UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
FOR THE QUARTERLY PERIOD ENDED
OR
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
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| Emerging growth company | |||
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As of May 6, 2024,
PURPLE INNOVATION, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PURPLE INNOVATION, INC.
Condensed Consolidated Balance Sheets
(unaudited – in thousands, except for par value)
| March 31, 2024 | December 31, 2023 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Other long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued compensation | ||||||||
| Customer prepayments | ||||||||
| Accrued rebates and allowances | ||||||||
| Accrued warranty liabilities – current portion | ||||||||
| Operating lease obligations – current portion | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Debt, net of current portion | ||||||||
| Accrued warranty liabilities, net of current portion | ||||||||
| Operating lease obligations, net of current portion | ||||||||
| Warrant liabilities | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 13) | ||||||||
| Stockholders’ equity: | ||||||||
| Class A common stock; $ | ||||||||
| Class B common stock; $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity attributable to Purple Innovation, Inc. | ||||||||
| Noncontrolling interest | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
PURPLE INNOVATION, INC.
Condensed Consolidated Statements of Operations
(unaudited – in thousands, except per share amounts)
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Revenues, net | $ | $ | ||||||
| Cost of revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Marketing and sales | ||||||||
| General and administrative | ||||||||
| Research and development | ||||||||
| Total operating expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other income (expense): | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Other income, net | ||||||||
| Loss on extinguishment of debt | ( | ) | ( | ) | ||||
| Change in fair value – warrant liabilities | ( | ) | ||||||
| Total other expense, net | ( | ) | ( | ) | ||||
| Net loss before income taxes | ( | ) | ( | ) | ||||
| Income tax expense | ( | ) | ( | ) | ||||
| Net loss | ( | ) | ( | ) | ||||
| Net loss attributable to noncontrolling interest | ( | ) | ( | ) | ||||
| Net loss attributable to Purple Innovation, Inc. | $ | ( | ) | $ | ( | ) | ||
| Net loss per share: | ||||||||
| Basic | $ | ( | ) | $ | ( | ) | ||
| Diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average common shares outstanding: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
PURPLE INNOVATION, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited – in thousands)
| Class A | Class B | Additional | Total | |||||||||||||||||||||||||||||||||
| Common Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | Noncontrolling | Total | ||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Capital | Deficit | Equity | Interest | Equity | ||||||||||||||||||||||||||||
| Balance – December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of stock for Intellibed acquisition | ||||||||||||||||||||||||||||||||||||
| Issuance of stock under equity compensation plans | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Impact of transactions affecting NCI | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance – March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
PURPLE INNOVATION, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited – in thousands)
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| 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 | ||||||||
| Paid-in-kind interest | ||||||||
| Change in fair value – warrant liabilities | ||||||||
| Loss on extinguishment of debt | ||||||||
| Stock-based compensation | ||||||||
| Loss on disposal of property and equipment | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other assets | ||||||||
| Operating leases, net | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accrued compensation | ||||||||
| Customer prepayments | ( | ) | ( | ) | ||||
| Accrued rebates and allowances | ( | ) | ( | ) | ||||
| Accrued warranty liabilities | ||||||||
| Other accrued liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Investment in intangible assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payments on term loan | ( | ) | ( | ) | ||||
| Payments on revolving line of credit | ( | ) | ||||||
| Proceeds from related party loan | ||||||||
| Payments for debt issuance costs | ( | ) | ( | ) | ||||
| Proceeds from stock offering | ||||||||
| Payments for public offering costs | ( | ) | ||||||
| Tax receivable agreement payments | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ||||||||
| Cash, cash equivalents and restricted cash, beginning of the year | ||||||||
| Cash, cash equivalents and restricted cash, end of the period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for interest, net of amounts capitalized | $ | $ | ( | ) | ||||
| Cash paid during the period for income taxes | $ | $ | ||||||
| Supplemental schedule of non-cash investing and financing activities: | ||||||||
| Property and equipment included in accounts payable | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Organization
The Company’s mission is to help people feel and live better through innovative comfort solutions.
Purple Innovation, Inc. collectively with its subsidiary (the “Company” or “Purple Inc.”) began as a digitally-native vertical brand founded on comfort product innovation with premium offerings, and is now omni-channel. The Company designs and manufactures a variety of innovative, branded and premium comfort products, including mattresses, pillows, cushions, bases, sheets, and other products. The Company markets and sells its products through its e-commerce online channels, retail brick-and-mortar wholesale partners, Purple owned retail showrooms, and third-party online retailers.
The Company was incorporated in Delaware on May 19, 2015 as a special purpose acquisition company under the name of Global Partnership Acquisition Corp (“GPAC”). On February 2, 2018, the Company consummated a transaction structured similar to a reverse recapitalization (the “Business Combination”) pursuant to which the Company acquired a portion of the equity of Purple Innovation, LLC (“Purple LLC”). At the closing of the Business Combination (the “Closing”), the Company became the sole managing member of Purple LLC, and GPAC was renamed Purple Innovation, Inc.
As the sole managing member of Purple LLC, Purple Inc. through its officers and directors is responsible for all operational and administrative decision making and control of the day-to-day business affairs of Purple LLC without the approval of any other member.
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 Purple LLC’s
wholly owned subsidiary Advanced Comfort Technologies, Inc., dba Intellibed (“Intellibed”). All intercompany balances
and transactions have been eliminated in consolidation. As of March 31, 2024, 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 year ended December 31, 2023. The unaudited condensed consolidated financial statements were prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which were considered of normal recurring nature) considered necessary to present fairly the Company’s financial results. The results of the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the year ending December 31, 2024 or for any other interim period or other future year.
Variable Interest Entities
Purple LLC is a variable interest
entity. The Company determined that it is the primary beneficiary of Purple LLC as it is the sole managing member and has the power to
direct the activities most significant to Purple LLC’s economic performance as well as the obligation to absorb losses and receive
benefits that are potentially significant. At March 31, 2024, Purple Inc. had a
5
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to establish accounting policies and to make estimates and judgments that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The Company regularly makes significant estimates and assumptions that affect revenue recognition, accounts receivable, allowance for credit losses, valuation of inventories, sales returns, warranty returns, fair value of assets acquired and liabilities assumed in a business combination, impairment reviews of long-lived assets and definite-lived intangible assets, 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.
Reclassification
Certain amounts in the prior year condensed consolidated balance sheet have been reclassified to conform to the current year’s presentation with no effect on previously reported net (loss) income, cash flows or stockholders’ equity. Accrued compensation, previously included in the condensed consolidated balance sheet within other current liabilities, is now presented separately.
Recent Accounting Pronouncements
Enhanced Segment Disclosures
In November 2023, the Financial Accounting Standards Board (the “FASB”) issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires public entities, including those that have a single reportable segment, to provide enhanced disclosures about significant expenses. This ASU requires disclosure to include significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”), a description of other segment items by reportable segment, and any additional measures of a segment’s profit or loss used by the CODM when deciding how to allocate resources. This ASU also requires all annual disclosures currently required by Topic 280 to be included in interim periods. The update is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted and requires retrospective application to all prior periods presented in the financial statements. The Company is currently analyzing the impact this ASU will have on its disclosures.
