UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
FOR
THE QUARTERLY PERIOD ENDED
OR
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
Commission
File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s
telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ☒ | |
| Non-accelerated filer | ☐ | Smaller reporting company | |
| Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of May 9, 2023,
PURPLE INNOVATION, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
| Page | ||||
| Part I. | Financial Information | 1 | ||
| Item 1. | Financial Statements (Unaudited): | 1 | ||
| Condensed Consolidated Balance Sheets | 1 | |||
| Condensed Consolidated Statements of Operations | 2 | |||
| Condensed Consolidated Statements of Stockholders’ Equity | 3 | |||
| Condensed Consolidated Statements of Cash Flows | 4 | |||
| Notes to Condensed Consolidated Financial Statements | 5 | |||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 29 | ||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 39 | ||
| Item 4. | Controls and Procedures | 39 | ||
| Part II. | Other Information | 40 | ||
| Item 1. | Legal Proceedings | 40 | ||
| Item 1A. | Risk Factors | 40 | ||
| Item 6. | Exhibits | 42 | ||
| Signatures | 43 | |||
i
In this Quarterly Report on Form 10-Q, references to “dollars” and “$” are to United States (“U.S.”) dollars.
We have several trademarks registered with the U.S. Patent and Trademark Office (USPTO), including EquaPressure®, WonderGel® and EquaGel® (for cushions), and Purple®, No Pressure®, Hyper-Elastic Polymer®, Somnigel®, Gel Matrix®, Matrix®, Gelee®, Ascent®, Softstretch®, Purple Powerbase®, Sleep Genius®, Firm and Soft®, Intellipillow®, and Intellibed® (for plasticized elastomeric gel and certain types of products including mattresses, seat cushions, bed linen, mattress foundation and others). Additional registered trademarks include, but are not limited to, Purple Grid®, Reinventing Comfort®, Comfort Reinvented®, TwinCloud®, Purple Cloud®, Purple Pillow®, The Purple Mattress®, Purple Hybrid®, Purple Hybrid Premier®, The Purple Mattress®, The Purple Plus®, Gelflex® and registration of the color purple as a trademark (for mattresses, pillows, and seat cushions). Applications are pending for registration of additional trademarks and some of these listed trademarks for additional classes of goods both in the U.S. and internationally. Our Purple, No Pressure and Hyper-Elastic Polymer trademarks are also registered and have applications pending for various classes of goods in numerous foreign jurisdictions, some of which include Australia, Canada, China, Europe, United Kingdom, Japan and Korea. Certain international trademark applications previously resided with EdiZONE, LLC, which is an entity owned by our founders, and were licensed to Purple LLC and we have taken the necessary steps to have those trademarks assigned to Purple LLC upon registration.
We also have a number of common law trademarks, including Sleep Purple, Live BetterÔ, New DayÔ, RestoreÔ, RestorePlusÔ, RestorePremierÔ, RejuvenateÔ, RejuvenatePlusÔ, RejuvenatePremierÔ, Perfectstay™, TempBalance™, Success Happens Overnight™, Overnight Success™, Harmony™, Purple Harmony Pillow™, Harmony Pillow™, Purple +™, Purple Plus™, +™, Find Comfort™, Dreams On Dreams™, Reinventing Sleep™, Gelflex Grid™, Gelflex Grid Plus™, Purple Ascent™, ™, Purple Squishy™, Purple Powerbase Premier™, Purple Powerbase Plus™, Purple Glove™, Eidertech™, Mattress Max™, WonderGel Original™, WonderGel Extreme™, DoubleGel™, DoubleGel Plus™, DoubleGel Ultra™, Roll n’ Go™, Fold N’ Go™, Purple Bed™, Purple Top™, Purple Pillow™, Portable Purple™, Everywhere Purple™, Simply Purple™, Lite Purple™, Royal Purple™, Double Purple™, Deep Purple™, Ultimate Purple™, Purple Back™, EquaGel Straight Comfort™, EquaGel General™, EquaGel Protector™, and EquaGel Adjustable™.
Many of the common law marks have registrations pending with the USPTO and other international jurisdictions. Solely for convenience, we refer to our trademarks in this Quarterly Report without the ™ or ® symbol, but such references are not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights to our trademarks.
In addition, we maintain copyrights, many of which are registered, to past and present versions of purple.com, onpurple.com, equapressure.com, wondergel.com, marketing content, blogs, logos, graphics, videos and other marketing and promotional materials promoting our products.
We protect and enforce our intellectual property rights, including through litigation as necessary.
ii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PURPLE INNOVATION, INC.
Condensed Consolidated Balance Sheets
(unaudited – in thousands, except for par value)
| March 31, 2023 | December 31, 2022 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash, cash equivalents and restricted cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Other long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued sales returns | ||||||||
| Accrued compensation | ||||||||
| Customer prepayments | ||||||||
| Accrued sales and use tax | ||||||||
| Accrued rebates and allowances | ||||||||
| Operating lease obligations – current portion | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Debt | ||||||||
| Operating lease obligations, net of current portion | ||||||||
| Other long-term liabilities, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 14) | ||||||||
| Stockholders’ equity: | ||||||||
| Class A common stock; $ | ||||||||
| Class B common stock; $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity attributable to Purple Innovation, Inc. | ||||||||
| Noncontrolling interest | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
PURPLE INNOVATION, INC.
Condensed Consolidated Statements of Operations
(unaudited – in thousands, except per share amounts)
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenues, net | $ | $ | ||||||
| Cost of revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Marketing and sales | ||||||||
| General and administrative | ||||||||
| Research and development | ||||||||
| Total operating expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other income (expense): | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Other income, net | ||||||||
| Loss on extinguishment of debt | ( | ) | ||||||
| Change in fair value – warrant liabilities | ||||||||
| Total other income (expense), net | ( | ) | ||||||
| Net loss before income taxes | ( | ) | ( | ) | ||||
| Income tax benefit (expense) | ( | ) | ||||||
| Net loss | ( | ) | ( | ) | ||||
| Net loss attributable to noncontrolling interest | ( | ) | ( | ) | ||||
| Net loss attributable to Purple Innovation, Inc. | $ | ( | ) | $ | ( | ) | ||
| Net loss per share: | ||||||||
| Basic | $ | ( | ) | $ | ( | ) | ||
| Diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average common shares outstanding: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
PURPLE INNOVATION, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited – in thousands)
| Class A | Class B | Additional | Total | |||||||||||||||||||||||||||||||||
| Common Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | Noncontrolling | Total | ||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Capital | Deficit | Equity | Interest | Equity | ||||||||||||||||||||||||||||
| Balance – December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | |||||||||||||||||||||||||||||||||||
| Issuance of stock upon underwritten offering, net of costs | — | |||||||||||||||||||||||||||||||||||
| Impact of transactions affecting NCI | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance – March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| Class A | Class B | Additional | Total | |||||||||||||||||||||||||||||||||
| Common Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | Noncontrolling | Total | ||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Capital | Deficit | Equity | Interest | Equity | ||||||||||||||||||||||||||||
| Balance – December 31, 2021 | $ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
| Net loss | — | — | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | |||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | |||||||||||||||||||||||||||||||||||
| Issuance of stock upon underwritten offering, net of costs | — | |||||||||||||||||||||||||||||||||||
| Accrued distributions | — | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Impact of transactions affecting NCI | — | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Balance – March 31, 2022 | $ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
PURPLE INNOVATION, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited – in thousands)
| Three Months Ended March 31, |
||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Non-cash interest | ||||||||
| Change in fair value – warrant liabilities | ( |
) | ||||||
| Loss on extinguishment of debt | ||||||||
| Stock-based compensation | ||||||||
| Deferred income taxes | ( |
) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( |
) | ||||||
| Inventories | ( |
) | ( |
) | ||||
| Prepaid expenses and other assets | ||||||||
| Operating leases, net | ||||||||
| Accounts payable | ( |
) | ||||||
| Accrued sales returns | ( |
) | ( |
) | ||||
| Accrued compensation | ||||||||
| Customer prepayments | ( |
) | ( |
) | ||||
| Accrued rebates and allowances | ( |
) | ( |
) | ||||
| Other accrued liabilities | ( |
) | ||||||
| Net cash used in operating activities | ( |
) | ( |
) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( |
) | ( |
) | ||||
| Investment in intangible assets | ( |
) | ( |
) | ||||
| Net cash used in investing activities | ( |
) | ( |
) | ||||
| Cash flows from financing activities: | ||||||||
| Payments on term loan | ( |
) | ( |
) | ||||
| Payments on revolving line of credit | ( |
) | ||||||
| Payments for debt issuance costs | ( |
) | ( |
) | ||||
| Proceeds from stock offering | ||||||||
| Payments for public offering costs | ( |
) | ( |
) | ||||
| Tax receivable agreement payments | ( |
) | ( |
) | ||||
| Proceeds from exercise of stock options | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( |
) | ||||||
| Cash, cash equivalents and restricted cash, beginning of the year | ||||||||
| Cash, cash equivalents and restricted cash, end of the period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for interest, net of amounts capitalized | $ | ( |
) | $ | ||||
| Cash paid during the period for income taxes | $ | $ | ||||||
| Supplemental schedule of non-cash investing and financing activities: | ||||||||
| Property and equipment included in accounts payable | $ | $ | ||||||
| Accrued distributions | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Organization
The Company’s mission is to help people feel and live better through innovative comfort solutions.
Purple Innovation, Inc. collectively with its subsidiary (the “Company” or “Purple Inc.”) began as a digitally-native vertical brand founded on comfort product innovation with premium offerings, and is now omni-channel. The Company designs and manufactures a variety of innovative, branded and premium comfort products, including mattresses, pillows, cushions, bases, sheets, and other products. The Company markets and sells its products through its e-commerce online channels, retail brick-and-mortar wholesale partners, Purple owned retail showrooms, and third-party online retailers.
The Company was incorporated in Delaware on May 19, 2015 as a special purpose acquisition company under the name of Global Partnership Acquisition Corp (“GPAC”). On February 2, 2018, the Company consummated a transaction structured similar to a reverse recapitalization (the “Business Combination”) pursuant to which the Company acquired a portion of the equity of Purple Innovation, LLC (“Purple LLC”). At the closing of the Business Combination (the “Closing”), the Company became the sole managing member of Purple LLC, and GPAC was renamed Purple Innovation, Inc.
As the sole managing member of Purple LLC, Purple Inc. through its officers and directors is responsible for all operational and administrative decision making and control of the day-to-day business affairs of Purple LLC without the approval of any other member.
On
August 31, 2022, the Company acquired all the issued and outstanding stock of Advanced Comfort Technologies, Inc., dba Intellibed (“Intellibed”)
pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), in which Gelato Merger Sub, Inc., a wholly owned subsidiary
of Purple Inc., merged with and into Intellibed, with Intellibed continuing as a wholly owned subsidiary of Purple Inc. On October 3,
2022, Purple Inc. contributed
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The
condensed consolidated financial statements include the accounts of Purple Inc., its controlled subsidiary Purple LLC, and Intellibed,
Purple LLC’s wholly owned subsidiary, from the date of acquisition. All intercompany balances and transactions have been eliminated
in consolidation. As of March 31, 2023, Purple Inc. held
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting and reflect the financial position, results of operations and cash flows of the Company. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The unaudited condensed consolidated financial statements were prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which were considered of normal recurring nature) considered necessary to present fairly the Company’s financial results. The results of the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2023 or for any other interim period or other future year.
Variable Interest Entities
Purple LLC is a variable interest
entity. The Company determined that it is the primary beneficiary of Purple LLC as it is the sole managing member and has the power to
direct the activities most significant to Purple LLC’s economic performance as well as the obligation to absorb losses and receive
benefits that are potentially significant. At March 31, 2023, Purple Inc. had a
5
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to establish accounting policies and to make estimates and judgments that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The Company regularly makes significant estimates and assumptions including, but not limited to, estimates that affect revenue recognition, accounts receivable and allowance for credit losses, valuation of inventories, sales returns, warranty returns, fair value of assets acquired and liabilities assumed in a business combination, warrant liabilities, stock based compensation, the recognition and measurement of loss contingencies, estimates of current and deferred income taxes, deferred income tax valuation allowances, and amounts associated with the Company’s tax receivable agreement with InnoHold, LLC (“InnoHold”). Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results could differ materially from those estimates.
Recent Accounting Pronouncements
Measurement of Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which was further updated and clarified by the FASB through issuance of additional related ASUs. This guidance replaces the existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost based on expected credit losses. The estimate of expected credit losses requires the incorporation of historical information, current conditions, and reasonable and supportable forecasts. These updates are effective for public companies, excluding Smaller Reporting Companies (“SRC”), for annual periods beginning after December 15, 2019, including interim periods therein. The standard is effective for all other entities for annual periods beginning after December 15, 2022, including interim periods therein. This standard was adopted utilizing a modified retrospective approach. The adoption of this standard on January 1, 2023 did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.
