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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
FOR THE QUARTERLY PERIOD ENDED
OR
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| | ||
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including
area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ☑ | |
| Non-accelerated filer | ☐ | Smaller reporting company | |
| Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of August 8, 2023,
PURPLE INNOVATION, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
| Page | |||
| Part I. | Financial Information | 1 | |
| Item 1. | Financial Statements (Unaudited): | 1 | |
| Condensed Consolidated Balance Sheets | 1 | ||
| Condensed Consolidated Statements of Operations | 2 | ||
| Condensed Consolidated Statements of Stockholders’ Equity | 3 | ||
| Condensed Consolidated Statements of Cash Flows | 4 | ||
| Notes to Condensed Consolidated Financial Statements | 5 | ||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 31 | |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 45 | |
| Item 4. | Controls and Procedures | 45 | |
| Part II. | Other Information | 46 | |
| Item 1. | Legal Proceedings | 46 | |
| Item 1A. | Risk Factors | 46 | |
| Item 5. | Other Information | 50 | |
| Item 6. | Exhibits | 53 | |
| Signatures | 54 | ||
i
In this Quarterly Report on Form 10-Q, references to “dollars” and “$” are to United States (“U.S.”) dollars.
We have several trademarks registered with the U.S. Patent and Trademark Office (“USPTO”), including EquaPressure®, WonderGel® and EquaGel® (for cushions), and Purple®, No Pressure®, Hyper-Elastic Polymer®, Somnigel®, Gel Matrix®, Matrix®, Gelee®, Ascent®, Softstretch®, Purple Powerbase®, Sleep Genius®, Firm and Soft®, Intellipillow®, and Intellibed®(for plasticized elastomeric gel and certain types of products including mattresses, seat cushions, bed linen, mattress foundation and others). Additional registered trademarks include, but are not limited to, Purple Grid®, Reinventing Comfort®, Comfort Reinvented®, TwinCloud®, Purple Cloud®, Purple Pillow®, The Purple Mattress®, Purple Hybrid®, Purple Hybrid Premier®, The Purple Mattress®, The Purple Plus®, Gelflex® and registration of the color purple as a trademark (for mattresses, pillows, and seat cushions). Applications are pending for registration of additional trademarks and some of these listed trademarks for additional classes of goods both in the U.S. and internationally. Our Purple, No Pressure and Hyper-Elastic Polymer trademarks are also registered and have applications pending for various classes of goods in numerous foreign jurisdictions, some of which include Australia, Canada, China, Europe, United Kingdom, Japan and Korea. Certain international trademark applications previously resided with EdiZONE, LLC, which is an entity owned by our founders, and were licensed to Purple LLC and we have taken the necessary steps to have those trademarks assigned to Purple LLC upon registration.
We also have a number of common law trademarks, including Sleep Purple, Live BetterÔ, New DayÔ, RestoreÔ, RestorePlusÔ, RestorePremierÔ, RejuvenateÔ, RejuvenatePlusÔ, RejuvenatePremierÔ, Perfectstay™, TempBalance™, Success Happens Overnight™, Overnight Success™, Harmony™, Purple Harmony Pillow™, Harmony Pillow™, Purple +™, Purple Plus™, Find Comfort™, Dreams On Dreams™, Reinventing Sleep™, Gelflex Grid™, Gelflex Grid Plus™, Purple Ascent™, Purple Squishy™, Purple Powerbase Premier™, Purple Powerbase Plus™, Purple Glove™, Eidertech™, Mattress Max™, WonderGel Original™, WonderGel Extreme™, DoubleGel™, DoubleGel Plus™, DoubleGel Ultra™, Roll n’ Go™, Fold N’ Go™, Purple Bed™, Purple Top™, Purple Pillow™, Portable Purple™, Everywhere Purple™, Simply Purple™, Lite Purple™, Royal Purple™, Double Purple™, Deep Purple™, Ultimate Purple™, Purple Back™, EquaGel Straight Comfort™, EquaGel General™, EquaGel Protector™, and EquaGel Adjustable™.
Many of the common law marks have registrations pending with the USPTO and other international jurisdictions. Solely for convenience, we refer to our trademarks in this Quarterly Report without the ™ or ® symbol, but such references are not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights to our trademarks.
In addition, we maintain copyrights, many of which are registered, to past and present versions of purple.com, onpurple.com, equapressure.com, wondergel.com, marketing content, blogs, logos, graphics, videos and other marketing and promotional materials promoting our products.
We protect and enforce our intellectual property rights, including through litigation as necessary.
ii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PURPLE INNOVATION, INC.
