Sleep Country Canada Annual Report 2022

FY2022 Annual Report · Sleep Country Canada

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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.

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 1A 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.

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.

Sleep Country Canada Holdings Inc. Annual Report 2022Growth 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.

Sleep Country Canada Holdings Inc. Annual Report 2022
Highlights

Expanded our industry-leading
sleep ecosystem with the
acquisition of Silk & Snow1

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

Net new Sleep Country/
Dormez-vous stores opened

125,000+

Mattresses and foundations
recycled or upcycled

Expanded Walmart partnership
by opening 7 additional Express
stores nationwide

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.

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

Basic EPS
(C$ Per Share)

Diluted Adjusted EPS 2
(C$ Per Share)

3.04

2.41

2.81

1.61

1.50

1.73

2022

2018

2019

2020

2021

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.

Sleep Country Canada Holdings Inc. Annual Report 2022Management’s
Discussion
and Analysis

Sleep Country Canada Holdings Inc. Annual Report 20221 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

Sleep Country Canada Holdings Inc. Annual Report 2022realized, 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.

Sleep Country Canada Holdings Inc. Annual Report 2022Building 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

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.

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.

Sleep Country Canada Holdings Inc. Annual Report 20224

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;

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

Sleep Country Canada Holdings Inc. Annual Report 2022Superstore, 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.

Sleep Country Canada Holdings Inc. Annual Report 2022The 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.

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.

Sleep Country Canada Holdings Inc. Annual Report 20225

Fourth Quarter and Annual Highlights

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).

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.

Sleep Country Canada Holdings Inc. Annual Report 2022Outlook

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.

Sleep Country Canada Holdings Inc. Annual Report 2022Selected 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.

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.

Sleep Country Canada Holdings Inc. Annual Report 2022

(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:

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

(2) See the Q4 2021 MD&A for discussion related to performance analysis.

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.

(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.

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.

(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

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.

Sleep Country Canada Holdings Inc. Annual Report 2022

General and administrative (“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

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

(3) Depreciation and amortization expenses increased by $1.3 million mainly due to the increase in

intangible depreciation.

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”.

Sleep Country Canada Holdings Inc. Annual Report 20227 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.

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.

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”.

Sleep Country Canada Holdings Inc. Annual Report 2022t
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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

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.

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

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

Sleep Country Canada Holdings Inc. Annual Report 2022funding 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.

Sleep Country Canada Holdings Inc. Annual Report 202214 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.

Sleep Country Canada Holdings Inc. Annual Report 2022The 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

Sleep Country Canada Holdings Inc. Annual Report 2022account 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.

Sleep Country Canada Holdings Inc. Annual Report 2022EBITDA, 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.

Sleep Country Canada Holdings Inc. Annual Report 2022Calculation 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.

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.

Sleep Country Canada Holdings Inc. Annual Report 2022Consolidated
Financial Statements

Sleep Country Canada Holdings Inc. Annual Report 2022Independent 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.

Sleep Country Canada Holdings Inc. Annual Report 2022Key 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.

Sleep Country Canada Holdings Inc. Annual Report 2022How 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

Sleep Country Canada Holdings Inc. Annual Report 2022concern 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.

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

Sleep Country Canada Holdings Inc. Annual Report 2022Sleep 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

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)

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

Sleep Country Canada Holdings Inc. Annual Report 2022

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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

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.

Sleep Country Canada Holdings Inc. Annual Report 2022Sleep 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).

Sleep Country Canada Holdings Inc. Annual Report 2022Sleep 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.

Sleep Country Canada Holdings Inc. Annual Report 2022Sleep 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.

Sleep Country Canada Holdings Inc. Annual Report 2022Sleep 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

Sleep Country Canada Holdings Inc. Annual Report 2022Sleep 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.

Sleep Country Canada Holdings Inc. Annual Report 2022Sleep 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

Sleep Country Canada Holdings Inc. Annual Report 2022Sleep 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.

Sleep Country Canada Holdings Inc. Annual Report 2022Sleep 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

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.

Sleep Country Canada Holdings Inc. Annual Report 2022Sleep 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.

Sleep Country Canada Holdings Inc. Annual Report 2022Sleep 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.

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.

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).

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

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

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

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.

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

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.

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.

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

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

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%

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

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

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

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

36,810

37,208

2021

EPS
$

2.41

2.38

Basic

Diluted

Basic

Diluted

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.

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).

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

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).

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).

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.

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.

Sleep Country Canada Holdings Inc. Annual Report 2022Sleep 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.

Sleep Country Canada Holdings Inc. Annual Report 2022Sleep 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.

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

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.

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