Sleep Country Canada
Annual Report 2022

Plain-text annual report

Annual Report 2022 Sleep Country Canada Holdings Inc. Sleep Well. Stay Well.™ Our vision is to champion sleep as the key to healthier, happier lives and help everyone achieve better tomorrows through better tonights. Table of Contents About Sleep Country . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 A Message from our President and CEO . . . . . . . . . . . . .2 Growth Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Financial Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Management’s Discussion and Analysis . . . . . . . . . . . . .7 Consolidated Financial Statements . . . . . . . . . . . . . . . . 41 For Sleep Country’s most recent ESG report, please visit ir.sleepcountry.ca About Sleep Country We are driven by our purpose to transform lives by awakening Canadians to the power of sleep through our highly differentiated service model, unmatched sleep ecosystem and expertise, superior brand trust and commitment to world-class customer experience. 1 The Silk & Snow acquisition was completed subsequent to year-end on January 4, 2023. 1 Sleep Country Canada Holdings Inc. Annual Report 202245BC39AB7SK7MB119ON62QC10NS,PEI,NBGrowing networkof 289 stores Elevatedsleep expertiseVast product assortmentfrom the world'sleading sleep brandsExceptional logisticsand stable supply chainPartnerships with leading Canadian retailers5 leading eCommerce platforms 9 partnerships, including:20 warehouses15+ mattress brands 50+ sleep accessory brands1,100+ Sleep ExpertsOur Sleep EcosystemOur leading omnichannel ecosystem where our customers can seamlessly purchaseour innovative sleep products across our physical and digital touchpoints.Our Retail Banners- Walmart- Loblaw- Best Buy 1A Message from our President and CEO We increased our revenues by 0.9% to $929 million, our operating EBITDA1 by 3.6% to $219 million and our diluted adjusted EPS1 by 6.4% to $2.81, driving shareholder value. At end of the year, our cash balance was $78 million, with access to an additional $160 million under our credit facility (not including the $100 million accordion). We increased our annual dividends paid by 7.7% to $0.84 per share and we repurchased for cancellation 2,339,409 common shares, approximately 6.7% of the public float, against our Normal Course Issuer Bid (“NCIB”). “Over the last few years, our business has grown from being the #1 brick-and-mortar mattress retailer to an integrated omnichannel sleep retailer with the addition of three direct-to- consumer sleep brands into the fold; Endy, Hush, and subsequent to 2022, Silk & Snow.” House of brands Over the last few years, our business has grown from being the #1 brick-and-mortar mattress retailer to an integrated omnichannel sleep retailer with the addition of three direct-to-consumer sleep brands into the fold; Endy, Hush, and subsequent to 2022, Silk & Snow. In keeping with our goal to grow our sleep accessories business and be Canada’s gateway for the world’s best sleep products, subsequent to 2022, we completed our acquisition of Silk & Snow on January 4, 2023. We are extremely pleased to welcome the Silk & Snow team into our family. Silk & Snow is a digital sleep retailer of high-quality affordable luxury sleep and lifestyle products that are thoughtfully made. Founded in 2017, Silk & Snow has become one of Canada’s highly known direct-to-consumer sleep brands and has been recognized as one of Canada’s top growing companies for the past three years. Through this acquisition, we strategically continued to build our industry-leading sleep ecosystem and expand our innovative and sustainable product assortment to better serve Canadians’ sleep needs. We invested in our ecosystem, further expanding our distribution channels with the launch of Sleep Country/ Dormez-vous online stores on the Loblaw Marketplace, adding net four new full service retail stores, and seven Sleep Country/Dormez-vous Express stores in Walmart locations nationwide – growing our total store count for the Express stores to 17 at the end of 2022. 2 Stewart Schaefer, President and CEO, Sleep Country Dear Shareholders; In 2022, we continued our journey to champion sleep as the key to healthier, happier lives and help every Canadian achieve better tomorrows through better tonights. Every day, we strive to live our purpose of transforming lives by awakening Canadians to the power of sleep and being Canadians’ sleep retailer of choice. Our teams demonstrated their resilience, adaptability and drive and performed beyond our expectations, while expertly navigating our business through a dynamic economic landscape that included supply chain disruptions, higher costs and a tight labour market. Their hard work underscored their commitment to helping our customers get their best night’s sleep. In 2022, we were pleased to serve over 1.1 million customers with their sleep needs. Even with the backdrop of weakening consumer sentiment, we stayed focused on delivering on our multi-year strategic plan by building on our growth and momentum, and strengthening shareholder value. The investments we made in our sleep ecosystem – our brands, expanded channels, innovative products – and our team’s dedication to creating a seamless customer experience, drove continued growth across key metrics in our business. Sleep Country Canada Holdings Inc. Annual Report 2022 Endy continued to delight its customers and is voted as one of the most trusted brands in Canada. Hush opened its first-ever pop-up retail experience at Yorkdale Shopping Centre in Toronto, bringing their popular online sleep brand to life. Combined, all our brands offer an array of affordable procured bedding products, that are seamlessly accessible to all Canadians from the convenience of their phone. Investing in our customer experience We continued our digital transformation with investments in our eCommerce platforms to serve a growing number of customers and enhance their online shopping experience. Our eCommerce businesses represented 19.6% of our Revenues in 2022. We also launched the innovative All For Sleep App, providing tools to empower Canadians and help them improve their sleep habits and wellbeing, while having access to the expertise of our Sleep Experts. “We continued to support the communities where we live and work with donations of $1.2 million, including $720,000 in mattresses, sheets, pillows, and bedding to support Ukrainians displaced by the war. We also donated $200,000 to the Canadian Mental Health Association reinforcing the message that sleep is crucial to health and wellness.” Making an impact The release of our first environment, social, and governance (“ESG”) report and strategy in 2022 showed our commitment to being a purpose-driven, sustainable business. These initiatives highlight our focus on encouraging people to achieve better health and wellbeing, while driving social change and protecting the environment. We continued to support the communities where we live and work with donations of $1.2 million, including $720,000 in mattresses, sheets, pillows, and bedding to support Ukrainians displaced by the war. We also donated $200,000 to the Canadian Mental Health Association reinforcing the message that sleep is crucial to health and wellness. We are especially proud of our workplace and culture recognition with Sleep Country/Dormez-vous named as one of “Canada’s Most Admired Corporate Cultures for 2022”, and Endy’s designation as a “Great Place to Work” for the fourth year in a row. Awards such as these highlight our vibrant culture and recognize our commitment to equity, diversity, inclusion, and belonging for our associates. Looking ahead We are very excited about our future and helping even more Canadians achieve their best night’s sleep. As we begin 2023, we recognize that we will continue to navigate a challenging macro environment. As consumer confidence continues to be challenged in these economic times, consumers may choose to defer their sleep purchases to a future time. However, we believe with our strong balance sheet, positive cash flow and our sustained growth in market share over the last three years, we are well positioned to capture the deferred purchases as our customers’ confidence returns and they are ready to invest in their sleep. With our continued investment in our strategic plan and the ongoing development of our sleep ecosystem, we are positioned for success. Our emphasis on nurturing customer relationships for the long haul continues to guide us in offering the best assortment of mattresses and sleep accessories across the most relevant distribution channels. We are more determined than ever to deliver seamless and frictionless sleep solutions for all Canadians by continuing to expand our physical and online touchpoints and provide the most comprehensive and innovative portfolio of products. I’d like to express deep gratitude to our Board, shareholders and partners for your continued support, as well as to our team across all our brands for their commitment to our business, customers, and to each other. Together, all these hard-working individuals make our Company so special, and are the reason that we are Canada’s number one sleep partner going onto our 29th year in business. Sleep well. Stay well. Stewart 1 SSS is a supplementary financial measure, Operating EBITDA and Diluted adjusted EPS are each non-IFRS measures. See the section titled “Non-IFRS and Other Measures” in the Management Discussion and Analysis (“MD&A”) section in this Annual Report for further details concerning how the Company calculates SSS, Operating EBITDA, and Diluted adjusted EPS and for a reconciliation to the most comparable IFRS measure. 3 Sleep Country Canada Holdings Inc. Annual Report 2022Growth Strategy We are committed to executing against our strategic growth platforms to further expand our leadership position and deliver sustainable value for our customers, shareholders, associates and communities. 1 World-class customer experience With a focus on the customer, we are committed to delivering a superior and seamless journey across all channels and touchpoints. 2 Channel and product innovation Our goal is to be Canada’s singular leading sleep partner and gateway to the world’s best sleep assortment, achieved through dedication to channel and product innovation. 3 Commitment to helping customers achieve their best sleep as a pillar of well-being As a purpose-driven organization, we are dedicated to supporting the well-being of all Canadians by championing sleep as an essential pillar of physical, mental and emotional well-being. With our sleep expertise, we aim to help all Canadians achieve their best sleep in the pursuit of healthier and happier lives. 4 Sleep Country Canada Holdings Inc. Annual Report 2022 Highlights Expanded our industry-leading sleep ecosystem with the acquisition of Silk & Snow1 X Opened Hush’s first-ever pop-up store at Yorkdale Shopping Centre expanding its touchpoint with customers 1.1 million+ Customers served by 1,100+ Sleep Experts Grew our digital footprint in partnership with Loblaw marketplace reaching millions of online customers +4 Net new Sleep Country/ Dormez-vous stores opened 125,000+ Mattresses and foundations recycled or upcycled X Expanded Walmart partnership by opening 7 additional Express stores nationwide X Launched our All For Sleep mobile app giving users access to tools to help improve their sleep habits and wellbeing Recognized as one of Canada’s Most Admired Corporate Cultures by Waterstone Human Capital 1 The Silk & Snow acquisition was completed subsequent to year-end on January 4, 2023. 5 Sleep Country Canada Holdings Inc. Annual Report 2022 Financial Performance Revenues increased by 0.9% to $928.7 million Operating EBITDA2 improved by 3.6% to $218.6 million Revenues (C$Millions) Accessories Mattresses 928.7 22.0% 23.8% Operating EBITDA 2 (C$Millions) Operating EBITDA Margin 2 (% Percent) 22.9% 1 23.5% 1 218.6 1 “The investments we made in our sleep ecosystem – our brands, expanded channels, innovative products – and our team’s dedication to creating a seamless customer experience, drove continued growth across key metrics in our business.“ – Stewart Schaefer, President and CEO, Sleep Country 78.0% 76.2% 2022 1 Figures include IFRS 16 impact 2022 Net Income Attributable to the Company increased by 24.7% to $110.5 million4 Achieved highest basic EPS at $3.044 Achieved highest diluted adjusted EPS2 at $2.813 Net Income Attributable to Company (C$Millions) 110.5 4 Basic EPS (C$ Per Share) Diluted Adjusted EPS 2 (C$ Per Share) 4 3.04 2.41 2.81 1.61 1.50 1.73 3 2022 2018 2019 2020 2021 2022 2022 1 Figures include IFRS 16 impact. 2 For more information on these non-IFRS and other measures, refer to “Non-IFRS and Other Measures” in the Management’s Discussion and Analysis section of the report. 3 Diluted EPS for fiscal 2019 was negatively impacted by additional items in 2019 that were not included in 2018 results. These items negatively impacted diluted EPS by 2 Diluted EPS for fiscal 2019 was negatively impacted by additional items in 2019 that were not included in 2018 results. These items negatively impacted diluted EPS by ($0.21) per share and related to the Endy acquisition and the adoption of IFRS 16. ($0.21) per share and related to the Endy acquisition and the adoption of IFRS 16. 4 This measure was positively impacted in Fiscal 2022 by a $20.5 million adjustment to the redemption liabilities due to the revised expected outcome related to the Hush acquisition. 6 Sleep Country Canada Holdings Inc. Annual Report 2022Management’s Discussion and Analysis 7 Sleep Country Canada Holdings Inc. Annual Report 20221 Preface The following Managementʼs Discussion and Analysis (“MD&A”) is prepared as of March 2, 2023 and is intended to assist readers in understanding the financial performance and financial condition of Sleep Country Canada Holdings Inc. (the “Company”) for the fourth quarter and year ended December 31, 2022 and should be read in conjunction with the audited consolidated financial statements of the Company and the accompanying notes for the years ended December 31, 2022 and December 31, 2021 and the related MD&A. Basis of Presentation All references in this MD&A to “Q4 2022” are to the Companyʼs quarter ended December 31, 2022, “Q4 2021” are to the Companyʼs quarter ended December 31, 2021 and “Q4 2020” are to the Companyʼs quarter ended December 31, 2020. All references in this MD&A to “2022” are to the Companyʼs year ended December 31, 2022, “2021” are to the Companyʼs year ended December 31, 2021 and “2020” are to the Companyʼs year ended December 31, 2020. The Companyʼs audited consolidated financial statements for the years ended December 31, 2022 and December 31, 2021 and the accompanying notes have been prepared in accordance with the International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”) using the accounting policies described therein. All amounts are presented in thousands of Canadian dollars, except number of stores, number of shares and per share amounts or unless otherwise indicated. The audited consolidated financial statements of the Company and the accompanying notes for the year ended December 31, 2022 and this MD&A were reviewed by the Companyʼs Audit Committee. They were approved by the Companyʼs Board of Directors (the “Board”) on March 2, 2023. Forward-looking Information This MD&A, including, in particular, the sections below entitled “Factors Affecting the Results of Operations”, “Outlook”, “Liquidity and Capital Resources” and “Risk Factors”, contains forward-looking information and forward-looking statements which reflect the current view of management with respect to the Companyʼs objectives, plans, goals, strategies, outlook, results of operations, financial and operating performance, prospects and opportunities. Wherever used, the words “may”, “will”, “anticipate”, “intend”, “estimate”, “expect”, “plan”, “believe” and similar expressions identify forward-looking information and forward-looking statements. Forward-looking information and forward-looking statements should not be read as guarantees of future events, performance or results, and will not necessarily be accurate indicators of whether, or the times at which, such events, performance or results will be achieved. All of the information in this MD&A containing forward-looking information or forward-looking statements is qualified by these cautionary statements. Forward-looking information and forward-looking statements are based on information available to management at the time they are made, underlying estimates, opinions and assumptions made by management and managementʼs current good faith belief with respect to future strategies, prospects, events, performance and results, and are subject to inherent risks and uncertainties surrounding future expectations generally. Such risks and uncertainties include, but are not limited to, those described below under the sections “Risk Factors” and those described in the Companyʼs 2022 annual information form (the “AIF”) filed on March 2, 2023. A copy of the AIF can be accessed under the Companyʼs profile on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com. Additional risks and uncertainties not presently known to the Company or that the Company currently believes to be less significant may also adversely affect the Company. The Company cautions that the list of risk factors and uncertainties described in this MD&A and the AIF are not exhaustive and that should certain risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual strategies, prospects, events, performance and results may vary significantly from those expected. There can be no assurance that the actual strategies, prospects, results, performance, events or activities anticipated by the Company will be realized or even if substantially 1 8 Sleep Country Canada Holdings Inc. Annual Report 2022realized, that they will have the expected consequences to, or effects on, the Company. Readers are urged to consider the risks, uncertainties and assumptions carefully in evaluating the forward-looking information and forward-looking statements and are cautioned not to place undue reliance on such information and statements. The Company does not undertake to update any such forward-looking information or forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable laws. 2 Overview The Company is Canadaʼs leading specialty sleep retailer with retail banners Sleep Country Canada™, Dormez-vous™, Endy™ and Hush™ (the “Banners”). The Companyʼs omnichannel retail banners are Sleep Country Canada™ and Dormez-vous™ (in Quebec). Sleep Country Canada launched its banner in Vancouver, British Columbia in 1994 and thereafter the banner expanded across Canada (except in Quebec). Similarly, Dormez-vous launched its banner in Montreal, Quebec in 1994 and subsequently expanded within Quebec. As at December 31, 2022, cumulatively, these banners have a growing network of 289 corporate-owned stores (2021 – 285 stores), 17 “Sleep Country Express”/“Dormez-vous Express” stores (“Express Stores”) (2021 – 10 Express Stores), augmented by its eCommerce platforms – sleepcountry.ca and dormezvous.com – and its digital chat and phone line. The Sleep Country Canada and Dormez-vous banners offer its customers Canadaʼs largest domestic and imported mattress selection and complementary sleep related products (“accessories”). At all its access points, the Company provides its customers with elevated sleep expertise via its “Sleep Experts” who are dedicated to matching all customers to their best nightʼs sleep. The Sleep Country Canada and Dormez-vous brands are highly recognized in the retail landscape and are considered to be Canadaʼs leading provider of Sleep. The Companyʼs direct-to-consumer retail banners are Endy™ and Hush™. Endy introduced its first mattress-in-a-box offering in 2015 on its ecommerce platform supported by its digital chat and phone line. Through its best-in-class online sales and digital capabilities, Endy has become Canadaʼs leading direct-to-consumer sleep solutions retailer offering customers with an expanding product assortment to meet their sleep needs. It has become one of Canadaʼs most recognized online retail brands. In Q4 2021, the Company acquired 52% of the common shares of Hush Blankets Inc. (“Hush”), a direct- to-consumer ecommerce sleep retailer. The Company will be acquiring the remaining 48% of the outstanding common shares in three equal increments of 16% over a three-year period starting on or about March 31, 2023. Founded in 2018, Hush introduced its weighted blankets to consumers which were received with huge success. Thereafter, Hush continued to expand its product offerings to include other sleep accessories, in addition, to introducing the Hush mattresses. Subsequent to December 31, 2022, on January 1, 2023, the Company acquired substantially all of the net operating assets of Silk & Snow Inc. (“Silk & Snow”), a direct-to-consumer sleep retailer. Recognized as one of Canadaʼs top growing companies, Silk & Snow is a digital sleep retailer of high-quality sleep and lifestyle products that are thoughtfully made. As at December 31, 2022, the Banners are supported by the Companyʼs distribution network which includes 20 warehouses (2021 – 20 warehouses) across Canada. Across all its Banners, the Companyʼs purpose is to transform lives by awakening Canadians to the power of sleep with a vision to champion sleep as the key to healthier, happier lives and help everyone achieve better tomorrows through better tonights. The Company continues to develop its industry-leading sleep ecosystem and it actively assesses opportunities to support its business model across infrastructure, channel, partnership and experience to best serve Canadiansʼ sleep needs. 2 9 Sleep Country Canada Holdings Inc. Annual Report 2022Building on its foundation of success, the Company drives sustainable growth through its three strategic platforms: 1. World-class customer experience • With a focus on the customer, the Company is committed to delivering a superior and seamless journey across all channels and touchpoints; 2. Channel and product innovation • The Companyʼs goal is to be Canadaʼs singular leading sleep partner and gateway to the worldʼs best sleep assortment, achieved through dedication to channel and product innovation; and 3. Commitment to helping customers achieve their best sleep as a pillar of well-being • As a purpose-driven organization, the Company is dedicated to supporting the well-being of all Canadians by championing sleep as an essential pillar of physical, mental and emotional well-being. With the Companyʼs sleep expertise, it aims to help all Canadians achieve their best sleep in the pursuit of healthier and happier lives. The Companyʼs purpose, strategy and operations differentiate it from its competitors. With its strong 28- year legacy, differentiated service model, unmatched sleep ecosystem, superior brand trust and commitment to customer experience, the Company has positioned itself to continue to be Canadaʼs leading provider of Sleep. 3 Dividends and Share Purchases Dividends: All dividends are designated as “eligible dividends” for Canadian tax purposes. The Board has periodically declared dividends on the Companyʼs common shares. The chart below illustrates the annual dividends paid from fiscal 2016 to fiscal 2022. Historical Annual Dividends Paid i d a P s d n e d i v i D $0.800 $0.700 $0.600 $0.500 $0.400 $0.300 $0.200 $0.100 $0.000 2016 2017 2018 2019 2020 Year * 2021 2022 * In 2020, the Company suspended its Q2 2020 and Q3 2020 dividends as part of the Companyʼs business continuity measures due to the COVID-19 pandemic. 