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2020 Reportannual report eve Sleep plc 2020 co mpany number 092 61636 year ended 31 December 2 0 20 4 e v e S l e e p p l c 2 0 2 0 a n n u a l r e p o r t good morning welcome to eve’s 2020 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 12 s t r a t e g i c r e p o r t 32 g o v e r n a n c e r e p o r t 60 a u d i t o r ’ s r e p o r t 6 8 g r o u p f i n a n c i a l s t a t e m e n t s 92 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) auditor Nexia Smith & Williamson James Sturrock (Non-executive Director) Statutory Auditor Thomas Enraght-Moony (Non-executive Director) 25 Moorgate Tim Parfitt (Chief Financial Officer) Nikki Crumpton (Non-executive Director) (Resigned 30 September 2020) London EC2R 6AY registered office 29A Kentish Town Road Camden London NW1 8NL registered number 09261636 Masood Choudhry (Non-executive Director) (Appointed 3 February 2021) Cheryl Calverley (Chief Executive Officer) (Appointed 1 June 2020) secretary Link Company Matters Limited The Registry 34 Beckenham Road Beckenham Kent BR3 4TU 7 8 g r o u p chairman’s statement eve is now a stronger, more resilient business, with a ready-made platform for future growth. Pau l P inda r completing the rebuild strategy In what has been one of the most difficult eve has continued to build on its and unpredictable years for business, eve has differentiated strategy of focusing on the exited 2020 in far better shape than it entered broader sleep wellness category as compared to the year, through a combination of favourable more mattress-focused peers where competition external factors and sound execution of the is largely price driven. Existing product categories strategy. The accelerated transition to online have been deepened with further products, as ordering and the strength of the homewares well as eve’s move into new categories. eve’s market brought about by the pandemic has first foray into gifting with Boots for a ‘well slept’ provided tailwinds for the business. Whilst the range of sleep gifts for the Christmas period sector remains highly competitive, there has sold out and the new partnership with the been an improvement in the landscape, with French homewares retailer Olivier Desforges goes the retrenchment of some online mattress from strength to strength. In tandem with new companies, as well as reduced store-based partnerships, eve has exited those which were competition, from both temporary and not economically viable, including Amazon UK, permanent shop closures. in order to stay focused The rebuild strategy is largely complete on profitable sales growth. and eve now has a more resilient and efficient The Company continued its ongoing technology, logistics and operational platform investment in broadcast TV and supported its for future growth. The product ranges have existing ‘wake up dancing’ campaign with an been expanded, alongside a broadening additional new campaign designed to build of distribution in both the UK and France, long term brand presence for eve as a sleep which has had the added benefit of further wellness brand. This longer term investment is raising brand awareness. Underpinning a sign of increasing confidence in the business the whole business is the quality of the and its ongoing growth potential. The new mattresses themselves, which have been ‘switch off with eve sleep’ campaign launched widely recognised as best in class, consumer in November 2020 and runs every Sunday night champion Which? in November 2020 rating across the Channel 4 estate, digital and mobile eve’s original and its premium hybrid the two advertising through until spring 2021. best mattresses in the UK. The Premium Hybrid The analytics on the campaign performance so has also been awarded ‘Meilleur Choix’ far have been very positive, with payback above (best choice) by the French equivalent of projected expectations. Which? - Que Choisir. Over the last two years the entire operations s t r a t e g i c r e p o r t : chairman's statement 9 and processes of the business have been £25.2m, driven by 19% growth in the second carefully analysed and restructuring plans half. This result, which exceeded the Board’s put in place. twice raised expectations, was achieved on The consumer websites have been a marketing budget 49% lower than the re-platformed to Shopify, which, in addition to previous year. Overheads (defined as wages, providing an improved customer experience salaries and a more stable platform, reduces ongoing and other administrative expenses but maintenance costs and is easily replicable excluding share based payment charges) across markets. As part of wider Brexit were also kept under tight control and preparations to minimise any trade frictions and 33% lower than the prior year. stay cost competitive, mattress manufacturing The improved financial performance of has been largely localised in the UK for the the business was UK-led, with Ireland also UK and Irish markets and Belgium for sales to benefitting in the fourth quarter from some the French market. Distribution capability for marketing investment. This is reflected in the the UK&I, in terms of both warehousing and UK&I’s increased share of total revenues, which carriers has also been upgraded, resulting in an has risen from 78% in 2019 to 81% in 2020. The improved customer experience and a reduction French business, which has been reset during in logistics cost through the consolidation the year with minimal marketing investment, of all items in an order into a single delivery. improved its marketing contribution; defined financial performance ahead of expectations The central focus of the rebuild strategy as profit after all direct costs including marketing but before overheads, by £1.5m. acting responsibly has always been to reduce losses and We will continue to evolve our business cash burn in order to put the business on to minimise our wider impact on the world a secure and sustainable long term footing. and be a better corporate citizen. Our Great progress in 2020 has been made in this major initiative during the year was forming regard, with underlying EBITDA1 losses cut by 81% a partnership with TFR Group in the UK, to £2.0m and statutory loss reduced by 83% a prominent furniture recycling company, to £2.0m. Cash generation was even stronger, on the removal, rejuvenation and recycling achieving a cash improvement of £0.4m, which of mattresses. This policy is part of ensuring after adjusting for £0.3m of tax payments that 100% of eve sleep’s returned mattresses deferred until post period end, resulted in a are diverted away from landfill, saving over maiden cash flow neutral position for the full 100 tonnes of waste, whilst also optimising year. Accordingly, eve closed the year with a revenue recovery. A separate partnership healthy statement of financial position, with with our carriers also encourages customers £8.4m (2019: £8.0m) of cash and no debt (other to have their previous mattress removed than the lease liability for our office premises), and recycled at the point their new mattress without recourse to any further funding. is delivered. The period was dominated by the pandemic, with heightened sales volatility in the early months of the year. Sales from May onwards grew strongly and have remained at elevated levels as a result of the trend to online ordering and the strength of the homewares market. Sales for the full year grew by 6% to Notes 1. Underlying EBITDA is defined as earnings before interest, tax, depreciation, amortisation and impairment, share-based payment charges connected with employee remuneration (2020 and 2019), fundraise-related expenditure (2019 only), adding back IFRS16 adjustments to office lease costs. Underlying EBITDA reflects what management believe to best demonstrate the underlying performance of the business in a given year. 10 s t r a t e g i c r e p o r t all credit to our people This year has brought about model, which limits both the initial risk but unprecedented change for our team, who also the financial upside. have been working through the rebuild We will continue to invest steadily in strategy since late 2018. During the first the UK, with efficient marketing now driving national lockdown in May we announced consistent growth and a positive marketing a change in CEO with the promotion of contribution. We anticipate a slowing in our Cheryl Calverley, eve’s Chief Marketing rate of UK progress from around May as a Officer at the time, replacing James result of tougher comparatives and a likely Sturrock, who has stayed on as a shift in consumer spending to out-of-home non-executive director. The entire team has as the country exits lockdown measures. once again adapted and stepped up to However, we firmly believe that the recent the challenge, showing great flexibility and shift to e-commerce will not reverse, and fortitude, including making a seamless move the underlying trend of sleep wellness, on to home working from March and ensuring a which the eve brand is built, is a fundamental smooth transition to Cheryl’s leadership. societal force that will continue in the long term. We are proud to have been able We plan to increase investment in France to navigate 2020 without the need to through 2021 and build on the higher profile announce new redundancies or furlough that our highly successful retail partnership staff. Having met our targeted performance with Olivier Desforges has provided. This will objectives for the year we have been able accelerate our growth in the country and to pay a bonus to each and every staff provide a more balanced and sustainable member by way of a thank you to our team growth profile to the wider business. Unlike for their unswerving commitment to eve. Our the UK, France has not experienced such team remain our greatest asset and we will an accelerated shift to e-commerce over continue to invest in their development, the past year, having maintained ‘open high safety and well-being. a brighter outlook streets’ through most of the pandemic. We expect good growth from France in 2021 and beyond through a combination of the continued structural shift to online, combined Trading for January and February has with investment in our own established and continued to be strong, benefitting from the award winning proposition. ongoing weekly TV campaign in the UK, the With the rebuild strategy now largely latest Which? ratings and the wider behavioural behind us, eve is now well placed to embrace shift to online purchasing. Revenue growth the future with renewed confidence. Paul Pindar Chairman 17 March 2021 for the first two months of the year of 16% represents an improvement from the last quarter of 2020 and has been boosted by an easing of supply constraints and improved stock management, which had previously held back the rate of growth in late 2020. Whilst we are still experiencing some challenges in componentry supply and inflationary pressures, we expect these issues to further ease in the coming months. In the year ahead we will also continue to expand and deepen our product offering. These wider categories including gifting and CBD are initially trialled through a license 11 12 s t r a t e g i c r e p o r t strategic review well placed in a large, fragmented, rapidly changing market Sleep is increasingly recognised as an consequent switch to working from home, essential element of wellness at a time when coupled with a lack of leisure spending wellness has never been more important. There alternatives, drove a strong increase in industry is a growing body of research and evidence wide demand for bedding and homewares which testifies to the importance of sleep products. Consumers en masse literally and the risks to physical and mental health ‘bedded down’ for lockdown as they sought of insufficient sleep. In a poll commissioned to renovate their homes and bedrooms. by eve and taken shortly after the start of the Data from Barclays UK Consumer Spending pandemic, as many as 48% of respondents Reports show that spending in the Household said that they were kept up due to worry category experienced double digit year-on- about COVID-19 and nearly one in four year growth each and every month from June admitted that their quality of sleep was worse 2020 through December 2020. than ever. ‘Sleep’ has now overtaken both ‘diet’ The growth in spending has been online and ‘exercise’ as the most searched for term led, resulting in an acceleration of the trend to on google (UK) across the ‘wellbeing triad’ ecommerce. Data from the Office for National of ‘sleep’, ‘diet’ and ‘exercise’, showing the Statistics shows that non-food retail sales increased awareness that consumers have of online grew to 25.5% of all sales in Q4 2020, this vital component of wellbeing. from 12.9% in Q4 2019. Historic data suggests With the increasing understanding of the that shifts to online show limited tendency to importance of sleep has come consumer reverse, and with the country entering 2021 change. Consumers are spending more on in its third national lockdown and all but wellness and the sleep market has been a essential shops closed, it is reasonable to beneficiary of this. Not only are consumers assume that a substantial element of the shift spending more on sleep wellness related to online will become permanent. products, they are also willing to spend Whilst the sector remains fragmented and more on the central element of a good highly competitive the competitive landscape night’s sleep; the mattress. The strong sales across beds and mattresses has eased, with a performance of eve’s premium hybrid mattress number of online mattress providers choosing testifies to this point, generating over 30% of to retrench from the UK market, alongside a mattress sales by volume. Every customer reduction in store based competition, both that purchases an eve mattress is asked at permanent and temporary as a result of the 100 days whether they’re sleeping better pandemic. There is also evidence to suggest thanks to their eve, and 80% tell us they are. A that the mattress in a box brands are growing strong piece of advocacy for the quality and their share of the market. Despite the level of effectiveness of our products. ongoing competition in mattresses, there is Sleep is a huge market, which has evolved no company that as yet has established itself substantially since the start of the pandemic. as a sleep wellness brand which commands Data from Euromonitor estimates that the widespread recognition and brand loyalty. European sleep market is worth approximately eve’s ambition is to achieve just this; to be £26bn, with the Core Markets that eve is seen as the go to brand for sleep wellness focused on (UK&I and France) being worth products, content and support across a range approximately £6bn.The advent of the first of categories and sales channels. national lockdown from March 2020 and the 13 s t r a t e g i c r e p o r t business model eve is an agile, digitally native business, with marketing, operations and customer a direct to consumer (DTC) led proposition, experience. In-line with many in the industry, supported by partnerships with leading manufacturing and fulfilment, which require retailers. This omni-channel approach reflects heavy fixed cost investment, are outsourced how consumers increasingly identify, research to leading third party suppliers in the UK and purchase items, moving seamlessly and Continental Europe. This setup helps between online and offline channels. By to de-risk the business in terms of currency being where the customer is, without incurring and any potential trade frictions. It has also the fixed costs of a large store estate, eve proved to be highly scalable and flexible, increases its potential sales opportunities enabling significant seasonal variations in and grows its brand awareness and product product demand to be met without any understanding. noticeable margin impact or variance Building a strong brand and customer in stock holding. There is a close working experience and ultimately therefore enjoying relationship with eve’s manufacturing repeat sales is at the centre of the eve model partners to innovate and develop best in and is essential to attaining profitability. class products that out-perform competitors To achieve this goal eve is focused on in terms of function and design, as establishing itself as a go to brand for sleep evidenced by the high performance of the wellness products, providing the authority and Premium Hybrid and Original Hybrid ranges consumer trust to sell a broader range in Which? Consumer surveys. of products at a greater frequency across The outsourced manufacturing and the category. fulfilment model, coupled with the DTC-led As a DTC-focused business, eve has the setup, enables a lower and more flexible privilege of vast amounts of first party data cost base than a traditional retailer. This from which to better understand customer has been evident throughout the rebuild needs and to evolve both its marketing and strategy, where non-profitable sales have its product offering. This enables the business been cut, processes completely overhauled to deliver better targeted incentives for without the negative margin impact and/ customers to return and buy further products or incurrence of substantial restructuring directly from eve. Some 13.2% of customers costs which would typically be expected that purchased an eve product in 2018 have from a more asset backed business. For returned to buy further eve products in the eve, marketing is one of its largest costs, subsequent two years. but unlike rent, it is flexible in nature and As a brand-led business, resources in is quick and easy to scale up and down terms of investment and talent are focused on as well as optimise and accelerate where the key operations of product development, opportunities arise. 