UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
FOR
THE QUARTERLY PERIOD ENDED
OR
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
Commission
File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s
telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ☒ | |
| Non-accelerated filer | ☐ | Smaller reporting company | |
| Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As
of November 13, 2023,
PURPLE INNOVATION, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
i
In this Quarterly Report on Form 10-Q, references to “dollars” and “$” are to United States (“U.S.”) dollars.
We have several trademarks registered with the U.S. Patent and Trademark Office (“USPTO”), including EquaPressure®, WonderGel® and EquaGel® (for cushions), and Purple®, No Pressure®, Hyper-Elastic Polymer®, Somnigel®, Gel Matrix®, Matrix®, Gelee®, Ascent®, Softstretch®, Purple Powerbase®, Sleep Genius®, Firm and Soft®, Intellipillow®, and Intellibed®(for plasticized elastomeric gel and certain types of products including mattresses, seat cushions, bed linen, mattress foundation and others). Additional registered trademarks include, but are not limited to, Purple Grid®, Reinventing Comfort®, Comfort Reinvented®, TwinCloud®, Purple Cloud®, Purple Pillow®, The Purple Mattress®, Purple Hybrid®, Purple Hybrid Premier®, The Purple Mattress®, The Purple Plus®, Gelflex® and registration of the color purple as a trademark (for mattresses, pillows, and seat cushions). Applications are pending for registration of additional trademarks and some of these listed trademarks for additional classes of goods both in the U.S. and internationally. Our Purple, No Pressure and Hyper-Elastic Polymer trademarks are also registered and have applications pending for various classes of goods in numerous foreign jurisdictions, some of which include Australia, Canada, China, Europe, United Kingdom, Japan and Korea. Certain international trademark applications previously resided with EdiZONE, LLC, which is an entity owned by our founders, and were licensed to Purple LLC and we have taken the necessary steps to have those trademarks assigned to Purple LLC upon registration.
We also have a number of common law trademarks, including Sleep Purple, Live Better™, New Day™, Restore™, RestorePlus™, RestorePremier™, Rejuvenate™, RejuvenatePlus™, RejuvenatePremier™, Perfectstay™, TempBalance™, Success Happens Overnight™, Overnight Success™, Harmony™, Purple Harmony Pillow™, Harmony Pillow™, Purple +™, Purple Plus™, Find Comfort™, Dreams On Dreams™, Reinventing Sleep™, Gelflex Grid™, Gelflex Grid Plus™, Purple Ascent™, Purple Squishy™, Purple Powerbase Premier™, Purple Powerbase Plus™, Purple Glove™, Eidertech™, Mattress Max™, WonderGel Original™, WonderGel Extreme™, DoubleGel™, DoubleGel Plus™, DoubleGel Ultra™, Roll n’ Go™, Fold N’ Go™, Purple Bed™, Purple Top™, Purple Pillow™, Portable Purple™, Everywhere Purple™, Simply Purple™, Lite Purple™, Royal Purple™, Double Purple™, Deep Purple™, Ultimate Purple™, Purple Back™, EquaGel Straight Comfort™, EquaGel General™, EquaGel Protector™, and EquaGel Adjustable™.
Many of the common law marks have registrations pending with the USPTO and other international jurisdictions. Solely for convenience, we refer to our trademarks in this Quarterly Report without the ™ or ® symbol, but such references are not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights to our trademarks.
In addition, we maintain copyrights, many of which are registered, to past and present versions of purple.com, onpurple.com, equapressure.com, wondergel.com, marketing content, blogs, logos, graphics, videos and other marketing and promotional materials promoting our products.
We protect and enforce our intellectual property rights, including through litigation as necessary.
ii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PURPLE INNOVATION, INC.
Condensed Consolidated Balance Sheets
(unaudited – in thousands, except for par value)
| September 30, 2023 | December 31, 2022 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash, cash equivalents and restricted cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Other long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued sales returns | ||||||||
| Accrued compensation | ||||||||
| Customer prepayments | ||||||||
| Accrued sales and use tax | ||||||||
| Accrued rebates and allowances | ||||||||
| Operating lease obligations – current portion | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Debt | ||||||||
| Operating lease obligations, net of current portion | ||||||||
| Other long-term liabilities, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 15) | ||||||||
| Stockholders’ equity: | ||||||||
| Class A common stock; $ | ||||||||
| Class B common stock; $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity attributable to Purple Innovation, Inc. | ||||||||
| Noncontrolling interest | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
PURPLE INNOVATION, INC.
Condensed Consolidated Statements of Operations
(unaudited – in thousands, except per share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Marketing and sales | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Loss on impairment of goodwill | — | — | ||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income, net | ||||||||||||||||
| Change in fair value – warrant liabilities | ( | ) | ||||||||||||||
| Loss on extinguishment of debt | ( | ) | ( | ) | ||||||||||||
| Total other income (expense), net | ( | ) | ( | ) | ||||||||||||
| Net income (loss) before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ||||||||||||
| Net income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net income (loss) attributable to noncontrolling interest | ( | ) | ( | ) | ( | ) | ||||||||||
| Net income (loss) attributable to Purple Innovation, Inc. | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Net income (loss) per share: | ||||||||||||||||
| Basic | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Diluted | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
PURPLE INNOVATION, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited – in thousands)
| Class A | Class B | Additional | Total | |||||||||||||||||||||||||||||||||
| Common Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | Noncontrolling | Total | ||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Capital | Deficit | Equity | Interest | Equity | ||||||||||||||||||||||||||||
| Balance - December 31, 2022 | $ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
| Net loss | — | — | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of stock under equity compensation plans | — | |||||||||||||||||||||||||||||||||||
| Issuance of stock upon underwritten offering, net of costs | — | |||||||||||||||||||||||||||||||||||
| Impact of transactions affecting NCI | — | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Balance – March 31, 2023 | $ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
| Net loss | — | — | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Exchange of stock | ( |
) | ||||||||||||||||||||||||||||||||||
| Proportional Representation Preferred Linked Stock redemption fee | — | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Additional costs associated with underwritten public stock offering | — | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Issuance of stock under equity compensation plans | — | |||||||||||||||||||||||||||||||||||
| Impact of transactions affecting NCI | — | — | ( |
) | ||||||||||||||||||||||||||||||||
| Balance – June 30, 2023 | $ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
| Net loss | — | — | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Exchange of stock | ( |
) | ||||||||||||||||||||||||||||||||||
| Impact of transactions affecting NCI | — | — | ( |
) | ||||||||||||||||||||||||||||||||
| Balance – September 30, 2023 | $ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
| Class A | Class B | Additional | Total | |||||||||||||||||||||||||||||||||
| Common Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | Noncontrolling | Total | ||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Capital | Deficit | Equity | Interest | Equity | ||||||||||||||||||||||||||||
| Balance - December 31, 2021 | $ | $ | $ | $ | ( |
) | $ | $ | |
$ | ||||||||||||||||||||||||||
| Net loss | — | — | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | |||||||||||||||||||||||||||||||||||
| Issuance of stock under equity compensation plans | — | |||||||||||||||||||||||||||||||||||
| Issuance of stock upon underwritten public offering, net of costs | — | |||||||||||||||||||||||||||||||||||
| Accrued distributions | — | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Impact of transactions affecting NCI | — | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Balance – March 31, 2022 | $ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
| Net loss | — | — | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of common stock under equity compensation plans | — | |||||||||||||||||||||||||||||||||||
| Additional costs associated with underwritten public stock offering | — | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Impact of transactions affecting NCI | — | — | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Balance – June 30, 2022 | $ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of common stock under equity compensation plans | — | |||||||||||||||||||||||||||||||||||
| Issuance of common stock for Intellibed acquisition | — | |||||||||||||||||||||||||||||||||||
| Impact of transactions affecting NCI | — | — | ( |
) | ||||||||||||||||||||||||||||||||
| Balance – September 30, 2022 | $ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
PURPLE INNOVATION, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited – in thousands)
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Non-cash interest | ||||||||
| Loss on extinguishment of debt | ||||||||
| Loss on impairment of goodwill | ||||||||
| Change in fair value – warrant liabilities | ( | ) | ||||||
| Stock-based compensation | ||||||||
| Gain from effective settlement of preexisting relationship | ( | ) | ||||||
| Deferred income taxes | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||
| Operating leases, net | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued sales returns | ( | ) | ( | ) | ||||
| Accrued compensation | ( | ) | ||||||
| Customer prepayments | ( | ) | ||||||
| Accrued rebates and allowances | ( | ) | ( | ) | ||||
| Other accrued and current liabilities | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Excess restricted cash returned to acquiree | ( | ) | ||||||
| Cash, cash equivalents and restricted cash acquired from acquisition, net of cash paid | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Investment in intangible assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payments on term loan | ( | ) | ( | ) | ||||
| Payments on revolving line of credit | ( | ) | ||||||
| Proceeds from term loan | ||||||||
| Payments for debt issuance costs | ( | ) | ( | ) | ||||
| Proceeds from stock offering | ||||||||
| Payments for public offering costs | ( | ) | ( | ) | ||||
| Proportional Representation Preferred Linked Stock redemption fee | ( | ) | ||||||
| Tax receivable agreement payments | ( | ) | ( | ) | ||||
| Proceeds from exercise of stock options | ||||||||
| Net cash provided by financing activities | ||||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ) | ( | ) | ||||
| Cash, cash equivalents and restricted cash, beginning of the year | ||||||||
| Cash, cash equivalents and restricted cash, end of the period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for interest, net of amounts capitalized | $ | ( | ) | $ | ||||
| Cash paid during the period for income taxes | $ | $ | ||||||
| Supplemental schedule of non-cash investing and financing activities: | ||||||||
| Property and equipment included in accounts payable | $ | $ | ||||||
| Issuance of common stock for Intellibed acquisition | $ | |||||||
| Accrued distributions | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Organization
Purple Innovation, Inc.’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 an omni-channel Company that began as 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 e-commerce online channels, retail brick-and-mortar wholesale partners, Purple owned retail showrooms, and third-party online retailers.
The Company was incorporated in Delaware on May 19, 2015 as a special purpose acquisition company under the name of Global Partnership Acquisition Corp (“GPAC”). On February 2, 2018, the Company consummated a transaction structured similar to a reverse recapitalization (the “Business Combination”) pursuant to which the Company acquired a portion of the equity of Purple Innovation, LLC (“Purple LLC”). At the closing of the Business Combination (the “Closing”), the Company became the sole managing member of Purple LLC, and GPAC was renamed Purple Innovation, Inc.
As the sole managing member of Purple LLC, Purple Inc. through its officers and directors is responsible for all operational and administrative decision making and control of the day-to-day business affairs of Purple LLC without the approval of any other member.
On
August 31, 2022, the Company acquired all the issued and outstanding stock of Advanced Comfort Technologies, Inc., dba Intellibed (“Intellibed”)
pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), in which Gelato Merger Sub, Inc., a wholly owned subsidiary
of Purple Inc., merged with and into Intellibed, with Intellibed continuing as a wholly owned subsidiary of Purple Inc. On October 3,
2022, Purple Inc. contributed
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The
condensed consolidated financial statements include the accounts of Purple Inc., its controlled subsidiary Purple LLC, and Intellibed,
Purple LLC’s wholly owned subsidiary, from the date of acquisition. All intercompany balances and transactions have been eliminated
in consolidation. As of September 30, 2023, Purple Inc. held
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting and reflect the financial position, results of operations and cash flows of the Company. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The unaudited condensed consolidated financial statements were prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which were considered of normal recurring nature) considered necessary to present fairly the Company’s financial results. The results of the three and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2023 or for any other interim period or other future year.
Variable Interest Entities
Purple
LLC is a variable interest entity. The Company determined that it is the primary beneficiary of Purple LLC as it is the sole managing
member and has the power to direct the activities most significant to Purple LLC’s economic performance as well as the obligation
to absorb losses and receive benefits that are potentially significant.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to establish accounting policies and to make estimates and judgments that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The Company regularly makes significant estimates and assumptions including, but not limited to, estimates that affect revenue recognition, accounts receivable and allowance for credit losses, valuation of inventories, sales returns, warranty returns, fair value of assets acquired and liabilities assumed in a business combination, warrant liabilities, stock based compensation, the recognition and measurement of loss contingencies, estimates of current and deferred income taxes, deferred income tax valuation allowances, and amounts associated with the Company’s tax receivable agreement with InnoHold, LLC (“InnoHold”). Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results could differ materially from those estimates.
5
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Recent Accounting Pronouncements
Measurement of Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which was further updated and clarified by the FASB through issuance of additional related ASUs. This guidance replaces the existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost based on expected credit losses. The estimate of expected credit losses requires the incorporation of historical information, current conditions, and reasonable and supportable forecasts. These updates are effective for public companies, excluding Smaller Reporting Companies (“SRC”), for annual periods beginning after December 15, 2019, including interim periods therein. The standard is effective for all other entities for annual periods beginning after December 15, 2022, including interim periods therein. The standard was adopted by the Company on January 1, 2023 utilizing a modified retrospective approach. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.
3. Revision of Consolidated Financial Statements for Correction of Immaterial Misstatements
In October 2023, the Company determined that it had not properly accounted for the warranty terms specified in contracts with its wholesale customers when estimating the liability for warranty related returns. Based on this determination, the Company concluded that its consolidated financial statements should be revised to properly reflect the estimated liability associated with the warranty provisions in its wholesale contracts. In accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company evaluated the error and determined that the related impact was not material to results of operations or financial position for any prior annual or interim period. However, the Company is correcting such errors in the financial statements as of and for the three and nine months ending September 30, 2023 included in this Quarterly Report on Form 10-Q by adjusting prior period financial statements. As a result, the Company has revised, within this quarterly report on Form 10-Q, its unaudited condensed consolidated financial statements as of June 30, 2023 and March 31, 2023 and for each of the quarterly and year-to-date periods therein. Additionally, the following note disclosures have been adjusted to reflect the correction of immaterial errors: Note 7 – Revenue from Contracts with Customers, Note 11 – Other Current Liabilities, Note 14 – Other Long-Term Liabilities and Note 15 – Commitments and Contingencies. The Company has also revised its consolidated financial statements as of December 31, 2022 and December 31, 2021 and for the years then ended, as well as the unaudited condensed consolidated financial statements for the periods ended September 30, 2022, June 30, 2022 and March 31, 2022.