3 10 Sleep Country Canada Holdings Inc. Annual Report 2022 In the last 3 years, the Company declared and paid the following dividends: Date of declaration Record date February 4, 2020 November 9, 2020 February 9, 2021 May 10, 2021 August 3, 2021 November 11, 2021 February 8, 2022 May 4, 2022 July 28, 2022 November 4, 2022 February 14, 2020 November 20, 2020 February 18, 2021 May 21, 2021 August 20, 2021 November 19, 2021 February 18, 2022 May 20, 2022 August 19, 2022 November 21, 2022 Payment date February 25, 2020 November 30, 2020 February 26, 2021 May 31, 2021 August 30, 2021 November 29, 2021 February 28, 2022 May 30, 2022 August 29, 2022 November 30, 2022 Dividend declared (per common share) $ 0.195 $ 0.195 $ 0.195 $ 0.195 $ 0.195 $ 0.195 $ 0.195 $ 0.215 $ 0.215 $ 0.215 Subsequent to December 31, 2022, on February 9, 2023, the Company declared a dividend of $0.215 per common share payable on February 28, 2023 to holders of the common shares of record as at the close of business on February 17, 2023. Share Purchases: On March 7, 2022, the Company received approval from the Toronto Stock Exchange (the "TSX") to commence a normal course issuer bid (“NCIB”). Pursuant to an amendment to the NCIB on November 29, 2022, the Company is permitted to purchase through the facilities of the TSX or alternative trading systems, from time to time until the completion of the NCIB, if considered advisable, up to a maximum of 3,155,250 of the Companyʼs common shares, representing approximately 10.0% of its public float as of February 28, 2022. Purchases will conclude on the earlier of the date on which purchases under the bid have been completed and March 8, 2023. In accordance with the rules and by-laws of the TSX, the Company has been permitted to purchase up to a daily maximum of 21,173 shares (representing 25% of the average daily trading volume of the shares on the TSX for the six months prior to commencement of the NCIB), except where such purchases are made in accordance with the "block purchase" exception under the applicable TSX rules and policies. Effective June 10, 2022, the Company established an automatic share purchase program (“ASPP”) in connection with its NCIB to facilitate the purchase of shares during times when the Company would ordinarily not be permitted to purchase shares due to regulatory restrictions or a self-imposed blackout period. Before entering a blackout period, the Company may, but is not required to, instruct its designated broker to make purchases at the brokerʼs sole discretion and based on parameters set by the Company in accordance with the ASPP, TSX rules and applicable securities laws. Pursuant to the ASPP established on June 10, 2022, the maximum number of Shares eligible to be purchased through the ASPP was automatically increased to a maximum of 3,155,250 as a result of the amendment to the NCIB. In 2022, the Company purchased for cancellation 2,339,409 common shares (2021 – nil) at an average price of $24.67 for total consideration of $57.7 million. The Company plans on filing a notice of intention with the TSX to commence a new NCIB when the current NCIB expires on March 8, 2023. If this notice is accepted by the TSX, the Company expects to be permitted to purchase through the facilities of the TSX or alternative trading systems, from time to time over the 12 months following such acceptance, if considered advisable, up to a maximum amount of the Companyʼs common shares, that represents 10% of the public float. 4 11 Sleep Country Canada Holdings Inc. Annual Report 20224 Factors Affecting the Results of Operations Revenues The Companyʼs revenues are derived from the sale of mattresses and accessories through its Banners. Mattresses revenue includes sales of mattresses, lifestyle adjustable bases, boxsprings and frames. Accessories revenue includes the sales of pillows, sheets, duvets, weighted blankets, quilts, duvet covers, mattress toppers, mattress and pillow protectors, pet beds, throws, cushions, sleep bundles, headboards, footboards, storage benches, delivery fees and warranties. Revenue is recognized when the performance obligation is deemed to be fulfilled and the control of the products has transferred to the customer and there is no unfulfilled obligation that could affect the customerʼs acceptance of the products. Provisions for returns relating to the Companyʼs various customer satisfaction programs are accrued based on historical experience. Revenues from the sale of third party warranties are recognized based on the net amount of consideration retained after monies owed to the third party provider. Building on the Companyʼs strong brands and market position, the Company plans to grow its same store sales (or “SSS”- see section “Non-IFRS and Other Measures”), which includes revenues from both its existing retail stores and its digital channels. The Companyʼs revenue growth initiatives include: • • • • • • • adding stores in both new and existing markets; partnering with new third-party online marketplace sellers; growing and optimizing its eCommerce platforms; expanding its product assortment; reaching more customers through targeted marketing; growing lifetime value with existing customers through serving more of their sleep needs; and growing revenue through strategic channel and brand partnerships. SSS is primarily driven by: • • • • changes in customer traffic across sales channels through effective marketing, customer loyalty and word of mouth; changes in the conversion rate of shoppers into buyers; changes in the average transaction size; and changes in economic conditions and consumer confidence. The Companyʼs revenues are impacted by competition from other retailers that sell similar products and by seasonal patterns. Product Expansion Opportunities One of the Companyʼs goals is to serve its customersʼ sleep needs by offering them a variety of best-in- class sleep products available in the market across all its Banners. Over the last few years, the Banners have introduced new innovative mattresses, including mattresses-in-box, as well as sleep products, some of which include adjustable bases, pillows, sheets, duvets, duvet covers, mattress protectors, pillow protectors, mattress toppers and weighted blankets. The Company continues to deepen and expand its product assortment through in-house innovations, sourcing new sleep products and strategic business partnerships. To provide its customers with the best available sleep products, the Company has entered into several exclusive partnerships with industry leaders in the North American and European sleep space: • Purple Innovation, a U.S. mattress and bedding leader, that uses innovation and technology to create comfort solutions including its signature Purple® Mattress; 5 12 Sleep Country Canada Holdings Inc. Annual Report 2022• Casper Sleep Inc., a U.S. award-winning sleep company; o Additionally, the Company has partnered with Casper in the development and distribution of new Casper products designed exclusively to meet Canadiansʼ sleep needs; • Simba, a U.K. leading mattress-in-a-box and sleep accessories retailer; and • Malouf, a U.S. industry leader in innovative bedding and furniture products. Additionally, the Company has established drop ship arrangements with select vendors to provide sleep products from brands such as Nautica, Eddie Bauer and Laura Ashley, Sheex, Tuck and If Only Home. This program enables the delivery of select sleep products to be shipped directly from the Companyʼs vendors to its customers. This capability allows the Company to offer Canadians an increased product assortment without increasing its inventory risk while achieving time, resource and cost efficiencies. The Company continues to strategically expand the drop ship program. The Company will continue to explore opportunities to expand its product assortment to better meet its customers sleep needs. Online Expansion Opportunities Each of the Companyʼs banners have their own eCommerce platforms; sleepcountry.ca, dormezvous.com, endy.com, hush.ca, and hushblankets.com. The sleepcountry.ca and dormezvous.com websites provide customers with access to the full range of sleep products available at the Sleep Country and Dormez-vous retail stores. These websites are supported by its digital chat and phone line which are serviced by the Companyʼs Sleep Experts. With this service capability, the Company can offer online customers the same differentiated sleep expertise available at the Companyʼs retail stores. This enhanced omnichannel experience gives customers the flexibility to shop when they want, how they want and where they want. Endyʼs direct-to-consumer business model leverages its eCommerce platform which is supported by its digital chat and phone line. Since Endyʼs launch in 2015, it has become a highly recognized brand through its best-in-class online sales and digital marketing capabilities. Hushʼs direct-to-consumer business model leverages its eCommerce platform which is supported by its digital chat and live-video consultation with Sleep Experts. The addition of Hush to the Companyʼs eCommerce platforms has allowed the Company to continue to expand its digital footprint both nationally and in the United States. The Company has also expanded its sleep ecosystem through partnerships with third-party online marketplaces to expand its customer reach and transform lives by awakening Canadians to the power of sleep. The Company partnered with Walmart to supply mattresses on the Walmart.ca marketplace. In addition to mattresses, the Company sells a variety of sleep accessories on the Walmart.ca marketplace, including pillows, pillowcases, sheets, weighted blankets, mattress protectors, mattress toppers, platforms and pet beds. Walmart receives millions of unique visitors to its Canadian website every month and over 80 percent of Canadian households shop at Walmart. In addition to mass exposure to a target customer segment, this partnership diversifies the Companyʼs sales channels and further bolsters the Company's omnichannel offering. The Company also has a partnership with Best Buy Canada, one of Canadaʼs largest omnichannel retailers, to offer a selection of the Companyʼs sleep solutions on the Best Buy Marketplace. The Company exclusively retails the traditional mattress category on BestBuy.ca offering a wide assortment of the Companyʼs most recognized mattress brands. In addition, the Company offers lifestyle bases and a leading assortment of sleep accessories including pillows, sheets, duvets on the Best Buy Marketplace. In Q1 2022, the Company partnered with Canadaʼs largest retailer, Loblaw Companies Ltd., and launched its Sleep Country/Dormez-vous online store across all Loblaw online platforms including Real Canadian 6 13 Sleep Country Canada Holdings Inc. Annual Report 2022Superstore, Atlantic Superstore, Loblaws, Zehrs, Maxi, Fortinos, Provigo, Valu-Mart, No Frills, Your Independent Grocer and Independent City Market. The Company is the exclusive provider of traditional mattresses on all Loblaw online platforms, offering a wide assortment of the Companyʼs most recognized mattress brands, as well as mattresses-in-a-box, lifestyle bases and a leading assortment of sleep essentials including pillows, sheets and duvets. Store Expansion Opportunities The Company has the ability to add new stores in existing markets (in-fill stores), satellite markets and new markets. An existing market or in-fill opportunity is a pre-existing built out region in which the Company already has an established store presence serviced by one or more existing warehouses. A satellite market is a new region that is adjacent or close to a pre-existing built-out region, which benefits from advertising spill and is serviced logistically from the nearby warehouse. A new market is a brand new territory in which the Company did not previously operate, requiring incremental advertising and distribution logistics. The Company has successfully expanded its store network every year since its inception in 1994. The capacity to expand its store presence depends on the Companyʼs ability to choose new locations, new markets, to hire and train new associates for its stores and warehouses and create top-of-mind brand awareness for its Banners. Stores in enclosed malls provide the Company with a unique opportunity to gain the attention of the captive audience, while capitalizing on the decline of department stores in recent years. As at December 31, 2022, the Company had 12 mall stores in Canada. The Companyʼs site selection strategy is focused on maximizing sales per store and per region throughout its store network. Prior to identifying and ultimately selecting locations for new stores, the Company conducts extensive analysis utilizing the following factors: • • • • • • demographics including population density, household income and population growth rates; store visibility and accessibility; lease and advertising economics; competitive dynamics; overlap with existing stores and distribution footprint; and potential cannibalization of existing stores. In terms of regional expansion, once a target area has been determined, the Company focuses on ensuring the Company can successfully incorporate its culture, vision and purpose into the new region. To attain this goal, the Company starts by ensuring its new core regional team is comprised of existing associates in leadership roles who are willing to relocate. The experienced team is then supplemented with local hires, who receive extensive training including in classroom, in-store and across the Company. To broaden its customer reach through channel innovation and strategic partnership, in Q4 2021, the Company introduced ten pilot “Sleep Country Express”/“Dormez-vous Express” stores (“Express Stores”) in Walmart Canada locations. As at December 31, 2022, the Company had 17 pilot Sleep Country/Dormez- vous Express Stores (2021 – 10 stores) in Ontario and Quebec further expanding its partnership with Walmart Canada. Each Express store has an average footprint between 500 and 800 square feet and offers cash-and-carry products as well as traditional mattresses which are delivered with the Company's white-glove service. A curated assortment of products, from the Company's leading mattress-in-a-box selection, to sheets, pillows and headboards, as well as 8-9 traditional mattresses for customers to experience, are available at each Express store location. These stores are staffed by the Company's highly trained Sleep Experts, who bring their renowned sleep expertise to Walmart Canada customers. 7 14 Sleep Country Canada Holdings Inc. Annual Report 2022The following table summarizes the Companyʼs corporate-owned store count for the three-month and twelve-month periods ended December 31, 2022 and December 31, 2021: Number of stores, beginning of period(1) Stores newly opened(1) Stores closed(1) Number of stores, end of period(1) Number of stores in enhanced store design, end of period(1) Stores relocated(1) Stores renovated(1) Note: 2022 287 2 - 289 Q4 2021 287 - 2 285 - - - 1 2022 285 5 1 289 241 - - Annual 2021 281 6 2 285 236 1 10 (1) Excludes the Companyʼs pilot Sleep Country/Dormez-vous Express Stores operating in Walmart Canada licensee spaces. Store Design The Company continuously evaluates its store design to provide customers with the optimal shopping experience. As at December 31, 2022, there are 241 corporate-owned stores or 83% of the store network that feature the store design introduced in 2014, of which 83 are new stores, 147 are renovated stores and 11 are relocations of existing stores. Competition The sleep industry is highly competitive and includes national and regional full-line furniture retailers, department stores, mass merchants, small regional specialty bedding retailers, eCommerce retailers and online marketplaces. The Company is Canadaʼs leading specialty sleep retailer with its national retail store network and multiple eCommerce platforms including its retail presence on several prominent third-party online marketplaces. Management believes it can maintain and strengthen its leading market position through its differentiated sleep ecosystem, trusted brands, unmatched product assortment, superior sleep expertise and customer experience. The Company continues to actively assess opportunities for infrastructure, channels, partnerships, products and customer experience improvements across all its Banners to best serve Canadiansʼ sleep needs. Supply Chain The Company relies on third party manufacturers to obtain its merchandise. Merchandise is sourced domestically in Canada as well as from countries around the world (for example - U.S., China, Italy and Spain) and can be adversely impacted by political, regulatory, economic and legal factors including duties, tariffs, sanctions, pandemics, currency exchange rates and other factors relating to foreign trade. 8 15 Sleep Country Canada Holdings Inc. Annual Report 2022 Seasonality The retail mattress industry is affected by seasonal conditions. The Company typically experiences higher sales and a greater proportion of income during the third and fourth quarters due to seasonal factors including the concentration of the summer and holiday season. Sales have historically trended lower in the first quarter as consumers tighten their spending after the holiday season and shop less in the cold winter weather. The below table illustrates the Companyʼs average percentage of annual sales by quarter for the fiscal years 2018, 2019 and 2022 from the Companyʼs omnichannel retail banners. Due to the uncertainties of the impact of the COVID-19 pandemic in Canada in 2020 and 2021, the Company did not include 2020 and 2021 in the below mentioned sales seasonality. The extent of COVID-19ʼs impact on the overall economy, consumer purchasing behaviour and the impact of public health measures, such as mandated store closures, are uncertain and may have had an impact on seasonality in the retail mattress industry. First quarter Second quarter Third quarter Fourth quarter Yearly total Gross Profit 22% 23% 29% 26% 100% Gross Profit is calculated from Revenues less Cost of Sales. Gross Profit Margin is defined as Gross Profit divided by Revenues. Cost of Sales includes product related costs - net of rebates, sales and distribution costs including compensation, occupancy and depreciation costs. Rebates are driven by the volume of inventory purchased. As an additional incentive, certain suppliers offer step-up thresholds for higher volume rebates. Rebates on inventories sold are recorded as a reduction to Cost of Sales. Gross Profit Margin is affected by changes in average unit selling prices (“AUSP”), sales product mix and Cost of Sales. 9 16 Sleep Country Canada Holdings Inc. Annual Report 20225 Fourth Quarter and Annual Highlights Q4 Annual (C$ thousands unless otherwise stated; other than store count and EPS) Revenues SSS(1) Stores opened(2) Stores closed Stores renovated/relocated 2022 2021 Change 2022 2021 Change $ 243,028 $ 271,158 (10.4%) $ 928,657 $ 920,194 0.9% (11.5%) 2 - - 3.2% - 2 1 (1.8%) 5 1 - 18.3% 6 2 11 Gross profit margin % 37.5% 36.0% 36.7% 34.5% Operating EBITDA(1) Operating EBITDA margin %(1) $ 53,005 $ 62,065 (14.6%) $ 218,559 $ 210,889 3.6% 21.8% 22.9% 23.5% 22.9% Net income Net income attributable to the Company Adjusted net income attributable to the Company(1) Basic EPS Diluted EPS Basic adjusted EPS(1) Diluted adjusted EPS(1) Notes: $ 40,783 $ 26,812 52.1% $ 110,696 $ 88,982 24.4% $ 40,469 $ 26,433 53.1% $ 110,471 $ 88,603 24.7% $ 23,874 $ 30,977 0.72 $ 0.71 $ 0.84 $ 0.83 $ 1.14 $ 1.13 $ 0.67 $ 0.67 $ (22.9%) $ 102,868 $ 98,342 2.41 58.3% $ 2.38 59.2% $ 2.67 (20.2%) $ 2.64 (19.3%) $ 3.04 $ 3.01 $ 2.83 $ 2.81 $ 4.6% 26.1% 26.5% 6.0% 6.4% (1) SSS is a supplementary financial measure, Operating EBITDA, Adjusted net income attributable to the Company, Basic adjusted EPS and Diluted adjusted EPS are each non-IFRS measures and Operating EBITDA margin is a non-IFRS ratio. See the section titled “Non-IFRS and Other Measures” for further details concerning how the Company calculates SSS, Operating EBITDA, Operating EBITDA margin, Adjusted net income attributable to the Company, Basic adjusted EPS and Diluted adjusted EPS and for a reconciliation to the most comparable IFRS measure. (2) This figure does not include the Sleep Country Express/Dormez-vous Express Stores in the Walmart Canada licensee spaces. As at December 31, 2022, the Company had 17 Sleep Country/Dormez- vous Express Stores (2021 – 10 stores). 10 17 Sleep Country Canada Holdings Inc. Annual Report 2022 Highlights of Results in Q4 2022 Q4 2022 compared to Q4 2021 - See “Non-IFRS and Other Measures”. • Revenues decreased by $28.2 million or 10.4% from $271.2 million in Q4 2021 to $243.0 million in Q4 2022 mainly driven by a 11.5% decrease in SSS, partially offset by incremental revenue earned from Hush which was acquired in late October 2021, net four new stores opened in 2022 and wrap stores opened in 2021; • eCommerce sales as a percentage of Revenues increased by 20 basis points from 20.9% in Q4 2021 to 21.1% in Q4 2022; • Gross profit margin increased by 150 basis points from 36.0% in Q4 2021 to 37.5% in Q4 2022; • Operating EBITDA margin decreased by 110 basis points from 22.9% in Q4 2021 to 21.8% in Q4 2022 • Net income attributable to the Company increased by $14.1 million or 53.1% from $26.4 million in Q4 2021 to $40.5 million in Q4 2022, which was impacted by the $20.5 million adjustment of the redemption liabilities due to the revised expected outcome related to the Hush acquisition; • Adjusted net income attributable to the Company decreased by $7.1 million or 22.9% from $31.0 million in Q4 2021 to $23.9 million in Q4 2022; • Diluted EPS increased by $0.42 or 59.2% from $0.71 in Q4 2021 to $1.13 in Q4 2022 impacted by: o Positive impact from the $20.5 million adjustment to the redemption liabilities of $0.57 per share; and • Diluted adjusted EPS decreased by $0.16 or 19.3% from $0.83 in Q4 2021 to $0.67 in Q4 2022. Highlights of Results in 2022 2022 compared to 2021- See “Non-IFRS and Other Measures”. • Revenues increased by $8.5 million or 0.9% from $920.2 million in 2021 to $928.7 million in 2022 mainly driven by incremental revenue earned from Hush which was acquired in late October 2021, net four new stores opened in 2022, and wrap stores opened in 2021, partially offset by decrease of SSS by 1.8%; • eCommerce sales a percentage of Revenues decreased by 390 basis points from 23.5% in 2021 to 19.6% in 2022; • Gross profit margin increased by 220 basis points from 34.5% in 2021 to 36.7% in 2022; • Operating EBITDA margin increased by 60 basis points from 22.9% in 2021 to 23.5% in 2022; • Net income attributable to the Company increased by $21.9 million or 24.7% from $88.6 million in 2021 to $110.5 million in 2022, which was impacted by the $20.5 million adjustment of the redemption liabilities due to the revised expected outcome related to the Hush acquisition; • Adjusted net income attributable to the Company increased by $4.6 million or 4.6% from $98.3 million in 2021 to $102.9 million in 2022; • Diluted EPS increased by $0.63 or 26.5% from $2.38 in 2021 to $3.01 in 2022 impacted by: o Positive impact from the $20.5 million adjustment to the redemption liabilities of $0.57 per share; and • Diluted adjusted EPS increased by $0.17 or 6.4% from $2.64 in 2021 to $2.81 in 2022. 11 18 Sleep Country Canada Holdings Inc. Annual Report 2022Outlook The Company continues to make investments supporting the Companyʼs long-term, profitable growth strategy and reinforcing the Companyʼs position as Canadaʼs leading provider of Sleep. The Company aims to make significant investments to strengthen its omnichannel and digital capabilities, deepen relationships with new and loyal customers, grow its assortment of innovative and relevant sleep products and expand its customer segmentations in the Canadian market. Key initiatives planned for 2023 include continuing to: • • • • • • • explore new growth opportunities to further expand the Companyʼs business in sleep; o On January 1, 2023, the Company completed its acquisition of Silk & Snow Inc., one of Canada's top growing direct-to-consumer sleep brands specializing in high-quality sleep and lifestyle products. The Company acquired substantially all of the operating assets of Silk & Snow Inc. for an upfront cash consideration of $24.1 million and up to an additional $19.5 million in contingent consideration to be paid in 2026 upon achieving certain growth and profitability targets in aggregate for years 2023, 2024 and 2025; expand the sleep product assortment through strategic partnerships and in-house innovation; invest in an elevated in-store customer experience across our Sleep Country/Dormez-vous retail store network including rolling out new and innovative store formats for planned renovations and new stores; o open a minimum of six new stores in 2023; o renovate 20 to 30 stores in 2023; consolidate four of the Companyʼs existing warehouses into two new warehouses resulting in better customer experience and operational efficiencies; continued rollout of the Companyʼs new ERP regionally and further investments to enhance the Companyʼs ERP to evolve front-end and back-end operations; continued investment in the Companyʼs digital infrastructure and marketing capabilities across the Banners, grow and optimize our existing eCommerce platforms including third-party online marketplace channels and invest in customer relationship management tools; and plan on filing a notice of intention with the TSX to commence a new NCIB to repurchase common shares, at the Companyʼs discretion, for up to 10% of the public float. 