EVE.L Regulatory News (EVE)

eve Sleep plc ("eve" the "Company" or the "Group")

Full Year Results

Third consecutive year of UK&I revenue growth, aiming to create the World's first digital sleep wellness retailer

eve, a direct-to-consumer sleep wellness brand operating in the UK, Ireland (together the "UK&I") and France, today issues its audited results for the year ended 31 December 2021 (the "Period").

Financial Highlights 1

Financial Highlights

Operational Highlights

Post period developments

Current trading and outlook

Trading in Q1 last year was eve's strongest quarter, as a result of extensive lockdown restrictions, with comparatives normalising from the start of May. In this context, trading for January and February has been softer than the prior period last year, but 6% up on 2020. Whilst there are heightened geopolitical uncertainties and the path for consumer spending is currently unclear for the year, our targets on growth and UK&I profitability remain.

Cheryl Calverley, CEO of eve Sleep, commented:

"Delivering a third year of growth in revenues and marketing contribution in our core UK&I business, notwithstanding the many external challenges faced during the period, demonstrates clearly the sustainability of our recovery and the success of the rebuild strategy. We have managed and mitigated inflationary pressures and supply chain disruption throughout 2021, whilst the Q4 issue of covid related labour supply shortages primarily in our delivery proposition has now abated. There is no denying the challenges we will face in 2022 but the restructured business is in good shape, our offering greatly enhanced and our team as strong as ever.

Our push into the sleep wellness space will continue at pace in 2022, including the launch of our first digital services. Sleep wellness is a large, fragmented and growing market, where we have a substantial lead over our more mattress focused competitors. There is a real opportunity to create the world's first digital sleep wellness retailer."

The management team will be hosting a live presentation with Q&A for retail investors at 10am GMT today. The presentation can be accessed via the Investor Meet Company platform. Interested investors can sign up to Investor Meet Company for free and add to meet EVE SLEEP PLC via the link: https://www.investormeetcompany.com/eve-sleep-plc/register-investor

Footnotes

1 Financial data has been rounded for presentation purposes. As a result of this rounding the totals, comparatives and calculations presented in this document may vary slightly from the arithmetic totals or calculations using such data.

2 Marketing contribution is defined as the profit/loss after marketing expenditure but before payroll and overhead costs; a measure also referred to as operational profitability.

3 Underlying EBITDA is defined as earnings before interest, taxation, depreciation, amortisation, impairment, share-based payment charges connected with employee remuneration, fundraise-related expenditure (2019 only) adding back IFRS16 adjustments for the office lease costs.

4 Marketing efficiency is defined as total reported marketing cost divided by the reported revenue for the specified segment, thus as the reported percentage falls marketing efficiency improves.

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chairman's statement

"eve is well placed to carve out a leadership position in the huge, growing and untapped market of sleep wellness." Mike Lloyd, Chairman

The attractions of eve

I was delighted to be appointed Chairman in May 2021.

We are a business that has built strong capabilities, in a market that is ripe with opportunity.

The near-term opportunity is to continue to grow our strong UK&I Direct-To-Consumer (DTC) mattress business. The longer-term opportunity is carving out a unique set of products and services in sleep wellness. This is a market that no-one has truly captured yet and is fast-emerging in the mainstream of public consciousness.

Eve was one of the first DTC mattress companies when we were founded in 2015. It was soon joined by a large number of other start-ups with a similar model - in the UK, Europe and North America. This created a level of intense and unprofitable competition. Many players have now been shaken out with a small number remaining. We decided ourselves to reset and rebuild in 2018 with a new leadership team - which now has Cheryl at its helm.

Since this time, the new team has established a record of strategic and financial progress, including the delivery of the rebuild strategy. The most marked result of this is that in our UK&I DTC business over the last two years, sales are up 49% while we spent 44% less on marketing.

Last year, our UK&I business performed well with revenues up 10% year on year and profit before group overheads also up 5% to £3.7m. Within the UK&I, the largest area is our DTC business which performed strongly and offset a decline in our smaller B2B business. In B2B, we have just started a new relationship with DFS, giving support to the attainment of our growth targets for 2022.

The French market has been more challenging. In 2019, we decided to reassess where we stood in France. As a result, we stopped any material investment in broadcast advertising - which has a payback period over several years. Whilst the resulting savings over 2020 allowed our French business to deliver a profit before group overheads, our top line in this market began to decline. We sought to re-establish growth in our French business in 2021, investing again in brand advertising from mid-year. The immediate result of this has been to swing France from contributing a £0.6m profit in 2020 to a £0.6m loss in 2021. While the top-line decline has been reducing, it is fair to say we'd hoped for a quicker turn-around than we have seen, in the face of unexpected market headwinds, with both increased competition and softening consumer demand ameliorating the growth.

Our Group overheads reduced slightly by £0.2m in the year. This plus the improvement in UK&I contribution did not offset the swing in profitability in France. Consequently, our Group EBITDA loss increased from £2.0m in 2020 to £3.0m in 2021.

It is clear we have a strong UK&I business. Our brand commands a premium and we have invested in it continuously since 2015. Our mattresses top the Which? Best Buy tables. Our service and operations are strong. Our HQ and core production is in the UK and we have a strong management team and wider set of colleagues.

The rebuild strategy has also given us a stronger platform to extend this momentum. It has given us a robust data set-up we did not have. This is critical to being effective at digital marketing. It has also given us a more scalable and resilient website platform. Having now got these in place there is more to be gained from both in 2022.

The rebuild strategy has also given us a product development and content capability to expand beyond mattresses and ultimately to become a true sleep wellness business. We are doing this in natural steps from where we started. In 2021 product development was stepped up. This included the creation of a range of 'sleep-away' products and we have accelerated the development of our gifting and wellness ranges, spanning everything from weighted blankets, sleep aids and candles, through to night lights and CBD oils.

Second consecutive year of revenue growth

Looking at the numbers in more detail: this was another year of financial progress towards our goal of building a profitable and sustainable business.

Group revenue increased year-on-year by 5% to £26.6m (2020: £25.2m). On two-year pre-Covid comparatives, revenue has grown 11% in tandem with a 40% reduction in marketing spend over the same period.

Revenue growth was led by the UK&I market, which achieved its third consecutive year of improvement. UK&I revenues grew 10% year-on-year and 22% on two-year pre-Covid comparatives. Within that the DTC revenues grew 21% year-on-year and 49% on two-year comparatives. The UK&I business generated a positive net contribution, defined as profit before overhead costs, for the second consecutive year, reporting a profit of £3.7m in 2021 (2020: £3.6m), an increase of 5% year-on year and an improvement of £5.4m on the 2019 loss.