| As of June 30, 2023 | As of March 31, 2023 | |||||||||||||||||||||||
| (In thousands) | As Reported | Adjustment | As Revised | As Reported | Adjustment | As Revised | ||||||||||||||||||
| Other current liabilities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Total current liabilities | ||||||||||||||||||||||||
| Other long-term liabilities, net of current portion | ||||||||||||||||||||||||
| Total liabilities | ||||||||||||||||||||||||
| Accumulated deficit | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Total stockholders’ equity attributable to Purple Innovation, Inc. | ( | ) | ( | ) | ||||||||||||||||||||
| Noncontrolling interest | ( | ) | ( | ) | ||||||||||||||||||||
| Total stockholders’ equity | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| As of December 31, 2022 | ||||||||||||
| (In thousands) | As Reported | Adjustment | As Revised | |||||||||
| Other current liabilities | $ | $ | $ | |||||||||
| Total current liabilities | ||||||||||||
| Other long-term liabilities, net of current portion | ||||||||||||
| Total liabilities | ||||||||||||
| Accumulated deficit | ( | ) | ( | ) | ( | ) | ||||||
| Total stockholders’ equity attributable to Purple Innovation, Inc. | ( | ) | ||||||||||
| Noncontrolling interest | ( | ) | ||||||||||
| Total stockholders’ equity | ( | ) | ||||||||||
6
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
| Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | |||||||||||||||||||||||
| (In thousands, except per share amounts) | As Reported | Adjustment | As Revised | As Reported | Adjustment | As Revised | ||||||||||||||||||
| Revenues, net | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Gross profit | ( | ) | ( | ) | ||||||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Net loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Net loss attributable to noncontrolling interest | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Net loss attributable to Purple Innovation, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Net loss per common share - basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Net loss per common share - diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
The following table sets forth the unaudited condensed consolidated statements of operations, including the balances as reported, adjustments and the as revised balances for the three months ended March 31, 2023:
| Three Months Ended March 31, 2023 | ||||||||||||
| (In thousands, except per share amounts) | As Reported | Adjustment | As Revised | |||||||||
| Revenues, net | $ | $ | ( | ) | $ | |||||||
| Gross profit | ( | ) | ||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ||||||
| Net loss before income taxes | ( | ) | ( | ) | ( | ) | ||||||
| Net loss | ( | ) | ( | ) | ( | ) | ||||||
| Net loss attributable to noncontrolling interest | ( | ) | ( | ) | ( | ) | ||||||
| Net loss attributable to Purple Innovation, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net loss per common share - basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net loss per common share - diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
The following table sets forth the consolidated statements of operations, including the balances as reported, adjustments and the as revised balances for the years ended December 31, 2022 and 2021:
| Year Ended December 31, | ||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||
| (In thousands, except per share amounts) | As Reported | Adjustment | As Revised | As Reported | Adjustment | As Revised | ||||||||||||||||||
| Revenues, net | ( | ) | ( | ) | ||||||||||||||||||||
| Gross profit | ( | ) | ( | ) | ||||||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Net income before income taxes | ( | ) | ( | ) | ||||||||||||||||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net loss attributable to noncontrolling interest | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Net income (loss) attributable to Purple Innovation, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||
| Net income (loss) per common share - basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||
| Net loss per common share - diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
7
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table sets forth the unaudited condensed consolidated statements of operations, including the balances as reported, adjustments and the as revised balances for the three and nine months ended September 30, 2022:
| Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 | |||||||||||||||||||||||
| (In thousands, except per share amounts) | As Reported | Adjustment | As Revised | As Reported | Adjustment | As Revised | ||||||||||||||||||
| Revenues, net | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Gross profit | ( | ) | ( | ) | ||||||||||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net income (loss) before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Income tax benefit (expense) | ||||||||||||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||
| Net income (loss) attributable to noncontrolling interest | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||
| Net income (loss) attributable to Purple Innovation, Inc. | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||
| Net income (loss) per common share - basic | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||
| Net income (loss) per common share - diluted | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||
The following table sets forth the unaudited condensed consolidated statements of operations, including the balances as reported, adjustments and the as revised balances for the three and six months ended June 30, 2022:
| Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |||||||||||||||||||||||
| (In thousands, except per share amounts) | As Reported | Adjustment | As Revised | As Reported | Adjustment | As Revised | ||||||||||||||||||
| Revenues, net | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Gross profit | ( | ) | ( | ) | ||||||||||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Net income (loss) before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Income tax benefit (expense) | ( | ) | ||||||||||||||||||||||
| Net income (loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Net income (loss) attributable to noncontrolling interest | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Net income (loss) attributable to Purple Innovation, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Net income (loss) per common share - basic | $ | ( | ) | $ | — | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||
| Net income (loss) per common share - diluted | $ | ( | ) | $ | — | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||
The following table sets forth the unaudited condensed consolidated statements of operations, including the balances as reported, adjustments and the as restated balances for the three months ended March 31, 2022:
| Three Months Ended March 31, 2022 | ||||||||||||
| (In thousands, except per share amounts) | As Reported | Adjustment | As Revised | |||||||||
| Revenues, net | $ | $ | ( | ) | $ | |||||||
| Gross profit | ( | ) | ||||||||||
| Operating income (loss) | ( | ) | ( | ) | ( | ) | ||||||
| Net income (loss) before income taxes | ( | ) | ( | ) | ( | ) | ||||||
| Income tax benefit (expense) | ||||||||||||
| Net income (loss) | ( | ) | ( | ) | ( | ) | ||||||
| Net income (loss) attributable to noncontrolling interest | ( | ) | ( | ) | ( | ) | ||||||
| Net income (loss) attributable to Purple Innovation, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net income (loss) per common share - basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net income (loss) per common share - diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
8
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
| (In thousands) | Accumulated Deficit | Total Stockholders’ Equity | Noncontrolling Interest | Total Equity | ||||||||||||
| Balance at June 30, 2023, as reported | $ | ( | ) | $ | $ | $ | ||||||||||
| Adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Balance at June 30, 2023, as revised | ( | ) | ||||||||||||||
| Balance at March 31, 2023, as reported | $ | ( | ) | $ | $ | $ | ||||||||||
| Adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Balance at March 31, 2023, as revised | ( | ) | ||||||||||||||
The following table sets forth the consolidated statements of stockholders’ equity, including the balances as reported, adjustments and the as revised balances for the years ended December 31, 2022 and 2021:
| (In thousands) | Accumulated Deficit | Total Stockholders’ Equity | Noncontrolling Interest | Total Equity | ||||||||||||
| Balance at December 31, 2022, as reported | $ | ( | ) | $ | $ | $ | ||||||||||
| Adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Balance at December 31, 2022, as revised | ( | ) | ||||||||||||||
| Balance at December 31, 2021, as reported | $ | ( | ) | $ | $ | $ | ||||||||||
| Adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Balance at December 31, 2021, as revised | ( | ) | ||||||||||||||
The following table sets forth the unaudited condensed consolidated statements of stockholders’ equity, including the balances as reported, adjustments and the as revised balances for the three months ended September 30, 2022, June 30, 2022 and March 31, 2022:
| (In thousands) | Accumulated Deficit | Total Stockholders’ Equity | Noncontrolling Interest | Total Equity | ||||||||||||
| Balance at September 30, 2022, as reported | $ | ( | ) | $ | $ | $ | ||||||||||
| Adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Balance at September 30, 2022, as revised | ( | ) | ||||||||||||||
| Balance at June 30, 2022, as reported | $ | ( | ) | $ | $ | $ | ||||||||||
| Adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Balance at June 30, 2022, as revised | ( | ) | ||||||||||||||
| Balance at March 31, 2022, as reported | $ | ( | ) | $ | $ | $ | ||||||||||
| Adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Balance at March 31, 2022, as revised | ( | ) | ||||||||||||||
9
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
| Six Months Ended June 30, | ||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||
| (In thousands) | As Reported | Adjustment | As Revised | As Reported | Adjustment | As Revised | ||||||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Change in other accrued liabilities | ( | ) | ||||||||||||||||||||||
| Net cash used in operating activities | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||
The following table sets forth the unaudited condensed consolidated statements of cash flows from operating activities, including the balances as reported, adjustments and the as revised balances for the three months ended March 31, 2023 and 2022. The adjustments had no impact on cash flows from investing or financing activities for each of the three-month periods.
| Three Months Ended March 31, | ||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||
| (In thousands) | As Reported | Adjustment | As Revised | As Reported | Adjustment | As Revised | ||||||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Change in other accrued liabilities | ( | ) | ||||||||||||||||||||||
| Net cash used in operating activities | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||
The following table sets forth the consolidated statement of cash flows from operating activities, including the balances as reported, adjustments and the as revised balances for the year ended December 31, 2022. The adjustment had no impact on cash flows from investing or financing activities.
Year Ended December 31, 2022 | ||||||||||||
| (In thousands) | As Reported | Adjustment | As Revised | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Change in other accrued liabilities | ||||||||||||
| Net cash used in operating activities | $ | ( | ) | $ | $ | ( | ) | |||||
The following table sets forth the unaudited condensed consolidated statement of cash flows from operating activities, including the balances as reported, adjustments and the as revised balances for the nine months ended September 30, 2022. The adjustments had no impact on cash flows from investing or financing activities for each of the quarterly periods.
Nine Months Ended September 30, 2022 | ||||||||||||
| (In thousands) | As Reported | Adjustment | As Revised | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Change in other accrued liabilities | ||||||||||||
| Net cash used in operating activities | $ | ( | ) | $ | $ | ( | ) | |||||
10
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
4. Underwritten Offering of Class A Common Stock
In
February 2023, the Company completed an underwritten offering of
5. Acquisition
On August 31, 2022, pursuant to the Merger Agreement, the Company acquired Intellibed, a premium sleep and health wellness company, offering gel-based mattresses scientifically designed for maximum back support, spinal alignment and pressure point relief. The addition of Intellibed increased product offerings to customers, expanded market opportunities, capitalized on synergies of the combined companies, and increased opportunities for innovation. In addition, the acquisition allowed the Company to consolidate ownership of its intellectual property licensed to Intellibed and more fully capitalize on growing demand for products with gel technologies.
| Fair value of Class A common stock issued at closing | $ | |||
| Fair value of Class A common stock held in escrow | ||||
| Fair value of contingent consideration | ||||
| Fair value of effective settlement of preexisting relationships | ||||
| Transaction expenses paid on behalf of Intellibed | ||||
| Due to seller | ||||
| Fair value of total purchase consideration | $ |
Contingent
consideration represents the fair value of
The
fair value of effective settlement of preexisting relationships includes $
The
Company recorded the acquisition based on the fair value of the consideration transferred and then allocated the purchase price
to the identifiable assets acquired and liabilities assumed based on their respective preliminary estimated fair values as of the acquisition
date. Determining the fair value of assets acquired and liabilities assumed required management to use significant judgment and estimates
including the selection of valuation methodologies, estimates of future revenues and cash flows, discount rates, and asset lives, among
other items. While the Company used its best estimates and assumptions as a part of the purchase price allocation process to accurately
value the assets acquired, including intangible assets, and the liabilities assumed at the acquisition date, the Company’s estimates
are inherently uncertain and subject to refinement. Consequently, during the measurement period, which could be up to
11
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Due
to the close proximity of the acquisition date to the Company’s first reporting date after the transaction, the Company recorded
the assets acquired and liabilities assumed at preliminary estimates of fair value. During the measurement period that ended August 31,
2023, the Company finalized the determination of the working capital adjustments and the fair values allocated to various assets and
liabilities, income tax provision, intangible assets and the residual amount allocated to goodwill. The table below reflects final measurement
period adjustments made to various assets acquired and liabilities assumed based on updated information, and revisions to reflect the
final fair value analysis associated with the two intangible assets. The corresponding offsets for these final measurement period adjustments
was goodwill.
| Net tangible assets (liabilities): | At date of acquisition |
Measurement period adjustments |
Final September 30, 2023 |
|||||||||
| Cash, cash equivalents and restricted cash | $ | $ | ( |
) | $ | |||||||
| Accounts receivable | ( |
) | ||||||||||
| Inventory | ( |
) | ||||||||||
| Other current assets | ||||||||||||
| Property and equipment | ||||||||||||
| Operating lease right-of-use assets | ||||||||||||
| Other long-term assets | ||||||||||||
| Accounts payable | ( |
) | ( |
) | ( |
) | ||||||
| Other current liabilities | ( |
) | ( |
) | ( |
) | ||||||
| Operating lease obligations | ( |
) | ( |
) | ||||||||
| Deferred tax liabilities | ( |
) | ( |
) | ( |
) | ||||||
| Net tangible assets (liabilities) | ( |
) | ||||||||||
| Goodwill | ||||||||||||
| Customer relationships | ||||||||||||
| Developed technology | ||||||||||||
| Net assets acquired and liabilities assumed | $ | $ | ( |
) | $ | |||||||
The amount of goodwill that resulted from the purchase price allocation was attributed to expected synergies from the assembled workforce, an increase in development capabilities, increased offerings to customers, expanded market opportunities, and enhanced opportunities for growth and innovation. Goodwill was not being amortized but instead tested for impairment at least annually or more frequently if certain indicators of impairment were present. The goodwill recorded was not deductible for income tax purposes.
The ongoing decline in the
Company’s market capitalization, along with other qualitative considerations was determined to be a triggering event for potential
goodwill impairment. Accordingly, the Company performed a goodwill impairment analysis as of September 30, 2023. The Company, considered
as a single reporting unit, estimated the implied fair value of its goodwill using a variety of valuation methods, including both the
income and market approaches. As a result of the impairment assessment performed, the Company determined goodwill was impaired and recorded
an impairment charge to write off the entire $
The
two identified definite lived intangible assets, comprised of customer relationships and developed technology, are being amortized over
their estimated useful lives of
The
acquired cash, cash equivalents and restricted cash amounts included $
12
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
6. Fair Value Measurements
The Company uses the fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:
Level 1—Quoted market prices in active markets for identical assets or liabilities;
Level 2—Significant other observable inputs (i.e., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable, such as interest rate and yield curves, and market-corroborated inputs); and
Level 3—Unobservable inputs in which there is little or no market data, which require the reporting unit to develop its own assumptions.
The classification of fair value measurements within the established three-level hierarchy is based upon the lowest level of input that is significant to the measurements. Financial instruments, although not recorded at fair value on a recurring basis include cash and cash equivalents, receivables, accounts payable and the Company’s debt obligations. The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair value because of the short-term nature of these accounts. The Company’s debt instruments are Level 2 instruments and fair value is estimated to be face value based on the contractual terms of the debt arrangements and market-based expectations.
The
sponsor warrant liabilities (see Note 13 — Warrant Liabilities for more information) were Level 3 instruments and used internal
models to estimate fair value using certain significant unobservable inputs which required determination of relevant inputs and assumptions.
Accordingly, changes in these unobservable inputs may have had a significant impact on fair value. Such inputs included risk free interest
rate, expected average life, expected dividend yield, and expected volatility. These Level 3 liabilities generally decreased (increased)
in value based upon an increase (decrease) in risk free interest rate and expected dividend yield. Conversely, the fair value of these
Level 3 liabilities generally increased (decreased) in value if the expected average life or expected volatility were to increase
(decrease). Unexercised sponsor warrants totaling
There
were no sponsor warrants outstanding on September 30, 2023 and the
| (In thousands) | Sponsor Warrants | |||
| Fair value as of December 31, 2021 | $ | |||
| Fair value of warrants exercised | ||||
| Change in valuation inputs(1) | ( | ) | ||
| Fair value as of September 30, 2022 | $ | |||
| (1) |
13
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
7. Revenue from Contracts with Customers
The Company markets and sells its products through e-commerce online channels, retail brick-and-mortar wholesale partners, Purple owned retail showrooms, and third-party online retailers. Revenue is recognized when the Company satisfies its performance obligations under the contract which involves transferring the promised products to the customer, subject to shipping terms.
Disaggregated Revenue
The Company classifies revenue into two sales categories: direct-to-consumer (“DTC”) and wholesale. The DTC category is comprised of the Company’s e-commerce channel that sells directly to consumers who purchase online and through our contact center, and the Purple owned retail showrooms channel that sells directly to consumers who purchase at a showroom location. The wholesale channel includes all product sales to our wholesale partners where consumers make purchases at their retail locations or through their online channels. The Company classifies products into two major types: sleep products and other. Sleep products include mattresses, platforms, adjustable bases, mattress protectors, pillows and sheets. Other products include cushions and various other products.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| Sales Category | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| DTC | $ | $ | $ | $ | ||||||||||||
| Wholesale | ||||||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| Product Type | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Sleep products | $ | $ | $ | $ | ||||||||||||
| Other | ||||||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
Contract Balances
Payment
for sale of products through the e-commerce online channel, third-party online retailers, Purple owned retail showrooms and contact center
is collected at point of sale in advance of shipping the products. Amounts received for unshipped products are recorded as customer prepayments.
Customer prepayments totaled $
8. Inventories, Net
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Inventory obsolescence reserve | ( |
) | ( |
) | ||||
| Inventories, net | $ | $ | ||||||
14
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
9. Property and Equipment, Net
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Equipment | $ | $ | ||||||
| Equipment in progress | ||||||||
| Leasehold improvements | ||||||||
| Furniture and fixtures | ||||||||
| Office equipment | ||||||||
| Total property and equipment | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Equipment
in progress reflects equipment, primarily related to mattress manufacturing, which is being constructed and was not in service at September
30, 2023 or December 31, 2022. Interest capitalized on borrowings during the active construction period of major capital projects totaled
$
10. Leases
The
Company leases its manufacturing and distribution facilities, corporate offices, Purple owned retail showrooms and certain equipment
under non-cancelable operating leases with various expiration dates through 2036. The Company’s office and manufacturing leases
provide for initial lease terms up to
| Three
Months Ended September 30, |
Nine
Months Ended September 30, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Operating | $ | $ | $ | $ | ||||||||||||
| Variable | ||||||||||||||||
| Short-term | ||||||||||||||||
| Total lease costs | $ | $ | $ | $ | ||||||||||||
15
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
| 2023 (excluding the nine months ended September 30, 2023)(a) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total operating lease payments | ||||
| Less – lease payments representing interest | ( | ) | ||
| Present value of operating lease payments | $ |
| (a) |
As of September 30, 2023 and December 31, 2022, the weighted-average
remaining term of operating leases was
| Nine
Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash paid for amounts included in present value of operating lease liabilities (b) | $ | $ | ||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | ||||||||
| (b) |
11. Other Current Liabilities
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Warranty expense accrual – current portion | $ | $ | ||||||
| Warranty returns accrual – current portion | ||||||||
| Insurance financing | ||||||||
| Debt – current portion | ||||||||
| Accrued sales tax liability assumed in acquisition | ||||||||
| Accrued property taxes | ||||||||
| Tax receivable agreement liability – current portion | ||||||||
| Other | ||||||||
| Total other current liabilities | $ | $ | ||||||
16
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
12. Debt
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Term loan – 2023 credit agreement | $ | $ | ||||||
| Term loan – 2020 credit agreement | ||||||||
| Less: unamortized issuance costs | ( |
) | ( |
) | ||||
| Total debt | ||||||||
| Less: current portion of debt, net of unamortized issuance costs | ( |
) | ||||||
| Long-term debt, net | $ | $ | ||||||
2023 Credit Agreements
On
August 7, 2023, Purple LLC, Purple Inc. and Intellibed, (collectively the “Loan Parties”) entered into a term loan credit
agreement (the “Term Loan Agreement”) with Callodine Commercial Finance, LLC and a group of financial institutions (the “Term
Loan Lenders”). Also, on August 7, 2023, the Loan parties entered into a separate financing arrangement with the Bank of Montreal
and a group of financial institutions (collectively the “ABL Lenders”) that provides for a revolving asset-based credit facility
(the “ABL Agreement”). Pursuant to entering into these agreements (the “2023 Credit Agreements”), the Company incurred fees
and expenses of $
Term Loan Agreement and Term Loan Pledge and Security Agreement
The
Term Loan Agreement provides for up to $
Pursuant to a pledge and security agreement, the Loan Parties’ obligations under the Term Loan Agreement are secured by a perfected second-priority security interest in the cash, inventory and accounts receivable of the Loan Parties, and a perfected first-priority security interest in substantially all other assets of the Loan Parties, including, without limitation, the intellectual property and equipment of the Loan Parties, subject to certain exceptions.
