SLEEPZ AG — Interim / Quarterly Report 2017

Sep 15, 2017

SLEEPZ AG

Berlin

Half Year Report 2017

Management Report of SLEEPZ AG as per 30.06.2017

Business purpose

SLEEPZ AG is the operating holding company of an e-commerce group, which it provides with a number of central services. It establishes its own subsidiaries and acquires majority interests in companies with the aim of developing a leading group in the Sleep segment in Germany.

Business development in the first half of 2017

SLEEPZ AG’s performance in the first half of 2017 was considerably weaker than expected. Total sales amounted to € 5.9 million, down roughly 25% compared to the previous year’s sales of € 7.7 million. There are two main reasons for this: Firstly, the market and competitive environment has changed. The new one-fits-all mattress companies in particular have drawn customers to them with very high advertising budgets in some cases, particularly online and on television, although this has often meant accepting disproportionately high customer acquisition costs. We cannot and do not intend to compete here, as this does not make economic sense in our view. As a result, we saw a decline in visitor numbers and generated lower sales in the first half of the year. At the same time, price pressure also increased for some standard products, with the effect that from a certain price point it no longer made sense to participate in this price war.

Secondly, the company had a number of internal issues to contend with, including an Extraordinary General Meeting, a subsequent capital reduction and two capital increases, as well as the final divestment of the former venture capital business. All of this put strain on the focus on operating business and also led to a tight liquidity position in some cases, which in turned reduced the degree of leeway in purchasing and marketing. This all had a negative impact on operating business, but had been completed by 30 June 2017.

The company ended with first six months of the 2017 financial year with consolidated earnings of - € 2,250 thousand. Adjusted for the result from the discontinued venture capital operations, this produces a consolidated result from ordinary business activities of - € 1,465 thousand. Of this total, a loss of € 432 thousand is attributable to Grafenfels Manufaktur GmbH, a loss of € 431 thousand to sleepz Home GmbH and a profit of € 34 thousand to the Matratzen Union Group, while the rest is attributable to SLEEPZ AG itself.

Discontinued venture capital operations

The remaining venture capital portfolio was sold in full in the first half of 2017, generating disposal proceeds that were slightly lower than the IFRS book value in line with expectations.

Market and competition

In our opinion, the market for bedroom furniture and bedding, etc. (“sleep products”) will develop positively in the medium term. Given the greater awareness of and desire for health both in society and among individuals, the long neglected bedroom is taking on an increasingly important role as a place of rest, a wellness oasis and a room for sleep, relaxation and work. For this reason, we assume that demand for high quality products for the bedroom will grow in the coming years.

Quite a bit is happening in terms of competition. The big, bricks-and-mortar chains such as Dänisches Bettenlager or Matratzen-Concord, who have so far generated only marginal revenues online, want to invest massively in expanding their online channels. Purely bricks-and-mortar smaller stores are at a disadvantage here if they do not have a particular profile (products, own brands, location, customer loyalty, etc.). Not only are they being confronted with growing online competition, they also face price competition on standard products.

Also, more and more young companies are entering the mattress market with the US Casper concept of a “one fits all” mattress, which accounts for a good 20% of the sleep products market in total. These mattresses are sold online to customers via their own webshops (B2C), and these customers are won over by “better prices by avoiding bricks-and-mortar stores”, the supposedly “perfect” mattress and a 100-night trial sleeping concept. As we see it, these companies are helping to draw press and consumer attention to the sleep products segment as a whole, and of course there is also reason enough for them to exist in a certain area of the mattress market. However, as our positioning is considerably broader, we see these companies as only limited competition to our overall approach.

Organisation and employees

As at the reporting date, 70 employees worked at SLEEPZ AG in addition to the Executive Board. The subsidiaries are managed by their executive directors, no personal identity exists between the Management of the Holding and the subsidiaries.

Opportunities and risks of future development, risk management

Market

The online market in the Sleep segment is undergoing change. Many furniture companies and larger bricks-and-mortar traders are discovering the online market, and greater competition is to be expected. At the same time, the market overall is exhibiting a strong growth dynamic.

Competition

The German market does have some larger players, such as Schlafwelt.de (Otto group), but no competitor exercises significant control over the market. Given the fact the market is not controlled by a single competitor or a small number of competitors, a very large number of companies are attempting to tap this market. Several new online companies require a higher level of service than is standard and are creating greater competition with regard to price. This could pose the risk of a decline in margins.