14 s t r a t e g i c r e p o r t chief executive’s report we have navigated the many challenges of 2020 well and enter 2021 in good shape thanks to the tireless dedication, creativity and commitment of the entire eve team. C he r yl Calverley introduction Taking on your first CEO role can be daunting 2019, and statutory losses reduced by 83% to at the best of times but add in a global £2.0m. The improvement in cash generation pandemic, an unplanned for acceleration has been even more dramatic, with the Group in demand and your entire team working reporting its first ever neutral cash flow for the from home and the challenges quickly year, after adjusting for £0.3m VAT payments multiply. However, I am pleased to say that the from 2020 Q1, which were deferred until after transition in May 2020 went smoothly, with no the year-end under the UK Government’s noticeable impact on performance. This has Coronavirus support measures. This compares been aided by my deep involvement in the with a net cash outflow of £10.1m (excluding rebuild strategy since joining eve in December £12.0m equity funding) in 2019 and an outflow 2018 as Chief Marketing Officer and the of £21.0m in 2018 and means eve exits 2020 strong culture of dedication, care, creativity with a healthy cash balance of £8.4m and and commitment across the entire eve team, no debt, other than the lease liability on our something that has been a priceless asset office premises. during this remarkable period. The improvements to infrastructure and I first joined eve because I could see operations of the business are less visible the unique opportunity to build a sleep but of equal, if not greater importance. The wellness brand. A brand of significant size and restructuring that has taken place to date is strength occupying an uncontested territory, about more than just greater efficiency, it is meeting a rapidly growing consumer need about building a platform and a collection with a differentiated proposition to the more of product and marketing assets that can price led, mattress focused competitors, or be readily scaled across markets, without generalist homewares retailers. I am pleased markedly increased overheads or damaging to say that that opportunity still remains and the customer experience. We have been during 2020 we’ve made good progress rebuilding in preparation for future growth, towards achieving this, as part of our wider and whilst work will remain ongoing, eve now rebuild strategy. has a tech platform that can be rolled out Since taking over as CEO the focus has across new markets without incurring higher remained on delivering the rebuild strategy, overheads. Complementing this more scalable with the central goal of putting the business platform is a broader product set, a brand on a more sustainable, long term financial positioning and a marketing strategy that is footing. The improvement in the financial instantly replicable across markets, supported performance is clear to see with underlying by a highly scalable logistics and customer EBITDA losses in 2020 reduced by 81% year- service operation. on-year to £2.0m on revenues 6% higher than 15 s t r a t e g i c r e p o r t the rebuild strategy To best evaluate the performance of the business in 2020 it is necessary to analyse the performance against the three core pillars of the rebuild strategy: • differentiated brand positioning; • expanded product range; and • lower friction customer experience. differentiated brand positioning To differentiate eve from the other mattress During the first half of the year, we grasped in a box brands, where competition is largely the opportunity offered by the depressed price-led, our strategy is to establish eve as TV market to run our existing, highly effective a trusted destination for high quality sleep campaigns in both the UK and France. These wellness products. To achieve this, we have drove a strong customer response and refocused our marketing communications on further gains in marketing efficiency. the benefits that eve can bring consumers in The success of our marketing is sleep wellness. A fine example is where eve demonstrated in our unprompted UK brand partnered with Channel 4 to celebrate World awareness, which increased from 15% in Sleep Day on 13 March 2020 by removing the August 2019 to 17% at August 2020. This brain-stimulating blue light from TV ads and understates the full improvement achieved replacing it with an amber-coloured filter to lull during the year, with the benefits of the viewers into a good night’s sleep. This initiative latest TV campaign that launched in was supported by an eve ad, which aired on November and the brand presence in Boots a Sunday evening time slot on Channel 4 and to come through in the next survey. related channels, providing simple and effective Our Irish business, which is now ready sleep tips to further amplify the eve message. for growth, benefited from some increased The concept evolved further with the marketing investment in the fourth quarter new UK campaign, ‘switch off with eve sleep,’ of the year, though this was not extended which leant on some of the key themes from to TV. Marketing investment in France, with the World Sleep Day campaign. The new the exception of the running of a small campaign, which launched in November 2020 amount of TV media utilising an existing TV and runs every Sunday night on Channel 4 campaign in May was minimal during the through to spring 2021, revived the iconic year, as the business is at an earlier stage ‘test Card F’, which until 1997, signalled the in its development than the UK. end of programming in a bid to encourage In addition to refocusing the positioning the nation to switch off their minds and of our brand, considerable effort has bodies and start winding down for bed. gone into improving marketing efficiency, The campaign extends to casual gaming, including the development of enhanced popping up on the screens of popular gaming data analytics. Subsequent marketing apps such as Candy Crush, to remind investment has been evaluated in depth, users that it is time to grab some sleep. 16 s t r a t e g i c r e p o r t : chief executive's report with the removal of channels that were not Complimenting the increased mattress and generating a sufficient return, in line with our bed frame range is ongoing growth in the strategy of focusing on profitable sales. The bedding ranges, with the notable addition success of this strategy is best evidenced in of eve’s first weighted blanket in the second the efficiency of our marketing spend, which half of the year, to combat anxiety and aid a has improved in all three of our markets in restful sleep. The weighted blanket forms part tandem with growing awareness in the UK. In of eve’s exploration into sleep accessories the UK&I marketing efficiency has improved alongside its new ‘well slept’ range of sleep from 52.3% in 2019 to 25.1% in 2020. This is the wellness gifting products and supporting items fourth successive year of improvement and we such as bedside storage and sleep aids. are now confident our marketing efficiency In the second half of the year eve has reached sustainable levels. In France, announced the launch of this first ever marketing efficiency improved from 44.1% gifting range of sleep wellness products, with in 2019 to 21.0% in 2020, though it should be Boots UK. The range was launched online recognised that our ambition is not to sustain and exclusively in 446 Boots wellness areas these levels, but to invest for further growth nationwide as part of its Christmas promotion in France. expanded product range Range expansion offers eve a clear trajectory to leading the sleep wellness space and provides the opportunity to grow the frequency of customer purchases. Mattresses remain at the heart of the business and increased from four to seven products in the year, with the relaunch of the Original Hybrid mattress in October a key move in response to the increasing importance of the hybrid category to the mattress market. eve also offers a cot mattress as part of its child and baby offering. Recognition of the quality of the product range is widespread and eve now has the top two most highly rated mattresses in the UK – the Original and Premium Hybrid - and three of the top five mattresses, according to consumer champion Which?. In France the Premium Hybrid Mattress has been awarded the ‘Meilleurs Choix’ (best choice) by the French equivalent of Which?. eve has further expanded its range of bedframes, and now offers four distinct styles, two of which offer ‘storage’ options. Furniture represents 5.8% of eve’s sales value for 2020, with furniture sales growing 40% year on year in the UK. As with mattresses, eve sees particularly strong sales in its premium ranges, with the more expensive ‘spindle back’ range now representing almost 10% of bed frame sales across the Group. and comprised a range of smaller items from candles and diffusers to hot water bottles and pyjamas. The range proved highly successful and sold out quickly, despite the turbulence on the high street. The partnership’s key focus was to further raise eve’s brand awareness and extend knowledge of our products to a wider audience. To best measure the success of range extension we have introduced a new KPI, which is the percentage of customers who make a repeat purchase within two years of their initial order. This new KPI will replace the existing KPI that measures sales of non- mattress products as a percentage of total revenues. For the base year of 2020 the percentage of customers who had repeated was 13.2%. lower friction customer experience During the year there has been extensive work on restructuring the e-commerce platform, manufacturing and distribution processes that ultimately underpin the customer experience and drive a higher conversion rate, as well as improving cost efficiency. The ecommerce websites for our three markets of the UK, Ireland and France were re-platformed to Shopify during the year, with France completing shortly after the period end. The new platform requires less s t r a t e g i c r e p o r t : chief executive's report 17 ongoing maintenance and provides greater The rapid and unplanned for uplift stability at times of high traffic, which proved in demand that followed the start of the invaluable during the record Black Friday pandemic caused some early capacity and winter sale periods. This has improved our issues in terms of speed of delivery and baseline performance, reducing failure and an overstretched customer service team, error on-site, and opens up opportunity for resulting in not all customers receiving further improvement in functionality without the first rate service that they rightfully increasing overheads. deserve. To address this issue, eve invested In 2020 the business restructured its in bolstering the Customer Experience team mattress manufacturing, which remains with new hires over the summer months. To outsourced to third parties, to run along further support customers during a difficult geographic lines. Having previously worked socio-economic time, in April, eve increased with three manufacturers in the UK, France and its ‘risk free trial’ period from 100 to 200 nights Belgium, this was reduced to two, resulting in and introduced an additional discount mattresses for the UK and Irish markets being for all NHS staff. The trial period has now made in the UK and those for the French returned to 100 nights, having seen very market largely manufactured in Belgium. little uptake beyond the usual 100-night end Concentrating manufacturing within end point, but the NHS staff discount remains. markets has clear benefits in the post-Brexit The aggregate impact of the above era in terms of frictionless trade, speed of initiatives that should continue to benefit delivery to customers and lower warehousing 2021 has been a 60 bps increase in the and delivery costs. group-wide conversion rate in 2020, which Historically eve has worked with a variety follows a 30 bps increase in 2019. of carriers in each of its three territories depending on the size of the product being delivered. Customer orders, which contained products of different sizes, would be delivered responsible business separately by several carriers, increasing As a business we recognise our costs and providing the customer with a sub- responsibility to our stakeholders and the optimal experience. Since the implementation wider community at large. We continue of Shopify, this issue has been resolved for the to make improvements throughout UK and Irish markets and will be extended to our operations in order to reduce our France in 2021. Orders are now consolidated environmental footprint. Our localised to allow all items in an order to be delivered in production facilities mean that we are not a single delivery. In Q2 eve further introduced trucking or airfreighting long distances, while a new delivery service of ‘remove and recycle’ our mattress packaging boxes are produced allowing customers to have their previous in the UK and made from Forest Stewardship mattress removed and recycled at the point Council approved card. their new mattress was delivered. This has In early 2020 eve partnered with TFR had a strongly positive customer response Group in the UK, a prominent furniture with uptake over 30% of all orders. recycling company, on the removal, Warehouse consolidation took place rejuvenation and recycling of mattresses. in 2019 in the UK, moving from three to one The partnership includes taking them facility. The new site, which is under third party through stringent sanitisation and quality- professional management has a superior check processes before rolling and boxing, stock management system and this has saving on CO2 emissions, storage and re- enabled further efficiencies and improvements delivery. This also lets the end refurbished in 2020, including the need to hold less stock mattress customer enjoy the benefits of a and occupy less warehouse space. rolled mattress. To date the partnership has achieved a rejuvenation 18 rate of approximately 60%. Remaining our extended leadership team share options mattresses that are not capable of being so they can share in the success they bring to rejuvenated are broken down and each the business. material individually recycled. At the same time we have moved This policy is part of ensuring that 100% of to a flat bonus structure, meaning everyone eve sleep’s returned mattresses are diverted in the business, regardless of salary, tenure away from landfill, saving over 100 tonnes of or experience receives the same cash reward waste, whilst also optimising revenue recovery. at year end, should we achieve our aims. This A separate partnership also encourages further fosters our culture of transparency, customers to have their previous mattress equality and openness, whilst showing real removed and recycled at the point their respect for the efforts each and every one new mattress is delivered. of the team put in to help us achieve our culture and diversity mission of sleep wellness. Our focus on diversity has just begun in earnest with two key initiatives. Firstly an evolution to our approach to recruitment to We thrive on individuality at eve. We believe ensure we recruit purely on capability and that irrespective of age, gender, ethnic origin, blind to background, through the introduction religion, sexual orientation, gender identity, of the ‘applied’ blind recruitment software. gender expression, or disability, eve should be And secondly, in November we took on our a place of opportunity, respect and support first apprentice in the marketing department, for individuals to be themselves, allowing them in partnership with the Marketing Academy. to do their best work. We understand that our eve is pleased to present the following people, capability and culture are one of the metrics relating to gender balance as at 31 most powerful competitive advantages that December 2020. The following breakdown we have, and a focus on developing talent, shows the number of persons of each sex retaining high performers and attracting a who were: diverse intake are core to our future success. There has been significant investment in the period and beyond in the development of our leadership team, with leadership skills training and individual coaching core to this. To widen our positive impact on development further, we have been working with ‘You Can Now’ giving students of design globally the opportunity to learn their craft on a live ‘eve’ brief to further develop our products and brand. Our business wide investment in learning was recently recognised by the Campaign for Learning for its impact. Retaining and motivating our key talent whilst engaging the whole eve business with the challenges at hand has been top of our mind. To this end we have this year redesigned our rewards and benefits scheme, awarding (i) (ii) directors of the company;. senior managers of the company (other than those falling within category (i)); and (iii) employees of the company. Male Female Directors Senior Managers Employees 4 3 15 1 2 36 19 the next two years With the restructuring of the business now 2021 will see a substantial increase in largely complete and the technology, logistics marketing investment in France, targeted and operations placed on a more stable and on a new marketing campaign, including efficient platform, the time is right to update TV, which is expected to launch in the the strategy for the next two years. The Group’s spring. There will also be an increased focus focus will be on accelerating the business on retail partnerships, including but not through the three pillars of Growth, Customer limited to an expansion of the successful Obsession and Resilience. Growth, as defined relationship with homewares retailer Olivier in terms of profitable revenues, will be the Desforges. primary objective and will be achieved from The Irish market received some new and existing markets as well as increased focus and investment in the a continued focus on product development, fourth quarter of 2020 and this will continue with Customer Obsession and Resilience the through 2021. As the strategy develops and key enablers. Customer obsession will focus progress is achieved in France and Ireland on developing products and services that we will look at entering new European help people sleep so well, and a customer markets. Expansion will be executed in a experience so seamless that they become controlled and disciplined way, leveraging vocal advocates for the brand. Resilience for existing infrastructure and product assets in eve can be defined as having a strong and order to keep a tight control of costs. stable tech, team and operational capability The investment in growth is expected that can adapt quickly to changing market to increase costs in the current year. The conditions in existing markets and expand into strategy does not represent a return to the new territories at minimal cost, whilst enjoying past, but a well thought out and costed robust margins. strategy to accelerate to a sustainable, The UK is eve’s largest market and has profitable and balanced business. The been the engine of growth in 2020, benefitting investment required from not only the strong external tailwinds to finance the growth will come from the but also the significant improvement in Group’s existing cash resources. marketing efficiency and the addition of the new TV led campaign from November 2020. We will continue to invest in the UK market over 2021, including the running of our weekly TV campaign until the spring, to maintain sales momentum and leverage our position as having the two best mattresses in the UK Cheryl Calverley according to consumer champion Which?. Chief Executive Officer To build a stronger, broader and larger, 17 March 2021 profitable business we must look beyond the UK market for balanced growth. Our near term focus is on the French market, where we have traded since 2016. Like the UK, our French business has been restructured as part of the rebuild strategy, including a re-platforming of the website to Shopify which completed shortly after the period end, but unlike the UK it has not received significant marketing investment in recent years. 