The Term Loan Agreement provides for customary events of default which include non-payment and failure to perform or observe covenants. The Term Loan Agreement contains customary indemnifications that benefit the Term Loan Lenders.
The Term Loan Agreement also contains representations, warranties and certain covenants of the Loan Parties. While any amounts are outstanding under the Term Loan Agreement, the Loan Parties are subject to a number of 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, each of which are subject to certain exceptions. In particular, the Loan Parties are (i) restricted from incurring additional debt up to certain amounts, subject to limited exceptions, as set forth in the Term Loan Agreement, and (ii) required to maintain a minimum revolving loan availability under the ABL Agreement. Each Loan Party is also restricted from paying dividends or making other distributions or payments on its respective capital stock, subject to limited exceptions. If the Loan Parties fail to perform their obligations under these and other covenants, or should any event of default occur, the Term Loans, together with accrued interest, could be declared immediately due and payable.
ABL Agreement and ABL Pledge and Security Agreement
The ABL Agreement provides for up to $
17
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The
borrowing rates under the ABL Agreement will accrue on a three-tiered grid based on revolving availability, ranging from
Pursuant to a pledge and security agreement, the Loan Parties’ obligations under the ABL Agreement are secured by a perfected first-priority security interest in the cash, inventory and accounts receivable of the Loan Parties, and a perfected second-priority security interest in substantially all of the other assets of the Loan Parties, subject to certain exceptions.
The ABL Agreement provides for customary events of default such as non-payment and failure to perform or observe covenants. The ABL Agreement contains customary indemnifications that benefit the ABL Lenders.
The ABL Agreement also contains representations, warranties and certain covenants of the Loan Parties. The Loan Parties are subject to 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, in each case, subject to certain exceptions. In particular, the Loan Parties are (i) restricted from incurring additional debt up to certain amounts, subject to limited exceptions, as set forth in the ABL Agreement, and (ii) if revolving availability under the ABL Agreement is less than a specified amount, required to maintain a minimum Consolidated Fixed Charge Coverage Ratio (as defined in the ABL Agreement), and (iii) required to maintain a specified minimum revolving availability. Each Loan Party is also restricted from paying dividends or making other distributions or payments on its respective capital stock, subject to limited exceptions. If the Loan Parties fail to perform their obligations under these and other covenants, or should any event of default occur, the revolving loan commitments under the ABL Agreement may be terminated and any outstanding ABL Loans, together with accrued interest, could be declared immediately due and payable and any outstanding letters of credit may be required to be cash collateralized.
2023 Credit Agreement Defaults
As of September 30, 2023 the Company was not in compliance with its debt covenants under each of the 2023 Credit Agreements due to (i) the Company’s failure to (a) provide certain financial reporting and related materials on a timely basis and (b) complete certain post-closing deliverables as required under the ABL Agreement and (ii) the Company drawing on the loan under the ABL Agreement while the above events of default were in existence (collectively, the “Subject Events of Default”).
On November 6, 2023, we entered into (i) a First Amendment and Waiver to the ABL Agreement (the “ABL Amendment”) and (ii) a First Amendment and Waiver to the Term Loan Agreement (the “Term Loan Amendment”), with the Term Loan Lenders and ABL Lenders, respectively (collectively, the “Lenders”), including waivers of the Subject Events of Default. In addition, the ABL Amendment and Term Loan Amendment also amended certain provisions of the 2023 Credit Agreements, including, among other changes, to require (i) weekly borrowing base certificates, (ii) 13-week cash flow reports and budgets, (iii) budget variance reports, (iv) the appointment of a third-party consultant, and (v) daily cash sweeps from the Loan Parties’ accounts to an account at the ABL Lender (collectively, the “2023 Credit Agreement Amendments”). In addition, the ABL Amendment and Term Loan Amendment increased our reporting obligations under the 2023 Credit Agreements and if we are not able to maintain compliance with such additional requirements we may experience future events of default, which could limit our ability to access the ABL Loans and adversely affect our financial position and operations.
Our
principal sources of funds are cash flows from operations and cash and cash equivalents on hand, supplemented with borrowings made pursuant
to our asset-based lending facility and proceeds received from offerings of our equity capital. Principal uses of funds consist of payments
of principal and interest on our debt facilities, capital expenditures, working capital needs, and operating lease payment obligations.
Our working capital needs depend largely upon the timing of cash receipts from product sales, payments to vendors and others, changes
in inventories, and operating lease payment obligations.
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 use the liquidity we have available under our ABL Loans.
18
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
If we experience further events of default in the future, we will not be able to access the ABL Loans unless such defaults are resolved, including by obtaining required waivers from the ABL Lenders. Even if we are able to obtain such waivers, the ABL Lenders may adopt additional availability reserves, which would limit the amount we can draw under the ABL Loans.
We may also need to seek additional funding sources including new debt from subordinated lenders or equity capital. However, such additional debt or equity capital may not be available on terms favorable to us or at all. In addition, our ability to raise additional debt financing is restricted by our covenants under the 2023 Credit Agreements and would require the consent of the Lenders.
If we are unable to access sufficient liquidity, we will need to take other actions to fund operational expenses, such as scaling back operations, reducing marketing spend, and postponing or discontinuing our growth strategies. Such actions could result in slower growth or no growth, and we may lose key suppliers, be unable to timely satisfy customer orders, and be unable to retain all of our employees. In addition, we may be forced to restructure our obligations to creditors, pursue work-out options or other protective measures.
Based on our current projections, we believe our cash on hand, amounts available under our asset-based lending arrangement, and expected cash to be generated from our operations will be sufficient to meet our working capital requirements and cover anticipated capital expenditures for at least the next 12 months.
2020 Credit Agreement
On
September 3, 2020, Purple LLC entered into a financing arrangement with KeyBank National Association and a group of financial institutions
(the “2020 Credit Agreement”). The 2020 Credit Agreement provided for a $
On February 17, 2023, the Company entered into a fifth amendment to
the 2020 Credit Agreement. The amendment, among other things, revised various covenants associated with the 2020 Credit Agreement. As
a condition of entering into the amendment, the Company repaid the $
On April 26, 2023, the Company
received consent under the 2020 Credit Agreement that allowed the Company’s redemption of Proportional Representation Preferred
Linked Stock (“PRPLS”) issued by the Company on February 24, 2023, in an aggregate amount not to exceed $
19
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
In
connection with the Company’s execution of the Term Loan Agreement and ABL Agreement, the Company terminated its 2020 Credit Agreement
in August 2023. The Company had no outstanding borrowings under the 2020 Credit Agreement at the time of termination. The termination
was accounted for as an extinguishment of debt and $
Interest
expense under the 2023 Credit Agreements was $
13. Warrant Liabilities
The
Company issued
Unexercised
sponsor warrants totaling
There
were no sponsor warrants exercised during the nine months ended September 30, 2022. The
| September 30, 2022 | ||||
| Trading price of common stock on measurement date | $ | |||
| Exercise price | $ | |||
| Risk free interest rate | % | |||
| Warrant life in years | ||||
| Expected volatility | % | |||
| Expected dividend yield | ||||
During
the three months ended September 30, 2022, the Company recognized a loss of $
14. Other Long-Term Liabilities
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Warranty expense accrual | $ | $ | ||||||
| Warranty returns accrual | ||||||||
| Asset retirement obligations | ||||||||
| Other | ||||||||
| Total | ||||||||
| Less – current portion of warranty accrual | ( | ) | ( | ) | ||||
| Other long-term liabilities, net of current portion | $ | $ | ||||||
20
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
15. Commitments and Contingencies
Warranty Liabilities
The Company provides a limited warranty on most of the products it sells. The estimated warranty costs associated with products sold through DTC channels are expensed at the time of sale and included in cost of revenues. The estimated warranty return costs associated with products sold through the wholesale channel are recorded at the time of sale and included as an offset to net revenues. Estimates for warranty costs are based on the results of product testing, industry and historical trends and warranty claim rates incurred, and are adjusted for any current or expected trends as appropriate. Actual warranty claim costs could differ from these estimates. The Company regularly assesses and adjusts the estimate of accrued warranty claims by updating claims rates for actual trends and projected claim costs. The Company classifies estimated warranty costs expected to be paid beyond a year as a long-term liability.
Required Member Distributions
Prior
to the Business Combination and pursuant to the then applicable First Amended and Restated Limited Liability Company Agreement (the “First
Purple LLC Agreement”), Purple LLC was required to distribute to its members an amount equal to
Subscription Agreement and Preemptive Rights
In
February 2018, in connection with the Business Combination, the Company entered into a subscription agreement with Coliseum Capital
Partners (“CCP”) and Blackwell Partners LLC – Series A (“Blackwell”), pursuant to which CCP and Blackwell
agreed to purchase from the Company an aggregate of
Rights of Securities Holders
The holders of certain warrants exercisable into Class A common stock, including CCP, Blackwell and CDF, were entitled to registration rights pursuant to certain registration rights agreements of the Company as of the Business Combination date. In March 2018, the Company filed a registration statement registering these warrants (and any shares of Class A common stock issuable upon the exercise of the warrants), and certain unregistered shares of Class A common stock. The registration statement was declared effective on April 3, 2018. Under the Registration Rights Agreement dated February 2, 2018 between the Company and CCP, Blackwell, and CDF (the “Coliseum Investors”), the Coliseum Investors have the right to make written demands for up to three registrations of certain warrants and shares of Class A common stock held by them, including in underwritten offerings. In an underwritten offering of such warrants and shares of Class A common stock by the Coliseum Investors, the Company will pay underwriting discounts and commissions and certain expenses incurred by the Coliseum Investors. In May 2021, the Coliseum Investors exercised the first of their three written demands for registration in an underwritten offering.
21
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 common stock (together with an equal number of Class B Units, the “Paired Securities”) for, at the Company’s option, either (A) shares of Class A common stock at an initial exchange ratio equal to one Paired Security for one share of Class A common stock or (B) a cash payment equal to the product of the average of the volume-weighted closing price of one share of Class A common stock for the ten trading days immediately prior to the date InnoHold or other Class B Unit holders deliver a notice of exchange multiplied by the number of Paired Securities being exchanged. In December 2018, InnoHold distributed Paired Securities to Terry Pearce and Tony Pearce who agreed to become parties to the Exchange Agreement. In June 2019, InnoHold distributed Paired Securities to certain current and former employees who also agreed to become parties to the exchange agreement. Holders of Class B Units may elect to exchange all or any portion of their Paired Securities as described above by delivering a notice to Purple LLC.
In certain cases, adjustments to the exchange ratio will occur in case of a split, reclassification, recapitalization, subdivision or similar transaction of or relating to the Class B Units or the shares of Class A common stock and Class B common stock or a transaction in which the Class A common stock is exchanged or converted into other securities or property. The exchange ratio will also adjust in certain circumstances when the Company acquires Class B Units other than through an exchange for its shares of Class A common stock.
The right of a holder of Paired Securities to exchange may be limited by the Company if it reasonably determines in good faith that such restrictions are required by applicable law (including securities laws), such exchange would not be permitted under other agreements of such holder with the Company or its subsidiaries, including the Third Purple LLC Agreement, or if such exchange would cause Purple LLC to be treated as a “publicly traded partnership” under applicable tax laws.
The Company and each holder of Paired Securities shall bear its own expense regarding the exchange except that the Company shall be responsible for transfer taxes, stamp taxes and similar duties.
During
the nine months ended September 30, 2023,
22
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Maintenance of One-to-One Ratios
The Third Purple LLC Agreement includes provisions intended to ensure that the Company at all times maintains a one-to-one ratio between (a) (i) the number of outstanding shares of Class A common stock and (ii) the number of Class A Units owned by the Company (subject to certain exceptions for certain rights to purchase equity securities of the Company under a “poison pill” or similar stockholder rights plan, if any, certain convertible or exchangeable securities issued under the Company’s equity compensation plan and certain equity securities issued pursuant to the Company’s equity compensation plan (other than a stock option plan) that are restricted or have not vested thereunder) and (b) (i) the number of other outstanding equity securities of the Company (including the warrants exercisable for shares of Class A common stock) and (ii) the number of corresponding outstanding equity securities of Purple LLC. These provisions are intended to result in non-controlling interest holders having a voting interest in the Company that is identical to their economic interest in Purple LLC.
Non-Income Related Taxes
The Company complies with current law and collects and reports on sales tax and other taxes and required fees in all states in which it does business. The application of existing, new or revised taxes and fees 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 and fees on the Company’s business could also create significant increases in internal costs necessary to capture data and collect and remit taxes and pay the fees. 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 October 13, 2020, Purple LLC filed a lawsuit against Responsive
Surface Technology, LLC and its parent company, PatienTech, LLC (collectively referred to as “ReST”) in the U.S. District
Court for the District of Utah. The lawsuit arises from ReST’s multiple breaches of its obligations to Purple LLC, including infringing
upon Purple LLC’s trademarks, patents, and trade dress, among other claims. Purple seeks monetary damages, injunctive relief, and
declaratory judgment based on certain conduct by ReST (“Case I”). On October 21, 2020, shortly after the complaint was filed
in Case I, ReST filed a retaliatory lawsuit against Purple LLC, and some of the Company’s board members, Gary DiCamillo, Adam Gray,
Joseph Megibow, Terry Pearce, and Tony Pearce, also in the United States District Court for the District of Utah (“Case II”).
Subsequently, the two cases were consolidated into one. Case II (now combined with Case I) involves many of the same facts and transactions
as Case I. ReST subsequently filed a motion to compel arbitration of the claims in Case I. Purple LLC opposed the motion to compel arbitration,
arguing that ReST waived any rights to arbitration and that all the claims in both cases should stay in the courts. However, the Court
granted ReST’s motion to compel arbitration, and stayed the proceedings in the United States District Court for the District of
Utah. Additionally, the Court ruled that ReST’s claims against the Company’s board members were not subject to arbitration,
and the Court stayed ReST’s claims against those individuals. Pursuant to the Court’s order, Purple LLC filed a demand for
arbitration with the American Arbitration Association (the “AAA”) on September 1, 2021. ReST filed its counterclaim
with the AAA on September 21, 2021. In the course of the pre-hearing litigation, ReST was sanctioned for improper litigation conduct,
and certain defenses and claims were stricken and costs were ordered to be paid by ReST to Purple LLC. A two-week arbitration hearing
was held between July 31, 2023 and August 11, 2023. The parties presented evidence, and subsequently presented post-hearing briefing to
the Arbitrator. At this time, the Arbitrator has not issued a decision, though a decision is expected before the end of November 2023.
Purple LLC seeks over $
23
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
On May 3, 2022, Purple
LLC filed a complaint against Photon Interactive UK Limited (“Photon”) in the U.S. District Court for the District of
Delaware regarding a Master Professional Services Agreement with Photon dated on or around November 1, 2019. Pursuant to the
agreement, Photon was required to rebuild Purple Innovation LLC’s website architecture and checkout process. Purple LLC paid
Photon $
24
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
In December 2022, Terry and
Tony Pearce, Purple’s founders, filed a complaint against Purple Inc. in the Fourth Judicial District Court in the State of Utah.
The Pearces allege that they each entered into employment agreements with Purple LLC in February 2018. The Pearces contend that certain
corporate transactions between May 2019 and June 2020 reduced their “ownership interest and voting power in Purple” and that,
as a result, they should have continued to be paid a salary between August 2020, when they retired from Purple LLC, and December 2021.
The Pearces calculate that they are each owed “no less than $
On
April 3, 2023, InnoHold, LLC, Terry Pearce, and Tony Pearce (collectively, the “InnoHold Parties”) filed a complaint against
Purple LLC in the Delaware Court of Chancery, captioned InnoHold, LLC et al. v. Purple Innovation, LLC, Case No. 2023-0393-PAF
(Del. Ch. Apr. 3, 2023). The complaint alleges that Purple LLC breached the Second Amended and Restated Limited Liability Company Agreement
of Purple Innovation, LLC, dated as of February 2, 2018 (the “LLC Agreement”), and the implied covenant of good faith and
fair dealing contained therein by failing to pay the full amount of tax distributions owed under the LLC Agreement. The complaint also
asserts a claim for indemnification under the LLC Agreement. The InnoHold Parties seek damages of approximately $
On March 24, 2023, Purple LLC filed a complaint against Tempur Sealy International, Inc., Sealy Technology LLC and Sealy Mattress Manufacturing Co., LLC (collectively, “Sealy”) in the U.S. District Court for the Middle District of North Carolina for infringement of Purple LLC’s U.S. Patent No. 11,317,733 entitled “Mattress Including an Elastomeric Cushioning Element and a Pocketed Coil Layer and Related Methods.” On July 17, 2023, Purple LLC filed a First Amended Complaint further detailing Sealy’s infringement of the patent through Sealy’s direct and indirect infringement by making, using, offering for sale, and/or importing into the United States Sealy FlexGrid Hybrid Construction mattresses. Purple seeks judgment of willful infringement, trebled damages, a permanent injunction, prejudgment and post-judgment interest, costs, expenses, and attorneys’ fees. Sealy filed its response to Purple’s First Amended Complaint on July 31, 2023. Discovery is scheduled to conclude April 18, 2024; no trial date has been set. Purple LLC intends to vigorously litigate its claims to resolution.