Improvements to Income Tax Disclosures
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU amends existing income tax disclosure guidance, primarily requiring more detailed disclosures for income taxes paid and the effective tax rate reconciliation. This ASU is effective for fiscal years beginning after December 15, 2024, may be applied prospectively or retrospectively, and allows for early adoption. The Company is currently evaluating the impact this update will have on its income tax disclosures in the consolidated financial statements.
3. Acquisition
The Company acquired Intellibed,
a premium sleep and health wellness company, in August 2022. The acquisition date fair value of the consideration transferred for Intellibed
was $
4. 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.
6
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 estimated fair value of the Company’s
debt arrangement is based on Level 2 inputs, which include observable inputs approximated using
discounted cash flows and market-based expectations for interest rates, credit risk and the contractual terms of debt instruments. As
of March 31, 2024, the estimated fair value of the Company’s debt arrangement was $
The warrant liabilities (see Note 11 — Warrant Liabilities for more information) are Level 3 instruments and use internal models to estimate fair value using certain significant unobservable inputs which require determination of relevant inputs and assumptions. Accordingly, changes in these unobservable inputs may have a significant impact on fair value. Such inputs include risk free interest rate, expected average life, expected dividend yield, and expected volatility. These Level 3 liabilities generally decrease (increase) in value based upon an increase (decrease) in the risk-free interest rate and expected dividend yield. Conversely, the fair value of these Level 3 liabilities generally increase (decrease) in value if the expected average life or expected volatility were to increase (decrease).
| (In thousands) | Warrants | |||
| Fair value as of December 31, 2023 | $ | |||
| Initial measurement at time of issuance | ||||
| Change in valuation inputs(1) | ||||
| Fair value as of March 31, 2024 | $ | |||
| (1) |
5. Revenue from Contracts with Customers
The Company markets and sells its products through e-commerce online channels, retail brick-and-mortar wholesale partners, Purple showrooms, and third-party online retailers. Revenue is recognized when the Company satisfies its performance obligations under the contract which involves transferring the promised products to the customer, subject to shipping terms.
Disaggregated Revenue
The Company classifies revenue into two sales categories: direct-to-consumer (“DTC”) and wholesale. The DTC category is comprised of the e-commerce channel that sells directly to consumers who purchase online and through our contact center, and the Purple showrooms channel that sells directly to consumers who purchase at a showroom location. The wholesale channel includes all product sales to our retail brick and mortar wholesale partners where consumers make purchases at their retail locations or through their online channels. The Company classifies products into two major types: sleep products and other. Sleep products include mattresses, platforms, adjustable bases, mattress protectors, pillows and sheets. Other products include cushions and various other products.
7
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
| Three Months Ended March 31, | ||||||||
| Sales Category | 2024 | 2023 | ||||||
| DTC | $ | $ | ||||||
| Wholesale | ||||||||
| Revenues, net | $ | $ | ||||||
| Three Months Ended March 31, | ||||||||
| Product Type | 2024 | 2023 | ||||||
| Sleep products | $ | $ | ||||||
| Other | ||||||||
| Revenues, net | $ | $ | ||||||
Contract Balances
Payments for the sale of products
through the e-commerce online channel, third-party online retailers, Purple showrooms and contact center are collected at point of sale
in advance of shipping the products. Amounts received for unshipped products are recorded as customer prepayments. Customer prepayments
totaled $
6. Inventories
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Inventories | $ | $ | ||||||
8
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
7. Property and Equipment, Net
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Equipment | $ | $ | ||||||
| Equipment in progress | ||||||||
| Leasehold improvements | ||||||||
| Furniture and fixtures | ||||||||
| Office equipment | ||||||||
| Total property and equipment | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Equipment in progress reflects
equipment, primarily related to mattress manufacturing, which is being constructed and was not in service at March 31, 2024 or December
31, 2023. Interest capitalized on borrowings during the active construction period of major capital projects totaled $
8. Leases
The Company leases its manufacturing and distribution facilities, corporate
offices, Purple 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 March 31, | ||||||||
| 2024 | 2023 | |||||||
| Operating lease costs | $ | $ | ||||||
| Variable lease costs | ||||||||
| Total lease costs | $ | $ | ||||||
9
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
| 2024 (excluding the three months ended March 31, 2024) (a) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total operating lease payments | ||||
| Less – lease payments representing interest | ( | ) | ||
| Present value of operating lease payments | $ |
| (a) |
As of March 31, 2024 and December
31, 2023, the weighted-average remaining term of operating leases was
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Cash paid for amounts included in present value of operating lease liabilities (b) | $ | $ | ||||||
| ROU assets obtained in exchange for operating lease liabilities | ||||||||
| (b) | Operating cash flows paid for operating leases are included within the change in operating leases, net within the condensed consolidated statement of cash flows offset by non-cash ROU asset amortization and lease liability accretion. |
9. Other Current Liabilities
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Accrued sales returns | $ | $ | ||||||
| Insurance financing | $ | |||||||
| Accrued sales and use tax | ||||||||
| Long-term debt and unamortized issuance costs – current portion | ||||||||
| Accrued interest | ||||||||
| Other | ||||||||
| Total other current liabilities | $ | $ | ||||||
10
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
10. Debt
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Related party loan | $ | $ | ||||||
| Term loan | ||||||||
| Revolving line of credit | ||||||||
| Less: unamortized debt issuance costs | ( | ) | ( | ) | ||||
| Total debt | ||||||||
| Current portion of debt and unamortized issuance costs (c) | ( | ) | ||||||
| Debt, net of current portion | $ | $ | ||||||
(c) – Amount is included.in other current liabilities in the condensed consolidated balance sheet.
2024 Credit Agreement
On January 23, 2024, Purple
LLC, Purple Inc. and Intellibed, (collectively the “Loan Parties”) entered into an amended and restated credit agreement (the
“Amended and Restated Credit Agreement”), which amended and restated the then existing term loan agreement (“Term Loan
Agreement”), with Coliseum Capital Partners (“CCP”) and other lenders (collectively the “Lenders”) and Delaware
Trust Company, as administrative agent. The Lenders agreed to assume the Loan Parties’ obligations under the Term Loan Agreement
and refinance their existing obligations. A term loan in the amount of $
Pursuant to entering into
the Amended and Restated Credit Agreement, the Company incurred fees and expenses of $
The Amended and Restated Credit Agreement granted a security interest to the Lenders in substantially all of the assets (subject to certain limited exceptions) of the Loan Parties to secure the Loan Parties’ loans and other obligations under the Amended and Restated Credit Agreement, including a security interest in the intellectual property owned by the Loan Parties.
The Loan Parties (other than Purple LLC) provided an unconditional guaranty of the payment of all obligations and liabilities of Purple LLC under the Amended and Restated Credit Agreement.