3. Underwritten Offering of Class A Common Stock
In
February 2023, the Company completed an underwritten offering of
4. Acquisition
On August 31, 2022, pursuant to the Merger Agreement, the Company acquired Intellibed, a premium sleep and health wellness company, offering gel-based mattresses scientifically designed for maximum back support, spinal alignment and pressure point relief. The addition of Intellibed is expected to increase product offerings to customers, expand market opportunities, capitalize on synergies of the combined companies, and increase opportunities for innovation. In addition, the acquisition allowed the Company to consolidate ownership of its intellectual property licensed to Intellibed and more fully capitalize on growing demand for products with gel technologies.
The
acquisition date fair value of the consideration transferred for Intellibed was $
| Fair value of Class A common stock issued at closing | $ | |||
| Fair value of Class A common stock held in escrow | ||||
| Fair value of contingent consideration | ||||
| Fair value of effective settlement of preexisting relationships | ||||
| Transaction expenses paid on behalf of Intellibed | ||||
| Due to seller | ||||
| Fair value of total purchase consideration | $ |
6
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The fair value of common stock issued at closing consisted of approximately 8.1 million shares of Class A common stock valued using the acquisition date closing price of $2.86. The fair value of common stock held in escrow consisted of 0.5 million shares of Class A common stock valued using the acquisition date closing price of $2.86. These shares are being held in escrow pending resolution of net working capital adjustments and certain indemnification matters, as described in the Merger Agreement.
Contingent
consideration represents the fair value of
The
fair value of effective settlement of preexisting relationships includes $
The
Company recorded the acquisition based on the fair value of the consideration transferred and then allocated the purchase price
to the identifiable assets acquired and liabilities assumed based on their respective preliminary estimated fair values as of the acquisition
date. Determining the fair value of assets acquired and liabilities assumed required management to use significant judgment and estimates
including the selection of valuation methodologies, estimates of future revenues and cash flows, discount rates, and asset lives, among
other items. While the Company used its best estimates and assumptions as a part of the purchase price allocation process to accurately
value the assets acquired, including intangible assets, and the liabilities assumed at the acquisition date, the Company’s estimates
are inherently uncertain and subject to refinement. Due to the close proximity of the acquisition date to the Company’s reporting
date, the Company recorded the assets acquired and liabilities assumed at their preliminary estimated fair values. As of March 31, 2023,
the Company had not finalized the determination of the working capital adjustments and the fair values allocated to various assets and
liabilities, income tax provision, intangible assets and the residual amount allocated to goodwill. Consequently, during the measurement
period, which could be up to
Based upon the purchase price allocation, the following table summarizes the preliminary fair value of the assets acquired and liabilities assumed at the date of the acquisition (in thousands):
Net tangible assets (liabilities):
| Cash, cash equivalents and restricted cash | $ | |||
| Accounts receivable | ||||
| Inventory | ||||
| Other current assets | ||||
| Property and equipment | ||||
| Operating lease right-of-use assets | ||||
| Other long-term assets | ||||
| Accounts payable | ( | ) | ||
| Other current liabilities | ( | ) | ||
| Operating lease obligations | ( | ) | ||
| Deferred tax liabilities | ( | ) | ||
| Net tangible assets (liabilities) | ||||
| Goodwill | ||||
| Customer relationships | ||||
| Developed technology | ||||
| Net assets acquired and liabilities assumed | $ |
7
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company believes the amount of goodwill resulting from the purchase price allocation is primarily attributable to expected synergies from the assembled workforce, an increase in development capabilities, increased offerings to customers, expanded market opportunities, and enhanced opportunities for growth and innovation. Goodwill is not being amortized but instead is tested for impairment at least annually or more frequently if certain indicators of impairment are present. In the event that goodwill becomes impaired, the Company will record an expense for the amount impaired during the quarter in which the determination is made. The goodwill recorded is not deductible for income tax purposes.
The
two identified definite lived intangible assets, comprised of customer relationships and developed technology, are being amortized over
their estimated useful lives of
The cash, cash equivalents and restricted cash balance acquired included
$
5. Fair Value Measurements
The Company uses the fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:
Level 1—Quoted market prices in active markets for identical assets or liabilities;
Level 2—Significant other observable inputs (i.e., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable, such as interest rate and yield curves, and market-corroborated inputs); and
Level 3—Unobservable inputs in which there is little or no market data, which require the reporting unit to develop its own assumptions.
The classification of fair value measurements within the established three-level hierarchy is based upon the lowest level of input that is significant to the measurements. Financial instruments, although not recorded at fair value on a recurring basis include cash and cash equivalents, receivables, accounts payable and the Company’s debt obligations. The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair value because of the short-term nature of these accounts. The fair value of the Company’s debt instruments is estimated to be face value based on the contractual terms of the debt arrangements and market-based expectations.
8
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The
sponsor warrant liabilities (see Note 12 — Warrant Liabilities for more information) were Level 3 instruments and used internal
models to estimate fair value using certain significant unobservable inputs which required determination of relevant inputs and assumptions.
Accordingly, changes in these unobservable inputs may have had a significant impact on fair value. Such inputs included risk free interest
rate, expected average life, expected dividend yield, and expected volatility. These Level 3 liabilities generally decreased (increased)
in value based upon an increase (decrease) in risk free interest rate and expected dividend yield. Conversely, the fair value of these
Level 3 liabilities generally increased (decreased) in value if the expected average life or expected volatility were to increase
(decrease). In February 2023, the
There
were no sponsor warrants outstanding on March 31, 2023 and the
| (In thousands) | Sponsor Warrants | |||
| Fair value as of December 31, 2021 | $ | |||
| Fair value of warrants exercised | ||||
| Change in valuation inputs(1) | ( | ) | ||
| Fair value as of March 31, 2022 | $ | |||
| (1) |
6. Revenue from Contracts with Customers
The Company markets and sells its products through e-commerce online channels, retail brick-and-mortar wholesale partners, Purple owned retail showrooms, and third-party online retailers. Revenue is recognized when the Company satisfies its performance obligations under the contract which involves transferring the promised products to the customer, subject to shipping terms.
Disaggregated Revenue
The Company classifies revenue into two sales categories: direct-to-consumer (“DTC”) and wholesale. The DTC category is comprised of the e-commerce channel that sells directly to consumers who purchase online and through our contact center, and the Purple owned retail showrooms channel that sells directly to consumers who purchase at a showroom location. The wholesale channel includes all product sales to our retail brick and mortar wholesale partners where consumers make purchases at their retail locations or through their online channels. The Company classifies products into two major types: sleep products and other. Sleep products include mattresses, platforms, adjustable bases, mattress protectors, pillows and sheets. Other products include cushions and various other products.
9
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following tables present the Company’s net revenue disaggregated by sales category and product type (in thousands):
| Three Months Ended March 31, | ||||||||
| Sales Category | 2023 | 2022 | ||||||
| DTC | $ | $ | ||||||
| Wholesale | ||||||||
| Revenues, net | $ | $ | ||||||
| Three Months Ended March 31, | ||||||||
| Product Type | 2023 | 2022 | ||||||
| Sleep products | $ | $ | ||||||
| Other | ||||||||
| Revenues, net | $ | $ | ||||||
Contract Balances
Payment
for sale of products through the e-commerce online channel, third-party online retailers, Purple owned retail showrooms and contact center
is collected at point of sale in advance of shipping the products. Amounts received for unshipped products are recorded as customer prepayments.
Customer prepayments totaled $
7. Inventories, Net
Inventories, net consisted of the following (in thousands):
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Inventory obsolescence reserve | ( | ) | ( | ) | ||||
| Inventories, net | $ | $ | ||||||
10
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
8. Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Equipment | $ | $ | ||||||
| Equipment in progress | ||||||||
| Leasehold improvements | ||||||||
| Furniture and fixtures | ||||||||
| Office equipment | ||||||||
| Total property and equipment | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Equipment
in progress reflects equipment, primarily related to mattress manufacturing, which is being constructed and was not in service at March
31, 2023 or December 31, 2022. Interest capitalized on borrowings during the active construction period of major capital projects totaled
$
9. Leases
The Company leases its manufacturing and distribution facilities, corporate
offices, Purple owned retail showrooms and certain equipment under non-cancelable operating leases with various expiration dates through
2036. The Company’s office and manufacturing leases provide for initial lease terms up to
The following table presents the Company’s lease costs (in thousands):
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Operating | $ | $ | ||||||
| Variable | ||||||||
| Short-term | ||||||||
| Total lease costs | $ | $ | ||||||
11
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The
table below reconciles the undiscounted cash flows for each of the first
| 2023 (excluding the three months ended March 31, 2023) (a) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total operating lease payments | ||||
| Less – lease payments representing interest | ( | ) | ||
| Present value of operating lease payments | $ |
| (a) |
As of March 31, 2023 and December
31, 2022, the weighted-average remaining term of operating leases was
The following table provides supplemental information related to the Company’s condensed consolidated statement of cash flows for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash paid for amounts included in present value of operating lease liabilities | $ | $ | ||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | ||||||||
| (b) | Operating cash flows paid for operating leases are included within the change in other assets and liabilities within the Consolidated Statement of Cash Flows offset by non-cash right-of-use asset amortization and lease liability accretion. |
10. Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Warranty accrual – current portion | $ | $ | ||||||
| Insurance financing | $ | |||||||
| Accrued sales tax liability assumed in acquisition | ||||||||
| Accrued affiliate marketing | ||||||||
| Accrued property taxes | ||||||||
| Tax receivable agreement liability – current portion | ||||||||
| Other | ||||||||
| Total other current liabilities | $ | $ | ||||||
12
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
11. Debt
Debt consisted of the following (in thousands):
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Term loan | $ | $ | ||||||
| Less: unamortized debt issuance costs | ( | ) | ||||||
| Total debt | $ | $ | ||||||
Term Loan and Revolving Line of Credit
On
September 3, 2020, Purple LLC entered into a financing arrangement with KeyBank National Association and a group of financial institutions
(the “2020 Credit Agreement”). The 2020 Credit Agreement provided for a $
Pursuant to a Pledge and Security Agreement between Purple LLC, KeyBank and the Company (the “Security Agreement”), the 2020 Credit Agreement is secured by a perfected first-priority security interest in the assets of Purple LLC and the Company, including a security interest in all intellectual property. Also, the Company agreed to an unconditional guaranty of the payment of all obligations and liabilities of Purple LLC under the 2020 Credit Agreement. The Security Agreement contains a pledge, as security for the Company’s guaranty, of all its ownership interest in Purple LLC. The 2020 Credit Agreement also provides for standard events of default, such as for non-payment and failure to perform or observe covenants, and contains standard indemnifications benefitting the lenders.
The 2020 Credit Agreement includes representations, warranties and certain covenants of Purple LLC and the Company. Under the 2020 Credit Agreement, Purple LLC is subject to several affirmative and negative covenants, including covenants regarding dispositions of property, investments, forming or acquiring subsidiaries, business combinations or acquisitions, incurrence of additional indebtedness, and transactions with affiliates, among other customary covenants, subject to certain exceptions. In particular, Purple LLC is (i) subject to annual capital expenditure limits that can be adjusted based on the Company achieving certain net leverage ratio thresholds as provided in the 2020 Credit Agreement, (ii) restricted from incurring additional debt up to certain amounts, subject to limited exceptions, as set forth in the 2020 Credit Agreement, and (iii) maintain minimum consolidated net leverage and fixed charge coverage ratio thresholds at certain measurement dates (as defined in the 2020 Credit Agreement). Purple LLC is also restricted from paying dividends or making other distributions or payments on its capital stock, subject to limited exceptions. If the Company or Purple LLC fail to perform their obligations under these and other covenants, or should any event of default occur, the revolving loan commitments under the 2020 Credit Agreement may be terminated and any outstanding borrowings, together with accrued interest, could be declared immediately due and payable.
13
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The
Company’s operating and financial results for the year ended December 31, 2021 did not satisfy the financial and performance
covenants required under the 2020 Credit Agreement. On February 28, 2022, prior to the covenant compliance certification date, the Company
entered into the first amendment of the 2020 Credit Agreement to avoid a breach of these covenants and potential default. Pursuant to
this amendment, the Company incurred fees and expenses of $
On March 23, 2022, the
Company entered into a second amendment to the 2020 Credit Agreement. This amendment modified the 2020 Credit Agreement to allow Coliseum
Capital Management, LLC, on behalf of its funds, managed accounts and its investment affiliates (individually “CCM” and collectively
“Coliseum”) to acquire
On May 13, 2022 and September 9, 2022, the Company entered into third and fourth amendments, respectively, to the 2020 Credit Agreement. These amendments modified the permitted leases schedule to reflect a change in showroom locations and a new lease for an innovation building. The amendments did not meet the criteria for a modification of existing debt and minimal costs were recorded as general and administrative expense in the condensed consolidated statement of operations.
