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) | (IRS Employer Identification No.) |
(Address of principal executive offices, including 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 | ||
| The |
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 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 ☐
As
of May 14, 2021,
PURPLE INNOVATION, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
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, including EquaPressure®, WonderGel® and EquaGel® (for cushions), and Purple®, No Pressure®, Hyper-Elastic Polymer®, Somnigel®, and Gel Matrix® (for plasticized elastomeric gel and certain types of products including mattresses, seat cushions, bed linen, mattress foundation and others). Additional registered trademarks include Purple Grid®, The Purple Mattress®, Purple Hybrid®, and Purple Hybrid Premier®. 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 Harmony™, Purple Harmony Pillow™, Harmony Pillow™, Purple +™, Purple Plus™, Find Comfort™, Dreams On Dreams™, Reinventing Comfort™, Gelflex™, Ascent™, Purple Ascent™, Comfort Reinvented™, Softstretch™, Purple Powerbase™, 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™.
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.
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PURPLE INNOVATION, INC.
Condensed Consolidated Balance Sheets
(unaudited – in thousands, except for par value)
| March
31, 2021 | December 31,
2020 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Prepaid inventory | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Deferred income taxes | ||||||||
| Other long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued sales returns | ||||||||
| Accrued compensation | ||||||||
| Customer prepayments | ||||||||
| Accrued sales tax | ||||||||
| Accrued rebates and allowances | ||||||||
| Operating lease obligations – current portion | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Debt, net of current portion | ||||||||
| Operating lease obligations, net of current portion | ||||||||
| Warrant liabilities | ||||||||
| Tax receivable agreement liability, net of current portion | ||||||||
| Other long-term liabilities, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 13) | ||||||||
| Stockholders’ equity: | ||||||||
| Class A common stock; $ | ||||||||
| Class B common stock; $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| 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 Income
(unaudited – in thousands, except per share amounts)
| Three
Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenues, net | $ | $ | ||||||
| Cost of revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Marketing and sales | ||||||||
| General and administrative | ||||||||
| Research and development | ||||||||
| Total operating expenses | ||||||||
| Operating income | ||||||||
| Other income (expense): | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Other income (expense), net | ( | ) | ||||||
| Tax receivable agreement income (expense) | ( | ) | ||||||
| Change in fair value – warrant liabilities | ||||||||
| Total other income, net | ||||||||
| Net income before income taxes | ||||||||
| Income tax benefit (expense) | ( | ) | ||||||
| Net income | ||||||||
| Net income attributable to noncontrolling interest | ||||||||
| Net income attributable to Purple Innovation, Inc. | $ | $ | ||||||
| Net income per share: | ||||||||
| Basic | $ | $ | ||||||
| Diluted | $ | $ | ||||||
| Weighted average common shares outstanding: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
PURPLE INNOVATION, INC.
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(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, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||
| Exchange of stock | ( | ) | ||||||||||||||||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||||||||||||||
| Tax receivable agreement liability | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Deferred income taxes | — | — | ||||||||||||||||||||||||||||||||||
| Accrued distributions | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Innohold indemnification payment | — | — | ||||||||||||||||||||||||||||||||||
| Impact of transactions affecting NCI | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance – March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| Class A | Class B | Additional | Total | |||||||||||||||||||||||||||||||||
| Common Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | Noncontrolling | Total | ||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Capital | Deficit | Deficit | Interest | Deficit | ||||||||||||||||||||||||||||
| Balance – December 31, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||
| Exchange of stock | — | ( | ) | |||||||||||||||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||||||||||||||
| Tax Receivable Agreement Liability | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Accrued distributions | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Impact of transactions affecting NCI | — | — | ( | ) | ||||||||||||||||||||||||||||||||
| Balance – March 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||
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, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Non-cash interest | ||||||||
| Change in fair value – warrant liabilities | ( | ) | ( | ) | ||||
| Tax receivable agreement (income) expense | ( | ) | ||||||
| Stock-based compensation | ||||||||
| Non-cash lease expense | ||||||||
| Deferred income taxes | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ||||||||
| Prepaid inventory and other assets | ( | ) | ||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued sales returns | ( | ) | ( | ) | ||||
| Accrued compensation | ( | ) | ( | ) | ||||
| Customer prepayments | ( | ) | ||||||
| Accrued rebates and allowances | ( | ) | ( | ) | ||||
| Operating lease obligations | ( | ) | ( | ) | ||||
| 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 | ( | ) | ||||||
| Proceeds from InnoHold indemnification payment | — | |||||||
| Tax receivable agreement payment | ( | ) | — | |||||
| Distributions to members | ( | ) | ||||||
| Proceeds from exercise of warrants | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Net cash provided by financing activities | ||||||||
| Net decrease in cash | ( | ) | ( | ) | ||||
| Cash and cash equivalents, beginning of the year | ||||||||
| Cash and cash equivalents, end of the period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the year for interest | $ | $ | ||||||
| Cash paid during the year for income taxes | $ | $ | ||||||
| Supplemental schedule of non-cash investing and financing activities: | ||||||||
| Property and equipment included in accounts payable | $ | $ | ||||||
| Non-cash leasehold improvements | $ | $ | ||||||
| Accrued distributions | $ | $ | ||||||
| Tax receivable agreement liability | $ | $ | ||||||
| Deferred income taxes | $ | $ | ||||||
| Exercise of liability warrants | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statement.
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.”) is a digitally-native vertical brand founded on comfort product innovation with premium offerings. 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 direct-to-consumer (“DTC”) online channels, retail brick-and-mortar wholesale partners, third-party online retailers and Company showrooms.
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.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The Company consists of Purple Inc. and its consolidated subsidiary, Purple LLC. As of March 31, 2021, Purple Inc. held approximately 99% of the common units of Purple LLC and Purple LLC Class B Unit holders held approximately 1% of the common units in Purple LLC.
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 2020 audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K/A filed May 10, 2021. 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, 2021 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2021 or for any other interim period or other future year.
On December 31, 2020, the Company ceased to be an emerging growth company (“EGC”) and was no longer exempt from certain reporting requirements that apply to public companies. As an EGC prior to this date, Purple Inc. had elected to use extended transition periods available to private companies for complying with new or revised accounting standards.
5
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Variable Interest Entities
Purple
LLC is a variable interest entity (“VIE”). 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, 2021, Purple Inc. had approximately
a
Reclassification
Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on net income, cash flows or shareholders’ equity previously reported.
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 doubtful accounts, valuation of inventories, cost of revenues, sales returns, warranty returns, warrant liability, 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. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results could differ materially from those estimates.
Leases
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases
(“ASC 842”), which required an entity to recognize lease liabilities and ROU assets on the balance sheet and to
disclose key information about an entity’s leasing arrangements. Because the Company ceased to be an EGC on December 31, 2020,
the standard became effective for the Company for its annual reporting period beginning January 1, 2020, and interim reporting periods
within the annual period beginning January 1, 2020. The adoption of ASC 842 and all related amendments using the modified retrospective
transition approach effective for the Company’s annual reporting period beginning January 1, 2020 resulted in the initial recognition
of operating lease right-of-use (“ROU”) assets of $
The Company determines if an agreement contains a lease at the inception of a contract. For leases with an initial term greater than 12 months, a related lease liability is recorded on the balance sheet at the present value of future payments discounted at the estimated fully collateralized incremental borrowing rate (discount rate) corresponding with the lease term. In addition, an ROU asset is recorded as the initial amount of the lease liability, plus any lease payments made to the lessor before or at the lease commencement date and any initial direct costs incurred, less any tenant improvement allowance incentives received.
The Company calculates the present value of future payments using its incremental borrowing rate when the discount rate implicit in the lease is not known. The incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. The Company determines the applicable incremental borrowing rate at the lease commencement date based on the rates of its secured borrowings, which is then adjusted for the appropriate lease term and risk premium. In determining the Company's ROU assets and operating lease liabilities, the Company applies these incremental borrowing rates to the minimum lease payments within each lease agreement.
Operating lease expense is recognized on a straight-line basis over the lease term. Tenant incentive allowances received from the lessor are amortized through the ROU asset as a reduction of rent expense over the lease term. Any variable lease costs are expensed as incurred. Leases with an initial term of 12 months or less (short-term leases) are not recorded as ROU assets and corresponding lease liabilities. Short-term lease expense is recognized on a straight-line basis over the lease term. ROU assets are assessed for impairment as part of the impairment of long-lived assets, which is performed whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.
6
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Revenue Recognition
The Company markets and sells its products through direct-to-consumer online channels, traditional wholesale partners, third-party online retailers, and Company showrooms. Revenue is recognized when the Company satisfies its performance obligations under the contract which is transferring the promised products to the customer. This principle is achieved in the following steps:
Identify the contract with the customer. A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods to be transferred and identifies the payment terms related to these goods, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for the goods that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company does not have significant costs to obtain contracts with customers.