We have reset the French business as I outlined. Here revenues declined 13% in the year to £4.0m. However, there are early signs of improvement including a growing conversion rate, which increased in the fourth quarter.

At the Group level EBITDA losses increased year-on-year to £3.0m (2020: loss £2.0m) reflecting the additional investment in France. This is 73% below 2019 pre-Covid loss levels of £10.7m. The increased EBITDA loss, compounded by a £1.0m cash outflow in H1 2021 for one-off factors relating to increased stock holding, payment of deferred VAT and other working capital movements, reduced the net cash position to £4.5m at 31 December 2021 (31 December 2020: £8.4m).

We are of course cognisant of how we are using our cash going into 2022, and a key objective this year is for the UK&I business to reach breakeven after covering its share of group overheads while building top-line growth.

All credit to our people

Coming into eve, I have been impressed by the culture and openness in the business. It is a creative, fun place to work, and an organisation with strong values and real purpose. For shareholders, this is an asset for our long-term success.

And in terms of our team: whilst often said, it is deeply felt - they have endured two unprecedented years. They have managed Covid induced uncertainty as well as working systematically through the challenging rebuild strategy. Throughout these trying times they have demonstrated incredible levels of resilience and flexibility. During the Christmas period, where Covid brought challenges to our delivery network and our own team capacity, all members of the team, irrespective of seniority jumped in to help resolve some of the resulting customer challenges.

I would also like to thank Paul Pindar for his service as Chairman to eve over many years. He has done a sterling job, overseeing both the appointment of a new and first-class management team as well as the delivery of the rebuild strategy. At the same time, I welcome Masood Choudhry, who was appointed to the board as a Non-Executive director in February 2021. Masood's 20-year background in logistics and supply chain (he is currently VP of logistics at Zalando) has and will prove invaluable in an environment where global supply chains are being disrupted.

outlook

The priorities we set out for this year are twofold. First, to build on the momentum we have in our UK&I business to deliver a breakeven result. Second, to accelerate our move to be a wider sleep wellness business.

As I write this, it is three weeks since Russia invaded Ukraine. The Bank of England has just put up interest rates and said they expect inflation to be hitting over 8% soon. Consumer sentiment has clearly turned since Christmas.

Trading in Q1 last year was eve's strongest quarter, as a result of extensive lockdown restrictions, with comparatives normalising from the start of May. In this context, trading for January and February has been softer than the prior period last year, but up 6% on 2020. Whilst there are heightened geopolitical uncertainties and the path for consumer spending is currently unclear for the year, our targets on growth and UK&I profitability remain.

With the invasion of Ukraine, we have entered a period of more intense uncertainty. Just as we did when COVID kicked-off, we will respond as things develop and seek to capture opportunities as they arise. Our direction and objectives remain unchanged however.

Mike Lloyd

Chairman

23 March 2022

strategic report

strategic review

Sleep wellness is a large, growing, global industry

Consumers en masse have woken up to the fact that sleep is an essential element of wellness that should be taken as seriously as diet and exercise. The pandemic has brought this issue to the fore, with reports of a substantial rise in sleep disruption, caused by anxiety, stress and lockdowns. Not getting enough sleep is correlated with many conditions including but not limited to an increased risk of depression, anxiety, weight gain, diabetes, heart disease and strokes.

In a survey undertaken for eve in 2021 nearly two thirds of respondents say that they worry about the amount of sleep they are getting and that nine in ten consumers asked had suffered some form of sleep disruption in the last three months. In the same eve survey, almost 75% of respondents had purchased or would consider purchasing a product or service to help them sleep.

With the increasing understanding of the importance of sleep has come consumer change. Consumers are spending more on wellness and the sleep wellness market has been a beneficiary of this. Data from the marketing intelligence and consulting firm P&S Intelligence estimates that the global sleep wellness market was worth US$79bn in 2019 and is expected to grow at a compound annual growth rate (CAGR) of 7.1% between 2020 and 2030. The key drivers of this projected growth include: the stress of modern life, ageing populations, increased use of caffeine, alcohol and screens, all of which impede a good night's sleep.

With the advent of lockdown restrictions from March 2020 in the UK and the switch to working from home, coupled with the lack of opportunities for travel and leisure activities, bedding and the wider homewares market has seen a significant and sustained increase in consumer spending. Whilst year-on-year comparatives are distorted by the timing of Covid restrictions and the associated closure of high street competition, data from Barclays UK Consumer Spending Reports show that retail spending in the household category increased each and every month through 2021 against two-year, pre-Covid comparatives. Furthermore, with the exception of January 2021, the two-year growth rate was in double digits every month.

eve experienced this trend in their own product categories. Not only did consumers spend more on sleep wellness related products but they also invested more on the central element of a good night's sleep: the mattress. The strong sales of eve's premium hybrid mattress testify to this point, generating over 23% of Group mattress sales by volume in 2021. As one of the Company's KPIs every customer that purchases an eve mattress is asked at 100 days whether they're sleeping better thanks to their eve, and over 8/10 of them tell us that they are. A strong piece of advocacy for the quality and effectiveness of our products.

Ecommerce has held onto much of the lockdown gains

The pandemic accelerated the already established structural shift to online ordering and although the proportion of online sales was for a while artificially high, boosted by the enforced temporary closure of physical store-based competition, ecommerce has held onto a significant proportion of the gains. Data from the Office for National Statistics shows that ecommerce sales represented 15.5% of total non-food retail sales in December 2019 before the pandemic, rising to 35.2% by December 2020, following the return of lockdown restrictions in the month. By December 2021 ecommerce's share of total non-food retail sales was 23.3%, a 780 bps increase from pre-Covid levels of December 2019.

Fragmented market, with most pursuing a volume driven, mattress focused strategy

Whilst the sector remains fragmented and highly competitive the landscape has changed through the pandemic. There has been a number of online mattress providers choosing to retrench from the UK market over the last two years, alongside a reduction in store-based competition, as some estates are parred back and other retailers fail to survive.

The evidence suggests that the mattress-in-a-box brands are growing their share of the market given their rates of growth and in eve's case the fact that they own the two most highly rated mattresses by Which? in the UK. Whilst competition remains intense it is clear that many online brands are largely focused on price driven, volume sales of mattresses, with eve adopting a differentiated strategy, aiming to be the go-to brand for high quality sleep wellness products, content and support across a range of categories and sales channels.