20 s t r a t e g i c r e p o r t : chief executive's report key performance indicators In 2020, the key performance indicators (KPIs) used to evaluate and monitor the performance of the business were as follows and are 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 KPIs Overall revenue growth Marketing efficiency Underlying EBITDA1 operational KPIs UK brand awareness Product return rates eve website conversion rate eve customer sleep wellness score Non-mattress revenue growth Notes 1. Underlying EBITDA is defined in the Glossary on page 23 21 22 s t r a t e g i c r e p o r t : key performance indicators update to KPIs for 2021 Operational KPIs relate to group performance To reflect the updated strategy which across all three markets unless otherwise stated. will focus on the new three pillars As can be seen in the data provided below, of Growth, Customer Obsession and all financial KPIs improved significantly in the Resilience, eve will be updating one period, along with four of the five operational of the KPIs. From 2021 onwards rather KPIs. Importantly, for the first time eve has generated than reporting the increase in non- revenue growth, whilst also improving the bottom line mattress sales as a proportion of total performance of the business, with an 83% reduction year- sales, by way of a proxy for repeat on-year in underlying EBITDA losses. business, the Group will report the The 200bps growth in unprompted brand percentage of customers who have awareness probably understates the full improvement actually made a second purchase given that the survey was undertaken before the within two years of the initial order. benefits of the latest UK TV led marketing campaign This new operational KPI: ‘Repeat and the Boots UK licensing deal. The conversion rate Customers’, more accurately measures has now improved for the last three years, which not the focus on growth through customer only underpins improved marketing efficiency but also obsession and establishing eve as testifies to the continued improvements that have the go to place for all sleep wellness been made to the third pillar of lower friction customer needs. For the base year 2020 the percentage of customers making a repeat purchase within two years was 13.2%. experience. financial KPIs • Group revenue increased by 6% to £25.2m (2019: £23.9m) • Improvement in Group marketing efficiency by 2634bps to 24.2% (2019: 50.5%) • Group underlying EBITDA losses reduced by 81% to £2.0m loss (2019: £10.7m loss) operational KPIs • Unprompted UK brand awareness: 200bps increase in unprompted UK brand awareness to 17.0% at August 2020 (August 2019: 15.0%) • 120 bps year-on-year improvement in the returns rate to 7.8% (2019: 9.0% restated) • 60 bps year-on-year improvement in the eve websites conversion rate • eve customer sleep wellness score: 8/10 (2019: 8/10) • Decrease in non-mattress sales as a proportion of total sales by 480bps to 20.8% (2019: 25.6%) 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 (2020 and 2019), fundraise-related expenditure (2019 only), adding back IFRS16 adjustments to office lease costs. Underlying EBITDA reflects what management believe to best 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 23 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 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 mattress (internally assessed using post-purchase email campaigns, sent to all customers who have purchased a mattress in the period). 24 25 financial review eve achieved 6% growth in group revenue and at the same time doubled the marketing efficiency and reduced underlying EBITDA losses by more than 80%. Tim Parfitt group financial performance £m Group revenue Group profit Distribution expenses Profit after distribution expenses Payment fees Marketing costs Profit/(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 Reconciliation to underlying EBITDA: Taxation Net finance income Fundraise-related expenditure Share-based payment charge connected to employee remuneration Depreciation and amortisation Impairment Underlying EBITDA (as stated in 2019) Application of IFRS 16 to lease for serviced office Underlying EBITDA (restated) 2019 Movement 2020 25.2 14.4 (3.5) 10.9 (0.5) (6.1) 4.3 (3.3) (3.2) (0.2) (2.4) - (2.4) 0.4 (2.0) 23.9 12.7 (2.7) 10.0 (0.4) (12.1) (2.5) (4.4) (5.0) (0.5) (12.5) - (12.5) 0.4 (12.1) (0.4) (0.4) - - 0.2 0.7 - (1.5) (0.5) (2.0) - 0.2 0.5 0.5 0.6 (10.7) (0.2) (10.9) +6% +14% +28% +10% +25% (49%) (269%) (24%) (37%) (57%) (80%) (80%) +18% (83%) (85%) (81%) s t r a t e g i c r e p o r t s t r a t e g i c r e p o r t : financial review 26 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 2020 57.3% (13.9%) 43.4% (24.2%) (28.0%) (25.5%) 2019 53.1% (11.4%) 41.7% (50.5%) (41.4%) Movement +418bps +244bps +174bps (2634bps) (1335bps) (35.9%) (1044bps) Wages & salaries (excluding share-based payment charges) (13.2%) (18.4%) (515bps) UK&I financial performance £m Revenue Gross profit Distribution Profit after distribution Payment fees Marketing Profit/(loss) after distribution, payment fees and marketing 2020 20.5 11.8 (2.7) 9.1 (0.5) (5.0) 3.6 2019 18.5 10.2 (1.8) 8.4 (0.4) (9.7) (1.7) Movement +11% +16% +47% +10% +31% (47%) +308% Marketing costs as % of revenue (25.1%) (52.3%) (2725bps) France financial performance £m Revenue Gross profit Distribution Profit after distribution Payment fees Marketing Profit/(loss) after distribution, payment fees and marketing 2020 4.6 2.5 (0.8) 1.7 (0.1) (1.0) 0.6 2019 5.3 2.6 (1.0) 1.6 (0.1) (2.4) (0.9) Movement (14%) (3%) (17%) +6% (22%) (59%) +173% Marketing costs as % of revenue (21.0%) (44.1%) (2308bps) other financial performance £m Revenue Gross profit Distribution Profit after distribution Payment fees Marketing Profit after distribution, payment fees and marketing 2020 0.1 0.1 0.0 0.1 (0.0) 0.0 0.1 2019 (0.0) (0.1) 0.1 0.0 0.0 0.0 0.0 Movement +424% +263% (100%) +750% (378%) (75%) 27 s t r a t e g i c r e p o r t : financial review revenue Revenue increased by 6% to £25.2m (2019: As a result of this focus, the Group £23.9m). The growth was driven by UK&I which successfully more than doubled the lifted 11% to £20.5m (2019: £18.5m), with efficiency to 24.2% (2019: 50.5%) an the direct-to-consumer channel performing improvement of 2634bps. UK&I improved by exceptionally well. France revenue declined 2725bps to 25.1% (2019: 52.3%) and France by 14% to £4.6m (2019: £5.3m) following a improved by 2308bps to 21.0% (2019: 44.1%). large reduction in marketing investment. gross margins profit after distribution, payment fees and marketing Gross margins for the Group improved by Both core markets of UK&I and France 418bps to 57.3% (2019: 53.1%). This was a result achieved profits after distribution, payment of the more profitable direct-to-consumer fees and marketing. UK&I delivered a £5.3m business growing as proportion of total sales improvement to £3.6m (2019: £1.7m loss) and also from a rigorous focus on margin and France delivered a £1.5m improvement and the decision to exit unprofitable retail to £0.6m (2019: £0.9m loss). partnerships when appropriate. distribution costs administrative expenses (excluding marketing) Distribution costs as a percentage of revenue Wages & salaries (excluding share-based increased by 244bps to 13.9% in 2020 (2019: payment charges connected with employee 11.4%). The mattress sales mix shifted from remuneration) reduced by £1.1m to £3.3m the previous year to more premium products in 2020 (2019: £4.4m) following reductions which are heavier and therefore more in headcount made at the end of 2019. This expensive to deliver. The relative increase in represents a decrease from 18.4% to 13.2% direct-to-consumer revenue also added to of Group revenue. the higher costs as a smaller proportion of Other administrative costs reduced orders were shipped in bulk to retail partners. by £1.8m to £3.2m (2019: £5.0m). In the final quarter this increase was partially The application of IFRS 16 to the office offset by consolidating customer deliveries lease costs has resulted in a depreciation where possible. Previously customers could charge of £0.5m (2019: £0.2m). The adoption receive multiple deliveries for a single order. was applied from August 2019 onwards, This has become possible following the UK when the Group moved to its existing implementation of Shopify. marketing investment The Group marketing investment was reduced by 49% to £6.1m in 2020 (2019: £12.1m). As a key performance indicator, the marketing efficiency, defined as marketing costs as a percentage of revenues, is closely monitored and investment targeted to achieve the best possible outcome. premises. Included in Other Administrative Costs for 2020 is a charge of rent and rates of £nil (2019: £0.5m). There were further reductions to administrative costs with £nil impairment charge (2019: £0.6m), £nil fund raising expenses (2019: £0.2m) and £0.2m share based payment charges relating to employee remuneration (2019: £0.5m). 28 s t r a t e g i c r e p o r t : financial review underlying EBITDA loss loss after tax (Defined as: earnings before interest, tax, depreciation, amortisation, impairment charges, share-based payment charges relating to employee remuneration, fundraise-related expenditure in 2019, adding back IFRS16 adjustments to office lease costs). The loss after tax improved by £10.1m to £2.0m loss (2019: £12.1m loss). capital expenditure The Directors consider that they are best Due to the Group’s outsourced business able to monitor Group financial performance model, capital expenditure requirements via underlying EBITDA by removing fundraise- remain low. The main area of capital related expenditure, share-based payment expenditure in 2020 related to ecommerce charges relating to employee remuneration and ERP systems infrastructure. Total capital and adding back the office lease costs which expenditure in 2020 in the form of intangible represent a material monthly cash outflow. software assets totalled £0.3m (2019: £0.5m). This has been restated from 2019 as the office lease costs were previously shown for only part of the year, and the new lease effective from August 2019 was presented under IFRS 16. The application of IFRS 16 has resulted in a depreciation charge recognised in 2020 of £0.5m (2019: £0.2m). Under IAS 17, expenditure relating to operating lease rentals would have been included within administrative expenses and hence EBITDA. The underlying Group EBITDA loss decreased by £8.9m to £2.0m loss in 2020 (2019: £10.9m loss). The 81% reduction in the loss reflects the increased focus on working capital Inventories reduced by 64% to £0.6m (2019: £1.6m) through better management of stock and realisations from obsolete inventory. Trade and Other Receivables reduced by 30% to £1.9m (2019: £2.7m) largely following the return of a rent deposit on the Group’s previous registered office, vacated in 2019. cash position profitable sales, greater efficiency in marketing The Group had cash and cash equivalents investment and substantial overhead of £8.4m at the year-end (2019: £8.0m). Tim Parfitt Chief Financial Officer 17 March 2021 reductions. share-based payment In accordance with IFRS, a share-based payment charge for 2020 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 2020 was £0.5m (2019: £1.1m) of which £0.3m (2019: £0.6m) related to equity issued in exchange for marketing services and £0.2m (2019: £0.5m) relating to employee remuneration. 29 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 The Group is subject to fluctuations in for the Group and there is a risk that this the cost of materials which may adversely expenditure may not result in the targeted impact on the Group's profit margins. The increase in sales or brand awareness levels. price of many components is impacted by eve monitors and analyses the global events such as the demand for key effectiveness of marketing spend on a daily chemicals used in the manufacture of foam. basis and adjusts accordingly. The Group The Group primarily manufactures its has built a deep understanding of the most French sold mattresses in the EU and its appropriate marketing strategies and also UK&I sold mattresses in the UK, creating a supplements this with third party media and natural hedge against currency movement marketing agencies to monitor and advise for its key products. For other products and on the effective implementation and roll-out markets the Group looks to agree prices for of marketing and advertising campaigns to a period of time with manufacturers where meet targeted outcomes. possible to provide a degree of certainty over currency fluctuations. product The Group is responsible for the design of eve products and could face exposure to product liability claims or claims against health and safety procedures or practices in different territories. The Group has a robust product and supplier onboarding process to ensure new products and suppliers are of the highest standards. The Group also retains insurance brokers to ensure sufficient insurance coverage for product liability and associated losses. 30 s t r a t e g i c r e p o r t s t r a t e g i c r e p o r t : principle risks and uncertainties operations Brexit The Group relies on outsourced partners The Group took steps in 2019 and 2020 for manufacturing and logistics who are to mitigate the effect of Brexit by aligning typically able to scale their operations to meet manufacturing geographically so that increased demand. However, the Group may mattresses are manufactured close to be exposed to disruption at these suppliers. the customers. This minimises the transit Close working relationships are of products between the UK and EU. maintained with outsourced partners. Close attention has been paid to export The Group regularly reviews and requirements, particularly shipping to communicates forecasts to ensure customers in Northern Ireland and Ireland. capacity constraints are managed. Investments have been made in the Group’s eve seeks to offer exceptional customer technology platforms to develop processes service and facilitate smooth returns which to minimize disruption. could result in high return rates under the 100-night trial offered on mattresses. Reverse logistics is an area of focus and the Group works with third parties to ensure an efficient collection and recycling process to recover costs. Return reasons is a key metric which is monitored closely and fed back into product development. competition COVID-19 virus During 2020 the restrictions placed on movement for the UK population resulted in increased demand from consumers for the Group’s products. COVID-19 has driven a significant shift from physical retail to ecommerce and whilst that may re-balance somewhat, it is expected that consumers will continue to shop online more than they The Group operates in the highly competitive did pre-pandemic. mattress and pillow industries and may not In the near-term, a relaxing of travel be able to grow, or maintain, its existing restrictions may see consumer spending move market share. away from homewares onto leisure and travel. The Group constantly reviews and This could have an adverse impact on revenues. analyses its performance against its business Furthermore, forecasting revenues in 2021 is plan and against market competitors. The made more difficult given that it’s not possible Group has both internal talent and external to determine the level of incremental sales advisors who can advise on and respond to generated in 2020 as a result of physical retail any changes in the competitive environment. competitors being closed. Approved and signed on behalf of the board. Tim Parfitt Chief Financial Officer 17 March 2021 31 32 s t r a t e g i c r e p o r t g o v e r n a n c e r e p o r t section 172 reporting COVID-19 The directors took the early decision to close the company’s office in mid-March 2020 and request all employees work from home before it was mandated by the UK government. This was done to protect the health of the Company’s employees. The Board were kept appraised throughout the year of the various activities and measures introduced by the Company to support employees’ well-being throughout the pandemic. The decision was taken to extend the normal 100-night trial to 200 nights during the first UK and French lockdowns giving customers the flexibility to work around any self-isolations and supply chain disruptions. The Board of Directors confirm that during the year under review, it has acted to promote the long-term success of the Company for the benefit of shareholders, whilst having due regard to the matters set out in section 172(1) (a) to (f) of the Companies Act 2006, being: (a) the likely consequences of any decision in the long term (b) the interests of the Company’s employees (c) the need to foster the Company’s business relationships with suppliers, customers and others (d) the impact of the Company’s operations on the community and the environment (e) the desirability of the Company maintaining a reputation for high standards of business conduct; and (f) the need to act fairly between members of the Company. issues, factors and stakeholders The Board has direct engagement principally with our employees and shareholders but is also kept fully apprised of the material issues of other stakeholders through the Executive Directors, reports from senior management and external advisers. We outline the ways in which the Board and management have engaged with key stakeholders in our Corporate Governance Report on pages 39 to 45. Stakeholder engagement not only allows the Board to understand the impact of its decisions on key stakeholders, but also ensures it is kept aware of any significant changes in the market, including the identification of emerging trends and risks, which in turn can be factored into its strategy discussions. The Directors define our stakeholders as individuals or groups who have an interest in, or are affected by, the activities of our business. The directors consider the key stakeholders to be shareholders, employees, local communities, key suppliers and key partners. The directors have identified and selected the following Board-level decision making processes as those of greatest strategic significance made during 2020 and would like to highlight the consultation undertaken by eve across a range of stakeholders due to their business impact. 33 g o v e r n a n c e r e p o r t adjustments to 2020 plan retail partnership profitability The Board reviewed revised financial plans to model the impact of a slow-down in consumer spending and made contingency plans to minimize any adverse impact. When it became clear that consumer demand for the company’s products had returned, the Board approved plans to increase marketing investment to take advantage of more economical TV advertising at a time when other consumer facing brands were reducing their spending. supporting communities The directors were delighted to be able to support healthcare workers in UK and France by providing mattresses free of charge to several hospitals for use in staff rest areas. Furthermore, NHS staff in UK have been offered an ongoing discount. The decision to withdraw from a relationship with Amazon in the UK was taken, despite the loss of revenue, to improve margins and allow management time to be focused on building long term relationships with other retailers. 2021 plan The Board scrutinized and approved the 2021 financial plan taking into account the Company’s available resources with a particular focus on sensible, sustainable growth. board changes Following the appointment of Cheryl Calverley to the role of Chief Executive Officer, James Sturrock was appointed as a non-executive director to enable the Board to continue to benefit from his experience leading the business over the previous two years. A search was commenced in the final quarter of the year for a new independent non-executive director who could bring operational and logistical experience which was identified as an area of expertise missing from the Board. 