On
July 14, 2022, the Company received consent under the 2020 Credit Agreement that allowed the Company’s acquisition of Intellibed
to constitute a permitted acquisition under the 2020 Credit Agreement. The Company incurred fees and expenses of $
In
December 2022, the Company made a $
On February 17, 2023, the Company entered into a fifth amendment to
the 2020 Credit Agreement. As a condition of entering into the amendment, the Company repaid the $
14
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
On April 26, 2023, the Company received consent under the 2020 Credit Agreement that allowed the Company’s redemption of Proportional Representation Preferred Linked Stock (“PRPLS”) issued by the Company on February 24, 2023, in an aggregate amount not to exceed $150,000 as agreed by the Company in an April 19, 2023 Cooperation Agreement (the “Cooperation Agreement”) entered into with Coliseum in connection with a complaint filed by Coliseum against the Company, and a waiver of any possible default related to entering into that Cooperation Agreement prior to receiving such consent. (See Note 14—Commitments and Contingencies—Legal Proceedings for information regarding the complaint previously filed by Coliseum; Note 15—Related Party Transactions—Coliseum Capital Management, LLC for information regarding events leading up to the Company’s issuance of the PRPLS; Note 16—Shareholders’ Equity—Preferred Stock for further information regarding the issuance of the PRPLS; and Note 21—Subsequent Events—Coliseum Cooperation Agreement and Proportional Representation Preferred Linked Stock for further information regarding the terms of the Cooperation Agreement and redemption of the PRPLS.)
On May 10, 2023, the Company entered into a sixth amendment to the 2020 Credit Agreement. This amendment clarified an ambiguity identified in the first sentence of Section 7.07(d), as amended by the fifth amendment, providing that Minimum Consolidated EBITDA as of each of March 31, 2023 and June 30, 2023 pertains to the Consolidated EBITDA for each such fiscal quarter rather than Consolidated EBITDA for the trailing twelve-month period..
Interest
expense under the 2020 Credit Agreement totaled $
12. Warrant Liabilities
The Company issued
In
February 2023, the
There
were no sponsor warrants exercised during the three months ended March 31, 2022. The
The Company determined the fair value of the sponsor warrants using the Black Scholes model with the following assumptions:
| March 31, 2022 | ||||
| Trading price of common stock on measurement date | $ | |||
| Exercise price | $ | |||
| Risk free interest rate | % | |||
| Warrant life in years | ||||
| Expected volatility | % | |||
| Expected dividend yield | ||||
During the three months ended March 31, 2022, the Company recognized a gain of $3.9 million in its condensed consolidated statements of operations related to a decrease in the fair value of the sponsor warrants outstanding at the end of the period.
13. Other Long-Term Liabilities
Other long-term liabilities consist of the following (in thousands):
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Warranty accrual | $ | $ | ||||||
| Asset retirement obligations | ||||||||
| Other | ||||||||
| Total | ||||||||
| Less – current portion of warranty accrual | ( | ) | ( | ) | ||||
| Other long-term liabilities, net of current portion | $ | $ | ||||||
15
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
14. Commitments and Contingencies
Warranty Liabilities
The Company provides a limited warranty on most of the products it sells. The estimated warranty costs, which are expensed at the time of sale and included in cost of revenues, are based on the results of product testing, industry and historical trends and warranty claim rates incurred, and are adjusted for any current or expected trends as appropriate. Actual warranty claim costs could differ from these estimates. The Company regularly assesses and adjusts the estimate of accrued warranty claims by updating claims rates for actual trends and projected claim costs. The Company classifies estimated warranty costs expected to be paid beyond a year as a long-term liability.
The Company had the following activity for warranty liabilities (in thousands):
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Balance at beginning of period | $ | $ | ||||||
| Additions charged to expense for current period sales | ||||||||
| Deduction from reserves for current period claims | ( | ) | ( | ) | ||||
| Balance at end of period | $ | $ | ||||||
Required Member Distributions
Prior
to the Business Combination and pursuant to the then applicable First Amended and Restated Limited Liability Company Agreement (the “First
Purple LLC Agreement”), Purple LLC was required to distribute to its members an amount equal to
Subscription Agreement and Preemptive Rights
In
February 2018, in connection with the Business Combination, the Company entered into a subscription agreement with Coliseum Capital
Partners (“CCP”) and Blackwell Partners LLC – Series A (“Blackwell”), pursuant to which CCP and Blackwell
agreed to purchase from the Company an aggregate of
Rights of Securities Holders
The holders of certain warrants exercisable into Class A common stock, including CCP, Blackwell and CDF, were entitled to registration rights pursuant to certain registration rights agreements of the Company as of the Business Combination date. In March 2018, the Company filed a registration statement registering these warrants (and any shares of Class A common stock issuable upon the exercise of the warrants), and certain unregistered shares of Class A common stock. The registration statement was declared effective on April 3, 2018. Under the Registration Rights Agreement dated February 2, 2018 between the Company and CCP, Blackwell, and CDF (the “Coliseum Investors”), the Coliseum Investors have the right to make written demands for up to three registrations of certain warrants and shares of Class A common stock held by them, including in underwritten offerings. In an underwritten offering of such warrants and shares of Class A common stock by the Coliseum Investors, the Company will pay underwriting discounts and commissions and certain expenses incurred by the Coliseum Investors. In May, 2021, the Coliseum Investors exercised the first of their three written demands for registration in an underwritten offering.
16
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Stockholder Rights Agreement
On September 25, 2022, with the authorization of the Board, a special committee of independent and disinterested directors of the Company (the “Special Committee”) approved the adoption of a limited-duration stockholder rights agreement (the “Rights Agreement”) with an expiration date of September 25, 2023. The Special Committee adopted the Rights Agreement in response to Coliseum’s substantial increase in ownership of the Company’s shares over the last year and the Special Committee’s desire to have the time and flexibility necessary to evaluate an unsolicited and non-binding proposal from Coliseum to acquire the outstanding common stock of the Company not already beneficially owned by Coliseum (See Note 15—Related Party Transactions— Coliseum Capital Management, LLC). The Rights Agreement was intended to enable the Company’s shareholders to realize the full value of their investment and to guard against any attempts to gain control of the Company without paying all shareholders an appropriate control premium. The Rights Agreement applied equally to all current and future shareholders and did not deter any offer or preclude the Special Committee from considering an offer that was fair and otherwise in the best interest of the Company’s shareholders.
Upon
adopting the Rights Agreement,
The initial issuance of the Rights as a dividend had no financial accounting or reporting impact. The fair value of the Rights was nominal since the Rights were not exercisable when issued and no value was attributable to them. Additionally, the Rights did not meet the definition of a liability under GAAP and was therefore not accounted for as a long-term obligation. Accordingly, the Rights Agreement had no impact on the Company’s consolidated financial statements. See Note 21—Subsequent Events for information regarding dissolution of the Rights Agreement.
Purple LLC Class B Unit Exchange Right
On February 2, 2018, in connection with the closing of the Business Combination, the Company entered into an exchange agreement with Purple LLC and InnoHold and Class B Unit holders who become a party thereto (the “Exchange Agreement”), which provides for the exchange of Purple LLC Class B units and shares of Class B common stock (together with an equal number of Class B units, the “Paired Securities”) for, at the Company’s option, either (A) shares of Class A common stock at an initial exchange ratio equal to one Paired Security for one share of Class A common stock or (B) a cash payment equal to the product of the average of the volume-weighted closing price of one share of Class A common stock for the ten trading days immediately prior to the date InnoHold or other Class B unit holders deliver a notice of exchange multiplied by the number of Paired Securities being exchanged. In December 2018, InnoHold distributed Paired Securities to Terry Pearce and Tony Pearce who agreed to become parties to the Exchange Agreement. In June 2019, InnoHold distributed Paired Securities to certain current and former employees who also agreed to become parties to the exchange agreement. Holders of Class B units may elect to exchange all or any portion of their Paired Securities as described above by delivering a notice to Purple LLC.
In certain cases, adjustments to the exchange ratio will occur in case of a split, reclassification, recapitalization, subdivision or similar transaction of or relating to the Class B units or the shares of Class A common stock and Class B common stock or a transaction in which the Class A common stock is exchanged or converted into other securities or property. The exchange ratio will also adjust in certain circumstances when the Company acquires Class B units other than through an exchange for its shares of Class A common stock.
The right of a holder of Paired Securities to exchange may be limited by the Company if it reasonably determines in good faith that such restrictions are required by applicable law (including securities laws), such exchange would not be permitted under other agreements of such holder with the Company or its subsidiaries, including the Third Purple LLC Agreement, or if such exchange would cause Purple LLC to be treated as a “publicly traded partnership” under applicable tax laws.
The Company and each holder of Paired Securities shall bear its own expense regarding the exchange except that the Company shall be responsible for transfer taxes, stamp taxes and similar duties.
There were no Paired Securities exchanged for Class A common stock during the three months ended March 31, 2023 and 2022.
17
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Maintenance of One-to-One Ratios
The Third Purple LLC Agreement includes provisions intended to ensure that the Company at all times maintains a one-to-one ratio between (a) (i) the number of outstanding shares of Class A common stock and (ii) the number of Class A units owned by the Company (subject to certain exceptions for certain rights to purchase equity securities of the Company under a “poison pill” or similar stockholder rights plan, if any, certain convertible or exchangeable securities issued under the Company’s equity compensation plan and certain equity securities issued pursuant to the Company’s equity compensation plan (other than a stock option plan) that are restricted or have not vested thereunder) and (b) (i) the number of other outstanding equity securities of the Company (including the warrants exercisable for shares of Class A common stock) and (ii) the number of corresponding outstanding equity securities of Purple LLC. These provisions are intended to result in non-controlling interest holders having a voting interest in the Company that is identical to their economic interest in Purple LLC.
Non-Income Related Taxes
The U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc., No.17-494, reversed a longstanding precedent that remote sellers are not required to collect state and local sales taxes. The Company cannot predict the effect of these and other attempts to impose sales, income or other taxes on e-commerce. The Company currently collects and reports on sales tax in all states in which it does business. However, the application of existing, new or revised taxes on the Company’s business, in particular, sales taxes, VAT and similar taxes would likely increase the cost of doing business online and decrease the attractiveness of selling products over the internet. The application of these taxes on the Company’s business could also create significant increases in internal costs necessary to capture data and collect and remit taxes. There have been, and will continue to be, substantial ongoing costs associated with complying with the various indirect tax requirements in the numerous markets in which the Company conducts or will conduct business.
Legal Proceedings
On September 20, 2020, Purple
LLC filed a complaint in the U.S. Court of International Trade seeking to recover approximately $
18
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
On October 13, 2020, Purple
LLC filed a lawsuit against Responsive Surface Technology, LLC and its parent company, PatienTech, LLC (collectively referred to as “ReST”)
in the U.S. District Court for the District of Utah. The lawsuit arises from ReST’s multiple breaches of its obligations to Purple
LLC, including infringing upon Purple LLC’s trademarks, patents, and trade dress, among other claims. Purple seeks monetary damages,
injunctive relief, and declaratory judgment based on certain conduct by ReST (“Case I”). On October 21, 2020, shortly after
the complaint was filed in Case I, ReST filed a retaliatory lawsuit against Purple LLC, and some of the Company’s board members,
Gary DiCamillo, Adam Gray, Joseph Megibow, Terry Pearce, and Tony Pearce, also in the United States District Court for the District of
Utah (“Case II”). Subsequently, the two cases were consolidated into one. Case II (now combined with Case I) involves many
of the same facts and transactions as Case I. ReST subsequently filed a motion to compel arbitration of the claims in Case I. Purple LLC
opposed the motion to compel arbitration, arguing that ReST waived any rights to arbitration and that all the claims in both cases should
stay in the courts. However, the Court granted ReST’s motion to compel arbitration, and stayed the proceedings in the United States
District Court for the District of Utah. Additionally, the Court ruled that ReST’s claims against the Company’s board members
were not subject to arbitration, and the Court stayed ReST’s claims against those individuals. Pursuant to the Court’s
order, Purple LLC filed a demand for arbitration with the American Arbitration Association (the “AAA”) on September 1, 2021.