Business model

eve is an agile, digitally native business, with a DTC led proposition, supported by selected partnerships with leading retailers. This omni-channel approach reflects how consumers increasingly discover, choose and buy items, moving seamlessly between online and offline channels. By being where the customer is, without incurring the fixed costs of a large store estate, eve increases its potential sales opportunities, its customer reach and grows its brand awareness and product understanding.

Building a strong brand and customer experience, developing direct customer relationships with first party data and ultimately therefore enjoying repeat sales of wider sleep wellness products is at the centre of the eve model and is essential to attaining profitability. To achieve this goal, eve is focused on establishing itself as a go to brand for sleep wellness products, underpinning its offering with the authority and consumer trust to sell a broader range of products at a greater frequency across the category.

As a primarily DTC business, eve has the privilege of vast amounts of first party data from which to better understand customer needs and to evolve both its marketing and its product offering. This enables the business to offer a more complete sleep solution to suit each customer.

As a brand led business, resources in terms of investment and talent are focused on the key operations of product development, marketing, operations and customer experience. In-line with many in the industry, manufacturing and fulfilment are outsourced to leading third party suppliers in the UK and Continental Europe. Mattresses for the UK&I market are made in the UK and those for France are manufactured in Belgium. This set-up helps to de-risk the business in terms of currency and post Brexit trade frictions. It has also proved to be highly scalable and flexible, enabling significant seasonal variations in product demand to be met without any noticeable margin impact or variance in stock holding.

There is a close working relationship with eve's manufacturing partners to innovate and develop best in class products that out-perform competitors in terms of function and design, as evidenced by the high performance of the ranges in the Which? and Que Choisir consumer surveys in the UK and France respectively.

As eve continues to expand into new and adjacent product categories, there is a consequent evolution in the business model. In addition to selling products developed by eve, there is a growing focus on leveraging the brand strength of eve and its ecommerce capability to build a position in the eyes of consumers as a sleep retailer. To support this goal eve has started working with innovative partner brands, such as eym, Morphee, Three Spirit and Rescue Remedy who bring a unique breadth to the overall eve sleep wellness offering, whilst retaining eve's reputation for quality.

The outsourced manufacturing and fulfilment model, coupled with the DTC led setup, enables a lower and more flexible cost base than a traditional store-based retailer. This has been evident throughout the rebuild strategy, where non-profitable sales have been cut, processes completely overhauled without the negative margin impact and/or incurrence of substantial restructuring costs which would typically be expected from a more asset backed business. For eve, marketing is one of its largest costs, but unlike manufacturing, it is flexible in nature and is relatively quick to scale up and down as well as optimise and accelerate where opportunities arise, once core advertising assets have been invested in and developed.

chief executive's report

"We are creating the world's first digital sleep wellness retailer" - Cheryl Calverley

Our journey

To fully understand the progress made in the year, as well as the end destination and how we plan to get there, we must first set-out the wider context and the improvements made to date that make this vision achievable.

Where we have come from

Three years ago eve kicked off a rebuild strategy designed to turn around the business and put it on a more sustainable long term footing. EBITDA losses, which peaked at £19m in 2018, and the resulting cash burn needed to be stemmed fast by addressing their underlying causes. The causes were multiple but included chasing sales growth in too many markets at any cost, a lack of discipline and control in marketing investment, an inflated cost base built for a far larger scale, a narrow product set with limited opportunity to drive basket value, repeat purchase or margin enhancement, and a creaking technology platform. Strategically eve was competing head-on with numerous DTC competitors focused on high volume mattress sales and needed to differentiate itself, targeting wider, untapped market opportunities. These issues and our subsequent progress can be categorised into four key elements:

Over the last three years there have been extensive changes to the management team, to lead and deliver the rebuild strategy. In addition to my own appointment as CEO in 2020, Tim Parfitt joined as CFO in 2019, having previously held the same position at the profitable ecommerce furniture operator Loaf. Most recently we secured the services of Mike Lloyd as Chairman, whose background includes director level roles at The AA and McCarthy & Stone and Masood Choudhry, currently VP of logistics at Zalando, as a non-executive director. For a company of eve's size, we have a heavy weight team, with a wealth of experience and relevant expertise, all of whom believe in the opportunity of building a sustainably profitable digital sleep wellness retailer.

Our progress to date:

Unit economics have significantly improved with a higher gross margin

We have improved our unit economics by focusing on driving profitable sales rather than chasing topline growth as an objective in its own right. Low margin sales channels including Amazon and some other retail partnerships have been terminated. Products have been reviewed and redeveloped, ranges refined, and logistics and supply chains improved throughout. The resulting impact on gross margin has been significant with the UK&I gross margin in 2021 improving to 55.9%, an increase of 347bps on the 52.5% reported in 2018. We are comfortable that margins at or around this level give us appropriate headroom for long term profitable growth.

Marketing efficiency has more than doubled

Marketing costs were poorly controlled in 2018 with little understanding as to the effectiveness of the investment. I joined the business at the end of the 2018 financial year as CMO, when marketing costs peaked at £22.2m for the Group, representing 64% of total revenues. Since then we have developed a more thorough understanding of the marketing mix and creative effectiveness, allowing us to focus investment on marketing channels with the strongest financial return.

The results have been impressive. In 2021 marketing investment totalled £7.2m, with marketing efficiency, defined as marketing costs as a percentage of revenues, falling to 27.0%, an improvement of 58% on the 2018 result, reflecting a reduction of marketing costs between 2018 and 2021 of £15.0m, with the associated fall in sales limited to £8.2m. 2020 was an anomalous year in this journey where media pricing, notably the costs of social media, search and TV fell ahead of plan across the industry, due to the impact of lock downs. 2021 marketing costs are more normalised, and in line with our rebuild plan.

Competitive position and product set is now highly differentiated to peers

Two of the three pillars of the rebuild strategy were essentially about moving eve forward from being a pure play mattress seller towards becoming a sleep wellness retailer, through a differentiated market position which could support a broader product suite. The new positioning has been built through a series of marketing campaigns since the start of 2019 onwards, and a growing amount of digital content highlighting the benefits that eve can bring consumers in sleep wellness.

The updated market positioning is reinforced with the focus on new product ranges. Bedframes, which were one of the earlier new categories, have grown to become a significant business in their own right, generating 7% of Group revenues in 2021. Gifting and wellness ranges were initially introduced as a test in late 2020 and have enjoyed further development in 2021. We now have some 50 products on the UK&I website spanning the Morphee Sleep aid, a range of eym candles, Rescue Remedy balms, capsules and droppers, nightlights and even a non-alcoholic nightcap drink to soothe consumers into a deep and restful sleep.