Identify the performance obligations in the contract. The Company’s contracts with customers do not include multiple performance obligations to be completed over a period of time. The performance obligations generally relate to delivering products to a customer, subject to the shipping terms of the contract. The Company has made an accounting policy election to account for shipping and handling activities performed after a customer obtains control of the goods, including “white glove” delivery services, as activities to fulfill the promise to transfer the goods. The Company does not offer extended warranty or service plans. The Company does not provide an option to its customers to purchase future products at a discount and therefore there are no material option rights.
Determine the transaction price. Payment for sale of products through the direct-to-consumer online channels and third-party online retailers is collected at point of sale in advance of shipping the products. Amounts received for unshipped products are recorded as customer prepayments. Payment by traditional wholesale customers is due under customary fixed payment terms. None of the Company’s contracts contain a significant financing component. Revenue is recorded at the net sales price, which includes estimates of variable consideration such as product returns, volume rebates, and other adjustments. The estimates of variable consideration are based on historical return experience, historical and projected sales data, and current contract terms. Variable consideration is included in revenue only to the extent that it is probable that a significant reversal of the revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues.
Allocate the transaction price to performance obligations in the contract. The Company’s contracts with customers do not include multiple performance obligations. Therefore, the Company recognizes revenue upon transfer of the product to the customer’s control at contractually stated pricing.
Recognize revenue when or as we satisfy a performance obligation. The Company satisfies performance obligations at a point in time upon either shipment or delivery of goods, in accordance with the terms of each contract with the customer. With the exception of third-party “white glove” delivery and certain wholesale partners, revenue generated from product sales is recognized at shipping point, the point in time the customer obtains control of the products. Revenue generated from sales through third-party “white glove” delivery is recognized at the point in time when the product is delivered to the customer. Revenue generated from certain wholesale partners is recognized at a point in time when the product is delivered to the wholesale partner’s warehouse. The Company does not have service revenue.
7
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Debt Issuance Costs and Discounts
Debt issuance costs and discounts that relate to borrowings are presented in the condensed consolidated balance sheet as a direct reduction from the carrying amount of the related debt liability and are amortized into interest expense using an effective interest rate over the duration of the debt. Debt issuance costs that relate to revolving lines of credit are carried as an asset in the condensed consolidated balance sheet and amortized to interest expense on a straight-line basis over the term of the related line of credit facility. Refer to Note 8 – Debt.
Warrant Liabilities
The Company accounted for its Incremental Loan Warrants as liability warrants under the provisions of ASC 480 - Distinguishing Liabilities from Equity. ASC 480 requires the recording of certain liabilities at their fair value. Changes in the fair value of these liabilities are recognized in earnings. These warrants contained a repurchase provision which, upon an occurrence of a fundamental transaction as defined in the warrant agreement, could have given rise to an obligation of the Company to pay cash to the warrant holders. In addition, other provisions may have led to a reduction in the exercise price of the warrants. The Company determined the fundamental transaction provisions required the warrants to be accounted for as a liability at fair value on the date of the transaction, with changes in fair value recognized in earnings in the period of change. The Company used the Monte Carlo Simulation of a Geometric Brownian Motion stock path model to determine the fair value of the liability. The model uses key assumptions and inputs such as exercise price, fair market value of common stock, risk free interest rate, warrant life, expected volatility and the probability of a warrant re-price. All of the Incremental Loan warrants were exercised during fiscal 2020.
The Company accounted for its public warrants in accordance with ASC 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity” (“ASC 815”), under which these warrants did not meet the criteria for equity classification and were recorded as liabilities. Since the public warrants met the definition of a derivative as contemplated in ASC 815, these warrants were measured at fair value at inception and at each reporting date in accordance with ASC 820, Fair Value Measurement, with changes in fair value recognized in earnings in the period of change. The Company determined the fair value of the public warrants based on their public trading price. All of the public warrants were exercised during fiscal 2020.
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 (e.g. 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, accrued expenses 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.
The public warrant liabilities are Level 1 instruments as they have quoted market prices in an active market. The sponsor and Incremental Loan warrant liabilities are Level 3 instruments and use internal models to estimate fair value using certain significant unobservable inputs which requires determination of relevant inputs and assumptions. Accordingly, changes in these unobservable inputs may have a significant impact on fair value. Such inputs include risk free interest rate, expected average life, expected dividend yield, and expected volatility. These Level 3 liabilities generally decrease (increase) 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 increase (decrease) in value if the expected average life or expected volatility were to increase (decrease).
8
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table presents information about the Company’s liabilities that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
| March 31, | ||||||||||
| (In thousands) | Level | 2021 | 2020 | |||||||
| Public warrants | 1 | $ | $ | |||||||
| Sponsor warrants | 3 | |||||||||
| Incremental Loan warrants | 3 | |||||||||
The following table summarizes the Company’s total Level 3 liability activity for the three months ended March 31, 2021 and 2020:
| (In thousands) | Sponsor Warrants | Incremental Loan Warrants | Total
Level 3 Liabilities | |||||||||
| Fair value as of December 31, 2019 | $ | $ | $ | |||||||||
| Fair value transfer to Level 1 measurement | ( | ) | ( | ) | ||||||||
| Change in valuation inputs(1) | ( | ) | ( | ) | ( | ) | ||||||
| Fair value as of March 31, 2020 | $ | $ | $ | |||||||||
| Fair value as of December 31, 2020 | $ | $ | $ | |||||||||
| Fair value of warrants exercised | ( | ) | ( | ) | ||||||||
| Change in valuation inputs(1) | ( | ) | ( | ) | ||||||||
| Fair value as of March 31, 2021 | $ | $ | $ | |||||||||
| (1) |
Income Taxes
In calculating the provision for interim income taxes, in accordance with ASC Topic 740, an estimated annual effective tax rate is applied to year-to-date ordinary income. At the end of each interim period, the Company estimates the effective tax rate expected to be applicable for the full fiscal year. This differs from the method utilized at the end of an annual period.
For annual periods, the Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that the deferred tax assets will be realized. Deferred tax assets and liabilities are calculated by applying existing tax laws and the rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change. Our effective tax rate is primarily impacted by the allocation of income taxes to the noncontrolling interest and the non-taxable nature of the change in fair value of the warrant liability.
The Company accounts for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return, which are subject to examination by federal and state taxing authorities. The tax benefit from an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination by taxing authorities based on technical merits of the position. The amount of the tax benefit recognized is the largest amount of the benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The effective tax rate and the tax basis of assets and liabilities reflect management’s estimates of the ultimate outcome of various tax uncertainties. The Company recognizes penalties and interest related to uncertain tax positions within the income tax benefit (expense) line in the accompanying condensed consolidated statements of income.
The Company files U.S. federal and certain state income tax returns. The income tax returns of the Company are subject to examination by U.S. federal and state taxing authorities for various time periods, depending on those jurisdictions’ rules, generally after the income tax returns are filed.
Net Income Per Share
Basic net income per common share is calculated by dividing net income attributable to common shareholders by the weighted average number of shares of Class A Stock outstanding each period. Diluted net income per share adds to those shares the incremental shares that would have been outstanding and potentially dilutive assuming exchanges of the Company’s outstanding warrants, stock options and Class B Stock for Class A Stock, and the vesting of unvested and restricted Class A Stock. An anti-dilutive impact represents an increase in net income per share or a reduction in net loss per share resulting from the conversion, exercise or contingent issuance of certain securities.
9
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company uses the “if-converted” method to determine the potential dilutive effect of conversions of its outstanding Class B Stock, and the treasury stock method to determine the potential dilutive effect of its outstanding warrants and stock options exercisable for shares of Class A Stock and the vesting of unvested Class A Stock.
Recent Accounting Pronouncements
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04), which provides guidance to alleviate the burden in accounting for reference rate reform by allowing certain expedients and exceptions in applying generally accepted accounting principles to contracts, hedging relationships, and other transactions impacted by reference rate reform. The provisions of ASU 2020-04 apply only to those transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. This standard is currently effective and upon adoption may be applied prospectively to contract modifications made on or before December 31, 2022, when the reference rate replacement activity is expected to be completed. The interest rate on the Company’s term loan is based on LIBOR. The Company plans to apply the amendments in this update to account for any contract modifications that result from changes in the reference rate used. The Company does not expect these amendments to have a material impact on its condensed consolidated financial statements and related disclosures.
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (ASU No. 2019-12). The new guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance is effective for fiscal years beginning after December 15, 2020 and for interim periods within those fiscal years. The adoption of this standard by the Company on January 1, 2021 did not have a material impact on the Company’s financial position, results of operations, or cash flows.