ReST filed its counterclaim with the AAA on September 21, 2021. Currently, the parties are nearing the end of the fact discovery
phase of the arbitration. The parties have taken several depositions and engaged in written discovery. The arbitration hearing
is scheduled to begin on July 31, 2023. Purple LLC seeks over $
On May 3, 2022, Purple LLC
filed a complaint against Photon Interactive UK Limited (“Photon”) in the U.S. District Court for the District of Delaware
regarding a Master Professional Services Agreement with Photon dated on or around November 1, 2019. Pursuant to the agreement, Photon
was required to rebuild Purple LLC’s website architecture and checkout process. Purple LLC paid Photon $
On August 5, 2022, Purple LLC filed a complaint with the U.S. International Trade Commission (“ITC”) against numerous entities and individuals from the People’s Republic of China and South Korea (“Respondents”) that have been violating Purple LLC’s intellectual property rights related to pillow and seat cushion products. The complaint alleged that the Respondents have been violating 19 U.S.C. § 1337 (“Section 337”) by importing into the United States, selling for importation into the United States, and/or selling in the United States after importation pillow and seat cushion products that infringe Purple LLC’s trade dress rights or otherwise constitute unfair competition, infringe a certain Purple LLC’s design patent, infringe Purple LLC’s trademarks, and/or infringe Purple LLC’s utility patents. The complaint requested at least the following relief: (i) a General Exclusion Order excluding from entry into the United States all pillow and seat cushion products that infringe any asserted intellectual property right; (ii) Limited Exclusion Orders excluding from entry into the United States all pillow and cushion products of the Respondents named in the complaint that infringe any asserted intellectual property right; and (iii) Cease and Desist Orders against the Respondents named in the complaint barring them from marketing, selling, advertising, or distributing infringing products in the United States, including via on-line retailers. On September 6, 2022, the ITC instituted Investigation No. 337-TA-1328 in response to Purple LLC’s complaint. Fact and expert discovery have been completed. Purple LLC has entered into settlement agreements with a number of Respondents. Purple LLC also has voluntarily terminated the Investigation as to a number of Respondents. No actively litigating Respondents remain in the case. Purple LLC also has filed a Motion for Summary Determination seeking, among other things, the imposition of a General Exclusion Order with respect to pillows that infringe an asserted utility patent. Under the current Procedural Schedule for the Investigation, the deadline for the Administrative Law Judge to issue an Initial Determination concerning Purple LLC’s Motion for Summary Determination is June 12, 2023, and the Commission’s Target Date for completion of the Investigation has been set for October 12, 2023.
On September 22, 2022, Purple
LLC filed an action in the U.S. District Court for the District of Utah styled Purple Innovation, LLC v. Bedmate-U Co., Ltd., against
numerous entities and individuals from the People’s Republic of China and South Korea (“Respondents”). The complaint
alleges that the Respondents have
19
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
On December 16, 2022, Terry
and Tony Pearce, Purple’s founders, filed a complaint against Purple Inc. in the Fourth Judicial District Court in the State of
Utah. The Pearces allege that they each entered into employment agreements with Purple LLC in February 2018. The Pearces contend that
certain corporate transactions between May 2019 and June 2020 reduced their “ownership interest and voting power in Purple”
and that, as a result, they should have continued to be paid a salary between August 2020, when they retired from Purple LLC, and December
2021. The Pearces calculate that they are each owed “no less than $
On February 21, 2023, Coliseum filed a complaint against Purple Inc. and several members of the Board in the Delaware Court of Chancery, captioned Coliseum Capital Management, LLC v. Anthos, Case No. 2023-0220-PAF (Del. Ch. Feb. 21, 2023). The complaint alleged that the Company and the named directors authorized an improper dividend of preferred stock in bad faith to impede stockholder voting rights and interfere with Coliseum’s nomination of a competing slate of director candidates ahead of the Company’s 2023 annual meeting of stockholders. Coliseum was seeking: (1) declarations that the authorization of Proportional Representation Preferred Linked Stock violated the Company’s charter and amounted to a breach of the named directors’ fiduciary duties; (2) a declaration that the Proportional Representation Preferred Linked Stock is invalid, unenforceable, and void; (3) unspecified damages resulting from the alleged breach of duties; and (4) an award of costs and expenses incurred in pursuing the action. The parties agreed to hold an expedited trial on Coliseum’s claims that would have resulted in a resolution of the dispute before the Company’s 2023 annual meeting of stockholders. On April 11, 2023, Coliseum and the Company resolved the litigation by entering into a binding memorandum of understanding in which the parties agreed to work together to prepare and enter into a formalized cooperation agreement. The Cooperation Agreement that embodied those material terms was signed by both parties on April 19, 2023 and became effective on April 27, 2023. See Note 21—Subsequent Events—Coliseum Cooperation Agreement for further discussion of the provisions of the cooperation agreement.
On April 3, 2023, InnoHold,
LLC, Terry Pearce, and Tony Pearce (collectively, the “InnoHold Parties”) filed a complaint against Purple LLC in the Delaware
Court of Chancery, captioned InnoHold, LLC et al. v. Purple Innovation, LLC, Case No. 2023-0393-PAF (Del. Ch. Apr. 3, 2023).
The complaint alleges that Purple LLC breached the Second Amended and Restated Limited Liability Company Agreement of Purple Innovation,
LLC, dated as of February 2, 2018 (the “LLC Agreement”), and the implied covenant of good faith and fair dealing contained
therein by failing to pay the full amount of tax distributions owed under the LLC Agreement. The complaint also asserts a claim
for indemnification under the LLC Agreement. The InnoHold Parties seek damages of approximately $
The Company is from time to time involved in various other claims, legal proceedings and complaints arising in the ordinary course of business. The Company does not believe that adverse decisions in any such pending or threatened proceedings, or any amount that the Company might be required to pay by reason thereof, would have a material adverse effect on the financial condition or future results of the Company.
15. Related Party Transactions
The Company had various transactions with entities or individuals which are considered related parties.
Coliseum Capital Management, LLC
Immediately following the Business Combination, Adam Gray was appointed to the Company’s Board. Mr. Gray is a manager of Coliseum Capital, LLC, which is the general partner of CCP and CDF, and he is also a managing partner of CCM, which is the investment manager of Blackwell and also manages investment funds and accounts. Mr. Gray has voting and dispositive control over securities held by CCP, CDF and Blackwell which were also Lenders under the Amended and Restated Credit Agreement. See Note 14—Commitments and Contingencies—Subscription Agreement and Preemptive Rights for further discussion.
On September 17, 2022, the
Company received an unsolicited and non-binding proposal from Coliseum on behalf of certain investment funds and accounts to acquire the
remaining outstanding common stock of the Company not already beneficially owned by Coliseum for $
20
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
On February 14, 2023, the
Company declared a dividend of one new PRPLS for each
Purple Founder Entities
TNT Holdings, LLC (herein “TNT Holdings”), EdiZONE, LLC, (herein “EdiZONE”) an entity wholly owned by TNT Holdings, and InnoHold (collectively the “Purple Founder Entities”) were entities under common control with Purple LLC prior to the Business Combination. TNT Holdings and InnoHold are majority owned and controlled by Terry Pearce and Tony Pearce (the “Purple Founders”), who were appointed to the Company’s Board following the Business Combination. InnoHold was a majority shareholder of the Company until it sold a portion of its interests in a secondary public offering in May 2020 and the remainder of its interests in a secondary public offering in September 2020. The Purple Founders also resigned as employees of Purple LLC and retired from the Company’s Board in August 2020.
TNT Holdings owned the Alpine
facility Purple LLC has been leasing since 2010, and the Purple Founders informed Purple LLC that TNT Holdings recently transferred ownership
to 123E LLC, an entity controlled by the Purple Founders. Effective as of October 31, 2017, Purple LLC entered into an Amended and Restated
Lease Agreement with TNT Holdings. The Company determined that neither TNT Holdings nor 123E LLC are a VIE as neither the Company nor
Purple LLC hold any explicit or implicit variable interest in TNT Holdings or 123E LLC and do not have a controlling financial interest
in TNT Holdings or 123E LLC. Purple LLC incurred $
16. Stockholders’ Equity
Class A Common Stock
The
Company has
21
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Class B Common Stock
The Company has
In
connection with the Business Combination, approximately
Preferred Stock
The Company has
Sponsor Warrants
There
were
Noncontrolling Interest
Noncontrolling interest (“NCI”)
is the membership interest in Purple LLC held by holders other than the Company. At March 31, 2023 and December 31, 2022, the combined
NCI percentage in Purple LLC was
22
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
17. Income Taxes
The Company’s sole material asset is Purple LLC, which is treated as a partnership for U.S. federal income tax purposes and for purposes of certain state and local income taxes. Purple LLC’s net taxable income and any related tax credits are passed through to its members and are included in the members’ tax returns, even though such net taxable income or tax credits may not have actually been distributed. While the Company consolidates Purple LLC for financial reporting purposes, the Company will be taxed on its share of earnings of Purple LLC not attributed to the noncontrolling interest holders, which will continue to bear their share of income tax on its allocable earnings of Purple LLC. The income tax burden on the earnings taxed to the noncontrolling interest holders is not reported by the Company in its consolidated financial statements under GAAP.
The Company reported income tax
expense related to various state taxes of $
In
connection with the Business Combination, the Company entered into a tax receivable agreement with InnoHold, which provides for the payment
by the Company to InnoHold of
As noncontrolling interest
holders exercise their right to exchange or cause Purple LLC to redeem all or a portion of their Class B units, a tax receivable agreement
liability may be recorded based on
23
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The estimation of liability under the tax receivable agreement is by
its nature imprecise and subject to significant assumptions regarding the amount and timing of future taxable income. As of March 31,
2023, the Company estimated that if all the remaining
The effects of uncertain tax positions are recognized in the consolidated financial statements if these positions meet a “more-likely-than-not” threshold. For those uncertain tax positions that are recognized in the consolidated financial statements, liabilities are established to reflect the portion of those positions it cannot conclude “more-likely-than-not” to be realized upon ultimate settlement. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. Accrued interest and penalties would be included on the related tax liability line in the consolidated balance sheet. As of March 31, 2023, no material uncertain tax positions were recognized as liabilities in the condensed consolidated financial statements.
18. Net Loss Per Common Share
Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of Class A stock outstanding during each period. Diluted net income (loss) per share reflects the weighted-average number of common shares outstanding during the period used in the basic net income (loss) computation plus the effect of common stock equivalents that are dilutive.
24
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table sets forth the calculation of basic and diluted weighted average shares outstanding and net loss per share for the periods presented (in thousands, except per share amounts):
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Numerator: | ||||||||
| Net loss attributable to Purple Innovation, Inc. – basic | $ | ( | ) | $ | ( | ) | ||
| Less – net loss attributed to noncontrolling interest | ( | ) | ( | ) | ||||
| Net loss attributable to Purple Innovation, Inc. – diluted | $ | ( | ) | $ | ( | ) | ||
| Denominator: | ||||||||
| Weighted average shares—basic | ||||||||
| Add – dilutive effect of Class B shares | ||||||||
| Weighted average shares—diluted | ||||||||
| Net loss per common share: | ||||||||
| Basic | $ | ( | ) | $ | ( | ) | ||
| Diluted | $ | ( | ) | $ | ( | ) | ||
For
the three months ended March 31, 2023, the Company excluded
19. Equity Compensation Plans
2017 Equity Incentive Plan
The
Purple Innovation, Inc. 2017 Equity Incentive Plan (the “2017 Incentive Plan”) provides for grants of stock options, stock
appreciation rights, restricted stock units and other stock-based awards. Directors, officers and other employees and subsidiaries and
affiliates, as well as others performing consulting or advisory services for the Company and its subsidiaries, will be eligible for grants
under the 2017 Incentive Plan. As of March 31, 2023, an aggregate of
Amended and Restated Grant Agreements
On
March 15, 2023, in accordance with the 2017 Incentive Plan, the Company entered into amended and restated grant agreements relating to
stock options and restricted stock unit awards previously granted to the Company’s chief executive officer in March 2022 and June
2022. The amended agreements revised the vesting schedule of the awards included in each grant. These agreements provided that
Employee Stock Options
The following table summarizes the Company’s total stock option activity for the three months ended March 31, 2023:
Options | Weighted | Weighted Term
in | Intrinsic | |||||||||||||
| Options outstanding as of January 1, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Forfeited/cancelled | ( | ) | ||||||||||||||
| Options outstanding as of March 31, 2023 | $ | $ | ||||||||||||||
25
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Outstanding and exercisable stock options as of March 31, 2023 are as follows:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
| Exercise Prices | Number of Options Outstanding (in thousands) | Weighted Average Remaining Life (Years) | Number of Options Exercisable (in thousands) | Weighted Average Remaining Life (Years) | Intrinsic Value (in thousands) | |||||||||||||||||
| $ | $ | |||||||||||||||||||||
The following table summarizes the Company’s unvested stock option activity for the three months ended March 31, 2023:
| Options (in thousands) | Weighted Average Grant Date Fair Value | |||||||
| Nonvested options as of January 1, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Nonvested options as of March 31, 2023 | $ | |||||||
The
estimated fair value of Company stock options is amortized over the options vesting period on a straight-line basis. For the three months
ended March 31, 2023 and 2022, the Company recognized stock option expense of $
As
of March 31, 2023, outstanding stock options had $
Employee Restricted Stock Units
The following table summarizes the Company’s restricted stock unit activity for the three months ended March 31, 2023:
| Number Outstanding (in thousands) | Weighted Average Grant Date Fair Value | |||||||
| Nonvested restricted stock units as of January 1, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Nonvested restricted stock units as of March 31, 2023 | $ | |||||||
The
Company recorded restricted stock unit expense of $
As
of March 31, 2023, outstanding restricted stock units had $
26
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Aggregate Non-Cash Stock-Based Compensation
The Company has accounted for all stock-based compensation under the provisions of ASC 718 Compensation—Stock Compensation. This standard requires the Company to record a non-cash expense associated with the fair value of stock-based compensation over the requisite service period.