Technology

E-commerce is becoming ever more complex and increasingly technical. In order to keep up, it is important always to use the latest technologies, such as mobile shopping, for example. The mobile internet and other technical advances require good external service providers or a strong in-house technical department. Dependency on external service providers poses a not insignificant risk. At the same time, developers are currently in strong demand, which makes recruiting staff for the in-house technical department increasingly difficult and leads to a high risk of losing good employees.

Staff

Particularly at the Berlin location, recruiting good employees in all areas is proving difficult due to the high number of e-commerce companies. Companies have to offer more in order to be attractive, especially at management level. This higher demand may potentially lead to an increase in staff costs.

Legal risks

Cease-and-desist letters and court cases have been inherent in online trading for many years. Counteracting this requires higher legal expenses with regard to prevention. This applies to all processes and areas on the domains. Costs for legal advice and provisions for legal disputes are rising.

Supplier risk

Despite the large opportunity brought about by many suppliers discovering trading on the internet and online traders therefore being offered ever more products, many manufacturers also protect themselves against misuse and strategic changes contractually. It is always possible for business relationships to end abruptly. This can change the product range and revenue can shift or in the worst case even fail to materialise.

Warranties/product liability

The issue of warranties hardly poses problems as the risk is primarily borne by the manufacturer. However, the importer bears the product liability risk for imported products. As a result, very high quality standards must be set for product testing. In spite of such quality standards, supplying imported products can bring with it the risk of product liability and the resulting costs.

Image

The internet is becoming ever more transparent and the opinions of consumers, associations and opinion leaders (e.g. Stiftung Warentest, the German consumer testing foundation) are becoming increasingly important. This represents a great opportunity to stand out from the competition, but also the major risk of rapidly suffering damage to one’s reputation.

Products

In the Sleep segment, mattresses, sprung bed slats and beds have a very long life, which means the product range can be well coordinated for many years. This is not the case in the fashionable segment, as with bedding, for example. In this area it is important to sell quickly as value adjustments must otherwise be made for slow sellers.

Financing risk

For the the subsidiaries in general there is the risk that they cannot cover their financing needs completely by banks. Due to the earnings situation and the company age, especially the subsidiaries sleepz Home GmbH and Grafenfels Manufaktur GmbH are dependent on the support of their shareholders. The current liquidity requirements have to be covered by SLEEPZ AG and optionally by the existing shareholders. Furthermore SLEEPZ AG can be called on by banks for credit protection.

Credit risk

There is a very low credit risk when selling directly to consumers due to the payment terms. There is a risk associated with selling via platforms that simultaneously perform a collection function. This risk is continuously monitored by the company’s management.

Company dependence on economic cycles

The economic success of SLEEPZ AG is heavily dependent on the general economic development.

Risks of changes in interest rates

The liabilities do not present any risks of changes in interest rates. Variable interest rates are assessed on all current money investments. The amount of future interest expenses is affected by the development of the general interest rate level.

Overall evaluation and risk management

SLEEPZ AG has recognised extensive provisions for all discernible individual risks in the annual financial statements as of 30 June 2017.

At the holding level, the Executive Board personally monitors and supports the development of the subsidiaries. It maintains close contact with the senior management of affiliated companies and is involved in decision-making relating to transactions outside of day-to-day business.

SLEEPZ’ scurrent liquidity is adequate for its existing business and will enable it to meet all its obligations. From a current standpoint, if the risks described were to occur individually or together they would still not pose a danger to the continuation of SLEEPZ AG as a going concern. In the view of the Executive Board, SLEEPZ AG has a lasting capability to remain in existence over the long term.

Opportunity report

Due to the positive performance of its own Grafenfels WEISS mattress in Stiftung Warentest’s cold foam mattress test for September 2017, Grafenfels will optimise its existing mattress range over the coming months. Active marketing for the Grafenfels WEISS, which has been rated “GOOD” in tests, is to begin in September, primarily via the SLEEPZ Group itself. There is good potential for the Grafenfels range to generate sales in the millions of euros along with a healthy margin next year. The SLEEPZ Group is increasingly working on major projects, which also offer good growth prospects.

Forecast report for the period from 1 July to 31 December 2017

Market environment

SLEEPZ AG focuses on the “Sleep” market segment and mainly on online trading (e-commerce) within this area. The Sleep segment ranges from beds, mattresses, bedding and bedroom furniture to accessories, among other things. Online trading is developing positively in this segment and continues to gain market share. Due to its positive development, an increasing number of competitors are entering the market, leading to price competition and increasing customer acquisition costs. This may put pressure on the contribution margins.

Investment activity

The Executive Board is currently examining a potential acquisition in the Sleep segment that could be concluded before the end of the year. In addition, the full acquisition of the equity investment in sleepz Home GmbH will be examined before the end of the year.