Condensed Consolidated Balance Sheets
(unaudited – in thousands, except for par value)
| June 30, 2023 | December 31, 2022 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash, cash equivalents and restricted cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Other long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued sales returns | ||||||||
| Accrued compensation | ||||||||
| Customer prepayments | ||||||||
| Accrued sales and use tax | ||||||||
| Accrued rebates and allowances | ||||||||
| Operating lease obligations – current portion | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Debt | ||||||||
| Operating lease obligations, net of current portion | ||||||||
| Other long-term liabilities, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 14) | ||||||||
| Stockholders’ equity: | ||||||||
| Class A common stock; $ | ||||||||
| Class B common stock; $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity attributable to Purple Innovation, Inc. | ||||||||
| Noncontrolling interest | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
PURPLE INNOVATION, INC.
Condensed Consolidated Statements of Operations
(unaudited – in thousands, except per share amounts)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Marketing and sales | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense), net | ( | ) | ( | ) | ||||||||||||
| Change in fair value – warrant liabilities | — | |||||||||||||||
| Loss on extinguishment of debt | — | ( | ) | — | ||||||||||||
| Total other income (expense), net | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to noncontrolling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to Purple Innovation, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
PURPLE INNOVATION, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited – in thousands)
| Class A | Class B | Additional | Total | |||||||||||||||||||||||||||||||||
| Common Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | Noncontrolling | Total | ||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Capital | Deficit | Equity | Interest | Equity | ||||||||||||||||||||||||||||
| Balance - December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of stock under equity compensation plans | — | |||||||||||||||||||||||||||||||||||
| Issuance of stock upon underwritten offering, net of costs | — | |||||||||||||||||||||||||||||||||||
| Impact of transactions affecting NCI | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance – March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Exchange of stock | ( | ) | ||||||||||||||||||||||||||||||||||
| Proportional Representation Preferred Linked Stock redemption fee | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Additional costs associated with underwritten public stock offering | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Issuance of stock under equity compensation plans | — | |||||||||||||||||||||||||||||||||||
| Impact of transactions affecting NCI | — | — | ( | ) | ||||||||||||||||||||||||||||||||
| Balance – June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| Class A | Class B | Additional | Total | |||||||||||||||||||||||||||||||||
| Common Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | Noncontrolling | Total | ||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Capital | Deficit | Equity | Interest | Equity | ||||||||||||||||||||||||||||
| Balance - December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | |||||||||||||||||||||||||||||||||||
| Issuance of stock under equity compensation plans | — | |||||||||||||||||||||||||||||||||||
| Issuance of stock upon underwritten public offering, net of costs | — | |||||||||||||||||||||||||||||||||||
| Accrued distributions | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Impact of transactions affecting NCI | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance – March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of common stock under equity compensation plans | — | |||||||||||||||||||||||||||||||||||
| Additional costs associated with underwritten public stock offering | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Impact of transactions affecting NCI | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance – June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
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)
| Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Non-cash interest | ||||||||
| Loss on extinguishment of debt | ||||||||
| Change in fair value – warrant liabilities | ( | ) | ||||||
| Stock-based compensation | ||||||||
| Deferred income taxes | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories, net | ( | ) | ||||||
| Prepaid expenses and other assets | ||||||||
| Operating leases, net | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued sales returns | ( | ) | ( | ) | ||||
| Accrued compensation | ( | ) | ||||||
| Customer prepayments | ( | ) | ||||||
| Accrued rebates and allowances | ( | ) | ( | ) | ||||
| Other accrued liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Investment in intangible assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payments on term loan | ( | ) | ( | ) | ||||
| Payments on revolving line of credit | ( | ) | ||||||
| Payments for debt issuance costs | ( | ) | ( | ) | ||||
| Proceeds from stock offering | ||||||||
| Payments for public offering costs | ( | ) | ( | ) | ||||
| Proportional Representation Preferred Linked Stock redemption fee | ( | ) | ||||||
| Tax receivable agreement payments | ( | ) | ( | ) | ||||
| Proceeds from exercise of stock options | ||||||||
| Net cash provided by financing activities | ||||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ) | ( | ) | ||||
| Cash, cash equivalents and restricted cash, beginning of the year | ||||||||
| Cash, cash equivalents and restricted cash, end of the period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for interest, net of amounts capitalized | $ | ( | ) | $ | ||||
| Cash paid during the period for income taxes | $ | $ | ||||||
| Supplemental schedule of non-cash investing and financing activities: | ||||||||
| Property and equipment included in accounts payable | $ | $ | ||||||
| Accrued distributions | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Organization
Purple Innovation, Inc.’s mission is to help people feel and live better through innovative comfort solutions.