12 19 Sleep Country Canada Holdings Inc. Annual Report 2022Selected Financial Information The following table presents selected IFRS and certain non-IFRS financial measures and ratios of the Company and should be read in conjunction with the audited consolidated financial statements for the years ended December 31, 2022 and December 31 2021. Q4 Annual (C$ thousands unless otherwise stated; other than EPS) Consolidated Income Statement Revenues Cost of sales Gross profit General and administrative expenses Income before finance related (income) expenses, other (income) expenses and income taxes Finance related (income) expenses Other (income) expenses Net income before provision for income taxes Provision for income taxes Net income Net income attributable to the Company EBITDA(1) Operating EBITDA(1) Operating EBITDA margin %(1) Adjusted net income attributable to the Company(1) Basic EPS Diluted EPS Basic adjusted EPS(1) Diluted adjusted EPS(1) Dividends declared per share Total Assets Total Long-term lease liabilities and long-term debt Note: 2022 2021 Change 2022 2021 Change $ 243,028 $ 271,158 173,438 97,720 56,263 151,953 91,075 57,540 $ 928,657 (10.4%) 587,629 (12.4%) (6.8%) 341,028 2.3% 196,167 $ 920,194 603,146 317,048 178,225 0.9% (2.6%) 7.6% 10.1% 33,535 (15,533) 65 41,457 4,259 (51) (19.1%) (464.7%) (227.5%) 144,861 (889) (292) 138,823 16,837 142 4.3% (105.3%) (305.6%) 49,003 8,220 37,249 10,437 40,783 $ 26,812 31.6% 146,042 (21.2%) 35,346 52.1% $ 110,696 121,844 32,862 $ 88,982 19.9% 7.6% 24.4% 40,469 $ 26,433 50,711 $ 57,314 53,005 $ 62,065 53.1% $ 110,471 $ 210,494 (11.5%) $ 218,559 (14.6%) $ 88,603 $ 199,549 $ 210,889 24.7% 5.5% 3.6% 21.8% 22.9% 23.5% 22.9% 23,874 $ 30,977 0.72 0.71 0.84 0.83 0.195 1.14 $ 1.13 $ 0.67 $ 0.67 $ 0.215 $ (22.9%) 58.3% $ 59.2% $ (20.2%) $ $ (19.3%) 10.3% $ $ 102,868 3.04 3.01 2.83 2.81 0.840 $ 98,342 2.41 $ 2.38 $ 2.67 $ 2.64 $ 0.780 $ 4.6% 26.1% 26.5% 6.0% 6.4% 7.7% $ $ $ $ $ $ $ $ $ $ 31-Dec-22 $ 1,021,719 $ 374,252 31-Dec-21 $ 988,035 $ 346,233 (1) EBITDA, Operating EBITDA, Adjusted net income attributable to the Company, Basic adjusted EPS and Diluted adjusted EPS are each non-IFRS measures and Operating EBITDA margin is a non-IFRS ratio. See the section titled “Non-IFRS and Other Measures” for further details concerning how the Company calculates EBITDA, Operating EBITDA, Adjusted net income attributable to the Company, Basic adjusted EPS and Diluted adjusted EPS and for a reconciliation to the most comparable IFRS measure. 13 20 Sleep Country Canada Holdings Inc. Annual Report 2022 The following table presents selected IFRS and certain non-IFRS financial measures and ratios of the Company and should be read in conjunction with the audited consolidated financial statements for the years ended December 31, 2021 and December 31 2020. (C$ thousands unless otherwise stated; other than EPS) Consolidated Income Statement Revenues Cost of sales Gross profit General and administrative expenses Income before finance related expenses, other (income) expenses and income taxes Finance related expenses Other (income) expenses Net income before provision for income taxes Provision for income taxes Net income Net income attributable to the Company EBITDA(1) Operating EBITDA(1) Operating EBITDA margin %(1) Adjusted net income attributable to the Company(1) Basic EPS Diluted EPS Basic adjusted EPS(1) Diluted adjusted EPS(1) Dividends declared per share Total Assets Total Long-term lease liabilities and long-term debt Notes: Q4 Annual 2021 2020 Change(2) 2021 2020 Change(2) $ 271,158 $ 248,861 166,699 82,162 43,665 173,438 97,720 56,263 9.0% $ 920,194 $ 757,699 513,203 4.0% 603,146 244,496 18.9% 317,048 134,926 28.9% 178,225 21.4% 17.5% 29.7% 32.1% 41,457 4,259 (51) 38,497 4,830 25 7.7% 138,823 16,837 142 (11.8%) (304.0%) 109,570 25,363 200 26.7% (33.6%) (29.0%) 37,249 10,437 33,642 7,071 $ 26,812 $ 26,571 $ $ 10.7% 121,844 47.6% 32,862 84,007 20,700 0.9% $ 88,982 $ 63,307 $ $ 26,433 26,571 $ 57,314 $ 52,847 $ 62,065 $ 53,848 22.9% 21.6% 88,603 (0.5%) 63,307 8.5% $ 199,549 $ 166,443 15.3% $ 210,889 $ 171,469 22.9% 22.6% 45.0% 58.8% 40.6% 40.0% 19.9% 23.0% $ 30,977 $ 27,404 0.72 $ 0.72 $ 0.75 $ 0.74 $ 0.195 $ 0.72 $ 0.71 $ 0.84 $ 0.83 $ 0.195 $ 31-Dec-21 $ 988,035 $ 346,233 13.0% $ 98,342 $ 71,593 1.73 1.71 1.95 1.94 0.390 2.41 $ 2.38 $ 2.67 $ 2.64 $ 0.780 $ 0.0% $ (1.4%)$ 12.0% $ 12.2% $ 0.0% $ 37.4% 39.3% 39.2% 36.9% 36.1% 100.0% 31-Dec-20 $ 902,351 $ 345,575 (1) EBITDA, Operating EBITDA, Adjusted net income attributable to the Company, Basic adjusted EPS and Diluted adjusted EPS are each non-IFRS measures and Operating EBITDA margin is a non-IFRS ratio. See the section titled “Non-IFRS and Other Measures” for further details concerning how the Company calculates EBITDA, Operating EBITDA, Adjusted net income attributable to the Company, Basic adjusted EPS and Diluted adjusted EPS and for a reconciliation to the most comparable IFRS measure. (2) See the Q4 2021 MD&A for discussion related to performance analysis. 14 21 Sleep Country Canada Holdings Inc. Annual Report 2022 6 Fourth Quarter 2022 versus Fourth Quarter 2021 Revenues Revenues decreased by $28.2 million or 10.4% from $271.2 million in Q4 2021 to $243.0 million in Q4 2022 mainly driven by an 11.5% decrease in SSS (See “Non-IFRS and Other Measures”) partially offset by incremental revenue earned from Hush which was acquired in late October 2021, net four new stores opened in 2022, and wrap stores opened in 2021. In Q4 2022, eCommerce sales as a percentage of revenue increased by 20 basis points from 20.9% in Q4 2021 to 21.1% in Q4 2022. The decrease in total revenues was comprised of a decrease in mattresses and accessories sales in Q4 2022 over Q4 2021. Q4 (C$ millions unless otherwise stated) Mattresses Accessories Total 2022 $ 180.6 $ 62.4 $ 243.0 2021 $ 207.4 63.8 $ $ 271.2 Gross profit Change Change (%) (12.9%) (2.2%) (10.4%) (26.8) (1.4) (28.2) $ $ $ Gross profit decreased by $6.6 million from $97.7 million in Q4 2021 to $91.1 million in Q4 2022. Gross profit margin increased by 150 basis points from 36.0% for Q4 2021 to 37.5% for Q4 2022. The increase in gross profit margin was attributable to higher AUSP in Q4 2022 versus Q4 2021 as well as a result of the following: • • • • • inventory and other directly related expenses, net of volume rebates, decreased as percentage of Revenues by 2.5% from 44.2% in Q4 2021 to 41.7% in Q4 2022 primarily due the increase in AUSP, lower inventory provision adjustments which were partially offset by higher products costs – net of volume rebates, transportation and delivery costs; sales and distribution compensation expenses remained unchanged as a percentage of Revenues at 12.5% in Q4 2021 and Q4 2022; other expenses remained unchanged as a percentage of Revenues at 0.7% in Q4 2021 and Q4 2022; store occupancy costs increased as a percentage of Revenues by 0.5% from 2.4% in Q4 2021 to 2.9% in Q4 2022 due to the Company deleveraging its occupancy costs tied to lower Revenues in Q4 2022; and depreciation expenses increased as a percentage of Revenues by 0.5% from 4.2% in Q4 2021 to 4.7% in Q4 2022 due to the Company deleveraging its depreciation costs tied to lower Revenues in Q4 2022. 15 22 Sleep Country Canada Holdings Inc. Annual Report 2022 General and administrative (“G&A”) expenses Total G&A expenses increased by $1.2 million or 2.3% from $56.3 million in Q4 2021 to $57.5 million in Q4 2022, and, as a percentage of revenue, G&A expenses increased from 20.7% of Revenues in Q4 2021 to 23.7% of Revenues in Q4 2022. Q4 (C$ millions unless otherwise stated) Media and advertising expenses(1) Salaries, wages and benefits Credit card and finance charges Occupancy charges Professional fees(2) Telecommunication and information technology Mattresses recycling and donations Depreciation and amortization(3) Other Total G&A expenses Notes: 2022 $ 23.7 12.4 5.6 2.5 3.1 3.0 0.1 5.8 1.3 $ 57.5 % of Revenues % of Revenues 2021 9.8% $ 22.3 5.1% 12.3 2.3% 5.7 1.0% 2.1 1.3% 4.2 1.2% 2.9 0.0% 1.1 2.4% 4.5 0.6% 1.2 23.7% $ 56.3 8.2% $ 4.5% 2.1% 0.8% 1.6% 1.1% 0.4% 1.7% 0.4% 20.7% $ Change 1.4 0.1 (0.1) 0.4 (1.1) 0.1 (1.0) 1.3 0.1 1.2 (1) Media and advertising expenses increased by $1.4 million mainly due to an increase in online and television advertising, market research costs and advertising fees in addition to a decrease in co- op and advertising credits received in Q4 2022. This increase was partially offset by a decrease billboard advertising, promotional material and advertising production costs. (2) Professional fees decreased by $1.1 million mainly due to a decrease in consulting fees related to the new ERP, partially offset by an increase in legal fees of which $0.4 million primarily related to the acquisition of Silk & Snow Inc. that closed subsequent to Q4 2022 on January 1, 2023. (3) Depreciation and amortization expenses increased by $1.3 million mainly due to the increase in intangible depreciation. 16 23 Sleep Country Canada Holdings Inc. Annual Report 2022 General and administrative (“G&A”) expenses Total G&A expenses increased by $1.2 million or 2.3% from $56.3 million in Q4 2021 to $57.5 million in Q4 2022, and, as a percentage of revenue, G&A expenses increased from 20.7% of Revenues in Q4 2021 to 23.7% of Revenues in Q4 2022. Q4 (C$ millions unless otherwise stated) Media and advertising expenses(1) Salaries, wages and benefits Credit card and finance charges Occupancy charges Professional fees(2) Telecommunication and information technology Mattresses recycling and donations Depreciation and amortization(3) Other Total G&A expenses Notes: 2022 $ 23.7 12.4 5.6 2.5 3.1 3.0 0.1 5.8 1.3 $ 57.5 % of Revenues % of Revenues 2021 9.8% $ 22.3 5.1% 12.3 2.3% 5.7 1.0% 2.1 1.3% 4.2 1.2% 2.9 0.0% 1.1 2.4% 4.5 0.6% 1.2 23.7% $ 56.3 8.2% $ 4.5% 2.1% 0.8% 1.6% 1.1% 0.4% 1.7% 0.4% 20.7% $ Change 1.4 0.1 (0.1) 0.4 (1.1) 0.1 (1.0) 1.3 0.1 1.2 (1) Media and advertising expenses increased by $1.4 million mainly due to an increase in online and television advertising, market research costs and advertising fees in addition to a decrease in co- op and advertising credits received in Q4 2022. This increase was partially offset by a decrease billboard advertising, promotional material and advertising production costs. (2) Professional fees decreased by $1.1 million mainly due to a decrease in consulting fees related to the new ERP, partially offset by an increase in legal fees of which $0.4 million primarily related to the acquisition of Silk & Snow Inc. that closed subsequent to Q4 2022 on January 1, 2023. (3) Depreciation and amortization expenses increased by $1.3 million mainly due to the increase in intangible depreciation. 16 24 Sleep Country Canada Holdings Inc. Annual Report 2022 EBITDA EBITDA decreased by $6.6 million or 11.5% from $57.3 million in Q4 2021 to $50.7 million in Q4 2022. The decrease was primarily due to lower revenues in Q4 2022, partially offset by an improved gross profit margin. See “Non-IFRS and Other Measures”. Operating EBITDA Operating EBITDA was $53.0 million for Q4 2022, or 21.8% of Revenues, compared to $62.1 million for Q4 2021, or 22.9% of Revenues, representing a decrease of $9.1 million or 14.6% mainly due to the decrease in EBITDA. See “Non-IFRS and Other Measures”. Finance related (income) expenses Finance related (income) expenses decreased by $19.8 million from expense of $4.3 million in Q4 2021 to income of $15.5 million in Q4 2022. This decrease was mainly due to the $20.5 million adjustment due to the revised expected outcome of the redemption liabilities related to the Hush acquisition and a gain on shares repurchased under the ASPP offset by decrease in the unrealized gain on the interest rate swap. Income taxes Net income before income taxes in Q4 2022 increased by $11.8 million from $37.2 million in Q4 2021 to $49.0 million in Q4 2022. The effective income tax rate decreased by 1120 basis points from 28.0% in Q4 2021 to 16.8% in Q4 2022. This decrease in the effective tax rate is mainly driven by the $20.5 million adjustment of the redemption liabilities related to the Hush acquisition that is not deductible for tax purposes. The lower effective tax rate of 16.8% resulted in a decrease to income taxes of $2.2 million. Net income attributable to the Company Net income attributable to the Company for Q4 2022 increased by $14.1 million from $26.4 million ($0.72 per share) in Q4 2021 to $40.5 million ($1.14 per share) in Q4 2022, which was impacted by the $20.5 million adjustment of the redemption liabilities due to the revised expected outcome related to the Hush acquisition. Adjusted net income attributable to the Company Adjusted net income attributable to the Company for Q4 2022 decreased by $7.1 million from $31.0 million ($0.84 per share) in Q4 2021 to $23.9 million ($0.67 per share) in Q4 2022. See “Non-IFRS and Other Measures”. 17 25 Sleep Country Canada Holdings Inc. Annual Report 20227 Annual Financial Results 2022 versus 2021 Revenues Revenues increased by $8.5 million or 0.9% from $920.2 million in 2021 to $928.7 million in 2022 mainly driven by incremental revenue earned from Hush which was acquired in late October 2021, net four new stores opened in 2022 and wrap stores opened in 2021, partially offset by SSS (See “Non-IFRS and Other Measures”) of 1.8%. In 2022, eCommerce sales as a percentage of revenue decreased by 390 basis points from 23.5% in 2021 to 19.6% in 2022. The increase in total revenues was comprised of an increase in accessories sales, partially offset by a decrease in mattresses sales in 2022 over 2021. (C$ millions unless otherwise stated) Mattresses Accessories Total 2022 $ 708.1 $ 220.6 $ 928.7 2021 $ 718.2 $ 202.0 $ 920.2 Change $ (10.1) $ 18.6 8.5 $ Annual Change (%) (1.4%) 9.2% 0.9% Gross profit Gross profit increased by $24.0 million from $317.0 million in 2021 to $341.0 million in 2022. Gross profit margin increased by 220 basis points from 34.5% for 2021 to 36.7% for 2022. The increase was attributable to higher AUSP in 2022 versus 2021 as well as a result of the following: • • • • • inventory and other directly related expenses, net of volume rebates, decreased as percentage of Revenues by 2.5% from 44.2% in 2021 to 41.7% in 2022 primarily due the increase in AUSP, lower delivery costs and inventory provision adjustments which was partially offset by higher transportation and products costs – net of volume rebates; other costs decreased as a percentage of Revenues by 0.1% from 0.7% in 2021 to 0.6% in 2022 depreciation expenses remained unchanged as a percentage of Revenues at 4.9% in 2021 and 2022; store occupancy costs increased as a percentage of Revenues by 0.1% from 2.8% in 2021 to 2.9% in 2022; and sales and distribution compensation expenses increased as a percentage of Revenues by 0.2% from 13.0% in 2021 to 13.2% in 2022. In 2022, the Company experienced an increase in higher sales salaries and commissions. 18 26 Sleep Country Canada Holdings Inc. Annual Report 2022 General and administrative (“G&A”) expenses Total G&A expenses increased by $18.0 million or 10.1% from $178.2 million in 2021 to $196.2 million in 2022, and, as a percentage of revenues, G&A expenses increased from 19.4% of Revenues in 2021 to 21.1% of revenues in 2022. Annual % of 2022 revenue % of revenue 2021 (C$ millions unless otherwise stated) Media and advertising expenses(1) Salaries, wages and benefits(2) Credit card and finance charges Occupancy charges Professional fees(3) Telecommunication and information technology(4) Mattresses recycling and donations Depreciation and amortization(5) Other(6) Total G&A expenses $ 74.9 42.8 19.9 9.6 10.0 11.5 2.9 20.2 4.4 $ 196.2 8.1% $ 66.0 4.6% 38.6 2.1% 19.4 1.0% 9.6 1.1% 11.9 1.2% 10.4 0.3% 3.9 2.2% 15.6 2.8 0.5% 21.1% $ 178.2 Change 8.9 4.2 0.5 - (1.9) 7.2% $ 4.2% 2.1% 1.0% 1.3% 1.1% 0.4% 1.7% 0.3% (1.0) 4.6 1.6 19.4% $ 18.0 Notes: (1) Media and advertising expenses increased by $8.9 million due to an increase in online and television advertising, market research costs and advertising fees including the incremental adverting costs attributed to Hush acquired in Q4 2021. These increases were partially offset by a decrease production costs. (2) Salaries, wages and benefits increased by $4.2 million mainly as a result of an increase in compensation expenses incurred in the regular course of business, partially offset by a decrease in share-based compensation and bonus expenses. (3) Professional fees decreased by $1.9 million mainly due to a decrease in consulting fees primarily related to the ERP implementation project, partially offset by an increase in legal fees. (4) Telecommunication and information technology expenses increased by $1.1 million mainly due to increased software licensing fees and support tied to our ERP and telecommunication expenses. (5) Depreciation expenses increased by $4.6 million mainly due to the increase in tangible and intangible depreciation. (6) Other expenses increased by $1.6 million mainly due to higher administrative, training, meals, entertainment and travel expenses. 19 27 Sleep Country Canada Holdings Inc. Annual Report 2022 EBITDA EBITDA increased by $11.0 million from $199.5 million in 2021 to $210.5 million in 2022. The increase was primarily due to an improved gross profit margin and partially offset by an increase in G&A expenses. See “Non-IFRS and Other Measures”. Operating EBITDA Operating EBITDA was $218.6 million for 2022, or 23.5% of Revenues, compared to $210.9 million for 2021, or 22.9% of Revenues, representing an increase of $7.7 million or 3.6% mainly due to the increase in EBITDA. See “Non-IFRS and Other Measures” Finance related (income) expenses Finance related (income) expenses decreased by $17.7 million from expense of $16.8 million in 2021 to income of $0.9 million in 2022 primarily due to the $20.5 million adjustment due to the revised expected outcome of the redemption liabilities related to the Hush acquisition and an increase in the gain on shares repurchased under the ASPP and unrealized gain on the interest rate swap. Income taxes The Companyʼs effective income tax rate decreased by 280 basis points from 27.0% in 2021 to 24.2% in 2022. This tax rate decrease is mainly driven by the $20.5 million adjustment of the redemption liabilities related to the Hush acquisition that is not deductible for tax purposes. Net income before income taxes in 2022 increased by $24.2 million from $121.8 million in 2021 to $146.0 million in 2022 resulting in an increase to income taxes of $2.4 million. Net Income attributable to the Company Net Income attributable to the Company for 2022 increased by $21.9 million from $88.6 million ($2.41 per share) in 2021 to $110.5 million ($3.04 per share) in 2022, which was impacted by the $20.5 million adjustment of the redemption liabilities due to the revised expected outcome related to the Hush acquisition. Adjusted net income attributable to the Company Adjusted net income attributable to the Company for 2022 increased by $4.6 million from $98.3 million ($2.67 per share) in 2021 to $102.9 million ($2.83 per share) in 2022. See “Non-IFRS and Other Measures”. 20 28 Sleep Country Canada Holdings Inc. Annual Report 2022t o t h e C o m p a n y , B a s c i j a d u s t e d E P S a n d D i l t u e d j a d u s t e d E P S a n d f o r a r e c o n c i l i a t i o n t o t h e m o s t c o m p a r a b e I l F R S m e a s u r e . O t h e r M e a s u r e s ” f o r f u r t h e r d e t a i l s c o n c e r n n g h o w i t h e C o m p a n y l c a c u a l t e s S S S , I E B T D A , O p e r a t i n g E B T D A I , j A d u s t e d n e t i n c o m e a t t r i b u t a b e l a n d D i l j u t e d a d u s t e d E P S a r e e a c h n o n - I F R S m e a s u r e s a n d O p e r a t i I n g E B T D A m a r g n i i s a n o n - I F R S r a t i o . S e e t h e s e c t i o n t i t l e d “ N o n - I F R S a n d 2 1 N o t e s : ( 1 ) S S S i s a l s u p p e m e n t a r y f i n a n c a i l m e a s u r e , I E B T D A , O p e r a t i n g E B T D A I , j A d u s t e d n e t i n c o m e a t t r i b u t a b e l t o t h e C o m p a n y , B a s c i j a d u s t e d E P S D i l t u e d a d u s t j e d E P S ( 1 ) N e t i n c o m e a t t r i b u a b e t l t o i B a s c E P S D i l t u e d E P S t h e C o m p a n y ( 1 ) B a s c i j a d u s t e d E P S ( 1 ) t h e C o m p a n y j A d u s t e d n e t i n c o m e a t t r i b u t a b e l t o O p e r a O p e r a t i I n g E B T D A ( 1 ) t i I n g E B T D A m a r g n % i ( 1 ) S S S ( 1 ) R e v e n u e s G r o s s p r o f i t I E B T D A ( 1 ) G r o s s p r o f i t m a r g n % i s t a t e d , e x c e p t E P S ) ( C $ t h o u s a n d s l u n e s s t o h e r w s e i $ $ $ $ $ $ $ $ $ 0 . 6 7 0 . 6 7 1 . 1 3 1 . 1 4 , 2 3 8 7 4 , 4 0 4 6 9 , 5 3 0 0 5 , 5 0 7 1 1 , 9 1 0 7 5 . 3 7 5 % . 2 1 8 % $ $ $ $ $ $ $ $ $ 0 . 8 9 0 . 9 0 0 . 7 9 0 . 8 0 3 2 , 4 5 7 2 8 , 9 2 6 6 5 , 6 0 3 6 3 , 6 8 3 9 6 , 6 2 3 3 8 . 5 % 2 6 . 1 % $ $ $ $ $ $ $ $ $ 0 . 6 9 0 . 7 0 0 . 6 1 0 . 6 1 2 5 , 7 3 9 2 2 , 6 6 5 5 3 , 2 4 2 5 1 , 8 6 6 8 1 , 7 0 0 3 5 . 9 % 2 3 . 4 % $ $ $ $ $ $ $ $ $ 0 . 5 6 0 . 5 6 0 . 4 9 0 . 5 0 2 0 , 8 0 0 $ $ $ $ $ 1 0 2 , 8 6 8 2 . 8 1 2 . 8 3 3 . 0 1 3 . 0 4 1 8 , 4 1 3 $ 1 1 0 , 4 7 1 4 6 , 7 1 4 4 4 , 2 3 9 $ $ 2 1 8 , 5 5 9 2 1 0 , 4 9 4 7 1 , 6 3 3 $ 3 4 1 , 0 2 8 3 4 . 6 % 3 6 . 7 % 2 2 . 6 % 2 3 . 5 % $ $ $ $ $ $ $ $ $ 0 . 8 3 0 . 8 4 0 . 7 1 0 . 7 2 3 0 , 9 7 7 2 6 , 4 3 3 6 2 , 0 6 5 5 7 , 3 1 4 2 2 . 9 % $ $ $ $ $ $ $ $ 1 . 0 7 1 . 0 8 0 . 9 8 0 . 9 9 3 9 , 7 0 7 3 6 , 4 5 8 7 3 , 6 5 9 6 9 , 4 1 2 2 6 . 9 % 9 7 , 7 2 0 $ 1 0 2 , 7 2 6 3 6 . 0 % 3 7 . 5 % $ $ $ $ $ $ $ $ $ 0 . 4 8 0 . 4 9 0 . 4 6 0 . 4 6 1 8 , 0 3 6 1 7 , 0 1 9 4 3 , 7 0 6 4 2 , 4 5 2 6 6 , 3 5 1 3 4 . 5 % 2 2 . 7 % $ $ $ $ $ $ $ $ $ 0 . 2 6 0 . 2 6 0 . 2 3 0 . 2 4 9 , 6 2 1 8 , 6 9 2 $ $ $ $ $ $ . 2 6 4 . 2 6 7 . 2 3 8 . 2 4 1 , 9 8 3 4 2 , 8 8 6 0 3 3 1 , 4 5 7 3 0 , 3 6 9 $ $ , 2 1 0 8 8 9 , 1 9 9 5 4 9 5 0 , 2 5 0 $ , 3 1 7 0 4 8 2 7 . 5 % . 3 4 5 % 1 7 . 2 % . 2 2 9 % $ , 2 4 3 0 2 8 $ 2 5 1 , 0 2 6 $ 2 2 7 , 5 7 5 $ 2 0 7 , 0 2 8 $ 9 2 8 , 6 5 7 $ 2 7 1 , 1 5 8 $ 2 7 3 , 8 4 0 $ 1 9 2 , 1 7 5 $ 1 8 3 , 0 2 0 $ , 9 2 0 1 9 4 . ( 1 1 5 % ) ( 1 1 . 1 % ) 1 5 . 1 % 8 . 8 % ( 1 . 8 % ) 3 . 2 % 1 0 . 6 % 6 5 . 5 % 1 9 . 6 % . 1 8 3 % Q 4 Q 3 Q 2 Q 1 A n n u a l Q 4 Q 3 Q 2 Q 1 A n n u a l 2 0 2 2 2 0 2 1 s u c h a s m a n d a t e d s t o r e l c o s u r e s , m a y h a v e h a d a n i m p a c t o n s e a s o n a l i t y i n t h e r e a t i l m a t t r e s s i n d u s t r y . w h e r e i i n d c a t e d . T h e e x t e n t o f I C O V D - 1 9 s ʼ i m p a c t o n t h e o v e r a l l e c o n o m y , c o n s u m e r p u r c h a s n g i b e h a v o u r i a n d t h e i m p a c t o f p u b l i c h e a l t h m e a s u r e s , T h e f o l l o w n g i t a b e l i d s p a y s l t h e C o m p a n y s ʼ f i n a n c a i l p e r f o r m a n c e f o r t h e l a s t i e g h t q u a r t e r s a n d i t h a s b e e n p r e p a r e d i n a c c o r d a n c e w i t h I F R S , e x c e p t q u a r t e r t h e l e a s t . A c c o r d n g y , l i r e s u l t s o f o p e r a t i o n s f o r a n y i t n e r i m p e r i o d a r e n o t n e c e s s a r i l y i n d c a i t i v e o f t h e r e s u l t s o f o p e r a t i o n s f o r t h e f u l l f i s c a l y e a r . 8 S u m m a r y o f Q u a r t e r l y R e s u l t s T h e C o m p a n y s R e v e n u e s ʼ a r e i m p a c t e d b y s e a s o n a l i t y , w i t h t h e t h i r d q u a r t e r t y p c a i l l y g e n e r a t i n g t h e g r e a t e s t c o n t r i b u t i o n t o r e v e n u e s a n d t h e f i r s t 29 Sleep Country Canada Holdings Inc. Annual Report 2022 9 Segment Reporting As at December 31, 2022, the Company manages its business on the basis of three operating segments, Sleep Country/Dormez-vous, Endy and Hush, which is consistent with the internal reporting provided to the chief operating decision-maker, the Chief Executive Officer. The Company has only one reportable segment as the operating segments meet the aggregation criteria of IFRS 8 - Operating Segments. The Company aggregates these reporting segments because the nature of products, services, methods of distribution and economic characteristics are similar. The Company operates primarily in Canada, its country of domicile. 