Forecast result of operations

For 2017, the Executive Board is planning for a result from ordinary business activities of -€ 1.5-2.0 million.

Significant events after the reporting

period

No significant events occurred after the reporting period.

Outlook

As a result of the extensive structuring work and liquidity shortages in the first half of the year, combined with growing competition in customer acquisition, sales were down significantly year-on-year. The company will do all it can to make up this shortfall and transform it into growth for the year as a whole. It is still possible to achieve the sales guidance of € 18 million for the year as a whole, which was subject to the prerequisite of sufficient growth financing, but this will certainly be a major challenge.

Based on work on a large number of major projects and the successful performance of the Grafenfels WEISS in Stiftung Warentest’s mattress test for September 2017, we expect to be able to gain growth momentum in the coming months and particularly in 2018.

Berlin, 12 September 2017

Oliver Borrmann

Balance Sheet

Assets

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		30.06.2017	31.12.2016
		€	T€
Long-term assets
Intangible assets		4,880,108.30	4,883
Tangible assets		302,056.53	435
Fixed asset securities		16,666.00	13
		5,198,830.83
Current assets
Inventories		2,067,480.43	2,251
Assets marked for sale of discontinued operation		0.00	5,493
Receivables and other assets		919,771.99	1,215
Trade accounts receivable		277,272.19	236
Cash on banks and cash on hand		2,243,025.26	798
		5,507,549.87
Total assets		10,706,380.70	15,324

PASSIVA

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		30.06.2017	31.12.2016
		€	T€
Shareholders´ equity
Subscribed capital		8,280,391.00	20,701
Capital reserves		266,984.20	2,271
Accumulated costs of capital increases		-1,322,776.30	-1,221
Other revenue reserves		668,123.39	668
Accumulated net loss		-832,815.41	-15,173
Minorities		210,605.84	340
		7,270,512.72
Non-current liabilities
Liabilities towards banks		16,791.18	21
Loans		429,438.70	429
		446,229.88
Current liabilities
Trade accounts payable		922,154.92	1,183
Liabilities towards banks		1,380,557.21	2,154
Prepayments received		104,758.41	191
Other liabilities		563,867.56	3,718
Provisions		18,300.00	40
		2,989,638.10
Total liabilities		10,706,380.70	15,324

Statement of Comprehensive Income for the Period from 01.01.2017 to 30.06.2017

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		1.1.-30.06. 2017	1.1.-30.06. 2016
		€	T€
Sales revenue
Sales revenue		5,864,727.61	7,719
Other operating income
Other operating income		129,201.21	2
Income from consulting and commissions		102,445.13	268
Change in inventories		-22,435.50	0
Cost of materials
Cost of sales and services purchased		-3,978,128.99	-5,364
Staff costs
Wages and salaries		-930,686.18	-962
Social security contributions and costs for pensions and support		-165,299.00	-150
Depreciations
Depreciation on tangible and intangible fixed assets		-133,304.34	-74
Other operating expenses		-2,209,591.73	-2,561
Operating income		-1,343,071.79	-1,122
Income from investments		71,588.08	47
Interest and similiar income		1,145.09	6
Interest and similiar expenses		-194,406.95	-210
Income taxes		-31,432.99	-16
Result from continuing operations		-1,496,178.56	-1,295
Result from discontinued operations		-753,663.67	-941
Consolidated net result		-2,249,842.23	-2,236
Share of result of non-controlling interests		129,561.49	132
result attributable to shareholders of the company		-2,120,280.74	-2,104
Earnings per share from continuing operations (diluted and non-diluted)		-0.19	-0.17
Earnings per share from discontinued operation (diluted and non-diluted)		-0.11	-0.13
Earnings per share (diluted and non-diluted)		-0.30	-0.30
Consolidated net result		-2,249,842.23	-2,236
Other comprehensive income		0.00	0
Comprehensive income		-2,249,842.23	-2,236

Cash-Flow Statement for the Period from 01.01.2017 to 30.06.2017

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		2017	2016
		T€	T€
Cash-flow from operations
Consolidated net result		-2,250	-2,236
Result of discontinued operation		754	941
Depreciation of intangible and tangible assets		133	74
Share of result of non-controlling interests		130	132
Other non-cash items		0	-28
Decrease/(-) increase in assets and increase/(-) decrease in liabilities
Receivables and other assets		254	-1,543
Inventories		184	-214
Other liabilities		-502	1,050
Provisions		-22	-504
Cash-flow from ordinary business activities		-1,320	-2,327
Cash flow-from investments
Additions to fixed asset securities		-4	-4
Additions to intangible and tangible assets		2	-165
Increase of the share of subsidiaries		0	-89
Sale of discontinued operations		5,000	0
Total cash-flow from investments		4,998	-258
Cash flow-from financing
Capital increase		1,934	0
Liabilities towards banks		-778	1,209
Minorities		-130	43
Loans		-3,000	396
Total cash-flow from financing		-1,973	1,649
Change in liquid funds		1,705	-936
Cash-flow from discontinued operation		-260	114
Total change in liquid funds		1,445	-822
Liquid funds at the beginning of the business year		798	1,943
Liquid funds at the end of the reporting period		2,243	1,121