Purple Innovation, Inc. collectively with its subsidiary (the “Company” or “Purple Inc.”) is an omni-channel Company that began as a digitally-native vertical brand founded on comfort product innovation with premium offerings. The Company designs and manufactures a variety of innovative, branded and premium comfort products, including mattresses, pillows, cushions, bases, sheets, and other products. The Company markets and sells its products through its e-commerce online channels, retail brick-and-mortar wholesale partners, Purple owned retail showrooms, and third-party online retailers.
The Company was incorporated in Delaware on May 19, 2015 as a special purpose acquisition company under the name of Global Partnership Acquisition Corp (“GPAC”). On February 2, 2018, the Company consummated a transaction structured similar to a reverse recapitalization (the “Business Combination”) pursuant to which the Company acquired a portion of the equity of Purple Innovation, LLC (“Purple LLC”). At the closing of the Business Combination (the “Closing”), the Company became the sole managing member of Purple LLC, and GPAC was renamed Purple Innovation, Inc.
As the sole managing member of Purple LLC, Purple Inc. through its officers and directors is responsible for all operational and administrative decision making and control of the day-to-day business affairs of Purple LLC without the approval of any other member.
On August 31, 2022, the Company
acquired all the issued and outstanding stock of Advanced Comfort Technologies, Inc., dba Intellibed (“Intellibed”) pursuant
to an Agreement and Plan of Merger (the “Merger Agreement”), in which Gelato Merger Sub, Inc., a wholly owned subsidiary of
Purple Inc., merged with and into Intellibed, with Intellibed continuing as a wholly owned subsidiary of Purple Inc. On October 3, 2022,
Purple Inc. contributed
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The condensed consolidated
financial statements include the accounts of Purple Inc., its controlled subsidiary Purple LLC, and Intellibed, Purple LLC’s wholly
owned subsidiary, from the date of acquisition. All intercompany balances and transactions have been eliminated in consolidation. As of
June 30, 2023, Purple Inc. held
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting and reflect the financial position, results of operations and cash flows of the Company. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The unaudited condensed consolidated financial statements were prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which were considered of normal recurring nature) considered necessary to present fairly the Company’s financial results. The results of the three and six months ended June 30, 2023 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2023 or for any other interim period or other future year.
Variable Interest Entities
Purple LLC is a variable interest
entity. The Company determined that it is the primary beneficiary of Purple LLC as it is the sole managing member and has the power to
direct the activities most significant to Purple LLC’s economic performance as well as the obligation to absorb losses and receive
benefits that are potentially significant. At June 30, 2023, Purple Inc. had a
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to establish accounting policies and to make estimates and judgments that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The Company regularly makes significant estimates and assumptions including, but not limited to, estimates that affect revenue recognition, accounts receivable and allowance for credit losses, valuation of inventories, sales returns, warranty returns, fair value of assets acquired and liabilities assumed in a business combination, warrant liabilities, stock based compensation, the recognition and measurement of loss contingencies, estimates of current and deferred income taxes, deferred income tax valuation allowances, and amounts associated with the Company’s tax receivable agreement with InnoHold, LLC (“InnoHold”). Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results could differ materially from those estimates.
5
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Recent Accounting Pronouncements
Measurement of Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which was further updated and clarified by the FASB through issuance of additional related ASUs. This guidance replaces the existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost based on expected credit losses. The estimate of expected credit losses requires the incorporation of historical information, current conditions, and reasonable and supportable forecasts. These updates are effective for public companies, excluding Smaller Reporting Companies (“SRC”), for annual periods beginning after December 15, 2019, including interim periods therein. The standard is effective for all other entities for annual periods beginning after December 15, 2022, including interim periods therein. The standard is effective for the Company’s interim and annual financial periods beginning January 1, 2023. This standard was adopted utilizing a modified retrospective approach. The adoption of this standard on January 1, 2023 did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.
3. Underwritten Offering of Class A Common Stock
In February 2023, the Company
completed an underwritten offering of
4. Acquisition
On August 31, 2022, pursuant to the Merger Agreement, the Company acquired Intellibed, a premium sleep and health wellness company, offering gel-based mattresses scientifically designed for maximum back support, spinal alignment and pressure point relief. The addition of Intellibed increased product offerings to customers, expanded market opportunities, capitalized on synergies of the combined companies, and increased opportunities for innovation. In addition, the acquisition allowed the Company to consolidate ownership of its intellectual property licensed to Intellibed and more fully capitalize on growing demand for products with gel technologies.
| Fair value of Class A common stock issued at closing | $ | |||
| Fair value of Class A common stock held in escrow | ||||
| Fair value of contingent consideration | ||||
| Fair value of effective settlement of preexisting relationships | ||||
| Transaction expenses paid on behalf of Intellibed | ||||
| Due to seller | ||||
| Fair value of total purchase consideration | $ |
Contingent consideration represents
the fair value of
The fair value of effective
settlement of preexisting relationships includes $
6
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company recorded the acquisition based
on the fair value of the consideration transferred and then allocated the purchase price to the identifiable assets acquired and liabilities
assumed based on their respective preliminary estimated fair values as of the acquisition date. Determining the fair value of assets acquired
and liabilities assumed required management to use significant judgment and estimates including the selection of valuation methodologies,
estimates of future revenues and cash flows, discount rates, and asset lives, among other items. While the Company used its best estimates
and assumptions as a part of the purchase price allocation process to accurately value the assets acquired, including intangible assets,
and the liabilities assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject to refinement.