The following table summarizes the aggregate non-cash stock-based compensation recognized in the statement of operations for stock awards, employee stock options and employee restricted stock units (in thousands):
| Three
Months Ended March 31, |
||||||||
| 2023 | 2022 | |||||||
| Cost of revenues | $ | $ | ||||||
| Marketing and sales | ( |
) | ||||||
| General and administrative | ||||||||
| Research and development | ||||||||
| Total non-cash stock-based compensation | $ | $ | ||||||
20. Employee Retirement Plan
In
July 2018 the Company established a 401(k) plan that qualifies as a deferred compensation arrangement under Section 401 of the IRS
Code. All eligible employees over the age of 18 and with 4 months’ service are eligible to participate in the plan.
21. Subsequent Events
InnoHold Litigation Matter
On
April 3, 2023, InnoHold, LLC, Terry Pearce, and Tony Pearce (collectively, the “InnoHold Parties”) filed a complaint
against Purple LLC in the Delaware Court of Chancery, captioned InnoHold, LLC et al. v. Purple Innovation, LLC, Case No. 2023-0393-PAF
(Del. Ch. Apr. 3, 2023). The complaint alleges that Purple LLC breached the Second Amended and Restated Limited Liability Company
Agreement of Purple Innovation, LLC, dated as of February 2, 2018 (the “LLC Agreement”), and the implied covenant of good
faith and fair dealing contained therein by failing to pay the full amount of tax distributions owed under the LLC Agreement. The
complaint also asserts a claim for indemnification under the LLC Agreement. The InnoHold Parties seek damages of approximately $
Coliseum Cooperation Agreement
On April 19, 2023, the Company entered into a Cooperation Agreement with Coliseum in connection with the previously disclosed complaint (See Note 14—Commitments and Contingencies—Legal Proceedings for information regarding the complaint previously filed by Coliseum). The Cooperation Agreement became effective April 27, 2023, providing for the following :
| ● | The size of the Board was increased from seven directors to eight directors. | |
| ● | The Company amended and restated the Company’s Second Amended and Restated Bylaws to include references to the Company’s Lead Independent Director Charter. | |
| ● | Current Board member and Coliseum managing partner Adam Gray was appointed Chairman of the Board. | |
| ● | Current Board member Gary DiCamillo continues to serve as Lead Independent Director and was appointed chair of the Nomination and Governance Committee. | |
| ● | Paul Zepf and Pano Anthos resigned as directors of the Company. | |
| ● | The Board appointed S. Hoby Darling, R. Carter Pate, and Erika Serow to fill the vacancies created by increasing the size of the board and the resignations of Mr. Zepf and Mr. Anthos. | |
| ● | Scott Peterson, who is a stockholder and has served as Board Observer since the Company’s acquisition of Intellibed, will be a nominee on the Board’s slate of directors at the 2023 Annual Meeting in place of Dawn Zier, who previously announced her decision not to stand for re-election. | |
| ● | Other than as described above with respect to Dawn Zier, the Board will nominate all incumbent directors for election at the Company’s annual meetings of stockholders to be held in 2023 and 2024. | |
| ● | The Company amended its Corporate Governance Guidelines for Operation of the Board of Directors and adopted a Lead Independent Director Charter to provide for the responsibilities of the Lead Independent Director. |
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PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
| ● | The Company terminated the stockholder rights agreement it adopted on September 25, 2022 and agreed not to adopt a new stockholder rights agreement prior to the termination of the Cooperation Agreement without Coliseum’s prior consent. | |
| ● | The Company redeemed all outstanding shares of PRPLS and agreed not to issue any similar security or take any other action prior to the termination of the Cooperation Agreement that would change the stockholder voting standards from those in effect prior to the issuance of the PRPLS. The PRPLS redemption payment record date was as of April 28, 2023. |
| ● | The Company will reimburse Coliseum for all out-of-pocket fees, costs, and expenses incurred in connection with the complaint, provided that such an amount shall not exceed $ | |
| ● | The Company terminated the Special Committee. | |
| ● | Coliseum dismissed its litigation against the Company. | |
| ● | At the 2023 and 2024 annual meetings of stockholders, Coliseum will cause all of the common stock that Coliseum or any of its affiliates has the direct or indirect right to vote as of the applicable record date, to be present in person or by proxy for quorum purposes and to be voted (i) in favor of each of the candidates for election on the Company’s slate of nominees for election to the Board, (ii) against any stockholder nominations for any other directors, and (iii) against any proposals or resolutions to remove any member of the Board other than for cause. | |
| ● | Coliseum agreed to be bound by customary standstill restrictions, including, among others, agreements not to acquire additional shares of the Company’s securities that would cause Coliseum’s ownership of Voting Securities to exceed | |
| ● | Coliseum agreed to condition any proposal from it or any of its affiliates to acquire the Company or all or substantially all of the outstanding stock of the Company held by stockholders unaffiliated with Coliseum on (i) such transaction being negotiated by, and subject to the approval of, a special committee of directors of the Board who are independent with respect to Coliseum and disinterested under Delaware law and (ii) a nonwaivable condition that such transaction be approved by the affirmative vote of the holders of a majority of the Company’s outstanding common stock not beneficially owned by Coliseum or its affiliates or other parties with a material conflict of interest in such transaction. | |
| ● | The Cooperation Agreement shall terminate on the day following the date on which the 2024 annual meeting of stockholders is held. |
2020 Credit Agreement
On April 26, 2023, the Company
received consent under the 2020 Credit Agreement that allowed the Company’s redemption of PRPLS in an aggregate amount not to exceed
$
On May 10, 2023, the Company entered into a sixth amendment to the 2020 Credit Agreement. This amendment clarified an ambiguity identified in the first sentence of Section 7.07(d), as amended by the fifth amendment, providing that Minimum Consolidated EBITDA as of each of March 31, 2023 and June 30, 2023 pertains to the Consolidated EBITDA for each such fiscal quarter rather than Consolidated EBITDA for the trailing twelve-month period.
Stockholder Rights Agreement
On April 27, 2023, pursuant to the Cooperation Agreement discussed above, the Company and Pacific Stock Transfer Company entered into the First Amendment to the Stockholder Rights Agreement (the “Amendment”). The Amendment changed the final expiration time of the Stockholder Rights Agreement from September 25, 2023 to April 27, 2023. With this, the Rights expired pursuant to the Stockholder Rights Agreement on April 27, 2023. As a result, all shares of preferred stock previously designated as Series A Junior Participating Preferred Stock were eliminated and returned to the status of authorized but unissued shares of preferred stock, without designation.
Proportional Representation Preferred Linked Stock
On April 27, 2023, pursuant to the Cooperation Agreement and following the consent and waiver under the 2020 Credit Agreement discussed above, the Company redeemed all shares of the Company’s PRPLS outstanding as of April 27, 2023. On the same date, the Company filed with the Secretary of State for the State of Delaware a Certificate of Elimination eliminating from its Second Amended and Restated Certificate of Incorporation, as amended, the designation of certain shares of its preferred stock as PRPLS. As a result, all shares of preferred stock previously designated as PRPLS were eliminated and returned to the status of authorized but unissued shares of preferred stock, without designation.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to provide a more comprehensive review of the operating results and financial condition of Purple Innovation, Inc. than can be obtained from reading the Unaudited Condensed Consolidated Financial Statements alone. The discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and the notes thereto included in “Part I. Item 1. Financial Statements.”
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that represent our current expectations and beliefs. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws. In some cases, you can identify these statements by forward-looking words such as “believe,” “expect,” “project,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “will,” “would,” “could,” “may,” “might,” the negative of these words and other similar words.
All forward-looking statements included in this Quarterly Report are made only as of the date thereof. It is routine for our internal projections and expectations to change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end of the next quarter or year. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses (including the discussion under the heading “Outlook for Growth”), and other characterizations of future events or circumstances are forward-looking statements.
We caution and advise readers that these statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those included in the “Risk Factors” section of this Quarterly Report and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 22, 2023, as amended on May 1, 2023. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements and investors are cautioned not to place undue reliance on any such statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.
Overview of Our Business
Our mission is to help people feel and live better through innovative comfort solutions.
We began as a digitally-native vertical brand founded on comfort product innovation with premium offerings, and are now omni-channel. We design and manufacture a variety of innovative, branded and premium comfort products, including mattresses, pillows, cushions, frames, sheets, duvets, duvet covers, and other products. Our products are the result of over 30 years of innovation and investment in proprietary and patented comfort technologies and the development of our own manufacturing processes. Our proprietary Hyper-Elastic Polymer gel technology underpins many of our comfort products and provides a range of benefits that differentiate our offerings from other competitors’ products. We market and sell our products directly to consumers through our e-commerce and Purple owned retail showroom channels (collectively “DTC”), online marketplaces and retail wholesale partners.
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Organization
Our business consists of Purple Inc. and its consolidated subsidiary, Purple LLC. Purple Inc. was incorporated in Delaware on May 19, 2015 as a special purpose acquisition company under the name of GPAC. On February 2, 2018, Purple Inc. consummated a transaction structured similar to a reverse recapitalization pursuant to which Purple Inc. acquired an equity interest in Purple LLC as holder of all Class A units and became its sole managing member. As the sole managing member of Purple LLC, Purple Inc., through its officers and directors, is responsible for all operational and administrative decision making and control of the day-to-day business affairs of Purple LLC without the approval of any other member. At March 31, 2023, Purple Inc. had a 99.6% economic interest in Purple LLC while Class B unit holders had the remaining 0.4%.
On August 31, 2022, the Company acquired all the issued and outstanding stock of Intellibed pursuant to the Merger Agreement in which Gelato Merger Sub, Inc., a wholly owned subsidiary of Purple Inc., merged with and into Intellibed, with Intellibed continuing as a wholly owned subsidiary of Purple Inc. On October 3, 2022, Purple Inc. contributed 100% of the membership interest in Intellibed to Purple LLC and Intellibed became a wholly owned subsidiary of Purple LLC. For further discussion see Note 4 — Acquisition.
Executive Summary – Results of Operations
Net revenues decreased 23.6% to $109.4 million for the three months ended March 31, 2023 compared to $143.2 million for the three months ended March 31, 2022. This decrease was primarily due to continued softening demand for home related products as consumer spending patterns shift more towards services and experiences, the negative effect of inflationary pressures on consumer discretionary spending, and our intentional reduction in advertising spend. This decrease was also due in part to wholesale demand for our legacy mattress models being negatively impacted by the upcoming launch of our new premium and luxury product lineup in the second quarter of 2023.
Gross profit decreased 16.3% to $43.2 million for the three months ended March 31, 2023 compared to $51.6 million for the three months ended March 31, 2022 due primarily to the decrease in sales volume. The gross profit percentage in 2023 was 39.5% as compared to 36.1% in 2022. Our gross profit percentage in the prior year was adversely impacted by elevated levels of materials, labor and freight costs. In the first quarter of 2023, we benefited from our efficiency and cost reduction initiatives, including greater balancing of production and fulfillment operations between facilities, that were initiated in the first half of fiscal 2022 and became fully impactful during the second half of that year.
Operating expenses decreased 6.8% to $65.2 million for the three months ended March 31, 2023 compared to $70.0 million for the three months ended March 31, 2022. This decrease primarily reflected a $12.0 million reduction in advertising spend due to the intentional reduction to improve marketing efficiency, stabilize profitability and align spending with current demand levels. Approximately $3.0 million in launch related expenses were shifted into the second quarter. The decrease in advertising spending was offset in part by $5.9 million of non-recurring legal and professional expenses incurred by the Board’s Special Committee.
Other expense totaled $1.3 million for the three months ended March 31, 2023 compared to other income of $2.9 million for the three months ended March 31, 2022. Other expense in 2023 included a $1.2 million loss on extinguishment of the Company’s term loan during the quarter. Other income in 2022 primarily reflected a $3.9 million gain related to a decrease in the fair value of the sponsor warrants outstanding at the end of March 31, 2022.