11
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Amended and Restated Credit Agreement also provides for standard indemnification of the Lenders and contains representations, warranties and certain covenants of the Loan Parties. While any amounts are outstanding under the Amended and Restated Credit 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. The Loan Parties are also restricted from paying dividends or making other distributions or payments on their capital stock, subject to limited exceptions. As of March 31, 2024, the Company was in compliance with all covenants under the Amended and Restated Credit Agreement.
2023 Credit Agreements
On August 7, 2023, the Loan
Parties entered into the Term Loan Agreement. Also, on August 7, 2023, the Loan parties entered into a separate financing arrangement
with a group of financial institutions (collectively the “ABL Lenders”) that provided for a revolving asset-based credit facility
(the “ABL Agreement”). Pursuant to entering into these agreements (collectively the “2023 Credit Agreements”),
the Company incurred fees and expenses of $
The Term Loan Agreement provided for up to $
The ABL Agreement provided
for up to $
Term loans totaling $
12
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
2020 Credit Agreement
On September 3, 2020, Purple
LLC entered into a financing arrangement with 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 $
Interest expense under the
2020 Credit Agreement totaled $
13
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
11. Warrant Liabilities
On January 23, 2024, in connection
with the Amended and Restated Credit Agreement, the Company issued
The Company uses the Monte
Carlo Simulation of a Geometric Brownian Motion stock path model to determine the fair value of the liability associated with the Warrants.
The model uses key assumptions and inputs such as exercise price, fair market value of common stock, risk free interest rate, warrant
life, expected volatility and the probability of a warrant re-price event.
| Trading price of common stock on measurement date | $ | |||
| Exercise price | $ | |||
| Risk free interest rate | % | |||
| Warrant life in years | ||||
| Expected volatility | % | |||
| Expected dividend yield | ||||
| Probability of an event causing a warrant re-price | % |
| Trading price of common stock on measurement date | $ | |||
| Exercise price | $ | |||
| Risk free interest rate | % | |||
| Warrant life in years | ||||
| Expected volatility | % | |||
| Expected dividend yield | ||||
| Probability of an event causing a warrant re-price | % |
During the three months ended
March 31, 2024, the Company recognized a loss of $
12. Other Long-Term Liabilities
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Asset retirement obligations | $ | $ | ||||||
| Other | ||||||||
| Total other long-term liabilities | $ | $ | ||||||
14
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
13. 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.
Chief Executive Officer Cash Bonus Award
On January 26, 2024, the Company’s
board of directors (the “Board”) approved an amendment to the Chief Executive Officer’s employment agreement. Under
the amendment, the Company agreed that, among other things, the Chief Executive Officer will be eligible to earn a cash payment of up
to $
Partial Settlement of Insurance Claim
In January 2024, the Company
received $
Rights of Securities Holders
On January 23, 2024, in connection with the issuance of the Warrants, the Company entered into an amended and restated registration rights agreement (the “Registration Rights Agreement”) with holders of the Warrants (the “Holders”), providing for the registration under the Securities Act of 1933, as amended of the Warrants, the shares issuable upon the exercise of the Warrants and Class A Stock held by the Holders as of such date (the “Registrable Securities”), subject to customary terms and conditions. This agreement entitles the Holders to demand registration of the Registrable Securities and to piggyback on the registration of securities by the Company and other Company securityholders. The Company will be responsible for the payment of the Holders’ expenses in connection with any offering or sale of Registrable Securities by the Holders, including underwriting discounts or selling commissions, placement agent or broker fees or similar discounts, commissions or fees relating to the sale of certain Registrable Securities. The Registration Rights Agreement provided further that the Company was required to prepare and file with the SEC a registration statement to register the resale of the Registrable Securities. On March 21, 2024, the Company filed a registration statement registering the Registrable Securities.
The holders of certain warrants exercisable into Class A common stock, including CCP, Blackwell Partners LLC – Series A (“Blackwell”) and Coliseum Co-Invest Debt Fund, L.P. (“CDF” and collectively with CCP and Blackwell, the “Coliseum Investors”), 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, 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.
15
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Non-Income Related Taxes
The U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc., No.17-494, reversed a longstanding precedent that remote sellers are not required to collect state and local sales taxes. The Company cannot predict the effect of these and other attempts to impose sales, income or other taxes on e-commerce. The Company currently collects and reports on sales tax in all states in which it does business. However, the application of existing, new or revised taxes on the Company’s business, in particular, sales taxes, value-added tax and similar taxes would likely increase the cost of doing business online and decrease the attractiveness of selling products over the internet. The application of these taxes on the Company’s business could also create significant increases in internal costs necessary to capture data and collect and remit taxes. There have been, and will continue to be, substantial ongoing costs associated with complying with the various indirect tax requirements in the numerous markets in which the Company conducts or will conduct business.
Legal Proceedings
On December 16, 2022, Purple’s
founders filed a complaint against Purple Inc. in the Fourth Judicial District Court in the State of Utah. In that suit, the plaintiffs
alleged that they each entered into employment agreements with Purple LLC in February 2018. The plaintiffs contended that certain corporate
transactions reduced their “ownership interest and voting power in Purple” and that, as a result, they should have continued
to be paid a salary when they retired from Purple LLC. The plaintiffs calculated that they were each owed “no less than $
On April 3, 2023, Purple’s founders filed a complaint against
Purple LLC in the Delaware Court of Chancery. The complaint alleges that Purple LLC breached the limited liability company agreement of
Purple LLC by failing to pay the full amount of tax distributions owed under the agreement. The plaintiffs seek damages of approximately
$
On January 17, 2024, two customers filed a punitive class action lawsuit against Purple LLC in California Superior Court in the County of San Francisco alleging unlawful marketing and pricing practices, fraud and unjust enrichment. The suit seeks damages and other relief on behalf of all persons who purchased Purple LLC products during the applicable statutory periods in California. On February 22, 2024, Purple LLC removed the case to the United States District for the Northern District of California. Purple LLC denies all allegations and intends to vigorously defend against these claims.
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.