Internal-Use Software
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350) (“ASU 2018-15”). The objective of ASU 2018-15 is to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with those incurred to develop or obtain internal-use software. The guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The amendments can be applied either retrospectively or prospectively. Because the Company lost its EGC status on December 31, 2020, the standard became effective for the Company for its annual period beginning January 1, 2020, and interim periods within the annual period beginning January 1, 2021. The Company elected to apply the amendments on a prospective basis. Adoption of this standard did not have a material impact on the Company’s financial position, results of operations, or cash flows.
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. Since the Company was considered an SRC on the deferral date of this standard, the guidance is effective for the Company’s interim and annual financial periods beginning January 1, 2023. This standard is to be applied utilizing a modified retrospective approach. The Company is currently evaluating the impact of this standard on its accounts receivable, cash and cash equivalents, and any other financial assets measured at amortized cost and do not expect that adoption will have a material impact on its consolidated financial statements or related disclosures.
10
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
3. Revenue from Contracts with Customers
The Company markets and sells its products through direct-to-consumer online channels, traditional wholesale partners, third-party online retailers and Company showrooms. Revenue is recognized when the Company satisfies its performance obligations under the contract which is transferring the promised products to the customer as described in Note 2 – Summary of Significant Accounting Policies.
Disaggregated Revenue
The Company sells products through two channels: Direct-to-Consumer and Wholesale. The Direct-to-Consumer channel includes product sales through various direct-to-consumer channels including Company showrooms and contact center. The Wholesale channel includes all product sales to traditional third-party retailers for both in store and online channels. The Company classifies products into two major categories: Bedding and Other. Bedding products include mattresses, platforms, adjustable bases, mattress protectors, pillows and sheets. Other products include cushions and various other products.
The following tables present the Company’s revenue disaggregated by sales channel and product category (in thousands):
| Three
Months Ended March 31, | ||||||||
| Channel | 2021 | 2020 | ||||||
| Direct-to-consumer | $ | $ | ||||||
| Wholesale partner | ||||||||
| Revenues, net | $ | $ | ||||||
| Three
Months Ended March 31, | ||||||||
| Product | 2021 | 2020 | ||||||
| Bedding | $ | $ | ||||||
| Other | ||||||||
| Revenues, net | $ | $ | ||||||
Contract Balances
Payment
for sale of products through the direct-to-consumer online channels, third-party online retailers, Company 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 $
11
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
4. Inventories
Inventories consisted of the following (in thousands):
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Inventory obsolescence reserve | ( | ) | ( | ) | ||||
| Inventories, net | $ | $ | ||||||
5. Property and Equipment
Property and equipment consisted of the following (in thousands):
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| 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,
2021 or December 31, 2020. Depreciation expense was $
6. Leases
The
Company leases its manufacturing and distribution facilities, corporate offices, 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
12
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table presents the Company’s lease costs (in thousands):
| Three
Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Operating lease costs | $ | $ | ||||||
| Variable lease costs | ||||||||
| Short-term lease costs | ||||||||
| Total lease costs | $ | $ | ||||||
The table below reconciles the undiscounted cash flows for each of the first five years and total remaining years to the operating lease liabilities recorded on the condensed consolidated balance sheet at March 31, 2021 (in thousands):
| 2021 (excluding the three months ended March 31, 2021) (1) | $ | ( | ) | |
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total operating lease payments | ||||
| Less – lease payments representing interest | ( | ) | ||
| Present value of operating lease payments | $ |
(1)
–
As
of March 31, 2021 and December 31, 2020, 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, 2021 and 2020:
| Three Months Ended March 31, |
||||||||
| 2021 | 2020 | |||||||
| Cash paid for amounts included in present value of operating lease liabilities | $ | $ | ||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | ||||||||
7. Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Warranty accrual – current portion | $ | $ | ||||||
| Long-term debt – current portion | $ | |||||||
| Tax receivable agreement liability – current portion | ||||||||
| Insurance financing | ||||||||
| Income taxes payable | ||||||||
| Other | ||||||||
| Total other current liabilities | $ | $ | ||||||
13
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
8. Debt
Debt consisted of the following (in thousands):
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Term loan | $ | $ | ||||||
| Less: unamortized debt issuance costs | ( | ) | ( | ) | ||||
| Total debt | ||||||||
| Less: current portion of debt | ( | ) | ( | ) | ||||
| Long-term debt, net | $ | $ | ||||||
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 provides 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. While any amounts are outstanding 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. As of March 31, 2021, the Company was in compliance with all of the covenants related to the 2020 Credit Agreement.
The
$
The
Company incurred $
Interest
expense under the 2020 Credit Agreement totaled $
14
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Related Party Loan
On
March 27, 2020, the Company entered into an amendment to Purple LLC’s Credit Agreement dated February 3, 2018 and all subsequent
amendments and agreements (collectively referred to as the “Related Party Loan”) that provided for the deferral of the full
amount of the interest payment due on March 31, 2020 and June 30, 2020 to reduce cash disbursements during the COVID-19 pandemic. The
Company accounted for this amendment as a modification of existing debt in accordance with ASC 470 - Debt. Interest expense on
the Related Party Loan was $
On
September 3, 2020, the Company paid $
9. Warrant Liabilities
On
February 26, 2019,
For
the three months ended March 31, 2020, the Company recorded a $
| Trading price of common stock on measurement date | $ | |||
| Exercise price | $ | |||
| Risk free interest rate | % | |||
| Warrant life in years | ||||
| Expected volatility | % | |||
| Expected dividend yield | ||||
| Probability of warrant re-price | % |
The public and sponsor warrants that were issued in connection with the Company’s IPO and simultaneous private placement contain certain provisions that do not meet the criteria for equity classification and therefore must be recorded as liabilities. The liability for these warrants was recorded at fair value on the date of the Business Combination and subsequently re-measured to fair value at each reporting date or exercise date with changes in the fair value included in earnings.
During
the three months ended March 31, 2021,
The Company used public trading prices of the public warrants to determine their fair value. The Company determined the fair value of the sponsor warrants using the Black Scholes model with the following assumptions:
March 31, | ||||||||
| 2021 | 2020 | |||||||
| 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, 2021 and 2020, the Company recognized gains of $
15
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
10. Other Long-Term Liabilities
Other long-term liabilities consist of the following (in thousands):
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Warranty accrual | $ | $ | ||||||
| Other | ||||||||
| Total | ||||||||
| Less: current portion of warranty accrual | ( | ) | ( | ) | ||||
| Other long-term liabilities, net of current portion | $ | $ | ||||||
11. Commitments and Contingencies
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
Service Agreement
In
October 2017,
Purchase Agreement
In
February 2018,
Indemnification Obligations
From
time to time, the Company enters into contracts that contingently require it to indemnify parties against claims. These contracts primarily
relate to provisions in the Company’s services agreements with related parties that may require the Company to indemnify the related
parties against services rendered; and certain agreements with the Company’s officers and directors under which the Company may
be required to indemnify such persons for liabilities.
16
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Subscription Agreement and Preemptive Rights
In
February 2018,
Rights of Securities Holders
The holders of certain Warrants exercisable into Class A 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 the Warrants (and any shares of Class A Stock issuable upon the exercise of the Warrants), and certain unregistered shares of Class A 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 Stock held by them, including in underwritten offerings. In an underwritten offering of such Warrants and shares of Class A Stock by the Coliseum Investors, the Company will pay underwriting discounts and commissions and certain expenses incurred by the Coliseum Investors.
The
holders of the Incremental Loan Warrants exercisable into Class A Stock were entitled to registration rights pursuant to the registration
rights agreement of the Company in connection with the Amended and Restated Credit Agreement. In March 2019, the Company filed a registration
statement registering the Warrants (and any shares of Class A Stock issuable upon the exercise of the Warrants). The registration statement
was declared effective on May 17, 2019, pursuant to which, the Company issued
On
February 2, 2018, in connection with the closing of the Business Combination, the Company entered into a Registration Rights Agreement
with InnoHold and the Parent Representative (the “InnoHold Registration Rights Agreement”). Under the InnoHold Registration
Rights Agreement, InnoHold holds registration rights that obligate the Company to register for resale under the Securities Act, all or
any portion of the Equity Consideration (including Class A Stock issued in exchange for the equity consideration received in the
Business Combination) (the “Registrable Securities”). InnoHold is entitled to make a written demand for registration under
the Securities Act of all or part of its Registrable Securities (up to a maximum of three demands in total). Pursuant to the InnoHold
Registration Rights Agreement, the Company filed a registration statement on Form S-3 that was declared effective on November 8, 2019,
pursuant to which InnoHold, Tony Pearce and Terry Pearce sold
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 (the “Class B Units”) and shares of Class B 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 Stock at an initial exchange ratio equal to one Paired Security for one share of Class A 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 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 also 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 Stock and Class B Stock or a transaction in which the Class A 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 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 Operating Agreement, or if such exchange would cause Purple LLC to be treated as a “publicly traded partnership” under applicable tax laws.