Consequently, during the measurement period, which could be up to
During the second quarter
of 2023, the Company updated the preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed,
which required a measurement period adjustment of $
| Net tangible assets (liabilities): | At date of acquisition | Measurement period adjustments | As adjusted June 30, 2023 | |||||||||
| Cash, cash equivalents and restricted cash | $ | $ | $ | |||||||||
| Accounts receivable | ( | ) | ||||||||||
| Inventory | ( | ) | ||||||||||
| Other current assets | ||||||||||||
| Property and equipment | ||||||||||||
| Operating lease right-of-use assets | ||||||||||||
| Other long-term assets | ||||||||||||
| Accounts payable | ( | ) | ( | ) | ( | ) | ||||||
| Other current liabilities | ( | ) | ( | ) | ||||||||
| Operating lease obligations | ( | ) | ( | ) | ||||||||
| Deferred tax liabilities | ( | ) | ( | ) | ( | ) | ||||||
| Net tangible assets (liabilities) | ( | ) | ||||||||||
| Goodwill | ( | ) | ||||||||||
| Customer relationships | ||||||||||||
| Developed technology | ||||||||||||
| Net assets acquired and liabilities assumed | $ | $ | $ | |||||||||
Due to the close proximity of the acquisition date to the Company’s first reporting date after the transaction, the Company recorded the assets acquired and liabilities assumed at preliminary estimates of fair value. As a result, the Company had not finalized the determination of the working capital adjustments and the fair values allocated to various assets and liabilities, income tax provision, intangible assets and the residual amount allocated to goodwill. While the final determination of working capital adjustments was still pending at June 30, 2023, the table above reflects measurement period adjustments made to various assets acquired and liabilities assumed based on updated information, and revisions to reflect the final fair value analysis associated with the two intangible assets. The corresponding offsets for these measurement period adjustments was goodwill.
The Company believes the amount of goodwill resulting from the purchase price allocation is primarily attributable to expected synergies from the assembled workforce, an increase in development capabilities, increased offerings to customers, expanded market opportunities, and enhanced opportunities for growth and innovation. Goodwill is not being amortized but instead is tested for impairment at least annually or more frequently if certain indicators of impairment are present. In the event that goodwill becomes impaired, the Company will record an expense for the amount impaired during the quarter in which the determination is made. The goodwill recorded is not deductible for income tax purposes.
The two identified definite
lived intangible assets, comprised of customer relationships and developed technology, are being amortized over their estimated useful
lives of
The cash, cash equivalents
and restricted cash balance acquired included $
7
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
5. Fair Value Measurements
The Company uses the fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:
Level 1—Quoted market prices in active markets for identical assets or liabilities;
Level 2—Significant other observable inputs (i.e., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable, such as interest rate and yield curves, and market-corroborated inputs); and
Level 3—Unobservable inputs in which there is little or no market data, which require the reporting unit to develop its own assumptions.
The classification of fair value measurements within the established three-level hierarchy is based upon the lowest level of input that is significant to the measurements. Financial instruments, although not recorded at fair value on a recurring basis include cash and cash equivalents, receivables, accounts payable and the Company’s debt obligations. The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair value because of the short-term nature of these accounts. The fair value of the Company’s debt instruments is estimated to be face value based on the contractual terms of the debt arrangements and market-based expectations.
The sponsor warrant liabilities
(see Note 12 — Warrant Liabilities for more information) are Level 3 instruments and use internal models to estimate fair
value using certain significant unobservable inputs which required determination of relevant inputs and assumptions. Accordingly, changes
in these unobservable inputs may have had a significant impact on fair value. Such inputs included risk free interest rate, expected average
life, expected dividend yield, and expected volatility. These Level 3 liabilities generally decreased (increased) in value based
upon an increase (decrease) in risk free interest rate and expected dividend yield. Conversely, the fair value of these Level 3 liabilities
generally increased (decreased) in value if the expected average life or expected volatility were to increase (decrease). Unexercised
sponsor warrants totaling
There were no sponsor warrants
outstanding on June 30, 2023 and the
| (In thousands) | Sponsor Warrants | |||
| Fair value as of December 31, 2021 | $ | |||
| Fair value of warrants exercised | ||||
| Change in valuation inputs(1) | ( | ) | ||
| Fair value as of June 30, 2022 | $ | |||
| (1) |
8
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
6. Revenue from Contracts with Customers
The Company markets and sells its products through e-commerce online channels, retail brick-and-mortar wholesale partners, Purple owned retail showrooms, and third-party online retailers. Revenue is recognized when the Company satisfies its performance obligations under the contract which involves transferring the promised products to the customer, subject to shipping terms.