16
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
14. 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. Lenders under the Amended and Restated Credit Agreement included CCP and Blackwell. See Note 10—Debt—2024 Credit Agreement 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. At the time of the offer, Coliseum beneficially
owned approximately
On February 21, 2023, Coliseum on behalf of its funds and managed accounts, filed a lawsuit against the Company and several members of the Board alleging the Company made an improper dividend of preferred stock and interfered with Coliseum’s nomination of a competing slate of director candidates ahead of the 2023 Annual Meeting. 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, included, among other things, the following:
| ● | The Board was increased from seven directors to eight and Adam Gray was appointed Chairman of the Board. |
| ● | All shares of preferred stock previously designated as Series A Junior Participating Preferred Stock were redeemed, 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 $ |
| ● | Coliseum dismissed its litigation against the Company. |
| ● | At both the 2023 and 2024 annual meetings of stockholders, Coliseum agreed to cause all of the common stock that it 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. |
17
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
| ● | 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 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 on (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 will terminate on the day following the date on which the 2024 annual meeting of stockholders is held. |
Purple Founder Entities
Purple LLC began leasing its
Alpine facility from entities controlled by Purple’s founders in 2010. On September 3, 2021, in accordance with the terms of that
original lease, Purple LLC gave notice that it intended to exercise its right to an early termination of the lease to occur on September
30, 2022. On July 20, 2022, the Company entered into an amendment to its Alpine facility lease agreement that rescinded the Company’s
previous notice of termination and extended the lease term to remain in effect until September 30, 2023. The Company vacated the Alpine
facility and returned the property back to its owner on September 30, 2023, in accordance with the terms of the lease agreement and notice
of termination. In conjunction with leasing the Alpine facility, Purple LLC incurred rent expense of $
15. Stockholders’ Equity
Class A Common Stock
The Company has
18
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Class B Common Stock
The Company has
Preferred Stock
The Company has
Warrants
In connection with the Amended
and Restated Credit Agreement, the Company issued
While the Warrants are exercisable,
the Company may call the Warrants for redemption in whole and not in part at any time at a price of $
A holder of the Warrants will
not have the right to exercise its Warrants, to the extent that after giving effect to such exercise, the holder (together with its affiliates)
would beneficially own in excess of
Sponsor Warrants
There were
Noncontrolling Interest
Noncontrolling interest (“NCI”)
is the membership interest in Purple LLC held by holders other than the Company. At March 31, 2024 and December 31, 2023, the combined
NCI percentage in Purple LLC was
19
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
16. 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 included in the members’ tax returns, even though such net taxable income or tax credits may not have 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 their allocable earnings of Purple LLC. The income tax burden on the earnings taxed to the noncontrolling interest holders is not reported by the Company in its consolidated financial statements under GAAP.
The Company reported income tax expense related to various state taxes
of $
In connection with the Business
Combination, the Company entered into a tax receivable agreement with InnoHold, which provides for the payment by the Company to InnoHold
of
As noncontrolling interest
holders exercise their right to exchange or cause Purple LLC to redeem all or a portion of their Class B units, a tax receivable agreement
liability may be recorded based on
20
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 March 31, 2024, the Company had unrecognized tax benefits of $
17. 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 common 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 March 31, | ||||||||
| 2024 | 2023 | |||||||
| Numerator: | ||||||||
| Net loss attributable to Purple Innovation, Inc. – basic | $ | ( | ) | $ | ( | ) | ||
| Less – net loss attributed to noncontrolling interest | ( | ) | ||||||
| Net loss attributable to Purple Innovation, Inc. – diluted | $ | ( | ) | $ | ( | ) | ||
| Denominator: | ||||||||
| Weighted average shares—basic | ||||||||
| Add – dilutive effect of Class B shares | ||||||||
| Weighted average shares—diluted | ||||||||
| Net loss per common share: | ||||||||
| Basic | $ | ( | ) | $ | ( | ) | ||
| Diluted | $ | ( | ) | $ | ( | ) | ||
For the three months ended March 31, 2024, the Company excluded
21
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
18. Equity Compensation Plans
2017 Equity Incentive Plan
The Purple Innovation, Inc. 2017 Equity Incentive Plan (the “2017
Incentive Plan”) provides for grants of stock options, stock appreciation rights, restricted stock units and other stock-based awards.
Directors, officers and other employees, as well as others performing consulting or advisory services for the Company and its subsidiaries,
may be eligible for grants under the 2017 Incentive Plan. As of March 31, 2024, an aggregate of
Employee Stock Options
| Options (in thousands) | Weighted Average Exercise Price | Weighted Term in | Intrinsic Value (in thousands) | |||||||||||||
| Options outstanding as of January 1, 2024 | $ | $ | ||||||||||||||
| Granted | — | — | — | — | ||||||||||||
| Exercised | — | — | — | — | ||||||||||||
| Forfeited | ( | ) | — | |||||||||||||
| Options outstanding as of March 31, 2024 | $ | $ | ||||||||||||||
| 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, 2024 | $ | |||||||
| Granted | — | — | ||||||
| Vested | ( | ) | ||||||
| Forfeited | — | — | ||||||
| Nonvested options as of March 31, 2024 | $ | |||||||
The estimated fair value of
Company stock options is amortized over the options vesting period on a straight-line basis. For the three months ended March 31, 2023,
the Company recognized stock option expense of $
22
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
As of March 31, 2024, outstanding
stock options had a de minimis amount of unrecognized stock compensation cost with a remaining recognition period of
Employee Restricted Stock Units
During the first quarter of
2024, 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, 2024 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Nonvested restricted stock units as of March 31, 2024 | $ | |||||||
The Company recorded restricted
stock unit expense of $
As of March 31, 2024, outstanding
restricted stock units had $
23
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 March 31, | ||||||||
| 2024 | 2023 | |||||||
| Cost of revenues | $ | $ | ||||||
| Marketing and sales | ( | ) | ||||||
| General and administrative | ||||||||
| Research and development | ||||||||
| Total non-cash stock-based compensation | $ | $ | ||||||
19. 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
20. Subsequent Events
On April 16, 2024, Purple’s founders, in their capacity as a
former landlord of Purple LLC, brought a lawsuit against Purple LLC, as lessee, for amounts allegedly owed under a real estate lease
which the parties terminated effective September 30, 2023. In the suit, the plaintiffs allege approximately $
24
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to provide a review of the operating results and financial condition of Purple Innovation, Inc. 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 12, 2024. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements and investors are cautioned not to place undue reliance on any such statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.
Overview of Our Business
Our mission is to help people feel and live better through innovative comfort solutions.
We 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 sell our products via our DTC channels, including Purple.com, online marketplaces (e.g., Amazon), our customer contact center, Purple showrooms and through wholesale retailers.
25
Organization
Our business consists of Purple Inc. and its consolidated subsidiary, Purple LLC. As the sole managing member of Purple LLC, Purple Inc., through its officers and directors, is responsible for all operational and administrative decision making and control of the day-to-day business affairs of Purple LLC without the approval of any other member. At March 31, 2024, Purple Inc. had a 99.8% economic interest in Purple LLC while Class B unit holders had the remaining 0.2%.
Recent Developments in Our Business
Operational Developments – Launch of New Premium and Luxe Product Lineups
Beginning 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. The response to our new products and enhanced brand positioning has been extremely positive. 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 showrooms to 60 as of March 31, 2024. In addition, we have focused on growing our placements with wholesale partners and improving wholesale door productivity. By the end of 2023, we had transitioned all of our wholesale partners to the new line of mattress products. Improving the sales productivity of both our wholesale partners and existing showrooms remains a primary focus and critical component of our strategy to respond to shifting demand patterns. We are also diligently working to improve e-commerce conversion by determining ways to best optimize traffic on our website. We experienced several years of growth during the pandemic and increased investments to support current and future expansion. After right-sizing our operations, improving our execution, and refining our strategies to drive share gains in the premium mattress category, we are now building the framework for improved operational maturity and accountability to position us for accelerated growth. With the introduction of our new product lineups, we initiated a new marketing campaign which included enhanced brand positioning and increased media investment at the top of the acquisition funnel. In 2024, we believe we can achieve efficiencies with our media investments by targeting specific segments most likely to purchase Purple and by focusing more effort on those consumers currently in the market for a sleep product. We believe we have set the right course for the next stage of growth for the Company.