17
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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.
During
the three months ended March 31, 2021 and 2020,
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 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 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 9, 2019, Purple LLC filed a Statement of Claim against PerfectSense Home Inc. and PerfectSense Trading Co. Ltd. (collectively,
“PerfectSense”) in the Federal Court of Canada. PerfectSense is a manufacturer and supplier of mattresses and related products.
PerfectSense owns the domain name www.purplesleep.ca, which used to, but no longer, redirects to its website at www.perfectsense.ca.
In addition to this, Purple LLC has alleged that PerfectSense has: designed their mattresses with the same look as the Purple mattresses
(white mattress top, purple stripe, and grey bottom); used many of the marketing elements on Purple’s website (including a similar
“exploded view” image of their mattress); and adopted the color purple as their dominant marketing color. Purple LLC is suing
for a declaration that PerfectSense has infringed Purple LLC’s copyright and trademark rights and committed the tort of passing
off. Purple LLC is asking for injunctive relief, damages, an accounting of profits, interest, costs, and delivery up or destruction of
the infringing products (including delivery up of the www.purplesleep.ca domain). After filing the statement of claim,
Purple LLC posted $
18
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
On September 20, 2020, Purple LLC filed a complaint at the U.S. Court of International Trade seeking to recover approximately $
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 United States 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.
On November 19, 2020, Purple LLC sued Advanced Comfort Technologies, Inc., dba Intellibed (“Intellibed”) in the U.S. District Court for the District of Utah for patent infringement, trademark infringement, trade secret misappropriation, and a number of related state law based claims. The principal allegations are that Intellibed has manufactured and sold unauthorized, infringing products under the Sleepy’s brand name owned by third-party Mattress Firm. Purple LLC also requested declaratory relief related to certain assignment terms of a license agreement in which Purple LLC is the licensor and Intellibed is the licensee. On December 14, 2020, Intellibed filed a motion to dismiss Counts I through XI of Purple LLC’s Complaint on the ground that these Counts fail to state a claim upon which relief can be granted. On December 15, 2020, Intellibed filed an Answer to Purple LLC’s complaint and also asserted against Purple LLC a total of eight counterclaims, including a number of declaratory judgment claims, breach of contract, and tortious interference claims. Intellibed’s main allegations are that its use of Purple LLC’s patents, trademark, and trade secrets in connection with Mattress Firm’s Sleepy’s products is authorized under the license agreement. On January 19, 2021, Purple LLC filed a motion to dismiss Intellibed’s fifth, sixth, seventh, and eighth counterclaims on the ground that these counterclaims fail to state a claim upon which relief can be granted. Briefing on Purple LLC’s partial motion to dismiss was completed on March 2, 2021. On January 19, 2021, Purple LLC also filed an Answer to Intellibed’s counterclaims, which were not subject to Purple LLC’s motion to dismiss. On January 27, 2021, Purple LLC filed a First Amended Complaint in response to Intellibed’s initial motion to dismiss. On February 10, 2021, Intellibed filed a motion to dismiss Counts I through XI of Purple LLC’s First Amended Complaint. Briefing on Intellibed’s partial motion to dismiss was completed on March 24, 2021. Both motions to dismiss are still pending before the Court. The case is in the early stages. No substantial discovery has taken place. The Court has not yet entered a Scheduling Order governing the case, and no trial date has been set.
19
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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.
12. 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 of directors. 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 Coliseum Capital Management, LLC (“CCM”),
which is the investment manager of Blackwell. 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. In 2018, the Lenders agreed to make the Related Party Loan in
an aggregate principal amount of $
In
May 2020, pursuant to the terms of the warrant agreement upon the condition that Tony Pearce or Terry Pearce individually or together
ceased to beneficially own at least
Purple Founder Entities
TNT Holdings, LLC (herein “TNT Holdings”), EdiZONE, (wholly owned by TNT Holdings) and InnoHold (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 of Directors 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 the Company and retired from the Board in August 2020.
20
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
TNT
Holdings owns the Alpine facility Purple LLC has been leasing since 2010. Effective as of October 31, 2017, Purple LLC entered into an
Amended and Restated Lease Agreement with TNT Holdings. The Company determined that TNT Holdings is not a VIE as neither the Company
nor Purple LLC hold any explicit or implicit variable interest in TNT Holdings and do not have a controlling financial interest in TNT
Holdings. The Company incurred $
During
the three months ended March 31, 2021, certain current and former employees of the Company who received distributions of Paired Securities
from InnoHold exchanged
On November 9, 2018, Purple
LLC and EdiZONE executed the Second Amended and Restated Confidential Assignment and License Back Agreement (the “Revised License
Agreement”), pursuant to which EdiZONE assigned all of its comfort and cushioning intellectual property to Purple LLC and further
limited the subset of such intellectual property licensed back to EdiZONE to only those uses that enabled EdiZONE to comply with its obligations
under previously existing contracts, agreements and licenses. On August 14, 2020, Purple LLC entered into a separate agreement whereby
EdiZONE, for consideration of $
During
the three months ended March 31, 2021, Purple LLC paid InnoHold through withholding payments directly to various states, an aggregate
of $
13. Stockholders’ Equity
Prior to the Business Combination, GPAC was a shell company with no operations, formed as a vehicle to effect a business combination with one or more operating businesses. After the Closing, the Company became a holding company whose sole material asset consists of its interest in Purple LLC.
Class A Common Stock
The
Company has
In
accordance with the terms of the Business Combination, approximately
Class B Common Stock
The Company has
21
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
In
connection with the Business Combination, approximately
Preferred Stock
The
Company has
Public and Sponsor Warrants
There
were
On
October 27, 2020, the Company provided notice to the holders of the public warrants that the Company was exercising its right under the
terms of the Public Warrants to redeem such warrants by paying to the warrant holders the redemption price of $
During
the three months ended March 31, 2021,
Incremental Loan Warrants
In
connection with the Amended and Restated Credit Agreement, the Company issued to the Incremental Lenders
22
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
On
October 27, 2020, the Company provided notice to the holders of the Incremental Loan Warrants that the Company was exercising its right
to redeem such warrants by paying to the warrant holders the redemption price of $
Noncontrolling Interest
Noncontrolling
interest (“NCI”) is the membership interest in Purple LLC held by holders other than the Company. Upon the close of the Business
Combination, and at December 31, 2018, InnoHold’s and other Class B Unit holders’ combined NCI percentage in Purple LLC was
approximately
14. 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. As a result, the Company’s effective tax rate differs from the statutory rate. The primary factors impacting the expected tax are the allocation of tax benefit to noncontrolling interest and the non-taxable nature of the change in fair value of the warrant liability.
Prior
to the second quarter of 2020, the Company maintained a full valuation allowance on its net deferred tax assets which are comprised primarily
of basis differences in Purple LLC. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income sufficient to utilize the deferred tax assets on income tax returns. In periods prior to the second quarter of 2020, management
made the determination that its net deferred tax assets were not more likely than not going to be realized because the Company was in
a three-year cumulative loss position and the generation of future taxable income was uncertain. Considering this and other factors,
the Company maintained a full valuation allowance of $
During
fiscal 2020, the Company achieved three-year cumulative income for the first time and determined that it would likely generate sufficient
taxable income to utilize some of its deferred tax assets. Based on this and other positive evidence, the Company concluded it was more
likely than not that some of its deferred tax assets would be realized and that a full valuation allowance for its deferred tax assets
was no longer appropriate.
The
Company currently estimates its annual effective income tax rate to be
For
the three months ended March 31, 2021, the Company has recorded income tax expense of $
23
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
In
response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in March 2020.
The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (2017 Tax Act).
On March 11, 2021, Congress passed, and the President signed into law, the American Rescue Plan Act, 2021 (the “ARP”), which includes certain business tax provisions. At this point the Company does not believe that these changes will have a material impact on its income tax provision for 2021. The Company will continue to evaluate the impact of new legislation on its financial position, results of operations, and cash flows.
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
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.
The Company has no federal net operating loss (“NOL”) carryforwards after utilization of the remaining carryforwards in 2020.
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 income. Accrued interest and penalties would be included on the related tax liability line in the consolidated balance sheet. As of March 31, 2021, no uncertain tax positions were recognized as liabilities in the condensed consolidated financial statements.
