n t a u d i t o r ’ s r e p o r t other information The other information comprises the information included in the Annual Report, other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. opinion on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • the information given in the Chairman’s Statement, the Strategic Report and the Governance Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the Chairman’s Statement, Strategic Report and Governance Report have been pre- pared in accordance with applicable legal requirements. matters on which we are required to report by exception In the light of the knowledge and understanding of the Group and the Parent Company and their environment obtained in the course of the audit, we have not identified material misstatements in the chairman’s statement, strategic report or the governance report. We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. responsibilities of Directors As explained more fully in the Statement of Directors’ Responsibilities set out on page 42, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so. 53 i n d e p e n d e n t a u d i t o r ’ s r e p o r t auditor’s responsibilities for the audit of the financial statements use of our report Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/ auditorsresponsibilities. This description forms part of our auditor’s report. This report is made solely to the Parent Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Parent Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Parent Company and the Parent Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Sancho Simmonds Senior Statutory Auditor, for and on behalf of Nexia Smith & Williamson Statutory Auditor Chartered Accountants 25 Moorgate London EC2R 6AY 23 March 2020 54 consolidated statement of profit and loss and other comprehensive income for the year ended 31 December 2019 Revenue Cost of sales Gross profit Distribution expenses Administrative expenses Operating loss Net finance income Loss before tax Taxation Loss for the year Other comprehensive income Note 2019 £ 2018 £ 3 3 3 3 4 7 8 23,852,931 34,818,260 (11,176,905) (16,442,852) 12,676,026 18,375,408 (2,729,317) (4,056,075) (22,453,901) (34,663,758) (12,507,192) (20,344,425) 18,022 44,822 (12,489,170) (20,299,603) 352,240 193,192 (12,136,930) (20,106,411) Foreign currency differences from overseas operations 17,310 98,720 Total comprehensive loss for the year (12,119,620) (20,007,691) Basic and diluted loss per share 18 (4.92p) (14.46p) All results relate to continuing activities. Notes 1 to 26 form part of these financial statements. consolidated statement of financial position at 31 December 2019 55 Non-current assets Property, plant and equipment Intangible assets Current assets Inventories Trade and other receivables Cash and cash equivalents Current tax receivable Total assets Non-current liabilities Lease liabilities Current liabilities Trade and other payables Provisions Lease Liabilities Total liabilities Net assets Equity attributable to equity holders of the parent Share capital Share premium Share-based payment reserve Retained earnings Note 9 10 11 12 13 23 14 15 23 16 17 2019 £ 518,575 344,456 863,031 1,574,648 2,637,650 7,988,769 354,466 2018 £ - 669,742 669,742 1,127,876 4,626,750 6,031,936 193,192 12,555,533 11,979,754 13,418,564 12,649,496 40,000 40,000 3,983,174 768,965 470,391 - - 4,561,792 955,949 - 5,222,530 5,517,741 5,262,530 5,517,741 8,156,034 7,131,755 263,445 139,735 48,887,392 36,716,372 998,495 250,073 (42,109,328) (30,073,145) Foreign currency translation reserve 116,030 98,720 Total equity 8,156,034 7,131,755 Notes 1 to 26 form part of these financial statements. These financial statements were approved by the board of directors on eve Sleep plc and were signed on its behalf by: Tim Parfitt Director 23 March 2020 Company registered number: 09261636 56 consolidated statement of changes in equity for the year ended 31 December 2019 Share Capital £ Share Premium £ Share-based reserve £ Retained Earnings £ Foreign currency translation reserve £ Total Equity £ For the year ended 31 December 2019 Balance at 1 January 2019 139,735 36,716,372 250,073 (30,073,145) 98,720 7,131,755 Issue of shares 120,317 11,911,415 Exercise of employee share options Share-based payment charge Transfer on exercise of employee share options Transfer on issue of equity for marketing services 770 - - - - - - - 1,111,396 - - - (100,747) 100,747 2,623 259,605 (262,228) - Total transactions with owners 123,710 12,171,020 748,421 100,747 - - - - - - - 12,031,732 770 1,111,396 - - 13,143,898 (12,136,930) Loss for the year Other comprehensive income for the year - - - - - - (12,136,930) - 17,310 17,310 Balance at 31 December 2019 263,445 48,887,392 998,495 (42,109,328) 116,030 8,156,034 For the year ended 31 December 2018 Balance at 1 January 2018 138,631 36,716,372 138,794 (10,158,736) Exercise of options Share-based payment charge Transfer on exercise of options 1,104 - - Total transactions with owners 1,104 Loss for the year Other comprehensive income for the year - - - - - - - - - 303,281 - - (192,002) 192,002 111,279 192,002 (20,106,411) - - - 98,720 98,720 - - - - - - 26,835,061 1,104 303,281 - 304,385 (20,106,411) Balance at 31 December 2018 139,735 36,716,372 250,073 (30,073,145) 98,720 7,131,755 consolidated statement of cash flows for the year ended 31 December 2019 57 Cash flows from operating activities Loss for the year Adjustments for: Depreciation Amortisation Impairment Interest payable (Increase)/decrease in inventories (Increase)/decrease in trade and other receivables Increase/(decrease) in trade and other payables Increase/(decrease) in provisions Share-based payment charge Note 2019 £ 2018 £ (12,136,930) (20,106,411) 198,048 263,046 594,724 9,144 (446,772) 1,827,827 (578,619) (186,984) 1,111,396 - 120,571 39,608 - (436,536) (642,885) 13,773 129,247 303,281 Net cash outflow from operating activities (9,345,120) (20,579,352) Cash flows from investing activities Additions to property, plant and equipment Additions to intangible assets Right of use asset initial direct costs - (532,484) (15,375) (3,150) (411,775) - Net cash outflows from investing activities (547,859) (414,925) Cash flows from financing activities Proceeds from issue of share capital 12,032,502 Repayment of capital element of finance lease rentals 24 (200,000) Net cash inflows from financing activities 11,832,502 1,104 - 1,104 Net cash inflow/(outflow) 1,939,523 (20,993,173) Cash at beginning of year Movement in cash Effect of exchange rate fluctuations on cash held Cash at end of year 6,031,936 26,926,389 1,939,523 17,310 (20,993,173) 98,720 7,988,769 6,031,936 58 notes to the financial statements forming part of the the financial statements 1. Reporting entity eve sleep PLC (the “Company”) is a public company, domiciled and registered in England in the UK. eve sleep PLC is a company limited by shares. The registered number is 09261636 and the registered address at 31st December 2019 was 29A Kentish Town Road, London, England, NW1 8NL effective from 5th August 2019. Prior to that date, the registered address of the Company was 128 Albert Street, London, England, NW1 7NE. 2. 2.1 Accounting policies Basis of preparation The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the “Group”). The Group financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU (“Adopted IFRSs”). The Company has elected to prepare its parent company financial statements in accordance with adopted IFRS, these are presented on pages 81 to 92. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these Group financial statements. Judgements made by the directors, in the application of these accounting policies that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 2.19. 2.2 Changes in accounting policy (a) New and amended Standards and Interpretations adopted by the Group and Company. In these financial statements, the Group has changed its accounting policies in the following areas: • Lease recognition The Group has adopted the following IFRSs in these financial statements: • IFRS 16 Leases (see note 23) The Company has considered the change in accounting policy associated with the application of IFRS 16. The Company’s lease of 128 Albert Street, London, NW1 7NE terminated in line with the agreed upon lease term on 17 August 2019 and therefore the Company has taken advantage of the short-term lease exemption for lease assets and lease liabilities where a lease term ends within 12 months of the date of initial application of IFRS 16. Thus the presentation of this lease as an operating lease for the twelve months ending 31 December 2019 remains consistent with previous periods under IAS 17. On 1 August 2019 the Company commenced a 24-month lease of 29A Kentish Town Road, London, NW1 8NL. The Company has recognised a lease asset and lease liability in relation to this lease from the inception of the lease. (b) New and amended Standards and Interpretations mandatory for the first time for the financial year beginning 1 January 2019 but not currently relevant to the Group or Company The following new and amended Standards and Interpretations are not currently relevant to the Group or Company; however, they may have a significant impact in future years: • IFRIC 23 “Uncertainty over Income Tax Treatments” • Amendment to IFRS 9: “Prepayment Features with Negative Compensation” • Amendment to IAS 28: “Investments in Associates and Joint Ventures” • Amendment to IAS 19: “Employee Benefits” • Amendments to IFRS 3, IFRS 11, IAS 12 and IAS 23 in “Annual Improvements 2015-2017 cycle” (c) New and amended Standards and Interpretations issued but not effective for the financial year beginning 1 January 2019 Amendments have been made to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors in relation to the definition of material. The new definition will apply for the first time in the next financial year. The amendments clarify the definition of what is material to the financial statements and how to apply the definition. The amendments will have an impact on the presentation and disclosure in the financial statements. After applying the new definition, the financial statement may have less disclosures as it may be easier to justify that certain disclosures are immaterial to users of financial statements. Furthermore, more meaningful disclosures may be presented in a more prominent manner due to the additional guidance on the effects of obscuring information. notes to the financial statements continued 59 2.3 Measurement convention The financial statements are prepared under the historical cost convention. 