The sleepovers category was introduced in the year, with a range of sleep away products including a mattress that rolls up and has its own carry handle. Early indications for this category are extremely positive with sales in the first six months surpassing £0.2m, and due to its initial success we have listed this product with Argos in addition to our own site.

Infrastructure and operations are now more robust, effective and efficient

All aspects of operations from manufacturing, warehousing, couriers and the website platform have been restructured over the last three years. Manufacturing has been consolidated from three to two locations, one in the UK, serving the domestic market and one in Belgium for European orders. This has given us greater cost efficiency, lower risk and flexibility to scale-up and down production with demand.

Warehouse operations have been consolidated in both the UK and France. We now have a more reliable warehouse operation, which allows us to maintain greater stock levels more efficiently - key in these times of supply chain disruption and unpredictability.

At the start of the rebuild strategy we ran our own website platform, designed and managed in-house. But it was not sufficiently robust, with site downtime running at excessive levels and costly to maintain. We have since migrated the UK, Irish and French sites to Shopify, and developed a high performing and efficient technology team in India to support further development of this platform. The combination of the Shopify platform and new couriers has also enabled us to improve the customer delivery experience and reduce costs, with the ability to combine all items in an order into a single delivery which previously was not possible.

The financial benefits of these changes to our operations are clear to see. Administrative costs (excluding marketing) as a % of revenue have fallen from a peak of 41.8% in 2019 to 24.7% in 2021.

Where we are now

The rebuild strategy has worked and the benefits are coming through strongly in the UK&I market. The brand and product range are highly differentiated to peers and are developing in alignment with our sleep wellness vision, all supported by a more robust, effective and efficient infrastructure and operations. This is clearly evident in our 2021 financial performance in the UK&I with the third consecutive increase in net contribution, despite the disruption to global supply chains and labour shortages. Our average delivery time in the UK&I in 2021 was just ten days.

Informed by in depth consumer research, early in 2022 we extended our risk-free trial from 100 nights to one whole year. This is an industry leading proposition, made possible by the quality of our award-winning mattresses and their very low return rates. We calculate that the additional sales secured through this offer will more than compensate for any increase in the number of returns.

In 2021 we passed an important milestone on the path to sustainable profitability in the UK&I, achieving a positive marketing contribution for the second consecutive year. Profit after marketing costs but before overheads in the UK&I grew by 5% to £3.7m (2020: £3.6m). Only two years ago the UK&I business reported a loss after marketing costs of £1.7m in 2019, demonstrating a £5.4m improvement in profitability over the period.

We estimate that the French business is some 18 months behind the UK&I in its development, with the market place some 2-3 years behind the UK in terms of its transition to online. But the same business improvements seen in the UK&I have also been made in France, with the unit economics restructured and the infrastructure and operations re-engineered to provide a more robust, effective and efficient platform. By way of example the French gross margin, which stood at 48.5% in 2019, increased to 52.2% in 2021.

The new French marketing campaign which launched in May 2021 is the first significant investment in the brand since 2018. It is bespoke to the French market but reflects the same differentiated brand proposition in sleep wellness as the UK&I equivalent. As we know from our history in the UK, this will take time to build and pay back through increased sales. Our initial focus is returning brand awareness to growth and establishing confidence in the core product. Despite a challenging and highly competitive market in France during the year, there are some early signs of encouragement in terms of an improving conversion rate in the fourth quarter. The profile of eve is further supported by our partnership with homewares retailer Olivier Desforges, which delivered £166k of revenue into the business in 2021, significantly ahead of expectations.

The eve product range in France is more limited than in the UK, in part reflecting the business' earlier stage of development and the importance of first establishing the core mattress product in the minds of consumers. However, in tandem with building momentum in mattress sales, ranges will continue to be developed that are aligned with the sleep wellness vision and localised for the French customer.

Where we are going

Sustainable profitability

Our near-term focus is moving eve into sustainable profitability, reaching a position where the business is growing and achieving both a profit and a positive cashflow each year. Anything less than this is not sustainable in the long term. Our initial focus is in reaching breakeven in the UK&I, returning to growth in France, and building an increasingly broad sleep wellness offering to engender ever improving customer repeat rates, fuelling organic underlying growth for the long term.

With the benefits of the rebuild strategy now coming through we expect to reach breakeven in the UK&I in the current financial year, though we are cognisant of the financial pressures facing UK consumers. It is a rapidly changing economic and socio-political picture, so we are retaining our focus on business resilience and flexibility. In France we expect a return to topline growth and an improvement in the bottom line performance compared to 2021, however again this is cast against a rapidly changing market place with strong and somewhat unexpected headwinds, and we will invest according to the circumstances we see before us.

Our improving margins and premium ranges give us the opportunity to drive stronger growth through maintaining our price position of 'accessible premium' to customers, despite inflationary cost pressures. This is particularly vital over the next 6-12 months when we anticipate consumer confidence maybe weaker and price will become a more significant factor than usual in buyers' decision making. The hard work over the past two years in driving efficiency puts us in a strong position to be able to offer great value to customers at a time they need it most, with no need to further expand margins.

We will achieve our financial goals through the continuation of our strategy of further product development, improving customer experience, backed up by a robust and efficient infrastructure, data and technology platform.

Growing the ranges

Our new product categories including gifting, wellness and sleepovers, have been well received and we expect strong growth in both consideration and purchases as our customer base becomes more aware of our wider ranges and we develop our marketing communications around them. It takes time to build momentum in new ranges, particularly with an eye to marketing efficiency, but the retail model we are working to allows for gradual and careful new category entry and range development with minimal risk.

We are planning further new product development during the year as we move towards the goal of becoming a 'sleep retailer' with further developments in core and supporting categories. eve has adopted a new model for developing its ranges as it seeks to move towards a more retail lead mindset, using a combination of in-house development and partner branded products, supported with a licensing model that allows us to trial and test new products in a low-risk way.

As we develop our knowledge in new categories, ranges and products, we will continually assess our 'make, buy or brand' decisions, allowing us to balance margin, growth and risk in each new category and product range we enter.

Leveraging data to enhance the customer experience

There are significant plans to further advance the customer experience in the current year. Historically we have not had the bandwidth to leverage our data set in any meaningful way, but that is now changing. In early 2022 we brought on board an experienced Data Director to help guide the business in developing a strong data capability. We see this as a key growth enabler, through the ability to better understand and personalise our offering to customers, acquiring and serving customers ever more efficiently, and delivering stronger repeat rates and customer lifetime value as a result. This will drive further improvements in our marketing efficiency, conversion rate and the number of repeating customers. Whilst seven years old, many parts of the business remain immature, and moving to a more data driven, automated model in many areas is at the top of our priority list to facilitate improving customer service as we scale, beginning with our customer returns management process.