Statement of Changes in Equity

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Figures in T€	Subscribed capital	Capital reserve	Other profit reserves	Minorities	Accumulated net result	Total
Equity as at 01.01.2017	20,701	1,051	668	340	-15,174	7,586
Net result				-130	-2,120	-2,250
Capital reduction	-13,801	-2,659			16,460	0
Capital increase	1,380	554				1,934
Equity as at 30.06.2017	8,280	-1,054	668	210	-834	7,270
Equity as at 01.01.2016	20,701	994	782	6	-5,617	16,866
Net result				-271	-9,557	-9,828
Transactions with non-controlling interests			-114			-114
Share-based compensation		57				57
Shares of non-controlling interests				605		605
Equity as at 31.12.2016	20,701	1,051	668	340	-15,174	7,586

Notes

Accounting in accordance with International Financial Reporting Standards (IFRS)

In accordance with Regulation 1606/2002 of the European Parliament and of the Council, SLEEPZ AG has prepared its annual financial statements for 2016 in accordance with the International Financial Reporting Standards (IFRS) adopted by the European Union. Accordingly, these interim financial statements as at 30 June 2017, which were not reviewed by a person qualified to audit financial statements, were also prepared in compliance with lAS 34 and contain condensed reporting compared to the annual financial statements. All amounts in themselves have been rounded in line with commercial practice; this can result in minor deviations in the addition of figures.

General

Following the reporting date, the Annual General Meeting of SLEEPZ AG carried out a change of name from bmp Holding AG to SLEEPZ AG in order to take account of the scope of the company‘s activities.

Accounting policies

SLEEPZ AG has implemented all accounting standards endorsed by the EU and effective for financial periods from 1 January 2017.

The accounting standards applicable for the first time in the 2017 business year have no significant effect on the presentation of the net assets, financial position and results of operations. A detailed compilation of these accounting standards can be seen in the notes to the 2016 annual report.

Otherwise, the same accounting policies were applied in the preparation of the interim financial statements and the calculation of the comparative figures for the previous year as in the 2016 annual financial statements. A detailed description of these methods was also published in the notes to the annual financial statements for the 2016 annual report.

Notes on the Interim Financial Statement

1. Business purpose

The purpose of the company is to develop and produce economic assets and to trade such assets, particularly in the consumer goods sector, including via subsidiaries, associates and equity investments, as well as to perform consulting services for companies. The company will promote subsidiaries, affiliates and holdings in the long term and pursue a joint business strategy.

SLEEPZ AG has its headquarters at Schlüterstrasse 38, D-10629 Berlin, Germany. SLEEPZ AG is entered in the Commercial Register of the District Court of Berlin-Charlottenburg, Federal Republic of Germany, under the number HR-B 64 077.

2. Non current assets held for sale

The venture capital business was reported in the annual financial statements of 2016 as a discontinued operation. The venture capital remaining portfolio was sold completely in the second quarter of 2017.

3. Information on subsidiaries

The interim financial statements include SLEEPZ AG and the subsidiaries over which it exercises control. SLEEPZ AG controls a company if it has power of disposal over that company. This means that SLEEPZ AG has existing rights that grant it the present ability to control material activities. These are activities that materially influence the company’s return. SLEEPZ AG is also exposed to fluctuating returns from its involvement in the company or has entitlement to them and has the ability to influence such returns by means of its power of disposal over the company.

Full consolidation of subsidiaries begins at the point in time from which the possibility of control exists and ends when such possibility of control ceases to exist. Generally, consolidation of capital is accounted for using the acquisition method under IFRS 3. This generally requires the acquired assets and liabilities to be recognised at their fair values. If the difference between the acquisition costs and the proportionate share of the remeasured equity of the subsidiary is positive, it is reported as goodwill and is regularly tested for impairment. Any remaining negative difference is recognised in profit or loss in the income statement following a reassessment.

Expenses, income, receivables and liabilities between the fully consolidated companies as well as intergroup profits from supply and service relationships within the group are eliminated. Where applicable, deferred taxes are recognised for consolidation transactions included in the income statement.