2.4 Going concern The financial statements are prepared on a going concern basis notwithstanding that the Group is still generating losses. The Group has reported an operating loss of £12.5m (2018: (£20.3m) loss) with an operating cash outflow of £9.3m (2018: £20.6m). The closing cash balance at 31 December 2019 was £8.0m (2018: £6.0m). The directors have prepared a business plan and financial model including cashflow forecasts covering a period of more than 12 months from the date of approval of these financial statements. The business plan makes the following key assumptions: • Economies in product and logistics costs; • Marketing efficiency within DTC is enhanced as a result of greater brand awareness and the focus on more profitable perfor- mance marketing activities leading to a significant improvement in profit/loss after distribution expenses, payment fees and marketing costs. Marketing spend is presented within administrative expenses in the financial statements; • The full-year benefit of savings made to overheads in 2019 generating a significant reduction in annual fixed costs; • Improvement in the slow-moving stock levels alongside optimised demand planning. These forecasts in the base case indicate that the group will have sufficient funds to meet its liabilities as they fall due until such point that it achieves sustainable profitability and cash generation. However, the delivery of the strategic plan is subject to uncertainty and these have been modelled through sensitivity analysis. Where sensitivity analysis indicates the possibility of a material impact to the ability of the group to meet liabilities as they fall due, the directors have considered what mitigating actions would be required and the timeframe within which those actions are needed. The key mitigating factors are centred around further reductions in controllable spend, including further marketing cost appraisal and reductions in other categories of discretionary spend. The directors also consider that it would be reasonable to target working capital improvements such as reducing stock days through lower stock levels and reducing debtor days through facilities such as debt factoring as the group does not presently have any debt (excluding the lease liability arising under IFRS 16). Uncertainties are such that potential mitigating actions, which would be over and above the current strategic plan, may not be sufficient to mitigate all reasonably possible downsides in assumptions. The impact of COVID-19 virus is one such uncertainty which management are assessing and managing the impact of on the business (further detail on this is provided on page 26). In such downsides the Directors would need further funding and would consider ways of sourcing this, which could include debt or possible further equity funding. The Directors consider that such scenarios are possible, but not the likely outcome. Based on the above, the directors believe it remains appropriate to prepare the financial statements on a going concern basis. However, these circumstances represent a material uncertainty that may cast significant doubt upon the company’s ability to continue as a going concern and, therefore to continue realising its assets and discharging its liabilities in the normal course of business. The financial statements do not include any adjustments that would result from the basis of preparation being inappropriate. 2.5 Presentational currency The Group financial statements are presented in Sterling. 2.6 Basis of consolidation Subsidaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the Group takes into consideration potential voting rights. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated. Unrealised gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. 60 notes to the financial statements continued 2.7 Foreign currency Transactions in foreign currencies are translated to the respective functional currencies of Group entities at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the statement of financial position date are retranslated to the functional currency at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the statement of profit and loss. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are retranslated to the functional currency at foreign exchange rates ruling at the dates the fair value was determined. The assets and liabilities of foreign operations are translated to the Group’s presentational currency, Sterling, at foreign exchange rates ruling at the statement of financial position date. The revenues and expenses of foreign operations are translated at an average rate for the year where this rate approximates to the foreign exchange rates ruling at the dates of the transactions. Exchange differences arising from this translation of foreign operations are reported as an item of other comprehensive income and accumulated in the foreign currency translation reserve (FCTR). 2.8 Classification of financial instruments issued by the Group This note provides information about the group’s financial instruments, including: • an overview of all financial instruments held by the group • specific information about each type of financial instrument • accounting policies • information about determining the fair value of the instruments, including judgements and estimation uncertainty involved. The group holds the following financial assets: Financial Financial asset Note Classification rationale instrument type Financial assets held at Trade receivables 12 Trade receivables are amounts due from customers for amortised cost goods sold or services performed in the ordinary course of business. They are generally due for settlement within 60 days and are therefore all classified as current. Trade receivables are recognised initially at the amount of consideration that is unconditional. The group holds the trade receivables with the objective of collecting the contractual cash flows and therefore measures them subsequently at amortised cost using the effective interest method. Details about the group’s impairment policies and the calculation of the loss allowance are provided in note 12. Other receivables Other current assets 12 12 These receivables relate to items that cannot be classified as trade receivables including VAT receivables, rent deposits, accrued income and volume rebate receivables. Current tax receivable N/A Collateral is not normally obtained and although interest may be charged or is automatically due where the terms of repayment exceed six months, this is not normally effected. Cash and cash equivalents 13 Cash comprises cash balances and call deposits (financial assets held with electronic money providers) whilst cash equivalents comprise term deposits. Term deposits are presented as cash equivalents if they have a maturity of three months or less from the date of acquisition and are repayable with 24 hours’ notice with no loss of interest. 2.9 Non-derivative financial instruments 2.8 Classification of financial instruments issued by the Group notes to the financial statements continued 61 2.8 Classification of financial instruments issued by the Group (continued) The group holds the following financial liabilities: Financial Financial asset Note Classification rationale instrument type Liabilities at amortised Trade payables cost Non-trade payables and accrued expenses 14 14 These payables are unsecured and are usually paid within 30 days of recognition. The carrying amounts of these payables are considered to be the same as their fair values, due to their short-term Taxes and social security 14 nature. payables Lease liabilities 23 Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: • fixed payments (including in-substance fixed pay- ments), less any lease incentives receivable • variable lease payment that are based on an index or a rate, initially measured using the index or rate as at the commencement date • amounts expected to be payable by the group under residual value guarantees • the exercise price of a purchase option if the group is reasonably certain to exercise that option, and • payments of penalties for terminating the lease, if the lease term reflects the group exercising that option. Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability. 2.9 Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Depreciation is charged to the statement of profit and loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. The estimated useful lives are as follows: Right of use asset 3 years Depreciation methods, useful lives and residual values are reviewed at each statement of financial position date. 2.10 Intangible assets The costs of acquiring and developing software that is not integral to its related hardware is capitalised separately as an intangible asset. Capitalised software costs include external direct costs of material and services and payroll related costs for employees who are directly associated with the project. Capitalised software development costs are stated at historic cost less accumulated amortisation. Amortisation is calculated on a straight-line basis over the assets’ expected economic lives, normally three years, and applied starting in the financial year after capitalisation. Amortisation and impairment charges are recognised within administrative expenses on the face of the statement of profit and loss. Software under development is held at cost less any recognised impairment loss. Expenditure on development activity is capitalised if the product or process is technically and commercially feasible, and if the Group intends to, and has the technical ability and sufficient resources to complete development, future economic benefits are probable, and if the Group can measure reliably the expenditure attributable to the intangible asset during its development. Development activities involve a plan or design for the production of new or substantially improved products or processes. Where no intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred. Expenditure on research activities is recognised as an expense in the period in which it is incurred. The estimated useful lives are as follows: Development Costs 3 years Amortisation methods, useful lives and residual values are reviewed at each statement of financial position date. 62 notes to the financial statements continued 2.11 Inventories Inventories are stated at the lower of cost and net realisable value. Cost is based on the weighted average principle and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs in bringing them to their existing location and condition. A provision is also made to write down any slow-moving or obsolete inventory to net realisable value. 2.12 Investments Investments in subsidiary companies are stated at cost and are subject to review for impairment indicators if identified. 