On March 27, 2023, Sealy Technology, LLC (“Sealy Technology”) filed a Petition for Cancellation with the U.S. Patent and Trademark Office, Trademark Trial and Appeal Board (“TTAB”), seeking cancellation of Purple LLC’s Trademark Registration No. 5,416,146 for HYPER-ELASTIC POLYMER in Class 20 for “elastomeric polymer in pre-shaped form sold as an integral component of pillows” (the “Registration”). On June 18, 2023, Sealy Technology filed an Amended Petition, which seeks cancellation of the Registration on the basis that the term is generic. On September 25, 2023, the TTAB denied Purple LLC’s previously filed motion to dismiss and issued a new schedule. On October 16, 2023, Purple LLC filed its Answer to the Amended Petition. Discovery is scheduled to open on November 14, 2023, and to conclude on May 12, 2024. Trial and post-trial briefing is scheduled to conclude March 8, 2025. Purple LLC intends to vigorously defend against Sealy Technology’s petition.
On August 16, 2023, Sealy Technology filed a Notice of Opposition with the TTAB, requesting that the U.S. Patent and Trademark Office deny Purple LLC’s pending Trademark Application No. 97,650,658 for HYPER-ELASTIC POLYMER in Class 20 for “mattresses; seat cushions” (the “Application”), on the grounds that the mark is merely descriptive or deceptively misdescriptive. On September 25, 2023, Purple LLC filed a motion to dismiss all claims. On October 5, 2023, the TTAB suspended all deadlines in the proceeding, pending the outcome of the motion to dismiss. On October 17, 2023, Sealy Technology filed its opposition to the motion to dismiss. Purple LLC’s reply in support of its motion to dismiss is due November 6, 2023. Purple LLC intends to vigorously defend against Sealy Technology’s opposition.
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.
25
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
16. Related Party Transactions
The Company had various transactions with entities or individuals which are considered related parties.
Coliseum Capital Management, LLC
Immediately following the Business Combination, Adam Gray was appointed to the Company’s Board. Mr. Gray is a manager of Coliseum Capital, LLC, which is the general partner of CCP and CDF, and he is also a managing partner of CCM, which is the investment manager of Blackwell and also manages investment funds and accounts. Mr. Gray has voting and dispositive control over securities held by CCP, CDF and Blackwell which were also Lenders under the Amended and Restated Credit Agreement. See Note 15—Commitments and Contingencies—Subscription Agreement and Preemptive Rights for further discussion.
On
September 17, 2022, the Company received an unsolicited and non-binding proposal from Coliseum on behalf of certain investment funds
and accounts to acquire the remaining outstanding common stock of the Company not already beneficially owned by Coliseum for $
Upon
adopting the Rights Agreement,
The initial issuance of the Rights as a dividend had no financial accounting or reporting impact. The fair value of the Rights was nominal since the Rights were not exercisable when issued and no value was attributable to them. Additionally, the Rights did not meet the definition of a liability under GAAP and was therefore not accounted for as a long-term obligation. Accordingly, the Rights Agreement had no impact on the Company’s consolidated financial statements.
On
February 14, 2023, the Company declared a dividend of one new PRPLS for each
On February 21, 2023, Coliseum filed a lawsuit against the Company and several members of its Board alleging that the Company and the named directors authorized an improper dividend of preferred stock in bad faith to impede stockholder voting rights and interfered with Coliseum’s nomination of a competing slate of director candidates ahead of our 2023 annual meeting of stockholders. On April 19, 2023, the Company entered into a Cooperation Agreement with Coliseum to resolve the litigation. The Cooperation Agreement, which became effective on April 27, 2023, resulted in the following:
| ● | The size of the Board was increased from seven directors to eight directors. | |
| ● | The Company amended and restated its Second Amended and Restated Bylaws to include references to the Lead Independent Director Charter. | |
| ● | Board member and Coliseum managing partner Adam Gray was appointed Chairman of the Board. | |
| ● | Board member Gary DiCamillo continued to serve as Lead Independent Director and was appointed chair of the Nomination and Governance Committee. |
26
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
| ● | Paul Zepf and Pano Anthos resigned as directors of the Company. | |
| ● | The Board appointed S. Hoby Darling, R. Carter Pate, and Erika Serow to fill the vacancies created by the increased the size of the board and the resignations of Mr. Zepf and Mr. Anthos. | |
| ● | Scott Peterson, a stockholder and Board Observer since the Company’s acquisition of Intellibed, was included as a nominee on the Board’s slate of directors at the 2023 Annual Meeting in place of Dawn Zier, who had previously announced her decision not to stand for re-election. | |
| ● | Other than as described above with respect to Dawn Zier, the Board nominated all incumbent directors for election at our annual meetings of stockholders to be held in 2023 and 2024. | |
| ● | The Company amended its Corporate Governance Guidelines for Operation of the Board of Directors and adopted a Lead Independent Director Charter to provide for the responsibilities of the Lead Independent Director. |
| ● | The Company terminated the stockholder rights agreement adopted on September 25, 2022 and agreed not to adopt a new stockholder rights agreement prior to the termination of the Cooperation Agreement without Coliseum’s prior consent. As a result, all shares of preferred stock previously designated as Series A Junior Participating Preferred Stock were eliminated and returned to the status of authorized but unissued shares of preferred stock, without designation. | |
| ● | The Company redeemed all outstanding shares of PRPLS and agreed not to issue any similar security or take any other action prior to the termination of the Cooperation Agreement that would change the stockholder voting standards from those in effect prior to the issuance of the PRPLS. As a result, all shares of preferred stock previously designated as PRPLS were eliminated and returned to the status of authorized but unissued shares of preferred stock, without designation. The Company made a $ |
| ● | The Company agreed to reimburse Coliseum for up to $ | |
| ● | The Company terminated the Special Committee. | |
| ● | Coliseum dismissed its litigation against the Company. | |
| ● | At the 2023 and 2024 annual meetings of stockholders, Coliseum caused or will cause all of the common stock that Coliseum or any of its affiliates had the direct or indirect right to vote as of the applicable record date, to be present in person or by proxy for quorum purposes and to be voted (i) in favor of each of the candidates for election on the Company’s slate of nominees for election to the Board, (ii) against any stockholder nominations for any other directors, and (iii) against any proposals or resolutions to remove any member of the Board other than for cause. | |
| ● | Coliseum agreed to be bound by customary standstill restrictions, including, among others, agreements not to acquire additional shares of the Company’s securities that would cause Coliseum’s ownership of Voting Securities to exceed | |
| ● | Coliseum agreed to condition any proposal from it or any of its affiliates to acquire the Company or all or substantially all of the outstanding stock of the Company held by stockholders unaffiliated with Coliseum on (i) such transaction being negotiated by, and subject to the approval of, a special committee of directors of the Board who are independent with respect to Coliseum and disinterested under Delaware law and (ii) a nonwaivable condition that such transaction be approved by the affirmative vote of the holders of a majority of the Company’s outstanding common stock not beneficially owned by Coliseum or its affiliates or other parties with a material conflict of interest in such transaction. | |
| ● | The Cooperation Agreement shall terminate on the day following the date on which the 2024 annual meeting of stockholders is held. |
27
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Purple Founder Entities
TNT Holdings, LLC (herein “TNT Holdings”), EdiZONE, LLC, (herein EdiZONE an entity wholly owned by TNT Holdings) and InnoHold (collectively the “Purple Founder Entities”) were entities under common control with Purple LLC prior to the Business Combination. TNT Holdings and InnoHold are majority owned and controlled by Terry Pearce and Tony Pearce (the “Purple Founders”), who were appointed to the Company’s Board following the Business Combination. InnoHold was a majority shareholder of the Company until it sold a portion of its interests in a secondary public offering in May 2020 and the remainder of its interests in a secondary public offering in September 2020. The Purple Founders also resigned as employees of Purple LLC and retired from the Company’s Board in August 2020.
TNT Holdings owned the Alpine
facility Purple LLC has been leasing since 2010, and the Purple Founders informed Purple LLC that TNT Holdings transferred ownership to
123E LLC, an entity controlled by the Purple Founders. Effective as of October 31, 2017, Purple LLC entered into an Amended and Restated
Lease Agreement with TNT Holdings. The Company determined that neither TNT Holdings nor 123E LLC are a VIE as neither the Company nor
Purple LLC hold any explicit or implicit variable interest in TNT Holdings or 123E LLC and do not have a controlling financial interest
in TNT Holdings or 123E LLC. Purple LLC incurred $
17. Stockholders’ Equity
Class A Common Stock
The
Company has
Class B Common Stock
The
Company has
In
connection with the Business Combination, approximately
28
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Preferred Stock
The
Company has
On February 14, 2023, the
Company declared a dividend of one new PRPLS for each
Sponsor Warrants
There
were
Noncontrolling Interest
Noncontrolling
interest (“NCI”) is the membership interest in Purple LLC held by holders other than the Company. At September 30, 2023 and
December 31, 2022, the combined NCI percentage in Purple LLC was
18. 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.
29
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company reported income
tax expense related to various state taxes of $
In
connection with the Business Combination, the Company entered into a tax receivable agreement with InnoHold, which provides for the payment
by the Company to InnoHold of
As
noncontrolling interest holders exercise their right to exchange or cause Purple LLC to redeem all or a portion of their Class B Units,
a tax receivable agreement liability may be recorded based on
The estimation of liability
under the tax receivable agreement is by its nature imprecise and subject to significant assumptions regarding the amount and timing of
future taxable income. As of September 30, 2023, the Company estimated that if all the remaining
30
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The effects of uncertain tax positions are recognized in the consolidated financial statements if these positions meet a “more-likely-than-not” threshold. For those uncertain tax positions that are recognized in the consolidated financial statements, liabilities are established to reflect the portion of those positions it cannot conclude “more-likely-than-not” to be realized upon ultimate settlement. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. Accrued interest and penalties would be included on the related tax liability line in the consolidated balance sheet. As of September 30, 2023, no material uncertain tax positions were recognized as liabilities in the condensed consolidated financial statements.
19. Net Loss Per Common Share
Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of Class A stock outstanding during each period. Diluted net income (loss) per share reflects the weighted-average number of common shares outstanding during the period used in the basic net income (loss) computation plus the effect of common stock equivalents that are dilutive.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net loss attributable to Purple Innovation, Inc. – basic | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Net income (loss) attributed to noncontrolling interest | ( | ) | ||||||||||||||
| Net loss attributable to Purple Innovation, Inc. – diluted | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Denominator: | ||||||||||||||||
| Weighted average shares—basic | ||||||||||||||||
| Add – dilutive effect of equity awards | ||||||||||||||||
| Add – dilutive effect of Class B shares | ||||||||||||||||
| Weighted average shares—diluted | ||||||||||||||||
| Net loss per common share: | ||||||||||||||||
| Basic | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Diluted | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
For the three and nine months
ended September 30, 2023, the Company excluded
31
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
20. Equity Compensation Plans
2017 Equity Incentive Plan
The
Purple Innovation, Inc. 2017 Equity Incentive Plan, as amended and restated (the “2017 Plan”), provides for grants of stock
options, stock appreciation rights, restricted stock units and other stock-based awards. Directors, officers and other employees and
subsidiaries and affiliates, as well as others performing consulting or advisory services for the Company and its subsidiaries, will
be eligible for grants under the 2017 Plan. As of September 30, 2023, an aggregate of
Class A Stock Awards
In
June 2023, the Company granted stock awards under the 2017 Incentive Plan to non-executive directors on the Board. The stock awards vested
immediately and the Company issued
Amended and Restated Grant Agreements
On March 15, 2023, in accordance
with the 2017 Incentive Plan, the Company entered into amended and restated grant agreements relating to stock options and restricted
stock unit awards previously granted to the Company’s chief executive officer in March 2022 and June 2022. The amended agreements
revised the vesting schedule of the awards included in each grant. Pursuant to these agreements,
Employee Stock Options
Following
receipt of shareholder approval of certain amendments to the 2017 Plan at the 2023 Annual Meeting, the
| Fair market value | $ | |||
| Exercise price | $ | |||
| Risk free interest rate | % | |||
| Expected term in years | ||||
| Expected volatility | % | |||
| Expected dividend yield |
| Options (in thousands) | Weighted
Average Exercise Price | Weighted
Average Remaining Contractual Term in Years | Intrinsic
Value (in thousands) | |||||||||||||
| Options outstanding as of January 1, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Forfeited/cancelled | ( | ) | ||||||||||||||
| Options outstanding as of September 30, 2023 | $ | $ | ||||||||||||||
32
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
| Exercise Prices | Number
of Options Outstanding (in thousands) | Weighted Average Remaining Life (Years) | Number
of Options Exercisable (in thousands) | Weighted Average Remaining Life (Years) | Intrinsic Value (in thousands) | |||||||||||||||||
| $ | $ | |||||||||||||||||||||
| Options (in thousands) | Weighted Average Grant Date Fair Value | |||||||
| Nonvested options as of January 1, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Nonvested options as of September 30, 2023 | $ | |||||||
The
estimated fair value of Company stock options is amortized over the options vesting period on a straight-line basis. For the three and
nine months ended September 30, 2023, the Company recognized stock option expense of $
As
of September 30, 2023, outstanding stock options had $
33
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Employee Restricted Stock Units
During
the second quarter of 2023, the Company granted
| Trading price of common stock on measurement date | $ | |||
| Risk free interest rate | % | |||
| Expected life in years | ||||
| Expected volatility | % | |||
| Expected dividend yield |
| Number Outstanding (in thousands) | Weighted Average Grant Date Fair Value | |||||||
| Nonvested restricted stock units as of January 1, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Nonvested restricted stock units as of September 30, 2023 | $ | |||||||
The
Company recorded restricted stock unit expense of $
As
of September 30, 2023, outstanding restricted stock units had $
34
PURPLE
INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Aggregate Non-Cash Stock-Based Compensation
The Company has accounted for all stock-based compensation under the provisions of ASC 718 Compensation—Stock Compensation. This standard requires the Company to record a non-cash expense associated with the fair value of stock-based compensation over the requisite service period.
| Three
Months Ended September 30, | Nine
Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Cost of revenues | $ | $ | $ | $ | ||||||||||||
| Marketing and sales | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total non-cash stock-based compensation | $ | $ | $ | $ | ||||||||||||
21. 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. The plan provides
for Company matching of employee contributions up to
22. Subsequent Events
Draws on ABL Credit Agreements
The company has received $
Notice of Default and Waiver
Certain events of default occurred under each of the 2023 Credit Agreements due to (i) the Company’s failure to (a) provide certain financial reporting and related materials on a timely basis and (b) complete certain post-closing deliverables as required under the ABL Agreement and (ii) the Company drawing on the loan under the ABL Agreement while the above events of default were in existence.
On November 6, 2023, we entered into (i) the ABL Amendment and (ii) the Term Loan Amendment, with the Term Loan Lenders and ABL Lenders, respectively, including waivers of the Subject Events of Default. In addition, the ABL Amendment and Term Loan Amendment also amended certain provisions of the 2023 Credit Agreements, including, among other changes, to require (i) weekly borrowing base certificates, (ii) 13-week cash flow reports and budgets, (iii) budget variance reports, (iv) the appointment of a third-party consultant, and (v) daily cash sweeps from the Loan Parties’ accounts to an account at the ABL Lender.
35
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to provide a more comprehensive review of the operating results and financial condition of Purple Innovation, Inc. than can be obtained from reading the Unaudited Condensed Consolidated Financial Statements alone. The discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and the notes thereto included in “Part I. Item 1. Financial Statements.”
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that represent our current expectations and beliefs. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws. In some cases, you can identify these statements by forward-looking words such as “believe,” “expect,” “project,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “will,” “would,” “could,” “may,” “might,” the negative of these words and other similar words.
All forward-looking statements included in this Quarterly Report are made only as of the date thereof. It is routine for our internal projections and expectations to change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end of the next quarter or year. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses (including the discussion under the heading “Outlook for Growth”), and other characterizations of future events or circumstances are forward-looking statements.
We caution and advise readers that these statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those included in the “Risk Factors” section of this Quarterly Report and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 22, 2023, as amended on May 1, 2023. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements and investors are cautioned not to place undue reliance on any such statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.
Revision of Consolidated Financial Statements for Correction of Immaterial Misstatements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the revision of the Company’s unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2022. For further detail regarding the revision, see Note 3 – Revision of Consolidated Financial Statements for Correction of Immaterial Misstatements of the Notes to the consolidated financial statements and Part I, Item 4 - Controls and Procedures herein.
Overview of Our Business
Our mission is to help people feel and live better through innovative comfort solutions.