10 Liquidity and Capital Resources Liquidity The Companyʼs primary sources of cash consist of existing cash balances, operating activities and available credit facilities. The Companyʼs primary uses of cash are to fund operating expenses, capital expenditures, finance costs, tax expenses, principal debt payments, dividends, business acquisitions and share repurchases. The Company believes cash generated from operations, together with cash on hand and amounts available under the Companyʼs credit facilities will be sufficient to meet its future cash requirements. However, the Companyʼs ability to fund future cash requirements will depend on its future operating performance. This could be affected by general economic, financial and other factors including factors beyond its control, despite the risk management strategies that the Company puts in place. See the section entitled “Risk Factors” in the AIF for a discussion of the various risks and uncertainties that may affect the Companyʼs ability to fund its future cash requirements. The Company reviews new store openings, acquisitions and investment opportunities in the normal course of its business and may, if suitable opportunities arise, realize these opportunities to meet the Companyʼs business strategy. Historically, the funding for any such acquisitions or investments has come from cash flow generated from operating activities and/or additional debt. The Companyʼs cash balance was $78.3 million with an additional $160.0 million (not including the $100.0 million accordion) of liquidity available under the Companyʼs credit facility as at December 31, 2022. A summary of net cash flows by activities is presented below for 2022 and 2021: (C$ thousands unless otherwise stated) Cash flows provided by operating activities Cash flows used by investing activities Cash flows used by financing activities Effects of foreign currency exchange rate changes on cash Net increase (decrease) in cash Cash at beginning of the period Cash at end of the period Net cash flows provided by operating activities 2022 $ 163,060 (18,224) (103,044) (20) 41,772 36,546 78,318 $ Annual 2021 $ 156,143 (63,106) (94,808) - (1,771) 38,317 36,546 $ Net cash flows provided by operating activities in 2022 were $163.1 million and consisted of the positive impact of cash generated from operating activities of $181.2 million offset by $18.2 million of cash used as a result of an increase in working capital. The increase in working capital in 2022 was primarily driven by higher inventories and prepaid expenses and deposits, and lower customer deposits and trade and other payables which were partially offset by lower trade and other receivables. Net cash flows provided by operating activities in 2021 were $156.1 million and consisted of the positive impact of cash generated from operating activities of $176.6 million offset by $20.5 million of cash used as a result of an increase in working capital. The increase in working capital in 2021 was primarily driven by higher inventories and prepaid expenses and deposits, which were partially offset by lower trade and other 22 30 Sleep Country Canada Holdings Inc. Annual Report 2022 receivables, higher trade and other payables and customer deposits. Additionally, the Company used $9.9 million of cash from operating activities to pay the contingent consideration due under the purchase agreement related to the Endy acquisition in 2018. Net cash flows used by investing activities Net cash flows used by investing activities in 2022 were $18.2 million and consisted primarily of investments in capital expenditure related to enhancements on the Companyʼs ERP system and eCommerce platforms, leasehold improvements, computer hardware and furniture and equipment. Net cash flows used by investing activities in 2021 were $63.1 million and consisted primarily of $23.3 million used in the acquisition of Hush, as well as $15.1 million used to pay the contingent consideration due under the purchase agreement related to the Endy acquisition in 2018. The remaining cash flows used by investing activities in 2021 are attributed to investments in capital expenditure related to new store openings, store renovations and hardware refresh, spend on the investment in the new ERP system and the eCommerce platforms. Net cash flows used by financing activities Net cash flows used by financing activities for 2022 were $103.0 million and consisted primarily of the repurchase for cancellation of the Companyʼs common shares under the NCIB of $57.7 million, dividends paid on the common shares of $30.4 million, the repayment of the principal on lease obligations of $38.7 million, the repayment to the senior secured credit facility of $21.0 million and interest payments of $15.9 million on lease liabilities and the senior secured credit facility. These cash outflows were partially offset by an additional draw on the senior secured credit facility of $58.0 million and $2.8 million received from common shares issued due to exercised stock options. Net cash flows used by financing activities in 2021 were $94.8 million, consisting primarily of the repayment of the net loan of $15.0 million in 2021 to the senior secured credit facility, dividends paid on the common shares of $28.7 million, the repayment of lease obligations of $37.8 million and interest payments of $16.1 million on lease liabilities and the senior secured credit facility. These cash outflows were partially offset by $3.3 million received from common shares issued due to exercised stock options. Contractual obligations The following table summarizes the Companyʼs significant contractual obligations as at December 31, 2022 based on undiscounted cash flow (including interest where applicable) which may differ from the carrying values of the liabilities at the reporting date: (C$ thousands unless otherwise stated) Trade and other payables Lease liabilities Long-term debt(1) Other liabilities(2) Notes: Within 1 year $ 106,883 51,187 1,400 22,705 $ 182,175 Between 1 and 5 years - $ 173,621 104,200 12,723 $ 290,544 $ Over 5 years - 157,889 - - $ 157,889 (1) Long-term debt represents the interest and principal amounts on the senior secured credit facility with a balance outstanding, net of transaction costs, as at December 31, 2022 of $99.1 million (2021 - $61.9 million) (2) Other liabilities includes $20.6 million (2021 – $nil) representing the estimated maximum obligation for shares to be repurchased under the ASPP, and $14.1 million (2021 - $32.0 million) representing the contractual commitment to acquire the remaining shares of non-controlling interests in Hush over a three-year period commencing on or about March 31, 2023. The commitment is measured at the expected outcome determined based on an earnings formula and the expected earnings levels over the measurement period. 23 31 Sleep Country Canada Holdings Inc. Annual Report 2022 On December 20, 2022, the Company announced its intention to acquire substantially all of the operating assets of Silk & Snow Inc. for an upfront cash consideration of $24.1 million and up to an additional $19.5 million in contingent consideration to be paid in 2026 upon achieving certain growth and profitability targets in aggregate for years 2023, 2024 and 2025. On January 1, 2023, the Company completed the acquisition. Capital Resources Senior secured credit facility The Company has a senior secured credit facility of $260.0 million with an additional $100.0 million available on its accordion, which is scheduled to mature on October 22, 2026. Under the terms of the senior secured credit facility, certain financial and non-financial covenants must be complied with. The Company is in compliance with all covenants as at December 31, 2022. The senior secured credit facility is secured by all of the present and after acquired personal property of the Company. As at December 31, 2022, the balance outstanding on the senior secured credit facility was $100.0 million (December 31, 2021 – $63.0 million). The long-term debt liability balance in the consolidated statements of financial position is net of transaction costs of $0.9 million (December 31, 2021 – $1.1 million). The senior secured credit facility allows for the debt to be held in Canadian or US dollars. As at December 31, 2022, the Company held the debt in Canadian dollars. Interest on the senior secured credit facility is based on the prime or bankersʼ acceptance rates plus applicable margins based on the achievement of certain targets, as defined by the amended and restated senior secured credit agreement. The Company entered into a fixed interest rate swap, effective April 1, 2021 ending on April 1, 2024, for the notional amount of $60.0 million whereby the Company pays a fixed rate of 1.072% and receives interest at a variable rate equal to the Canadian Dollar Offered Rate for 3- month bankers' acceptances (“3-month CDOR”) on the notional amount. The swap is being used to manage the volatility of interest rates on the outstanding balance on its senior secured credit facility. Off-balance sheet arrangements The Company did not have any material off-balance sheet arrangements as at December 31, 2022 and December 31, 2021, nor did it have any subsequent to December 31, 2022. Related party transactions At December 31 2022, trade and other receivables in the Companyʼs consolidated financial statements included $0.5 million (2021 - $nil) receivable from non-controlling interests. There is no balance payable to non-controlling interests at December 31, 2022 (2021 - $2.6 million). 11 Transactions with Key Management Personnel Key management personnel are those individuals having authority and responsibility for planning, directing and controlling the activities of the Company, including members of the Companyʼs Board of Directors. The Company considers key management to be the Board of Directors and its Named Executive Officers (“NEO”). The Company incurred the following compensation expenses in relation to key management personnel: (C$ thousands unless otherwise stated) Salaries and short-term associate benefits Share-based compensation Directors’ fees 2022 $ 4,219 2,746 549 $ 7,514 Annual 2021 $ 4,599 3,260 549 $ 8,408 24 32 Sleep Country Canada Holdings Inc. Annual Report 2022 12 Risk Factors The Companyʼs activities expose it to a variety of financial risks: market risk (including foreign exchange risk and cash flow and fair value interest risks), credit risk, liquidity risk, capital risk and technology risk. The Companyʼs overall risk management program and business practices seek to minimize any potential adverse effects on its financial performance. Risk management is carried out by the senior management team and is reviewed by the Board. For an understanding of other potential risks, including, non-financial risks, see the section entitled “Risk Factors” in the AIF. Market Risk Market risk is the loss that may arise from changes in factors such as interest rates, foreign exchange rates and the impact these factors may have on other counter-parties. Foreign Exchange Risk The Companyʼs operating results are reported in Canadian dollars. A portion of the Companyʼs sales and purchases are denominated in U.S. dollars which results in foreign currency exposure related to fluctuations between the Canadian and U.S. dollars. The Company does not currently use foreign exchange options or forward contracts to hedge its foreign currency risk relating to sales and purchases. A sudden increase in the U.S. dollar relative to the Canadian dollar could result in higher costs to the Company, which could in turn result in increased prices and reduced sales, decreased profit margins and could negatively impact the Companyʼs business and financial results. Cash Flow and Fair Value Interest Risk The Company has no significant interest-bearing assets. Its income and operating cash flows are substantially independent of changes in market interest rates. The Companyʼs primary interest rate risk arises from long-term debt. It manages its exposure to changes in interest rates by using a combination of fixed and variable rate debt and varying lengths of terms to achieve the desired proportion of variable and fixed rate debt. Additionally, in Q2 2021, the Company entered into a fixed rate swap for the notional amount of $60.0 million to manage its interest rate risk. An increase (or decrease) in interest rates by 1% would result in a $0.40 million increase (or decrease) of the annual interest expense of the credit facility. The Company has leases that carry interest at variable rates. Credit Risk Credit risk refers to the risk of losses due to the failure of the Companyʼs customers or other counter-parties to meet their payment obligations. Credit risk arises from deposits with banks, as well as credit exposures from vendors for the payment of volume and co-operative advertising rebate amounts and balances owed from third-party financing companies under the various financing plans the Company offers its customers. In accordance with the Companyʼs investment practice, deposits are held at banks possessing a credit rating of AA- or better. Sales to retail customers are settled in cash, financed by third-party financing companies or by using major credit cards. The Company transfers the credit risk for financing plans to third- party financing companies. The third-party financing company that the Company deals with carries a minimum rating of BBB or better. There are no significant impaired receivables that have not been provided for in the allowance. There are no significant amounts considered past due or impaired. Liquidity Risk Liquidity risk is the risk the Company will not be able to meet a demand for cash or fund its obligations as they come due. It also includes the risk of not being able to liquidate assets in a timely manner at a reasonable price. Prudent liquidity management implies maintaining sufficient cash and the availability of 25 33 Sleep Country Canada Holdings Inc. Annual Report 2022funding through an adequate number of committed credit facilities. Capital Risk The Companyʼs objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns for its common shareholders in the form of cash dividends, benefits to other stakeholders and to maintain an optimal capital structure to minimize the cost of capital. In order to maintain or adjust the capital structure, the Company may issue new shares, purchase its own shares or sell assets to reduce long-term debt. Technology Risk The Company continues to undertake investments in new IT systems to improve the operating effectiveness of the organization. This includes the ongoing enhancements on the Companyʼs ERP system and eCommerce platforms. Failure to successfully migrate from legacy systems to the new systems or a significant disruption in the Companyʼs current IT systems during the implementation of the new systems could result in a lack of accurate data to enable management to effectively manage day-to-day operations of the business or achieve its operational objectives causing significant disruptions to the business and potential financial losses. 13 Critical Accounting Estimates A summary of significant accounting policies is included in Note 3 of the Companyʼs 2022 audited annual consolidated financial statements. The Companyʼs critical accounting estimates are included in Note 4 of the Companyʼs 2022 audited annual consolidated financial statements and are described below. Critical accounting estimates require management to make certain judgements and estimates, which may differ from actual results. Accounting estimates are based on historical experience and other factors that management believes to be reasonable under the time frame and circumstances. Changes in managementʼs accounting estimates can have a material impact on the financial results of the Company. Impairment of goodwill and brands The Company is required to use judgment in determining the appropriate groupings of CGUs, in order to determine the level at which goodwill and intangible assets are tested for impairment. In addition, judgment is used to determine whether a triggering event has occurred requiring an impairment test to be completed. In determining the recoverable amount of a CGU, various estimates are employed. The Company determines the higher of its fair value less costs of disposal and its value in use, using estimates such as projected future sales, earnings, capital investments and discount rates. Projected future sales and earnings are consistent with strategic plans provided to the Companyʼs Board of Directors. Discount rates are based on an estimate of the Companyʼs weighted average cost of capital taking into account external industry information reflecting the risk associated with the specific cash flows. As at reporting dates for the consolidated financial statements, impairment reviews were performed by comparing the carrying value with the recoverable amount of the CGU to which goodwill and brands have been allocated. The Company has determined there had been no impairment as at the reporting dates of the consolidated financial statements. Business combinations For each business combination, the Company measures the identifiable assets acquired and the liabilities assumed at their acquisition date fair values. The determination of fair value requires the Company to make assumptions, estimates and judgments regarding future events. The allocation process is inherently subjective and impacts the amounts assigned to individual identifiable assets and liabilities, including the recognition and measurement of any identified intangible assets and the final determination of the amount of goodwill or gain on acquisition. The inputs to the exercise of judgments include legal, contractual, business and economic factors. As a result, the purchase price allocation impacts the Companyʼs reported assets and liabilities and future net earnings and impairment tests. 26 34 Sleep Country Canada Holdings Inc. Annual Report 202214 Financial Instruments As at December 31, 2022, the financial instruments consisted of cash, trade and other receivables, trade and other payables, customer deposits, the Companyʼs senior secured credit facility, lease liabilities, interest rate swap, redemption liabilities and the share repurchase commitment under ASPP. The carrying values of cash, trade and other receivables, trade and other payables, customer deposits and the share repurchase commitment under ASPP approximate their fair values due to the relatively short periods to maturity of these financial instruments. The carrying value of the senior secured credit facility approximates its fair value as the terms and conditions of the borrowing arrangements are comparable to market terms and conditions as at December 31, 2022 and December 31 2021. The interest rate swap obtained effective April 1, 2021 is recognized at fair value based on observable quoted market prices for identical financial instruments in active markets as at December 31, 2022 and December 31 2021. The redemption liabilities related to the acquisition of Hush were initially recognized at fair value measured at the expected outcome (discounted) determined based on an earnings formula and the expected earnings levels over the measurement period and subsequently measured at amortized cost. The Companyʼs financial instruments are exposed to certain financial risks, including currency risk, interest rate risk, credit risk and liquidity risk, which are discussed above under the section “Risk Factors”. 15 Disclosure Controls and Procedures Disclosure controls and procedures are designed to provide reasonable assurance that material information relating to the Company is made known to the Chief Executive Officer and the Chief Financial Officer (the “Certifying Officers”) by others on a timely basis so that appropriate decisions can be made regarding public disclosure within the time periods required by applicable securities laws. The Certifying Officers are responsible for establishing and maintaining the Companyʼs disclosure controls and procedures. The Companyʼs system of disclosure controls and procedures includes, but is not limited to, the Companyʼs Disclosure Policy, the Companyʼs Codes of Business Conduct, the effective functioning of the Companyʼs Disclosure Committee, procedures in place to systematically identify matters warranting consideration of disclosure by the Disclosure Committee, verification processes for individual financial and non-financial metrics and information contained in annual and interim filings, including the consolidated financial statements, MD&As, AIF, Management Information Circular and other documents and external communications. Based on an evaluation of the Companyʼs disclosure control and procedures, the Certifying Officers have concluded that these controls are appropriately designed and were operating effectively as of December 31, 2022. Although the Companyʼs disclosure controls and procedures were operating effectively as of December 31, 2022, there can be no assurance that the Companyʼs disclosure controls and procedures will detect or uncover all failures of persons within the Company to disclose material information otherwise required to be set forth in the Companyʼs regulatory filings. 16 Internal Controls Over Financial Reporting Management is responsible for establishing and maintaining appropriate internal controls over financial reporting (“ICFR”). ICFR is designed to provide reasonable assurance regarding the reliability of the Companyʼs financial reporting and the preparation of financial statements in accordance with IFRS. In designing ICFR, it should be recognized that due to inherent limitations, any controls, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and cannot provide absolute assurance with respect to the prevention or detection of misstatements. Additionally, management is required to use judgment in evaluating ICFR. Management is also responsible for establishing and maintaining a system of disclosure controls and procedures to provide reasonable assurance that all material information relating to the Company and its subsidiary is gathered and reported to senior management on a timely basis so that appropriate decisions can be made regarding public disclosure. 27 35 Sleep Country Canada Holdings Inc. Annual Report 2022The Companyʼs ICFR includes policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companyʼs assets that could have a material effect on the financial statements. A “material weakness” in ICFR is a deficiency, or a combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of a companyʼs annual or interim financial statements will not be prevented or detected in a timely basis by the organizationʼs internal controls. The Certifying Officers have evaluated the effectiveness of the Companyʼs ICFR as at December 31, 2022 using the framework established in ʻInternal Control - Integrated Framework (COSO Framework)ʼ published by The Committee of Sponsoring Organizations of the Treadway Commission (COSO), 2013. Based on that evaluation, the Certifying Officers concluded that the ICFR, as defined by National Instrument 52-109 – Certification of Disclosure on Issuersʼ Annual and Interim Filings, are appropriately designed and were operating effectively as at December 31, 2022 and that no material weaknesses were identified through their evaluation. 17 Current and Future Accounting Standards A summary of the Companyʼs significant accounting policies is included in Note 3 of the Companyʼs 2022 audited annual consolidated financial statements. Accounting standards issued but not yet in effect A number of interpretations and amendments to existing standards have been published by the IASB that are not yet in effect. The Company has not early adopted these interpretations or amendments and the Company is currently evaluating the impact on its consolidated financial statements. The following amendments may have an impact on the Companyʼs consolidated financial statements in future reporting periods: Classification of Liabilities as Current or Non-current (Amendments to IAS 1) In January 2020, the IASB issued amendments to IAS 1 – Presentation of Financial Statements, to clarify that the classification of liabilities as current or non-current should be based on rights that are in existence at the end of the reporting period and specifies that classification is unaffected by expectations about whether an entity will exercise its right to defer settlement of a liability. The amendments are effective for annual reporting periods beginning on or after January 1, 2023 and are to be applied retrospectively. Disclosure of Accounting Policies (Amendments to IAS 1) In February 2021, the IASB issued amendments to IAS 1 – Presentation of Financial Statements, requiring an entity to disclose its material accounting policies, rather than its significant accounting policies. Additional amendments were made to explain how an entity can identify a material accounting policy. The amendments are effective for annual reporting periods beginning on or after January 1, 2023. Definition of Accounting Estimates (Amendments to IAS 8) In February 2021, the IASB issued amendments to IAS 8 – Accounting Policies, Changes to Accounting Estimates and Errors, to replace the definition of accounting estimates and help entities distinguish changes in accounting estimates from changes in accounting policies. The amendments are effective for annual reporting periods beginning on or after January 1, 2023. Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction (Amendments to IAS 12) In May 2021, the IASB issued amendments to IAS 12 – Income Taxes, to clarify how companies should 28 36 Sleep Country Canada Holdings Inc. Annual Report 2022account for deferred tax on certain transactions that on initial recognition give rise to equal taxable and deductible temporary differences, such as leases and decommissioning obligations. The amendments are effective for annual reporting periods beginning on or after January 1, 2023 and are to be applied retrospectively. 