34 g o v e r n a n c e r e p o r t directors’ governance statement The Board recognises the importance of achieving the highest possible standards of corporate governance. Pau l P indar Dear Shareholders, The Board recognises the importance of achieving the highest possible standards of corporate governance. High standards of corporate governance remain pivotal to, and complementary to, our long-term strategy. Our commitment to good corporate governance is based on a recognition that good governance allows us as a Board to identify and to focus on supporting the drivers of long-term growth; it allows us to take into account the full range of our stakeholders, including investors, employees, customers, those in our supply chain; and facilitates constructive discussions between the Board and management on the Company’s strategic and operational priorities. As detailed elsewhere in this Annual Report, the Board has dedicated significant time in 2020 toward overseeing and scrutinising the development and delivery of eve’s long-term strategy. Clearly, 2020 posed several unprecedented challenges to the business and we have dedicated significant time this year to overseeing management’s response to the enormous changes, both in terms of the Company’s operations and the wider market environment in which the Company is operating. As a Board, we are pleased with the progress we have made on a range of corporate governance actions in 2020, of which I would particularly like to highlight the following: • Regularly considered the potential impact of COVID-19 on the Company’s operations and actions taken and proposed by management in response whilst taking into account the views of a range of stakeholders. For further information on the ways in which we have engaged with stakeholders over the course of 2020, please see pages 32 to 33. • 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 were delighted to confirm the internal promotion of Cheryl Calverley to be our new Chief Executive Officer in 2020, which we feel reflects the strong succession planning processes we have in place. • We received and challenged several detailed updates on a number of our core 35 reviews this compliance annually and last reviewed our compliance in November 2020. We remain fully committed to the principles and spirit of the Code and disclose both in our compliance statement (available on investor. evesleep.co.uk/corporate-governance) and in this governance statement, on how we have applied the Code’s principles. Paul Pindar Chairman operational functions, including product development, operations and marketing functions, and the ways in which such functions have reoriented to meet the unprecedented changes brought about by the COVID-19 pandemic. • We undertook an internally facilitated Board evaluation in 2020, 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. • We focused on succession planning at a Board level and as a result, we began the recruitment process for the onboarding of Masood Choudhry, the Company’s new Non-Executive Director. Further information on each of the above points is set out subsequently in this report. The Board decided in 2018 to formally adopt the QCA Code (the “Code”). The Board 36 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 focussed 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 Nomination Committee Remuneration Committee (Chair) Cheryl Calverley Chief Executive Officer appointed: May 2020 experience: Cheryl joined eve in December 2018 as Chief Marketing Officer before her promotion to the role of Chief Executive Officer in May 2020. Cheryl has over 20 years’ experience in marketing and building brands, working with leading consumer facing companies including Unilever, Birds Eye Iglo and most recently The AA, where she held the position of Marketing Director. committee membership: None g o v e r n a n c e r e p o r t : board of directors 37 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 businesses. committee membership: None James Sturrock Non-Executive Director appointed: May 2020 experience: James joined eve in September 2018 as Chief Executive Officer before stepping away from this role in May 2020. James remained on the Board as a Non-Executive Director, with effect from May 2020, allowing the Company to continue to benefit from his expertise. Prior to his roles at eve he had 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. Before 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. James is also Chief Executive Officer of Tapi Carpets & Floors Limited. committee membership: Audit Committee Nomination Committee Remuneration Committee 38 g o v e r n a n c e r e p o r t : board of directors Thomas Enraght-Moony Independent Non-Executive Director appointed: April 2017 experience: Tom joined Eve in April 2017. He has spent over 20 years leading brand transformation at fast growing, global technology firms. He currently serves as President, International for ecoATM a global leader in offering consumers eco-friendly trade-in of used mobile phones. Prior to ecoATM, he served as Chief Customer Officer at McArthurGlen, Europe’s largest owner and operator of outlet malls with €4.5 billion in annual sales. Prior to that he was COO and then CEO of Leisure Pass Group. Previous to that he served as CEO of Match.com (owned by Barry Diller’s IAC), the world’s largest online dating business. Earlier he held roles at E*TRADE and AT&T Wireless. He holds an undergraduate degree from The University of Glasgow and an MBA from INSEAD. committee membership: Audit Committee Nomination Committee (Chair) Remuneration Committee Masood Choudhry Independent Non-Executive Director appointed: February 2021 experience: Masood joined Eve in February 2021. Masood has over 20 years’ of experience working in supply chain having worked for a number of digital and multi- channel retailers. Masood is currently Vice President of Logistics at Zalando, Europe's biggest online fashion retailer, with responsibility for managing their supply chain and has held this position for the last four years. Prior to this Masood spent time at various other leading direct to consumer businesses including World Stores, where he held the position of Chief Operating Officer and ASOS for six years, where he was Director of Supply Chain Development and Director of Logistics, overseeing a period of rapid global committee membership Audit Committee (Chair) Nomination Committee Remuneration Committee corporate governance report 39 g o v e r n a n c e r e p o r t 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. The Company also takes steps to apply the principles of the UK Corporate Governance Code in so far as it can be applied practically, given the size of the Company and the nature of its operations. compliance statement our governance structure During the year ended 31 December 2020, the Board has reviewed its compliance with the QCA Code and has reviewed and approved a revised compliance statement, which sets out how the Company complies with the Code’s ten principles and explains any areas in which the Company’s practice and policies deviate from the Code. The compliance statement can be viewed via: investor.evesleep.co.uk/ corporate-governance 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 and oversight of the external and diversity rewards across eve audit function 40 g o v e r n a n c e r e p o r t : corporate governance report 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. 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 46 to 56. The terms of reference of each committee are available from our website found at investor.evesleep.co.uk/corporate governance#governance-docs 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 November 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. g o v e r n a n c e r e p o r t : corporate governance report 41 board activity in 2020 strategy Purpose, values and culture • • • Regularly considered the potential impact of COVID-19 on the Company’s operations and actions taken and proposed by management in response Regularly received and discussed strategic updates, proposals and reviews from the Executive Directors Reviewed the product strategy for 2020 operations • Considered the financial performance of the Group and key performance targets, including a review of the monthly accounts at each Board meeting • Monitored performance through regular presentations from the CEO and CFO Purpose Why we do what we do Value The qualities we embody Culture How we work together Our strategy revolves around building a sustainable and profitable business that will deliver long-term value to our shareholders. The Board believes that our corporate culture continues to serve as one of our key competitive advantages. We encourage all 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. • Approved the Annual Report, half-year and In respect of the Board’s role, we recognise annual results announcements • Approved the 2021 budget shareholder and stakeholder engagement • • Took into account the views of a range of stakeholders when considering the Company’s actions in response to the COVID-19 pandemic Reviewed a technology migration in order to provide improve efficiency and customer experience corporate governance • Discussed the outcome of the Evaluation of Board Effectiveness and agreed actions for 2021 • Appointed James Sturrock as a Non- Executive Director and as a member of the Audit Committee, Nomination Committee and the Remuneration Committee Received updates on legal and governance developments affecting the Company Began the recruitment of Non- Executive Director, Masood Choudhry • • the importance of setting a tone from the top and have met with a number of staff over 2020 at various levels of the business. This is an area where we want to keep on developing in terms of the Board’s awareness and engagement with corporate culture in 2021, including regular reporting to the Board on a number of cultural metrics. These metrics will include the following focus areas: engagement, growth, diversity and inclusiveness, and transparency and communication of strategy. Culture and engagement is measured and facilitated by an external technology platform which highlights key focus areas in order to shape the Company’s people strategy and benchmark against peers. The Board in 2021 will receive regular updates on progression against these metrics through incorporation within the Chief Executive Officer report presented at each meeting. 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. 42 g o v e r n a n c e r e p o r t : corporate governance report With a view to securing further independence on the Board, and having had regard to the current and desired further skills, competencies and diversity mix on the Board, the Board approved the appointment of Masood Choudhry to the Board as an independent non-executive director, effective 3 February 2021. A short biography of each of the directors in office at the date of this Report is set out on pages 36 to 38. 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. Thomas Enraght-Moony and Masood Choudhry are considered by the Board to be independent. During the reporting year, Nikki Crumpton was also considered by the Board to be independent. The Board is of the opinion that both Thomas and Masood 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. Not withstanding 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. We have internal policies covering a range of ethical behaviours, such as an anti-bribery and anti-corruption 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 2020, there were no instances of the anti-bribery and anti-corruption policy or whistleblowing policy being invoked. In respect of our forthcoming priorities for 2021, the Board will be looking at: • How eve responds to the short-term and likely longer-term structural and market changes created by the COVID-19 pandemic, and focus on long-term value generation; The ways in which we develop our corporate culture and talent management processes, as described above; • • Continued engagement with our shareholders and wider stakeholders. 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. Our assessment of the current skills, knowledge and expertise of each Director is set out in the Nomination Committee report on page 50. As at 31 December 2020, the Board comprised a non-executive chairman, two executive directors, and two non- executive directors, one of whom is deemed independent by the Board. g o v e r n a n c e r e p o r t : corporate governance report 43 election/re-election ofdirectors board and committee meetings The table below sets out the Board and Committee attendance for 2020. 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. Under the Company’s Articles of Association, Directors are required to stand for election at the first AGM after their appointment. Thereafter, at each AGM, any Director who has not stood for appointment or re-election at either of the two preceding AGMs is required to retire and offer him/herself for re-election, as is any Director who has held office for a continuous period of nine years or more. Beyond these requirements, the Board has agreed that all Directors will seek annual re-election at the Company’s AGMs. All Directors will therefore stand for re-election at the forthcoming AGM. The Board considers that, during the year ended 31 December 2020, each Director that served in 2020 has performed effectively and continues to demonstrate commitment to the role. It therefore believes that it is in the best interests of shareholders that each director is re-elected at the AGM. Board Audit Remuneration Committee Committee Nomination Committee Paul Pindar 6 of 6 3 of 3 2 of 2 2 of 2 Cheryl Calverley1 Tim Parfitt 3 of 3 6 of 6 - - - - - - James Sturrock2 3 of 3 1 of 1 1 of 1 1 of 1 Tom Enraght-Moony 6 of 6 3 of 3 2 of 2 2 of 2 Nikki Crumpton3, 4 4 of 5 2 of 2 1 of 1 1 of 1 Masood Choudhry5 - - - - Notes 1. 2. 3. 4. Cheryl was appointed as a director from 1 June 2020. James resigned from the role of Chief Executive Officer on 11 May 2020, remaining on the Board as a Non-Executive Director with effect from 12 May 2020. James was also appointed to the Nomination Committee and Remuneration Committee with effect from 30 September 2020. Nikki resigned 30 September 2020. Nikki was unable to attend the February Board meeting due to prior commitments which were communicated to and agreed by the Board in advance. 5. Masood was appointed to the Board as a Non Executive Director on 3 February 2021. 44 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 The Board places due weight on stakeholder openly with our shareholders to ensure awareness and engagement. It assesses that our strategy and performance are stakeholders according to the definition of clearly understood. We communicate with stakeholders set out in the Global Reporting shareholders through the Annual Report Initiative (Standard 101 paragraph 1.1) and Accounts, full-year and half-year as organisations or individuals who have announcements, trading updates and the “a reasonable expectation of being annual general meeting (AGM); and we significantly affected” by the Group’s activities encourage shareholders’ participation in or products. In addition to our shareholders, face-to-face meetings. A range of corporate the Board has identified the Group’s other information (including all announcements major stakeholders, and approved a strategy and presentations) is also available to for engaging with these groups, as follows: shareholders, investors and the public on our corporate website, at investor.evesleep.co.uk Stakeholder Channel of engagement Employees • • • • • Quarterly performance reviews; Weekly feedback exercises; Exit interviews; Mental health awareness and training and employee support; Continuing personal development plans. Local communities relevant charities through selective partnerships and the regular review of additional ways The Company has a range of initiatives including volunteer days for employees, support of it can provide support to the local community and relevant charitable organisations. Key suppliers Regular meetings and reviews with key contacts within the Company and senior management team. Key partners Regular meetings with partnership managers and continuous review of partnership generally. g o v e r n a n c e r e p o r t : corporate governance report 45 board and committee effectiveness internal controls and risk management The Board continually strives to improve its The Group has a comprehensive system effectiveness and recognises that an annual of internal controls in place, designed to evaluation process is an important tool in ensure that risks are mitigated and that the reaching that goal. The Directors are aware Group’s objectives are attained. The Board of the importance to monitor performance recognises its responsibility to present a fair, through Board evaluations and that feedback balanced and understandable assessment from these evaluations leads to improving Board effectiveness. of the Group’s position and prospects. It is accountable for reviewing and approving During the year, an internally facilitated the effectiveness of internal controls performance evaluation of the Board, operated by the Group, including financial, committees and individual directors was operational and compliance controls, and undertaken. The evaluation was informed in risk management. The Board recognises its part by a tailored questionnaire that each responsibility in respect of the Group’s risk Director responded to, which focussed on management process and system of internal Board composition, Board dynamics and control and oversees the activities of the behaviours, the ways in which the Board was Group’s external auditors and the Group’s fulfilling its remit and responsibilities and risk management function (supported by suggested focal areas for the Board in 2021. the Audit Committee). Overall, the Board was pleased with the A review of the Group’s risk findings. The evaluation found strong general management approach is further discussed agreement amongst respondents that the in the Strategic Report on pages 12 to 13. For Company’s purpose and mission was clear detail on the management and mitigation and that all Directors were encouraged of each principal risk see pages 29 to 30. to participate fully in Board discussions, highlighting a culture of openness and honesty within the boardroom. Helpful suggestions were provided in terms of further embedding the culture, considerations of the Company into Board discussions, increasing stakeholder engagement and further enhance the succession planning process of the Board and senior management. These will be taken forward by the Board over 2021, with support from management and the Company Secretary. A number of other suggestions were received in respect of the focal areas for the Board in 2021. Throughout the COVID-19 pandemic Board and Committee meetings took place via video conference to the schedule agreed at the start of the year. 46 g o v e r n a n c e r e p o r t audit committee report committee composition financial reporting Over the reporting period, the members of the Audit Committee were as follows: • Paul Pindar (Chair of the Committee); • Nikki Crumpton (resigned from the Committee on 30 September 2020); • Thomas Enraght-Moony; and • James Sturrock (appointed to the Committee on 30 September 2020). Following the year-end, Masood Choudhry was appointed as Chair of the Committee on 3 February 2020. Paul Pindar remains a member of the Committee. The Board is satisfied that all members of the Audit Committee have recent and relevant financial experience and that the Audit Committee as a whole has competence relevant to the sector in which the Company • • • 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 statements, 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 and Group operate. The Board is of the view the Board on the tendering of the external that Paul Pindar, as a qualified accountant, audit contract, and the appointment, holds recent and relevant financial experience. remuneration and terms of engagement audit 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 2020. The main responsibilities of the Committee are set out below: 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: investor.evesleep.co.uk/corporate- governance#committee-composition. These were last reviewed and approved by the Board on 18 November 2020. key activities in 2020 fair, balanced and understandable 47 In line with best practice, the Committee has reviewed the 2020 Annual Report to consider whether it provides a true and fair view of the Group’s affairs at the end of the year and provides 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: Is the report fair? • Is the whole story presented? • Have any sensitive material areas been omitted? Is the report • Is there a good level of consistency balanced? between the front and back sections of the Annual Report and Accounts? • Is the Annual Report a document for shareholders and other stakeholders? Is the report • Is there a clear & understandable understandable? framework to the Annual Report? • Is the Annual Report presented in straightforward language & a user-friendly and easy to understand manner? 