2.13 Impairment excluding inventories The Group recognises loss allowances for expected credit losses (ECLs) on financial assets measured at amortised cost (as defined in IFRS 9). Loss allowances for all financial assets are always measured at an amount equal to lifetime ECL. 2.14 Provisions A provision is recognised in the statement of financial position when the Group has a present legal or constructive obligation as a result of a past event, that can be reliably measured and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects risks specific to the liability. 2.15 Revenue Revenue and profit before tax are attributable to the one principal activity of the business. Revenue represents the net sales of goods including freight, excluding value added tax. Revenue from the sale of goods is recognised when the Group has transferred the goods to the buyer, less appropriate deduction for actual and expected returns and relevant discounts. As required under IFRS 15, a disaggregation of revenue in respect of primary geographical markets is shown in the Group’s Segmental analysis (note 3) and significant distribution channels set out below: Direct to consumer revenue Multi-channel revenue 2019 £ 17,382,370 6,470,562 23,852,931 2018 £ 26,996,512 7,821,748 34,818,260 Whilst direct to consumer revenues represent sales placed and fulfilled via the Group’s own websites, multi-channel revenues represent wholesale sales to third-party partners of the Group who ultimately sell the product on to their own end customers. 2.16 Expenses Operating lease payments In line with the short-term lease exemption under IFRS 16, payments relating to the short-term lease of the former registered office of the Group at 128 Albert Street have been recognised in the statement of profit and loss on a straight-line basis over the remaining term of the lease. Financing income and expenses Financing expenses comprises interest payable related to lease liabilities and the unwinding of the discount on provisions. Financing income comprises interest earned on cash equivalents. Interest income and interest payable is recognised in profit or loss as it accrues, using the effective interest method. Foreign currency gains and losses are reported on a net basis. 2.17 Employee benefits Defined contribution plans The company operates a defined contribution plan. A defined contribution plan is a post-employment benefit plan under which the company pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognised as an expense in the statement of profit and loss in the periods during which services are rendered by employees. Share–based payment transactions Share-based payment arrangements in which the Group receives goods or services as consideration for its own equity instruments are accounted for as equity-settled share-based payment transactions, regardless of how the equity instruments are obtained by the Group. notes to the financial statements continued 63 2.17 Employee benefits (continued) The grant date fair value of share-based payments awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period in which the employees become unconditionally entitled to the awards. The fair value of the options granted is measured using an option valuation model, taking into account the terms and conditions upon which the awards were granted. The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with market and non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. Share–based payments reserve This comprises the cumulative share-based payment charge recognised in the statement of profit and loss in relation to equity-settled options and share rights issued but not yet exercised. 2.18 Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the statement of profit and loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the statement of financial position date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the statement of financial position date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised. 2.19 Significant estimates and judgements The preparation of financial statements in conformity with IFRS as adopted by the EU requires management to make judgements, estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. The estimates and assumptions are based on historical experience and various other factors believed to be reasonable under the circumstances. Actual results could differ from these estimates and any subsequent changes are accounted for when such information becomes available. The judgements, estimates and assumptions that are the most subjective or complex are as follows: Accounting estimates Slow-moving inventory provision (note 11) Inventory is carried at the lower of cost or net realisable value. The estimation of net realisable value may be different from the future actual value realised. The provision for slow-moving inventory is based upon an analysis of forecast inventory turnover. Management calculates the best estimate of the subsequent volumes of inventory held at year-end forecast to be sold in a period greater than twelve months from the statement of financial position date. In reference to this inventory population a slow-moving stock provision is calculated. Following sensitivity analysis, management have concluded that the estimate is not materially sensitive to variance of the input estimates and is therefore not a key estimate in the accounts. Refunds provision (note 15) The Group recognises a provision for the probable financial liability to refund customers for returned products. Provisions are calculated in reference to historical return rates. This estimate is therefore sensitive to management’s estimate of expected customer refunds in subsequent periods. Upon sensitivity analysis management have concluded that the estimate is not materially sensitive to variance of the input estimates and is therefore not a key estimate in the accounts. Warranty provision (note 15) The Group recognises a provision for the probable financial liability to customers in respect of warranty claims. The provision is calculated in reference to historical rates of successful manufacturer warranty claims. In the application of IFRS 15, management do not consider the provision of a warranty to customers to be a separate performance obligation. Following sensitivity analysis, management have concluded that the estimate is not materially sensitive to variance of the input estimates and is therefore not a key estimate in the accounts. In addition, based on the current level of warranty claims experienced across the Group, there is no evidence to suggest that current inputs would lead to a material misstatement. 64 notes to the financial statements continued 2.19 Significant estimates and judgements (continued) Accounting judgements Intangible assets (note 10) Development expenditure is recognised on the statement of financial position when certain criteria are met, as described more fully in the accounting policy on the treatment of research and development expenditure. Management uses its judgement in assessing development against the criteria. After capitalisation, management monitors whether the recognition requirements continue to be met and whether there are any indicators that the asset may be impaired, as discussed above. notes to the financial statements continued 65 3 Segmental analysis IFRS 8, “Operating Segments”, requires operating segments to be determined based on the Group’s internal reporting to the Chief Operating Decision Maker (the Board). The Chief Operating Decision Maker has been determined to be the Board and the primary segmental reporting format of the Group is geographical by customer location, based on the Group’s management and internal reporting structure. The Board assesses the performance of each segment based on revenue, gross profit and profit after distribution expenses, payment fees and marketing expenses. Payment fees and marketing expenses are presented within administrative expenses on the statement of profit and loss and other comprehensive income. UK&I France Rest of Europe Rest of the World Total For the year ended 31 December 2019 Revenue Cost of Sales Gross profit 18,548,073 5,345,076 (45,141) 4,923 23,852,931 (8,385,865) (2,751,453) - (39,587) (11,176,905) 10,162,208 2,593,623 (45,141) (34,664) 12,676,026 Distribution expenses (1,809,692) (1,014,774) 94,185 Payment Fees (352,702) (90,180) Marketing expenses (9,703,321) (2,357,403) 5,418 6,346 964 245 - (2,729,317) (437,219) (12,054,377) Segment results (1,703,507) (868,734) 60,808 (33,454) (2,544,887) Administration expenses (excluding payment fees and marketing expenses) Net finance income Taxation Loss for the year (9,962,305) 18,022 352,240 (12,136,930) UK&I France Rest of Europe Rest of the World Total For the year ended 31 December 2018 Revenue Cost of Sales Gross profit 22,520,896 6,833,520 4,744,696 719,148 34,818,260 (10,703,472) (3,174,414) (2,197,303) (367,663) (16,442,852) 11,817,424 3,659,106 2,547,393 351,485 18,375,408 Distribution expenses (1,697,775) (1,204,140) (1,079,010) (75,150) (4,056,075) Payment fees (403,616) (137,270) (166,366) (29,206) (736,458) Marketing expenses (12,178,634) (5,662,664) (4,200,150) (126,294) (22,167,742) Segment results (2,462,601) (3,344,968) (2,898,133) 120,835 (8,584,867) Administration expenses (excluding payment fees and marketing expenses) Net finance income Taxation Loss for the year (11,759,558) 44,822 193,192 (20,106,411) No analysis of the assets and liabilities of each operating segment is provided to the Chief Operating Decision Maker in the monthly management accounts. Therefore no measure of segmental assets or liabilities is disclosed in this note. Due to the nature of its activities the Group is not reliant on any major customers. 66 notes to the financial statements continued 4 Expenses and auditor’s remuneration Included in profit/loss are the following: Auditors remuneration: Audit of these financial statements Audit of these financial statements 70,000 75,000 Amounts received by auditor’s and their associates in respect of: 2019 £ 2018 £ Tax advisory services Tax compliance services Other items Depreciation of property, plant and equipment Amortisation of intangible assets Impairment Cost of inventory write offs (note 11) Lease expenditure (note 2.16) Staff and country exit costs - - 198,048 263,046 594,724 361,583 424,266 - 61,050 236,502 - 120,571 39,608 70,632 767,480 752,261 In 2018, the Group’s external auditor was KPMG LLP and during the financial year ended 31 December 2018 KPMG LLP were additionally engaged in providing tax advisory and tax compliance services to the Group. In 2019, the Group retendered the external audit and appointed Nexia Smith & Williamson whose fees are shown in the table above; Nexia Smith & Williamson did not provide any professional services to the Group outside the audit of these financial statements. 