Debt Financing
On January 23, 2024, we entered into the Amended and Restated Credit Agreement, which amended and restated the Term Loan Agreement, with the Lenders. The Lenders agreed to assume our obligations under the Term Loan Agreement and agreed to refinance our existing obligations. Pursuant to the Amended and Restated Credit Agreement, we borrowed $61.0 million from the Lenders that was used to repay the $25.0 million of Term Loans outstanding, the $5.0 million of ABL Loans outstanding, loan fees, premiums and expenses incurred in connection with this transaction, and provided net proceeds to us (after payments of outstanding debt, unpaid accrued interest, and expenses) equal to approximately $27.0 million. Interest on the new loan is payable each month and the principal outstanding matures and is due on December 31, 2026. We may elect for interest to be capitalized and added to the principal amount. The loan bears interest at a rate equal to (i) the secured overnight financing rate plus 0.10%, with a floor of 3.5% per annum, plus (ii) 8.25% per annum (or, if Purple LLC elects to pay interest in kind to reduce its cash obligations, 10.25% per annum). Any prepayments on or after August 7, 2024 but before August 7, 2025 are subject to a prepayment penalty of 1.25%, and any prepayments on or after August 7, 2025 are subject to a prepayment penalty of 2.50%. We may request an additional term loan from the Lenders in an aggregate amount not to exceed $19.0 million on terms requested by us to the extent agreed to by the Lenders at their discretion. The Amended and Restated Credit Agreement also removed restrictions and requirements typically associated with an asset-based loan. In connection with our execution of the Amended and Restated Credit Agreement, all obligations under the 2023 Credit Agreements were paid in full and the 2023 Agreements were terminated.
26
Warrants
In connection with the Amended and Restated Credit Agreement, we issued Warrants to the Lenders to purchase 20.0 million shares of our Class A common stock. Each Warrant entitles the registered holder to purchase one share of our Class A common stock at a price of $1.50 per share, subject to adjustment. The Warrants will expire on the 10-year anniversary of issuance, or earlier upon redemption. A holder of the Warrants will not have the right to exercise them, to the extent that after giving effect to such exercise, the holder (together with its affiliates) would beneficially own in excess of 49.9% of the shares of Class A common stock outstanding immediately after giving effect to such exercise. The Warrants contain certain provisions that do not meet the criteria for equity classification and therefore were recorded as liabilities. The liability for these Warrants was recorded at a fair value of $19.6 million on the date of issuance with the offset included in debt issuance costs. This liability is re-measured to fair value at each reporting date or exercise date with changes in the fair value included in earnings. During the three months ended March 31, 2024, we recognized a loss of $23.6 million in our condensed consolidated statement of operations related to an increase in the fair value of the Warrants outstanding at March 31, 2024.
Registration Rights Agreement
In connection with the issuance of the Warrants, we entered into the Registration Rights Agreement with the Holders, providing for the registration of Registrable Securities, subject to customary terms and conditions. We are responsible for the payment of the Holders’ expenses in connection with any offering or sale of Registrable Securities by the Holders, including underwriting discounts or selling commissions, placement agent or broker fees or similar discounts, commissions or fees relating to the sale of certain Registrable Securities. On March 21, 2024, we filed a registration statement registering the Registrable Securities.
Amended Employment Agreement and Special Recognition Bonuses
On January 26, 2024, the Board approved an amendment to our Chief Executive Officer’s employment agreement. Under the amendment, we agreed that, among other things: (i) the Chief Executive Officer’s base salary will be increased, effective March 19, 2024, to $0.7 million; (ii) the Chief Executive Officer will be eligible to earn an incremental aggregate cash bonus equal to $0.9 million that will vest 10% on August 1, 2024, 20% on February 1, 2025, and 70% on August 1, 2025, provided he continues to be employed by us and subject to the Chief Executive Officer’s obligation to repay any such bonus actually received in the event his employment is terminated other than by us without cause prior to June 30, 2026, subject to certain conditions; and (iii) the Chief Executive Officer will be eligible to earn a cash payment of up to $5.0 million, less tax and other required withholdings, based on the Volume Weighted Average Price per share of our Class A common stock on NASDAQ during the period from March 16, 2026 through June 30, 2026 subject to his continued employment with us. The amount earned will be payable in quarterly installments commencing with the first payroll period following June 30, 2026.
Also, on January 26, 2024, the Board unanimously approved a special recognition bonus payment to certain members of our senior leadership team. Each participant is eligible to earn a special recognition bonus payment equal to 15 months of their regular salary. The special recognition bonus payment is payable, subject to the employee’s continued employment with us, 10% on August 1, 2024, 20% on February 1, 2025, and 70% on August 1, 2025.
Executive Summary – Results of Operations
Net revenues increased 12.5% to $120.0 million for the three months ended March 31, 2024 compared to $106.7 million for the three months ended March 31, 2023. This increase was primarily due to a $13.4 million, or 33.1%, increase in wholesale channel net revenues. This growth reflected the continued positive response by our wholesale partners to the new Premium and Luxe product lineups which became fully accessible to all our wholesalers in the fourth quarter of 2023. This increase was further affected by wholesale partner “slots” (a term commonly used to describe a section in a wholesale partner’s store to display a particular product) growing approximately 11% during the quarter as compared to the prior year first quarter. Within our DTC channel, e-commerce net revenues decreased $1.8 million, or 3.5%, while Purple showroom net revenues increased $1.7 million, or 11.3%. The decrease in e-commerce net revenues reflected the ongoing impact of soft demand and a reduction in price promotions. The growth in Purple showroom net revenues was driven by the continued positive response to our new products and the number of retail locations increasing to 60 at the end of the first quarter of 2024 from 55 at the end of the prior year first quarter.
27
Gross profit increased 2.8% to $41.7 million for the three months ended March 31, 2024 compared to $40.6 million for the three months ended March 31, 2023 due primarily to an increase in sales volume. The gross profit percentage in 2024 was 34.8% as compared to 38.0% in 2023. The lower gross profit percentage in the first quarter of 2024 was primarily due to a shift in revenue to our wholesale channel, which carries a lower average selling price than sales from our DTC channels.
Operating expenses decreased 0.5% to $64.9 million for the three months ended March 31, 2024 compared to $65.2 million for the three months ended March 31, 2023. This decrease primarily reflected a $3.9 million reduction in general and administrative expense, offset in part by a $3.3 million increase in marketing and sales costs. The decrease in general and administrative expense was primarily due to the prior year comparative quarter including non-recurring legal and professional costs incurred by the Board’s special committee. The increase in marketing and sales expense was driven by higher advertising spend to further support our new product lineup coupled with an increase in wholesale marketing and sales costs.