Net loss increased $9.8 million to $23.3 million for the three months ended March 31, 2023 compared to $13.5 million for the three months ended March 31, 2022. The increase in net loss in 2023 was due to an $8.4 million decrease in gross profit due primarily to the decrease in net revenues, a decrease of $6.2 million in other income and income tax benefit partially offset by $4.8 million in reduced operating costs.
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Recent Developments in Our Business
Coliseum Cooperation Agreement
On February 21, 2023, Coliseum filed a complaint against the Company and several members of the Board alleging that the Company and the named directors authorized an improper dividend of preferred stock in bad faith to impede stockholder voting rights and interfered with Coliseum’s nomination of a competing slate of director candidates ahead of the Company’s 2023 annual meeting of stockholders. On April 19, 2023, the Company entered into a Cooperation Agreement with Coliseum in connection with the previously disclosed complaint. The Cooperation Agreement became effective on April 27, 2023 and included the following provisions:
| ● | The size of the Board was increased from seven directors to eight directors. |
| ● | The Company amended and restated the Company’s Second Amended and Restated Bylaws to include references to the Company’s Lead Independent Director Charter. |
| ● | Current Board member and Coliseum managing partner Adam Gray was appointed Chairman of the Board. |
| ● | Current Board member Gary DiCamillo continues to serve as Lead Independent Director and was appointed chair of the Nomination and Governance Committee. |
| ● | Paul Zepf and Pano Anthos resigned as directors of the Company. | |
| ● | The Board appointed S. Hoby Darling, R. Carter Pate, and Erika Serow to fill the vacancies created by increasing the size of the board and the resignations of Mr. Zepf and Mr. Anthos. | |
| ● | Scott Peterson, who is a stockholder and has served as Board Observer since the Company’s acquisition of Intellibed, will be a nominee on the Board’s slate of directors at the 2023 Annual Meeting in place of Dawn Zier, who previously announced her intention not to stand for re-election. | |
| ● | Other than as described above with respect to Dawn Zier, the Board will nominate all incumbent directors for election at the Company’s annual meetings of stockholders to be held in 2023 and 2024. | |
| ● | The Company amended its Corporate Governance Guidelines for Operation of the Board of Directors and adopted a Lead Independent Director Charter to provide for the responsibilities of the Lead Independent Director. | |
| ● | The Company terminated the stockholder rights agreement it adopted on September 25, 2022 and agreed not to adopt a new stockholder rights agreement prior to the termination of the Cooperation Agreement without Coliseum’s prior consent. | |
| ● | The Company redeemed all outstanding shares of PRPLS and agreed not to issue any similar security or take any other action prior to the termination of the Cooperation Agreement that would change the stockholder voting standards from those in effect prior to the issuance of the PRPLS. The PRPLS redemption payment record date will be as of April 28, 2023. | |
| ● | The Company will reimburse Coliseum for all out-of-pocket fees, costs, and expenses incurred in connection with the complaint, provided that such an amount shall not exceed $4 million in the aggregate. | |
| ● | The Company terminated the Special Committee. |
| ● | Coliseum dismissed its litigation against the Company. |
| ● | At the 2023 and 2024 annual meetings of stockholders, Coliseum will cause all of the common stock that Coliseum or any of its affiliates has the direct or indirect right to vote as of the applicable record date, to be present in person or by proxy for quorum purposes and to be voted (i) in favor of each of the candidates for election on the Company’s slate of nominees for election to the Board, (ii) against any stockholder nominations for any other directors, and (iii) against any proposals or resolutions to remove any member of the Board other than for cause. |
| ● | Coliseum agreed to be bound by customary standstill restrictions, including, among others, agreements not to acquire additional shares of the Company’s securities that would cause Coliseum’s ownership of Voting Securities to exceed 44.4% of the total outstanding Common Stock (other than acquisitions directly from the Company), engage in proxy solicitations and related matters, form or join any “group” with respect to shares of the Company, encourage others to pursue a “contested solicitation,” or make any public proposals, subject to certain exceptions. |
| ● | Coliseum agreed to condition any proposal from it or any of its affiliates to acquire the Company or all or substantially all of the outstanding stock of the Company held by stockholders unaffiliated with Coliseum on (i) such transaction being negotiated by, and subject to the approval of, a special committee of directors of the Board who are independent with respect to Coliseum and disinterested under Delaware law and (ii) a nonwaivable condition that such transaction be approved by the affirmative vote of the holders of a majority of the Company’s outstanding common stock not beneficially owned by Coliseum or its affiliates or other parties with a material conflict of interest in such transaction. |
| ● | The Cooperation Agreement shall terminate on the day following the date on which the 2024 annual meeting of stockholders is held. |
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Shelf Registration Statement and Equity Financing
On January 30, 2023, the Form S-3 shelf registration statement we filed with the SEC in December 2022 became effective. As a result, we may offer and sell from time to time, in one or more series or issuances and on terms that we will determine at the time of the offering, any combination of the securities described in the registration statement, up to an aggregate amount of $90.0 million.
In February 2023, we completed an underwritten offering of 13.4 million shares of Class A common stock at a public offering price of $4.50 per share. The underwriters did not exercise their over-allotment option. The aggregate net proceeds received by us from the offering, after deducting offering fees and expenses of $3.1 million, totaled $57.2 million.
Debt Financing
On September 3, 2020, Purple LLC entered into a financing arrangement with KeyBank National Association and a group of financial institutions (the “2020 Credit Agreement”). The 2020 Credit Agreement provided for a $45.0 million term loan and a $55.0 million revolving line of credit. The term loan was to be repaid in accordance with a five-year amortization schedule or prepaid in whole or in part at any time without premium or penalty, subject to reimbursement of certain costs. The revolving credit facility has a term of five years and carries the same interest provisions as the term debt.
On February 17, 2023, we entered into a fifth amendment to the 2020 Credit Agreement. As a condition of entering into the amendment, we repaid the $24.7 million outstanding balance on the term loan plus accrued interest. The amendment provided that the maximum leverage ratio covenant will not be tested for the first and second quarters of 2023, revised the ratio to 4.50x for the third quarter of 2023, and revised the ratio to 3.00x for all quarters thereafter. In addition, the minimum fixed charge coverage ratio covenant will not be tested for the first and second quarters of 2023, was revised to 1.50x for the third and fourth quarters of 2023, and was revised to 2.00x for all quarters thereafter. The amendment also revised the lease incurrence test which allows us to incur ten new showroom leases for stores that will open in 2023 and six new leases for stores that will open in 2024. Moreover, beginning in the fourth quarter of 2023, we will be allowed to begin incurring leases for stores that will open in 2024, subject to leverage ratio requirements. The leverage ratio must be less than 2.50x to sign leases, with up to a maximum of six new leases per quarter, increasing to eight new leases per quarter if the leverage ratio is less than 2.00x. The amendment further provided certain minimum consolidated EBITDA covenants for the first and second quarters of 2023 based on our total unrestricted cash and unused revolver availability. The amendment also modified the definition of consolidated EBITDA to allow for nonrecurring / one-time and non-cash expenses and certain other expenses that are cash capped. In addition, for purposes of the definition of consolidated EBITDA, annual non-recurring and unusual out-of-pocket legal expenses were capped at $5.0 million for 2023 and $2.0 million per year thereafter. Moreover, the amendment (i) reduced the amount available under the revolving line of credit to $50.0 million, (ii) provided that the maturity date of the 2020 Credit Agreement will spring forward to June 30, 2024 if consolidated EBITDA is not greater than $15.0 million for 2023, (iii) reduced limits on maximum growth capital expenditures to $32.0 million for 2023 and $35.0 million for 2024 and 2025, and (iv) revised the current minimum liquidity covenant of $25.0 million to provide that it will increase to $30.0 million for each three-month period following the applicable fiscal quarter if the leverage ratio is greater than 3.00x for any fiscal quarter ending on or after the third quarter of 2023. Pursuant to this amendment, we incurred fees and expenses of $2.9 million that were recorded as debt issuance costs in the condensed consolidated balance sheet. The amendment was accounted for as an extinguishment of debt and $1.2 million of unamortized debt issuance costs related to the term loan were recorded as loss on extinguishment of debt in the condensed consolidated statement of operations. For us to draw on our revolving line of credit, we must be in compliance with the covenants outlined in the fifth amendment. As of March 31, 2023, we complied with all the financial covenants associated with the 2020 Credit Agreement, as amended, and the full $50.0 million of the revolving line of credit was available to draw upon.
Operational Developments
The COVID-19 pandemic has impacted many aspects of our operations, directly and indirectly, including disruption of our employees, consumer behavior, distribution and logistics, our suppliers, and the market overall. Soon after the pandemic began, we experienced an increase in demand in our e-commerce channel, and in 2021 we doubled our production capacity by opening a second, larger plant in Georgia to match actual and anticipated demand growth. After two years of the pandemic, we experienced a pull-back in growth. In 2022, our gross profit and results of operations were adversely affected by elevated levels of materials, labor and freight costs and the lower demand levels. In the first quarter of 2023, we benefited from various efficiency and cost reduction initiatives at the plant level that became fully impactful during the second half of 2022. These efficiency and cost saving initiatives helped increase our gross margin in the first quarter of 2023 to 39.5% compared to 36.1% in the first quarter of 2022.
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In the first quarter of 2023, we continued to experience a softening of demand for home-related products as consumers shift spending patterns more towards services and experiences. As consumer spending habits shift away from e-commerce purchases to brick and mortar buying, we have invested in showroom expansion while continuing to develop our capabilities and improving productivity. We have also focused on growing our placements with wholesale partners and improving wholesale door productivity. Although we ended both the first quarter of 2023 and year-end 2022 with 55 Purple owned retail showrooms, we expect to start adding new showrooms again across the remainder of 2023. In addition, at March 31, 2023, our products were being sold through approximately 3,400 wholesale doors, having added approximately 300 net new doors during the past 12 months. Showroom expansion and improving the sales productivity of both our wholesale doors and existing showrooms remain primary focuses and are critical components of our strategy to respond to shifting demand patterns. After several years of hyper growth and increased investments to support current and future expansion, we are building the framework for improved operational maturity and accountability after focusing on right-sizing our operations, improving our execution, and refining our strategies that will drive share gains in the premium mattress category and position us for accelerated growth. In 2022 and continuing into the first quarter of 2023, we have purposely reduced our advertising spending to improve marketing efficiency, conserve profitability in a challenging macroeconomic environment and align spending with current demand levels. As we have expanded our focus on product development and increased our innovation capabilities, in the first quarter of 2023 we announced the upcoming May 2023 launch of our new Premium and Luxe product lineup. This launch is being supported by enhancements to our in-store presence, refinements to our marketing programs and brand messaging and the shift of approximately $3.0 million of launch related expenses into the second quarter of 2023.
We believe the acquisition of Intellibed was a strong strategic addition because of shared technology and geographic proximity of their primary facility. The acquisition also provided an immediate impact on our target luxury market expansion. We also expect to capitalize on synergies of the combined companies and to benefit from expanding the market presence of premium product offerings. In addition, the acquisition has allowed us to consolidate ownership of our intellectual property and more fully capitalize on growing demand for products with gel technologies. Moreover, the acquisition has accelerated our product development program by several years and allowed us to immediately enter the higher price point luxury segment of the sleep and wellness industry that are a natural extension of our existing product offerings.
Outlook for Growth
We believe that our four strategic initiatives – accelerating innovation, brand elevation, developing our three distribution channels and operational excellence – will be fundamental to our future success.
To support our plans for future growth and sustained profitability, we are focusing on the following opportunities:
| ● | Develop and execute our strategies to meaningfully expand our wholesale business by strengthening wholesale relationships and prioritizing existing door productivity. The initial testing of our new product line-up with our wholesale partners was positive and we currently have increased our existing footprint by 1,900 slots, a 15% increase, and we continue to receive orders to further expand our existing footprint. |
| ● | Expand and mature our fleet of Purple company owned showrooms in 2023 to increase door productivity, provide a brand halo benefit to other channels in the surrounding areas, strengthen the relationship with the consumer, and increase share of more profitable DTC revenues. |
| ● | Build brand position to grow our market share of the premium and luxury mattress categories. We plan to launch our elevated brand positioning in the second quarter of 2023. |
| ● | Refine and enhance marketing strategies to reach a broader audience, increase customer engagement and reduce dependency on price promotions as a means of driving sales. |
| ● | Strengthen research and development disciplines and go-to-market processes to further develop our current product categories and position our business to eventually expand to additional categories. |
| ● | Manage production labor and capacity utilization to promote efficient use of our manufacturing facilities as we grow into our production footprint. |
| ● | Manage input costs, operating efficiencies and pricing to further enhance our gross margin. |
There is no guarantee that we will be able to effectively execute on these opportunities, which are subject to risks, uncertainties, and assumptions that are difficult to predict, including the risks described under “Risk Factors” and elsewhere herein. Therefore, actual results may differ materially and adversely from those described above. In addition, we may, in the future, adapt these focuses in response to changes in the market or our business.