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 provides the information necessary for shareholders to assess eve’s performance, business model and strategy. • The main focus of the Committee in 2020 has been to: • review and the recommend the reappointment to shareholders of the Company’s external auditor at the 2020 AGM; review and recommend to the Board the approval of the 2020 full year preliminary results and Annual Report and Accounts; • assess the company’s risk management systems and the risk register and conduct an annual review of the Committee’s Terms of Reference. 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 areas 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 Going concern Provision for returns What? How this is mitigated Risk of inability to meet liabilities as they fall due Review of 24-month rolling financial forecasts and cash projections Risk of returns increasing above historic levels particularly following the temporary extension of the mattress trial from 100 to 200 days in 2020 Review of provision methodology Revenue recognition Fraud risk related to define risk and to misstatement of reward transfer criteria revenues for recognition as Review of methodology revenue Inventory valuation and existence Risk of error in Review of gross profit stock costing and margins and bi-annual provisioning inventory counts Fraud risk related Review of control Management to unpredictable processes and override of way management permission structures controls override of controls within Finance and the may occur wider business 48 g o v e r n a n c e r e p o r t : audit committee report risk management and internal control external audit external audit effectiveness 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 2020 financial year and findings from the 2020 external audit. The Committee notes that there were no instances of the Company’s whistleblowing and anti-bribery and anti-corruption policies being invoked over the course of 2020. As per previous years, the Company continues to 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. 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 the 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: • • 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 management when required; and that productive discussions were held with the Committee throughout the audit planning process. • • g o v e r n a n c e r e p o r t : audit committee report 49 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 as a byproduct of the audit process. 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 and the Directors will be proposing the re-appointment and the determination of Nexia Smith & Williamson’s remuneration to shareholders at the 2021 AGM. Following a tender for the provision of external audit services in 2019, the Group will be required to 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. 50 g o v e r n a n c e r e p o r t nomination committee committee composition Over the reporting period, the members of the Nomination Committee were as follows: • Thomas Enraght-Moony (Chair of the Committee); • Nikki Crumpton (resigned from the Committee on 30 September 2020); • Paul Pindar; and • James Sturrock (appointed to the Committee on 30 September 2020). Following the year-end, Masood Choudhry was appointed as a member of the Committee on 3 February 2020. committee responsibilities The main responsibilities of the Nomination Committee are: • Reviewing the size, structure and composition 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; and Identifying and nominating candidates for Board vacancies. • The Terms of Reference for the Nomination Committee are available on our website: investor.evesleep.co.uk/corporate- governance#committee-composition. These were last reviewed and approved by the Board on 18 November 2020. key activities in 2020 appointment of Chief Executive Officer Paul Pindar and Tom Enraght-Moony, as Chairman of the Nomination Committee, were closely involved with the appointment of Cheryl Calverley as Chief Executive Officer. In assessing potential candidates, we took the following areas into account: • in depth knowledge of the sector and geographies in which the Company operates; the ability to motivate and develop the management team and employees more generally; • • strong fit with the culture and values of the Company; and • diversity considerations. Shortlisted candidates were considered by the Chairman of the Board. The process identified Cheryl as the outstanding candidate and the Nomination Committee was pleased to recommend her appointment to the Board. The Nomination Committee was particularly pleased to note the fact that this was an internal appointment, which is testament to the strong pipeline of talent that has been developed across the business, including at a senior level. succession planning 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. We are pleased to note that a number of initiatives are underway to support development across the company in a way that is consistent with, and serves to promote, our unique corporate culture and values. A focal area for the Committee, and for the Board in 2021, will be on the way in which we support our leaders, and help to develop the next generation of leaders within our business, and we look forward to reporting on those areas in our next annual report. The Committee will also dedicate further time in 2021 toward Board level succession planning. Further details on Board succession considerations are set out below. appointment of an independent Non-Executive Director A further focus of the Committee in 2020 has been to review the size, structure and composition of the Board and Board Committees to ensure these remained appropriate. As part of the wider Board evaluation process that took place in 2020, the Board identified the need for further experience and expertise in operations and supply chain management. In late 2020, Renaissance Leadership, Tim Parfitt The Board has also been mindful of the need to ensure sufficient independent representation on the Board. With that in mind, the Committee has been engaged in the search process for a further independent non-executive Director on the Board. an independent consultancy, were commissioned to lead the search for a non-executive Director. Renaissance Leadership have no other connections with the Company. Following an extensive search process, the Committee was pleased in February 2021 to be able to recommend the appointment of Masood Choudhry to the Board. size, structure and composition of the Board Following the appointment of Masood, the Committee considers the size, structure and composition of the Board is appropriate, and is well structured to help to support and oversee the next stage of the Company’s strategic growth. This will be an area that will be kept under continued review by the Committee. The below table sets out the key experience, skills and capabilities that each director brings to the Board, which cumulatively support the delivery of the Company’s strategy for the benefit of all shareholders over the medium to long-term. 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. Director Key experience, skills and competencies Paul Pindar Cheryl Calverley Masood Choudhry • • • • • • • • • Leadership experience in large public limited companies Significant experience of chairing Boards Strong understanding of market expansion and market penetration strategies Brand building and marketing Strong understanding of the e-commerce and sleep wellness sector Product development & innovation Expertise in customer experience Supply chain and logistics expertise Strategic operations experience 51 g o v e r n a n c e r e p o r t Director Key experience, skills and competencies Tom Enraght-Moony James Sturrock • • • • • • Marketing and customer focus Tech and e-commerce experience Recent and relevant financial experience Risk management People and culture management Strong understanding of the e-commerce sector directors’ time commitments All the Non-Executive Directors are required to devote sufficient time to eve to enable the Board to discharge its duties effectively. This includes preparation for and attendance at scheduled Board and committee meetings, engagement with the business more generally, as well as ad hoc meetings or calls as required. Following review by the Committee, the Board confirms that each of the Non- Executive Directors can commit the necessary time to fulfil their roles. diversity and inclusion We recognise the business benefits of diversity and inclusion. Our aim is to go beyond the legal requirement to treat everyone fairly, so we can ensure that eve is an attractive employer to everyone, regardless of their background. eve supports and encourages a diverse and inclusive workforce, no matter their ethnic origin, colour, gender, sexual orientation, gender expression, disability, age or status. The Committee is pleased to note that, as at March 2021, 43% of eve’s leadership team are female. However, this is just a starting point; there is further work to do on improving diversity in terms of ethnic and social backgrounds, as an example. We recognise that there is further work to do on our diversity and inclusion agenda, and we have a number of initiatives underway to drive this agenda – including anonymised recruitment processes across the business - over the next few years. The Committee, and the Board, recognise the Hampton-Alexander and Parker Review targets on boardroom diversity. Currently, the Board does not adopt formal diversity targets at Board level but this is an area that the Committee will continue to keep under review. We aspire to be progressive in this area, and a focal area for the Committee in 2021 will be on diversity and inclusion across the business. 52 g o v e r n a n c e r e p o r t remuneration committee report committee composition key activities in 2020 Over the reporting period, the members of the The main focus of the Committee in 2020 has Remuneration Committee were as follows: been to review proposals around Executive • Paul Pindar (Chair of the Committee); Directors’ remuneration arrangements for 2020 • Nikki Crumpton (resigned from the and scrutinise management bonus scheme Committee on 30 September 2020); proposals. The Committee will continue to focus • • Thomas Enraght-Moony; and in 2021 on ensuring that executive remuneration James Sturrock (appointed to the and shareholder interests remain closely aligned. Committee on 30 September 2020). Following the year-end, Masood remuneration policy Choudhry was appointed as a member The Company’s policy is that the remuneration of the Committee on 3 February 2021. package of the Executive Directors should Members of the management team are be sufficiently competitive to attract, retain invited to attend meetings as appropriate and motivate those directors to achieve the unless there is an actual or potential conflict Company’s objectives without making excessive of interest. payments. The Board determines the terms and conditions of the Non-Executive directors. responsibilities of the committee We have summarised the main principles behind Executive Directors’ remuneration in the The role of the Committee is to assist the table to the right: 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: investor.evesleep.co.uk/corporate- governance#committee-composition. These were last reviewed and approved by the Board on 18 November 2020. g o v e r n a n c e r e p o r t : remuneration committee report 53 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. 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. There is no prescribed The performance of the maximum annual base individual in the period since salary 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. pension To contribute financially Defined contribution The Company contributes up Not applicable. post-retirement. arrangement. to 3% of base salary on Base salary and bonus a “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 change. variable remuneration elements Purpose How it operates Maximum opportunity Performance-related framework share plan Supports the strategy and business plan by incentivising and retaining the eve senior management team in a way that is aligned both with the Company’s long-term financial performance and with the interests of shareholders Awards of share options to certain employees, which normally vest after three years subject to the achievement of performance conditions Not applicable. Not applicable. other benefits To support the personal Benefits include private There is no overall maximum Not applicable. health and wellbeing medical insurance and level of benefits provided of employees. To reflect discount on eve products. to Executive Directors, and and support the Company's culture. the level of some of these benefits is not pre¬determined but may vary from year to year based on the overall c ost to the Company. 54 g o v e r n a n c e r e p o r t : remuneration committee report directors’ remuneration table The remuneration of the Directors for the year to 31 December 2020 is set out in the table below. Director Appointed Resigned Salary / fees £ Pension £ Bonus £ Compensation for loss of Total remuneration office £ £ 2020 2019 2020 2019 2020 2019 2020 2020 2019 Executive Directors Tim Parfitt 17 June 2019 N/A 140,760 66,523 1,314 658 14,076 Cheryl Calverley1 1 June 2020 N/A 87,500 - 766 - 14,500 James Sturrock 2 September 8 May 2020 77,833 200,000 557 1,188 10 Non-Executive Directors 2018 3 30 Nikki Crumpton September September 15,000 26,667 85 557 2018 2020 Thomas Enraght- Moony 28 April 2017 N/A 15,000 26,667 - - James Sturrock 2 9 May 2020 N/A 10,833 N/A 206 N/A Paul Pindar 21 November 2016 N/A 10,000 26,667 - - - - - - - - - - - - - - NA 156,150 67,181 NA 102,766 - - 78,390 201,188 - 15,085 27,223 N/A 15,000 26,667 N/A 11,039 N/A N/A 10,000 26,667 1. 2. Cheryl Calverley was appointed to the Board on 1 June 2020. The above salary does not include earnings prior to the appointment. During the reporting period, James Sturrock held office as an Executive Director of the Company between 1 January 2020 and 11 May 2020. His appointment as a Non-Executive Director of the Company took effect from 12 May 2020. His annualised salary for the year was £200,000, and his annualised fee as a Non-Executive Director of the Company for the year was £10,000 to 30 September 2020 and £30,000 from 1 October to 31 December. The Executive Directors holding office at 31 December were awarded a bonus, paid after the year end, on the same criteria as all staff. No other directors were awarded bonuses, long term incentives or other income. 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 17 to the financial statements. Over the reporting period, private medical insurance was provided to Cheryl Calverley, James Sturrock and Tim Parfitt, the value of which management have deemed immaterial to the users of these financial statements. g o v e r n a n c e r e p o r t : remuneration committee report 55 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 Executive Directors As at 31 December 2019 (no. of options) Granted during the year to 31 December 2020 (no. of options) Lapsed during the year Exercised during the year As at 31 December 2020 (no. of options) Service conditions Exercise price (pence) - - - - - - 187,500 262,500 Length of service Length of service Length of service Subject to certain performance criteria Length of service 0.1p 0.1p 0.1p 0.1p 0.1p - 1,500,000 2,250,000 2,000,000 - n/a n/a 180,000 2,444,444 1,555,556 - 4,400,000 Length of service Length of service Length of service 0.1p 0.1p 0.1p Cheryl Calverley 1 April 2019 450,000 - 17 February 2020 1 June 2020 1 June 2020 - - - 300,000 1,500,000 2,250,000 Tim Parfitt 17 December 2019 2,000,000 Non-Executive Directors Paul Pindar n/a - Tom Enraght-Moony 1 April 2019 180,000 James Sturrock 23 May 2019 4,400,000 17 December 2019 4,400,000 - - - - - - - - - - - - - - 1. Performance criteria for these awards are as follows: 750,000 vest on each of the following events: (i) the quoted share price of eve sleep plc remaining above 5p for five consecutive days; (ii) the quoted share price of eve sleep plc remaining above 10p for five consecutive days; (iii) the Group achieving a positive underlying EBITDA for three consecutive months Any gain on option exercises made by Directors in 2020 is presented in note 17 to the financial statements. 