Disaggregated Revenue
The Company classifies revenue into two sales categories: direct-to-consumer (“DTC”) and wholesale. The DTC category is comprised of the Company’s e-commerce channel that sells directly to consumers who purchase online and through our contact center, and the Purple owned retail showrooms channel that sells directly to consumers who purchase at a showroom location. The wholesale channel includes all product sales to our wholesale partners where consumers make purchases at their retail locations or through their online channels. The Company classifies products into two major types: sleep products and other. Sleep products include mattresses, platforms, adjustable bases, mattress protectors, pillows and sheets. Other products include cushions and various other products.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| Sales Category | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| DTC | $ | $ | $ | $ | ||||||||||||
| Wholesale | ||||||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| Product Type | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Sleep products | $ | $ | $ | $ | ||||||||||||
| Other | ||||||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
Contract Balances
Payment for sale of products
through the e-commerce online channel, third-party online retailers, Purple owned retail showrooms and contact center is collected at
point of sale in advance of shipping the products. Amounts received for unshipped products are recorded as customer prepayments. Customer
prepayments totaled $
7. Inventories, Net
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Inventory obsolescence reserve | ( | ) | ( | ) | ||||
| Inventories, net | $ | $ | ||||||
9
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
8. Property and Equipment, Net
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Equipment | $ | $ | ||||||
| Equipment in progress | ||||||||
| Leasehold improvements | ||||||||
| Furniture and fixtures | ||||||||
| Office equipment | ||||||||
| Total property and equipment | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Equipment in progress reflects
equipment, primarily related to mattress manufacturing, which is being constructed and was not in service at June 30, 2023 or December
31, 2022. Interest capitalized on borrowings during the active construction period of major capital projects totaled $
9. Leases
The Company leases its manufacturing
and distribution facilities, corporate offices, Purple owned retail showrooms and certain equipment under non-cancelable operating leases
with various expiration dates through 2036. The Company’s office and manufacturing leases provide for initial lease terms up to
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Operating | $ | $ | $ | $ | ||||||||||||
| Variable | ||||||||||||||||
| Short-term | ||||||||||||||||
| Total lease costs | $ | $ | $ | $ | ||||||||||||
10
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
| 2023 (excluding the six months ended June 30, 2023)(a) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total operating lease payments | ||||
| Less – lease payments representing interest | ( | ) | ||
| Present value of operating lease payments | $ |
| (a) |
As of June 30, 2023 and December
31, 2022, the weighted-average remaining term of operating leases was
| Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash paid for amounts included in present value of operating lease liabilities (b) | $ | $ | ||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | ||||||||
| (b) |
10. Other Current Liabilities
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Warranty accrual – current portion | $ | $ | ||||||
| Insurance financing | ||||||||
| Accrued sales tax liability assumed in acquisition | ||||||||
| Accrued property taxes | ||||||||
| Tax receivable agreement liability – current portion | ||||||||
| Other | ||||||||
| Total other current liabilities | $ | $ | ||||||
11
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
11. Debt
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Term loan | $ | $ | ||||||
| Less: unamortized debt issuance costs | ( | ) | ||||||
| Total debt | $ | $ | ||||||
Term Loan and Revolving Line of Credit
On September 3, 2020, Purple
LLC entered into a financing arrangement with KeyBank National Association and a group of financial institutions (the “2020 Credit
Agreement”). The 2020 Credit Agreement provided for a $
Pursuant to a Pledge and Security Agreement between Purple LLC, KeyBank and the Company (the “Security Agreement”), the 2020 Credit Agreement was secured by a perfected first-priority security interest in the assets of Purple LLC and the Company, including a security interest in all intellectual property. Also, the Company agreed to an unconditional guaranty of the payment of all obligations and liabilities of Purple LLC under the 2020 Credit Agreement. The Security Agreement contained a pledge, as security for the Company’s guaranty, of all its ownership interest in Purple LLC. The 2020 Credit Agreement also provided for standard events of default, such as for non-payment and failure to perform or observe covenants, and contained standard indemnifications benefitting the lenders.