4. Scope of consolidation

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Name	Principal activities	Headquarters	Share of capital and voting rights as at 30.06.2017	Share of capital and voting rights as at 31.12.2016
sleepz Home GmbH	Operating and further developing online shops as well as multichannel sales, in particular of bedding and furniture of all kinds	Ludwigsfelde, Germany	66,8%	66,8%
Matratzen Union GmbH	Purchasing and selling mattresses, bedding and sleep systems	Wolfhagen, Germany	60,0%	60,0%
Markenschlaf GmbH	Trading in goods of all kinds, particularly products relating to sleep, furnishings and living, as well as comparable consumer goods	Wolfhagen, Germany	60,0%	60,0%
Ecom Union GmbH	Trading in goods of all kinds, particularly products relating to sleep, furnishings and living, as well as comparable consumer goods	Wolfhagen, Germany	60,0%	60,0%
Denkvertrieb GmbH	Developing marketing strategies, graphic design and implementation, textual design, selling and trading via internet platforms, developing sales strategies and designing and optimising websites	Wolfhagen, Germany	60,0%	60,0%
Grafenfels Manufaktur GmbH	Designing, manufacturing and selling mattresses, bedding, bed linen and all other products relating to the theme “sleep”	Berlin, Germany	100 %	100 %

5. Disclosures on related party companies and persons

The Company has maintained service relationships with the Executive Board and the Supervisory Board. The compensation system and the amount remained unchanged. The Executive Board, Oliver Borrmann, is a minority shareholder in bmp Ventures AG, with which a service agreement exists.

6. Reconciliation of balance sheet items to classes of financial instruments

The table below shows the reconciliation of financial instruments, broken down by carrying amount and fair value, to the balance sheet:

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2017	At amortised cost	Balance sheet item as at
T€	Book value	30.06.2017
Non-current assets
Fixed asset securities	17	17
Current assets
Trade accounts receivable	920	920
Receivables and other assets	277	277
Cash in hand and bank balances	2.243	2.243
Total	3.457	3.457
Non-Current liabilities
Loans	429	429
Liabilities towards banks	17	17
Current liabilities
Trade accounts payable	922	922
Liabilities towards banks	1.381	1.381
Other liabilities	564	564
Advance payments received	105	105
Total	3.418	3.418

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2016	at fair value	At amortised cost	Balance sheet item as at
T€	Book value	Book value	31.12.16
Non-current assets
Fixed asset securities		13	13
Current assets
Trade accounts receivable		1215	1,215
Receivables and other assets		236	236
Cash in hand and bank balances		798	798
Assets of discontinued operation	5,493		5,493
Total	5,493	2,262	7,755

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Non-Current liabilities
Loans		429	429
Liabilities towards banks		21	21
Current liabilities
Trade accounts payable		1,183	1,183
Liabilities towards banks		2,154	2,154
Other liabilities		3,718	3,718
Advance payments received		191	191
Total	0	7,696	7,696

7. Significant events and business transactions

The capital was reduced by resolution of the Annual General Meeting on 21 March 2017. Furthermore, the capital was increased by € 1,380 thousand in two capital increases, see No. 10.

8. Unusual circumstances

There were no unusual circumstances affecting the company’s assets, liabilities, equity, profit or loss for the period or cash flows in the period under review.

9. Estimates

There were no changes in estimated amounts in the period under review.

10. Changes in shares

SLEEPZ AG carried out a capital reduction and two capital increases in the reporting period. The capital was reduced by a resolution of the Annual General Meeting of March 21, 2017 in a ratio of 3:1 from € 20,701,174.00 to

€ 6,900,391.00. In May 2017, capital was increased by € 690,000.00 to € 7,590,391.00 and in June 2017 by € 690,000.00 to € 8,280,391.00. The new shares are entitled to share in profits as of 01.01.2016.

11. Dividends

No dividends were paid in the period under review.

12. Segment information

SLEEPZ AG generated its revenue primarily from the sale of products in the area of “sleeping” in Germany. The company’s revenues and earnings were not broken down into segments.

13. Contingent liabilities and contingent assets

There were no changes in contingent liabilities or contingent assets in the period under review.

14. Responsibility statement

To the best of my knowledge, and in accordance with the applicable reporting principles for interim financial reporting, the condensed interim financial statements give a true and fair value of the assets, liabilities, financial position and profit or loss of the company, and the management report includes a fair review of the development and performance of the business and the position of the company, together with a description of the principal opportunities and risks associated with the expected development of the company in the remainder of the business year.

The Executive Board