5 Staff numbers and cost The average number of persons employed by the Group (including directors) during the year, analysed by category, was as follows: Finance Marketing Operations Total 2019 7 17 58 82 2018 6 23 82 111 notes to the financial statements continued 67 5 Staff numbers and cost (continued) The aggregate payroll costs of these persons were as follows: Wages and salaries Social security costs Share-based payment charge (note 17) Employer pension contributions 2019 £ 2018 £ 3,838,096 4,851,555 452,443 534,315 66,999 526,054 303,281 48,664 Total 4,891,853 5,729,554 6 Remuneration of key management personnel and Directors The aggregate compensation to the Directors of eve Sleep PLC (Executive and Non-Executive) who were the key management personnel was as follows: Salaries or fees Employer pension contributions Employer’s national insurance Share-based payment charge Compensation for loss of office Total 2019 £ 424,389 2,824 52,746 124,804 31,788 636,551 2018 £ 368,423 1,447 65,688 36,553 150,000 622,111 Directors’ aggregate emoluments and pension payments are detailed in the Directors’ Remuneration Report on pages 41, along with directors’ interests in issued shares and share options on page 42, which form part of these audited financial statements. The gain on exercise of share options in respect of directors for the year was £nil (2018: £nil). Directors of the Company and their immediate relatives control 6.38% per cent of the voting shares of the Company. 7 Net finance income Finance income receivable on cash and cash equivalents is recognised in the statement of profit and loss as it is earned. Interest receivable on cash and cash equivalents Interest expense on lease liabilities Total 2019 £ 27,165 (9,143) 18,022 2018 £ 44,822 - 44,822 68 notes to the financial statements continued 8 Taxation Recognised in the statement of profit and loss: Current tax expense Research and development tax credit for the prior year Total current tax Reconciliation of effective tax rate: Loss for the year Total tax credit 2019 £ 352,240 352,240 2018 £ 193,192 193,192 2019 £ 2018 £ (12,136,930) (20,106,411) 352,240 193,192 Loss excluding taxation (12,489,169) (20,299,603) Tax using the UK corporation tax rate of 19% (2018: 19%) (2,372,942) (3,856,925) Effects of: Expenses not deductible for tax purposes Fundraise-related expenditure Depreciation, amortisation and impairment Share-based payment charges Research and development tax credit for the prior year Current year losses for which no deferred tax asset was recognised Total Tax credit/(expense) 10,242 46,440 200,605 101,520 352,240 2,014,135 352,240 16,333 - 30,434 57,623 193,192 3,752,534 193,192 The Group has accumulated tax losses available for offset against future profits of £58,552,569 (2018: £46,415,639). A deferred tax asset has not been recognised in respect of these losses as there is uncertainty regarding the timing of when these losses will be recovered. The UK corporation tax rate is consistent year on year at 19%. Reductions in the UK corporation tax rate from 20% (effective from 1 April 2017) to 18% (effective 1 April 2020) were substantively enacted on 26 October 2015, and an additional reduction to 17% (effective 1 April 2020) was substantively enacted on 6 September 2016. This will reduce the Group’s future tax charge accordingly. notes to the financial statements continued 69 9 Property, plant and equipment Right of use asset £ Plant and equipment £ Fixtures and fittings £ Total £ Cost Balance at 1 January 2018 Additions Balance at 31 December 2018 Additions Balance at 31 December 2019 Depreciation and Impairment Balance at 1 January 2018 Depreciation charge for the year Impairment charge for the year Balance at 31 December 2018 - - - 716,623 716,623 - - - - Depreciation charge for the year 198,048 Impairment charge for the year - 7,326 3,150 10,476 - 10,476 7,326 - 3,150 10,476 - - 39,724 - 39,724 - 39,724 3,266 - 36,458 39,724 - - 47,050 3,150 50,200 716,623 766,823 10,592 - 39,608 50,200 198,048 - Balance at 31 December 2019 198,048 10,476 39,724 248,248 Net Book Value At 31 December 2018 At 31 December 2019 10 Intangible assets Cost Balance at 1 January 2018 Additions - internally generated Additions - externally generated Transfers Balance at 31 December 2018 Additions - internally generated Additions - externally generated Transfers Balance at 31 December 2019 Amortisation and Impairment Balance at 1 January 2018 Amortisation for the year Impairment for the year Balance at 31 December 2018 Amortisation for the year Impairment for the year Balance at 31 December 2019 Net Book Value At 31 December 2018 At 31 December 2019 - 518,575 - - - - - 518,575 Development costs £ Assets under construction £ Total £ 282,940 - - 105,030 387,970 - - 747,553 1,135,523 - 120,571 - 120,571 263,046 526,954 910,571 267,399 224,952 95,598 168,833 242,942 (105,030) 402,343 310,573 221,912 (747,553) 187,274 - - - - - 67,770 67,770 402,343 119,504 378,538 168,833 242,942 - 790,313 310,573 221,912 - 1,322,797 - 120,571 - 120,571 263,046 594,724 978,341 669,742 344,456 70 notes to the financial statements continued 10 Intangible assets (continued) Development costs relate to internal and external costs incurred in respect of the infrastructure of the website platform and ERP system; the impairment charge in the period relates wholly to capitalised website platform costs. Assets under construction at 31 December 2019 relate to internal costs incurred for the development of ERP software for internal use where the asset is expected to go live in 2020. The carrying value of intangible assets has been reviewed by management at the year-end date for potential impairment and an impairment charge recognised totalling £594,724 (2018: £nil) relating to capitalised website platform costs following the decision to transition to a new front-end platform to support the Group’s DTC websites. 11 Inventories Finished goods 2019 £ 2018 £ 1,574,648 1,127,876 There was no write-down of inventories to net realisable value in the year (2018: £nil). Included within inventories is £401,998 expected to be recovered in more than 12 months from the statement of financial position date. This balance of inventory is fully provided for within the Group’s slow-moving inventory provision of £401,998 (2018: £551,580). Inventory days were 51 days in 2019 (2018: 25 days). Finished goods recognised in cost of sales in the year amounted to £11,176,905 (2018: £16,358,170). 12 Trade and other receivables Trade receivables Other receivables Prepayments Other current assets 2019 £ 676,537 447,051 784,083 729,979 2018 £ 1,815,260 1,124,112 1,320,555 366,823 2,637,650 4,626,750 The average credit period offered on sales of goods during 2019 was 32 days (2018: 27 days). The average days sales outstanding (‘‘DSO’’) in 2019 was 38 days (2018: 82 days). At 31 December 2019, trade receivables at a nominal value of £3,481 (2018: £35,681) were impaired and fully provided for. All trade and other receivables are short-term. The directors consider that the carrying amount of trade receivables approximates to their fair value. All trade and other receivables have been reviewed for indications of impairment. Trade receivables represent amounts due from wholesale and retail customers. The Group has not charged interest for late payment of invoices in the current year or prior period. Allowances against doubtful debts are estimated by reference to expected credit losses based on the probability of default (using past default experience with that customer and alongside analysis of the counterparty’s current financial position where specific credit risk is known), risk exposure (being the value of receivables outstanding with that customer) and finally a percentage representative of the loss due to default. Before accepting any significant new customer, the Group uses a variety of credit scoring systems to assess the potential customer’s credit quality and to define credit limits for each customer. Limits and scoring attributed to customers are reviewed regularly. Four major retail customers each accounted for more than 10% of the total balance of trade receivables on 31 December 2019, an increase from 2018 where three major retail customers each accounted for more than 10% of the total balance of trade receivables on 31 December 2018. Not overdue Overdue between 0-30 days Overdue between 31-60 days Overdue between 61-90 days Overdue over 90 days 2019 £ 277,934 21,493 245,198 131,912 - 2018 £ 1,177,698 382,274 56,070 73,634 125,584 676,537 1,815,260 notes to the financial statements continued 71 12 Trade and other receivables (continued) In determining the recoverability of a trade receivable the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the relevant year-end. Aside from the major retail customers accounting for the year- end trade receivable balance mentioned above, the concentration of credit risk is limited due to the customer base being large and diverse. 13 Cash and cash equivalents Cash and cash equivalents 7,988,769 6,031,936 2019 £ 2018 £ At 31 December 2019, the Group had an available £3,250,000 credit card facility. 14 Trade and other payables Trade payables Non–trade payables and accrued expenses Deferred revenue Taxes and social security payable 2019 £ 2,430,596 649,995 573,082 329,501 2018 £ 1,794,802 1,691,425 538,447 537,118 3,983,174 4,561,792 All trade and other payables are short-term. The directors consider that the carrying amount of trade and other payables approximates to their fair value. Deferred revenue represents contractual liabilities to deliver goods to customers where consideration has been received prior to the year-end date. The opening balance of deferred revenue was fully recognised during the 2019 financial year. 15 Provisions Balance at 1 January 2018 Refunds £ 826,702 Warranty £ - Total £ 826,702 Provisions made during the year 11,647,815 163,832 11,811,647 Provisions used during the year (11,620,290) Prior year under/(over) provision recognised in year Balance at 31 December 2018 Provisions made during the year Provisions used during the year Prior year under/(over) provision recognised in year Balance at 31 December 2019 (62,110) 792,117 7,869,078 (8,116,237) 22,728 567,686 - - 163,832 73,574 (36,127) - 201,279 (11,620,290) (62,110) 955,949 7,942,652 (8,152,364) 22,728 768,965 A refund provision is required as the Group provides certain products to customers under a 100-day trial period. During this period the customer is entitled to return goods for a full refund. The provision is calculated by reference to the rate of returns experienced by the Group in preceding periods and the level of sales subject to the relevant trial periods of each product at the year end. An analysis of the rate of return over historical periods does not indicate a significant variation in the rate of refunds provided to customers and accordingly, whilst there is a degree of estimation in the calculation of this provision, any reasonable sensitivity analysis in the rate applied to sales at the year-end would not result in a material impact (as considered in note 2.19). 