We are an omni-channel Company that began as 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, duvets, duvet covers, and other products. Our products are the result of over 30 years of innovation and investment in proprietary and patented comfort technologies and the development of our own manufacturing processes. Our proprietary Hyper-Elastic Polymer gel technology underpins many of our comfort products and provides a range of benefits that differentiate our offerings from other competitors’ products. We market and sell our products directly to consumers through our e-commerce and Purple owned retail showroom channels, online marketplaces and retail wholesale partners.
Organization
Our business consists of Purple Inc. and its consolidated subsidiary, Purple LLC. Purple Inc. was incorporated in Delaware on May 19, 2015 as a special purpose acquisition company under the name of GPAC. On February 2, 2018, Purple Inc. consummated a transaction structured similar to a reverse recapitalization pursuant to which Purple Inc. acquired an equity interest in Purple LLC as holder of all Class A units and became its sole managing member. As the sole managing member of Purple LLC, Purple Inc., through its officers and directors, is responsible for all operational and administrative decision making and control of the day-to-day business affairs of Purple LLC without the approval of any other member. At September 30, 2023, Purple Inc. had a 99.6% economic interest in Purple LLC while other Class B Unit holders had the remaining 0.4%.
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On August 31, 2022, we acquired all the issued and outstanding stock of Intellibed pursuant to the Merger Agreement. On October 3, 2022, Purple Inc. contributed 100% of the membership interest in Intellibed to Purple LLC and Intellibed became a wholly owned subsidiary of Purple LLC. For further discussion see Note 5 — Acquisition.
Executive Summary – Third Quarter Results of Operations
Net revenues decreased $2.9 million, or 2.0%, to $140.0 million for the three months ended September 30, 2023 as compared to the corresponding period in the prior year. This decrease reflected the continued impact of softening demand for home-related products due to the normalization of demand distribution. The negative effects of this were mostly offset by additional existing wholesale partners transitioning to our new Premium and Luxe product lineup coupled with the positive response to the new products in our DTC channels.
Gross profit decreased $11.7 million, or 19.8%, to $47.3 million for the three months ended September 30, 2023 as compared to the corresponding period in the prior year. This decrease reflected the impact of our gross profit percentage declining to 33.8% of net revenues in the third quarter of 2023 as compared to 41.3% in the third quarter of 2022. The lower gross profit percentage was primarily due to the impact of new mattress and base floor models being sold to our wholesale partners at reduced pricing, increased labor and freight costs related to the transition to our new products, the wrap-around on manufacturing efficiencies from last year when we had a higher amount of inventory production, and a shift in revenue to our wholesale channel which carries a lower average selling price than sales from our DTC channels.
Operating expenses increased $21.8 million, or 37.6%, to $79.9 million for the three months ended September 30, 2023 when compared to the corresponding period in the prior year. This increase was primarily due to higher advertising spend which began increasing in mid-May to align with the launch of our new Premium and Luxe product lineups and enhanced brand positioning. Operating expenses in 2023 also included a $6.9 million loss on impairment of goodwill.
Other expense totaled $3.5 million for the three months ended September 30, 2023 compared to other income of $0.3 million for the three months ended September 30, 2022. Other expense in 2023 was primarily comprised of a $3.1 million loss on extinguishment of debt associated with the termination of the Company’s 2020 Credit Agreement in August 2023.
Net loss was $36.0 million for the three months ended September 30, 2023 compared to net income of $2.0 million for the three months ended September 30, 2022.
37
Recent Developments in Our Business
Operational Developments – Launch of New Premium and Luxe Product Lineups
In 2022 and continuing into 2023, we expanded our focus on product development and increased our innovation capabilities. As a result, in May 2023, we launched our new Premium and Luxe product lineups. This launch was supported by enhancements to our in-store presence and refinements to our marketing programs and brand messaging. While the response to our new products and enhanced brand positioning has been extremely positive, we have continued to experience in 2023 softening demand for home-related products due to a normalization of demand distribution. Also, as consumer spending habits have moved away from the COVID era e-commerce spike to brick and mortar buying, we have grown the number of Purple owned retail showrooms to 57 at September 30, 2023. In addition, we have focused on growing our placements with wholesale partners and improving wholesale door productivity. By the end of the third quarter, more than half of our approximately 3,300 wholesale doors had transitioned to our new line of mattress products. We expect to convert the remaining wholesale doors to our new product lineup by the end of the year. Improving the sales productivity of both our wholesale doors and existing showrooms remains a primary focus and critical component of our strategy to respond to shifting demand patterns. After several years of hyper growth and increased investments to support current and future expansion, we are building the framework for improved operational maturity and accountability after focusing on right-sizing our operations, improving our execution, and refining our strategies that will drive share gains in the premium mattress category and position us for accelerated growth. Beginning in 2022 and continuing into early 2023, we purposely reduced our advertising spending to improve marketing efficiency, conserve profitability in a challenging macroeconomic environment and align spending with current demand levels. With the introduction of our new product lineups in May 2023, we initiated a new marketing campaign and enhanced brand positioning. As a result, in the third quarter of 2023, the first full quarter with our new product lineup in-market, we grew net revenues 31.2% and 18.8% over the first and second quarters of 2023, respectively. Also, sales from our e-commerce channel reached a more normalized level in the third quarter of 2023 as e-commerce net revenues increased 15.8% and 15.4% over the first and second quarters of 2023, respectively. We believe we have set the right course for the next stage of growth for the Company.
Coliseum Cooperation Agreement
On February 21, 2023, Coliseum filed a lawsuit against us and several members of our Board alleging that we and the named directors authorized an improper dividend of preferred stock in bad faith to impede stockholder voting rights and interfered with Coliseum’s nomination of a competing slate of director candidates ahead of our 2023 annual meeting of stockholders. On April 19, 2023, we entered into a Cooperation Agreement with Coliseum to resolve the litigation. The details of the Cooperation Agreement, which became effective on April 27, 2023, are discussed further in Note 16 — Related Party Transactions— Coliseum Capital Management, LLC.
Shelf Registration Statement and Equity Financing
On January 30, 2023, the Form S-3 shelf registration statement we filed with the SEC in December 2022 became effective. As a result, we may offer and sell from time to time, in one or more series or issuances and on terms that we will determine at the time of the offering, any combination of the securities described in the registration statement, up to an aggregate amount of $90.0 million.
In February 2023, we completed an underwritten offering of 13.4 million shares of Class A common stock at a public offering price of $4.50 per share. The underwriters did not exercise their over-allotment option. The aggregate net proceeds received by us from the offering, after deducting offering fees and expenses of $3.3 million, totaled $57.0 million.
Debt Financing
On August 7, 2023, Purple LLC, Purple Inc. and Intellibed, (collectively the “Loan Parties”) entered into a term loan credit agreement (the “Term Loan Agreement”) with Callodine Commercial Finance, LLC and a group of financial institutions. Also, on August 7, 2023, the Loan parties entered into a separate financing arrangement with the Bank of Montreal and a group of financial institutions (collectively the “ABL Lenders”) that provided for a revolving asset-based credit facility (the “ABL Agreement” and together with the Term Loan Agreement the “2023 Credit Agreements”). Pursuant to entering into these agreements, the Company incurred fees and expenses of $3.1 million that were recorded as debt issuance costs in the third quarter of 2023.
38
The Term Loan Agreement provided for up to $25.0 million of term loans, with up to $5.0 million of incremental term loans available, subject to certain conditions (collectively, the “Term Loans”). Proceeds from the Term Loans, which were fully drawn at closing, are being used for general corporate purposes. The borrowing rates under the Term Loan Agreement are based on SOFR, plus a credit spread adjustment of 0.15% per annum, plus 8.5% per annum, with a SOFR floor of 2.0% per annum. The Term Loans will be repaid at the earlier of (a) a three-year amortization schedule ending on August 7, 2026 or (b) the payment in full of the ABL Agreement. The Term Loans may be prepaid in whole or in part at any time, but subject to a prepayment premium. There may also be mandatory prepayment obligations based on certain asset dispositions, casualty events and extraordinary receipts. Once repaid, no portion of the Term Loans may be reborrowed. The outstanding balance of the Term Loans was $25.0 million at September 30, 2023.
Pursuant to a pledge and security agreement, the Loan Parties’ obligations under the Term Loan Agreement are secured by a perfected second-priority security interest in the cash, inventory and accounts receivable of the Loan Parties, and a perfected first-priority security interest in substantially all other assets of the Loan Parties, including, without limitation, the intellectual property and equipment of the Loan Parties, subject to certain exceptions.
The ABL Agreement provides for up to $50.0 million of revolving loans subject to a borrowing base calculation and minimum availability requirements (with sub-facilities for swing line loans and the issuance of letters of credit), with incremental increases available up to $20.0 million (the “ABL Loans”), subject to certain conditions, availability reserves, minimum availability requirements, borrowing base calculations, and restrictive covenants. In October 2023, the ABL Lenders implemented an availability reserve of $5.0 million, which reduces the amount available under our borrowing base. No funds were drawn under the ABL Agreement at closing and there was no outstanding balance at September 30, 2023. We executed $17.0 million in draws on our ABL Loans in October and November 2023 and have given notice to repay $2.0 million. We may use the funds drawn from the ABL Agreement to finance permitted acquisitions, as defined in the ABL Agreement, and for working capital, capital expenditures and other general corporate purposes. Outstanding principal and accrued interest on the ABL Loans shall be repaid on August 7, 2026.
The borrowing rates under the ABL Agreement will accrue on a three-tiered grid based on revolving availability, ranging from (i) SOFR, plus a credit spread adjustment of 0.10% per annum, plus 2.75% per annum to (ii) SOFR, plus a credit spread adjustment of 0.10% per annum, plus 3.25% per annum, with a SOFR floor of 0% per annum. The ABL Loans may be prepaid in whole or in part at any time without premium or penalty, subject to reimbursement of certain costs. There may be mandatory prepayment obligations based on certain asset dispositions, casualty events, equity issuances and extraordinary receipts.
Pursuant to a pledge and security agreement, the Loan Parties’ obligations under the ABL Agreement are secured by a perfected first-priority security interest in the cash, inventory and accounts receivable of the Loan Parties, and a perfected second-priority security interest in substantially all of the other assets of the Loan Parties, subject to certain exceptions.
In connection with our execution of the Term Loan Agreement and ABL Agreement, the Company terminated its 2020 Credit Agreement in August 2023. The Company had no outstanding borrowings under the 2020 Credit Agreement at the time of termination. The termination was accounted for as an extinguishment of debt and $3.1 million of unamortized debt issuance costs related to the 2020 Credit Agreement were recorded as a loss on extinguishment of debt in the condensed consolidated statement of operations.
Amendments to 2023 Credit Agreements
On November 6, 2023, we entered into (i) a First Amendment and Waiver to the ABL Agreement (the “ABL Amendment”) and (ii) a First Amendment and Waiver to the Term Loan Agreement (the “Term Loan Amendment”), with the Term Loan Lenders and ABL Lenders, respectively (collectively, the “Lenders”), including waivers of the Subject Events of Default. In addition, the ABL Amendment and Term Loan Amendment also amended certain provisions of the 2023 Credit Agreements, including, among other changes, to require (i) weekly borrowing base certificates, (ii) 13-week cash flow reports and budgets, (iii) budget variance reports, (iv) the appointment of a third-party consultant, and (v) daily cash sweeps from the Loan Parties’ accounts to an account at the ABL Lender (collectively, the “2023 Credit Agreement Amendments”). The foregoing descriptions of the ABL Amendment and Term Loan Amendment do not purport to be complete and are qualified in their entirety by reference to the ABL Amendment and Term Loan Amendment, which are attached as Exhibit 10.2 and Exhibit 10.3, respectively, to this report and are incorporated by reference herein.
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Outlook for Growth
We believe that our four strategic initiatives – accelerating innovation, brand elevation, developing our three distribution channels and operational excellence – will be fundamental to our future success.
To support our plans for future growth and sustained profitability, we are focusing on the following opportunities:
| ● | Strengthen our wholesale relationships, prioritize existing door productivity, and develop and execute our other strategies to meaningfully expand our wholesale business. |
| ● | Mature our fleet of Purple owned retail showrooms, increase door productivity, provide a brand halo benefit to other channels in the surrounding areas, strengthen the relationship with the consumer, and develop a more profitable DTC revenue mix. |
| ● | Build brand position to grow our market share of the premium and luxury mattress categories. We launched our new Premium and Luxe product lineups in the second quarter of 2023. This launch was supported by enhancements to our in-store presence and refinements to our marketing programs and brand messaging. |
| ● | Refine and enhance marketing strategies to reach a broader audience, increase customer engagement and reduce dependency on price promotions as a means of driving sales. |
| ● | Strengthen research and development disciplines and go-to-market processes to further develop our current product categories and position our business to eventually expand to additional categories. |
| ● | Manage production labor and capacity utilization to promote efficient use of our manufacturing facilities as we grow into our production footprint. |
| ● | Manage input costs, operating efficiencies, and pricing to further enhance our gross margin. |
There is no guarantee that we will be able to effectively execute on these opportunities, which are subject to risks, uncertainties, and assumptions that are difficult to predict, including the risks described under “Risk Factors” and elsewhere herein. Therefore, actual results may differ materially and adversely from those described above. In addition, we may, in the future, adapt these focuses in response to changes in the market or our business.
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Operating Results for the Three Months Ended September 30, 2023 and 2022
The following table sets forth for the periods indicated, our results of operations and the percentage of total revenue represented in our condensed consolidated statements of operations:
| Three Months Ended September 30, | ||||||||||||||||
| 2023 | % of Net Revenues | 2022 | % of Net Revenues | |||||||||||||
| Revenues, net | $ | 139,996 | 100.0 | % | $ | 142,867 | 100.0 | % | ||||||||
| Cost of revenues | 92,687 | 66.2 | 83,867 | 58.7 | ||||||||||||
| Gross profit | 47,309 | 33.8 | 59,000 | 41.3 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Marketing and sales | 52,816 | 37.7 | 37,007 | 25.9 | ||||||||||||
| General and administrative | 17,524 | 12.5 | 19,166 | 13.4 | ||||||||||||
| Research and development | 2,704 | 1.9 | 1,927 | 1.3 | ||||||||||||
| Loss on impairment of goodwill | 6,879 | 4.9 | — | — | ||||||||||||
| Total operating expenses | 79,923 | 57.1 | 58,100 | 40.7 | ||||||||||||
| Operating income (loss) | (32,614 | ) | (23.3 | ) | 900 | 0.6 | ||||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (594 | ) | (0.4 | ) | (717 | ) | (0.5 | ) | ||||||||
| Other income, net | 205 | 0.1 | 1,107 | 0.8 | ||||||||||||
| Change in fair value – warrant liabilities | — | — | (53 | ) | — | |||||||||||
| Loss on extinguishment of debt | (3,114 | ) | (2.2 | ) | — | — | ||||||||||
| Total other income (expense), net | (3,503 | ) | (2.5 | ) | 337 | 0.2 | ||||||||||
| Net income (loss) before income taxes | (36,117 | ) | (25.8 | ) | 1,237 | 0.9 | ||||||||||
| Income tax (expense) benefit | (18 | ) | — | 720 | 0.5 | |||||||||||
| Net income (loss) | (36,135 | ) | (25.8 | ) | 1,957 | 1.4 | ||||||||||
| Net income (loss) attributable to noncontrolling interest | (131 | ) | (0.1 | ) | 1 | — | ||||||||||
| Net income (loss) attributable to Purple Innovation, Inc. | $ | (36,004 | ) | (25.7 | ) | $ | 1,956 | 1.4 | ||||||||
Revenues, Net
Net revenues decreased $2.9 million, or 2.0%, to $140.0 million for the three months ended September 30, 2023 compared to $142.9 million for the three months ended September 30, 2022. This decrease reflected the continued impact of softening demand for home-related products due to the normalization of demand distribution. The negative effects of this were mostly offset by additional existing wholesale partners transitioning to our new Premium and Luxe product lineup coupled with the positive response to the new products in our DTC channels. From a sales channel perspective, wholesale net revenues increased $1.5 million, or 2.6%, offset in part by DTC net revenues decreasing $4.4 million, or 5.2%. The increase in wholesale net revenues was primarily due to additional existing wholesale partners transitioning to our new product lineup during the third quarter partially offset by an increase in the warranty reserve for products sold to our wholesale customers. Within DTC, e-commerce net revenues decreased $6.2 million, or 9.5%, while Purple owned retail showroom net revenues increased $1.8 million, or 9.7%. Although e-commerce net revenues decreased as compared to the prior year corresponding quarter, the positive response to our new product lineups resulted in e-commerce revenue increasing 15.8% and 15.4% over the first and second quarters of 2023, respectively. The increase in Purple owned retail showroom net revenue was driven by the positive response to our new product lineups coupled with the impact of showroom expansion.