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Operating Results for the Three Months Ended March 31, 2023 and 2022
The following table sets forth for the periods indicated, our results of operations and the percentage of total revenue represented in our condensed consolidated statements of operations (dollars in thousands):
| Three Months Ended March 31, | ||||||||||||||||
| 2023 | % of Net Revenues |
2022 | % of Net Revenues |
|||||||||||||
| Revenues, net | $ | 109,372 | 100.0 | % | $ | 143,179 | 100.0 | % | ||||||||
| Cost of revenues | 66,149 | 60.5 | 91,553 | 63.9 | ||||||||||||
| Gross profit | 43,223 | 39.5 | 51,626 | 36.1 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Marketing and sales | 38,173 | 34.9 | 49,959 | 34.9 | ||||||||||||
| General and administrative | 23,667 | 21.6 | 17,888 | 12.5 | ||||||||||||
| Research and development | 3,372 | 3.1 | 2,143 | 1.5 | ||||||||||||
| Total operating expenses | 65,212 | 59.6 | 69,990 | 48.9 | ||||||||||||
| Operating loss | (21,989 | ) | (20.1 | ) | (18,364 | ) | (12.8 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (202 | ) | (0.2 | ) | (1,023 | ) | (0.7 | ) | ||||||||
| Other income, net | 73 | 0.1 | 17 | — | ||||||||||||
| Loss on extinguishment of debt | (1,217 | ) | (1.1 | ) | — | — | ||||||||||
| Change in fair value – warrant liabilities | — | — | 3,928 | 2.7 | ||||||||||||
| Total other income (expense), net | (1,346 | ) | (1.2 | ) | 2,922 | 2.0 | ||||||||||
| Net loss before income taxes | (23,335 | ) | (21.3 | ) | (15,442 | ) | (10.8 | ) | ||||||||
| Income tax (expense) benefit | (72 | ) | (0.1 | ) | 1,811 | 1.3 | ||||||||||
| Net loss | (23,407 | ) | (21.4 | ) | (13,631 | ) | (9.5 | ) | ||||||||
| Net loss attributable to noncontrolling interest | (107 | ) | (0.1 | ) | (129 | ) | (0.1 | ) | ||||||||
| Net loss attributable to Purple Innovation, Inc. | $ | (23,300 | ) | (21.3 | ) | $ | (13,502 | ) | (9.4 | ) | ||||||
Revenues, Net
Net revenues decreased $33.8 million, or 23.6%, to $109.4 million for the three months ended March 31, 2023 compared to $143.2 million for the three months ended March 31, 2022. The decrease in net revenues was primarily due to continued softening demand for home related products as consumer spending patterns shift more towards services and experiences, the negative effect of inflationary pressures on consumer discretionary spending, and our intentional reduction in advertising spend. This decrease was also due in part to wholesale demand for our legacy mattress models being impacted by the upcoming launch of our new Premium and Luxe product lineup in the second quarter. The decline in net revenues from a sales channel perspective consisted of DTC net revenues decreasing $19.2 million, or 22.5% and wholesale net revenues decreasing $14.6 million, or 25.3%. Within DTC, e-commerce net revenues decreased $22.2 million, or 30.1%, while Purple owned retail showroom net revenues increased $2.9 million, or 24.4%. The decrease in e-commerce net revenues reflected the impact of the reasons previously stated. The increase in Purple owned retail showroom net revenue was mainly driven by showrooms increasing from 34 at the end of March 2022 to 55 at the end of March 2023. The decrease in wholesale net revenues was due in part to reduced purchases by our existing wholesale partners ahead of taking delivery of new models in conjunction with the upcoming launch of our new premium product lineup in the second quarter. The decrease in wholesale net revenues was offset in part by the effects of adding $5.3 million of Intellibed wholesale net revenues.
Cost of Revenues
Cost of revenues decreased $25.4 million, or 27.7%, to $66.1 million for the three months ended March 31, 2023 compared to $91.6 million for the three months ended March 31, 2022. This decrease was primarily due to the corresponding decrease in sales volume. Our gross profit percentage, which increased to 39.5% of net revenues in the first quarter of 2023 from 36.1% in the first quarter of 2022, benefited from the continued realization of efficiency and cost saving initiatives that we introduced in the first half of fiscal 2022 and became more fully impactful during the second half of the year and into 2023.
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Marketing and Sales
Marketing and sales expense decreased $11.8 million, or 23.6%, to $38.2 million for the three months ended March 31, 2023 compared to $50.0 million for the three months ended March 31, 2022. This decrease reflected a decline in advertising spending of $12.0 million, or 50.7% to $11.7 million in 2023 from $23.7 million in 2022. This reduction was primarily due to management focusing its efforts on improving marketing efficiency with its legacy products and delaying advertising spend increases to align with the upcoming launch of our new premium and luxury product lineup in the second quarter. Marketing and sales expense as a percentage of net revenues was 34.9% in both the first quarter of 2023 and the first quarter of 2022.
General and Administrative
General and administrative expense increased $5.8 million, or 32.3%, to $23.7 million for the three months ended March 31, 2023 compared to $17.9 million for the three months ended March 31, 2022. This increase was primarily due to $5.9 million in legal and professional fees associated with expenses incurred by the Special Committee.
Research and Development
Research and development costs increased $1.2 million, or 57.3%, to $3.4 million for the three months ended March 31, 2023 compared to $2.1 million for the three months ended March 31, 2022. This increase primarily reflected higher costs associated with our renewed focus on product innovation.
Operating Income (Loss)
Operating loss increased $3.6 million to $22.0 million for the three months ended March 31, 2023 compared to $18.4 million for the three months ended March 31, 2022. The larger operating loss primarily resulted from a decrease in gross profit that was driven by lower sales, offset in part by a decrease in operating expenses related primarily to lower advertising spend.
Interest Expense
Interest expense totaled $0.2 million for the three months ended March 31, 2023 compared to $1.0 million for the three months ended March 31, 2022. This decrease was primarily due to higher interest expense of $0.7 million incurred during the three months ended March 31, 2022 on the term loan that was paid off in February 2023 and the $55.0 million revolving line of credit that was drawn down by the Company in November 2021 and repaid in full on March 31, 2022.
Loss on Extinguishment of Debt
On February 17, 2023, the Company entered into a fifth amendment to the 2020 Credit Agreement and repaid in full the $24.7 million outstanding balance of the term loan plus accrued interest. The amendment was accounted for as an extinguishment of debt during the first quarter of 2023 and $1.2 million of unamortized debt issuance costs were recorded as loss on extinguishment of debt in the condensed consolidated statement of operations.
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Change in Fair Value – Warrant Liabilities
In February 2023, the 1.9 million of sponsor warrants outstanding expired and were cancelled pursuant to the terms of the agreement. These sponsor warrants had no fair value on the date of expiration. During the three months ended March 31, 2022, we recognized a gain of $3.9 million in our condensed consolidated statement of operations related to a decrease in the fair value of the warrants outstanding at the end of the quarter. The 1.9 million sponsor warrants outstanding at March 31, 2022 had a fair value of $0.4 million.
Income Tax (Expense) Benefit
We had income tax expense of $0.1 million for the three months ended March 31, 2023 compared to an income tax benefit of $1.8 million for the three months ended March 31, 2022. The income tax expense amount in the first quarter of 2023 related to various state taxes.
Noncontrolling Interest
We calculate net income or loss attributable to noncontrolling interests on a quarterly basis using their weighted average ownership percentage. Net loss attributed to noncontrolling interests was $0.1 million for both the three months ended March 31, 2023 and 2022.
Liquidity and Capital Resources
Our principal sources of funds are cash flows from operations and cash and cash equivalents on hand, supplemented with borrowings made pursuant to our credit facility and proceeds received from offerings of our equity capital. Principal uses of funds consist of payments of principal and interest on our debt facilities, capital expenditures, working capital needs, and operating lease payment obligations. Our working capital needs depend largely upon the timing of cash receipts from product sales, payments to vendors and others, and changes in inventories. Our unrestricted cash and working capital positions were $52.8 million and $77.5 million, respectively, as of March 31, 2023 compared to $40.0 million and $62.4 million, respectively, as of December 31, 2022. Cash used for capital expenditures decreased from $13.1 million in the first quarter of 2022 to $2.9 million in the first quarter of 2023. Our capital expenditures in the first quarter of 2023 primarily consisted of additional investments made in our manufacturing facilities in Utah and Georgia.
In the event our cash flow from operations or other sources of financing are less than anticipated, we believe we will be able to fund operating expenses and continue satisfying the conditions of our 2020 Credit Agreement, as amended, based on our ability to scale back operations, reduce marketing spend, use the liquidity we have available under our revolving line of credit, and postpone or discontinue our growth strategies. In such event, this could result in slower growth or no growth, and we may run the risk of losing key suppliers, we may not be able to timely satisfy customer orders, and we may not be able to retain all of our employees. We may also consider seeking additional funding sources including new debt or equity capital. Our 2020 Credit Agreement, as amended, includes various covenants and obligations that may make it difficult to obtain additional capital on terms that are favorable to us and to execute on our growth strategies.
Based on our current projections, we believe our cash on hand, amounts available under our revolving line of credit, and expected cash to be generated from e-commerce, wholesale, and Purple owned retail store channels will be sufficient to meet our working capital requirements, comply with debt covenants and cover anticipated capital expenditures for at least the next 12 months.
Shelf Registration Statement and Offering of Class A Common Stock
On January 30, 2023, the registration statement we filed in December 2022 on Form S-3 with the SEC using the “shelf” registration process became effective. As a result, we may offer and sell from time to time, in one or more series or issuances and on terms that we will determine at the time of the offering, any combination of the securities described in the registration statement, up to an aggregate amount of $90.0 million.
In February 2023, the Company completed an underwritten offering of 13.4 million shares of Class A common stock at a public offering price of $4.50 per share. The underwriters did not exercise their over-allotment option. The aggregate net proceeds received by the Company from the offering, after deducting offering fees and expenses of $3.1 million, totaled $57.2 million.
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Debt
On September 3, 2020, Purple LLC entered into the 2020 Credit Agreement that provided for a $45.0 million term loan and a $55.0 million revolving line of credit. The term loan was to be repaid in accordance with a five-year amortization schedule and could be prepaid in whole or in part at any time without premium or penalty, subject to reimbursement of certain costs. The revolving credit facility has a term of five years and carries the same interest provisions as the term debt. A commitment fee is due quarterly based on the applicable margin applied to the unused total revolving commitment.
On February 17, 2023, we entered into a fifth amendment to the 2020 Credit Agreement. As a condition of entering into the amendment, we repaid the $24.7 million outstanding balance on the term loan plus accrued interest. The amendment provided that the maximum leverage ratio covenant will not be tested for the first and second quarters of 2023, revised the ratio to 4.50x for the third quarter of 2023, and revised the ratio to 3.00x for all quarters thereafter. In addition, the minimum fixed charge coverage ratio covenant will not be tested for the first and second quarters of 2023, was revised to 1.50x for the third and fourth quarters of 2023, and was revised to 2.00x for all quarters thereafter. The amendment also revised the lease incurrence test which allows us to incur ten new showroom leases for stores that will open in 2023 and six new leases for stores that will open in 2024. Moreover, beginning in the fourth quarter of 2023, we will be allowed to begin incurring additional leases for stores that will open in 2024, subject to leverage ratio requirements. The leverage ratio must be less than 2.50x to sign leases, with up to a maximum of six new leases per quarter, increasing to eight new leases per quarter if the leverage ratio is less than 2.00x. The amendment further provided certain minimum consolidated EBITDA covenants for the first and second quarters of 2023 based on our total unrestricted cash and unused revolver availability. The amendment also modified the definition of consolidated EBITDA to allow for nonrecurring / one-time and non-cash expenses and certain other expenses that are cash capped. In addition, for purposes of the definition of consolidated EBITDA, annual non-recurring and unusual out-of-pocket legal expenses were capped at $5.0 million for 2023 and $2.0 million per year thereafter. Moreover, the amendment (i) reduced the amount available under the revolving line of credit to $50.0 million, (ii) provided that the maturity date of the 2020 Credit Agreement will spring forward to June 30, 2024 if consolidated EBITDA is not greater than $15.0 million for 2023, (iii) reduced limits on maximum growth capital expenditures to $32.0 million for 2023 and $35.0 million for 2024 and 2025, and (iv) revised the current minimum liquidity covenant of $25.0 million to provide that it will increase to $30.0 million for each three-month period following the applicable fiscal quarter if the leverage ratio is greater than 3.00x for any fiscal quarter ending on or after the third quarter of 2023. Pursuant to this amendment, we incurred fees and expenses of $2.9 million that were recorded as debt issuance costs in the condensed consolidated balance sheet. The amendment was accounted for as an extinguishment of debt and $1.2 million of unamortized debt issuance costs related to the term loan were recorded as loss on extinguishment of debt in the condensed consolidated statement of operations. For us to draw on the revolving line of credit, we must be in compliance with the covenants outlined in the fifth amendment. As of March 31, 2023, we complied with all the financial covenants associated with the 2020 Credit Agreement, as amended, and the full $50.0 million of the revolving line of credit was available to draw upon.