72 notes to the financial statements continued 15 Provisions (continued) A warranty provision is required as the Group provides certain products to customers with a 10-year warranty period. During this period the customer is entitled to claim under warranty a replacement product. The provision is calculated by reference to the rate of successful claims experienced by the Group in preceding periods and applying a projected distribution of the claims across the 10-year warranty period. Whilst there is a degree of estimation in the calculation of this provision, any reasonable sensitivity analysis in the rate applied to claims at the year-end would not result in a material impact (as considered in note 2.19). 16 Share capital Allotted, issued and fully paid: Number Nominal Value £ 31 December 2019 £ 31 December 2018 £ Ordinary Shares 263,444,823 £0.001 Total 263,445 263,445 139,735 139,735 The table below summarises the movements in number of shares at the beginning and end of the period: Ordinary Shares Share capital 31 December 2018 139,735,161 Nominal Value £ Value of Share Capital £ Summary of Movements £0.001 £139,735 Issue of shares 122,939,599 Exercise of share options over ordinary shares 770,063 Share capital 31 December 2019 263,444,823 Nominal Value £ Value of Share capital £ £0.001 £263,445 The holders of Ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. During 2019, 122,939,599 shares were issued and 770,063 share options were exercised bringing the total share capital of the Company to 263,444,823 at 31 December 2019. 17 Share–based payments The Group recognised a charge of £1.1m (2018: £0.3m) related to share-based payments during the year to 31 December 2019, all of which relates to equity-settled schemes and are presented within administrative expenses. The charge is made up of two components: share-based payment charges connected with employee remuneration totalling £0.5m and, share-based payment charges relating to the equity settlement of liabilities due to Channel 4 totalling £0.6m, of which £0.3m were satisfied with the issue of share capital during the period. At 31 December 2019, the Group benefits from £0.3m in available marketing credits with Channel 4 for future marketing expenditure. The Company issues equity-settled share-based payments to certain employees, whereby employees render services in exchange for shares or rights over shares of the parent company. Equity-settled awards are measured at fair value at the date of grant. The fair value is calculated using an appropriate option pricing model and is expensed to the consolidated statement of profit and loss on a straight-line basis over the vesting period after allowing for an estimate of shares that will ultimately vest. notes to the financial statements continued 73 17 Share-based payments (continued) The Company operates an HMRC approved executive management incentive plan (EMI). The vesting conditions are based on length of service with typically 25% of the options vesting on or after the 12-month anniversary of the employee’s start after which vesting occurs in equal monthly tranches so that options vest in full on the 48-month anniversary of the employee’s start date. All options are equity settled. The terms and conditions of the grants are as follows: Grant Date Number of Contracts Number of Options Exercise Price Performance Conditions Expiry Date 16/01/2017 16/01/2017 23/01/2017 25/01/2017 20/02/2017 10/04/2017 12/05/2017 01/04/2019 23/05/2019 17/12/2019 13 3 3 22 1 1 18 15 1 4 14,017,897 £0.001 Length of service 16/01/2027 4,653,841 56,626 1,289,236 18,825 251,000 2,222,731 7,004,814 4,400,000 6,850,000 £0.001 £0.001 £0.001 £0.001 £0.001 £1.012 £0.001 £0.001 £0.001 Performance Based 16/01/2027 Length of service Length of service Length of service Length of service Length of service Length of service 23/01/2027 25/01/2027 20/02/2027 10/04/2027 12/05/2027 01/04/2029 Length of service 23/05/2029 Length of service 17/12/2029 The Company operates an unapproved executive incentive plan. The vesting conditions for grants made on 12 May 2017 and during 2018 are based on length of service with 100% of the options vesting on 36-month anniversary of the employee’s start date. The remaining options have vesting conditions based on length of service with typically 25% of the options vesting on or after the 12-month anniversary of the employee’s start date after which vesting occurs in equal monthly tranches so that options vest in full on the 48-month anniversary of the employee’s start date. All options are equity settled. The terms and conditions of the grants are as follows: Grant Date Number of Contracts Number of Options Exercise Price Performance Conditions Expiry Date 13/07/2015 01/01/2016 01/02/2016 26/01/2016 12/05/2017 12/10/2017 20/10/2017 16/01/2018 17/01/2018 02/02/2018 05/02/2018 11/02/2018 01/04/2019 1 1 1 1 6 1 1 1 1 1 1 1 2 132,905 49,447 224,269 12,550 991,798 23,939 23,833 20,000 100,000 15,000 87,500 20,000 £0.001 £0.001 £0.001 £0.001 £1.012 £0.001 £0.001 £1.01 £1.01 £1.01 £1.01 £1.01 Length of service Length of service Length of service Length of service Length of service Length of service Length of service Length of service Length of service Length of service Length of service Length of service 531,600 £0.001 Length of service 13/07/2025 01/01/2026 01/02/2026 26/01/2026 12/05/2027 12/10/2027 20/10/2027 16/01/2028 17/01/2028 02/02/2028 05/02/2028 11/02/2028 01/04/2029 74 notes to the financial statements continued 17 Share-based payments (continued) The number and weighted average exercise prices of share options are as follows: Outstanding at beginning of year Granted during the year Forfeited during the year Exercised during the year Lapsed during the year Cancelled during the year Outstanding at the end of the year Exercisable at the end of the year Weighted Average Exercise Price £ Number of Options £0.613 £0.001 £0.179 £0.001 £0.001 £1.012 £0.001 £0.001 3,203,153 18,786,413 (2,531,217) (770,063) (165,687) (1,491,686) 17,030,913 3,166,892 All options exercised during the year were options over Ordinary shares. The weighted average share price at the date of exercise of share options exercised during the year was 6.37p (2018: 80.03p.) The options outstanding at the end of the year have an exercise price in the range of £0.001 and a weighted average contractual life of 10 years. The fair value of employee share options is measured using a Black-Scholes model. Measurement inputs and assumptions for those share options granted during 2019 are as follows: Share class Fair Value Award 01/04/19 £ Award 23/05/19 £ Award 17/12/19 £ Ord £0.07 Ord £0.06 Ord £0.02 Exercise Price £0.001 £0.001 £0.001 Expected volatility* Option Life 82% 10yrs 83% 10yrs 84% 10yrs Risk free interest rate 1.000% 1.000% 1.000% * Expected volatility is measured at the standard deviation of expected share price movements and based on a review of volatility used by listed companies of comparable industry sector and years of establishment. notes to the financial statements continued 75 18 Earnings per share The basic earnings per share is calculated by dividing the net profit attributable to equity holders of the Group by the weighted average number of ordinary shares in issue during the year. Weighted average shares in issue Loss attributable to the owners of the parent company Basic loss per share (pence) Diluted loss per share (pence) 2019 246,739,240 (12,136,930) (4.92) (4.92) 2018 139,087,779 (20,106,411) (14.46) (14.46) For the periods presented, the weighted average number of shares used for calculating the diluted loss per share are identical to those for the basic loss per share. This is because the outstanding share options would have the effect of reducing the loss per share and would not be dilutive under IAS 33. At 31 December 2019, options outstanding amounted to 17,030,913. Given the loss for the year of £12,136,930 (2018 loss: £20,106,411) these options are anti-dilutive. 19 Financial instruments Categories of financial instruments: Financial assets at amortised cost 2019 £ 2018 £ Cash and cash equivalents, trade receivables and other receivables 9,842,336 9,338,130 Financial liabilities at amortised cost Trade payables, other payables and provisions (4,179,058) (4,979,295) 76 notes to the financial statements continued 19 Financial instruments (continued) ‘Financial assets held at amortised cost’ includes trade receivables, other receivables (including accrued income) and cash and cash equivalents and excludes prepayments and inventories. Included in ‘Financial liabilities at amortised cost’ are trade payables, accruals and other payables (albeit excluding deferred income). The carrying value of financial assets and liabilities approximates their fair value. Risk management The Company seeks to reduce exposures to capital risk, liquidity risk, credit risk and foreign currency risk, to ensure liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. The Group does not engage in speculative trading in financial instruments and transacts only in relation to underlying business requirements. The Group’s treasury policies and procedures are periodically reviewed and approved by the Board. Capital risk The Group’s objectives when managing capital (defined as equity attributable to owners of the parent) are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders through an appropriate amount of equity funding, while maintaining a strong credit rating and sufficient headroom. The Group makes adjustments to its capital structure in light of changes to economic conditions and the Group’s strategic objectives. Credit risk Credit risk is the risk that a counterparty may default on its obligation to the Group in relation to lending, hedging, settlement and other financial activities. The Group’s principal financial assets are trade and other receivables, bank balances, and cash in hand. The Group’s credit risk is primarily attributable to its trade and other receivables. The amounts included in the Statement of Financial Position are net of allowances for doubtful receivables. Allowances against doubtful debts are estimated by reference to expected credit losses based on the probability of default. The Group has a low retail credit risk due to transactions being principally of high volume, low value and short maturity. Whilst a significant proportion of trade receivables is with a few customers the Group assessed the risk of default as low due to the nature of these customers to be large well established retailers with which the Group has a good relationship. The credit risk on liquid funds is considered to be low, as the counterparties are all major banks with high credit ratings from all the key ratings agencies. The ageing of trade receivables at the statement