24
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
15. Net Income Per Common Share
The following table sets forth the calculation of basic and diluted weighted average shares outstanding and earnings per share for the periods presented (in thousands, except per share amounts):
| Three
Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Numerator: | ||||||||
| Net income attributable to Purple Innovation, Inc. – basic | $ | $ | ||||||
| Less: dilutive effect of change in fair value – warrant liabilities | ( | ) | ( | ) | ||||
| Net income attributable to Purple Innovation, Inc. – diluted | $ | $ | ||||||
| Denominator: | ||||||||
| Weighted average shares—basic | ||||||||
| Add: dilutive effects of equity awards | ||||||||
| Add: dilutive effects of warrants | ||||||||
| Weighted average shares—diluted | ||||||||
| Net income per common share: | ||||||||
| Basic | $ | $ | ||||||
| Diluted | $ | $ | ||||||
For
the three months ended March 31, 2021, the Company excluded
16. 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 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, 2021, an aggregate of
25
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Employee Stock Options
In
March 2021, the Company granted
| Fair market value | $ | |||
| Exercise price | $ | |||
| Risk free interest rate | % | |||
| Expected term in years | ||||
| Expected volatility | % | |||
| Expected dividend yield |
The following table summarizes the Company’s total stock option activity for the three months ended March 31, 2021:
Options (in thousands) | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term in Years | Intrinsic Value $ | |||||||||||||
| Options outstanding as of January 1, 2021 | $ | $ | ||||||||||||||
| Granted | — | |||||||||||||||
| Exercised | ( | ) | — | |||||||||||||
| Forfeited/cancelled | ( | ) | — | |||||||||||||
| Options outstanding as of March 31, 2021 | $ | $ | ||||||||||||||
Outstanding and exercisable stock options as of March 31, 2021 are as follows:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
| Exercise Prices | Number of Options Outstanding | Weighted (Years) | Number of Options Exercisable | Weighted Average Remaining Life (Years) | Intrinsic Value | |||||||||||||||||
| $ | $ | |||||||||||||||||||||
26
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table summarizes the Company’s unvested stock option activity for the three months ended March 31, 2021:
Options (in thousands) | Weighted Average Grant Date Fair Value | |||||||
| Nonvested options as of January 1, 2021 | ||||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Nonvested options as of March 31, 2021 | ||||||||
The
estimated fair value of Company stock options, less expected forfeitures, is amortized over the options vesting period on a straight-line
basis. The Company recognized $
As
of March 31, 2021, outstanding stock options had $
InnoHold Incentive Units
In
January 2017, pursuant to the 2016 Equity Incentive Plan approved by InnoHold and Purple LLC that authorized the issuance of
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 table below summarizes the aggregate non-cash stock-based compensation recognized in the statement of operations for stock awards, employee stock options and the distribution by InnoHold of Paired Securities.
| (in thousands) | Three
Months Ended March 31, | |||||||
| Non-Cash Stock-Based Compensation | 2021 | 2020 | ||||||
| Cost of revenues | $ | $ | ||||||
| Marketing and sales | ||||||||
| General and administrative | ||||||||
| Research and development | ||||||||
| Total non-cash stock-based compensation | $ | $ | ||||||
17. 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.
27
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. Investors are cautioned not to place undue reliance on any such forward-looking 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.
We caution and advise readers that these statements are based on assumptions that may not be realized and involve risks and uncertainties that could cause actual results to differ materially from the expectations and beliefs contained herein. These risks include, among others, the evolving impact and duration of the COVID-19 pandemic. For a summary of these risks, see the risk factors included in the “Risk Factors” section in this Quarterly Report and in our Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on May 10, 2021.
Overview of Our Business
Our mission is to help people feel and live better through innovative comfort solutions.
We are a digitally-native vertical brand founded on comfort product innovation with premium offerings. We design and manufacture a variety of innovative, branded and premium comfort products, including mattresses, pillows, cushions, frames, sheets, 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 gel technology, Hyper-Elastic Polymer, 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 through our direct-to-consumer (“DTC”) online channels, retail brick-and-mortar wholesale partners, third-party online retailers and Company showrooms.
Organization
The Company 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, the Company consummated a transaction structured similar to a reverse recapitalization (the “Business Combination”) pursuant to which Purple Inc. acquired an equity interest in Purple LLC 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. In connection with the Business Combination, InnoHold retained an 82% economic interest in Purple LLC. InnoHold subsequently transferred a portion of its Class B Units to permitted transferees and exchanged its remaining shares for shares of Class A Stock that it sold. At March 31, 2021, Purple Inc. had a 99% economic interest in Purple LLC while other Class B unit holders had the remaining 1%.
COVID-19 Pandemic 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. The scope and nature of these impacts continue to evolve. Because of the COVID-19 pandemic, we have taken precautionary measures to manage our resources and mitigate the adverse impact of the pandemic, which is intended to help minimize the risk to our Company, employees, customers, and the communities in which we operate. Employees at the Company’s headquarters and certain other employees have been asked to work from home where possible, with only limited access given to employees to work in the office when necessary. For roles that require employees to be on-site, such as our manufacturing facilities and distribution center, we require employees to wear protective equipment, perform temperature testing at the start of each shift and again during the shift, contact trace when risk of exposure is known, stagger shifts to reduce concentration of employees, follow social distancing guidelines and sanitize daily including complete weekly anti-viral fumigation.
28
Despite the ongoing challenges from COVID-19, we have been able to capitalize on the opportunities created by this situation. We continue to serve our customers through our Direct to Consumer (“DTC”) channel, which has remained strong throughout the pandemic as consumer demand for our premium, differentiated product offerings shifted to our DTC channel. We continue to focus our efforts in our DTC core competencies resulting in an ongoing strength in DTC channel sales across all of our product categories. This increase in demand was a contributing factor to DTC net revenue growth of 54.8% over the prior year first quarter. There can be no assurance that this trend of strong demand through our DTC channel will continue. We experienced a sharp decline in the wholesale side of our business during the second quarter of 2020 as temporary shutdowns of non-essential businesses and shelter-at-home directives occurred in most U.S. states. As the shutdowns were lifted and stores began to open again, demand through the wholesale channel increased. Net revenue from wholesale customers the first quarter of 2021 increased 47.6% over the prior year first quarter. All of our showrooms are currently open and we have continued with our expansion plans by opening three new showrooms since the beginning of 2021.
The increase in demand over the last twelve months allowed us to work through a portion of our on-hand inventory and required us to ramp up production. On March 3, 2021 we began operations at a new manufacturing facility in Georgia. We continue to take advantage of our vertically integrated business model to adjust production schedules to leverage inventory on hand and manage labor costs. We also continue to dynamically adjust our significant discretionary online advertising spend in response to any changes in DTC trends as they develop.
Our supply chain has not been significantly affected by COVID-19. Suppliers in China were temporarily closed because of the pandemic, but we had sufficient inventory on hand. These suppliers have resumed production and are able to supply materials as needed. Most of our domestic suppliers have been able to continue operations and provide necessary materials when needed. We have experienced some constraints from certain suppliers due to our increased production to meet demand. We have also experienced some shipping delays in the delivery of our product to our customers. This is due to the increased nationwide demand placed on delivery companies.
Although we have taken measures to protect the business, we cannot predict the specific duration for which precautionary measures relating to COVID-19 will stay in effect, and we may elect or need to take additional measures as the information available to us continues to develop, including with respect to our employees, manufacturing facilities and distribution center, and relationships with our suppliers and customers. Subject to certain assumptions regarding the duration and severity of the COVID-19 pandemic, and government, consumer, and our responses thereto, based on our current projections we believe our cash on hand, ongoing cash generated from e-commerce, liquidity available under our line of credit, and continuing resumption and ramp up of store operations and our wholesale business, will be sufficient to cover our working capital requirements and anticipated capital expenditures for the next 12 months.
Whereas most state and local governments have eased restrictions on commercial retail activity, it is possible that a resurgence in cases of COVID-19 or one of its variants could prompt a return to tighter restrictions in certain areas of the country. We also do not yet know the impact that vaccines may have in mitigating or ending the outbreak of COVID-19, or how the availability of such vaccines may affect our work force. Furthermore, while the bedding industry has fared much better during the pandemic than certain other sectors of the economy, continued economic weakness may eventually have an adverse impact upon the industry and our business. Therefore, significant uncertainty remains regarding the ongoing impact of the COVID-19 outbreak upon our financial condition and future results of operations, as well as upon the significant estimates and assumptions we utilize in reporting certain assets and liabilities.
Restatement
As described in additional detail in the Explanatory Note to our Annual Report on Form 10-K/A for the year ended December 31, 2020, filed on May 10, 2021, the SEC released a public statement on April 12, 2021 (the “SEC Statement”) informing market participants that warrants issued by special purpose acquisition companies (“SPACs”) may require classification as a liability of the entity measured at fair value, with changes in fair value each period reported in earnings. The Company previously classified its public warrants and sponsor warrants, which were issued in 2015, as equity.