Tax Receivable Agreement
We are required to make certain payments to InnoHold under the tax receivable agreement, which may have a material adverse effect on our liquidity and capital resources. As of both March 31, 2023 and December 31, 2022, there was no tax receivable agreement liability reflected in the Company’s consolidated balance sheet. For reasons similar to those that led to the recording of a full valuation allowance on our deferred tax assets in the fourth quarter of 2022, we evaluated the probability of amounts being owed pursuant to the tax receivable agreement and determined the likelihood of a future liability was not probable. As result, we continued to record no tax receivable agreement liability in the first quarter of 2023. We are currently unable to determine the total future amount of these payments due to the unpredictable nature of several factors, including the timing of future exchanges, the market price of shares of Class A common stock at the time of the exchanges, the extent to which such exchanges are taxable and the amount and timing of future taxable income sufficient to utilize tax attributes that give rise to the payments under the agreement.
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Other Contractual Obligations
Other material contractual obligations primarily include operating lease payment obligations. Also, as discussed above regarding the Cooperation Agreement, we will reimburse Coliseum for all out-of-pocket fees, costs, and expenses incurred in connection with their complaint, provided that such an amount shall not exceed $4 million in the aggregate. See Note 9 of the condensed consolidated financial statements for additional information on leases.
Cash Flows for the Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022
The following summarizes our cash flows for the three months ended March 31, 2023 and 2022 as reported in our condensed consolidated statements of cash flows (in thousands):
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Net cash used in operating activities | $ | (13,503 | ) | $ | (44,281 | ) | ||
| Net cash used in investing activities | (3,098 | ) | (13,078 | ) | ||||
| Net cash provided by financing activities | 29,377 | 28,441 | ||||||
| Net decrease in cash | 12,776 | (28,918 | ) | |||||
| Cash, beginning of the period | 41,754 | 91,616 | ||||||
| Cash, end of the period | $ | 54,530 | $ | 62,698 | ||||
Cash used in operating activities was $13.5 million and $44.3 million for the three months ended March 31, 2023 and 2022, respectively. Cash used in operating activities in 2023 was primarily comprised of a net loss of $23.3 million, offset in part by non-cash adjustments totaling $9.6 million. These non-cash adjustments primarily related to $6.9 million of depreciation and amortization, a $1.2 million loss on the extinguishment of debt and $1.2 million of stock-based compensation. Changes in operating assets and liabilities increased cash used in operating activities by $0.3 million in 2023. This increase primarily reflected a $20.1 million decrease in accounts receivable and a $1.2 million increase in accounts payable, offset by a $14.5 million increase in inventories combined with a $6.8 million decrease in accrued rebates and allowances. The decline in accounts receivable was due in part to a $23.3 million decrease in wholesale net revenues in the first quarter of 2023 compared to the fourth quarter of 2022. The increase in inventories was primarily due to an increase in finished goods inventory. The decrease in accrued rebates and allowances primarily resulted from a large credit memo issued to a wholesale partner for volume rebates related to 2022 purchases.
Cash used in investing activities reflected capital expenditures of $3.1 million for the three months ended March 31, 2023 compared to $13.1 million for the three months ended March 31, 2022. Capital expenditures in the first quarter of 2023 primarily consisted of additional investments made in our manufacturing facilities in Utah and Georgia.
Cash provided by financing activities was $29.4 million during the three months ended March 31, 2023 compared to $28.4 million during the three months ended March 31, 2022. Financing activities in the first quarter of 2023 included $57.2 million of net proceeds received from the stock offering, offset in part by a $24.7 million term loan payment, a $0.3 million payment on the tax receivable agreement, and $2.9 million in other debt related payments.
Critical Accounting Policies
We discuss our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Annual Report on Form 10-K filed March 22, 2023. There were no significant changes in our critical accounting policies since the end of fiscal 2022.
Available Information
Our website address is www.purple.com. We make available free of charge on the Investor Relations portion of our website, investors.purple.com, our annual report on Form 10-K and Form 10-K/A, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The inclusion of our website address in this report does not include or incorporate by reference into this report any information on our website.
We also use the Investor Relations portion of our website, investors.purple.com, as a channel of distribution of additional Company information that may be deemed material. Accordingly, investors should monitor this channel, in addition to following our press releases, SEC filings and public conference calls and webcasts. The contents of our website shall not be deemed to be incorporated herein by reference.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our operating results are subject to risk from interest rate fluctuations on the outstanding borrowings under our 2020 Credit Agreement. Our revolving line of credit bears interest at a variable rate, which exposes us to market risks relating to changes in interest rates. Interest rate risk is highly sensitive due to many factors, including U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our control. As of March 31, 2023, we had no variable rate debt outstanding as our term loan was paid in full during the first quarter of 2023 and we had no borrowings outstanding under our revolving line of credit. We do not use derivative financial instruments for speculative or trading purposes, but this does not preclude our adoption of specific hedging strategies in the future.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Interim Chief Financial Officer (“CFO” and together with the CEO, the “Certifying Officers”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Certifying Officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
We acquired Intellibed on August 31, 2022 and we are currently in the process of integrating Intellibed into our assessment of internal control over financial reporting. Management’s assessment and conclusions on the effectiveness of our internal control over financial reporting as of March 31, 2023 excludes an assessment of the internal control over financial reporting of Intellibed. We are in the process of implementing our internal control structure at Intellibed and expect that this effort will be completed in fiscal 2023.
Based upon this evaluation, and the above criteria, our CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2023 at the reasonable assurance level.
(b) Changes in Internal Controls Over Financial Reporting.
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is from time to time involved in various claims, legal proceedings and complaints arising in the ordinary course of business. Please refer to Note 14 — Commitments and Contingencies to the condensed consolidated financial statements contained in this report for certain information regarding our legal proceedings.
ITEM 1A. RISK FACTORS
Except as described below, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K filed with the SEC on March 22, 2023.The disclosure of risks identified below does not imply that the risk has not already materialized.
Anti-takeover provisions in our Second Amended and Restated Certificate of Incorporation, our Third Amended and Restated Bylaws as well as provisions of Delaware law, contain anti-takeover provisions, any of which could delay or discourage a merger, tender offer, or assumption of control of the Company not approved by our Board of Directors that some stockholders may consider favorable.
Provisions of Delaware law, our Second Amended and Restated Certificate of Incorporation, and our Third Amended and Restated Bylaws could hamper a third party’s acquisition of us, or discourage a third party from attempting to acquire control of us. You may not have the opportunity to participate in these transactions. These provisions could also limit the price that investors might be willing to pay in the future for equity interests in the Company. These provisions include:
| ● | the right of our Board to elect a director to fill a vacancy created by the expansion of our Board or the resignation, death or removal of a director in certain circumstances, which prevents stockholders from being able to fill vacancies on our Board; |
| ● | a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; |
| ● | a prohibition on stockholders calling a special meeting and the requirement that a meeting of stockholders may only be called by members of our Board, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; |
| ● | the requirement that changes or amendments to certain provisions of our certificate of incorporation or bylaws must be approved by holders of at least two-thirds of our common stock; and |
| ● | advance notice procedures that stockholders must comply with in order to nominate candidates to our Board or to propose matters to be acted upon at a meeting of stockholders, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us. |
In December 2022, we amended our bylaws to add requirements relating to stockholder nominations of directors, including a requirement that stockholder nominees complete a written questionnaire and that stockholder nominees make themselves available for interviews by our Board upon request.
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain transactions with stockholders owning 15% or more of our outstanding voting stock or require us to obtain stockholder approval prior to engaging in such transactions. Coliseum collectively holds approximately 44.7% of our outstanding voting stock. Any delay or prevention of a change in control transaction or changes in our Board could adversely affect our ability to execute transactions that are needed to carry out our operations and growth strategies and cause the market price of our common stock to decline.
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Our business and our reputation could be adversely affected by the failure to protect sensitive employee, customer and consumer data, or to comply with evolving regulations relating to our obligation to protect such data.
In the ordinary course of our business, we collect and store certain personal information from individuals, such as our customers and suppliers, and we process customer payment card and check information for purchases via our website. In addition, we may share with third-parties personal information we have collected. Cyber-attacks designed to gain access to sensitive information by breaching security systems of large organizations leading to unauthorized release of confidential information have occurred at a number of major U.S. companies despite widespread recognition of the cyber-attack threat and improved data protection methods. Computer hackers may attempt to penetrate our computer system or the systems of third-parties with which we have shared personal information and, if successful, misappropriate personal information, payment card or check information or confidential Company business information. In addition, a Company employee, contractor or other third party with whom we do business may attempt to circumvent our security measures in order to obtain such information and may purposefully or inadvertently cause a breach involving such information. For example, though it did not involve access to or release of personal information, we recently experienced an unauthorized intrusion into one of our vendor’s system using a former contractor’s credentials that resulted in access to email addresses and an unauthorized email being sent under a valid Purple email address. Breaches involving any personal information could be more likely to the extent we have any material weakness in internal control over financial reporting related to information technology general controls in the areas of user access and segregation of duties related to certain IT systems that support the Company’s financial reporting processes.
We and third-parties with which we have shared personal information have been subject to attempts to breach the security of networks, IT infrastructure, and controls through cyber-attack, malware, computer viruses, social engineering attacks, ransomware attacks, and other means of unauthorized access. For example, in 2022, we experienced a spear-phishing attack that resulted in the unauthorized change to a significant vendor’s bank account to which we made payments that were lost in part until the scheme was discovered. We expect that this attack will result in costs to us of up to $250,000. We anticipate that we may, in the future, continue to be subject to these and similar cyber threats. A breach of systems resulting in the unauthorized release of sensitive data could also adversely affect our reputation and lead to financial losses from remedial actions or potential liability, possibly including punitive damages, and could also materially increase the costs we already incur to protect against these risks. In addition, cyber-attacks, such as ransomware attacks, if successful, could interfere with our ability to access and use systems and records that are necessary to operate our business. Such attacks could materially adversely affect our reputation, relationships with customers, and operations and could require us to expend significant resources to resolve such issues. We continue to balance the additional risk with the cost to protect us against a breach. Additionally, while losses arising from a breach may be covered in part by insurance that we carry, such coverage may not be adequate for liabilities or losses actually incurred.
We may be subject to data privacy and data breach laws in the states in which we do business, and as we expand into other countries, we may be subject to additional data privacy laws and regulations. In many states, state data privacy laws (such as the California Consumer Privacy Act), including application and interpretation, are rapidly evolving. The rapidly evolving nature of state and federal privacy laws, including potential inconsistencies between such laws and uncertainty as to their application, adds additional compliance costs and increases our risk of non-compliance. While we attempt to comply with such laws, we may not be in compliance at all times in all respects. Failure to comply with such laws may subject us to fines, administrative actions, and reputational harm.
ITEM 5. OTHER INFORMATION
On May 10, 2023, the Company entered into a sixth amendment to the 2020 Credit Agreement. This amendment clarified an ambiguity identified in the first sentence of Section 7.07(d), as amended by the fifth amendment, providing that Minimum Consolidated EBITDA as of each of March 31, 2023 and June 30, 2023 pertains to the Consolidated EBITDA for each such fiscal quarter rather than Consolidated EBITDA for the trailing twelve-month period. The foregoing description of the Sixth Amendment does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Sixth Amendment, a copy of which is attached hereto as Exhibit 10.13 and is incorporated herein by reference.
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ITEM 6. EXHIBITS
| * | Filed herewith. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| PURPLE INNOVATION, INC. | ||
| Date: May 10, 2023 | By: | /s/ Robert T. DeMartini |
| Robert T. DeMartini | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: May 10, 2023 | By: | /s/ Bennett L. Nussbaum |
| Bennett L. Nussbaum | ||
| Interim Chief Financial Officer | ||
| (Principal Financial Officer) | ||
| Date: May 10, 2023 | By: | /s/ George T. Ulrich |
| George T. Ulrich | ||
| VP Accounting and Financial Reporting | ||
| (Principal Accounting Officer) |
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