of financial position date was: Not overdue Overdue between 0-30 days Overdue between 31-60 days Overdue between 61-90 days Overdue over 90 days Total 2019 £ 277,934 21,493 245,198 131,912 - 2018 £ 1,177,698 382,274 56,070 73,634 125,584 676,537 1,815,260 Liquidity risk Liquidity risk is the risk that the group will not be able to meet its financial obligations as they fall due. The Group manages its exposure to liquidity risk by continuously monitoring short and long-term forecasts and actual cash flows and ensuring it has the necessary banking and reserve borrowing facilities available to meet the requirements of the business. notes to the financial statements continued 77 19 Financial instruments (continued) Foreign currency risk The Group operates internationally and is therefore exposed to foreign currency transactions risk, primarily on sales denominated in US dollars and Euros. The Group’s presentational currency is Sterling, therefore the Group is also exposed to foreign currency translation risks due to movements in foreign exchange rates on the translation of non-sterling assets and liabilities. Sterling £ Euro £ US Dollar £ Other £ Total £ Statement of financial position exposure Cash and cash equivalents 6,760,881 1,171,012 54,990 1,886 7,988,769 Trade receivables 494,991 181,546 Other receivables 263,091 183,960 Other current assets 729,979 - - - - - - - 676,537 447,051 729,979 Trade payables (2,034,133) (395,055) (1,448) 40 (2,430,596) Taxes and social security payables (233,044) (23,146) - (73,311) (329,501) Non-trade payables and accrued expenses (434,742) (204,516) (10,737) Provisions Total (670,269) (98,696) - 4,876,754 815,105 42,805 (71,385) 5,663,279 - - (649,995) (768,965) Foreign currency sensitivity The Group’s principal financial instrument foreign currency exposures are to Euros. The Group have considered the sensitivity of the Group’s reported loss before tax and closing equity to a 10% increase and decrease in the value of this currency relative to pounds sterling at the reporting date, assuming all other variables remain unchanged. The sensitivity rate of 10% is deemed to represent a reasonably possible change based on historic exchange rate volatility. A 10% percent strengthening of these currencies against Sterling at 31 December 2019 would have decreased the Group loss by 0.71% and an immaterial absolute value. This calculation assumes that the change occurred at the statement of financial position date and had been applied to risk exposures existing at that date. 20 Contingencies There were no contingent liabilities to be disclosed (2018: £nil). Related parties 21 Key management compensation (considered to be the Directors of eve Sleep PLC) disclosures can be found in Note 6 and on pages 41 to 42 of the Director’s remuneration report. 78 notes to the financial statements continued 22 Commitments There were no commitments in the year (2018: £nil). 23 Leases The Group commenced the lease of its registered office at 29A Kentish Town Road, London, NW1 8NL on 1 August 2019. Excluding the short-term lease discussed below, this is the only lease reflected on the statement of financial position as a right-of-use asset and a lease liability. The Group classifies its right-of-use asset in a consistent manner to its property, plant and equipment as an Office Building. Based on the fact that the lease of 29A Kentish Town Road is restricted from further sub-leasing and has a lease term of 24-months with a break clause after 18-months, management have calculated the interest payable on the lease liability over the shorter time horizon as there was no certainty that the break clause effective 31 January 2021 would not be made use of at the date of lease inception, and upon review at the statement of financial position date. The terms of the lease at 29A Kentish Town Road, London, NW1 8NL do not include variable lease payments therefore management have not been required to consider the impact of such payments. The Group has elected to take advantage of the short-term lease exemption for lease assets and lease liabilities where a lease term ends within 12 months of the date of initial application of IFRS 16. The Group’s lease of the former registered office at 128 Albert Street, London, NW1 7NE, a lease term which ceased on 17 August 2019, fell within the definition of a short-term lease exemption and therefore payments made under such leases have been expensed to the statement of profit and loss on a straight-line basis. During the year £424,266 was recognised as an expense in the statement of profit and loss in respect of the lease of the Group’s former registered office at 128 Albert Street, London, NW1 7NE. At 31 December 2019, the Group had no further commitments to short-term leases. Non-cancellable operating lease rentals are payable as follows: Less than one year Between one and five years More than five years Total Right-of-use-asset 2019 £ - - - - 2018 £ 459,536 - - 459,536 Additional information on the right-of-use assets by class of assets is as follows: Asset Carrying amount Additions Depreciation Impairment Office Building 716,623 518,575 716,623 Total 716,623 518,575 716,623 198,048 198,048 - - The right-of-use assets are included in the same line item as where the corresponding underlying assets would be presented if they were owned. Lease liability Lease liabilities are presented in the statement of financial position as follows: Current Non-Current Total 31 December 2019 31 December 2018 470,391 40,000 510,391 - - - notes to the financial statements continued 79 24 Reconciliation of liabilities arising from financing activities 31 December 2018 Cash flows Non-cash changes: Additions 31 December 2019 Lease liabilities Total - - (200,000) 710,391 (200,000) 710,391 510,391 510,391 31 December 2017 Cash flows Non-cash changes: Additions 31 December 2018 Lease liabilities Total - - - - - - - - 25 Change in significant accounting policies The Group has adopted the new accounting pronouncements which have become effective this year, and are as follows: IFRS 16 Leases IFRS 16 ‘Leases’ replaces IAS 17 ‘Leases’ along with three Interpretations (IFRIC 4 ‘Determining whether an Arrangement contains a Lease’, SIC 15 ‘Operating Leases-Incentives’ and SIC 27 ‘Evaluating the Substance of Transactions Involving the Legal Form of a Lease’). On transition to IFRS 16, the Group’s lease previously accounted for as an operating lease, namely the Group’s former registered office at 128 Albert Street, London, NW1 7NE, with a remaining lease term of less than 12 months and for leases of low-value assets the Group has applied the optional exemptions to not recognise right-of-use assets but to account for the lease expense on a straight-line basis over the remaining lease term. For this reason, the cumulative impact of adopting IFRS 16 has not required an adjustment to the opening balance of retained earnings for the current period and prior periods have not been restated. On transition to IFRS 16 the weighted average incremental borrowing rate applied to lease liabilities recognised under IFRS 16 was 3.75% per annum. The Group has benefited from the use of hindsight for determining the lease term when considering options to extend and terminate leases. 26 Subsequent events The worldwide outbreak of the COVID–19 virus represents a significant event since the end of the financial period. In light of the impact of the virus upon supply chain and consumer demand, the Group has reviewed its cash flow forecasts and considered the impact on going concern, concluding that the going concern basis remains an appropriate basis of preparation for these financial statements given the likely cash flow impact of operations 12 months from the date of signing this report. Please refer to note 2.4 for further detail on the Group’s going concern basis of preparation. COVID-19 is considered to be a non-adjusting post balance sheet event and therefore has not been taken into account in preparing the statement of financial position as at 31 December 2019. 80 company statement of financial position at 31 December 2019 81 Non-current assets Property, plant and equipment Intangible assets Investments Current assets Inventories Trade and other receivables Current tax receivable Cash and cash equivalents Total assets Non-current liabilities Lease liabilities Current liabilities Trade and other payables Provisions Lease liabilities Total liabilities Net assets Note 4 5 6 7 8 9 18 10 11 18 2019 £ 518,575 344,456 1,669 864,700 1,574,648 3,100,528 354,466 7,231,061 2018 £ - 669,742 1,669 671,411 870,011 5,499,057 193,192 5,055,952 12,260,703 11,618,212 13,125,403 12,289,623 40,000 - 3,823,970 670,269 470,391 4,349,059 845,824 - 4,964,630 5,194,883 5,004,630 5,194,883 8,120,773 7,094,740 Equity attributable to equity holders of the parent Share capital Share premium 12 263,445 139,735 48,887,392 36,716,371 Share-based payment reserve 998,495 250,073 Retained earnings Total Equity (42,028,559) (30,011,439) 8,120,773 7,094,740 Notes 1 to 19 form part of the historical financial information shown above. The loss for the year was £12,117,866. These financial statements were approved by the board of directors on eve Sleep PLC and were signed on its behalf by: Tim Parfitt Director 23 March 2020 Company registered number: 09261636 82 company statement of cash flows for the year ended 31 December 2019 Cash flows from operating activities Loss for the year Adjustments for Depreciation Amortisation Impairment Interest payable (Increase)/decrease in trade and other receivables (Increase)/decrease in inventories Increase/(decrease) in trade and other payables Increase/(decrease) in provisions Share-based payment charge Note 2019 £ 2018 £ (12,117,866) (20,264,926) 198,048 263,046 594,724 9,144 2,237,255 (704,636) (525,089) (175,556) 1,111,396 - 120,571 39,608 - (855,235) (280,668) 37,847 158,697 303,281 Net cash outflow from operating activities (9,109,534) (20,740,825) Cash flows from investing activities Additions to property, plant and equipment Additions to intangible assets Right of use asset initial direct costs - (532,484) (15,375) (3,150) (411,775) - Net cash outflow from investing activities (547,859) (414,925) Cash flows from financing activities Proceeds from issue of share capital 12,032,502 Repayment of capital element of finance lease rentals 19 (200,000) Net cash inflow from financing activities 11,832,502 1,104 - 1,104 Net cash inflow/(outflow) 2,175,109 (21,154,646) Cash at beginning of year Movement in cash Cash at end of year 5,055,952 2,175,109 7,231,061 26,210,595 (21,154,646) 5,055,952 83 company statement of changes in equity for the year ended 31 December 2019 Share Capital £ Share Premium £ Share-based payment reserve £ Retained Earnings £ Total Equity £ For the year ended 31 December 2019 Balance at 1 January 2019 139,735 36,716,371 250,073 (30,011,440) 7,094,739 Issue of shares Exercise of options Share-based payment charge Transfer on exercise of options 120,317 11,911,415 770 - - - - - - - 1,111,396 - - - (100,747) 100,747 Transfer on issue of share capital in exchange for marketing services 2,622 259,605 (262,227) - 12,031,732 770 1,111,396 - - Transactions with owners 123,710 12,171,020 748,422 100,747 13,143,898 Loss for the year - - - (12,117,866) (12,117,866) Balance at 31 December 2019 263,445 48,887,392 998,495 (42,028,559) 8,120,773 For the year ended 31 December 2018 Balance at 1 January 2018 138,631 36,716,371 138,794 (9,938,516) 27,055,280 Exercise of options Share-based payment charge Transfer on exercise of options Transactions with owners Loss for the year 1,104 - - 1,104 - - - - - - - 303,281 - - 1,104 303,281 (192,003) 192,003 - 111,279 192,003 304,385 - (20,264,926) (20,264,926) Balance at 31 December 2018 139,735 36,716,371 250,073 (30,011,440) 7,094,739 84 notes to the company financial statements 1 Accounting policies All accounting policies of the Group relevant to the Company are applied by the Company in preparing its financial statements. The Company additionally applies the following accounting policy: 1.1 Investment in subsidiaries These investments are held at cost less impairment. 