In light of the SEC Statement, on April 28, 2021, the Audit Committee of the Board of Directors of the Company, after considering the recommendations of management, concluded that the Company’s previously issued audited consolidated financial statements as of and for the years ended December 31, 2020 and 2019 and previously issued unaudited condensed consolidated financial statements as of and for the quarterly periods ended September 30, 2020 and 2019, June 30, 2020 and 2019 and March 31, 2020 and 2019 (collectively, the “Non-Reliance Periods”) should not be relied upon due to required corrections related to the accounting for warrants described in the SEC Statement. As a result, we restated our previously issued audited consolidated financial statements and unaudited condensed consolidated financial statements for the Non-Reliance Periods. Such restated financial statements were included in our Annual Report on Form 10-K/A for the year ended December 31, 2020 filed on May 10, 2021. The unaudited condensed consolidated financial statements for the quarter ended March 31, 2020 included in this Quarterly Report on Form 10-Q reflect the impacts of such restatement.
29
Operating Results for the Three Months Ended March 31, 2021 and 2020
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 income:
| Three Months Ended March 31, | ||||||||||||||||
| 2021 | %
of Net Revenues | 2020 | %
of Net Revenues | |||||||||||||
| Revenues, net | $ | 186,429 | 100.0 | % | $ | 122,375 | 100.0 | % | ||||||||
| Cost of revenues | 98,905 | 53.1 | 69,193 | 56.5 | ||||||||||||
| Gross profit | 87,524 | 46.9 | 53,182 | 43.5 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Marketing and sales | 54,368 | 29.2 | 36,684 | 30.0 | ||||||||||||
| General and administrative | 14,526 | 7.8 | 7,548 | 6.2 | ||||||||||||
| Research and development | 1,723 | 0.9 | 1,445 | 1.2 | ||||||||||||
| Total operating expenses | 70,617 | 37.9 | 45,677 | 37.3 | ||||||||||||
| Operating income | 16,907 | 9.1 | 7,505 | 6.1 | ||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (570 | ) | (0.3 | ) | (1,389 | ) | (1.1 | ) | ||||||||
| Other income (expense), net | (68 | ) | 0.0 | 90 | 0.1 | |||||||||||
| Tax receivable agreement income (expense) | 174 | 0.1 | (122 | ) | (0.1 | ) | ||||||||||
| Change in fair value – warrant liabilities | 9,147 | 4.9 | 21,633 | 17.7 | ||||||||||||
| Total other income, net | 8,683 | 4.7 | 20,212 | 16.5 | ||||||||||||
| Net income before income taxes | 25,590 | 13.7 | 27,717 | 22.6 | ||||||||||||
| Income tax (expense) benefit | (4,651 | ) | (2.5 | ) | 284 | 0.2 | ||||||||||
| Net income | 20,939 | 11.2 | 28,001 | 22.9 | ||||||||||||
| Net income attributable to noncontrolling interest | 115 | 0.1 | 11,166 | 9.1 | ||||||||||||
| Net income attributable to Purple Innovation, Inc. | $ | 20,824 | 11.2 | $ | 16,835 | 13.8 | ||||||||||
Revenue
Total net revenues increased $64.1 million, or 52.3%, to $186.4 million for the three months ended March 31, 2021 compared to $122.4 million for the three months ended March 31, 2020. We were able to further capitalize on the shift in customer demand that began in 2020 and grew DTC net revenues by $44.2 million, or 54.8%, during the first quarter of 2021. Our wholesale business generated net revenue growth of $19.8 million, or 47.6%, in the first quarter. The increase in net revenues from a product perspective reflected a $46.1 million increase in mattress sales, an $11.3 million increase in other bedding product sales and a $6.7 million increase in other product sales. This growth in product sales was primarily attributable to an increase in demand across all product lines.
Cost of Revenues
The cost of revenues increased $29.7 million, or 42.9%, to $98.9 million for the three months ended March 31, 2021 from $69.2 million for the three months ended March 31, 2020. This increase reflected a $18.6 million increase in direct material costs, a $6.3 million increase in labor and overhead, a $2.6 million increase in freight charges and a $2.2 million increase in all other costs, all associated with increased product sales. The gross profit percentage increased to 46.9% of net revenues for the three months ended March 31, 2021 from 43.5% for the same period in 2020. The improvement in gross profit was primarily driven by a higher proportion of DTC channel revenue, which carries a higher gross margin than revenue from the wholesale channel.
Marketing and Sales
Marketing and sales expenses increased $17.7 million, or 48.2%, to $54.4 million for the three months ended March 31, 2021 compared to $36.7 million for the three months ended March 31, 2020. The increase was due to an $11.0 million increase in advertising costs, a $4.2 million increase in marketing salaries related to an increase in personnel and a $2.5 million increase in other marketing and sales expenses. Marketing and sales expense as a percentage of net revenues was 29.2% for the three months ended March 31, 2021 compared to 30.0% for the prior period. This decrease was due to efficiencies realized in our advertising spending created from enhanced marketing strategies.
General and Administrative
General and administrative expenses increased $7.0 million, or 92.4%, to $14.5 million for the three months ended March 31, 2021 from $7.5 million for the three months ended March 31, 2020. The increase was primarily due to a $3.1 million increase in legal and professional fees, a $1.9 million increase in salaries related to an increase in personnel, a $0.6 million increase related to a new corporate building lease, and a $1.4 million increase in all other expenses.
30
Research and Development
Research and development costs increased $0.3 million, or 19.2%, to $1.7 million for the three months ended March 31, 2021 from $1.4 million for the three months ended March 31, 2020. The increase was primarily due to a $0.3 million increase in salaries and wages and other R&D expenses as we added resources for new product innovation.
Operating Income
Operating income increased $9.4 million to $16.9 million for the three months ended March 31, 2021, from operating income of $7.5 million for the three months ended March 31, 2020. The increase was primarily due to increased DTC sales with higher margins and lower marketing and sales costs as a percentage of revenue.
Interest Expense
Interest expense totaled $0.6 million for the three months ended March 31, 2021 as compared to $1.4 million for the three months ended March 31, 2020. The $0.8 million decrease was primarily due to the $35.0 million Related Party Loan, which carried an interest rate of 12.00%, being refinanced in the third quarter of 2020 with a $45.0 million term loan at an initial interest rate of 3.50%. Interest expense also includes amortization of deferred loan costs associated with the 2020 Credit Agreement and fees related to the revolving line of credit.
Change in Fair Value – Warrant Liabilities
On February 26, 2019, the Incremental Lenders from the 2018 credit arrangement funded a $10.0 million increase in the Related Party Loan and received 2.6 million warrants to purchase 2.6 million shares of our Class A Stock at a price of $5.74 per share, subject to certain adjustments. We accounted for the Incremental Loan Warrants as liabilities and recorded them at fair value on the date of the transaction and subsequently re-measured to fair value at each reporting date with changes in the fair value included in earnings. We determined the fair value of the Incremental Loan Warrants to be $8.0 million at March 31, 2020. During the three months ended March 31, 2020, we recognized a gain of $13.6 million in our condensed consolidated statements of income. There was no gain or loss on the Incremental Loan Warrants for the three months ended March 31, 2021 as they were exercised in 2020.
There were 15.5 million public warrants issued in connection with GPAC’s formation and IPO and 12.8 million sponsor warrants issued pursuant to a simultaneous private placement with the IPO. We have accounted for these warrants as liabilities and recorded them at fair value on the date of the transaction and subsequently re-measured to fair value at each reporting date with changes in fair value included in earnings. The 1.9 million sponsor warrants outstanding at March 31, 2021 had a fair value of $19.4 million. The fair value of the public and sponsor warrants outstanding at March 31, 2020 was $15.8 million. During the three months ended March 31, 2021 and 2020, we recognized gains of $9.1 million and $8.0 million, respectively, in its condensed consolidated statements of income related to decreases in the fair value of the warrants exercised during the respective periods or that were outstanding at the end of the respective periods.
Tax Receivable Agreement Expense
We are party to a tax receivable agreement which generally provides for the payment by us to InnoHold of 80% of certain tax benefits, if any, that we realize as a result of increases in its allocable share of the tax basis of the tangible and intangible assets of Purple LLC. Because of the Business Combination, subsequent exchanges of 43.5 million Class B Units for Class A Stock and changes in estimates relating to the expected tax benefits associated with the tax receivable agreement, the tax receivable agreement liability totaled $171.9 million and $172.0 million at March 31, 2021 and December 31, 2020, respectively. During the first quarter, a payment of $0.6 million was made combined with a $0.2 million decrease in tax receivable agreement expense due to a state tax rate change. These decreases were offset by $0.8 million related to current year exchanges that were recorded as a decrease to additional paid-in capital in the consolidated statement of stockholders’ equity. The tax receivable agreement expense incurred in the first quarter of 2020 was $0.1 million.
31
Income Tax (Expense) Benefit
Our income tax expense was $4.7 million for the three months ended March 31, 2021, compared to an income tax benefit of $0.3 million for the three months ended March 31, 2020. Income tax expense for the three months ended March 31, 2021 was primarily the result of no longer having a full valuation allowance and the decrease in noncontrolling interest.