Creating a content and digital experience led strategy - the 'well slept club'

To further improve our marketing efficiency we will continue reducing our reliance on paid search and high marginal marketing costs to acquire customers. We have made our first steps towards a more content and digital experience led strategy with the launch of the 'well slept club', a personalised platform of sleep advice, articles and support. This is currently in beta and will formally launch during the spring. This not only supports marketing efficiencies, but allows us to generate an additional, positive contribution from marketing channels that were previously a drain on eve's resources, for example, social media. This will integrate more fully with our e-commerce experience over time, allowing customers to find the help and advice they need to improve their sleep alongside the products that will make a difference. The well slept club creates a sleep wellness presence for eve more widely on Google, and there are over 1,000 sleep related words that customers might search for (from 'helping kids sleep' to 'am I a night owl or a lark') that eve's content will now appear alongside.

In 2023 we will further accelerate our focus on the digital experience for customers. We will build on the well slept club and develop new digital innovations and services to enhance the digital experience, moving ever closer to becoming the world's first digital sleep wellness business.

As with many retailers over the early part of the year, Covid created challenges in our logistics operation and customer service. We have now moved through this period and back to the more normal, high levels of service we expect to deliver to our customers. We see no reason for further upsets to our service and are working to build ever more resilience into our operation to handle any future turmoil.

responsible business

As a business we recognise our responsibility to our stakeholders and the wider community at large. We continue to make improvements throughout our operations in order to reduce our environmental footprint. Our localised production facilities mean that we are not trucking or airfreighting long distances, while our mattress packaging boxes are produced in the UK and made from Forest Stewardship Council (FSC) approved card. During the year we have been able to make improvements to our mattress plastic packaging in the UK&I, which is now made from a minimum of 40% recycled materials.

Since early 2020 eve has partnered with TFR Group in the UK, a prominent furniture recycling company, on the removal, rejuvenation and recycling of mattresses. The partnership includes taking them through stringent sanitisation and quality-check processes before rolling and boxing, saving on CO2 emissions, storage and re-delivery. This also lets the end refurbished mattress customer enjoy the benefits of a rolled mattress. To date the partnership has achieved a rejuvenation rate of approximately 60%. Remaining mattresses that are not capable of being rejuvenated are broken down and each material individually recycled. This policy is part of ensuring that 100% of eve sleep's returned mattresses are diverted away from landfill, saving 125 tonnes of waste per annum, whilst also optimising revenue recovery. A separate partnership also encourages customers to have their previous mattress removed and recycled at the point their new mattress is delivered.

Culture and diversity

We thrive on individuality at eve. We believe that irrespective of age, gender, ethnic origin, religion, sexual orientation, gender identity, gender expression, or disability, eve should be a place of opportunity, respect and support for individuals to be themselves, allowing them to do their best work. We understand that our people, capability and culture are one of the most powerful competitive advantages that we have, and a focus on developing talent, retaining high performers and attracting a diverse intake are core to our future success. I, and my executive team are seeking to build the business that we would have thrived in when we were earlier in our careers, giving our team the opportunity to develop to their greatest potential.

There continues to be significant investment in the development of our leadership team, with leadership skills training and individual coaching core to this. To widen our positive impact on development further, we work with 'You Can Now' giving students of design globally the opportunity to learn their craft on a live 'eve' brief to further develop our products and brand. Our business wide investment in learning was recently recognised by the Campaign for Learning for its impact.

Retaining and motivating our key talent whilst engaging the whole eve business with the challenges at hand remains top of our mind. To this end we redesigned our rewards and benefits scheme in 2020, awarding our extended leadership team share options so they can share in the success they bring to the business. At the same time, we have moved to a flat bonus structure, meaning everyone in the business, regardless of salary, tenure or experience receives the same cash reward at year end, should we achieve our aims.

Our desire for team inclusivity and fair pay for all is also in evidence in our pay ratio, which measures the ratio of the CEO's total remuneration to that of the lowest paid full-time member of eve. In 2021 this ratio was 7.9x and whilst there is limited data against which to accurately benchmark eve's performance, the Company is of the view that this compares favourably with the wider market. This further fosters our culture of transparency, equality and openness, whilst showing real respect for the efforts each and every one of the team put in to help us achieve our mission of sleep wellness.

Our focus on diversity continues with two key initiatives. Firstly an evolution to our approach to recruitment to ensure we recruit purely on capability and blind to background, through the introduction of the 'beapplied.com' blind recruitment software. And secondly, 2021 saw us take on our first apprentice in the marketing department, in partnership with the Marketing Academy.

The concerted efforts that we are making with regards to employee well-being and fairness are evident in our employee survey scores. Using the Peakon employee survey, our employee scores for health and well-being have increased from 8.0 in 2020 to 8.2 in 2021, which compares favourably with the industry benchmark of 7.8. In addition our diversity and inclusion score has improved substantially from 7.9 to 8.4 in the year.

eve is pleased to present the following metrics relating to gender balance as at 31 December 2021. The following breakdown shows the number of persons of each sex who were:

(i) directors of the company;

(ii) senior managers of the company (other than those falling within category (i)); and

(iii) employees of the company.

Cheryl Calverley

Chief Executive Officer

23 March 2022

key performance indicators

In 2021 the key performance indicators (KPIs) used to evaluate and monitor the performance of the business and measure the effectiveness of the three pillars of Growth (increasing revenue and profitability), Customer Obsession (offering customers an increasingly better service and range of products) and Resilience (structuring the business to ensure it can flex and adapt to external changes) are listed below.

Financial KPIs:

Operational KPIs:

Operational KPIs relate to group performance across all three markets unless otherwise stated.

Unprompted Brand Awareness is calculated by an external consultancy. The methodology for calculating the score was amended in the year and the August 2020 figure has been rebased.

Both the financial and operational KPIs on the face of it show a mixed performance year-on-year. Whilst Group revenue has continued to grow year-on-year by 5%, Group marketing efficiency declined by 274bps. However, Covid distorted some underlying trends in 2020 and alongside consumers essentially being forced to shop online and a marked increase in TV viewing, the costs of google search, social media and other marketing costs were artificially lower in 2020 than they ordinarily would have been, with on-site conversion rates higher than planned. On a two-year, pre-Covid basis, Group marketing efficiency in 2021 improved by 2355 bps from 50.5% in 2019 to 27.0% in 2021 and the conversion rate, which declined year-on-year by 32 bps in 2021, is still ahead of 2019 comparatives. As we move to a broader content strategy on site, with many more pages dedicated to educating and supporting our customers in improving their sleep, this 'site conversion rate' metric will become an increasingly unclear metric, and we will introduce alongside the more nuanced 'product conversion rate' metric, which reflects the % of customers that purchase having visited a website page featuring one of our products.