56 g o v e r n a n c e r e p o r t : remuneration committee report directors shareholdings The Directors who held office at 31 December 2020 had the following interests in the shares of the Group. Director Executive Directors Cheryl Calverley Tim Parfitt Non-Executive Directors Paul Pindar James Sturrock Thomas Enraght-Moony Beneficially owned at 31 December 2020 (no. of shares) Beneficially owned at 31 December 2019 (no. of shares) 280,285 527,048 15,334,885 2,697,194 - - 27,048 15,334,885 252,750 - 57 g o v e r n a n c e r e p o r t statement of directors’ responsibilities The directors are responsible for preparing the Group Strategic Report, the Directors’ Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare sufficient to show and explain the Company’s financial statements for each financial year. transactions and disclose with reasonable Under that law the directors have elected accuracy at any time the financial position to prepare the group and parent company of the Company and the Group and enable financial statements in accordance with them to ensure that the financial statements applicable law and International Financial comply with the Companies Act 2006. They are Reporting Standards (IFRSs) as applied also responsible for safeguarding the assets of in accordance with the provisions of the the Company and the Group and hence for Companies Act 2006. Under Company law taking reasonable steps for the prevention and the directors must not approve the financial detection of fraud and other irregularities. statements unless they are satisfied that they The directors are also responsible for give a true and fair view of the state of affairs ensuring that they meet their responsibilities of the Company and of the Group and of under the AIM rules. the profit or loss of the Group for the period. The directors are responsible for the In preparing these financial statements, 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. directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether applicable IFRSs in conformity with the requirements of the Companies Act 2006 have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going 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 58 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 39 to 45 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 future developments going concern statement risk management and principle risks Page(s) 10, 19 72 29-30, 45, 46, 48 corporate governance statement 39-45 There have been no significant events affecting the Group since 1 January 2021. presence outside of UK the company has the following subsidiaries outside of the UK: eve Sleep SASU Principal place of business/ 5 Rue Des Suisses, 75014, registered office address Paris Registered number 823397419 R.C.S Paris 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 Ownership 2020 89-90 Ownership 2019 100% 100% dividends The directors do not recommend the payment of a dividend. strategic report This is set out on pages 12 to 28 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 10 to the accounts. g o v e r n a n c e r e p o r t : director's report 59 political donations auditor No political donations have been made during this financial year. directors The Directors who held office during the year were: • Cheryl Calverley (appointed 1 June 2020) • Nikki Crumpton (resigned 30 September 2020) • Thomas Enraght-Moony • Tim Parfitt • Paul Pindar • James Sturrock Biographical details of the Directors are shown on pages 36 to 38. 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 page 54. 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 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, which is ordinarily renewable once, subject to annual reappointment by shareholders at the Company’s Annual General Meeting. 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 investor.evesleep. co.uk/corporate-governance#governance- docs pursuant to AIM Rule 26. Nexia Smith & Williamson (Audit) Limited 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 2020 was 272,569,414 ordinary shares of £0.001. Full details of the issued share capital, together with the details of shares issued during the year to 31 December 2020, are shown in Note 16 to the financial statements on page 86. 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 they should have taken as a director to make themself 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 26 May 2021 at 29A Kentish Town Road, London NW1 8NL. The Notice of Meeting has been sent to shareholders along with this Annual Report. Approved and signed on behalf of the Board Tim Parfitt Chief Finance Officer 17 March 2021 60 independent auditor’s report to the members of eve Sleep plc 61 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 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. Conclusions relating to going concern In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our evaluation of the directors’ assessment of the group’s and company's ability to continue to adopt the going concern basis of accounting included: • Reviewing the future cash flow forecasts prepared by management and challenging the inputs and assumptions included in the forecasts. • Comparing forecasts with actuals in the year and post year-end. • Reviewing the current cash reserves and comparing these to the cash outflows forecast over the period to December 2022. • Reviewing sensitivity analysis prepared by management to assess the effect of changing key assumptions. Please see further detail regarding procedures performed in the Key audit matters section of our report. Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the group and parent company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue. Our responsibilities and the responsibilities of 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 2020 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 significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and international accounting standards in conformity with the requirements 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 2020 and of the group’s loss for the year then ended; • have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006; and • 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. 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 62 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 the directors with respect to going concern to uncertainties, which have been modelled are described in the relevant sections of through sensitivity analysis. Where sensitivity this report. key audit matters 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 We identified the key audit matters described required and the timeframe within which these below as those that were of most significance actions are needed. in the audit of the financial statements of the current period. Key audit matters include the How the matter was addressed in the audit most significant assessed risks of material misstatement, including those risks that We considered management’s assessment had the greatest effect on our overall audit of the group’s ability to continue as a going strategy, the allocation of resources in the concern and as part of our procedures we: audit and the direction of the efforts of the • Reviewed the future cash flow forecasts audit team. prepared by management and In addressing these matters, we have challenged the inputs and assumptions performed the procedures below which were included in the forecasts. Where designed to address the matters in the context appropriate we corroborated the of the financial statements as a whole and in inputs and assumptions to supporting forming our opinion thereon. Consequently, we information. do not provide a separate opinion on these • Compared forecasts with actuals in the individual matters. year and post year-end, to consider management's forecasting ability. • Reviewed the current cash reserves and going concern – group and parent company compared to the cash outflows forecast (note 2.4) Description of risk over the period to December 2022 • Reviewed sensitivity analysis performed by management to assess the effect of The historic trading losses and cash outflows changing key assumptions. of the group indicate a higher risk that the group may not be able to continue to trade revenue recognition - for the foreseeable future. For the year ended group and parent company (note 2.15) 31 December 2020, the group reported Description of risk an operating cash inflow of £1.2m and an operating loss of £2.4m. Under International Standards on Auditing In order to assess going concern, the there is a rebuttable presumption that directors have prepared a business plan and revenue recognition gives rise to a material financial model, including cashflow forecasts risk of fraud, and given that eve Sleep has covering a period of more than 12 months a potential incentive to overstate its revenue from the date of approval of these financial to respond to market pressure, we have statements, that indicates that the group will not rebutted this presumption with respect continue to reduce operating losses and work to cut-off of revenue at the statement of towards generating an operating profit and a financial position date. positive EBITDA, therefore putting the business Specifically, we identified the risk on a sustainable footing. that revenue transactions recorded in The achievement of the projections is subject the year may not have been delivered to the customer before year-end and 63 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 therefore may have been recorded in We reviewed management’s method for the incorrect period. estimating the returns provision. We challenged the assumptions and assertions made How the matter was addressed in the audit by management in their assessment and We reviewed management's revenue with reference to post year-end actual returns. recognition policy and ensured revenue The estimate was recognised and was being measured and recognised in measured in accordance with IAS 37. considered the completeness of the provision 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 As part of our procedures we: • Confirmed the methods were consistent with the prior year. • Confirmed the provision had been calculated accurately. • Corroborated management’s complete, by testing that a sample of inputs and assertions where reasonably orders from the sales ordering systems practicable, through agreement which have been fulfilled in the year have to supporting documentation. been included in revenue. • Substantively tested that revenue has • Reviewed post year-end evidence of actual returns to gain comfort over the been recognised in the correct period, completeness of the provision. through agreeing a sample of revenue entries from either side of the year-end to goods delivered notes. • Ensured the revenue recognition policy is compliant with IFRS 15, through reference • Reviewed management’s sensitivity analysis on the key assumptions used in the model. • Confirmed appropriate disclosures have been made in the accounts. to the five-step revenue recognition policy. our application of materiality provision for returns – group and parent company Description of risk The materiality for the group financial statements as a whole (“group FS materiality”) was set at £504,000. This has been determined with reference to the benchmark of the The Group offers a 100-night trial on the eve group’s revenue, which we consider to be one mattress, giving customers the option to return of the principal considerations for members the mattress within 100 days of purchase and of the company in assessing the group’s receive a full refund. During the year, this trial performance. Given the group is loss making, was extended to 200 nights for the month an earnings-based measure would not be of April only. A material provision is therefore appropriate. FS materiality represents 2% of the recorded based on the expected number of group’s revenue as presented on the face of returns post year end. the Consolidated Statement of Profit and Loss The level of expected returns is subject and Other Comprehensive Income. to estimation uncertainty. There is a risk The materiality for the parent company that the provision could be materially financial statements as a whole (“parent FS misstated due to the estimation uncertainty. materiality”) was set at £413,000. The financial statements (note 2.19) disclose management’s consideration that the sensitivity estimated by the Group is immaterial. How the matter was addressed in the audit 64 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 This has been determined with reference an overview of the scope of the audit to the benchmark of the parent company’s revenue, which we consider to be one of The group has two components. The parent the principal considerations for members company’s financial statements were audited of the parent company in assessing by us. The subsidiary’s financial statements the performance of the company. Given were subject to audit procedures by us for the parent company is loss making, an the purpose of auditing the group financial earnings-based measure would not be statements. appropriate. Parent FS materiality represents 2% of the parent company’s revenue. other information Performance materiality for the group financial statements was set at £327,600, The other information comprises the being 65% of group FS materiality, for information included in the Annual Report, purposes of assessing the risks of material other than the financial statements and misstatement and determining the our auditor’s report thereon. The directors nature, timing and extent of further audit are responsible for the other information procedures. We have set it at this amount contained within the annual report. Our to reduce to an appropriately low level opinion on the financial statements does not the probability that the aggregate of cover the other information and, except to the uncorrected and undetected misstatements extent otherwise explicitly stated in our report, exceeds FS materiality. We judged this we do not express any form of assurance level to be appropriate based on our conclusion thereon. Our responsibility is to understanding of the group and its read the other information and, in doing financial statements, as updated by our so, consider whether the other information risk assessment procedures and our is materially inconsistent with the financial expectation regarding current period statements or our knowledge obtained in misstatements including considering the course of the audit or otherwise appears experience from previous audits. It was to be materially misstated. If we identify set at 65% to reflect the fact that few such material inconsistencies or apparent misstatements were expected in the current material misstatements, we are required period, management are generally keen to to determine whether this gives rise to process adjustments and there are some a material misstatement in the financial areas of judgement and estimation in the statements themselves. If, based on the financial statements. work we have performed, we conclude that Performance materiality for the parent there is a material misstatement of this other company financial statements was set at information, we are required £268,450, being 65% of parent FS materiality. to report that fact. It was set at 65% to reflect the fact that few misstatements were expected in the current We have nothing to report in this regard. period, management are generally keen to process adjustments and there are some areas of judgement and estimation in the financial statements. 65 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 opinions on other matters prescribed by for being satisfied that they give a true and the Companies Act 2006 fair view, and for such internal control as the directors determine is necessary to enable the In our opinion, based on the work preparation of financial statements that are undertaken in the course of the audit: • the information given in the strategic free from material misstatement, whether due to fraud or error. report and the directors’ report for the In preparing the financial statements, financial year for which the financial the directors are responsible for assessing statements are prepared is consistent the group’s and the parent company’s ability with the financial statements; and to continue as a going concern, disclosing, • the strategic report and the directors’ as applicable, matters related to going report have been prepared in accordance with applicable legal requirements. 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 matters on which we are required alternative but to do so. to report by exception Auditor’s responsibilities for the audit In the light of the knowledge and of the financial statements understanding of the group and the parent company and their environment obtained Our objectives are to obtain reasonable in the course of the audit, we have not assurance about whether the financial identified material misstatements in the statements as a whole are free from material strategic report or the directors’ report. misstatement, whether due to fraud or error, We have nothing to report in respect of and to issue an auditor’s report that includes the following matters in relation to which the our opinion. Reasonable assurance is a high Companies Act 2006 requires us to report to level of assurance but is not a guarantee you if, in our opinion: • adequate accounting records have not been kept by the parent company, or that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements returns adequate for our audit have not can arise from fraud or error and are been received from branches not visited considered material if, individually or in by us; or • the parent company financial the aggregate, they could reasonably be expected to influence the economic decisions statements are not in agreement with of users taken on the basis of these financial the accounting records and returns; or statements. • certain disclosures of directors’ Irregularities, including fraud, are remuneration specified by law are instances of non-compliance with laws and not made; or • we have not received all the information and explanations we require for our audit. responsibilities of directors regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud, is As explained more fully in the directors’ detailed below: responsibilities statement set out on page 57, the directors are responsible for the preparation of the financial statements and 66 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 obtained a general understanding of the company’s legal and regulatory framework through enquiry of management • Reviewed board meeting minutes held during the year and post year-end; and • Obtained written management concerning: their understanding of relevant representations regarding the adequacy laws and regulations; the entity’s policies of procedures in place. and procedures regarding compliance; and how they identify, evaluate and account The senior statutory auditor led a discussion for litigation claims. We also drew on our with senior members of the engagement team existing understanding of the company’s regarding the susceptibility of the entity’s industry and regulation. financial statements to material misstatement, We understand that the company including how fraud might occur. The key complies with the framework through: • Outsourcing payroll and research areas identified in this discussion were with regard to the manipulation of the financial and development tax credit calculation statements through manual journal entries to external experts. and incorrect recognition of revenue. • Subscribing to relevant updates from