Cost of Revenues
Cost of revenues increased $8.8 million, or 10.5%, to $92.7 million for the three months ended September 30, 2023 compared to $83.9 million for the three months ended September 30, 2022. This increase was due in part to increased labor and freight costs associated with the transition to our new products. Our gross profit percentage, which decreased to 33.8% of net revenues in the third quarter of 2023 from 41.3% in the prior year third quarter, was adversely impacted by new mattress and base floor models being sold to our wholesale partners at reduced pricing, increased labor and freight costs related to the transition to our new products, the wrap-around on manufacturing efficiencies from last year when we had a higher amount of inventory production, and increased discounting of mattresses sold through our online channels as we transitioned to our new Premium and Luxe product lineups. In addition, the gross profit percentage in the third quarter of 2023 was negatively impacted by a shift in revenue to our wholesale channel, which carries a lower average selling price than sales from our DTC channels.
41
Marketing and Sales
Marketing and sales expense increased $15.8 million, or 42.7%, to $52.8 million for the three months ended September 30, 2023 compared to $37.0 million for the three months ended September 30, 2022. Marketing and sales expense as a percentage of net revenues was 37.7% in the third quarter of 2023 compared to 25.9% in the third quarter of 2022. Advertising spending increased $12.6 million to $25.4 million for the three months ended September 30, 2023 compared to $12.7 million for the three months ended September 30, 2022. Advertising spend began increasing in mid-May to align with the launch of our new Premium and Luxe product lineups, whereas ad spend in the third quarter of 2022 had been reduced to align spending with then current demand levels. The increase in marketing and sales expense also reflected a $2.0 million increase in costs associated with showroom expansion and a $1.3 million increase in wholesale marketing and sales costs as the majority of our existing wholesale partners transitioned to our new Premium and Luxe product lineup during the third quarter of 2023.
General and Administrative
General and administrative expense decreased $1.6 million, or 8.6%, to $17.5 million for the three months ended September 30, 2023 compared to $19.2 million for the three months ended September 30, 2022. This decrease was primarily due to a $1.5 million decline in legal and professional fees as the prior year comparative quarter included transaction costs associated with the Intellibed acquisition.
Research and Development
Research and development costs increased $0.8 million, or 40.3%, to $2.7 million for the three months ended September 30, 2023 compared to $1.9 million for the three months ended September 30, 2022. This increase primarily reflected our continued focus on new product innovation initiatives to remain competitive and advance our current product line.
Loss on Impairment of Goodwill
The ongoing decline in the Company’s market capitalization, along with other qualitative considerations was determined to be a triggering event for potential goodwill impairment. Accordingly, the Company performed a goodwill impairment analysis as of September 30, 2023. The Company, considered as a single reporting unit, estimated the implied fair value of its goodwill using a variety of valuation methods, including both the income and market approaches. As a result of the impairment assessment performed, the Company determined goodwill was impaired and recorded an impairment charge to write off the entire $6.9 million balance of goodwill.
Operating Loss
Operating loss was $32.6 million for the three months ended September 30, 2023 compared to operating income of $0.9 million for the three months ended September 30, 2022. The operating loss in 2023 primarily reflected a decrease in gross profit that was driven by a reduced gross profit percentage, an increase in marketing and sales costs associated with our new product launch, and a loss on impairment of goodwill.
Interest Expense
Interest expense totaled $0.6 million for the three months ended September 30, 2023 compared to $0.7 million for the three months ended September 30, 2022. In August 2023, the Company entered into a new $25.0 million Term Loan Agreement and a separate ABL Agreement that provided for up to $50.0 million of revolving loans. Interest expense in the third quarter of 2023 totaled $0.9 million related to these new financing arrangements. Interest expense was reduced by capitalized interest that totaled $0.4 million and $0.2 million during the three months ended September 30, 2023 and 2022, respectively.
Other Income (Expense)
Other income was $0.2 million for the three months ended September 30, 2023 compared to $1.1 million for the three months ended September 30, 2022. This decrease primarily resulted from the prior year third quarter including an estimated fair value gain of $1.4 million related to the effective settlement of a preexisting legal matter between the Company and Intellibed upon the Company’s acquisition of Intellibed on August 31, 2022.
Loss on Extinguishment of Debt
In August 2023, the Company entered into a new $25.0 million Term Loan Agreement and a separate ABL Agreement that provided for up to $50.0 million of revolving loans. In connection with the execution of these new financing arrangements, the Company terminated its 2020 Credit Agreement. While the Company had no outstanding borrowings under the 2020 Credit Agreement at that time, the termination was accounted for as an extinguishment of debt during the third quarter of 2023 and $3.1 million of unamortized debt issuance costs were recorded as loss on extinguishment of debt in the condensed consolidated statement of operations.
Income Tax (Expense) Benefit
We had a negligible income tax expense for the three months ended September 30, 2023 compared to an income tax benefit of $0.7 million for the three months ended September 30, 2022. The income tax expense amount in 2023 resulted from various state income taxes.
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Noncontrolling Interest
We calculate net income or loss attributable to noncontrolling interests on a quarterly basis using their weighted average ownership percentage. Net loss attributed to noncontrolling interests was $0.1 million for the three months ended September 30, 2023 compared to a negligible net income amount for the three months ended September 30, 2022.
Operating Results for the Nine Months Ended September 30, 2023 and 2022
The following table sets forth for the periods indicated, our results of operations and the percentage of total revenue represented in our statements of operations:
| Nine Months Ended September 30, | ||||||||||||||||
| 2023 | % of Net Revenues | 2022 | % of Net Revenues | |||||||||||||
| Revenues, net | $ | 364,605 | 100.0 | % | $ | 428,896 | 100.0 | % | ||||||||
| Cost of revenues | 241,244 | 66.2 | 270,717 | 63.1 | ||||||||||||
| Gross profit | 123,361 | 33.8 | 158,179 | 36.9 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Marketing and sales | 137,368 | 37.7 | 127,339 | 29.7 | ||||||||||||
| General and administrative | 67,628 | 18.5 | 55,833 | 13.0 | ||||||||||||
| Research and development | 9,001 | 2.5 | 5,818 | 1.4 | ||||||||||||
| Loss on impairment of goodwill | 6,879 | 1.9 | — | — | ||||||||||||
| Total operating expenses | 220,876 | 60.6 | 188,990 | 44.1 | ||||||||||||
| Operating loss | (97,515 | ) | (26.7 | ) | (30,811 | ) | (7.2 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (1,148 | ) | (0.3 | ) | (2,447 | ) | (0.6 | ) | ||||||||
| Other income, net | 315 | 0.1 | 988 | 0.2 | ||||||||||||
| Change in fair value – warrant liabilities | — | — | 4,221 | 1.0 | ||||||||||||
| Loss on extinguishment of debt | (4,331 | ) | (1.2 | ) | — | — | ||||||||||
| Total other income (expense), net | (5,164 | ) | (1.4 | ) | 2,762 | 0.6 | ||||||||||
| Net loss before income taxes | (102,679 | ) | (28.2 | ) | (28,049 | ) | (6.5 | ) | ||||||||
| Income tax benefit (expense) | (162 | ) | — | 7,036 | 1.6 | |||||||||||
| Net loss | (102,841 | ) | (28.2 | ) | (21,013 | ) | (4.9 | ) | ||||||||
| Net loss attributable to noncontrolling interest | (417 | ) | (0.1 | ) | (204 | ) | — | |||||||||
| Net loss attributable to Purple Innovation, Inc. | $ | (102,424 | ) | (28.1 | ) | $ | (20,809 | ) | (4.9 | ) | ||||||
Revenues, Net
Net revenues decreased $64.3 million, or 15.0%, to $364.6 million for the nine months ended September 30, 2023 compared to $428.9 million for the nine months ended September 30, 2022. The decrease in net revenues was primarily due to softening demand for home-related products due to the normalization of demand distribution. This decline was partially offset by the positive response to the launch of our new Premium and Luxe product lineups in May 2023. The decline in net revenues from a sales channel perspective consisted of DTC net revenues decreasing $37.0 million, or 14.7%, and wholesale net revenues declining $27.3 million, or 15.4%. Within DTC, e-commerce net revenues decreased $43.8 million, or 21.2%, while Purple owned retail showroom net revenues increased $6.8 million, or 15.1%. The decrease in e-commerce net revenues reflected the impact of the reasons previously stated. The increase in Purple owned retail showroom net revenue was driven in part by the positive response to our new products coupled with the impact of showroom expansion. The decrease in wholesale net revenues, which reflected the impact of the reasons previously stated, was also affected by an increase in the warranty reserve for products sold to our wholesale customers, reduced purchases from existing wholesale partners prior to them transitioning to our new Premium and Luxe product lineups coupled with floor models of our new mattress and base products being sold to our wholesale partners at reduced pricing.
Cost of Revenues
Cost of revenues decreased $29.5 million, or 10.9%, to $241.2 million for the nine months ended September 30, 2023 compared to $270.7 million for the nine months ended September 30, 2022. This decrease was due in part to lower sales volume. Our gross profit percentage, which decreased to 33.8% of net revenues in 2023 from 36.9% in 2022, was adversely impacted by new mattress and base floor models being sold to our wholesale partners at reduced pricing, increased labor and freight costs related to the transition to our new products, the wrap-around on manufacturing efficiencies from last year when we had a higher amount of inventory production, and increased discounting of mattresses sold through our online channels as we transitioned to our new Premium and Luxe product lineups.
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Marketing and Sales
Marketing and sales expense increased $10.0 million, or 7.9%, to $137.4 million for the nine months ended September 30, 2023 compared to $127.3 million for the nine months ended September 30, 2022. This increase was comprised of a $1.8 million increase in advertising spending, a $9.7 million increase in marketing and sales costs associated with showroom expansion, and a $1.8 million increase in wholesale marketing and sales costs. These increases were offset in part by a $3.2 million decrease in other marketing costs. The increase in advertising spend began in mid-May to align with the launch of our new Premium and Luxe product lineups. The increase in wholesale marketing and sales costs was primarily due to additional existing wholesale partners transitioning to our new Premium and Luxe product lineup during the third quarter of 2023. The decrease in other marketing costs reflected the impact of management restructuring the marketing organization in the first half of 2022. Marketing and sales expense as a percentage of net revenues was 36.5% during the first nine months of 2023 compared to 29.6% for the first nine months of 2022. The higher percentage of revenues reflected the impact of lower sales coupled with management’s expanded marketing efforts beginning in the second quarter of 2023 to support the launch of our new Premium and Luxe product lineups.
General and Administrative
General and administrative expense increased $11.8 million, or 21.1%, to $67.6 million for the nine months ended September 30, 2023 compared to $55.8 million for the nine months ended September 30, 2022. This increase was primarily due to legal and professional fees incurred by the Special Committee. We are pursuing insurance claims with our D&O and business interruption policy carriers relating to costs incurred (i) in connection with the litigation and settlement relating to Coliseum and (ii) due to the interruption of our business following the death of an employee in 2021. However, there can be no guarantee that we will be able to recover on such claims in amount to cover such costs, or at all.
Research and Development
Research and development costs increased $3.2 million, or 54.7%, to $9.0 million for the nine months ended September 30, 2023 compared to $5.8 million for the nine months ended September 30, 2022. This increase primarily reflected our continued focus on new product innovation initiatives to remain competitive and advance our current product line.
Loss on Impairment of Goodwill
The ongoing decline in the Company’s market capitalization, along with other qualitative considerations was determined to be a triggering event for potential goodwill impairment. Accordingly, the Company performed a goodwill impairment analysis as of September 30, 2023. The Company, considered as a single reporting unit, estimated the implied fair value of its goodwill using a variety of valuation methods, including both the income and market approaches. As a result of the impairment assessment performed, the Company determined goodwill was impaired and recorded an impairment charge to write off the entire $6.9 million balance of goodwill.
Operating Loss
Operating loss increased $66.7 million to $97.5 million for the nine months ended September 30, 2023 compared to $30.8 million for the nine months ended September 30, 2022. The larger operating loss primarily resulted from a decrease in gross profit that was driven by reduced sales and a lower gross profit percentage, an increase in marketing and sales costs related to the launch of our new products and showroom expansion, an increase in general and administrative expense resulting from legal and professional fees incurred by the Special Committee, and a loss on impairment of goodwill.
Interest Expense
Interest expense totaled $1.1 million for the nine months ended September 30, 2023 compared to $2.4 million for the nine months ended September 30, 2022. Interest expense for the nine months ended September 30, 2023 was primarily comprised of $0.9 million related to the new asset based financing arrangements entered into in August 2023 and $1.1 million related to the 2020 Credit Agreement that was terminated upon entering into the new financing arrangements, Interest expense was reduced by capitalized interest that totaled $0.9 million and $0.6 million during the nine months ended September 30, 2023 and 2022, respectively.
Other Income (Expense)
Other income was $0.3 million for the nine months ended September 30, 2023 compared to $1.0 million for the nine months ended September 30, 2022. This decrease primarily resulted from the prior year third quarter including an estimated fair value gain of $1.4 million related to the effective settlement of a preexisting legal matter between the Company and Intellibed upon the Company’s acquisition of Intellibed on August 31, 2022.
Change in Fair Value – Warrant Liabilities
Unexercised sponsor warrants totaling 1.9 million expired in February 2023 and were cancelled pursuant to the terms of the agreement. These sponsor warrants had no fair value on the date of expiration and a de minimis fair value at the previous reporting date. During the nine months ended September 30, 2022, we recognized a gain of $4.2 million in our condensed consolidated statement of operations related to a decrease in the fair value of the warrants outstanding at the end of the quarter.
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Loss on Extinguishment of Debt
In August 2023, the Company entered into a new $25.0 million Term Loan Agreement and a separate ABL Agreement that provided for up to $50.0 million of revolving loans. In connection with the execution of these new financing arrangements, the Company terminated its 2020 Credit Agreement. While the Company had no outstanding borrowings under the 2020 Credit Agreement at that time, the termination was accounted for as an extinguishment of debt during the third quarter of 2023 and $3.1 million of unamortized debt issuance costs were recorded as loss on extinguishment of debt in the condensed consolidated statement of operations. In February 2023, the Company entered into a fifth amendment to the since terminated 2020 Credit Agreement and repaid in full the $24.7 million outstanding balance of the term loan plus accrued interest. This amendment was accounted for as an extinguishment of debt during the first quarter of 2023 and $1.2 million of unamortized debt issuance costs were recorded as loss on extinguishment of debt in the condensed consolidated statement of operations.
Income Tax (Expense) Benefit
We had income tax expense of $0.2 million for the nine months ended September 30, 2023 compared to an income tax benefit of $7.0 million for the nine months ended September 30, 2022. The income tax expense amount in 2023 resulted from various state income taxes.
Noncontrolling Interest
We calculate net income or loss attributable to noncontrolling interests on a quarterly basis using their weighted average ownership percentage. Net loss attributed to noncontrolling interests was $0.4 million for the nine months ended September 30, 2023 compared to a net loss of $0.2 million for the nine months ended September 30, 2022.
Liquidity and Capital Resources
Our principal sources of funds are cash flows from operations and cash and cash equivalents on hand, supplemented with borrowings made pursuant to our asset-based lending facility and proceeds received from offerings of our equity capital. Principal uses of funds consist of payments of principal and interest on our debt facilities, capital expenditures, working capital needs, and operating lease payment obligations. Our working capital needs depend largely upon the timing of cash receipts from product sales, payments to vendors and others, changes in inventories, and operating lease payment obligations. Our unrestricted cash and working capital positions were $26.6 million and $40.2 million, respectively, as of September 30, 2023 compared to $40.0 million and $62.4 million, respectively, as of December 31, 2022. Cash used for capital expenditures decreased from $34.1 million in the first nine months of 2022 to $9.4 million during the first nine months of 2023. Our capital expenditures in 2023 have primarily consisted of additional investments made in our manufacturing and showroom facilities.
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 use the liquidity we have available under our ABL Loans. In October 2023, the ABL Lenders implemented an availability reserve of $5.0 million, which reduces the amount available under our borrowing base. Since September 30, 2023, we have drawn approximately $17.0 million in ABL Loans and have given notice to repay $2.0 million. Based on our borrowing base calculation, including application of the $5.0 million availability reserve and a minimum availability requirement of $11.0 million, as of November 13, 2023, we have approximately $4.6 million available for borrowings under our ABL Agreement. However, the amount available under the ABL Agreement depends on our borrowing base calculations and minimum availability requirements at the time of any draw. Therefore, the amount available to us under the ABL Agreement will change from time to time. Our cash balance as of November 13, 2023, was $31.0 million.
In addition, the ABL Amendment and Term Loan Amendment increased our reporting obligations under the 2023 Credit Agreements and if we are not able to maintain compliance with such additional requirements we may experience future events of default, which could limit our ability to access the ABL Loans and adversely affect our financial position and operations.
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If we experience further events of default in the future, we may not, without the approval of the ABL Lenders, be able to access the ABL Loans unless such defaults are resolved, including by obtaining required waivers from the ABL Lenders. Even if we are able to obtain such waivers, the ABL Lenders may adopt additional availability reserves, which would limit the amount we can draw under the ABL Loans.
We may also need to seek additional funding sources including new debt from subordinated lenders or equity capital. However, such additional debt or equity capital may not be available on terms favorable to us or at all. In addition, our ability to raise additional debt financing is restricted by our covenants under the 2023 Credit Agreements and would require the consent of the Lenders.