The decline in brand awareness in the year was planned and reflects the maturing of the marketing strategy, which evolved from an early focus on raising awareness to a concentration on building familiarity, consideration and purchase. The success of this shift in focus can be seen in the 200 bps increase in familiarity from 5% in August 2020 to 7% in September 2021, the achievement of a third consecutive year of UK&I revenue growth and the improvement in the marketing contribution, which rose to £3.7m (2020: £3.6m) in the year.

Financial KPIs

Operational KPIs

Update to KPIs for 2022

To reflect the current UK focus on prioritising brand familiarity, consideration and purchase over brand awareness, eve will for 2022 report UK brand familiarity alongside unprompted brand awareness as a KPI. This new KPI is measured externally.

To reflect the evolution of the website to deliver content alongside commerce, going forward eve will report 'product conversion rate' alongside 'site conversion rate'.

glossary

Definitions of Financial and Operational KPIs:

Overall revenue growth - % change in value of reported revenue for the specified segment of the latest period vs the previous period.

Marketing efficiency - total reported marketing cost divided by the reported revenue for the specified segment, thus as the reported percentage falls marketing efficiency improves.

Underlying EBITDA - earnings before interest, tax, depreciation, amortisation and impairment, share-based payment charges connected with employee remuneration (2021 and 2020), adding back IFRS16 depreciation relating to lease costs. Underlying EBITDA reflects what management believe to best demonstrate the underlying performance of the business in a given year.

UK Brand awareness - when asked question "What mattress brands can you think of?" the % of total respondents that answer eve (externally assessed using industry polling agencies).

Product return rates - return rate % is calculated by dividing the total value of sales returns by the value of net sales of goods including freight (all excluding VAT).

eve website conversion rate - the percentage of website traffic in a specific period that complete a purchase. Calculated by dividing the number of completed sales orders by the total website traffic. This figure is compared on a bps movement between periods.

eve customer sleep wellness score - the average number of customers out of every ten customers that report improved sleep as a result of purchasing an eve mattress (internally assessed using post-purchase email campaigns, sent to all customers who have purchased a mattress in the period).

repeat customers - the percentage of mattress customers who have made a second purchase within two years of their initial order.

financial review

"Delivered topline growth over a restructured financial model" - Tim Parfitt

group financial performance

group financial performance as a % of revenue

UK&I financial performance

France financial performance

revenue

Group revenue was up 5% to £26.6m (2020: £25.2m), 11% above pre-Covid revenue (2019: £23.9m).

UK&I grew 10% to £22.6m (2020: £20.5m), 22% above pre-covid levels (2019: £18.5m). More specifically, the UK&I direct-to-consumer business increased revenue by 21% to £19.1m (2020: £15.8m) and was 49% higher than two years previously (2019: £12.8m).

France declined 13% to £4.0m (2020: £4.6m). Prior to the launch of a new TV campaign in May 2021, there had been very limited marketing investment in France for two years and revenue had declined as a result.

gross margins

Gross margins declined 193bps to 55.4% (2020: 57.3%) but were 229bps above 2019 (2019: 53.1%). This was in part due to cost pressure and partly due to sales discounting. In 2020 supply constraints prevented the Group from offering the normal promotional prices at certain points in the year as this would have created demand which could not be fulfilled. In 2021 inventory was increased to mitigate against supply chain disruption and this allowed promotional pricing to be offered thus driving higher revenue.

distribution expenses

Distribution expenses lifted 20 bps to 14.1% (2020: 13.9%). This marginal increase was the result of taking more warehouse space early in the year to facilitate the increased inventory holding.

marketing investment

Group marketing investment increased by 17% to £7.2m (2020: £6.1m). In UK&I marketing efficiency improved 118 bps to 23.9% (2020: 25.1%). France efficiency reduced 2352 bps to 44.5% (2020: 21.0%). The low level of investment in France in 2020 constrained revenue, as noted above. In 2021 a TV campaign was developed and launched contributing to the bulk of the 82% increase in spend to £1.8m (2020: £1.0m). The images and video created for the TV campaign will be reused in future years so whilst there will be airtime costs, the creative and production costs will not re-occur.

profit after distribution, payment fees and marketing

UK&I achieved a 5% improvement in profit after distribution, payment fees and marketing with £3.7m (2020: £3.6m). France fell to a loss of £0.6m after distribution, payment fees and marketing (2020: £0.6m profit).

administrative expenses

(excluding marketing)

Group administrative costs reduced 5% to £6.4m (2020: £6.7m). Wages & salaries (excluding share-based payment charges connected with employee remuneration) were unchanged at £3.3m (2020: £3.3m).

Other administration costs reduced 1% to £3.1m (2020: £3.2m).

underlying EBITDA loss

(Defined as: earnings before interest, tax, depreciation, amortisation, impairment charges, share-based payment charges relating to employee remuneration, unrealised currency gains and losses, adding back IFRS16 adjustments to office lease costs)

The Directors consider that this is the most useful method of monitoring Group performance as it closely correlates to movements in cash.

EBITDA losses widened to £3.0m (2020: £2.0m). The main difference was the increase in marketing investment in France, as noted above.

share-based payment

In accordance with IFRS, a share-based payment charge for 2021 has been calculated and charged to the statement of profit and loss. The fair value of options granted is recognised as an expense over the vesting period with a corresponding credit being recognised in equity. The charge for 2021 was £0.2m (2020: £0.5m) of which £0.0m (2020: £0.3m) related to equity issued in exchange for marketing services and £0.2m (2020: £0.2m) relating to employee remuneration.

loss after tax

The loss after tax was £3.1m (2020: £2.0m loss).

capital expenditure

Due to the Group's outsourced business model, capital expenditure requirements remain low. The main area of capital expenditure in 2021 related to ecommerce and ERP systems infrastructure. Total capital expenditure in 2021 in the form of intangible software assets totalled £0.2m (2020: £0.3m).

working capital

Inventories were increased to £1.3m (2020: £0.6m) to provide a buffer against potential supply chain disruption and ensure that customer deliveries could continue to be met in periods of high demand. Tax liabilities reduced by £0.5m to £0.3m (2020: £0.8m) with the repayment of £0.3m deferred VAT from Q1 2020, delayed under the UK government's Covid-19 support measures.

cash position

The Group had cash and cash equivalents of £4.5m at the year-end (2020: £8.4m).