These areas were communicated to external experts and making changes the other members of the engagement team to internal procedures and controls who were not present at the discussion. as necessary. • The directors’ close involvement in the day-to-day running of the business, The procedures we carried out to gain evidence in the above areas included: • Testing of a sample of revenue meaning that any litigation or claims transactions either side of the year-end to would come to their attention directly. underlying documentation to corroborate that revenue was recognised in the correct In the context of the audit, we considered period; and those laws and regulations: which • Testing of manual journal entries, selected determine the form and content of the based on specific risk assessments financial statements; which are central applied based on the group and parent to the company’s ability to conduct its company’s processes and controls business; and where failure to comply could surrounding manual journal entries. result in material penalties. We identified the following laws and regulations as being of A further description of our responsibilities is available on the Financial Reporting Council’s website at: www.frc.org.uk/ auditorsresponsibilities. This description forms part of our auditor’s report. significance in the context of the company: • The Companies Act 2006 and IFRS in respect of the preparation and presentation of the financial statements; • AIM regulations and Market Abuse Regulations; and • Consumer product regulations. We performed the following specific procedures to gain evidence about compliance with the significant laws and regulations identified above: • Made enquiries of the legal team; • Inspected correspondence with regulators; 67 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 Use of our 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 Date: 17 March 2021 68 consolidated statement of profit and loss and other comprehensive income for the year ended 31 December 2020 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 Foreign currency differences from overseas operations which may be reclassified subsequently to profit or loss Note 2020 £ 2019 £ 3 3 3 7 8 25,218,550 23,852,931 (10,763,508) (11,176,905) 14,455,042 12,676,026 (3,500,916) (2,729,317) (13,394,391) (22,453,901) (2,440,265) (12,507,192) 1,641 18,022 (2,438,624) (12,489,170) 414,541 352,240 (2,024,083) (12,136,930) 35,822 17,310 Total comprehensive loss for the year (1,988,261) (12,119,620) Basic and diluted loss per share 18 (0.75p) (4.92p) All results relate to continuing activities. Notes 1 to 24 form part of these financial statements. consolidated statement of financial position at 31 December 2020 69 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 8 14 15 23 16 17 2020 £ 273,496 466,330 2019 £ 518,575 344,456 739,826 863,031 559,915 1,574,648 1,880,188 2,637,650 8,438,453 7,988,769 414,542 354,466 11,293,098 12,555,533 12,032,924 13,418,564 - 40,000 4,024,210 3,983,174 1,041,236 273,857 768,965 470,391 5,339,303 5,222,530 5,339,303 5,262,530 6,693,621 8,156,034 272,570 263,445 49,421,049 48,887,392 766,749 998,495 (43,918,599) (42,109,328) Foreign currency translation reserve 151,852 116,030 Total equity 6,693,621 8,156,034 Notes 1 to 24 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 17 March 2021 Company registered number: 09261636 70 consolidated statement of changes in equity for the year ended 31 December 2020 Share Capital £ Share Premium £ Share-based reserve £ Retained Earnings £ Foreign currency translation reserve £ Total Equity £ For the year ended 31 December 2020 Balance at 1 January 2020 263,445 48,887,392 998,495 (42,109,328) 116,030 8,156,034 Exercise of employee share options 3,734 Share-based payment charge Transfer on exercise of employee share options Transfer on issue of equity for marketing services - - - - 220,084 - - (214,812) 214,812 5,391 533,657 (237,018) - Total transactions with owners 9,125 533,657 (231,746) 214,812 Loss for the period Other comprehensive income for the year - - - - - - (2,024,083) - 35,822 35,822 Balance at 31 December 2020 272,570 49,421,049 766,749 (43,918,599) 151,852 6,693,621 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 770 - - 1,111,396 - - - (100,747) 100,747 - - - 2,623 259,605 (262,228) - Share-based payment charge Transfer on exercise of employee share options Transfer on issue of equity for marketing purposes Total transactions with owners 123,710 12,171,020 748,421 100,747 Loss for the period Other comprehensive income for the period - - - - - - (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 - - - - - - 3,734 220,084 - (302,030) 525,848 (2,024,083) - - - - - - - 12,031,732 770 1,111,396 - - 13,143,898 (12,136,930) - - - - consolidated statement of cash flows for the year ended 31 December 2020 71 Cash flows from operating activities Loss for the year Adjustments for: Depreciation Amortisation Impairment (Increase)/decrease in inventories Decrease in trade and other receivables Increase/(decrease) in trade and other payables Increase/(decrease) in provisions Share-based payment charge Note 2020 £ 2019 £ (2,024,083) (12,136,930) 470,211 169,192 - 1,014,733 697,384 41,036 272,271 522,116 198,048 263,046 594,724 (446,772) 1,827,827 (578,619) (186,984) 1,111,396 9 10 10 11 12 14 15 17 Net cash flow from operating activities 1,162,860 (9,344,264) Cash flows from investing activities Additions to intangible assets 10 (291,066) Right of use asset initial direct costs - (532,484) (15,375) Net cash flow from investing activities (291,066) (547,859) Cash flows from financing activities Interest payable Proceeds from the issue of share capital Repayment of capital element of finance lease rentals 16 23 18,334 3,734 9,144 12,032,502 (480,000) (200,000) Net cash inflows/(outflows) from financing activities (457,932) 11,841,646 Net cash inflow 413,862 1,939,523 Cash at beginning of year Movement in cash Effect of exchange rate fluctuations on cash held Cash at end of year 7,988,769 6,031,936 413,862 35,822 1,939,523 17,310 8,438,453 7,988,769 72 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 United Kingdom and its shares are listed on the London Stock Exchange AIM market. eve sleep PLC is a company limited by shares. The registered number is 09261636 and the registered address at 31st December 2020 was 29A Kentish Town Road, London, England, NW1 8NL. Prior to 5th August 2019 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 accounting standards in conformity with the Companies Act 2006 ("Adopted IFRSs"). The Company has elected to prepare its parent company financial statements in accordance with adopted IFRS. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these Group financial statements. 2.2 Changes in accounting policy (a) New and amended Standards and Interpretations adopted by the Group and Company There are no changes to accounting policies adopted by the Group in the year ended 31 December 2020. (b) New and amended Standards and Interpretations mandatory for the first time for the financial year beginning 1 January 2020 but not currently relevant to the Group or Company. Amendments to IFRS 16 addressing COVID-19 related rent concessions became effective for annual reporting periods beginning on or after 1 June 2020. As neither the Group not Company has received such concessions, this is not relevant. (c) New and amended Standards and Interpretations mandatory for periods beginning on or after 1 January 2021 These may have a significant impact in future years: • Amendment to IFRS 9: “Financial Instruments” • • Amendment to IAS 39: “Recognition and Measurement” Amendment to IFRS 7: “Financial Disclosures” 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 underlying EBITDA1 of £2.0m loss (2019: £10.7m loss) with an operating cash inflow of £1.2m (2019: outflow of £9.3m). The closing cash balance at 31 December 2020 was £8.4m (2019: £8.0m) with £0.3m VAT deferred from Q1 2020 under the UK Government Coronavirus support measures and due for payment in April 2021 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: • Revenue growth in the French and Irish markets driven by further marketing investment in these territories having underinvested in 2020. The directors understand that the impact of COVID-19 on French consumer behaviour has been less extreme that the UK and thus investment in these markets will reduce the reliance on UK consumers to drive revenue growth in the Group. • Minimal growth in the UK direct-to-consumer market due to uncertainties around the impact of COVID-19 on consumer behaviour and spending capacity. When travel and leisure restrictions are eased in the UK, consumers may divert spending away from homewares to these areas. However, the shift from physical retail to ecommerce spending is likely to be permanent and the business is extremely well placed to capitalize on this. • Marketing efficiencies throughout all territories broadly in line with 2020, measured as % of revenue. Having doubled marketing 1. Underlying EBITDA loss defined as earnings before interest, tax, depreciation, amortisation and impairment, share-based payment charges connected with employee remuneration (2020 and 2019), fundraise-related expenditure (2019 only), adding back IFRS16 adjustments to office lease costs. Underlying EBITDA reflects what management believe to best demonstrate the underlying performance of the business in a given year. notes to the financial statements continued 73 efficiency from 2019 to 2020, the directors are confident that a similar return on investment can be made in the foreseeable future. • • Short-term investment in people and technology to deliver improvements in the efficiency and resilience of the business. This will generate an increase in some discretionary costs in 2021 but these can be reduced if required. There will be minimal disruption from Brexit given the changes made in 2020 to the location of mattress manufacturing. 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. The delivery of the strategic plan is subject to uncertainty and these have been modelled through sensitivity analysis to revenue and costs. 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 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). The directors consider that given the strong opening cash position relative to the 2020 underlying EBITDA loss, the expected performance over the next 12-18 months and the level of fixed and non-discretionary costs, that the Group will be able to continue realising its assets and discharging its liabilities in the normal course of business and it is therefore appropriate to prepare the financial statements on a going concern basis. 2.5 Presentational Currency The Group financial statements are presented in Sterling. 2.6 Basis of consolidation Subsidiaries 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. 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. 74 notes to the financial statements continued 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 instrument type Financial asset Note Classification rationale Financial assets held at amortised cost Trade receivables are amounts due from customers for 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 Trade receivables 12 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 12 Other current assets 12 Cash and cash equivalents 13 These receivables relate to items that cannot be classified as trade receivables including rent deposits, accrued income and volume rebate receivables. 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 applied. 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. 75 notes to the financial statements continued Financial instrument type Financial asset Note Classification rationale Liabilities at amortised cost Trade payables Non-trade payables and accrued expenses 14 14 Lease liabilities 23 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 nature. 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 payments), 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 The shorter of 3 years or length of lease Depreciation methods, useful lives and residual values are reviewed at each statement of financial position date. 76 notes to the financial statements continued 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. 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). The Group measures loss allowances at an amount equal to lifetime ECL, except for other debt securities and bank balances for which credit risk (i.e. the risk of default occurring over the expected life of the financial instrument) has not increased significantly since initial recognition which are measured as 12-month 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 2020 £ 19,791,409 5,427,141 25,218,550 2019 £ 17,382,370 6,470,562 23,852,931 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. notes to the financial statements continued 77 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 were recognised in the statement of profit and loss during 2019 on a straight-line basis over the remaining term of the lease. See note 23 for treatment of the lease for the office at 29A Kentish Town Road under IFRS 16. Finance income and expenses Finance expenses comprises interest payable related to lease liabilities and the unwinding of the discount on provisions. Finance 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. 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 international accounting standards to meet the requirements of the Companies Act 2006 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: 78 notes to the financial statements continued Accounting estimates 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 and inventory of items for which management has decided to discontinue from sale, either before the year-end or within three months of the year-end. 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. 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. 2.20 Equity settled expenses Where shares are issued in settlement of marketing service liabilities, those services have been provided at the normal market rate with no discount. notes to the financial statements continued 79 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 Chief Operating Decision Maker has been determined to be the executive 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 2020 Revenue Cost of Sales Gross profit 20,501,151 4,586,988 130,411 (8,692,158) (2,071,350) - 11,808,993 2,515,638 130,411 Distribution expenses (2,658,227) (842,746) 57 Payment Fees (461,143) (70,214) (15,760) Marketing expenses (5,138,937) (964,248) 806 Segment results 3,550,686 638,430 115,514 Administration expenses (excluding payment fees and marketing expenses) Net Finance Income/(Expense) Taxation Total - - - - - - - 25,218,550 (10,763,508) 14,455,042 (3,500,916) (547,117) (6,102,379) 4,304,630 (6,744,895) 1,641 414,541 (2,024,083) 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) (1,014,775) 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/(Expense) Taxation Total (9,962,304) 18,022 352,239 (12,136,930) 80 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 73,500 70,000 Amounts received by auditor’s and their associates in respect of: 2020 £ 2019 £ Tax advisory services Tax compliance services Other items Depreciation of property, plant and equipment (note 9) Amortisation of intangible assets (note 10) Impairment (note 10) Cost of inventory write offs (note 11) Lease expenditure (note 2.16) - - 470,211 169,192 - 60,003 - - - 198,048 263,046 594,724 361,583 424,266 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 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 2020 2019 6 9 44 59 7 17 58 82 2020 £ 2019 £ 2,788,003 3,838,096 312,632 220,084 51,225 452,443 534,315 66,999 Total 3,371,944 4,891,853 notes to the financial statements continued 81 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 2020 £ 362,427 3,038 43,469 162,386 - 571,320 2019 £ 424,389 2,824 52,746 124,804 31,788 636,551 Directors' aggregate emoluments and pension payments are detailed in the Directors' Remuneration Report on page 54, along with directors' interests in issued shares and share options on page 55, which form part of these audited financial statements. The gain on exercise of share options in respect of directors for the year was £nil (2019: £nil). Directors of the Company and their immediate relatives control 7.3% 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 2020 £ 19,975 (18,334) 1,641 2019 £ 27,165 (9,143) 18,022 82 notes to the financial statements continued 8 Taxation Recognised in the statement of profit and loss: Current tax credit Research and development tax credit for the prior year Total current tax Reconciliation of effective tax rate: Loss for the year Total tax credit 2020 £ 414,541 414,452 2019 £ 352,240 352,240 2020 £ 2019 £ (2,024,083) (12,136,930) 414,541 352,240 Loss excluding taxation (2,438,624) (12,489,169) Tax using the UK corporation tax rate of 19% (2018: 19%) 463,339 2,372,942 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 - - (121,487) (101,072) 414,541 (10,242) (46,440) (200,605) (101,520) 352,240 Current year losses for which no deferred tax asset was recognised (242,650) (2,014,135) Total tax credit 414,541 352,240 The Group has accumulated tax losses available for offset against future profits of £60,576,652 (2019: £58,552,569). 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%. notes to the financial statements continued 83 9 Property, plant and equipment Right of use asset £ Plant and equipment £ Fixtures and fittings £ Cost Balance at 1 January 2019 Additions Balance at 31 December 2019 Additions Balance at 31 December 2020 Depreciation and Impairment Balance at 1 January 2019 Depreciation charge for the year Balance at 31 December 2019 Depreciation charge for the year Balance at 31 December 2020 Net Book Value At 31 December 2019 At 31 December 2020 10 Intangible assets Cost Balance at 1 January 2019 Additions - internally generated Additions - externally generated - 716,623 716,623 225,132 941,755 - 198,048 198,048 470,210 668,258 518,575 273,497 10,476 - 10,476 - 10,476 10,476 - 10,476 - 10,476 - - 39,724 - 39,724 - 39,724 39,724 - 39,724 - 39,724 - - Development costs £ Assets under construction £ 387,970 - - 402,343 310,573 221,912 Transfers 747,553 (747,553) Total £ 50,200 716,623 766,823 225,132 991,955 50,200 198,048 248,248 470,211 718,459 518,575 273,496 Total £ 790,313 310,573 221,912 - Balance at 31 December 2019 1,135,523 187,274 1,322,797 Additions - internally generated Additions - externally generated Transfers Balance at 31 December 2020 Amortisation and Impairment Balance at 1 January 2019 Amortisation for the year Impairment for the year Balance at 31 December 2019 Amortisation for the year - - 193,459 1,328,982 120,571 263,046 526,954 910,571 169,192 268,305 22,761 (193,459) 268,305 22,761 - 284,881 1,613,863 - - 67,770 67,770 - 120,571 263,046 594,724 978,341 169,192 Balance at 31 December 2020 1,079,763 67,770 1,147,533 Net Book Value At 31 December 2019 At 31 December 2020 224,952 249,219 119,504 217,111 344,456 466,330 84 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 prior period relates wholly to capitalised website platform costs. Assets under construction at 31 December 2020 relate to internal costs incurred for the development of ERP software for internal use where the asset is expected to go live in 2021. The carrying value of intangible assets has been reviewed by management at the year-end date for potential impairment and an impairment charge has been recognised totalling £nil (2019: £594,724). The charge for 2019 was related to capitalised website platform costs following the decision to transition to a new front-end platform to support the Group’s direct-to-consumer websites. 