Other expense totaled $27.1 million for the three months ended March 31, 2024 compared to other expense of $1.3 million for the three months ended March 31, 2023. Other expense in 2024 included a $23.6 million loss related to an increase in the fair value of the Warrants outstanding at March 31, 2024, a $3.4 million loss on extinguishment of the Company’s 2023 Credit Agreements during the quarter, and $4.5 million of interest expense related primarily to our new loan under the Amended and Restated Credit Agreement. These expenses were offset in part by $4.3 million of other income associated with proceeds received in January 2024 as partial settlement for a previously filed business interruption insurance claim.
Net loss attributable to Purple Inc. increased $24.3 million to $50.2 million for the three months ended March 31, 2024 compared to $25.9 million for the three months ended March 31, 2023. The increase in net loss in 2024 was primarily due to the $23.6 million loss associated with the increase in the fair value of the Warrants outstanding at March 31, 2024.
Outlook for Growth
We believe that we are well positioned to build on our recent trends due to our differentiated product and growing brand strength. We remain focused on five key initiatives to drive profitable market share gains:
| ● | Improving the productivity of our existing wholesale and showroom doors. With our wholesale partners, we are continuing to focus on deepening our partnerships at each functional touch point, including joint business planning, collaborative marketing and sales associate training to maximize productivity and continued brand awareness. In showrooms, we are prioritizing profitability over door expansion, with only one store addition planned for 2024. We plan to drive profitability through a combination of demand driving initiatives as well as cost optimization. |
| ● | Improving e-commerce mattress conversion. The implementation of price changes to improve margins had the expected impact of lower conversion rates in the first quarter. We will look to enhance e-commerce conversion rates through data-enabled personalization, improved consumer financing offers, and streamlining our website while testing new messaging configurations and techniques. |
| ● | Driving gross margin improvements. We believe we can drive gross margin improvements through tactics such as selective pricing actions, continued mix shift towards our Premium and Luxe collections and manufacturing and supply chain optimization. |
| ● | Continued focus on innovation. We are strategically evaluating and ensuring we have a pipeline of future products in development of new comfort and sleep technology. We focus intensively on innovation to support our long-range growth and profitability plan. |
| ● | Improving our marketing efficiency. We are bringing the execution of our paid digital advertising back in-house, shifting more spend toward higher-converting media behind our “Sleep Better, Live Purple” campaign, reallocating media based on consumer segmentation and geographical analyses. This includes new impactful advertising with the goal of decreasing our cost acquisition. Additionally, we will look to drive more customer engagement through new marketing techniques. |
There is no guarantee that we will be able to effectively execute these initiatives, which are subject to risks, uncertainties, and assumptions that are difficult to predict, including the risks described under “Risk Factors” and elsewhere herein. Therefore, actual results may differ materially and adversely from those described above. In addition, we may, in the future, adapt these focuses in response to changes in the market or our business.
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Operating Results for the Three Months Ended March 31, 2024 and 2023
The following table sets forth for the periods indicated, our results of operations and the percentage of total revenue represented in our condensed consolidated statements of operations (dollars in thousands):
| Three Months Ended March 31, | ||||||||||||||||
| 2024 | % of Net Revenues | 2023 | % of Net Revenues | |||||||||||||
| Revenues, net | $ | 120,033 | 100.0 | % | $ | 106,727 | 100.0 | % | ||||||||
| Cost of revenues | 78,313 | 65.2 | 66,149 | 62.0 | ||||||||||||
| Gross profit | 41,720 | 34.8 | 40,578 | 38.0 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Marketing and sales | 41,462 | 34.5 | 38,173 | 35.8 | ||||||||||||
| General and administrative | 19,728 | 16.4 | 23,667 | 22.2 | ||||||||||||
| Research and development | 3,666 | 3.1 | 3,372 | 3.2 | ||||||||||||
| Total operating expenses | 64,856 | 54.0 | 65,212 | 61.1 | ||||||||||||
| Operating loss | (23,136 | ) | (19.3 | ) | (24,634 | ) | (23.1 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (4,474 | ) | (3.7 | ) | (202 | ) | (0.2 | ) | ||||||||
| Other income, net | 4,394 | 3.7 | 72 | — | ||||||||||||
| Loss on extinguishment of debt | (3,394 | ) | (2.8 | ) | (1,217 | ) | (1.1 | ) | ||||||||
| Change in fair value – warrant liabilities | (23,599 | ) | (19.7 | ) | — | — | ||||||||||
| Total other expense, net | (27,073 | ) | (22.6 | ) | (1,346 | ) | (1.3 | ) | ||||||||
| Net loss before income taxes | (50,209 | ) | (41.8 | ) | (25,980 | ) | (24.3 | ) | ||||||||
| Income tax (expense) benefit | (59 | ) | — | (72 | ) | (0.1 | ) | |||||||||
| Net loss | (50,268 | ) | (41.9 | ) | (26,052 | ) | (24.4 | ) | ||||||||
| Net loss attributable to noncontrolling interest | (51 | ) | — | (119 | ) | (0.1 | ) | |||||||||
| Net loss attributable to Purple Innovation, Inc. | $ | (50,217 | ) | (41.8 | ) | $ | (25,933 | ) | (24.3 | ) | ||||||
Revenues, Net
Net revenues increased $13.3 million, or 12.5%, to $120.0 million for the three months ended March 31, 2024 compared to $106.7 million for the three months ended March 31, 2023. This revenue growth was primarily due to a $13.4 million, or 33.1%, increase in wholesale channel net revenues. This growth reflected the continued positive response of our wholesale partners to the new Premium and Luxe product lineups which became fully accessible to all our wholesalers in the fourth quarter of 2023. This increase was further affected by wholesale partner “slots” (a term commonly used to describe a section in a wholesale partner’s store to display a particular product) growing approximately 11% during the quarter as compared to the prior year first quarter. Within our DTC channel, e-commerce net revenues decreased $1.8 million, or 3.5%, while Purple showroom net revenues increased $1.7 million, or 11.3%. The decrease in e-commerce net revenues reflected the ongoing impact of soft demand and a reduction in price promotions. The growth in Purple showroom net revenues was driven by the continued positive response to our new products and the number of retail locations increasing to 60 at the end of the first quarter of 2024 from 55 at the end of the prior year first quarter.
Cost of Revenues
Cost of revenues increased $12.2 million, or 18.4%, to $78.3 million for the three months ended March 31, 2024 compared to $66.1 million for the three months ended March 31, 2023. This increase was primarily due to the corresponding increase in sales volume. Our gross profit percentage, which decreased to 34.8% of net revenues in the first quarter of 2024 from 38.0% in the prior year first quarter, was in part impacted by a shift in revenue to our wholesale channel, which carries a lower average selling price than sales from our DTC channels.