Tim Parfitt

Chief Financial Officer

23 March 2022

Principal risks and uncertainties

Risk management is an important part of the management process for the Group. Regular reviews are undertaken to assess the nature of risks faced, the magnitude of the risk presented to business performance and the manner in which the risk may be mitigated. Where controls are in place, their adequacy is regularly monitored.

The risks considered to be particularly important at the current time are set out below.

Cash

The Group has yet to achieve positive cashflow and the Board is therefore very focussed on the cash position and the use of cash within the business. The Board is mindful of the impact on cash should the business experience weaker than expected revenue growth and hence larger losses.

Consumer Confidence

eve's products are a discretionary purchase for most consumers. The business is therefore exposed to fluctuations in consumer confidence which may be adversely affected in the current year by increases in the cost of living and very recently by the war in Ukraine.

Marketing

Marketing is an important investment area for the Group and is the principal driver of customer visits to the Group websites. There is a risk that expenditure may not result in the targeted increase in brand awareness of website traffic.

eve monitors and analyses the effectiveness of marketing spend on a daily basis and adjusts accordingly. The Group has built a deep understanding of the most appropriate marketing strategies and also supplements this with third party media and marketing agencies to monitor and advise on the effective implementation and roll-out of marketing and advertising campaigns to meet targeted outcomes.

'Best-Buy' recommendations

Consumer recommendations such as Which? and Que Choisir play an important role in giving customers the confidence to buy eve products. The Group takes time to ensure that existing products are refined when necessary to remain market-leading.

Product

The Group is responsible for the design of eve products and could face exposure to product liability claims or claims against health and safety procedures or practices in different territories. The Group has a robust product and supplier onboarding process to ensure new products and suppliers are of the highest standards. The Group also retains insurance brokers to ensure sufficient insurance coverage for product liability and associated losses.

The Group is subject to fluctuations in the cost of materials which may adversely impact on the Group's profit margins. The price and availability of many components is impacted by global events such as the demand for key chemicals used in the manufacture of foam. The Group primarily manufactures its French sold mattresses in the EU and its UK&I sold mattresses in the UK, creating a natural hedge against currency movement for its key products. For other products and markets the Group looks to agree prices for a period of time with manufacturers where possible to provide a degree of certainty over currency fluctuations.

Operations

The warehousing of inventory and delivery of customer orders is outsourced to third parties who have the ability to flex their operations to meet fluctuations in demand. With the increase in home shopping during the Covid-19 pandemic and as a result of increased pandemic related sickness, the demands on logistics companies have increased and at times the service provided to eve and its customers has fallen below expected standards. The Group constantly monitors the performance of service providers and maintains the flexibility to switch providers if service levels cannot be maintained.

Competition

The Group operates in the highly competitive mattress and pillow industries and may not be able to grow, or maintain, its existing market share. The Group constantly reviews and analyses its performance against its business plan and against market competitors. The Group has both internal talent and external advisors who can advise on and respond to changes in the competitive environment.

Staff retention and recruitment

eve recognises that the employment market is highly competitive with many opportunities available to employees in other organisations. The Group strives to make eve an attractive place to work through focussing on employee engagement and wellbeing.

Customer Reviews

Customer review websites are monitored as these give impartial feedback on the products and service levels received by customers. These are a useful source of information confirming areas of the business operations requiring improvement. Prospective new customers use these websites to compare against competitors and adverse reviews may have a negative impact on Group revenues.

Approved and signed on behalf of the board.

Tim Parfitt

Chief Financial Officer

23 March 2022

consolidated statement of profit and loss and other comprehensive income

for the year ended 31 December 2021

consolidated statement of financial position

at 31 December 2021

consolidated statement of changes in equity

consolidated statement of cash flows

for the year ended 31 December 2021

notes to the accounts

forming part of the financial statements

1. Reporting Entity

eve sleep PLC (the "Company") is a public company, domiciled and registered in England in the United Kingdom and its shares are listed on the London Stock Exchange AIM market. eve sleep PLC is a company limited by shares. The registered number is 09261636 and the registered address at 31st December 2021 was 29A Kentish Town Road, London, England, NW1 8NL.

2. Accounting Policies

2.1 Basis of preparation

The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the "Group").

The Group and Company financial statements have been prepared and approved by the directors in accordance with UK-adopted international accounting standards.

The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these Group financial statements.

This preliminary announcement is simultaneous with signed financial statements on which the audit report is unqualified and unmodified.

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2021 or 2020 but is derived from those accounts. Statutory accounts for 2020 have been delivered to the registrar of companies, and those for 2021 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did include a reference to which the auditor drew attention by way of emphasis without qualifying their report in respect of going concern for the year ended 31 December 2021 only and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

There are no changes to accounting policies adopted by the Group in the year ended 31 December 2021.

Amendments to IFRS 16 addressing Covid-19 related rent concessions became effective for annual reporting periods beginning on or after 1 June 2020. As neither the Group nor Company has received such concessions, this is not relevant.

Interest rate benchmark reform - phase 2 - amendments provided a practical expedient when accounting for a modification of a financial instrument when an old interest rate benchmark is replaced with an alternative (SONIA) as a result of the reform. As neither the Group nor Company has such financial instruments, this is not relevant.

2.3 Measurement Convention

The financial statements are prepared under the historical cost convention.

2.4 Going Concern

The financial statements are prepared on a going concern basis notwithstanding that the Group is still generating losses.

The Group has reported a loss for the year of £3.1m (2020: £2.0m) with net cash outflow of £3.9m (2020: inflow £0.5m). The closing cash balance at 31 December 2021 was £4.5m (2020: £8.4m).

There were two material cash outflows in the year totalling £1.0m which are non-recurring: firstly, there was a planned increase in inventories of £0.7m with the intention that this would mitigate against potential supply chain disruption during the year and allow customer orders to be fulfilled; secondly, £0.3m VAT was paid to HMRC in April 2021 having been deferred from 2020 Q1 under the UK Government Coronavirus support measures. Without these cash outflows, the net cash outflow for the year would have been £2.9m and the prior year cash outflows would have been higher.

The directors have prepared a business plan and financial model including cashflow forecasts for a period of more than 12 months from the date of approval of these financial statements.

The business plan makes the following key assumptions:

The base case forecast demonstrates that the company will reduce its net loss compared to 2021 and cash outflow will be less than £2.0m annually.