18 Outstanding Share Data As of the date hereof, 34,837,943 common shares and no Class A common shares of the Company are issued and outstanding. As of the date hereof, 1,038,790 stock options to purchase an equivalent number of common shares, 232,667 performance share units, 170,164 restricted share units and 84,761 deferred share units are issued and outstanding. For further details concerning the rights, privileges and restrictions attached to the common shares and the Class A common shares, please refer to the section entitled “Description of Share Capital” in the AIF. 19 Non-IFRS and Other Measures The Company prepares its consolidated financial statements in accordance with IFRS. In order to provide additional insight into the business, to provide investors with supplemental measures of its operating performance and to highlight trends in its business that may not otherwise be apparent when relying solely on IFRS financial measures, the Company has also provided in this MD&A certain supplementary financial measures, such as SSS, non-IFRS measures such as EBITDA, Operating EBITDA, Adjusted net income, Basic adjusted EPS, Diluted adjusted EPS, and non-IFRS ratios including Operating EBITDA margin each as defined below. These measures are provided as additional information to complement IFRS measures by providing further understanding of the Companyʼs results of operations from managementʼs perspective. Management also uses these measures in order to facilitate operating performance comparisons from period to period, to prepare annual operating budgets and forecasts and to determine components of management compensation. The Company also believes that securities analysts, investors and other interested parties frequently use these measures in the evaluation of issuers. Readers are cautioned that these measures are not recognized under IFRS and do not have a standardized meaning prescribed by IFRS. They are therefore unlikely to be comparable to similarly titled measures presented by other publicly traded companies. Accordingly, they should not be considered in isolation nor as a substitute for analysis of the Companyʼs financial information reported under IFRS. See below for further details concerning how the Company calculates these measures and for reconciliations to the most comparable IFRS measures. Same Store Sales (SSS) SSS is a supplementary financial measure used in the retail industry to compare sales derived from established stores over a certain period compared to the same period in the prior year. The Company has embarked on an omnichannel approach to engaging with customers. This approach allows customers to shop online for home delivery or purchase in any store locations. Due to the customer cross-channel behavior, the Company reports a single comparable sales metric, inclusive of store and eCommerce channels. This measure does not include sales from the Companyʼs Sleep Country/Dormez-vous Express Stores. SSS calculation excludes sales of excess inventory to third parties. SSS helps to explain what portion of revenue growth can be attributed to growth in established stores and eCommerce sales and what portion can be attributed to the opening of new stores. The Company calculates SSS as the percentage increase or decrease in sales of stores opened for at least 12 complete months relative to the same period in the prior year. 29 37 Sleep Country Canada Holdings Inc. Annual Report 2022EBITDA, Operating EBITDA, and Operating EBITDA margin EBITDA and Operating EBITDA are used by the Company to assess its operating performance. EBITDA is defined as net income attributable to the Company adjusted for: • • • • • non-controlling interests other (income) expenses; finance related (income) expenses; income taxes; and depreciation and amortization. Operating EBITDA is defined as EBITDA adjusted for: • • • acquisition costs; ERP implementation expenses; and share-based compensation. Operating EBITDA margin is defined as Operating EBITDA divided by Revenues. Adjusted net income attributable to the Company Adjusted net income attributable to the Company is used by the Company to assess its operating performance. Adjusted net income attributable to the Company is defined as net income attributable to the Company adjusted for: • • • • acquisition costs; ERP implementation expenses; share-based compensation; and accretion on redemption liabilities related to the Hush acquisition in October 2021. Basic adjusted earnings per share (Basic adjusted EPS) Basic adjusted EPS is defined as adjusted net income attributable to the Company divided by weighted average number of shares issued and outstanding during the period. Diluted adjusted earnings per share (Diluted adjusted EPS) Diluted adjusted EPS is defined as adjusted net income attributable to the Company divided by weighted average number of shares issued and outstanding during the period adjusted for the effects of dilutive stock options, performance share units, restricted share units and deferred share units. 30 38 Sleep Country Canada Holdings Inc. Annual Report 2022Calculation of Non-IFRS and Other Measures (C$ thousands unless otherwise stated, except EPS) Reconciliation of net income attributable to the Company to EBITDA and Operating EBITDA: Net income attributable to the Company Add impact of the following: Non-controlling interests Other (income) expenses Finance related (income) expenses Income taxes Depreciation and amortization EBITDA Adjustments: Acquisition costs(1) ERP implementation costs(2) Share-based compensation(3) Total adjustments 2022 Q4 2021 Annual 2021 2022 $ 40,469 $ 26,433 $ 110,471 $ 88,603 314 65 (15,533) 8,220 17,176 50,711 379 (51) 4,259 10,437 15,857 57,314 225 (292) (889) 35,346 65,633 210,494 379 142 16,837 32,862 60,726 199,549 449 603 1,242 2,294 $ 23 2,000 2,728 4,751 $ 438 449 5,080 2,637 4,979 5,822 8,065 $ 11,340 $ Operating EBITDA Operating EBITDA margin % $ 53,005 $ 62,065 $ 218,559 $ 210,889 21.8% 22.9% 23.5% 22.9% Reconciliation of net income attributable to the Company to adjusted net income attributable to the Company: Net income attributable to the Company Adjustments: Acquisition costs(1) ERP implementation costs(2) Share-based compensation(3) Accretion(4) Tax impact of all adjustments(5) Total adjustments $ 40,469 $ 26,433 $ 110,471 $ 88,603 449 603 1,242 (18,370) (519) $ (16,595) $ 23 2,000 2,728 903 (1,110) $ 4,544 $ 449 2,637 4,979 (13,850) (1,818) $ (7,603) $ 438 5,080 5,822 903 (2,504) 9,739 Adjusted net income attributable to the Company $ 23,874 $ 30,977 $ 102,868 $ 98,342 Weighted average number of shares – Basic Weighted average number of shares – Diluted Basic EPS Diluted EPS Basic adjusted EPS Diluted adjusted EPS(6) Notes: 35,456 35,747 36,863 37,333 36,316 36,648 $ $ $ $ 1.14 $ 1.13 $ 0.67 $ 0.67 $ 0.72 $ 0.71 $ 0.84 $ 0.83 $ 36,810 37,208 2.41 2.38 2.67 2.64 3.04 $ 3.01 $ 2.83 $ 2.81 $ (1) Adjustment for professional fees incurred in relation to acquisition of business operations of Hush Blankets Inc. that closed in October 2021 and Silk & Snow Inc. that closed in January 2023. (2) Adjustment for charges related to its ERP implementation project and results in significantly increased costs during the implementation phase relative to the ongoing operating costs. (3) Adjustment for share-based compensation, a non-cash item. (4) Adjustment for accretion for the redemption liabilities related to the Hush acquisition in October 2021. (5) The related tax effects are calculated at the Companyʼs average statutory tax rate. 31 39 Sleep Country Canada Holdings Inc. Annual Report 2022 20 Additional Information Additional information relating to the Company, including the Companyʼs AIF, quarterly and annual reports and supplementary information is available on SEDAR at www.sedar.com. Press releases and other information are also available at the Companyʼs investor relations website at www.sleepcountryir.ca. 32 40 Sleep Country Canada Holdings Inc. Annual Report 2022Consolidated Financial Statements 41 Sleep Country Canada Holdings Inc. Annual Report 2022Independent auditor’s report Independent auditor’s report To the Shareholders of Sleep Country Canada Holding Inc. To the Shareholders of Sleep Country Canada Holding Inc. Our opinion Our opinion In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Sleep Country Canada Holding Inc. and its subsidiaries (together, the Company) the financial position of Sleep Country Canada Holding Inc. and its subsidiaries (together, the Company) as at December 31, 2022 and 2021, and its financial performance and its cash flows for the years then as at December 31, 2022 and 2021, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS). Accounting Standards Board (IFRS). What we have audited What we have audited The Company’s consolidated financial statements comprise: The Company’s consolidated financial statements comprise:           the consolidated statements of financial position as at December 31, 2022 and 2021; the consolidated statements of financial position as at December 31, 2022 and 2021; the consolidated statements of income and comprehensive income for the years then ended; the consolidated statements of income and comprehensive income for the years then ended; the consolidated statements of changes in shareholder’s equity for the years then ended; the consolidated statements of changes in shareholder’s equity for the years then ended; the consolidated statements of cash flows for the years then ended; and the consolidated statements of cash flows for the years then ended; and the notes to the consolidated financial statements, which include significant accounting policies and the notes to the consolidated financial statements, which include significant accounting policies and other explanatory information. other explanatory information. Basis for opinion Basis for opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. the consolidated financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. our opinion. Independence Independence We are independent of the Company in accordance with the ethical requirements that are relevant to our We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements. in accordance with these requirements. PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP PwC Centre, 354 Davis Road, Suite 600, Oakville, Ontario, Canada L6J 0C5 PwC Centre, 354 Davis Road, Suite 600, Oakville, Ontario, Canada L6J 0C5 T: +1 905 815 6300, F: +1 905 815 6499 T: +1 905 815 6300, F: +1 905 815 6499 “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. 42 Sleep Country Canada Holdings Inc. Annual Report 2022Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended December 31, 2022. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter How our audit addressed the key audit matter Impairment assessment of goodwill and indefinite life intangible assets Our approach to addressing the matter included the following procedures, among others: Refer to note 3 – Summary of significant accounting policies, note 4 – Critical accounting estimates and judgments and note 10 – Goodwill and intangible assets to the consolidated financial statements. The Company had goodwill of $317.0 million and indefinite life intangible assets of $101.5 million as at December 31, 2022. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows. Goodwill and indefinite life intangible assets (brands) are allocated to CGUs for the purpose of impairment testing. Management tests goodwill and brands for impairment annually on December 31 or more frequently if events or changes in circumstances indicate the asset might be impaired. The impairment tests are performed by comparing the carrying values of the CGUs with their recoverable amounts, which is the higher of their fair value less costs of disposal and their value in use. Management used the value in use approach to determine the fair value of the Sleep Country, Endy and Hush CGUs (the CGUs) based on discounted cash flow models. Significant assumptions used in the discounted cash flow models included growth rates and terminal growth rates. No impairment was recognized as a result of the 2022 impairment tests.  Evaluated how management determined the recoverable amounts of the goodwill and indefinite life intangible assets for the CGU’s which included the following:  Tested the appropriateness of the approach used and the mathematical accuracy of the discounted cash flow models.  Tested the reasonableness of the significant assumptions applied by management in the discounted cash flow models by: o comparing the growth rates to the budget approved by the Board of Directors, and current and past performance, and considering consistency with available third party published industry data; and o comparing the terminal growth rates to current and past performance and considering consistency with available third party published industry data.  Tested the underlying data used in the discounted cash flow models.  Tested the disclosures made in the consolidated financial statements. 43 Sleep Country Canada Holdings Inc. Annual Report 2022How our audit addressed the key audit matter Key audit matter We considered this a key audit matter due to (i) the significance of the goodwill and indefinite life intangible assets balances; (ii) the significant judgments made by management in determining the recoverable amounts of the CGUs, including the use of significant assumptions; and (iii) the audit effort and auditor’s judgment involved in testing those significant assumptions. Other information Management is responsible for the other information. The other information comprises the Management’s Discussion and Analysis, which we obtained prior to the date of this auditor’s report and the information, other than the consolidated financial statements and our auditor’s report thereon, included in the annual report, which is expected to be made available to us after that date. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the information, other than the consolidated financial statements and our auditor’s report thereon, included in the annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going 44 Sleep Country Canada Holdings Inc. Annual Report 2022concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.  Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.  Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. 45 Sleep Country Canada Holdings Inc. Annual Report 2022 Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in this independent auditor’s report is Adam Boutros. /s/PricewaterhouseCoopers LLP Chartered Professional Accountants, Licensed Public Accountants Oakville, Ontario March 2, 2023 46 Sleep Country Canada Holdings Inc. Annual Report 2022Sleep Country Canada Holdings Inc. Consolidated Statements of Financial Position As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars) Assets Current assets Cash (note 5) Trade and other receivables (note 6) Inventories (note 7) Prepaid expenses and deposits Other assets Non-current assets Property and equipment (note 8) Right-of-use assets (note 9) Other assets Intangible assets (note 10) Goodwill (note 10) Deferred tax assets (note 17) Liabilities Current liabilities Trade and other payables (note 11) Deferred revenues Other liabilities (note 12) Lease liabilities (note 9) Non-current liabilities Other liabilities (note 12) Lease liabilities (note 9) Long-term debt (note 13) Deferred tax liabilities (note 17) Shareholders’ Equity Share capital and other (note 14) Retained earnings Other reserves Equity attributable to Sleep Country Canada Holdings Inc. Non-controlling interests December 31, 2022 $ December 31, 2021 $ 78,318 14,303 98,691 9,683 638 36,546 16,678 91,539 9,329 500 201,633 154,592 63,676 263,149 1,611 171,367 316,785 3,498 1,021,719 106,883 24,762 22,525 38,612 192,782 9,373 275,170 99,082 25,234 601,641 328,439 84,380 (25) 412,794 7,284 1,021,719 71,674 273,097 492 165,862 318,369 3,949 988,035 107,886 33,435 — 37,910 179,231 27,688 284,338 61,895 24,919 578,071 362,969 41,217 — 404,186 5,778 988,035 47 Approved by the Board of Directors (Signed) Mandeep Chawla - Director (Signed) David Shaw - Director The accompanying notes are an integral part of these consolidated financial statements. Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Consolidated Statements of Income and Comprehensive Income For the years ended December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, except per share amounts) Revenues Cost of sales (note 15) Gross profit General and administrative expenses (note 15) Income before finance related expenses, other expenses (income) and income taxes Finance related (income) expenses (note 16) Other (income) expenses 2022 $ 928,657 587,629 2021 $ 920,194 603,146 341,028 317,048 196,167 178,225 144,861 138,823 (889) (292) (1,181) 16,837 142 16,979 Income before provision for income taxes 146,042 121,844 Provision for income taxes (note 17) Current Deferred Net income for the year Net income for the year attributable to: Sleep Country Canada Holdings Inc. Non-controlling interests Other comprehensive loss Items that may be reclassified subsequently to net income: Exchange differences on translation of foreign operations Other comprehensive loss for the year 34,381 965 35,346 110,696 110,471 225 110,696 (23) (23) 28,564 4,298 32,862 88,982 88,603 379 88,982 — — Comprehensive income for the year 110,673 88,982 Comprehensive income for the year attributable to: Sleep Country Canada Holdings Inc. Non-controlling interests Earnings per share attributable to Sleep Country Canada Holdings Inc. Basic earnings per share (in dollars) (note 18) Diluted earnings per share (in dollars) (note 18) 110,446 227 110,673 3.04 3.01 The accompanying notes are an integral part of these consolidated financial statements. 88,603 379 88,982 2.41 2.38 48 Sleep Country Canada Holdings Inc. Annual Report 2022 T h e a c c o m p a n y n g i n o t e s a r e a n i n t e g r a l p a r t o f t h e s e c o n s o l i d a e d t f i n a n c a i l s t t a e m e n t s . B a l a n c e – D e c e m b e r 3 1 , 2 0 2 2 3 4 , 8 3 7 , 9 4 3 3 1 3 , 5 5 0 1 4 , 8 8 9 8 4 , 3 8 0 ( 2 5 ) , 4 1 2 7 9 4 N o n - c o n t r o l l i n g i n t e r e s t s ( n o t e 2 0 ) S h a r e r e p u r c h a s e c o m m i t m e n t u n d e r a u t o m a t i c s h a r e p u r c h a s e l p a n ( " A S P P " ) ( n o t e 1 4 ) — — ( 2 0 , 6 6 0 ) — S h a r e s r e p u r c h a s e d u n d e r n o r m a l c o u r s e i s s u e r i b d ( “ N C B ” ) I ( n o t e 1 4 ) ( 2 , 3 3 9 , 4 0 9 ) ( 2 2 , 1 1 6 ) i i D v d e n d s d e c a r e d l N e t i n c o m e f o r t h e y e a r C o m p r e h e n s v e i i n c o m e f o r t h e y e a r O t h e r c o m p r e h e n s v e i l o s s f o r t h e y e a r S h a r e - b a s e d c o m p e n s a t i o n ( n o t e 1 9 ) S h a r e s i s s u e d o n s e t t l e m e n t o f s h a r e - b a s e d c o m p e n s a t i o n o p t i o n / u n i t ( n o t e 1 9 ) 2 6 3 , 3 6 5 — — — — — 5 , 7 4 7 — — — — — — — — 4 , 9 3 5 ( 2 , 9 4 6 ) 5 1 0 — — — ( 3 6 , 3 8 9 ) — — 1 1 0 , 4 7 1 ( 3 0 , 9 1 9 ) 1 1 0 , 4 7 1 — — — B a l a n c e – J a n u a r y 1 , 2 0 2 2 3 6 , 9 1 3 , 9 8 7 3 5 0 , 5 7 9 1 2 , 3 9 0 4 1 , 2 1 7 B a l a n c e – D e c e m b e r 3 1 , 2 0 2 1 3 6 , 9 1 3 , 9 8 7 3 5 0 , 5 7 9 1 2 , 3 9 0 4 1 , 2 1 7 P u r c h a s e c o m m i t m e n t o f N o n - c o n t r o l l i n g i n t e r e s t s a r i s n g i o n a i b u s n e s s i c o m b n a t i o n ( n o t e 2 0 ) n o n - c o n t r o l l i n g i n t e r e s t s ( n o t e 2 0 ) S h a r e - b a s e d c o m p e n s a t i o n ( n o t e 1 9 ) S h a r e s i s s u e d o n s e t t l e m e n t o f s h a r e - b a s e d c o m p e n s a t i o n o p t i o n / u n i t ( n o t e 1 9 ) i i D v d e n d s d e c a r e d l N e t i n c o m e f o r t h e y e a r C o m p r e h e n s v e i i n c o m e f o r t h e y e a r O t h e r c o m p r e h e n s v e i i n c o m e f o r t h e y e a r 2 1 3 , 2 2 3 5 , 3 3 2 — — — — — — — — — — — — — — — — 5 , 4 8 5 ( 2 , 0 5 8 ) — — — — ( 2 3 , 0 1 3 ) — ( 2 8 , 7 0 5 ) 8 8 , 6 0 3 8 8 , 6 0 3 — — — B a l a n c e – J a n u a r y 1 , 2 0 2 1 3 6 , 7 0 0 , 7 6 4 3 4 5 , 2 4 7 8 , 9 6 3 4 , 3 3 2 — — — — — — ( 2 5 ) ( 2 5 ) — — — — — — — — — — — — S l e e p C o u n t r y C a n a d a H o d n g s i l I n c . ( i n t h o u s a n d s o f C a n a d a n i d o l l a r s , e x c e p t s h a r e a m o u n t s ) C o n s o l i d a t e d S t a t e m e n t s o f C h a n g e s i n S h a r e h o d e r s l ʼ E q u i t y F o r t h e y e a r s e n d e d D e c e m b e r 3 1 , 2 0 2 2 a n d D e c e m b e r 3 1 , 2 0 2 1 N u m b e r o f S h a r e s C o m m o n C o n t r i b u t e d S h a r e s$ S u r p u s$ l E a r n n g s$ i R e t a i n e d R e s e r v e s$ O t h e r S h a r e C a p i t a l a n d O t h e r E q u i t y A t t r i b u t a b l e t o S l e e p C o u n t r y C a n a d a H o d n g s l i I n c . , ( 2 0 6 6 0 ) — , ( 5 8 5 0 5 ) 4 , 9 3 5 2 , 8 0 1 , 1 1 0 4 4 6 , ( 3 0 4 0 9 ) ( 2 5 ) , 1 1 0 4 7 1 , 4 0 4 1 8 6 , 4 0 4 1 8 6 , ( 2 3 0 1 3 ) — 5 , 4 8 5 3 , 2 7 4 , ( 2 8 7 0 5 ) 8 8 , 6 0 3 8 8 , 6 0 3 — , 3 5 8 5 4 2 T o t a l$ , 7 2 8 4 , 1 2 7 9 — — — — 2 2 7 — 2 2 5 2 , 5 7 7 8 , 5 7 7 8 , 5 3 9 9 — — — 3 7 9 — 3 7 9 — — C o n t r o l l i n g I n t e r e s t s$ N o n - 4 2 0 , 0 7 8 ( 2 0 , 6 6 0 ) 1 , 2 7 9 ( 5 8 , 5 0 5 ) 4 , 9 3 5 2 , 8 0 1 1 1 0 , 6 7 3 ( 3 0 , 4 0 9 ) ( 2 3 ) 1 1 0 , 6 9 6 4 0 9 , 9 6 4 4 0 9 , 9 6 4 5 , 3 9 9 ( 2 3 , 0 1 3 ) 5 , 4 8 5 3 , 2 7 4 ( 2 8 , 7 0 5 ) 8 8 , 9 8 2 8 8 , 9 8 2 — 3 5 8 , 5 4 2 E q u i t y$ S h a r e h o d e r s l ' T o t a l 49 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Consolidated Statements of Cash Flows For the years ended December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars) Cash provided by (used in) Operating activities Net income for the year Items not affecting cash Depreciation of property and equipment (note 8) Depreciation of right-of-use assets (note 9) Amortization of intangible assets (note 10) Share-based compensation (note 19) Finance related (income) expenses (note 16) Other (income) expenses Deferred income taxes (note 17) Changes in non-cash items relating to operating activities Changes in working capital Trade and other receivables Inventories Prepaid expenses and deposits Trade and other payables Customer deposits Payment of contingent consideration Investing activities Purchase of property and equipment - net of disposals (note 8) Additions to right-of-use assets (note 9) Purchase of intangible assets (note 10) Acquisition of subsidiary (note 20) Issuance of notes receivable Purchase of other assets Payment of contingent consideration Financing activities Proceeds from options exercised (note 19) Shares repurchased under NCIB (note 14) Proceeds from senior secured credit facility (note 13) Repayment of senior secured credit facility (note 13) Financing costs on senior secured credit facility (note 13) Dividends paid Proceeds from non-controlling interests Interest paid Repayment of principal portion of lease liabilities (note 9) Effects of foreign currency exchange rate changes on cash Increase (decrease) in cash during the year Cash – Beginning of the year Cash – End of the year Supplementary information Purchase of property and equipment in trade and other payables Purchase of intangible assets in trade and other payables 2022 $ 110,696 16,761 39,816 9,057 4,935 (889) (128) 965 181,213 3,192 (7,152) (355) (5,164) (8,674) (18,153) — 163,060 (7,499) (58) (9,667) — (1,000) — — (18,224) 2,801 (57,717) 58,000 (21,000) (60) (30,409) — (15,942) (38,717) (103,044) (20) 41,772 36,546 78,318 1,497 4,895 The accompanying notes are an integral part of these consolidated financial statements. 2021 $ 88,982 15,983 38,587 6,156 5,485 16,837 310 4,298 176,638 3,236 (21,375) (1,797) 4,026 5,292 (10,618) (9,877) 156,143 (19,123) (194) (4,807) (23,333) — (526) (15,123) (63,106) 3,274 — 78,000 (93,000) (684) (28,705) 240 (16,126) (37,807) (94,808) — (1,771) 38,317 36,546 368 3,370 50 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) 1 Organization Sleep Country Canada Holdings Inc. (the “Company”) was incorporated by articles of incorporation under the Canada Business Corporations Act on May 27, 2015. The Company is authorized to issue an unlimited number of common shares and Class A common shares without par value. The common shares are voting and entitled to dividends if and when declared by the Board of Directors (the “Board”). The Company is Canada's leading specialty sleep retailer with a national retail store network and multiple eCommerce platforms. The Company has 289 corporate-owned stores and 20 warehouses across Canada and operates under retail banners: Sleep Country CanadaTM, Dormez-vousTM, EndyTM and HushTM. The address of its registered office is 7920 Airport Road, Brampton, Ontario. The Companyʼs common shares are listed on the Toronto Stock Exchange (“TSX”) under the stock symbol “ZZZ”. 