If we are unable to access sufficient liquidity, we will need to take other actions to fund operational expenses, such as scaling back operations, reducing marketing spend, and postponing or discontinuing our growth strategies. Such actions could result in slower growth or no growth, and we may lose key suppliers, be unable to timely satisfy customer orders, and be unable to retain all of our employees. In addition, we may be forced to restructure our obligations to creditors, pursue work-out options or other protective measures.
Based on our current projections, we believe our cash on hand, amounts available under our asset-based lending arrangement, and expected cash to be generated from our operations will be sufficient to meet our working capital requirements and cover anticipated capital expenditures for at least the next 12 months.
Shelf Registration Statement and Offering of Class A Common Stock
On January 30, 2023, the Form S-3 shelf registration statement we filed with the SEC in December 2022 became effective. As a result, we may offer and sell from time to time, in one or more series or issuances and on terms that we will determine at the time of the offering, any combination of the securities described in the registration statement, up to an aggregate amount of $90.0 million.
In February 2023, we completed an underwritten offering of 13.4 million shares of Class A common stock at a public offering price of $4.50 per share. The underwriters did not exercise their over-allotment option. The aggregate net proceeds received by us from the offering, after deducting offering fees and expenses of $3.1 million, totaled $57.0 million.
Debt
On August 7, 2023, the Loan Parties entered into the Term Loan Agreement with Callodine Commercial Finance, LLC and a group of financial institutions. Also, on August 7, 2023, the Loan parties entered into a separate financing arrangement with the ABL Lenders that provides for the ABL Agreement. Pursuant to entering into these agreements, the Company incurred fees and expenses of $3.1 million that were recorded as debt issuance costs in the third quarter of 2023.
The Term Loan Agreement provides for up to $25.0 million of term loans, with up to $5.0 million of incremental Term Loans, subject to certain conditions (collectively, the “Term Loans”). Proceeds from the Term Loans, which were fully drawn at closing, are being used for general corporate purposes. The borrowing rates under the Term Loan Agreement are based on SOFR, plus a credit spread adjustment of 0.15% per annum, plus 8.5% per annum, with a SOFR floor of 2.0% per annum. The Term Loans will be repaid at the earlier of (a) a three-year amortization schedule or (b) the payment in full of the ABL Agreement. The Term Loans may be prepaid in whole or in part at any time, but subject to a prepayment premium. There may also be mandatory prepayment obligations based on certain asset dispositions, casualty events and extraordinary receipts. Once repaid, no portion of the Term Loans may be reborrowed. The outstanding balance of the Term Loans was $25.0 million at September 30, 2023.
Pursuant to a pledge and security agreement, the Loan Parties’ obligations under the Term Loan Agreement are secured by a perfected second-priority security interest in the cash, inventory and accounts receivable of the Loan Parties, and a perfected first-priority security interest in substantially all other assets of the Loan Parties, including, without limitation, the intellectual property and equipment of the Loan Parties, subject to certain exceptions.
The ABL Agreement provides for up to $50.0 million of revolving loans subject to a borrowing base calculation and minimum availability requirements (with sub-facilities for swing line loans and the issuance of letters of credit), with incremental increases available up to $20.0 million, subject to certain conditions, availability reserves, minimum availability requirements, borrowing base calculations, and restrictive covenants. In October 2023, the ABL Lenders implemented an availability reserve of $5.0 million, which reduces the amount available under our borrowing base. No funds were drawn under the ABL Agreement at closing and there was no outstanding balance at September 30, 2023. We executed $17.0 million in draws on our ABL Loans in October and November 2023 and have given notice to repay $2.0 million. We may use the funds drawn from the ABL Agreement to finance permitted acquisitions, as defined in the ABL Agreement, and for working capital, capital expenditures and other general corporate purposes. Outstanding principal and accrued interest on the ABL Loans shall be repaid on August 7, 2026.
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Certain events of default occurred under each of the 2023 Credit Agreements due to (i) the Company’s failure to (a) provide certain financial reporting and related materials on a timely basis and (b) complete certain post-closing deliverables as required under the ABL Agreement and (ii) the Company drawing on the loan under the ABL Agreement while the above events of default were in existence.
On November 6, 2023, we entered into (i) the ABL Amendment and (ii) the Term Loan Amendment, with the Term Loan Lenders and ABL Lenders, respectively, including waivers of the Subject Events of Default. In addition, the ABL Amendment and Term Loan Amendment also amended certain provisions of the 2023 Credit Agreements, including, among other changes, to require (i) weekly borrowing base certificates, (ii) 13-week cash flow reports and budgets, (iii) budget variance reports, (iv) the appointment of a third-party consultant, and (v) daily cash sweeps from the Loan Parties’ accounts to an account at the ABL Lender. The foregoing descriptions of the ABL Amendment and Term Loan Amendment do not purport to be complete and are qualified in their entirety by reference to the ABL Amendment and Term Loan Amendment, which are attached as Exhibit 10.2 and Exhibit 10.3, respectively, to this report and are incorporated by reference herein.
If we experience further events of default in the future, we will not be able to access the ABL Loans unless such defaults are resolved, including by obtaining required waivers from the ABL Lenders. Even if we are able to obtain such waivers, the ABL Lenders may adopt additional availability reserves, which would limit the amount we can draw under the ABL Loans.
We may also need to seek additional funding sources including new debt from subordinated lenders or equity capital. However, such additional debt or equity capital may not be available on terms favorable to us or at all. In addition, our ability to raise additional debt financing is restricted by our covenants under the 2023 Credit Agreements and would require the consent of the Lenders.
If we are unable to access sufficient liquidity, we will need to take other actions to fund operational expenses, such as scaling back operations, reducing marketing spend, and postponing or discontinuing our growth strategies. Such actions could result in slower growth or no growth, and we may lose key suppliers, be unable to timely satisfy customer orders, and be unable to retain all of our employees. In addition, we may be forced to restructure our obligations to creditors, pursue work-out options or other protective measures.
The borrowing rates under the ABL Agreement will accrue on a three-tiered grid based on revolving availability, ranging from (i) SOFR, plus a credit spread adjustment of 0.10% per annum, plus 2.75% per annum to (ii) SOFR, plus a credit spread adjustment of 0.10% per annum, plus 3.25% per annum, with a SOFR floor of 0% per annum. The ABL Loans may be prepaid in whole or in part at any time without premium or penalty, subject to reimbursement of certain costs. There may be mandatory prepayment obligations based on certain asset dispositions, casualty events, equity issuances and extraordinary receipts.
Pursuant to a pledge and security agreement, the Loan Parties’ obligations under the ABL Agreement are secured by a perfected first-priority security interest in the cash, inventory and accounts receivable of the Loan Parties, and a perfected second-priority security interest in substantially all of the other assets of the Loan Parties, subject to certain exceptions.
In connection with the Company’s execution of the Term Loan Agreement and ABL Agreement, the Company terminated its 2020 Credit Agreement in August 2023. While the Company had no outstanding borrowings under the 2020 Credit Agreement at that time, the termination was accounted for as an extinguishment of debt during the third quarter of 2023 and $3.1 million of unamortized debt issuance costs were recorded as loss on extinguishment of debt in the condensed consolidated statement of operations.
Tax Receivable Agreement
We are required to make certain payments to InnoHold under the tax receivable agreement, which may have a material adverse effect on our liquidity and capital resources. As of both September 30, 2023 and December 31, 2022, there was no tax receivable agreement liability reflected in either of these consolidated balance sheets. For reasons similar to those that led to the recording of a full valuation allowance on our deferred tax assets in the fourth quarter of 2022, we evaluated the probability of amounts being owed pursuant to the tax receivable agreement and determined the likelihood of a future liability was not probable. As result, we continued to record no tax receivable agreement liability in the third quarter of 2023. We are currently unable to determine the total future amount of these payments due to the unpredictable nature of several factors, including the timing of future exchanges, the market price of shares of Class A common stock at the time of the exchanges, the extent to which such exchanges are taxable and the amount and timing of future taxable income sufficient to utilize tax attributes that give rise to the payments under the agreement.
Other Contractual Obligations
Other material contractual obligations primarily include operating lease payment obligations. See Note 10 of the condensed consolidated financial statements for additional information on leases.
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Cash Flows for the Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022
The following summarizes our cash flows for the nine months ended September 30, 2023 and 2022 as reported in our condensed consolidated statements of cash flows (in thousands):
| Nine
Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net cash used in operating activities | $ | (55,808 | ) | $ | (30,474 | ) | ||
| Net cash used in investing activities | (10,183 | ) | (30,411 | ) | ||||
| Net cash provided by financing activities | 50,843 | 28,412 | ||||||
| Net decrease in cash | (15,148 | ) | (32,473 | ) | ||||
| Cash, beginning of the period | 41,754 | 91,616 | ||||||
| Cash, end of the period | $ | 26,606 | $ | 59,143 | ||||
Cash used in operating activities increased $25.3 million in the nine months ended September 30, 2023 as compared to the same period in the prior year. The increase in cash used in operating activities was negatively impacted by an increase in our net loss, offset in part by an increase in cash related to the net change in accounts payable in 2023 compared to 2022.
Cash used in investing activities primarily reflected capital expenditures of $9.4 million for the nine months ended September 30, 2023 compared to $34.1 million for the nine months ended September 30, 2022. Capital expenditures during the first nine months of 2023 primarily consisted of additional investments made in our manufacturing and showroom facilities. Cash flows from investing activities in the prior year also included the impact of cash acquired in the acquisition of Intellibed that consisted of $1.9 million of cash and cash equivalents and $1.7 million of restricted cash.
Cash provided by financing activities was $50.8 million during the nine months ended September 30, 2023 compared to $28.4 million during the nine months ended September 30, 2022. Financing activities during the first nine months of 2023 included $57.0 million of net proceeds received from the stock offering and $25.0 million from the term loans entered into in August 2023, offset in part by a $24.7 million payment to pay off the term loan from the 2020 Credit Agreement, $6.1 million in payments on debt issuance costs, and $0.4 million of other payments.
Critical Accounting Policies
We discuss our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Annual Report on Form 10-K filed March 22, 2023. There were no significant changes in our critical accounting policies since the end of fiscal 2022.
Available Information
Our website address is www.purple.com. We make available free of charge on the Investor Relations portion of our website, investors.purple.com, our annual report on Form 10-K and Form 10-K/A, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The inclusion of our website address in this report does not include or incorporate by reference into this report any information on our website.
We also use the Investor Relations portion of our website, investors.purple.com, as a channel of distribution of additional Company information that may be deemed material. Accordingly, investors should monitor this channel, in addition to following our press releases, SEC filings and public conference calls and webcasts. The contents of our website shall not be deemed to be incorporated herein by reference.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our operating results are subject to risk from interest rate fluctuations on our outstanding borrowings. Interest rate risk is highly sensitive due to many factors, including U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our control. The proceeds we received from the Term Loans entered into in August 2023 bear interest at variable rates which exposes us to market risks relating to changes in interest rates. As of September 30, 2023, we had $25.0 million of variable rate debt outstanding under our Term Loans and no ABL Loans outstanding under our revolving line of credit. Based on these debt levels, an increase of 100 basis points in the effective interest rate on the outstanding debt amount would result in an increase in interest expense of approximately $0.3 million over the next 12 months.
We do not use derivative financial instruments for speculative or trading purposes, but this does not preclude our adoption of specific hedging strategies in the future.
ITEM 4. CONTROLS AND PROCEDURES
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” and together with the CEO, the “Certifying Officers”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Certifying Officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Based upon this evaluation, and the above criteria, our Certifying Officers concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2023, at the reasonable assurance level due to a material weakness in our internal control over financial reporting, described below, relating to errors in our accounting for warranty reserves.
Changes in Internal Controls Over Financial Reporting.
Our internal control over financial reporting did not identify an error in the accounting of our warranty reserves, relating to wholesale contracts. As a result, our CEO and CFO have concluded that we did not maintain effective internal control over financial reporting, due to a material weakness in our internal control over financial reporting, described below, related to errors in our accounting for warranty reserves.
In October 2023, we determined that we had not properly accounted for the warranty terms specified in contracts with our wholesale customers when estimating the liability for warranty related returns. As a result, our warranty reserves relating to wholesale customers were understated. We determined the impact of this error on our previously issued financial statements was immaterial, but that the cumulative effect would be material, if left uncorrected, in the current period. Therefore, we elected to correct these errors in our financial statements as of and for the three and nine months ending September 30, 2023 included in this Quarterly Report on Form 10-Q by adjusting prior period financial statements.
In response to this material weakness in internal control over financial reporting related to the accounting of our warranty reserves, we will implement a new control to assess all wholesale customer contracts to ensure the terms contained therein are accounted for properly. Our plans include increased training and communication among our personnel regarding the appropriate consideration and application of contractual terms, including legal to review all significant contracts and implementing new processes over credit memo approvals. 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.
Other than as described above relating to the material weakness we identified, there were no changes in our internal control over financial reporting during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is from time to time involved in various claims, legal proceedings and complaints arising in the ordinary course of business. Please refer to Note 15 — Commitments and Contingencies to the condensed consolidated financial statements contained in this report for certain information regarding our legal proceedings.
ITEM 1A. RISK FACTORS
Except as described below, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K filed with the SEC on March 22, 2023. The disclosure of risks identified below does not imply that the risk has not already materialized.
We may need additional capital to execute our business plan and fund operations and may not be able to obtain such capital on acceptable terms or at all.
We expect to incur significant ongoing operating expenses in connection with the execution of our business strategies. We also expect to incur significant capital expenses as we seek to expand our business.
Our efforts to obtain needed capital resources and sources of liquidity may not be sufficient to support our business operations and future growth strategies. If we are unable to satisfy our liquidity and capital resource requirements, we may have to scale back, postpone or discontinue our growth strategies, which could result in slower growth or no growth, and we may lose key suppliers, be unable to timely satisfy customer orders, and be unable to retain our employees. In addition, we may be forced to restructure our obligations to creditors, pursue work-out options or other protective measures.
Our ability to access funds under the ABL Agreement (the “ABL Loans”) is subject to certain conditions, availability reserves, minimum availability requirements, borrowing base calculations and restrictive covenants, and there is no guarantee that we will be able to satisfy such conditions and restrictive covenants. In addition, because the amount available under the ABL Agreement is based on our borrowing base calculations and minimum availability requirements at the time of any draw, the amount available to us will change from time to time. In October 2023, the ABL Lenders implemented an availability reserve of $5.0 million, which reduces the amount available under our borrowing base.
Certain events of default occurred under each of the 2023 Credit Agreements due to (i) the Company’s failure to (a) provide certain financial reporting and related materials on a timely basis and (b) complete certain post-closing deliverables as required under the ABL Agreement and (ii) the Company drawing on the loan under the ABL Agreement while the above events of default were in existence. In addition, the ABL Amendment and Term Loan Amendment increased our reporting obligations under the 2023 Credit Agreements and if we are not able to maintain compliance with such additional requirements we may experience future events of default, which could limit our ability to access the ABL Loans and adversely affect our financial position and operations.
To the extent that waivers and amendments are necessary under either of the 2023 Credit Agreements, there can be no guarantee that we will be able to obtain waivers or amendments from the applicable Lenders if, in the future, we are unable to comply with the covenants and other terms of the 2023 Credit Agreements. Our failure to satisfy the required conditions under the 2023 Credit Agreements or maintain compliance with the financial and performance covenants under the 2023 Credit Agreements could result in future defaults, which would adversely affect our financial condition and results of operations, including, potentially, as a result of acceleration of our outstanding debt. We would also be restricted from drawing on the ABL Loans while an event of default is continuing. In addition, any default under the 2023 Credit Agreements would adversely affect our ability to obtain alternative financing, including additional indebtedness from subordinated lenders.
Further, our ability to obtain additional capital on acceptable terms or at all is subject to a variety of uncertainties. Adequate alternative financing may not be available or, if available, may only be available on unfavorable terms or subject to covenants that we may not be able to satisfy.
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.
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. For example, on February 13, 2023, we completed an offering of our Class A Shares that increased the number of outstanding Class A Shares from 91,380,323 to 104,780,323. Newly issued securities may include preferences or superior voting rights or 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.
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Our level of indebtedness and related covenants could limit our operational and financial flexibility and adversely affect our business if we breach such covenants and default on such indebtedness.
Under the 2023 Credit Agreements, we are subject to a number of 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, in each case, subject to certain exceptions. In particular, we are (i) restricted from incurring additional debt up to certain amounts, subject to limited exceptions, as set forth in each 2023 Credit Agreement, and (ii) required to maintain minimum revolving availability under the ABL Agreement, and, if revolving availability falls beneath a specified amount, a specified Consolidated Fixed Charge Coverage Ratio (as such term is defined in the ABL Agreement). The Loan Parties are also restricted from paying dividends or making other distributions or payments on their capital stock, subject to limited exceptions.
These restrictions may prevent us from taking actions that we believe would be in the best interests of the business and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. If we determine that we need to take any action that is restricted under any 2023 Credit Agreement, we will need to first obtain a waiver from the applicable Agent and Lenders. Obtaining such waivers, if needed, may impose additional costs on us or we may be unable to obtain such waivers. Our ability to comply with these restrictive covenants in future periods will largely depend on our ability to successfully implement our overall business strategy. The breach of any of these covenants or restrictions could result in a default, which could potentially result in the acceleration of our outstanding debt. In the event of an acceleration of such debt, we could be forced to apply all available cash flows to repay such debt, which could also force us into bankruptcy or liquidation.