The 2020 Credit Agreement included representations, warranties and certain covenants of Purple LLC and the Company. Under the 2020 Credit Agreement, Purple LLC was subject to several affirmative and negative covenants, including covenants regarding dispositions of property, investments, forming or acquiring subsidiaries, business combinations or acquisitions, incurrence of additional indebtedness, and transactions with affiliates, among other customary covenants, subject to certain exceptions. In particular, Purple LLC was (i) subject to annual capital expenditure limits that can be adjusted based on the Company achieving certain net leverage ratio thresholds as provided in the 2020 Credit Agreement, (ii) restricted from incurring additional debt up to certain amounts, subject to limited exceptions, as set forth in the 2020 Credit Agreement, and (iii) required to maintain minimum consolidated net leverage and fixed charge coverage ratio thresholds at certain measurement dates (as defined in the 2020 Credit Agreement). Purple LLC was also restricted from paying dividends or making other distributions or payments on its capital stock, subject to limited exceptions. If the Company or Purple LLC failed to perform their obligations under these and other covenants, or if any event of default had occurred, the revolving loan commitments under the 2020 Credit Agreement could have been terminated and any outstanding borrowings, together with accrued interest, could have been declared immediately due and payable.
The Company’s operating
and financial results for the year ended December 31, 2021 did not satisfy the financial and performance covenants required under
the 2020 Credit Agreement. On February 28, 2022, prior to the covenant compliance certification date, the Company entered into the first
amendment of the 2020 Credit Agreement to avoid a breach of these covenants and potential default. Pursuant to this amendment, the Company
incurred fees and expenses of $
12
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
On
March 23, 2022, the Company entered into a second amendment to the 2020 Credit Agreement. This amendment modified the 2020 Credit
Agreement to allow Coliseum Capital Management, LLC, on behalf of its funds, managed accounts and its investment affiliates (individually
“CCM” and collectively “Coliseum”) to acquire
On May 13, 2022 and September 9, 2022, the Company entered into third and fourth amendments, respectively, to the 2020 Credit Agreement. These amendments modified the permitted leases schedule to reflect a change in showroom locations and a new lease for an innovation building. The amendments did not meet the criteria for a modification of existing debt and minimal costs were recorded as general and administrative expense in the condensed consolidated statement of operations.
On July 14, 2022, the Company
received consent under the 2020 Credit Agreement that allowed the Company’s acquisition of Intellibed to constitute a permitted
acquisition under the 2020 Credit Agreement. The Company incurred fees and expenses of $
In December 2022, the Company
made a $
On February 17, 2023, the
Company entered into a fifth amendment to the 2020 Credit Agreement. As a condition of entering into the amendment, the Company repaid
the $
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 $
On May 10, 2023, the Company entered into a sixth amendment to the 2020 Credit Agreement. This amendment clarified an ambiguity identified in the first sentence of Section 7.07(d), as amended by the fifth amendment, which provided that Minimum Consolidated EBITDA as of each of March 31, 2023 and June 30, 2023 pertained to Consolidated EBITDA for each such fiscal quarter rather than Consolidated EBITDA for the trailing twelve-month period.
13
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Interest expense under the
2020 Credit Agreement totaled $
12. Warrant Liabilities
The Company issued
Unexercised sponsor warrants
totaling
There were no sponsor warrants
exercised during the six months ended June 30, 2022. The
| June 30, 2022 | ||||
| Trading price of common stock on measurement date | $ | |||
| Exercise price | $ | |||
| Risk free interest rate | % | |||
| Warrant life in years | ||||
| Expected volatility | % | |||
| Expected dividend yield | ||||
During the three and six months
ended June 30, 2022, the Company recognized gains of $
13. Other Long-Term Liabilities
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Warranty accrual | $ | $ | ||||||
| Asset retirement obligations | ||||||||
| Other | ||||||||
| Total | ||||||||
| Less – current portion of warranty accrual | ( | ) | ( | ) | ||||
| Other long-term liabilities, net of current portion | $ | $ | ||||||
14
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
14. Commitments and Contingencies
Warranty Liabilities
The Company provides a limited warranty on most of the products it sells. The estimated warranty costs, which are expensed at the time of sale and included in cost of revenues, are based on the results of product testing, industry and historical trends and warranty claim rates incurred, and are adjusted for any current or expected trends as appropriate. Actual warranty claim costs could differ from these estimates. The Company regularly assesses and adjusts the estimate of accrued warranty claims by updating claims rates for actual trends and projected claim costs. The Company classifies estimated warranty costs expected to be paid beyond a year as a long-term liability.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | ||||||||||||
| Additions charged to expense for current period sales | ||||||||||||||||
| Deduction from reserves for current period claims | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Balance at end of period | $ | $ | $ | $ | ||||||||||||
Required Member Distributions
Prior to the Business Combination
and pursuant to the then applicable First Amended and Restated Limited Liability Company Agreement (the “First Purple LLC Agreement”),
Purple LLC was required to distribute to its members an amount equal to
Subscription Agreement and Preemptive Rights
In February 2018, in
connection with the Business Combination, the Company entered into a subscription agreement with Coliseum Capital Partners (“CCP”)
and Blackwell Partners LLC – Series A (“Blackwell”), pursuant to which CCP and Blackwell agreed to purchase from the
Company an aggregate of
Rights of Securities Holders
The holders of certain warrants exercisable into Class A common stock, including CCP, Blackwell and CDF, were entitled to registration rights pursuant to certain registration rights agreements of the Company as of the Business Combination date. In March 2018, the Company filed a registration statement registering these warrants (and any shares of Class A common stock issuable upon the exercise of the warrants), and certain unregistered shares of Class A common stock. The registration statement was declared effective on April 3, 2018. Under the Registration Rights Agreement dated February 2, 2018 between the Company and CCP, Blackwell, and CDF (the “Coliseum Investors”), the Coliseum Investors have the right to make written demands for up to three registrations of certain warrants and shares of Class A common stock held by them, including in underwritten offerings. In an underwritten offering of such warrants and shares of Class A common stock by the Coliseum Investors, the Company will pay underwriting discounts and commissions and certain expenses incurred by the Coliseum Investors. In May 2021, the Coliseum Investors exercised the first of their three written demands for registration in an underwritten offering.