Noncontrolling Interest
We attribute net income or loss to the Class B Units in Purple LLC, owned by InnoHold and other parties, as a noncontrolling interest at their aggregate ownership percentage. We calculate net income or loss attributable to noncontrolling interests on a quarterly basis using their weighted average ownership percentage. Net income attributed to noncontrolling interests was $0.1 million and $11.2 million for the three months ended March 31, 2021 and 2020, respectively. The decrease in the net income level attributed to noncontrolling interests resulted from the noncontrolling ownership interest declining from 56.2% at March 31, 2020 to 1.0% at March 31, 2021.
Liquidity and Capital Resources
Our primary cash needs have historically consisted of working capital, capital expenditures and debt service. Our working capital needs depend upon the timing of cash receipts from sales, payments to vendors and others, changes in inventories, and operating lease payment obligations. Our cash and working capital positions are $103.8 million and $103.2 million, respectively, as of March 31, 2021 compared to $123.0 million and $96.9 million, respectively, as of December 31, 2020. Cash used for purchases of property and equipment increased from $4.5 million during the first quarter of 2020 to $12.3 million during the first quarter of 2021. This increase primarily resulted from enhancing our manufacturing capabilities in Utah, scaling our infrastructure to support the growth of our workforce, opening several new Company showrooms, and continuing to build out our new manufacturing facility in Georgia that began operations on March 3, 2021.
In response to the COVID-19 pandemic, we took a number of precautionary measures to manage our resources and mitigate its adverse impact. Given the initial difficultly in predicting how long the pandemic would persist and its full impact, we managed our business and opportunities to preserve liquidity. We ended most of the cash preservation programs and returned to full production to meet increased demand during the second half of 2020. Subject to certain assumptions regarding the duration and severity of the COVID-19 pandemic, and our responses thereto, based on our current projections we believe our cash on hand, ongoing cash generated from our DTC business, amounts available under our new line of credit, continued demand of our products in the wholesale channel and continuing ramp up of store operations, will be sufficient to cover our working capital requirements and anticipated capital expenditures for the next 12 months.
On September 3, 2020, we paid $45.0 million to retire, in full, all indebtedness related to Purple LLC’s Related Party Loan. The payment included $25.0 million for the original loan under the agreement, $10.0 million for a subsequent incremental loan, $6.6 million for paid-in-kind interest, $2.5 million for a prepayment fee and $0.9 million for accrued interest.
Also 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 agreement has a five-year term and borrowing rates for both the Term Loan and revolving line of credit are based on Purple LLC’s leverage ratio and can range from LIBOR plus a 3.00% to 3.75% margin with a LIBOR minimum of 0.50%. As of March 31, 2021, there was no balance outstanding on the revolving credit facility. Proceeds from the Term Loan were used to retire all indebtedness associated with the Related Party Loan.
During the three months ended March 31, 2021, 6.6 million sponsor warrants were exercised on a cash and cashless basis resulting in the issuance of 2.3 million shares of Class A common stock. The proceeds received for the cash exercise was $0.1 million. At March 31, 2021, there were 1.9 million sponsor warrants outstanding.
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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 based on our ability to scale back operations, reduce marketing spend 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. In addition, we may be forced to restructure our obligations to current creditors or pursue work-out options.
If cash flow from operations or available financing under the 2020 Credit Agreement are not sufficient to fund our operating expenses or our growth strategies, we may need to raise additional capital. Our ability to obtain additional or alternative capital on acceptable terms or at all is subject to a variety of uncertainties, including instability in the credit and financial markets resulting from the COVID-19 pandemic, political or social unrest, other macroeconomic factors and approval from the lenders under the 2020 Credit Agreement. Adequate financing may not be available or, if offered, may only be available on unfavorable terms. The restrictive covenants in the 2020 Credit Agreement may make it difficult to obtain additional capital on terms that are favorable to us, and we may not be able to satisfy the conditions necessary to obtain additional funds pursuant to the revolving credit facility under the 2020 Credit Agreement. There is no assurance we will obtain the capital we require. As a result, there can be no assurance that we will be able to fund our future operations or growth strategies. In addition, future equity or debt financings may require us to also issue warrants or other equity securities that are likely to be dilutive to our existing stockholders. Newly issued securities may include preferences or superior voting rights or, as described above, may be combined with the issuance of warrants or other derivative securities, which each may have additional dilutive effects. Furthermore, we may incur substantial costs in pursuing future capital and financing, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition. If we cannot raise additional funds on favorable terms or at all, we may not be able to carry out all or parts of our long-term growth strategy, maintain our growth and competitiveness or continue in business.
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. 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 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 tax receivable agreement. As of March 31, 2021, the tax receivable agreement liability reflected in our consolidated balance sheet is $171.9 million of which $5.9 million is presented as a short-term liability.
Cash Flows for the Three months Ended March 31, 2021 and 2020
The following summarizes our cash flows for the three months ended March 31, 2021 and 2020 as reported in our condensed consolidated statements of cash flows (in thousands):
| Three
Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Net cash used in operating activities | $ | (9,391 | ) | $ | (264 | ) | ||
| Net cash used in investing activities | (12,354 | ) | (6,848 | ) | ||||
| Net cash provided by financing activities | 2,605 | 12 | ||||||
| Net decrease in cash | (19,140 | ) | (7,100 | ) | ||||
| Cash, beginning of the period | 122,955 | 33,478 | ||||||
| Cash, end of the period | $ | 103,815 | $ | 26,378 | ||||
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Three months ended March 31, 2021 Compared to the Three months ended March 31, 2020
Cash used in operating activities was $9.4 million for the three months ended March 31, 2021 compared to $0.3 million for the three months ended March 31, 2020. This increase in cash used in operations primarily resulted from a $15.1 million decrease in operating cash flows related to unfavorable net changes in operating assets and liabilities for the three months ended March 31, 2021 compared to the corresponding period in the prior year. This decrease consisted of less cash from unfavorable changes in period-over-period fluctuations in accounts receivable and liabilities, offset in part by increases in cash related to favorable changes in year-over-year fluctuations in inventory and other assets. The impact of this was offset in part by $6.0 million in cash provided by operating incomes which was mainly driven by increased DTC sales.
Cash used in investing activities was $12.4 million for the three months ended March 31, 2021 compared to $6.8 million for the three months ended March 31, 2020. This increase primarily resulted from enhancing our manufacturing capabilities in Utah, scaling our infrastructure to support the growth of our workforce, opening several new Company showrooms, and continuing to expand our manufacturing capacity in our new manufacturing facility in Georgia that began operations on March 3, 2021.
Cash provided by financing activities during the three months ended March 31, 2021 was $2.6 million compared to a minimal amount of cash provided by financing activities during the three months ended March 31, 2020. Financing activities in the first quarter of 2021 included $4.1 million in proceeds from an InnoHold indemnification payment and $0.2 million of proceeds from warrant and stock option exercises, offset in part by a $0.6 million principal payment on the term loan, a $0.6 million payment for the tax receivable agreement and member distributions of $0.5 million.
Critical Accounting Policies
For a description of our critical accounting policies, refer to Note 2 — Summary of Significant Accounting Policies of our condensed consolidated financial statements.
Contractual Obligations
Our contractual obligations and other commercial commitments as of March 31, 2021 are summarized below:
| (in thousands) | Payment Due By Period | |||||||||||||||||||||||||||
| Contractual Obligations | 2021(1) | 2022 | 2023 | 2024 | 2025 | Thereafter | Total Obligations | |||||||||||||||||||||
| Debt (2) | $ | 1,688 | $ | 2,531 | $ | 3,375 | $ | 3,656 | $ | 32,625 | $ | — | $ | 43,875 | ||||||||||||||
| Interest payments (3) | 1,263 | 1,606 | 1,502 | 1,386 | 850 | — | 6,607 | |||||||||||||||||||||
| Operating lease obligations (4) | 4,819 | 8,432 | 7,851 | 7,874 | 7,903 | 62,996 | 99,875 | |||||||||||||||||||||
| Purchase obligations | 112 | 150 | 150 | 150 | 150 | 1,122 | 1,834 | |||||||||||||||||||||
| Total (4) | $ | 7,882 | $ | 12,719 | $ | 12,878 | $ | 13,066 | $ | 41,528 | $ | 64,118 | $ | 152,191 | ||||||||||||||
(1) – Excludes amounts due during the three months ended March 31, 2021.
(2) – Excludes amounts due under the revolving credit line since no amounts have been borrowed against it.
(3) – Includes quarterly commitment fee payments based on unused portion of revolving credit line.
(4) – Excludes $6.6 million of tenant improvement allowances which are expected to be fully utilized in fiscal 2021.
Seasonality and Cyclicality
We believe that sales of our products are typically subject to seasonality corresponding to different periods of the consumer spending cycle, holidays and other seasonal factors. Our sales may also vary with the performance of the broader economy consistent with the market.
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/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 Securities and Exchange Commission.