11 Inventories Finished goods 2012 £ 559,915 2019 £ 1,574,648 There was no write-down of inventories to net realisable value in the year (2019: £nil). Included within inventories is £143,364 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 £200,774 (2019: £401,998). Inventory days were 19 days in 2020 (2019: 51 days). Finished goods recognised in cost of sales in the year amounted to £10,763,508 (2019: £11,176,905). 12 Trade and other receivables Trade receivables Other receivables Prepayments Other current assets 2020 £ 656,032 221,030 883,126 120,000 2019 £ 676,537 447,051 784,083 729,979 1,880,188 2,637,650 The average credit period offered on sales of goods during 2020 was 32 days (2019: 32 days). The average days sales outstanding (‘‘DSO'') in 2020 was 38 days (2019: 38 days). At 31 December 2020, trade receivables at a nominal value of £nil (2019: £3,481) 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 2020, identical to 2019 where four major retail customers each accounted for more than 10% of the total balance of trade receivables on 31 December 2019. Not overdue Overdue between 0-30 days Overdue between 31-60 days Overdue between 61-90 days Overdue over 90 days 2020 £ 289,305 142,721 113,216 72,200 38,590 2019 £ 277,934 21,493 245,198 131,912 - 656,032 676,537 notes to the financial statements continued 85 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 8,438,453 7,988,769 2020 £ 2019 £ As at 31 December 2020, the group had an available £680,000 and €30,000 credit card facility. 14 Trade and other payables Trade payables Non–trade payables and accrued expenses Deferred revenue Taxes and social security payable 2020 £ 1,183,802 1,027,043 949,411 863,954 2019 £ 2,430,596 649,995 573,082 329,501 4,024,210 3,983,174 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 2020 financial year. The Company took advantage of the UK Government Coronavirus support measures in the year, to defer VAT due in April 2020 until April 2021. The amount deferred is included in the above taxes and social security payable. 15 Provisions Balance at 1 January 2019 Provisions made during the year Refunds £ 792,117 7,869,078 Warranty £ 163,832 73,574 Total £ 955,949 7,942,652 Provisions used during the year (8,116,237) (36,127) (8,152,364) Prior year under provision recognised in year Balance at 31 December 2019 Provisions made during the year 22,728 567,686 3,735,217 - 201,279 106,000 22,728 768,965 3,841,217 Provisions used during the year (3,437,640) (65,221) (3,502,861) Prior year over provision recognised in year Balance at 31 December 2020 (66,085) 799,178 - (66,085) 242,058 1,041,236 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. A warranty provision is required as the Group provides certain products to customers with 2, 3, 5 or 10-year warranty periods depending on the product category. 86 notes to the financial statements continued 15 Provisions (continued) During these periods 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. A 10% sensitivity applied to the estimated rate for warranty claims would result in the warranty charge increasing or decreasing by around £20,000. (See note 2.19). 16 Share capital Allotted, issued and fully paid: Number Nominal Value £ 31 December 2020 £ 31 December 2019 £ Ordinary Shares 272,569,414 £0.001 Total 272,569 272,569 263,445 263,445 The table below summarises the movements in number of shares at the beginning and end of the period: Ordinary Shares Share capital 31 December 2019 263,444,823 Nominal Value £ Value of Share Capital £ Summary of Movements £0.001 £263,445 Issue of shares for marketing services at £0.10 per share 5,390,479 Exercise of share options over ordinary shares 3,734,112 Share capital 31 December 2020 272,569,414 Nominal Value £ Value of Share capital £ £0.001 £272,569 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 2020, 5,390,479 shares were issued and 3,734,112 share options were exercised bringing the total share capital of the Company to 272,569,414 at 31 December 2020. 17 Share–based payments The Group recognised a charge of £0.5m (2019: £1.1m) related to share-based payments during the year to 31 December 2020, 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 £0.2m and share-based payment charges relating to the equity settlement of liabilities due to Channel 4 totalling £0.3m, of which £0.2m were satisfied with the issue of share capital during the period. 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 87 17 Share-based payments (continued) The Company operates an HMRC approved executive management incentive plan (EMI). Under length of service criteria, options typically vest over a 3 year period in equal monthly amounts. For those options with performance based condition, the options will vest when the conditions are met. All options are equity settled. The terms and conditions of the grants are as follows: Grant Date 10/04/2017 01/04/2019 17/12/2019 17/02/2020 01/06/2020 01/06/2020 Number of Contracts Number of Options Exercise Price Performance Conditions Expiry Date 1 7 4 2 3 2 251,000 £0.001 Length of service 10/04/2027 6,679,364 £0.001 Length of service 01/04/2029 6,850,000 £0.001 Length of service 17/12/2029 550,000 £0.001 Length of service 17/02/2030 1,750,000 £0.001 Length of service 01/06/2030 2,650,000 £0.001 Performance Based 01/06/2030 The Company operates an unapproved executive incentive plan. The vesting conditions for grants made on 26 January 2016 and 1 April 2019 are based on length of service with 100% of the options vesting on 36-month anniversary of the grant date. All options are equity settled. The terms and conditions of the grants are as follows: Grant Date 26/01/2016 01/04/2019 Number of Contracts Number of Options Exercise Price Performance Conditions Expiry Date 1 1 12,550 £0.001 Length of service 26/01/2026 150,000 £0.001 Length of service 01/04/2029 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 £0.001 £0.001 £0.001 £0.001 £0.001 £0.001 £0.001 17,030,913 4,950,000 (1,960,642) (3,734,112) (483,060) - 15,803,099 4,670,603 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 0.1p (2019: 6.37p) The options outstanding at the end of the year have an exercise price of £0.001 and a weighted average contractual life of 10 years. 88 notes to the financial statements continued 17 Share-based payments (continued) The fair value of employee share options is measured using a Black-Scholes model. Measurement inputs and assumptions for those share options granted during 2020 are as follows: Share class Fair Value Exercise Price Expected volatility Option Life Risk free interest rate Award 17/02/2020 £ Award 01/06/2020 £ Ord £0.011 £0.001 84% 10yrs 1.000% Ord £0.012 £0.001 104% 10yrs 1.000% 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) 2020 269,819,716 (2,024,083) (0.75) (0.75) 2019 246,739,240 (12,136,930) (4.92) (4.92) 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 2020, options outstanding amounted to 15,803,099. Given the loss for the year of £2,024,083 (2019 loss: £12,136,930) these options are anti-dilutive. 19 Financial instruments Categories of financial instruments: Financial assets at amortised cost 2020 £ 2019 £ Cash and cash equivalents, trade receivables and other receivables 9,435,515 9,842,336 Financial liabilities at amortised cost Trade payables, other payables and provisions (3,252,081) (3,849,556) ‘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. notes to the financial statements continued 89 19 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 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 2020 £ 289,305 142,721 113,216 72,200 38,590 2019 £ 277,934 21,493 245,198 131,912 - 656,032 676,537 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 facilities available to meet the requirements of the business. 90 notes to the financial statements continued 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 7,224,328 1,105,488 108,636 Trade receivables Other receivables Other current assets 413,876 242,155 126,314 120,000 91,285 - - - - Trade payables (761,350) (390,101) (32,349) Non-trade payables and accrued expenses (957,306) (69,736) (959,828) (81,407) - - Provisions Total - - 8,438,452 656,031 3,429 221,028 - - - - 120,000 (1,183,800) (1,027,042) (1,041,235) 5,206,034 897,684 76,287 3,429 6,183,434 Foreign currency sensitivity The Group's principal financial instrument foreign currency exposures are to Euros. The Group has 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 2020 would have decreased the Group loss by 5.4%. 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 (2019: £nil). 21 Related parties Key management compensation (considered to be the Directors of eve Sleep PLC) disclosures can be found in Note 6 and on pages 53 to 54 of the Director’s remuneration report. 22. Commitments There were no commitments in the year (2019: £nil). notes to the financial statements continued 91 23. Leases The Group commenced the lease of its registered office at 29A Kentish Town Road, London, NW1 8NL on 1 August 2019. 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. 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. At 31 December 2020, the Group had no further commitments to short-term leases. Right-of-use-asset Additional information on the right-of-use assets by class of assets is as follows: Office Building Total Asset 941,755 941,755 Carrying amount - - Additions Depreciation Impairment 225,132 225,132 668,259 668,259 - - 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 2020 31 December 2019 277,397 - 277,397 470,391 40,000 510,391 Reconciliation of liabilities arising from financing activities 31 December 2019 Cash flows Non-cash changes: Additions 31 December 2020 Lease liabilities 510,391 (480,000) Total 510,391 (480,000) 247,006 247,006 277,397 277,397 31 December 2018 Cash flows Non-cash changes: Additions 31 December 2019 Lease liabilities Total - - (200,000) (200,000) 710,391 710,391 510,391 510,391 24. Subsequent events There have been no significant events since the year end. 92 company statement of financial position at 31 December 2020 Non-current assets Property, plant and equipment Intangible assets Investments Current assets Cash and cash equivalents Inventories Trade and other receivables Current tax receivable Total assets Non-current liabilities Lease liabilities Current liabilities Trade and other payables Provisions Lease liabilities Total liabilities Net assets Share capital Share premium Share-based payment reserve Retained earnings Total Equity Note 4 5 6 9 7 8 18 10 11 18 2020 £ 273,496 466,330 768 740,594 7,500,365 559,915 2,072,457 414,542 2019 £ 518,575 344,456 1,669 864,700 7,231,061 1,574,648 3,100,528 354,466 10,547,279 12,260,703 11,287,873 13,125,403 - 40,000 3,183,182 3,823,970 924,752 273,857 670,269 470,391 4,381,791 4,964,630 4,381,791 5,004,630 6,906,082 8,120,773 12 272,570 263,445 49,421,049 48,887,392 766,749 998,495 (43,554,286) (42,028,559) 6,906,082 8,120,773 Notes 1 to 19 form part of the historical financial information shown above. The loss for the year was £1,739,641. These financial statements were approved by the board of directors on eve Sleep PLC and were signed on its behalf by: Tim Parfitt Director 17 March 2021 Company registered number: 09261636 company statement of cash flows for the year ended 31 December 2020 Cash flows from operating activities Loss for the year Adjustments for: Depreciation Amortisation Impairment 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 93 Note 2020 £ 2019 £ (1,739,641) (12,117,866) 470,211 169,193 - 1,014,733 967,996 (640,788) 254,483 522,116 198,048 263,046 594,724 2,237,255 (704,636) (525,089) (175,556) 1,111,396 Net cash outflow from operating activities 1,018,303 (9,118,678) Cash flows from investing activities Additions to property, plant and equipment Additions to intangible assets Right of use asset initial direct costs - (291,067) - - (532,484) (15,375) Net cash outflow from investing activities (291,067) (547,859) Cash flows from financing activities Interest payable Proceeds from issue of share capital 18,334 3,734 9,144 12,032,502 Repayment of capital element of finance lease rentals 19 (480,000) (200,000) Net cash inflow from financing activities (457,932) 11,841,646 Net cash inflow/(outflow) 269,304 2,175,109 Cash at beginning of year Movement in cash Cash at end of year 7,231,061 269,304 7,500,365 5,055,952 2,175,109 7,231,061 94 company statement of changes in equity for the year ended 31 December 2020 Balance at 1 January 2020 263,445 48,887,392 998,495 (42,028,559) 8,120,773 Share Capital £ Share Premium £ Share-based payment reserve £ Retained Earnings £ Total Equity £ Exercise of employee share options 3,734 Share-based payment charge Transfer on exercise of employee share options Transfer on issue of equity for marketing purposes - - - - - - 220,084 - - 3,734 220,084 (214,812) 214,812 - 5,391 533,657 (237,018) - 302,030 Transactions with owners 9,125 533,657 (231,746) 214,812 525,848 Loss for the year Write down in investments - - - - - - (1,739,641) (1,739,641) (900) (900) Balance at 31 December 2020 272,570 49,421,049 766,749 (43,554,286) 6,906,082 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 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 purposes 770 - - - - - - - 1,111,396 - - - (100,747) 100,747 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 notes to the financial statements continued 95 1 Accounting policies The Company financial statements have been prepared and approved by the directors in accordance with international accounting standards in conformity with the Companies Act 2006 ("Adopted IFRSs"). The Company has elected to prepare the financial statements in accordance with adopted IFRS. The Company additionally applies the following accounting policies: 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 £1,739,641 (2019: £12,117,866 loss). 3 Directors’ remuneration The Company shares the same directors as the Group. Directors' remuneration is disclosed in note 6 of the Group financial statements. 4 All property, plant and equipment in the Group is owned by the Company. See Group note 9. Property, plant and equipment 5 Intangible assets All intangible assets in the Group are owned by the Company. See Group note 10. 6 Investments During the year the company held the following investments in subsidiaries: Company: eve sleep Inc Dissolved on 16 June 2020 Principal place of business/ Registered office address 185 W. Broadway, Suite 101, PO Box 1150, Jackson, USA Registered Number Type of share Ownership 2019 Ownership 2018 EIN 47-4164566 Ordinary 100% 100% eve sleep SASU 5 Rue Des Suisses, 75014, Paris 823397419 R.C.S Paris Ordinary 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 2020 and was dissolved on 16 June 2020. 96 notes to the financial statements continued 7 Inventories Inventories within the Group are owned by the Company. See Group note 11. 8 Trade and other receivables Trade receivables Other receivables Receivables from subsidiary undertakings Other current assets Prepayments Total 2020 £ 344,007 125,748 605,578 120,000 877,124 2019 £ 494,991 443,577 650,048 729,979 781,933 2,072,457 3,100,528 As at 31 December 2020, receivables from subsidiary undertakings of £1.3m (2019: £0.7m) 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 2020 £ 2019 £ 605,578 650,048 - - 605,578 650,048 The average credit period offered on sales of goods during 2020 was 32 days (2019: 32 days). The average days sales outstanding (‘‘DSO'') in 2020 was 27 days (2019: 32 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 2020, identical to 2019 when three major retail customers each accounted for more than 10% of the total balance of trade receivables. notes to the financial statements continued 97 2020 £ 68,729 128,429 103,373 17,850 25,626 344,007 2019 £ 277,934 - 85,624 131,433 - 494,991 Not overdue Overdue between 0-30 days Overdue between 31-60 days Overdue between 61-90 days Overdue over 90 days Total 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 7,500,365 7,231,061 2020 £ 2019 £ 10 Trade and other payables Trade payables Non-trade payables and accrued expenses Deferred revenue Taxes and social security payable 2020 £ 909,694 672,684 868,081 732,723 2019 £ 2,411,997 559,148 544,478 308,347 3,183,182 3,823,970 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 2020 financial year. 98 notes to the financial statements continued 11 Provisions Refunds £ Warranty £ Total £ Balance at 1 January 2019 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 provision recognised in year 33,512 - 33,512 Balance at 31 December 2019 513,078 157,191 670,269 Provisions made during the year 4,135,093 106,000 4,241,093 Provisions used during the year (3,860,883) (56,349) (3,917,232) Prior year over provision recognised in year (69,517) 139 (69,378) Balance at 31 December 2020 717,771 206,981 924,752 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 2, 3, 5 and 10-year warranty periods, depending on the product type. During these periods 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. A 10% sensitivity applied to the estimated rate for warranty claims would result in the warranty charge increasing or decreasing by less than £20,000. 12 Share Capital See Group note 16. 13 Financial instruments Categories of financial instruments: Financial Assets 2020 £ 2019 £ Cash and cash equivalents, trade receivables, other receivables and other current assets 8,275,203 9,367,754 Financial Liabilities Trade payables, non-trade payables, accrued expenses and provisions (2,507,129) (3,641,415) ‘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. notes to the financial statements continued 99 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 not 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 Company 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 increased the Company loss by 3.85% 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 53 and 54 of the Director's report. 15 Commitments There were no commitments in the year (2019: £nil). 16 Change in significant accounting policies There have been no changes to accounting policies in the year. 17 Subsequent events There have been no events subsequent to the year end that would have a material effect on the Company. 18 Leases See Group note 23. 100 notes to the company financial statements continued 19 Reconciliation of liabilities arising from financing activities 31 December 2019 Cash flows Non-cash changes: Additions 31 December 2020 Lease liabilities 510,391 (480,000) Total 510,391 (480,000) 247,006 247,006 277,397 277,397 31 December 2018 Cash flows Non-cash changes: Additions 31 December 2019 Lease liabilities Total - - (200,000) (200,000) 710,391 710,391 510,391 510,391 101 every great day starts the night before
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