2 Loss for the year The Company has taken advantage of the exemption allowed under section 408 of the Companies Act 2006 and has not presented its own Statement of comprehensive income in these financial statements. The loss after tax of the parent Company for the year was £12,117,866 (2018: £20,264,926 loss). 3 Directors’ remuneration The Company shares the same directors as the Group. Please find Directors’ remuneration disclosed in note 6 of the Group financial statements. notes to the company financial statements continued 85 4 Property, plant and equipment Right of use asset £ Plant and equipment £ Fixtures & fittings £ Total £ Cost Balance at 1 January 2018 Additions Balance at 31 December 2018 Additions Balance at 31 December 2019 Depreciation and Impairment Balance at 1 January 2018 Depreciation charge for the year Impairment charge for the year Balance at 31 December 2018 Depreciation charge for the year Impairment charge for the year Balance at 31 December 2019 Net Book Value At 31 December 2018 At 31 December 2019 5 Intangible assets Cost Balance at 1 January 2018 Additions - internally generated Additions - externally generated Transfers Balance at 31 December 2018 Acquisitions - internally generated Additions - externally generated Transfers Balance at 31 December 2019 Amortisation and Impairment Balance at 1 January 2018 Amortisation for the year Impairment for the year Balance at 1 January 2018 Amortisation for the year Impairment for the year Balance at 31 December 2019 Net Book Value At 31 December 2018 At 31 December 2019 - - - 716,623 716,623 - - - - 198,048 - 198,048 - 518,575 7,326 3,150 10,476 - 10,476 7,326 - 3,150 10,476 - - 39,724 - 39,724 - 39,724 3,266 - 36,458 39,724 - - 47,050 3,150 50,200 716,623 766,823 10,592 - 39,608 50,200 198,048 - 10,476 39,724 248,248 - - - - - 518,575 Development costs £ Assets under construction £ Total £ 282,940 - - 105,030 387,970 - - 747,553 1,135,523 - 120,571 - 120,571 263,046 526,954 910,571 267,399 224,952 95,598 168,833 242,942 (105,030) 402,343 310,573 221,912 (747,553) 187,274 - - - - - 67,770 67,770 402,343 119,504 378,538 168,833 242,942 - 790,313 310,573 221,912 - 1,322,797 - 120,571 - 120,571 263,046 594,724 978,341 669,742 344,456 86 notes to the company financial statements continued 5 Intangible assets (continued) Development costs relate to internal and external costs incurred in respect of the infrastructure of the website platform and ERP system. Assets under construction at 31 December 2019 relate to internal costs incurred for the development of ERP software for internal use where the asset is expected to go live in 2020. The carrying value of intangible assets has been reviewed by management at the year-end date for potential impairment and an impairment charge recognised totalling £594,724 (2018: £nil) relating to capitalised website platform costs following the decision to transition to a new front-end platform to support the Company’s DTC websites. 6 Investments The company has the following investments in subsidiaries: Principal place of business/ Registered office address 185 W. Broadway, Suite 101, PO Box 1150, Jackson, USA 5 Rue Des Suisses, 75014, Paris Company: eve sleep Inc eve sleep SASU Registered Number Type of share Ownership 2019 Ownership 2018 EIN 47-4164566 Ordinary 823397419 R.C.S Paris Ordinary 100% 100% 100% 100% All subsidiaries are included in the consolidated financial statements, based on percentage of voting rights held. No subsidiaries have non-controlling interests that are material to the consolidated financial statements. Following the decision of July 2018 for the Group to exit the US market, eve Sleep Inc was a non-trading entity during 2019. 7 Inventories Finished goods 2019 £ 2018 £ 1,574,648 870,012 There was no write-down of inventories to net realisable value in the year (2018: £nil). Included within inventories is £401,998 expected to be recovered in more than 12 months from the statement of financial position date. This balance of inventory is fully provided for within the Company’s slow-moving inventory provision of £401,998 (2018: £551,580). Inventory days were 71 days in 2019 (2018: 25 days). Finished goods recognised in cost of sales in the year amounted to £11,176,905 (2018: £16,358,170). 8 Trade and other receivables Trade receivables Other receivables Receivables from subsidiary undertakings Other current assets Prepayments Total 2019 £ 494,991 443,577 650,048 729,979 781,933 2018 £ 1,794,871 1,001,937 1,027,915 366,823 1,307,511 3,100,528 5,499,057 As at 31 December 2019, receivables from subsidiary undertakings of £0.7m (2018: £1.0m) have been considered in light of IFRS 9 and expected credit losses arising were not considered material by management and no allowance has been recognised on this basis. The ageing analysis of these receivables is as follows: Less than 12 months More than 12 months Total 2019 £ 2018 £ 650,048 1,027,915 - - 650,048 1,027,915 87 notes to the company financial statements continued 8 Trade and other receivables (continued) The average credit period offered on sales of goods during 2019 was 26 days (2018: 26 days). The average days sales outstanding (‘‘DSO’’) in 2019 was 32 days (2018: 88 days). All other trade and other receivables are short-term. The directors consider that the carrying amount of trade receivables approximates to their fair value. All trade and other receivables have been reviewed for indications of impairment. Trade receivables represent amounts due from wholesale and retail customers. The Company has not charged interest for late payment of invoices in the current year or prior period. Allowances against doubtful debts are estimated by reference to expected credit losses based on the probability of default (using past default experience with that customer and alongside analysis of the counterparty’s current financial position where specific credit risk is known), risk exposure (being the value of receivables outstanding with that customer) and finally a percentage representative of the loss due to default. Before accepting any significant new customer, the Company uses a variety of credit scoring systems to assess the potential customer’s credit quality and to define credit limited for each customer. Limits and scoring attributed to customers are reviewed regularly. Three major retail customers each accounted for more than 10% of the total balance of trade receivables on 31 December 2019, comparable to 2018 when three major retail customers each accounted for more than 10% of the total balance of trade receivables. Not overdue Overdue between 0-30 days Overdue between 31-60 days Overdue between 61-90 days Overdue over 90 days Total 2019 £ 277,934 - 85,624 131,433 - 2018 £ 1,161,596 377,985 56,070 73,634 125,586 494,991 1,794,871 In determining the recoverability of a trade receivable the Company considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the relevant year-end. Aside from the major retail customers accounting for the year-end trade receivable balance mentioned above, the concentration of credit risk is limited due to the customer base being large and diverse. 9 Cash and cash equivalents Cash and cash equivalents per statement of financial position 7,231,061 5,055,952 2019 £ 2018 £ 88 notes to the company financial statements continued 10 Trade and other payables Trade payables Non-trade payables and accrued expenses Deferred revenue Taxes and social security payable 2019 £ 2,411,997 559,148 544,478 308,347 2018 £ 1,740,634 1,322,691 408,406 877,328 3,823,970 4,349,059 All trade and other payables are short-term. The directors consider that the carrying amount of trade and other payables approximates to their fair value. Deferred revenue represents contract liabilities to deliver goods to customers where consideration has been received prior to the year-end date. The opening balance of deferred revenue was fully recognised during the 2019 financial year. 11 Provisions Balance at 1 January 2018 Refunds £ 687,127 Warranty £ Total £ - 687,127 Provisions made during the year 9,924,452 142,351 10,066,803 Provisions used during the year (9,844,534) Prior year under/(over) provision recognised in year (63,572) - - (9,844,534) (63,572) Balance at 31 December 2018 703,473 142,351 845,824 Provisions made during the year 7,286,602 43,129 7,329,731 Provisions used during the year (7,510,509) (28,289) (7,538,798) Prior year under/(over) provision recognised in year 33,512 - 33,512 Balance at 31 December 2019 513,078 157,191 670,269 A refund provision is required as the Company provides certain products to customers under a 100-day trial period. During this period the customer is entitled to return goods for a full refund. The provision is calculated by reference to the rate of returns experienced by the Company in preceding periods and the level of sales subject to the relevant trial periods of each product at the year end. An analysis of the rate of return over historical periods does not indicate a significant variation in the rate of refunds provided to customers and accordingly, whilst there is a degree of estimation in the calculation of this provision, any reasonable sensitivity analysis in the rate applied to sales at the year-end would not result in a material impact. A warranty provision is required as the Company provides certain products to customers with a 10-year warranty period. During this period the customer is entitled to claim under warranty a replacement product. The provision is calculated by reference to the rate of successful