2 Basis of presentation The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. The consolidated financial statements were reviewed by the Companyʼs Audit Committee. They were approved and authorized for issuance by the Board on March 2, 2023. 3 Summary of significant accounting policies The significant accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements. Consolidation The consolidated financial statements of the Company include the financial results of the Company and the entities it controls. Control exists when the Company has the existing rights that give it the current ability to direct the activities that significantly affect the entitiesʼ returns. The Company assesses control on an ongoing basis. Transactions and balances between the Company and its consolidated entities have been eliminated on consolidation and consistent accounting policies are applied across the Company. Non-controlling interests are recorded in the consolidated financial statements and represent the non-controlling shareholdersʼ equity in an entity consolidated by the Company for which the Companyʼs ownership is less than 100%. Transactions with non-controlling interests are treated as transactions with equity owners of the Company. Changes in the Companyʼs ownership interest in its subsidiaries are accounted for as equity transactions. 51 Sleep Country Canada Holdings Inc. Annual Report 2022Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) Financial assets and liabilities Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the financial instrument. Financial assets are derecognized when the contractual rights to receive cash flows from the financial assets expire and financial liabilities are derecognized when obligations under the contracts expire, are discharged or are cancelled. Financial assets upon initial recognition are classified into two categories: (1) those to be measured subsequently at fair value (either through other comprehensive income or through net income); and (2) those to be measured at amortized cost. The classification depends on the Companyʼs business model for managing the financial assets and the contractual terms of the cash flows. The following classifications have been applied: • • • cash and trade and other receivables are classified as financial assets measured at amortized cost; trade and other payables, customer deposits, other liabilities and long-term debt have been classified as financial liabilities measured at amortized costs; and Interest rate swaps have been classified as financial liabilities measured at fair-value through net income. The redemption liabilities presented within other liabilities are recognized initially at fair value, and are subsequently measured at amortized cost, which is the carrying value. Any difference between the carrying value and the redemption value is recognized in the consolidated statements of income and comprehensive income. For changes in the estimated liabilities amount, a gain or loss is calculated as the difference between the original contractual cash flows and the modified cash flows discounted at the original effective interest rate. Long-term debt is recognized initially at fair value, net of recognized transaction costs, and is subsequently measured at amortized cost, which is the carrying value. Any difference between the carrying value and the redemption value is recognized in the consolidated statements of income and comprehensive income using the effective interest rate method. For debt modifications, a gain or loss is calculated as the difference between the original contractual cash flows and the modified cash flows discounted at the original effective interest rate. Fees paid on initial recognition and subsequent modifications on the senior credit facilities are capitalized and amortized over the period of the facility to which it relates and are presented net of long-term debt in the consolidated statements of financial position. The Company assesses on a forward-looking basis the expected credit losses associated with its financial assets. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade and other receivables, the Company applies the simplified approach permitted by IFRS 9 - Financial Instruments, which requires expected lifetime losses to be recognized at the time of initial recognition of the receivables. Derivative financial instruments Forward foreign exchange contracts are periodically used to limit foreign currency risks relating to the Companyʼs senior secured credit facility (note 13) when denominated in US dollars. Interest rate swaps are periodically used to limit the interest rate risk relating to the Companyʼs senior secured credit facility (note 13). 52 Sleep Country Canada Holdings Inc. Annual Report 2022Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) These contracts are treated as derivative instruments and they are measured at mark-to-market in the period, with changes in fair value recorded in the consolidated statements of income and comprehensive income within finance related expenses. Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statements of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or to realize the asset and settle the liability simultaneously. Foreign currency translation • • Functional and presentation currency Items included in the consolidated financial statements of each of the Companyʼs subsidiaries are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in Canadian dollars, which is also the Companyʼs functional currency. Transactions and balances Transactions in a foreign currency are translated into the functional currency at the foreign currency exchange rates that approximate the rates in effect at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rate at the reporting date. Non-monetary items that are measured based on historical cost in a foreign currency are translated at the exchange rate that approximate the rates in effect at the date of the transaction. Foreign exchange gains and losses are included in the consolidated statements of income and comprehensive income. • Foreign operations The results and financial position of subsidiaries whose functional currency is different from the Companyʼs functional currency are translated into the presentation currency of the Company as follows: • Assets and liabilities are translated at the closing exchange rate at the reporting date. • Revenues and expenses of the subsidiaries are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case revenues and expenses are translated at the dates of the transactions). • Equity transactions are translated at exchange rates on the dates of the transactions. The resulting foreign exchange translation differences are recorded as exchange differences on translation of foreign operations in other comprehensive income. 53 Sleep Country Canada Holdings Inc. Annual Report 2022Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) Segment information As at December 31, 2022, the Company manages its business on the basis of three operating segments, Sleep Country/Dormez-vous, Endy and Hush, which is consistent with the internal reporting provided to the chief operating decision-maker, the Chief Executive Officer. The Company has only one reportable segment as the operating segments meet the aggregation criteria of IFRS 8, Operating Segments. The Company aggregates these reporting segments because the nature of products, services, methods of distribution and economic characteristics are similar. The Company operates primarily in Canada, its country of domicile. Inventories Inventories are stated at the lower of their carrying value determined on a specific item on an actual cost basis and net realizable value. Net realizable value is the estimated selling price less applicable selling expenses. Cost of inventories includes the cost of merchandise and the costs incurred to deliver inventory to the Companyʼs distribution centres including freight and duties. Volume rebates earned are deducted in determining the carrying value of inventory. The Company periodically reviews its inventories and makes provisions as necessary to appropriately value obsolete or damaged goods. In addition, as part of inventory valuations, the Company accrues for inventory shrinkage for lost or stolen items based on historical trends. Property and equipment Property and equipment are recorded at cost less accumulated depreciation, net of any impairment loss. Depreciation is computed on a straight-line basis at annual rates based on the estimated useful lives of the related assets as follows: Computer hardware Furniture, fixtures and other Leasehold improvements 36 months 48 to 60 months lesser of the lease term or 120 months Included in furniture, fixtures and other are office equipment depreciated over 60 months and certain vehicles depreciated over 48 months. The Company recognizes in the carrying amount of property and equipment the full purchase price of assets acquired/constructed as well as the costs incurred that are directly incremental as a result of the construction of a specific asset, when they relate to bringing the asset into working condition. Estimates of useful lives, residual values and methods of depreciation are reviewed annually. Any changes are accounted for prospectively as a change in accounting estimate. 54 Sleep Country Canada Holdings Inc. Annual Report 2022Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) Goodwill and intangible assets Intangible assets are acquired assets that lack physical substance and that meet the specified criteria for separate recognition from goodwill. • • • Computer software Computer software is recorded at cost less accumulated amortization, net of any impairment loss. Amortization is computed on a straight-line basis based on the estimated useful life of 36 to 90 months. Non-compete contracts Non-compete contracts are amortized over an estimated life of up to five years. Brands Sleep Country and Dormez-vous brands are recorded at cost and are not subject to amortization, as they have an indefinite life. The Company has determined these brands have an indefinite life because the Company has the ability and intention to renew the brand names indefinitely and an analysis of product life cycle studies and market and competitive trends provides evidence that the brands will generate net cash inflows for the group for an indefinite period. They are tested for impairment annually, as at the dates of these consolidated statements of financial position, or more frequently if events or circumstances indicate they may be impaired. The Endy and Hush brands are recorded at fair value at the time of acquisition and are subject to amortization over an estimated life of 20 years.  • Goodwill Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the assets acquired, less liabilities assumed. Goodwill is not amortized and the Company tests goodwill for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired. Impairment of non-financial assets • Impairment of goodwill and indefinite life intangible assets The Company tests goodwill and its indefinite life intangible assets for impairment annually as at the dates of these consolidated statements of financial position or more frequently if events or changes in circumstances indicate the asset might be impaired. The asset will be written down if the carrying amount of the asset exceeds the higher of its fair value less costs of disposal and its value in use. Value in use is the present value of the future cash flows expected to be derived from the asset. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows. Goodwill and indefinite life intangible assets (brands) are allocated to cash generating units (“CGUs”) or groups of CGUs for the purpose of impairment testing. The allocation is 55 Sleep Country Canada Holdings Inc. Annual Report 2022Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) made to those CGUs or groups of CGUs that are expected to benefit from the synergies of the business combination from which the goodwill arose. The impairment tests are performed by comparing the carrying value of the assets (or asset groups) of these CGUs with their recoverable amount, which is the higher of their fair value less costs of disposal and their value in use (which is the present value of the expected future cash flows of the relevant asset or CGU), as determined by management. • Impairment of definite life intangible assets, right-of-use assets and property and equipment Assets that are subject to amortization are periodically reviewed for indicators of impairment. Whenever events or changes in circumstances indicate the carrying amount may not be recoverable, the asset or CGU is tested for impairment. To the extent the asset or CGUʼs carrying amount exceeds its recoverable amount, an impairment loss is recognized in the consolidated statements of income and comprehensive income. The recoverable amount of an asset or a CGU is the higher of its fair value less costs of disposal and its value in use. Value in use is the present value of the future cash flows expected to be derived from an asset or CGU. The fair value is the price that could be received for an asset or CGU in an orderly transaction between market participants at the measurement date, less costs of disposal. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows. • Impairment reversals If, in a subsequent period, the amount of recognized impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, a reversal of the previously recognized impairment, except for goodwill, is recognized in the consolidated statements of income and comprehensive income.  Trade and other payables Trade and other payables are obligations to pay for goods or services that have been acquired or rendered in the ordinary course of business. Trade and other payables are classified as current liabilities if payment is due or expected within one year or less. Otherwise, they are presented as non-current liabilities. Trade and other payables are recognized initially at fair value and subsequently are measured at amortized cost. Customer deposits Customer deposits represent amounts paid by customers in advance of delivery of product. These deposits can be for all or a portion of the total purchase price of the product. The amounts received representing the customer deposit are unencumbered and can be used for general operating purposes. Once the product is delivered to the customer, therefore fulfilling the performance obligation, the liability is relieved and is recorded in revenue. Over time, some portion of the customer deposits is not redeemed (breakage). The expected breakage amount based on historical actuals are recognized as revenue in proportion to the redemption pattern exercised by the customers. 56 Sleep Country Canada Holdings Inc. Annual Report 2022Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) Decommissioning provisions Decommissioning provisions represent the cost of the Companyʼs obligation to rehabilitate its leased premises and are estimated based on the present value of expected future rehabilitation costs and recognized in the period in which the obligation is incurred. The present value of these costs is added to the cost of the associated asset and is amortized over its useful life, while the corresponding liability will accrete to its future value over the same period. Share-based compensation The Company has a long-term equity incentive plan (“LTIP”) for certain associates and executive officers in the Company. The LTIP includes stock options, performance share units (“PSUs”) and restricted share units (“RSUs”) for certain associates and key management personnel. The Company has a deferred share unit (“DSU”) plan for its Directors. The LTIP and DSU plan can be settled in shares or cash at the discretion of the Board. Historically, the LTIP and DSU plan have been settled in common shares and are accounted for as equity-settled awards. Stock options granted prior to fiscal 2020 typically vest on the grant dateʼs fourth anniversary, and may have a term of up to 10 years. Stock options granted in fiscal 2020 onwards will vest in equal installments over a period of three years from the grant date and may have a term of up to 10 years. The stock option exercise price is determined by the Board at the grant date and may not be less than the market price on the grant date. The market price is generally the volume weighted average trading price of the common shares on the TSX or such other exchange on which the common shares are trading during the five trading days immediately preceding the grant date. The fair value of stock options at grant date is calculated using the Black-Scholes valuation model. PSUs generally vest 100% on the third anniversary of the grant date. The number of units that will vest is calculated based on a performance adjustment factor of between 0.0 and 2.0 which is determined based on the Companyʼs revenues (weighted at 25%) and basic earnings per share (“EPS”) (weighted at 75%) performance relative to the Board established targets that have been set for the three-year performance period between the grant date and the vesting date of the PSUs. For PSUs granted prior to fiscal 2020, the number of units that will vest is calculated based on a performance adjustment factor of between 0.5 and 1.5 which is determined based on the Companyʼs performance relative to the Board established target on profitability that has been set for the three-year performance period between the grant date and the vesting date of the PSUs. RSUs generally vest 100% on the third anniversary of the grant date. The number of units which will vest and are paid is equal to the number of units originally granted to a participant. DSUs granted vest in equal installments on the last day of each month of the fiscal year immediately following the grant date, and relate to the applicable portion of the Directorsʼ annual retainer. The compensation expense for equity-settled plans is prorated over the vesting or performance period, with a corresponding increase to contributed surplus. Forfeitures are estimated at the grant date and are revised to reflect changes in expected or actual forfeitures. Upon exercise of options, the amount recognized in contributed surplus for the award plus the cash received upon exercise is recognized as an increase in share capital. Upon 57 Sleep Country Canada Holdings Inc. Annual Report 2022Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) settlement of PSUs, RSUs and DSUs, the amount recognized in contributed surplus for the award is reclassified to share capital, with any premium or discount applied to retained earnings. Revenue recognition Revenue is recognized based on the five-step model outlined in IFRS 15 - Revenue from contracts with customers. Revenue is derived from the sale of goods and services and is recognized at a point in time when the performance obligation is fulfilled. The performance obligation is deemed fulfilled when the control of the products has transferred to the customer and there is no unfulfilled obligation that could affect the customerʼs acceptance of the products. Provisions for returns relating to the Companyʼs various customer satisfaction programs are accrued based on historical experience. Revenue from sale of third party warranties is recognized based on the net amount of consideration the Company retains after paying the third party the consideration received in exchange for the services to be provided by the third party. Income taxes Income taxes comprise of current and deferred income taxes. Income taxes are recognized in the consolidated statements of income and comprehensive income, except to the extent that they relate to items recognized directly in other comprehensive income or directly in equity, in which case the income tax is recognized directly in other comprehensive income or equity, respectively. Current income tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the reporting period, and any adjustment to tax payable in respect of previous years. Income taxes provided for by the Company are accounted for using the liability method. Deferred income taxes arise due to the temporary differences in the financial reporting and tax bases of assets and liabilities. Changes in these temporary differences are reflected in the provision for deferred income taxes using substantively enacted income tax rates and regulations. Deferred income taxes are recognized for all temporary differences, except where they arise from goodwill that is not tax deductible, on the initial recognition of an asset or liability that is not a business combination and at the time of the transaction affects neither accounting nor taxable income. In addition, deferred tax liabilities are not recognized for taxable temporary differences arising from investments in subsidiaries and associates where the reversal of the temporary difference can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognized to the extent that the recoverability of deferred income tax assets is considered more likely than not. Leases Leases are accounted for by recognizing a right-of-use asset and a lease liability except for low-value assets and short-term leases (less than 12 months) which are recognized in the consolidated statements of income and comprehensive income on a straight-line method. Lease liabilities are recorded on the present value of the non-cancellable lease payments over the lease term and discounted at the Companyʼs incremental borrowing rate. Lease payments include fixed payments and variable payments. 58 Sleep Country Canada Holdings Inc. Annual Report 2022Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) The right-of-use assets are measured at cost, which comprises the lease liability, lease payments made prior to delivery, initial direct costs and restoration obligations less lease incentives. The right-of-use assets are subsequently measured at amortized cost. The assets are depreciated over the term of the lease using the straight-line method. Extension and termination options exist for a number of leases, particularly for properties. The Company assesses all facts and circumstances available in determining the probability of exercising available extension and termination options. The Company includes the extension option in calculating the lease term when it determines that it is reasonably certain that the Company will exercise the available extension option. The Company reassesses whether an extension option is included in the lease term when there is a change in events and circumstances which affect that decision, and re-measures the lease liability upon change in the assessment. Business combinations Business combinations are accounted for using the acquisition method. The consideration transferred by the Company is measured as the fair value of assets transferred and equity instruments issued at the date of completion of the acquisition. Identifiable assets acquired and liabilities assumed in a business combination are measured initially at fair value at the acquisition date. The excess of the consideration transferred and non- controlling interest in the acquired entity over the fair value of the net assets acquired is recorded as goodwill. If those amounts are less than the net assets acquired, the difference is recognized directly in the consolidated statements of income and comprehensive income as a gain on acquisition. Results of operations of an acquired business are included in the Companyʼs consolidated financial statements from the date of the business acquisition. Acquisition costs incurred are expensed and included in general and administrative expenses. Non-controlling interests are initially recognized at the non-controlling interestʼs proportionate share of the acquired entityʼs net identifiable assets. Accounting standards issued but not yet in effect A number of interpretations and amendments to existing standards have been published by the IASB that are not yet in effect. The Company has not early adopted these interpretations or amendments and the Company is currently evaluating the impact on its consolidated financial statements. The following amendments may have an impact on the Companyʼs consolidated financial statements in future reporting periods: Classification of Liabilities as Current or Non-current (Amendments to IAS 1) In January 2020, the IASB issued amendments to IAS 1 – Presentation of Financial Statements, to clarify that the classification of liabilities as current or non-current should be based on rights that are in existence at the end of the reporting period and specifies that classification is unaffected by expectations about whether an entity will exercise its right to defer settlement of a liability. The amendments are effective for annual reporting periods beginning on or after January 1, 2023 and are to be applied retrospectively. 