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Marketing and Sales
Marketing and sales expense increased $3.3 million, or 8.6%, to $41.5 million for the three months ended March 31, 2024 compared to $38.2 million for the three months ended March 31, 2023. This increase was primarily comprised of a $1.2 million increase in advertising spending and a $1.8 million increase in wholesale marketing and sales costs. Advertising spend as a percentage of net revenues was 10.8% in the first quarter of 2024 compared to 11.0% in the first quarter of 2023. The increase in wholesale marketing and sales expenses was primarily due to increased costs associated with our wholesale partners becoming fully transitioned to the new Premium and Luxe product lineup during the third and fourth quarters of 2023.
General and Administrative
General and administrative expense decreased $3.9 million, or 16.6%, to $19.7 million for the three months ended March 31, 2024 compared to $23.7 million for the three months ended March 31, 2023. This decrease was primarily due to a $5.0 million decline in legal and professional fees as the prior year’s comparative quarter included costs associated with the Board’s special committee.
Research and Development
Research and development costs increased $0.3 million, or 8.7%, to $3.7 million for the three months ended March 31, 2024 compared to $3.4 million for the three months ended March 31, 2023. This increase primarily reflected our continued focus on new product innovation initiatives.
Operating Loss
Operating loss decreased $1.5 million to $23.1 million for the three months ended March 31, 2024 compared to $24.6 million for the three months ended March 31, 2023. The smaller operating loss primarily resulted from an increase in gross profit that was driven by higher sales coupled with a minimal decrease in operating expenses.
Interest Expense
Interest expense totaled $4.5 million for the three months ended March 31, 2024 compared to $0.2 million for the three months ended March 31, 2023. This increase was primarily due to interest incurred on the $61.0 million new loan that was entered into in January 2024 to refinance the term loan and revolving line of credit associated with the 2023 Credit Agreements. Interest expense in the first quarter of 2023 was lower because the term loan associated with 2020 Credit Agreement was repaid in full in February 2023.
Other Income, Net
Other income increased to $4.4 million for the three months ended March 31, 2024 compared to $0.1 million for the three months ended March 31, 2023. This increase was primarily due to $4.3 million of proceeds received in January 2024 as partial settlement for a previously filed business interruption insurance claim.
Loss on Extinguishment of Debt
In January 2024, we entered into the Amended and Restated Credit Agreement that terminated and paid off our 2023 Credit Agreements. This termination was accounted for as an extinguishment of debt and $3.4 million of unamortized debt issuance costs were recorded as loss on extinguishment of debt in the first quarter of 2024. In February 2023, we entered into a fifth amendment to the since terminated 2020 Credit Agreement and repaid in full the outstanding balance of the related term loan plus accrued interest. This amendment was accounted for as an extinguishment of debt and $1.2 million of unamortized debt issuance costs were recorded as loss on extinguishment of debt in the first quarter of 2023.
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Change in Fair Value – Warrant Liabilities
In connection with the Amended and Restated Credit Agreement, we issued 20.0 million Warrants to the Lenders. These Warrants contain certain provisions that do not meet the criteria for equity classification and therefore are recorded as liabilities. The initial liability for these Warrants was recorded at a fair value of $19.6 million on the date of issuance with the offset included in debt issuance costs. This liability is being re-measured to fair value at each reporting date or exercise date with changes in the fair value included in earnings. During the three months ended March 31, 2024, we recognized a loss of $23.6 million in our condensed consolidated statement of operations related to an increase in the fair value of the Warrants outstanding at March 31, 2024.
Income Tax (Expense) Benefit
We had income tax expense of $0.1 million for the three months ended March 31, 2024 compared to an income tax expense of $0.1 million for the three months ended March 31, 2023. The income tax expense amount in the first quarter of 2024 related to various state taxes.
Noncontrolling Interest
We calculate net income or loss attributable to noncontrolling interests on a quarterly basis using their weighted average ownership percentage. Net loss attributed to noncontrolling interests was $0.1 million for both the three months ended March 31, 2024 and 2023.
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 Amended and Restated Credit Agreement and proceeds received from offerings of our equity capital. Principal uses of funds consist of capital expenditures, working capital needs, and operating lease payment obligations. In accordance with the Amended and Restated Credit Agreement, the Company has elected to pay interest in kind on its new loan to reduce cash 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 cash and cash equivalents and working capital positions were $34.5 million and $47.9 million, respectively, as of March 31, 2024 compared to $26.9 million and $30.8 million, respectively, as of December 31, 2023. Cash used for capital expenditures totaled $3.1 million for both the first quarter of 2024 and the first quarter of 2023. Our capital expenditures in 2024 primarily consisted of additional investments made in our manufacturing operations and showroom facilities. Additional details about our Amended and Restated Credit Agreement are described above under “Recent Developments in our Business – Debt Financing.”
Based on our current projections, we believe our cash on hand, amounts available under our Amended and Restated Credit Agreement, and expected cash to be generated from our operations will be sufficient to meet our working capital requirements and cover anticipated capital expenditures for the next 12 months. In the event our cash flow from operations or other sources of financing are less than anticipated, we believe we will be able to fund operating expenses based on our ability to scale back operations, reduce marketing spend, and postpone or discontinue our growth strategies. 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. 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. Our ability to raise additional debt financing would require the consent of the Lenders.
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Other Contractual Obligations
Other material contractual obligations primarily include operating lease payment obligations. See Note 8 of the condensed consolidated financial statements for additional information on leases.
Cash Flows for the Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023
The following summarizes our cash flows for the three months ended March 31, 2024 and 2023 as reported in our condensed consolidated statements of cash flows (in thousands):
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Net cash used in operating activities | $ | (16,814 | ) | $ | (13,503 | ) | ||
| Net cash used in investing activities | (3,100 | ) | (3,098 | ) | ||||
| Net cash provided by financing activities | 27,534 | 29,377 | ||||||
| Net increase in cash | 7,620 | 12,776 | ||||||
| Cash, beginning of the period | 26,857 | 41,754 | ||||||
| Cash, end of the period | $ | 34,477 | $ | 54,530 | ||||
Cash used in operating activities was $16.8 million and $13.5 million for the three months ended March 31, 2024 and 2023, respectively. Cash used in operating activities during the first quarter of 2024 was more than offset by the net proceeds received from entering into the Amended and Restated Credit Agreement in January 2024. Significant components of the year-over-year change in cash used in operating activities included a $24.2 million increase in net loss, offset in part by a $23.6 million increase in the fair value of Warrants issued in January 2024.
Cash used in investing activities reflected capital expenditures of $3.1 million for both the three months ended March 31, 2024 and 2023. Capital expenditures in the first quarter of 2024 primarily consisted of additional investments made in our manufacturing operations and showroom facilities.
Cash provided by financing activities was $27.5 million during the three months ended March 31, 2024 compared to $29.4 million during the three months ended March 31, 2023. Financing activities in the first quarter of 2024 included $61.0 million of proceeds received from the new loan under the Amended and Restated Credit Agreement, offset in part by a $25.0 million payment to pay off the Term Loans from the 2023 Credit Agreement, a $5.0 million payment to pay off the ABL Loans from the 2023 Credit Agreement, and payments of $3.5 million for debt issuance costs associated with entering into the Amended and Restated Credit Agreement.