The delivery of the business plan is subject to uncertainty which has been modelled through sensitivity analysis. Uncertainties are such that potential mitigating actions, which would be over and above the current strategic plan, may not be sufficient to mitigate all reasonably possible downsides in assumptions. The impact of weaker consumer confidence is one such uncertainty which management are assessing and managing the impact of on the business.

Mitigating actions would include reviewing all discretionary spend including changes to marketing investment and fixed overheads. In addition, the directors have considered opportunities to improve working capital such as debt factoring and reducing inventory investment.

Based on the above, the directors believe it remains appropriate to prepare the financial statements on a going concern basis. However, these circumstances represent a material uncertainty that may cast doubt upon the company's ability to continue as a going concern and, therefore to continue realising its assets and discharging its liabilities in the normal course of business. The financial statements do not include any adjustments that would result from the basis of preparation being inappropriate.

3. Segmental analysis

IFRS 8, "Operating Segments", requires operating segments to be determined based on the Group's internal reporting to the Chief Operating Decision Maker. The Chief Operating Decision Maker has been determined to be the executive board and the primary segmental reporting format of the Group is geographical by customer location, based on the Group's management and internal reporting structure.

The board assesses the performance of each segment based on revenue, gross profit and profit after distribution expenses, payment fees and marketing expenses. Payment fees and marketing expenses are presented within administrative expenses on the statement of profit and loss and other comprehensive income.

For the year ended 31 December 2021

For the year ended 31 December 2020

4. Earnings per share

The basic earnings per share is calculated by dividing the net profit attributable to equity holders of the Group by the weighted average number of ordinary shares in issue during the year.

For the periods presented, the weighted average number of shares used for calculating the diluted loss per share are identical to those for the basic loss per share. This is because the outstanding share options would have the effect of reducing the loss per share and would not be dilutive under IAS 33.

At 31 December 2021, options outstanding amounted to 12,280,674. Given the loss for the year of £3,054,224 (2020 loss: £2,024,083) these options are anti-dilutive.

5. Share Capital

Allotted, issued and fully paid:

The table below summarises the movements in number of shares at the beginning and end of the period:

The holders of Ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.

During 2021, 987,245 shares were issued and 765,203 share options were exercised bringing the total share capital of the Company to 274,321,862 at 31 December 2021.

6. Share based payments

The Group recognised a charge of £0.2m (2020: £0.5m) related to share-based payments during the year to 31 December 2021, all of which relates to equity-settled schemes and are presented within administrative expenses. The charge in 2020 included £0.3m issued to Channel 4 in relation to the equity settlement of marketing services provided.

The Company issues equity-settled share-based payments to certain employees, whereby employees render services in exchange for shares or rights over shares of the parent company. Equity-settled awards are measured at fair value at the date of grant. The fair value is calculated using an appropriate option pricing model and is expensed to the consolidated statement of profit and loss on a straight-line basis over the vesting period after allowing for an estimate of shares that will ultimately vest. 

The Company operates an HMRC approved executive management incentive plan (EMI). Under length of service criteria, options typically vest over a 3-year period in equal monthly amounts. For those options with performance based condition, the options will vest when the conditions are met. All options are equity settled.

The terms and conditions of the grants are as follows:

The Company operates an unapproved executive incentive plan. The vesting conditions for grants made on 26 January 2016 and 1 April 2019 are based on length of service with 100% of the options vesting on 36-month anniversary of the grant date. All options are equity settled.

The terms and conditions of the grants are as follows:

The number and weighted average exercise prices of share options are as follows:

All options exercised during the year were options over Ordinary shares.

The weighted average share price at the date of exercise of share options exercised during the year was £0.001 (2020: £0.001).

The options outstanding at the end of the year have an exercise price of £0.001 and a weighted average contractual life of 10 years.

The fair value of employee share options is measured using a Black-Scholes model. Measurement inputs and assumptions for those share options granted during 2021 are as follows:

7. Trade and other receivables

The average credit period offered on sales of goods during 2021 was 52 days (2020: 32 days). The average days sales outstanding (''DSO'') in 2021 was 65 days (2020: 44 days). At 31 December 2021, trade receivables at a nominal value of £nil (2020: £nil) were impaired and fully provided for.

All trade and other receivables are short-term. The directors consider that the carrying amount of trade receivables approximates to their fair value. All trade and other receivables have been reviewed for indications of impairment.

Trade receivables represent amounts due from wholesale and retail customers.

The Group has not charged interest for late payment of invoices in the current year or prior period.

Allowances against doubtful debts are estimated by reference to expected credit losses based on the probability of default (using past default experience with that customer and alongside analysis of the counterparty's current financial position where specific credit risk is known), risk exposure (being the value of receivables outstanding with that customer) and finally a percentage representative of the loss due to default.

Before accepting any significant new customer, the Group uses a variety of credit scoring systems to assess the potential customer's credit quality and to define credit limits for each customer. Limits and scoring attributed to customers are reviewed regularly.

Three major retail customers each accounted for more than 10% of the total balance of trade receivables on 31 December 2021, (2020: Four major retail customers each accounted for more than 10% of the total balance of trade receivables on 31 December 2020).

In determining the recoverability of a trade receivable, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the relevant year-end. Aside from the major retail customers accounting for the year-end trade receivable balance mentioned above, the concentration of credit risk is limited due to the customer base being large and diverse.

8. Trade and other payables

All trade and other payables are short-term. The directors consider that the carrying amount of trade and other payables approximates to their fair value. Deferred revenue represents contractual liabilities to deliver goods to customers where consideration has been received prior to the year-end date. The opening balance of deferred revenue was fully recognised during the 2021 financial year.

9. Provisions

A refund provision is required as the Group provides certain products to customers under a 100-day trial period.

During this period the customer is entitled to return goods for a full refund. The provision is calculated by reference to the rate of returns experienced by the Group in preceding periods and the level of sales subject to the relevant trial periods of each product at the year end. An analysis of the rate of return over historical periods does not indicate a significant variation in the rate of refunds provided to customers and accordingly, whilst there is a degree of estimation in the calculation of this provision, any reasonable sensitivity analysis in the rate applied to sales at the year-end would not result in a material impact.

A warranty provision is required as the Group provides certain products to customers with 2, 3, 5 or 10-year warranty periods depending on the product category.

During these periods the customer is entitled to claim under warranty a replacement product. The provision is calculated by reference to the rate of successful claims experienced by the Group in preceding periods and applying a projected distribution of the claims across the 10-year warranty period. A 10% sensitivity applied to the estimated rate for warranty claims would result in the warranty charge increasing or decreasing by around £20,000. (See note 2.19).

10. Subsequent events

There have been no significant events since the year end.

[1] Underlying EBITDA is defined in the Glossary