Certain events of default occurred under each of the 2023 Credit Agreements due to (i) the Company’s failure to (a) provide certain financial reporting and related materials on a timely basis and (b) complete certain post-closing deliverables as required under the ABL Agreement and (ii) the Company drawing on the loan under the ABL Agreement while the above events of default were in existence. In addition, the ABL Amendment and Term Loan Amendment increased our reporting obligations under the 2023 Credit Agreements. If we are not able to maintain compliance with our covenants under the 2023 Credit Agreements, we may need to seek amendments or waivers to the Term Loan Agreement and ABL Agreement in the future, and may also need to obtain alternative sources of liquidity. Such alternative sources of liquidity, including subordinated date, may not be available on terms favorable to us or at all.
To the extent that waivers and amendments under any 2023 Credit Agreement are necessary, there can be no guarantee that we will be able to obtain waivers or amendments from the applicable Lenders if, in the future, we are unable to comply with the covenants and other terms of any 2023 Credit Agreement. Our failure to satisfy the required conditions under the 2023 Credit Agreements, any amendments thereof, or maintain compliance with the financial and performance covenants under the 2023 Credit Agreements could result in future defaults, which would adversely affect our financial condition and results of operations, including, potentially, as a result of acceleration of our outstanding debt. In addition, any default under would adversely affect our ability to obtain alternative financing, and significantly limit our ability to execute our business strategies.
We are required to make certain prepayments to our term and revolving loans and thereafter will not be able to benefit from that portion of the term loan and may not be able to draw upon our revolving line of credit.
Under the Term Loan Agreement, as amended, we have mandatory prepayment obligations (i) upon the disposition of assets by any loan party or subsidiary resulting in net cash proceeds in excess of $1.0 million in any calendar year, and (ii) upon the receipt of cash in excess of $1.0 million by any loan party or subsidiary not in the ordinary course of business other than permitted under the Term Loan Agreement. Under the ABL Agreement, as amended, we have mandatory prepayment obligations (i) in the event of certain dispositions which result in the realization of net cash proceeds in excess of $1.0 million in any calendar year, (ii) upon the sale or issuance by any loan party or any of its subsidiaries of any of its equity interests other than those permitted under the ABL Agreement, (iii) upon the receipt of net cash proceeds by any loan party or subsidiary from the incurrence or issuance of debt other than permitted by the ABL Agreement, (iv) upon the receipt of cash in excess of $1.0 million by any loan party or subsidiary not in the ordinary course of business other than permitted under the ABL Agreement, and (v) and for over advances if at any time the total revolving credit outstanding exceeds the borrowing base as defined under the ABL Agreement. In addition, the ABL Agreement imposes limitations on other forms of indebtedness, liens, investments, and other operational actions. Moreover, under the ABL Agreement our borrowing is limited to a borrowing base that is periodically adjusted, and if for any reason the amount we have borrowed exceeds that borrowing base we may be required to prepay amounts equal to such excess. If for any reason we are required to prepay any amount owed under the Term Loan Agreement or ABL Agreement, we may not have sufficient liquidity available to make such prepayments and we would be in default under our obligations. In addition, any prepayment would require us to divert liquidity and capital resources away from the operating expenses of our business, which could adversely affect our relationships with suppliers and vendors and our ability to execute on our growth strategies, and prevent us from taking actions in our best interest or even continue in business.
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We have identified a material weakness in our internal control over financial reporting and if we fail to maintain an effective system of internal controls, we may not be able to report our financial results accurately, may make a material misstatement in our financial statements, may experience a financial loss, or may face litigation. Any inability to report and file our financial results accurately and timely could harm our business and adversely affect the value of our business.
As a public company, we are required to establish and maintain internal controls over financial reporting and disclosure controls and procedures and to comply with other requirements of the Sarbanes-Oxley Act and the rules promulgated by the SEC. Even when such controls are implemented, management, including our Chief Executive Officer and Chief Financial Officer, cannot guarantee that our internal controls and disclosure controls and procedures will prevent all possible errors or loss. Because of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company or perpetrated against us will be prevented or have been detected. These inherent limitations include the possibility that judgments in decision-making can be faulty and subject to simple error or mistake. Furthermore, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, measures of control may become inadequate because of changes in conditions, new fraudulent schemes, or the deterioration of compliance with policies or procedures. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and/or may not be detected.
The accuracy of our financial reporting depends on the effectiveness of our internal control over financial reporting. Internal control over financial reporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements and may not prevent or detect misstatements. Failure to maintain effective internal control over financial reporting, or lapses in disclosure controls and procedures, could undermine the ability to provide accurate disclosure (including with respect to financial information) on a timely basis, which could cause investors to lose confidence in our disclosures (including with respect to financial information), require significant resources to remediate the lapse or deficiency, and expose us to legal or regulatory proceedings.
In the course of preparing our financial statements as of September 30, 2023, we identified certain errors in our accounting for warranty reserves, relating specifically to our warranty reserves under wholesale contracts. As part of such process, we identified a material weakness in our internal controls over financial reporting. Our internal controls over financial reporting did not result in the proper accounting of warranty reserves relating to our long-term warranty obligations, which due to its cumulative impact on our consolidated financial statements as of September 30, 2023, we determined to be a material weakness.
We continue to evaluate, design and work through the process of implementing controls and procedures under a remediation plan designed to address this material weakness, but there can be no assurance that we will be able to remediate this material weakness in a timely manner or at all. If our remediation measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our financial statements may contain material misstatements and we could be required to restate our financial results, which could lead to substantial additional costs for accounting and legal fees and stockholder litigation.
We cannot guarantee that we will not experience additional material weaknesses in our internal controls in the future. If additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our financial statements may contain material misstatements and we could be required to restate our financial results, which could lead to substantial additional costs for accounting and legal fees and stockholder litigation.
Any failure to maintain such internal control could adversely impact our ability to report our financial position and results from operations on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations. Likewise, if our financial statements are not filed on a timely basis, we could be subject to sanctions or investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory authorities. In either case, this could result in a material adverse effect on our business. Failure to timely file will cause us to be ineligible to utilize short form registration statements on Form S-3, which may impair our ability to obtain capital in a timely fashion to execute our business strategies or issue shares to effect an acquisition. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.
As a result of our 2022 acquisition of Intellibed, we are in the process of integrating its systems and processes into ours, including bringing such systems and processes into our existing framework of internal controls. That process requires us to devote resources that might otherwise be used to grow the business. If we do not successfully integrate the Intellibed processes into our internal controls, there may be material misstatements that are not detected in a timely manner.
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We may face litigation and other risks as a result of current and previous material weaknesses in our internal control over financial reporting.
We have determined that a material weakness exists related to the accounting of our warranty reserves, which resulted in an understatement of our warranty reserves in prior periods. In addition, we have had previous material weaknesses that have been remediated, some of which resulted in restatements of our previously issued audited financial statements. As a result of such restatements, material weakness, and other matters that may in the future arise, we face potential for litigation or other disputes which may include, among others, claims invoking the federal and state securities laws, contractual claims or other claims arising from the restatement and material weaknesses in our internal control over financial reporting and the preparation of our financial statements. As of the date of this filing, we have no knowledge of any such litigation or dispute. However, we can provide no assurance that such litigation or dispute will not arise in the future. Any such litigation or dispute, whether successful or not, could have a material adverse effect on our business, results of operations and financial condition.
Anti-takeover provisions in our Second Amended and Restated Certificate of Incorporation, our Third Amended and Restated Bylaws as well as provisions of Delaware law, contain anti-takeover provisions, any of which could delay or discourage a merger, tender offer, or assumption of control of the Company not approved by our Board of Directors that some stockholders may consider favorable.
Provisions of Delaware law, our Second Amended and Restated Certificate of Incorporation, and our Third Amended and Restated Bylaws could hamper a third party’s acquisition of us or discourage a third party from attempting to acquire control of us. You may not have the opportunity to participate in these transactions. These provisions could also limit the price that investors might be willing to pay in the future for equity interests in the Company. These provisions include:
| ● | the right of our Board to elect a director to fill a vacancy created by the expansion of our Board or the resignation, death or removal of a director in certain circumstances, which prevents stockholders from being able to fill vacancies on our Board; |
| ● | a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; |
| ● | a prohibition on stockholders calling a special meeting and the requirement that a meeting of stockholders may only be called by members of our Board, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; |
| ● | the requirement that changes or amendments to certain provisions of our certificate of incorporation or bylaws must be approved by holders of at least two-thirds of our common stock; and |
| ● | advance notice procedures that stockholders must comply with in order to nominate candidates to our Board or to propose matters to be acted upon at a meeting of stockholders, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us. |
In December 2022, we amended our bylaws to add requirements relating to stockholder nominations of directors, including a requirement that stockholder nominees complete a written questionnaire and that stockholder nominees make themselves available for interviews by our Board upon request.
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain transactions with stockholders owning 15% or more of our outstanding voting stock or require us to obtain stockholder approval prior to engaging in such transactions. Coliseum collectively holds approximately 44.7% of our outstanding voting stock. Any delay or prevention of a change in control transaction or changes in our Board could adversely affect our ability to execute transactions that are needed to carry out our operations and growth strategies and cause the market price of our common stock to decline.
We may not be able to identify, complete or successfully integrate acquisitions, and any such acquisitions may not achieve the anticipated financial benefits, all of which could have a negative impact on our growth, financial condition, and results of operations.
We may seek to acquire businesses in the future as we encounter acquisition prospects that would complement our current product offerings, increase the size and geographic scope of our operations, or otherwise offer strategic, growth and operating efficiency opportunities. We cannot assure investors that we will be able to identify and acquire acceptable acquisition candidates on terms favorable to us in the future, or that any acquisitions will achieve the anticipated strategic or financial benefits. Even if we do identify opportunities to acquire businesses, we may not be able to consummate such acquisitions due to a number of factors, including lacking access to sufficient capital to fund such acquisitions.
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In addition, acquisitions involve numerous risks and uncertainties and may be of businesses in which we lack operational or market experience. The financing for any of these acquisitions could dilute the interests of our stockholders, result in an increase in our indebtedness or both. Future acquisitions could entail numerous risks, including:
| ● | difficulties in integrating acquired technologies, operations or products; |
| ● | the difficulties of imposing financial and operating controls on the acquired companies and their management and the potential costs of doing so; |
| ● | the potential loss of key employees, customers, suppliers or distributors from acquired businesses and disruption to our direct selling channel; |
| ● | diversion of management’s attention from our core business; |
| ● | the failure to achieve the strategic objectives of these acquisitions; |
| ● | increased fixed costs; |
| ● | the failure of the acquired businesses to achieve the results we have projected in either the near or long term; |
| ● | the assumption of unexpected liabilities, including compliance and litigation risks; |
| ● | adverse effects on existing business relationships with our suppliers, sales force or consumers; | |
| ● | Failure to gain consumer or wholesale market acceptance of acquired brands and products; and |
| ● | risks associated with entering markets or industries in which we have limited or no prior experience, including limited expertise in running the business, developing the technology, and selling and servicing the products. |
Our failure to successfully complete the integration of any acquired business, or a failure to effectively identify and pursue such acquisitions, could have a material adverse effect on our business, financial condition and operating results.
Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters, including matters relating to our Tax Receivable Agreement, could significantly affect our financial results.
Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business are complex and involve many subjective assumptions, estimates and judgments by our management, including but not limited to estimates that affect our revenue recognition, accounts receivable and allowance for doubtful accounts, valuation of inventories, cost of revenues, sales returns, warranty liabilities, the recognition and measurement of loss contingencies, warrant liabilities, estimates of current and deferred income taxes, deferred income tax valuation allowances and amounts associated with our Tax Receivable Agreement with our founders dated February 22, 2018 (the “Tax Receivable Agreement”). Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance, and could have a material adverse effect on our business and results of operations. For example, in the third quarter of 2023, management determined that certain assumptions made relating to the valuation of our fixed assets were no longer accurate. As a result, we were required to record an impairment charge relating to our fixed assets.
Our business and our reputation could be adversely affected by the failure to protect sensitive employee, customer and consumer data, or to comply with evolving regulations relating to our obligation to protect such data.
In the ordinary course of our business, we collect and store certain personal information from individuals, such as our customers and suppliers, and we process customer payment card and check information for purchases via our website. In addition, we may share with third-parties personal information we have collected. Cyber-attacks designed to gain access to sensitive information by breaching security systems of large organizations leading to unauthorized release of confidential information have occurred at a number of major U.S. companies despite widespread recognition of the cyber-attack threat and improved data protection methods. Computer hackers may attempt to penetrate our computer system or the systems of third-parties with which we have shared personal information and, if successful, misappropriate personal information, payment card or check information or confidential Company business information. In addition, a Company employee, contractor or other third party with whom we do business may attempt to circumvent our security measures in order to obtain such information and may purposefully or inadvertently cause a breach involving such information. For example, though it did not involve access to or release of personal information, we recently experienced an unauthorized intrusion into one of our vendor’s systems using a former contractor’s credentials that resulted in access to email addresses and an unauthorized email being sent under a valid Purple email address. Breaches involving any personal information could be more likely to the extent we have any material weakness in internal control over financial reporting related to information technology general controls in the areas of user access and segregation of duties related to certain IT systems that support the Company’s financial reporting processes.
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We and third parties with which we have shared personal information have been subject to attempts to breach the security of networks, IT infrastructure, and controls through cyber-attack, malware, computer viruses, social engineering attacks, ransomware attacks, and other means of unauthorized access. For example, in 2022, we experienced a spear-phishing attack that resulted in the unauthorized change to a significant vendor’s bank account to which we made payments that were lost in part until the scheme was discovered. We expect that this attack will result in costs to us of up to $250,000. We anticipate that we may, in the future, continue to be subject to these and similar cyber threats. A breach of systems resulting in the unauthorized release of sensitive data could also adversely affect our reputation and lead to financial losses from remedial actions or potential liability, possibly including punitive damages, and could also materially increase the costs we already incur to protect against these risks. In addition, cyber-attacks, such as ransomware attacks, if successful, could interfere with our ability to access and use systems and records that are necessary to operate our business. Such attacks could materially adversely affect our reputation, relationships with customers, and operations and could require us to expend significant resources to resolve such issues. We continue to balance the additional risk with the cost to protect us against a breach. Additionally, while losses arising from a breach may be covered in part by insurance that we carry, such coverage may not be adequate for liabilities or losses actually incurred.
We may be subject to data privacy and data breach laws in the states in which we do business, and as we expand into other countries, we may be subject to additional data privacy laws and regulations. In many states, state data privacy laws (such as the California Consumer Privacy Act), including application and interpretation, are rapidly evolving. The rapidly evolving nature of state and federal privacy laws, including potential inconsistencies between such laws and uncertainty as to their application, adds additional compliance costs and increases our risk of non-compliance. While we attempt to comply with such laws, we may not be in compliance at all times in all respects. Failure to comply with such laws may subject us to fines, administrative actions, and reputational harm.
Nasdaq may delist our securities from its exchange, which could harm our business and limit our stockholders’ liquidity.
Our common stock is currently listed on the Nasdaq Global Select Market, which has qualitative and quantitative listing criteria. However, we cannot assure that our Class A common stock will continue to be listed on Nasdaq in the future. In order to continue listing our Class A common stock on Nasdaq, we must maintain certain financial, distribution and stock price levels. Generally, we must maintain a minimum amount in stockholders’ equity, a minimum number of holders of our Class A common stock, and a minimum bid price for our Class A common stock.
If we are unable to comply with the continued listing requirements, our Class A common stock may be subject to delisting. If Nasdaq delists our Class A common stock from trading on its exchange and we are not able to list our securities on another national securities exchange, we expect our securities could be quoted on an over-the-counter market. If this were to occur, we could face significant material adverse consequences, including:
| ● | a limited availability of market quotations for our securities; | |
| ● | reduced liquidity for our securities; | |
| ● | a determination that our Class A common stock is a “penny stock” which will require brokers trading in our Class A common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities; | |
| ● | a limited amount of news and analyst coverage; and | |
| ● | a decreased ability to issue additional securities or obtain additional financing in the future. |
The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” If our Class A common stock continues to be listed on Nasdaq, our Class A common stock will be a covered security. Although the states are preempted from regulating the sale of our securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case.
ITEM 5. OTHER INFORMATION
10b5-1 Trading Plans
During
the third quarter of 2023, none of our directors or executive officers
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ITEM 6. EXHIBITS
| * | Filed herewith. |
| + | Indicates management contract or compensatory plan. |
| # | Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted exhibit or schedule will be furnished supplementally to the SEC or its staff upon request. |
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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: November 14, 2023 | By: | /s/ Robert T. DeMartini |
| Robert T. DeMartini | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: November 14, 2023 | By: | /s/ Todd E. Vogensen |
| Todd E. Vogensen | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) | ||
| Date: November 14, 2023 | By: | /s/ George T. Ulrich |
| George T. Ulrich | ||
| VP Accounting and Financial Reporting | ||
| (Principal Accounting Officer) |
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