15
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Purple LLC Class B Unit Exchange Right
On February 2, 2018, in connection with the closing of the Business Combination, the Company entered into an exchange agreement with Purple LLC and InnoHold and Class B Unit holders who become a party thereto (the “Exchange Agreement”), which provides for the exchange of Purple LLC Class B Units (the “Class B Units”) and shares of Class B common stock (together with an equal number of Class B Units, the “Paired Securities”) for, at the Company’s option, either (A) shares of Class A common stock at an initial exchange ratio equal to one Paired Security for one share of Class A common stock or (B) a cash payment equal to the product of the average of the volume-weighted closing price of one share of Class A common stock for the ten trading days immediately prior to the date InnoHold or other Class B Unit holders deliver a notice of exchange multiplied by the number of Paired Securities being exchanged. In December 2018, InnoHold distributed Paired Securities to Terry Pearce and Tony Pearce who agreed to become parties to the Exchange Agreement. In June 2019, InnoHold distributed Paired Securities to certain current and former employees who also agreed to become parties to the exchange agreement. Holders of Class B Units may elect to exchange all or any portion of their Paired Securities as described above by delivering a notice to Purple LLC.
In certain cases, adjustments to the exchange ratio will occur in case of a split, reclassification, recapitalization, subdivision or similar transaction of or relating to the Class B Units or the shares of Class A common stock and Class B common stock or a transaction in which the Class A common stock is exchanged or converted into other securities or property. The exchange ratio will also adjust in certain circumstances when the Company acquires Class B Units other than through an exchange for its shares of Class A common stock.
The right of a holder of Paired Securities to exchange may be limited by the Company if it reasonably determines in good faith that such restrictions are required by applicable law (including securities laws), such exchange would not be permitted under other agreements of such holder with the Company or its subsidiaries, including the Third Purple LLC Agreement, or if such exchange would cause Purple LLC to be treated as a “publicly traded partnership” under applicable tax laws.
The Company and each holder of Paired Securities shall bear its own expense regarding the exchange except that the Company shall be responsible for transfer taxes, stamp taxes and similar duties.
There were a de minimis number of Paired Securities exchanged for Class A common stock during the six months ended June 30, 2023. There were no Paired Securities exchanged for Class A common stock during the six months ended June 30, 2022.
16
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Maintenance of One-to-One Ratios
The Third Purple LLC Agreement includes provisions intended to ensure that the Company at all times maintains a one-to-one ratio between (a) (i) the number of outstanding shares of Class A common stock and (ii) the number of Class A Units owned by the Company (subject to certain exceptions for certain rights to purchase equity securities of the Company under a “poison pill” or similar stockholder rights plan, if any, certain convertible or exchangeable securities issued under the Company’s equity compensation plan and certain equity securities issued pursuant to the Company’s equity compensation plan (other than a stock option plan) that are restricted or have not vested thereunder) and (b) (i) the number of other outstanding equity securities of the Company (including the warrants exercisable for shares of Class A common stock) and (ii) the number of corresponding outstanding equity securities of Purple LLC. These provisions are intended to result in non-controlling interest holders having a voting interest in the Company that is identical to their economic interest in Purple LLC.