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 2023 Annual Report on Form 10-K filed March 12, 2024. There have been no significant changes in our critical accounting policies since the end of fiscal 2023.
Available Information
Our website address is www.purple.com. We make available free of charge on the Investor Relations portion of our website, investors.purple.com, our annual report on Form 10-K and Form 10-K/A, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The inclusion of our website address in this report does not include or incorporate by reference into this report any information on our website.
We also use the Investor Relations portion of our website, investors.purple.com, as a channel of distribution of additional Company information that may be deemed material. Accordingly, investors should monitor this channel, in addition to following our press releases, SEC filings and public conference calls and webcasts. The contents of our website shall not be deemed to be incorporated herein by reference.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our operating results are subject to risk from interest rate fluctuations on the outstanding borrowings. 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 Amended and Restated Credit Agreement entered into in January 2024 bears interest at a variable rate which exposes us to market risks relating to changes in interest rates. As of March 31, 2024, we had $62.8 million of variable rate debt outstanding under our new loan under the Amended and Restated Credit Agreement. Based on this debt level, 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 $0.6 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
(a) Evaluation of Disclosure Controls and Procedures
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 Exchange Act). Our disclosure controls and procedures are designed to provide reasonable assurance that the 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. 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 March 31, 2024, due to the material weakness in our internal control over financial reporting, described below.
Previously Reported Material Weakness
As previously reported, we identified a material weakness related to the review and evaluation of wholesale customer contracts, specifically as it relates to variable consideration, including wholesale warranty obligations. Specifically, we did not design and maintain effective controls over the review and evaluation of the accounting relating to contract terms agreed upon with our wholesale customers and the identification and calculation of the related wholesale accrued warranty liabilities.
Plans for Remediation of Material Weakness
In response to the material weakness, we have designed and implemented a control over the review of all wholesale customer contracts to ensure the terms contained therein are appropriately evaluated and recorded. This control includes increased rigor and participation among our legal and accounting personnel regarding the appropriate consideration and application of contractual terms. We are also implementing a new control over credit memo review and approval. Further, we are implementing a new control over the evaluation and review of accrued wholesale warranty liabilities. The Company will not be able to fully remediate this material weakness until these steps have been completed and have been operating effectively for a sufficient period of time. The Company may also identify additional measures that may be required to remediate the material weakness in the Company’s internal control over financial reporting, necessitating further action.
(b) Changes in Internal Controls Over Financial Reporting.
Other than the remediation efforts described above, there were no changes in our internal control over financial reporting during the quarter ended March 31, 2024 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 13 — Commitments and Contingencies and Note 20 – Subsequent Events 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 2023 Annual Report on Form 10-K filed with the SEC on March 12, 2024.The disclosure of risks identified below does not imply that the risk has not already materialized.
Future sales of our Common Stock in the public market may depress our share price.
Sales of a substantial number of shares of our Common Stock in the public market, or the perception that these sales might occur, could depress the market price of our Common Stock and could impair our ability to raise capital through the sale of additional equity securities or other securities convertible into or exchangeable for equity securities, regardless of whether there is any relationship between such sales and the performance of our business.
In connection with the issuance of Warrants pursuant to the Amended and Restated Credit Agreement, on January 23, 2024, the Company entered into an Amended and Restated Registration Rights Agreement (the “Registration Rights Agreement”) with CCP, Blackwell, Coliseum Capital Co-Invest III, L.P. (“C-3”), Harvest Master, Harvest Partners, and HSCP (the “Holders”), providing for the registration under the Securities Act of the Warrants, the shares of Common Stock issuable upon the exercise of the Warrants and the Class A Common Stock held by the Holders as of such date (the “Registrable Securities”), subject to customary terms and conditions. The Registration Rights Agreement provides that on or prior to February 22, 2024, the Company was required to prepare and file with the SEC pursuant to Rule 415 of the Securities Act a registration statement to register the resale of the Registrable Securities. The Company received an extension from the Holders to file the registration statement on or prior to March 22, 2024. On March 21, 2024, the Company filed the registration statement pursuant to the Registration Rights Agreement.
The market price of our Common Stock could decline as a result of sales in the market by a few large stockholders, such as Coliseum or the Holders, or the perception that these sales could occur, including as a result of the registration statement filed March 21, 2024. These sales might also make it more difficult for us to sell equity securities at a time and price that we deem appropriate.
Our stockholders may experience substantial dilution in the value of their investment or may otherwise have their interests impaired if we issue additional shares of our capital stock, including as a result of the exercise of the Warrants.
Our Second Amended and Restated Certificate of Incorporation allows us to issue up to 300 million shares of our common stock, including 210 million shares of Common Stock and 90 million shares of Class B Stock, and up to five million shares of undesignated preferred stock. For example, in February 2023 we issued 13,400,000 shares of Common Stock pursuant to an underwritten public offering. To raise additional capital, we may in the future sell additional shares of our Common Stock or other securities convertible into or exchangeable for our Common Stock at prices that are lower than the prices paid by existing stockholders, and investors purchasing shares or other securities in the future could have rights superior to existing stockholders, which could result in substantial dilution to the interests of existing stockholders. For example, on January 23, 2024, we issued to the Lenders under the Amended and Restated Credit Agreement Warrants to purchase 20,000,000 shares of our Common Stock (approximately 19% of our currently outstanding Class A Common Stock) at a price of $1.50 per share, subject to certain adjustments. The Warrants will expire on the 10-year anniversary of issuance or earlier upon redemption. The exercise of the Warrants will dilute the value of the Common Stock and stockholder voting power.
Pursuant to our Certificate of Incorporation, our board of directors may authorize the issuance of up to five million shares of preferred stock at any time and from time to time, with such terms and preferences as the board of directors determines and without any stockholder approval other than as may be required by Nasdaq rules. The issuance of such shares of preferred stock could dilute the interest of, or impair the voting power of, our common stockholders. The issuance of such preferred stock could also be used as a method of discouraging, delaying, or preventing a change of control.
ITEM 5. OTHER INFORMATION
10b5-1 Trading Plans
During the first quarter of 2024, none of our directors or executive officers adopted or terminated any “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” as such terms are defined under Item 408 of Regulation S-K.
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ITEM 6. EXHIBITS
| * | Filed herewith. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| PURPLE INNOVATION, INC. | ||
| Date: May 7, 2024 | By: | /s/ Robert T. DeMartini |
| Robert T. DeMartini | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: May 7, 2024 | By: | /s/ Todd E. Vogensen |
| Todd E. Vogensen | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) | ||
| Date: May 7, 2024 | By: | /s/ George T. Ulrich |
| George T. Ulrich | ||
| VP Accounting and Financial Reporting | ||
| (Principal Accounting Officer) |
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