claims experienced by the Company in preceding periods and applying a projected distribution of the claims across the 10-year warranty period. Whilst there is a degree of estimation in the calculation of this provision, any reasonable sensitivity analysis in the rate applied to claims at the year-end would not result in a material impact. notes to the company financial statements continued 89 12 Share capital Allotted, issued and fully paid: Number Nominal Value £ 31 December 2019 £ 31 December 2018 £ Ordinary Shares 263,444,823 £0.001 Total 263,445 263,445 139,735 139,735 The table below summarises the movements in number of shares at the beginning and end of the period: Ordinary Shares Share capital 31 December 2018 139,735,161 Nominal Value £ Value of Share capital £ Summary of Movements £0.001 139,735 Issue of shares 122,939,599 Exercise of share options over ordinary shares 770,063 Share capital 31 December 2019 263,444,823 Nominal Value £ Value of Share capital £ £0.001 £263,445 13 Financial instruments Categories of financial instruments: Financial Assets 2019 £ 2018 £ Cash and cash equivalents, trade receivables, other receivables and other current assets 9,367,754 9,247,498 Financial Liabilities Trade payables, taxes and social security payables, non-trade payables, accrued expenses and provisions (3,949,762) (4,786,477) ‘Financial assets held at amortised cost’ include trade receivables, other receivables (including accrued income) and cash and cash equivalents and excludes prepayments and inventories. ‘Financial liabilities held at amortised cost’ include trade payables, accruals and other payables and excludes deferred income. The carrying value of financial assets and liabilities approximates their fair value. 90 notes to the company financial statements continued 13 Financial instruments (continued) Risk management The Company seeks to reduce exposures to capital risk, liquidity risk, credit risk and foreign currency risk, to ensure liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. The Company does not engage in speculative trading in financial instruments and transacts only in relation to underlying business requirements. The Company’s treasury policies and procedures are periodically reviewed and approved by the Board. Capital risk The Company’s objectives when managing capital (defined as equity attributable to owners of the parent) are to safeguard the Company’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders through an appropriate amount of equity funding, while maintaining a strong credit rating and sufficient headroom. The Company makes adjustments to its capital structure in light of changes to economic conditions and the Company’s strategic objectives. Credit risk Credit risk is the risk that a counterparty may default on its obligation to the Company in relation to lending, hedging, settlement and other financial activities. The Company’s principal financial assets are trade and other receivables, bank balances, and cash in hand. The Company’s credit risk is primarily attributable to its trade and other receivables. The amounts included in the Statement of Financial Position are net of allowances for doubtful receivables. Allowances against doubtful debts are estimated by reference to expected credit losses based on the probability of default. The Company has a low retail credit risk due to transactions being principally of high volume, low value and short maturity. Whilst a significant proportion of trade receivables is with a few customers the Company assessed the risk of default as low due to the nature of these customers to be large well established retailers with which the Company has a good relationship. The credit risk on liquid funds is considered to be low, as the counterparties are all major banks with high credit ratings from all the key ratings agencies. Liquidity risk Liquidity risk is the risk that the Company will no be able to meet its financial obligations as they fall due. The Company manages its exposure to liquidity risk by continuously monitoring short- and long-term forecasts and actual cash flows and ensuring it has the necessary banking and reserve borrowing facilities available to meet the requirements of the business. Foreign currency risk The Company operates internationally and is therefore exposed to foreign currency transactions risk, primarily on sales denominated in Euros. Foreign currency sensitivity The Company’s principal financial instrument foreign currency exposures are to Euros. The Group have considered the sensitivity of the Company’s reported loss before tax and closing equity to a 10% increase and decrease in the value of this currency relative to pounds sterling at the reporting date, assuming all other variables remain unchanged. The sensitivity rate of 10% is deemed to represent a reasonably possible change based on historic exchange rate volatility. A 10% percent strengthening of these currencies against Sterling at 31 December 2019 would have decreased the Company loss by 0.21% and an immaterial absolute value. This calculation assumes that the change occurred at the statement of financial position date and had been applied to risk exposures existing at that date. 14 Related parties Key management compensation (considered to be the Directors of eve Sleep PLC) disclosures can be found in Note 6 of the Group accounts and on pages 41 and 42 of the Director’s report. 15 Commitments There were no commitments in the year (2018: £nil). notes to the company financial statements continued 91 16 Change in significant accounting policies The Company has adopted the new accounting pronouncements which have become effective this year, and are as follows IFRS 16 ‘Leases’ IFRS 16 ‘Leases’ replaces IAS 17 ‘Leases’ along with three Interpretations (IFRIC 4 ‘Determining whether an Arrangement contains a Lease’, SIC 15 ‘Operating Leases-Incentives’ and SIC 27 ‘Evaluating the Substance of Transactions Involving the Legal Form of a Lease’). On transition to IFRS 16, the Group’s lease previously accounted for as an operating lease, namely the Group’s former registered office at 128 Albert Street, London, NW1 7NE, with a remaining lease term of less than 12 months and for leases of low- value assets the Group has applied the optional exemptions to not recognise right-of-use assets but to account for the lease expense on a straight-line basis over the remaining lease term. For this reason, the cumulative impact of adopting IFRS 16 has not required an adjustment to the opening balance of retained earnings for the current period and prior periods have not been restated. On transition to IFRS 16 the weighted average incremental borrowing rate applied to lease liabilities recognised under IFRS 16 was 3.75% per annum. The Company has benefited from the use of hindsight for determining the lease term when considering options to extend and terminate leases. 17 Subsequent events The worldwide outbreak of the COVID–19 virus represents a significant event since the end of the financial period. In light of the impact of the virus upon supply chain and consumer demand, the Company has reviewed its cash flow forecasts and considered the impact on going concern, concluding that the going concern basis remains an appropriate basis of preparation for these financial statements given the likely cash flow impact of operations 12 months from the date of signing this report. Please refer to note 2.4 of the Group financial statements for further detail on the Company’s going concern basis of preparation. COVID-19 is considered to be a non-adjusting post balance sheet event and therefore has not been taken into account in preparing the statement of financial position as at 31 December 2019. 18 Leases The Company commenced the lease of its registered office at 29A Kentish Town Road, London, NW1 8NL on 1 August 2019. Excluding the short-term lease discussed below, this is the only lease reflected on the statement of financial position as a right-of-use asset and a lease liability. The Company classifies its right-of-use asset in a consistent manner to its property, plant and equipment as an Office Building. Based on the fact that the lease of 29A Kentish Town Road is restricted from further sub-leasing and has a lease term of 24-months with a break clause after 18-months, management have calculated the interest payable on the lease liability over the shorter time horizon as there was no certainty that the break clause effective 31 January 2021 would not be made use of at the date of lease inception, and upon review at the statement of financial position date. The terms of the lease at 29A Kentish Town Road, London, NW1 8NL do not include variable lease payments therefore management have not been required to consider the impact of such payments. The Company has elected to take advantage of the short-term lease exemption for lease assets and lease liabilities where a lease term ends within 12 months of the date of initial application of IFRS 16. The Company’s lease of the former registered office at 128 Albert Street, London, NW1 7NE, a lease term which ceased on 17 August 2019, fell within the definition of a short-term lease exemption and therefore payments made under such leases have been expensed to the statement of profit and loss on a straight- line basis. During the year £424,266 was recognised as an expense in the statement of profit and loss in respect of the lease of the Company’s former registered office at 128 Albert Street, London, NW1 7NE. At 31 December 2019, the Company had no further commitments to short-term leases. 92 notes to the company financial statements continued 18 Leases (continued) Non-cancellable operating lease rentals are payable as follows: Less than one year Between one and five years More than five years Total 2019 £ - - - - 2018 £ 459,536 - - 459,536 Right-of-use asset Additional information on the right-of-use assets by class of assets is as follows: Asset Carrying amount Additions Depreciation Impairment Office Building Total 716,623 716,623 518,575 518,575 716,623 716,623 198,048 198,048 - - The right-of-use assets are included in the same line item as where the corresponding underlying assets would be presented if they were owned. Lease liability Lease liabilities are presented in the statement of financial position as follows: 31 December 2019 31 December 2018 Current Non-current Total 470,391 40,000 510,391 - - - 19 Reconciliation of liabilities arising from financing activities 31 December 2018 Cash flows Non-cash changes: Additions 31 December 2019 Lease liabilities Total - - (200,000) 710,391 (200,000) 710,391 510,391 510,391 31 December 2017 Cash flows Non-cash changes: Additions 31 December 2018 Lease liabilities Total - - - - - - - - every great day starts the night before
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