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, Securities and Exchange Commission 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
Not Applicable.
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 Chief Financial Officer (“CFO”), 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.
Based upon this evaluation, and the above criteria, our CEO and CFO concluded that due to the material weakness described below and as previously disclosed in our Form 10-K/A filed May 10, 2021, the Company’s disclosure controls and procedures were not effective as of March 31, 2021.
Material Weakness in Internal Control over Financial Reporting
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
As previously disclosed in our Annual Report on Form 10-K/A for the year ended December 31, 2020, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2020 due to the material weakness described below.
Our internal control over financial reporting did not identify an error in the classification of the public and sponsor warrants issued in connection with our IPO and through a simultaneous private placement, which we determined to be a material weakness. This error in classification was brought to our attention when the SEC issued the SEC Statement informing market participants that warrants issued by special purpose acquisition companies (“SPACs”) may require classification as a liability of the entity measured at fair value, with changes in fair value each period reported in earnings. The SEC Statement addresses certain accounting and reporting considerations related to warrants of a kind similar to those public and sponsor warrants we issued. We previously classified our public warrants and sponsor warrants as equity. As a result of such misclassification, we restated our previously issued audited consolidated financial statements as of and for the years ended December 31, 2020 and 2019 and previously issued unaudited condensed consolidated financial statements as of and for the quarterly periods ended September 30, 2020 and 2019, June 30, 2020 and 2019 and March 31, 2020 and 2019. Such restated financial statements were included in our Annual Report on Form 10-K/A for the year ended December 31, 2020 filed on May 10, 2021.
In response to this material weakness in internal control over financial reporting related to the assessment of complex accounting issues reached in prior periods that continue to impact the Company, we will implement a new control to assess complex accounting issues reached in the past that continue to impact the Company to ensure those conclusions reached are still appropriate. Our plans include increased communication among our personnel and third-party professionals with whom we consult regarding the application of complex accounting transactions. Our remediation plan can only be accomplished over time and will be continually reviewed to determine that it is achieving its objectives. We can offer no assurance that these initiatives will ultimately have the intended effects.
(b) Changes in Internal Controls Over Financial Reporting.
Other than the changes described above, during the three months ended March 31, 2021, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls 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 11 — 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 Securities and Exchange Commission on March 11, 2021 as amended by Form 10-K/A filed on May 10, 2021.
Regulatory and Litigation Risks
Regulatory requirements relating to the manufacture and disposal of mattresses may increase our product costs and increase the risk of disruption to our business.
The U.S. Consumer Product Safety Commission (“CPSC”) and other jurisdictions have adopted rules relating to fire retardancy standards for the mattress industry. Some states and the U.S. Congress continue to consider fire retardancy regulations that may be different from or more stringent than the current standard. In addition, these regulations require manufacturers to implement quality assurance programs and encourage manufacturers to conduct random testing of products. These regulations also require maintenance and retention of compliance documentation. These quality assurance and documentation requirements are costly to implement and maintain. If any product testing, other evidence, or regulatory inspections yield results indicating that any of our products may not meet the flammability standards, we may be required to temporarily cease production and distribution or to recall products from the field, and we may be subject to fines or penalties, any of which outcomes could harm our business, reputation, sales, profitability, cash flows and financial condition.
The CPSC adopted new flammability standards and related regulations which became effective nationwide in July 2007 for mattresses and mattress and foundation sets. Compliance with these requirements has resulted in higher materials and manufacturing costs for our products and has required modifications to our information systems and business operations, further increasing our costs and negatively impacting our capacity. Some states and the U.S. Congress continue to consider fire retardancy regulations that may be different from or more stringent than the CPSC standard. Adoption of multi-layered regulatory regimes, particularly if they conflict with each other, could increase our costs, alter our manufacturing processes and impair the performance of our products which may have an adverse effect on our business.
Also, California recently enacted laws effective in 2021 requiring mattress retailers delivering mattresses via common carrier in California to offer to pick up their customers’ old mattresses at no cost to the customer. Additionally, California, Rhode Island and Connecticut have all enacted laws requiring the recycling of mattresses discarded in their states. State and local bedding industry regulations vary among the states in which we operate but generally impose requirements as to the proper labeling of bedding merchandise, restrictions regarding the identification of merchandise as “new” or otherwise, controls as to hygiene and other aspects of product handling, disposal, sales, resales and penalties for violations. We or our suppliers may be required to incur significant expense to the extent that these regulations change and require new and different compliance measures.
New legislation aimed at improving the fire retardancy of mattresses, regulating the handling of mattresses in connection with preventing or controlling the spread of bed bugs could be passed, or requiring the collection or recycling of discarded mattresses, could result in product recalls or in a significant increase in the cost of operating our business. In addition, failure to comply with these various regulations may result in penalties, the inability to conduct business as previously conducted or at all, or adverse publicity, among other things. Adoption of multi-layered regulatory regimes, particularly if they conflict with each other, could increase our costs, alter our manufacturing processes and impair the performance of our products which may have an adverse effect on our business. We are also subject to various health and environmental provisions such as 16 CFR Part 1633 (Standard for the Flammability (Open Flame) of Mattress Sets).
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Our manufacturing processes involve the use of heavy machinery and equipment, which exposes us to potentially significant financial losses and reputational harm due to workplace injuries or industrial accidents that may occur at our facilities.
Our manufacturing processes involve the use of heavy machinery and equipment and are subject to risks involving workplace injuries, mechanical failures, and industrial accidents, including, among other things, personal injury or death resulting from such incidents at our manufacturing plants. A workplace accident, mechanical failure, industrial accident or any similar problem involving any one or more of our facilities has required, and may require us in the future, that we suspend production at one or more of our manufacturing plants, which could lead to delays in manufacturing and shipping our products and adversely affect our business and results of operations. The occurrence of such incidents, or any perceived insufficiency in our response to any such deficiency or problem, could also materially adversely affect our reputation. If we are unable to meet workplace safety standards or, if our employees or customers perceive us having a poor safety record, it could materially impact our ability to attract and retain new employees and our reputation with our customers could suffer, which could adversely affect our business and results of operations.
The occurrence of such incidents could also result in investigations by or the imposition of fines from regulatory authorities or require us to implement corrective actions to address the causes of such incidents, which could require the expenditure of significant resources and may adversely affect our financial condition and operations. Further, the occurrence of such incidents may result in litigation, including personal injury or workers’ compensation claims, which could also adversely affect our financial condition and reputation. While we maintain insurance coverage for certain types of losses, such insurance coverage may be insufficient to cover all losses that may arise.
Risks Related to Our Operations
Disruption of operations in our manufacturing facilities, including as a result of, among other things, workplace injuries, pandemics or natural disasters, has and could increase our costs of doing business or lead to delays in shipping our products.
We have two manufacturing plants, which are located in Alpine, Utah and Grantsville, Utah. We began operations on March 3, 2021 at a third manufacturing plant in McDonough, Georgia that manufactures and distributes products. In the future we may also enter into leases for additional manufacturing plants.
Although we can produce some of our products at both Utah sites, we have consolidated production of certain products at each site. Therefore, the disruption of operations of our manufacturing facilities, particularly where manufacturing has been consolidated, for a significant period of time, or even permanently, or disruptions to the scheduled build-out of the Georgia facility such as through a closure related to the COVID-19 pandemic or the loss of the lease, may increase our costs of doing business and lead to delays in shipping our products to customers. In addition, the occurrence of workplace injuries or other industrial accidents at one or more of our manufacturing plants has required, and may require in the future, that we suspend production or modify our operations, which could lead to delays in manufacturing and shipping our products to customers. Such delays could adversely affect our sales, customer satisfaction, profitability, cash flows, liquidity and financial condition. Because two of our currently operating manufacturing plants are located within the same geographic region, regional economic downturns, natural disasters, closures due to COVID-19 or other issues could potentially disrupt a significant portion of our manufacturing and other operating activities, which could adversely affect our business. On March 18, 2020, Magna, Utah was the epicenter of a 5.7 magnitude earthquake that was felt approximately 20 miles away at our Grantsville, Utah manufacturing plant but not felt at our Alpine, Utah manufacturing plant. Since that date, there have been approximately one-thousand aftershocks. Though no damage occurred at either manufacturing plant from the 5.7 earthquake or its aftershocks, continued or increased earthquake activity in the area could disrupt manufacturing and other operating activities, which could adversely affect our business.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
| * | Filed herewith. |
| (1) | Previously filed as an Exhibit to the Current Report on Form 8-K filed February 8, 2018. |
| (2) | Previously filed as an Exhibit to the Annual Report on Form 10-K filed March 11, 2021. |
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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 17, 2021 | By: | /s/ Joseph B. Megibow |
| Joseph B. Megibow | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: May 17, 2021 | By: | /s/ Craig L. Phillips |
| Craig L. Phillips | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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