59 Sleep Country Canada Holdings Inc. Annual Report 2022Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) Disclosure of Accounting Policies (Amendments to IAS 1) In February 2021, the IASB issued amendments to IAS 1 – Presentation of Financial Statements, requiring an entity to disclose its material accounting policies, rather than its significant accounting policies. Additional amendments were made to explain how an entity can identify a material accounting policy. The amendments are effective for annual reporting periods beginning on or after January 1, 2023. Definition of Accounting Estimates (Amendments to IAS 8) In February 2021, the IASB issued amendments to IAS 8 – Accounting Policies, Changes to Accounting Estimates and Errors, to replace the definition of accounting estimates and help entities distinguish changes in accounting estimates from changes in accounting policies. The amendments are effective for annual reporting periods beginning on or after January 1, 2023. Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction (Amendments to IAS 12) In May 2021, the IASB issued amendments to IAS 12 – Income Taxes, to clarify how companies should account for deferred tax on certain transactions that on initial recognition give rise to equal taxable and deductible temporary differences, such as leases and decommissioning obligations. The amendments are effective for annual reporting periods beginning on or after January 1, 2023 and are to be applied retrospectively. 4 Critical accounting estimates and judgments The preparation of consolidated financial statements requires management to make estimates and assumptions using judgments that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses during the reporting period. Estimates and other judgments are continually evaluated and are based on managementʼs experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances. Actual results may differ from those estimates. The following discusses the most significant accounting judgments and estimates the Company has made in the preparation of the consolidated financial statements. Impairment of goodwill and brands The Company is required to use judgment in determining the appropriate groupings of CGUs, in order to determine the level at which goodwill and intangible assets are tested for impairment. In addition, judgment is used to determine whether a triggering event has occurred requiring an impairment test to be completed. In determining the recoverable amount of a CGU, various estimates are employed. The Company determines the higher of its fair value less costs of disposal and its value in use, using estimates such as projected future sales, earnings, capital investments and discount rates. Projected future sales and earnings are consistent with strategic plans provided to the Companyʼs Board of Directors. Discount rates are based on an estimate of the Companyʼs weighted average cost of capital taking into account external industry information reflecting the risk associated with the specific cash flows. As at reporting dates for these consolidated financial statements, impairment reviews were performed by comparing the carrying value with the recoverable amount of the CGU to which goodwill and brands have been allocated. 60 Sleep Country Canada Holdings Inc. Annual Report 2022Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) The Company has determined there had been no impairment as at the reporting dates of these consolidated financial statements (note 10). Business combinations For each business combination, the Company measures the identifiable assets acquired and the liabilities assumed at their acquisition date fair values. The determination of fair value requires the Company to make assumptions, estimates and judgments regarding future events. The allocation process is inherently subjective and impacts the amounts assigned to individual identifiable assets and liabilities, including the recognition and measurement of any identified intangible assets and the final determination of the amount of goodwill or gain on acquisition. The inputs to the exercise of judgments include legal, contractual, business and economic factors. As a result, the purchase price allocation impacts the Companyʼs reported assets and liabilities and future net earnings and impairment tests. 5 Cash The Companyʼs cash balance consists of restricted cash of $744 (2021 - $nil) related to equity transactions under the Companyʼs NCIB awaiting settlement as at December 31, 2022. 6 Trade and other receivables Trade and other receivables Allowance for expected credit losses 2022 $ 14,628 (325) 14,303 2021 $ 16,973 (295) 16,678 The Companyʼs trade and other receivables consist of balances due from vendors related to volume and co- operative advertising rebates and balances due from third party financing companies. The carrying amounts of the Companyʼs trade and other receivables approximate their fair values. The maximum exposure to credit risk at the reporting date is the carrying value of the trade and other receivables. 7 Inventories The inventories on hand by the Company as at December 31, 2022 is $98,691 (2021 - $91,539). The Company records the provision for obsolescence to value inventory to the estimated net realizable value and estimated damages and shrinkage. The write-downs of inventories to net realizable value and due to damage and shrinkage in 2022 was $2,417 (2021 - $4,367) which was recognized in cost of sales. Reversals of previously taken write-downs in 2022 was $2,325 (2021 – $nil). 61 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) 8 Property and equipment Computer hardware Furniture, fixtures and other Leasehold improvements $ $ $ Total $ Year ended December 31, 2021 Cost At January 1, 2021 Acquisition through business combination (note 20) Additions Disposals 6,387 12,629 104,389 123,405 — 1,528 (787) 46 3,161 (638) — 14,848 (2,136) 46 19,537 (3,561) At December 31, 2021 7,128 15,198 117,101 139,427 Accumulated depreciation At January 1, 2021 Depreciation Disposal 4,568 1,469 (786) 7,731 2,207 (575) 42,955 12,307 (2,123) 55,254 15,983 (3,484) At December 31, 2021 5,251 9,363 53,139 67,753 Net book value 1,877 5,835 63,962 71,674 Year ended December 31, 2022 Cost At January 1, 2022 Additions Disposals 7,128 1,273 (1,312) 15,198 1,899 (877) 117,101 139,427 9,030 (2,570) 5,858 (381) At December 31, 2022 7,089 16,220 122,578 145,887 Accumulated depreciation At January 1, 2022 Depreciation Disposal 5,251 1,221 (1,305) 9,363 2,392 (803) 53,139 13,148 (195) 67,753 16,761 (2,303) At December 31, 2022 5,167 10,952 66,092 82,211 Net book value 1,922 5,268 56,486 63,676 62 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) 9 Right-of-use assets and lease liabilities Right-of-use assets Year ended December 31, 2021 At January 1, 2021 Acquisition through business combination (note 20) Net additions with a corresponding increase to the lease liability Cash additions due to initial direct cost incurred during the year Additions of restorative obligations Assets derecognized Tenant inducements received Depreciation Properties $ Trucks $ Total $ 255,793 124 2,438 — 258,231 124 56,059 (109) 55,950 194 236 (275) (2,776) (37,761) — — — — (826) 194 236 (275) (2,776) (38,587) At December 31, 2021 271,594 1,503 273,097 Year ended December 31, 2022 At January 1, 2022 Net additions with a corresponding increase to the lease liability Cash additions due to initial direct cost incurred during the year Additions of restorative obligations Assets derecognized Tenant inducements received Depreciation 271,594 1,503 273,097 31,447 607 32,054 58 39 (1,486) (797) (38,920) — — — — (896) 58 39 (1,486) (797) (39,816) At December 31, 2022 261,935 1,214 263,149 63 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) Lease liabilities – Current and non-current Year ended December 31, 2021 At January 1, 2021 Acquisition through business combination (note 20) Net additions with a corresponding increase to right-of-use assets Gross lease payment Interest expense on lease liabilities At December 31, 2021 Year ended December 31, 2022 At January 1, 2022 Net additions with a corresponding increase to right-of-use assets Liabilities derecognized Gross lease payment Interest expense on lease liabilities At December 31, 2022 Lease liabilities are presented in the consolidated statements of financial position as follows: Current Non-current 2022 $ 38,612 275,170 Total $ 303,973 132 55,950 (49,751) 11,944 322,248 322,248 32,054 (1,803) (50,807) 12,090 313,782 2021 $ 37,910 284,338 313,782 322,248 64 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) 10 Goodwill and intangible assets Intangible assets Brands – indefinite life $ Brands – definite life $ Non – compete contracts $ Computer software $ Total $ Goodwill $ Year ended December 31, 2021 Cost At January 1, 2021 Acquisition through 101,540 21,961 2,949 34,708 161,158 300,884 business combination (note 20) Additions Disposals — — — 16,140 — — 450 — (1,402) 16 8,177 (1,295) 16,606 8,177 (2,697) 17,485 — — At December 31, 2021 101,540 38,101 1,997 41,606 183,244 318,369 Accumulated amortization At January 1, 2021 Amortization Disposals At December 31, 2021 — — — — 2,273 1,254 — 2,876 54 (1,402) 8,575 4,848 (1,096) 13,724 6,156 (2,498) 3,527 1,528 12,327 17,382 — — — — Net book value 101,540 34,574 469 29,279 165,862 318,369 Year ended December 31, 2022 Cost At January 1, 2022 Additions Disposals Adjustment to non-controlling interests 101,540 — — 38,101 — — 1,997 — — 41,606 183,244 318,369 — 14,562 14,562 — (1,402) (1,402) — — — — — (1,584) At December 31, 2022 101,540 38,101 1,997 54,766 196,404 316,785 Accumulated amortization At January 1, 2022 Amortization Disposals At December 31, 2022 — — — — 3,527 1,905 — 1,528 126 — 12,327 7,026 (1,402) 17,382 9,057 (1,402) 5,432 1,654 17,951 25,037 — — — — Net book value 101,540 32,669 343 36,815 171,367 316,785 The Sleep Country and Dormez-vous brands of $101,540 (2021 – $101,540) are included in to the Sleep Country operating segment. 65 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) Goodwill of $316,785 (2021 – $318,369) has been allocated to the three CGUʼs Sleep Country, Endy and Hush as follows: Sleep Country Endy Hush (note 20) 2022 $ 242,146 58,739 15,900 2021 $ 242,146 58,738 17,485 316,785 318,369 In assessing goodwill for impairment, the Company compared the aggregate recoverable amount of the assets included in the CGUs to their respective carrying amounts. The recoverable amount is the higher of value in use and fair value less costs of disposal. The Company performs annual goodwill impairment tests at the end of each fiscal year, for the CGUs using the recoverable amounts based on the value in use (discounted cash flows) approach. Recoverable amounts were determined for the CGUs using the 2023 budget approved by the Board of Directors that made maximum use of observable markets for inputs and outputs. For periods beyond the budget period, cash flows were extrapolated using growth rates of 3.0% (2021 – 3.0%) and a terminal growth rate of 3.0% (2021 – 3.0%). A discount rate of 13.0% was used for Sleep Country (2021 - 9.1%), 17.5% was used for Endy (2021 – 9.1%) and 17.5% was used for Hush (2021 – N/A). As at December 31, 2022, any reasonable changes to the model assumptions would not result in an impairment. The Company has determined, using appropriate valuation methodologies, that there was no impairment of its goodwill or brands as at the reporting dates of these consolidated financial statements. As at December 31, 2022, any reasonable changes to the impairment model assumptions would not result in an impairment. 11 Trade and other payables Trade payables Income taxes payable Accrued expenses 2022 $ 56,111 11,632 39,140 2021 $ 62,211 1,392 44,283 106,883 107,886 66 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) 12 Other liabilities Current Share repurchase commitment under ASPP (note 14) Redemption liabilities Non-current Decommissioning provisions Redemption liabilities Other 2022 $ 20,660 1,865 22,525 1,145 8,201 27 9,373 2021 $ — — — 1,080 23,916 2,692 27,688 At the time of the Hush acquisition on October 22, 2021, the Company entered into an agreement to acquire the remaining 48% of outstanding common shares in three equal increments of 16% over a three-year period starting March 31, 2023. The consideration paid for each share increment purchase will be calculated based on specified earnings levels achieved during the three-year period. On December 31, 2022, the Company remeasured the redemption liabilities at $10,066 (2021 - $23,013) based on the expected outcome during the three-year redemption period and the change was recorded in finance related expenses in the consolidated statement of income and other comprehensive income as at December 31, 2022. The expected outcome (discounted) is determined based on an earnings formula and the expected earnings levels over the measurement period. 13 Long-term debt The Company has a senior secured credit facility of $260,000 with an additional $100,000 available on its accordion, which is scheduled to mature on October 22, 2026. Under the terms of the senior secured credit facility, certain financial and non-financial covenants must be complied with per the agreement. The Company is in compliance with all covenants as at December 31, 2022. The senior secured credit facility is secured by all of the present and after-acquired personal property of the Company. As at December 31, 2022, the balance outstanding on the senior secured credit facility was $100,000 (2021 – $63,000). The long-term debt liability balance in the consolidated statements of financial position is net of transaction costs of $918 (2021 – $1,105). The senior secured credit facility allows for the debt to be held in Canadian or U.S. dollars. As at December 31, 2022, the Company held the debt in Canadian dollars. Interest on the senior secured credit facility is based on the prime or bankersʼ acceptance rates plus applicable margins based on the achievement of certain targets, as defined by the amended and restated senior secured credit agreement. The Company entered into a fixed interest rate swap, effective April 1, 2021 ending on April 1, 2024, for the notional amount of $60,000 whereby the Company pays a fixed rate of 1.072% and receives interest at a variable rate equal to the Canadian Dollar Offered Rate for 3-month bankers' acceptances (“3- month CDOR”) on the notional amount. The swap is being used to manage the volatility of interest rates on the outstanding balance on its senior secured credit facility. 67 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) 14 Share capital and other The following table outlines the issued and outstanding shares: 34,837,943 common shares (2021 – 36,913,987) Share repurchase commitment under ASPP Reorganization adjustment and other Contributed surplus Common shares and Class A common shares 2022 $ 610,369 (20,660) (276,159) 14,889 2021 $ 626,738 — (276,159) 12,390 328,439 362,969 The holders of common shares are entitled to receive notice of any meetings of shareholders, to attend and to cast one vote per common share at all such meetings. Holders of common shares do not have cumulative voting rights with respect to the election of directors and, accordingly, holders of a majority of the common shares entitled to vote in any election of directors may elect all directors standing for election. Holders of common shares are entitled to receive on a pro rata basis such dividends, if any, as and when declared by the Board at its discretion from funds legally available therefore and on liquidation, dissolution or winding up of the Company are entitled to receive on a pro rata basis the net assets of the Company after payment of debts and other liabilities, in each case subject to the rights, privileges, restrictions and conditions attaching to any other series or class of shares ranking senior in priority to or on a pro rata basis with the common shares with respect to dividends or liquidation. The common shares do not carry any pre-emptive, subscription, redemption or conversion rights, nor do they contain any sinking or purchase fund provisions. Holders of Class A common shares will be entitled to the same rights and privileges as holders of common shares described above and will rank equally with the holders of common shares on liquidation, dissolution, or winding up of the Company. The Class A common shares will not carry any pre-emptive or subscription rights, nor will they contain any sinking or purchase fund provisions. Class A common shares are redeemable at the option of the Company on written notice to the holders of the Class A common shares, with the redemption price being equal to the price per common share in the IPO. As at December 31, 2022, there were no outstanding Class A common shares (2021– nil). On March 7, 2022, the Company received approval from the TSX to commence an NCIB. Pursuant to an amendment to the NCIB on November 29, 2022, the Company is permitted to to purchase through the facilities of the TSX or alternative trading systems, from time to time until the completing of the NCIB, if considered advisable, up to a maximum of 3,155,250 of the Companyʼs common shares, representing approximately 10.0% of the public float as of February 28, 2022. Purchases will conclude on the earlier of the date on which purchases under the bid have been completed and March 8, 2023. In accordance with the rules and by-laws of the TSX, the Company has been permitted to purchase up to a daily maximum of 21,173 shares (representing 25% of the average daily trading volume of the shares on the TSX for the six months prior to commencement of the NCIB), except where such purchases are made in accordance with the "block purchase" exception under the applicable TSX rules and policies. 68 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) Effective June 10, 2022, the Company established an ASPP in connection with its NCIB to facilitate the purchase of shares during times when the Company would ordinarily not be permitted to purchase shares due to regulatory restrictions or a self-imposed blackout period. Before entering a blackout period, the Company may, but is not required to, instruct its designated broker to make purchases at the brokerʼs sole discretion and based on parameters set by the Company in accordance with the ASPP, TSX rules and applicable securities laws. Pursuant to the ASPP established on June 10, 2022, the maximum number of Shares eligible to be purchased through the ASPP was automatically increased to a maximum of 3,155,250 as a result of the amendment to the NCIB. The Company records a liability for share repurchase commitment during blackout period based on the parameters of the NCIB and ASPP. As at December 31, 2022, an estimated maximum obligation of $20,660 (2021 – $nil) was outstanding under the ASPP in other current liabilities on the consolidated statements of financial position. During the year ended December 31, 2022, the Company purchased for cancellation 2,339,409 common shares (2021 – $nil) at an average price of $24.67 for total consideration of $57,717. The total cash consideration paid exceeded the carrying value of the shares repurchased by $35,601, of which $36,389 was recorded to retained earnings, and a realized gain of $788 was recorded to finance related expenses. 15 Expense by nature Inventory and directly related costs recognized as an expense, including write-downs, write-offs and reversals Salaries, wages and benefits Occupancy costs – stores Depreciation and amortization Other Cost of sales 2022 $ 387,370 122,192 26,949 45,430 5,688 2021 $ 406,416 119,882 25,309 45,128 6,411 587,629 603,146 69 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) The depreciation included in cost of sales relates to depreciation on store and delivery property and equipment. Media and advertising expenses Salaries, wages and benefits Credit card and finance charges Occupancy costs – distribution centres and other Professional fees Telecommunication and information technology Mattress recycling costs and donations Depreciation and amortization Other General and administrative 2022 $ 74,883 42,797 19,914 9,614 10,030 11,483 2,873 20,204 4,369 2021 $ 65,978 38,621 19,366 9,613 11,867 10,437 3,895 15,598 2,850 196,167 178,225 The depreciation included in general and administrative expenses relates to distribution centres, offices and other property and equipment and intangibles. 16 Finance related (income) expenses Interest on lease obligations Interest expense on senior secured credit facility Change in redemption liabilities Revolver commitment fees Change in fair value on interest rate swap Realized gain on share repurchases under ASPP 2022 $ 12,090 3,623 (13,850) 630 (2,594) (788) 2021 $ 11,944 3,689 903 892 (591) — (889) 16,837 70 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) 17 Income taxes Components of income tax provision Components of the income tax provision are as follows: Current income tax expense Deferred income tax expense relating to; Temporary differences Deferred income tax rate changes 2022 $ 2021 $ 34,381 28,564 965 — 965 4,298 — 4,298 Provision for income taxes 35,346 32,862 Reconciliation to effective tax rate The overall income tax provision differs from the amount that would be obtained by applying the combined statutory income tax rate to income due to the following: 2022 $ 2021 $ Income of continuing operations before income taxes Weighted average Canadian income tax rate 146,042 26.50% 121,844 26.50% Income tax expense based on statutory income tax rate Difference between rates applicable to Company and rates applicable to subsidiaries Effect of non-deductible expenses and other items Deferred tax rate changes 38,701 (273) (3,082) — 35,346 32,289 (202) 775 — 32,862 Effective income tax rate 24.20% 26.97% 71 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) Deferred income tax liability Significant components of the net deferred income tax liability are as follows: Excess of carrying value of intangible assets over tax values Benefit of share issuance costs and financing fees deductible in future years Loss carry-forwards Other temporary differences 2022 $ 2021 $ (29,508) (28,830) (73) 3,309 4,536 (53) 3,327 4,586 (21,736) (20,970) The Company has recognized a deferred tax asset of $3,498 (2021 – $3,949), which is dependent on future taxable income. The Company expects that it will be able to utilize the deferred tax asset in the future. As at December 31, 2022, the Company has unused capital losses of $19,739 (2021 – $19,739) with no expiry date. Capital losses may only be used to offset capital gains. No deferred income tax benefit has been set up for these losses as the Company does not expect to realize capital gains in the foreseeable future. On February 1, 2018, the Canada Revenue Agency (“CRA”) issued a notice of proposed adjustments for the 2014 taxation year, which also results in consequential income adjustments for the 2015 and 2016 taxation years. The proposed adjustments relate to restructuring transactions in the Companyʼs pre-initial public offering (“IPO”) structure and certain related transactions. In June 2018, CRA issued Notices of Reassessments related to certain of these items with an exposure of $3,480 which includes interest. On September 5, 2018, the Company filed Notices of Objection with CRA. Subsequently, the Company received an acknowledgement of receipt from CRA to the Notices of Objection. The Company is currently awaiting a response to these Notices. The Company was required to pay a minimum of 50% of the amount issued in the Notices of Reassessment within 30 days of the date of these Notices. Accordingly, payments of $2,988 were made and included in prepaid expenses and deposits on the consolidated statements of financial position. The Company expects to receive a Notice of Reassessment under Part III Tax, pursuant to subsection 184(2) of the Income Tax Act (Canada) on the basis that it paid an excess capital dividend on July 15, 2015. The maximum exposure, including tax, penalty and interest, in this matter is approximately $5,818. In the event the Notice of Reassessment under Part III Tax is received, the Company, with the concurrence of Birch Hill Equity Partners Management Inc. (“Birch Hill”) and its co-investors, has the ability to file an election under subsection 184(3) to treat the excess amount as a taxable dividend, which is expected to resolve this exposure. Pursuant to the indemnification provisions of the pre-IPO share purchase agreement dated July 10, 2015, the Company has a contractual arrangement for all of the above matters with Birch Hill and its co-investors, which 72 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) include some current members of the Companyʼs Board and the Companyʼs management. The Company believes it will be able to sustain its tax positions, and consequently no reserve has been made. 18 Earnings per share (“EPS”) Basic EPS amounts are calculated by dividing the net income attributable to common shareholders of Sleep Country Canada Holdings Inc. by the weighted average number of shares outstanding during the year. Diluted EPS amounts are calculated by dividing the net income attributable to common shareholders of Sleep Country Canada Holdings Inc. by the weighted average number of shares outstanding during the year adjusted for the effects of potentially dilutive stock options in addition to performance share units (“PSUs”), restrictive share units (“RSUs”) and deferred share units (“DSUs”) which are dilutive in nature. The below table summarizes the dilution impact of stock options: Dilutive Anti-dilutive Total 2022 $ 526,791 511,999 2021 $ 841,555 316,158 1,038,790 1,157,713 73 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) The following table illustrates the calculation of basic and diluted EPS: Attributable to common shareholders of Sleep Country Canada Holdings Inc. Net income attributable to Sleep Country Canada Holdings Inc. $ Weighted average number of shares (in thousands of shares) 110,471 110,471 36,316 36,648 2022 EPS $ 3.04 3.01 Attributable to common shareholders of Sleep Country Canada Holdings Inc. Net income attributable to Sleep Country Canada Holdings Inc. $ Weighted average number of shares (in thousands of shares) 88,603 88,603 36,810 37,208 2021 EPS $ 2.41 2.38 Basic Diluted Basic Diluted 74 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) 19 Share-based compensation The Company has a long-term equity incentive plan (“LTIP”) for executive officers and certain associates in the Company. The LTIP includes stock options, PSUs and RSUs. Additionally, the Company has a DSU plan for its Board. The LTIP and DSU plan can be settled in shares or cash at the discretion of the Board. The Company accounts for these plans as equity-settled and it has no intention to settle in cash. The expense associated with these instruments are recorded as share-based compensation expense through the consolidated statements of income and comprehensive income with a corresponding entry made to contributed surplus in share capital and other on the consolidated statements of financial position and the consolidated statements of shareholdersʼ equity. The contributed surplus balance is reduced as the options or units under these plans are exercised and the amount initially recorded in contributed surplus is reclassified to common shares. Share-based compensation expense is summarized as follows: 1,038,790 stock options (2021 – 1,157,713) (a) 232,667 PSUs (2021 – 255,385) (b) 170,164 RSUs (2021 – 93,596) (c) 84,761 DSUs (2021 – 67,857) (d) 2022 $ 1,102 2,387 1,080 366 4,935 2021 $ 1,473 3,059 567 386 5,485 The Company recorded $44 (2021 – $337) in payroll taxes related to share-based compensation which is not included in the above table. The maximum number of common shares that may be issued, under all share-based compensation arrangements implemented by the Company including stock options, PSUs, RSUs and DSUs, may not exceed 6.5% of the total number of common shares issued and outstanding. The maximum number of common shares that may be issued within any one-year period under all share-based compensation arrangements implemented by the Company may not exceed 1.5% of the then issued and outstanding number of common shares. The maximum number of common shares that may be issued under the PSU plan, the RSU plan and the DSU plan cumulatively is 2.6% of the total number of common shares issued and outstanding. a) Stock options The stock option exercise price is determined by the Board at the grant date and may not be less than the market price on the grant date. The market price is generally the volume weighted average trading price of the common shares on the TSX or such other exchange on which the common shares are trading during the five trading days immediately preceding the grant date. Stock options granted prior to 2020 typically vest on the grant dateʼs fourth anniversary, and may have a term of up to 10 years. Stock options granted in 2020 onwards will vest in equal installments over a period of three years from the grant date and may have a term of up to 10 years. 75 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) The stock option plan allows for the cashless exercise of options at the Boardʼs discretion, if the common shares issuable upon the exercise of the options are to be immediately sold. This amount may, at the discretion of the Board, be settled in cash, by the issuance of common shares from treasury or in common shares acquired on the market. Historically, the Board has settled granted stock options by issuance of common shares from treasury. The Company has no intention to settle in cash. The Companyʼs stock option transactions during the year were as follows: 2022 2021 Weighted average exercise price per share option $ 24.23 27.73 17.87 25.39 Number of options 1,157,713 102,518 (156,675) (64,766) Weighted average exercise price per share option $ 22.62 31.16 18.58 20.46 Number of options 1,204,419 133,093 (176,249) (3,550) Outstanding, at beginning of the year Granted during the year Exercised during the year Forfeited during the year Outstanding, at the end of the year 25.46 1,038,790 24.23 1,157,713 Options, exercisable at the end of the year 27.08 570,094 22.73 483,211 The weighted average share price on the date the stock options were exercised during the year was $28.04 (2021 – $34.12). The Companyʼs outstanding and exercisable stock option weighted average remaining contractual life and exercise price were as follows: Exercise price range Number of stock options Stock options outstanding Weighted average remaining contractual Weighted average exercise life (in years) price $ Stock options exercisable Weighted average remaining contractual life (in years) Weighted average exercise price $ Number of stock options $15.94 to $17.00 $19.31 to $27.73 $30.70 to $38.83 198,230 425,328 415,232 1,038,790 6.4 6.1 5.6 6.0 16.12 22.13 33.32 118,096 114,870 337,128 25.46 570,094 5.9 3.2 5.0 4.8 16.24 19.31 33.52 27.08 The weighted average fair value of stock options estimated at the grant date for the year is $9.32 (2021 – $10.06). 76 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) The Black-Scholes model was used to estimate the fair value of stock options. In determining the fair value of these associate stock options, the following assumptions were used: Risk-free interest rate Expected volatility Estimated dividend yield Expected life of the options (in years) Forfeiture rate b) PSU plan Grant Date March 15, 2022 1.7% 41.4% 2.3% 6.5 3.7% A PSU represents the right to receive a common share settled by the issuance of treasury shares or purchased on the open market or the cash equivalent at the market value of a share at the vesting date at the discretion of the Board. The Company has no intention to settle in cash. PSUs generally vest 100% on the third anniversary of the grant date. The number of units that will vest is calculated based on a performance adjustment factor of between 0.0 and 2.0 which is determined based on the Companyʼs revenues (weighted at 25%) and basic EPS (weighted at 75%) performance relative to the Board established targets that have been set for the three-year performance period between the grant date and the vesting date of the PSUs. For PSUs granted prior to 2020, the number of units that will vest is calculated based on a performance adjustment factor of between 0.5 and 1.5 which is determined based on the Companyʼs performance relative to the Board established target on profitability that has been set for the three-year performance period between the grant date and the vesting date of the PSUs. Therefore, the number of units that vest and are paid out may be higher or lower than the number of units originally granted to a participant. The Companyʼs PSU plan transactions during the year were as follows: Outstanding, at beginning of the year Granted during the year Settled during the year Forfeited during the year 2022 Number of units (vested and unvested) 255,385 108,345 (106,690) (24,373) 2021 Number of units (vested and unvested) 225,118 73,428 (27,148) (16,013) Outstanding, at the end of the year 232,667 255,385 The weighted average fair value of the grant price for the year was $25.44 (2021 – $33.74). 77 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) c) RSU plan A RSU represents the right to receive a common share settled by the issuance of treasury shares or purchased on the open market or the cash equivalent of the market value of a share at the vesting date at the discretion of the Board. The Company has no intention to settle in cash. RSUs generally vest 100% on the third anniversary of the grant date. The number of units which will vest and are paid is equal to the number of units originally granted to a participant. The Companyʼs RSU plan transactions during the year were as follows: Outstanding, at beginning of the year Granted during the year Forfeited during the year 2022 Number of units (vested and unvested) 93,596 88,051 (11,483) 2021 Number of units (vested and unvested) 51,046 42,987 (437) Outstanding, at the end of the year 170,164 93,596 The weighted average fair value of the grant price for the year was $25.77 (2021 – $32.43). d) DSU plan A DSU represents the right to receive a common share settled by the issuance of treasury shares or purchased on the open market. DSUs granted vest in equal installments on the last day of each month of the year immediately following the grant date, and relate to the applicable portion of the Directorsʼ annual retainer. The Companyʼs DSU plan transactions during the year were as follows: Outstanding, at beginning of the year Granted during the year Settled during the year 2022 Number of units (vested and unvested) 67,857 16,904 — 2021 Number of units (vested and unvested) 60,183 17,500 (9,826) Outstanding, at the end of the year 84,761 67,857 The weighted average fair value of the grant price for the year was $25.73 (2021 – $27.68). 78 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) 20 Business combination On October 22, 2021, the Company acquired 52% of the issued and outstanding common shares of Hush, a direct- to-consumer sleep retailer, for a cash consideration of $23,333. This acquisition has been accounted for as a business combination. The following table summarizes the purchase consideration paid and the final allocation of the purchase consideration to the identifiable assets acquired and liabilities assumed based on the Companyʼs estimate of the fair values: Purchase consideration Cash purchase price Final allocation of purchase consideration to net assets acquired Net working capital Indemnification asset Property and equipment (note 8) Right-of-use assets (note 9) Intangible assets (note 10) Deferred tax liabilities (note 17) Lease liabilities (note 9) Other liabilities (note 12) Total net assets acquired Non-controlling interests Goodwill (note 10) Total net assets acquired, non-controlling interests and goodwill $ 23,333 (1,305) 500 46 124 16,606 (2,001) (132) 273 14,111 (6,678) 15,900 23,333 At December 31, 2021, the Company had not finalized the accounting for the acquisition. The purchase price allocation above reflects the final allocation of purchase consideration to net assets acquired, which includes a change recorded in 2022 to deferred taxes of $199, other liabilities of $2,665, that resulted in a change to non- controlling interest of $1,279, and goodwill of $1,585. The Company did not make any retrospective adjustments to the net assets acquired nor the purchase consideration recognized at the acquisition date. The Company has recognized the non-controlling interests at its proportionate share of the acquired net identifiable assets. To estimate the fair value of the brand, the Company used the royalty relief method using a discounted cash flow model. The Company developed significant assumptions related to revenue and earnings before interest, taxes, depreciation, and amortization (“EBITDA”) forecasts, royalty rates and discount rate. 79 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) Acquisition related costs of $438 are included in general and administrative expenses in the consolidated statement of income and comprehensive income and in operating cash flows in the consolidated statement of cash flows for year ended December 31, 2021. Recognized goodwill reflects the value assigned to expected future synergies, a portion of which is tax deductible. Pursuant to the Hush share purchase agreement, the Company is indemnified by the non-controlling interests against losses suffered or incurred as a result of or arising from taxes payable by Hush in respect of pre- closing tax periods. The Company has recorded liability on its consolidated statement of financial position at the acquisition date and recorded the corresponding indemnification asset to offset the liability. 21 Financial instruments and risk management The Companyʼs activities expose it to a variety of financial risks: market risk (including foreign exchange risk and cash flow and fair value interest risks), credit risk and liquidity risk. The Companyʼs overall risk management program and business practices seek to minimize any potential adverse effects on the Companyʼs consolidated financial performance. Risk management is carried out by the senior management team and is overseen by the Board of Directors. Market risk Market risk is the loss that may arise from changes in factors such as interest rates, foreign exchange and the impact these factors may have on other counterparties. • Foreign exchange risk A portion of the Companyʼs sales and purchases are denominated in U.S. dollars which results in foreign currency exposure related to fluctuations between the Canadian and U.S. dollars. Foreign currency forward contracts can be used from time to time to mitigate risks associated with forecasted USD merchandise purchases sold in Canada. • Cash flow and fair value interest risk The Company has no significant interest bearing assets. The Companyʼs income and operating cash flows are substantially independent of changes in market interest rates. The Companyʼs primary interest rate risk arises from long-term debt. The Company manages its exposure to changes in interest rates by using a combination of fixed and variable rate debt and utilizing interest rate swaps as necessary to achieve the desired proportion of variable and fixed rate debt. As at December 31, 2022, an increase or decrease in interest rates by 1% would result in an increase or a decrease of $400 (2021 – $30) on interest expense on the credit facilities. 80 Sleep Country Canada Holdings Inc. Annual Report 2022Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) Credit risk Credit risk refers to the risk of losses due to failure of the Companyʼs customers or other counterparties to meet their payment obligations. Credit risk arises from deposits with banks, as well as credit exposures from mattress vendors for the payment of volume and co-operative advertising rebate amounts and balances owed from third party financing companies under the various financing plans the Company offers its customers. In accordance with the Companyʼs investment practice, all deposits are held at banks possessing a credit rating of AA- or better. Sales to retail customers are settled in cash, financed by third party financing companies or by using major credit cards. The Company transfers the credit risk for financing plans to third party financing companies. The third party financing companies that the Company deals with carry a minimum rating of BBB or better. Trade and other receivables are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with the group, and a failure to make contractual payments for a period of greater than 120 days past due. The trade and other receivables presented on the consolidated statements of financial position are net of expected credit losses. Liquidity risk Liquidity risk is the risk the Company will not be able to meet a demand for cash or to fund its obligations as they come due. Liquidity risk also includes the risk of not being able to liquidate assets in a timely manner at a reasonable price. Prudent liquidity management implies maintaining sufficient cash and the availability of funding through an adequate amount of committed credit facilities. As at December 31, 2022, the Companyʼs cash balance was $78,318 with an additional $160,000 (not including the $100,000 accordion) of liquidity available under the Companyʼs credit facility. 81 Sleep Country Canada Holdings Inc. Annual Report 2022Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) The table below analyzes the Companyʼs financial liabilities into relevant maturity groupings based on the remaining period from the consolidated statements of financial position dates to the contractual maturity date. The amounts in the table reflect the contractual undiscounted cash flows (including interest where applicable) which may differ to the carrying values of the liabilities at the reporting date. At December 31, 2022 Trade and other payables Lease liabilities Long-term debt Other liabilities At December 31, 2021 Trade and other payables Lease liabilities Long-term debt Other liabilities Within 1 year $ Between 1 and 5 years $ 106,883 51,187 1,400 22,705 — 173,621 104,200 12,723 Over 5 years $ — 157,889 — — 182,175 290,544 157,889 107,886 48,320 2,980 — — 127,929 74,169 34,634 159,186 236,732 — 39,259 — — 39,259 Fair value of financial instruments The different levels used to determine fair values have been defined as follows: • • • Level 1 – inputs use quoted prices (unadjusted) in active markets for identical financial assets or financial liabilities that the Company has the ability to access. Level 2 – inputs other than quoted prices included in Level 1 that are observable for the financial asset or financial liability, either directly or indirectly. Level 2 inputs include quoted prices for similar financial assets and financial liabilities in active markets, and inputs other than quoted prices that are observable for the financial liabilities. Level 3 – inputs are unobservable inputs for the financial asset or financial liability and include situations where there is little, if any, market activity for the financial asset or financial liabilities. The following describes the fair value determinations of financial instruments: • • The carrying values of cash, trade and other receivables, trade and other payables, customer deposits and the share repurchase commitment under the ASPP approximate their fair values due to the relatively short periods to maturity of these financial instruments. The carrying value of the senior secured credit facility approximates its fair value as the terms and conditions of the borrowing arrangements are comparable to market terms and conditions as at December 31, 2022 and December 31, 2021. 82 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) ● ● The interest rate swap obtained effective April 1, 2021 is recognized at fair value based on observable quoted market prices for identical financial instruments in active markets as at December 31, 2022 and December 31, 2021. The interest rate swap is included in trade and other receivables in the consolidated statements of financial position. The redemption liabilities related to the acquisition of Hush were initially recognized at fair value on acquisition date and subsequently measured at amortized cost. The inputs to the measurement of the fair value of the redemption liabilities related to acquisitions are Level 3 inputs. The fair value measurements were made using a discounted cash flow model; significant model inputs were expected future pre-tax earnings over the measurement period (determined with reference to the specific acquired business) and a pre-tax discount rate of 14%. The discount rate is attributable to the level of risk related to economic growth factors combined with the length of the contingent payment periods; and the dispersion was driven by unique characteristics of the businesses acquired and the respective terms for these future payments. A 1% increase in the weighted average discount rate would decrease the fair value of redemption liabilities by $112 (2021 - $491). Changes in the value of the redemption liabilities comprises the following: Redemption liabilities – Current and non-current Year ended December 31, 2021 At January 1, 2021 Amounts recognized at acquisition Accretion At December 31, 2021 Year ended December 31, 2022 At January 1, 2022 Change in estimated outcome Accretion At December 31, 2022 Capital risk management Total $ — 23,013 903 23,916 23,916 (20,458) 6,608 10,066 The Companyʼs objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns for its common shareholders in the form of cash dividends, benefits to other stakeholders and to maintain an optimal capital structure to minimize the cost of capital. In order to maintain or adjust the capital structure, the Company may issue new shares or sell assets to reduce long-term debt. 22 Contingent liabilities and unrecognized contractual commitments In the normal course of business, the Company has entered into agreements that include indemnities in favour of third parties, such as purchase and sale agreements, confidentiality agreements, engagement letters with advisers and consultants, leasing contracts, licence agreements, information technology agreements, and various product and service agreements. These indemnification arrangements may require the Company to 83 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Country Canada Holdings Inc. Notes to Consolidated Financial Statements As at December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, unless otherwise noted) compensate counterparties for losses incurred by the counterparties as a result of breaches in representations, covenants and warranties provided by the Company or as a result of litigation or other third party claims or statutory sanctions that may be suffered by the counterparties as a consequence of the relevant transaction. In some instances, the terms of these indemnities are not explicitly defined. The Company, whenever possible, tries to limit this potential liability within the particular agreement or contract; however, due to the unpredictability of future events, the maximum amount of any potential reimbursement required to be made by the Company or its subsidiary entities cannot be reasonably estimated, but could have a material adverse effect on the Company. 23 Related party transactions and balances Key management personnel are those individuals who have the authority and responsibility for planning, directing and controlling the activities of the Company, including members of the Companyʼs Board of Directors. The Company considers key management to be the Companyʼs Board of Directors and its Named Executive Officers (“NEO”). The Company incurred the following compensation expenses in relation to key management personnel: Salaries and short-term associate benefits Share-based compensation Directors’ fees 2022 $ 4,219 2,746 549 7,514 2021 $ 4,599 3,260 549 8,408 At December 31 2022, trade and other receivables included $530 (2021 - $nil) receivable from non-controlling interests. There is no balance payable to non-controlling interests of Hush at December 31, 2022 (2021 - $2,632). 24 Subsequent events The Companyʼs dividend policy is at the discretion of the Board. On February 9, 2023, the Company declared a dividend of $0.215 per common share that will be payable on February 28, 2023 to holders of the common shares of record as at the close of business on February 17, 2023. On January 1, 2023, the Company acquired substantially all the operating assets of Silk & Snow Inc., a direct- to-consumer sleep retailer, for an upfront cash consideration of $24,100 and up to an additional $19,500 in contingent consideration to be paid in 2026 upon achieving certain growth and profitability targets in aggregate for years 2023, 2024 and 2025. 84 Sleep Country Canada Holdings Inc. Annual Report 2022 Sleep Well. Stay Well.™ Sleep Country Canada Holdings Inc. 7920 Airport Road, Brampton, ON, L6T 4N8 Telephone 289-748-0206 sleepcountry.ca | dormezvous.com | endy.com | hush.ca | hushblankets.com | silkandsnow.com 

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