Non-Income Related Taxes
The Company complies with current law and collects and reports on sales tax and other taxes and required fees in all states in which it does business. The application of existing, new or revised taxes and fees on the Company’s business, in particular, sales taxes, VAT and similar taxes would likely increase the cost of doing business online and decrease the attractiveness of selling products over the internet. The application of these taxes and fees on the Company’s business could also create significant increases in internal costs necessary to capture data and collect and remit taxes and pay the fees. There have been, and will continue to be, substantial ongoing costs associated with complying with the various indirect tax requirements in the numerous markets in which the Company conducts or will conduct business.
Legal Proceedings
On September 20, 2020, Purple
LLC filed a complaint in the U.S. Court of International Trade seeking to recover approximately $
17
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
On October 13, 2020, Purple
LLC filed a lawsuit against Responsive Surface Technology, LLC and its parent company, PatienTech, LLC (collectively referred to as “ReST”)
in the U.S. District Court for the District of Utah. The lawsuit arises from ReST’s multiple breaches of its obligations to Purple
LLC, including infringing upon Purple LLC’s trademarks, patents, and trade dress, among other claims. Purple seeks monetary damages,
injunctive relief, and declaratory judgment based on certain conduct by ReST (“Case I”). On October 21, 2020, shortly after
the complaint was filed in Case I, ReST filed a retaliatory lawsuit against Purple LLC, and some of the Company’s board members,
Gary DiCamillo, Adam Gray, Joseph Megibow, Terry Pearce, and Tony Pearce, also in the United States District Court for the District of
Utah (“Case II”). Subsequently, the two cases were consolidated into one. Case II (now combined with Case I) involves many
of the same facts and transactions as Case I. ReST subsequently filed a motion to compel arbitration of the claims in Case I. Purple LLC
opposed the motion to compel arbitration, arguing that ReST waived any rights to arbitration and that all the claims in both cases should
stay in the courts. However, the Court granted ReST’s motion to compel arbitration, and stayed the proceedings in the United States
District Court for the District of Utah. Additionally, the Court ruled that ReST’s claims against the Company’s board members
were not subject to arbitration, and the Court stayed ReST’s claims against those individuals. Pursuant to the Court’s
order, Purple LLC filed a demand for arbitration with the American Arbitration Association (the “AAA”) on September 1, 2021.
ReST filed its counterclaim with the AAA on September 21, 2021. The parties have completed the fact discovery and the expert discovery
phases of the arbitration, and a two-week arbitration hearing began on July 31, 2023. ReST was sanctioned for improper litigation conduct,
and certain defenses and claims were stricken and costs were ordered to be paid by ReST to Purple LLC. Purple LLC seeks over $
On May 3, 2022, Purple LLC
filed a complaint against Photon Interactive UK Limited (“Photon”) in the U.S. District Court for the District of Delaware
regarding a Master Professional Services Agreement with Photon dated on or around November 1, 2019. Pursuant to the agreement, Photon
was required to rebuild Purple Innovation LLC’s website architecture and checkout process. Purple LLC paid Photon $
On August 5, 2022, Purple LLC filed a complaint with the U.S. International Trade Commission (“ITC”) against numerous entities and individuals from the People’s Republic of China and South Korea (“Respondents”) that have been violating Purple LLC’s intellectual property rights related to pillow and seat cushion products. The complaint alleged that the Respondents have been violating 19 U.S.C. § 1337 by importing into the United States, selling for importation into the United States, and/or selling in the United States after importation pillow and seat cushion products that infringe Purple LLC’s trade dress rights or otherwise constitute unfair competition, infringe a certain Purple LLC design patent, infringe certain Purple LLC registered trademarks, and/or infringe certain Purple LLC utility patents, specifically including U.S. Patent No. 10,772,445. The complaint requested at least the following relief: (i) a General Exclusion Order excluding from entry into the United States all pillow and seat cushion products, regardless of the source of those products, that infringe Purple LLC’s asserted intellectual property right; (ii) Limited Exclusion Orders excluding from entry into the United States all pillow and cushion products of the Respondents named in the complaint that infringe any asserted intellectual property rights; and (iii) Cease and Desist Orders against the Respondents named in the complaint barring them from marketing, selling, advertising, or distributing infringing products in the United States, including via on-line retailers. On September 6, 2022, the ITC instituted Investigation No. 337-TA-1328 in response to Purple LLC’s complaint. Fact and expert discovery have been completed. Purple LLC has entered into settlement agreements with seven Respondents, and the ITC issued Consent Orders under which those seven Respondents agreed to no longer import infringing products into the United States. Purple LLC also has voluntarily terminated the Investigation as to a number of other Respondents. No actively litigating Respondents remain in the case. On July 13, 2023, the ITC Administrative Law Judge issued an Initial Determination (“ID”) in which she granted Purple LLC’s Motion for Summary Determination finding that the four remaining Respondents have violated Section 337. The ID also recommended that the ITC issue a General Exclusion Order excluding from entry into the United States all pillows that infringe certain asserted claims of the ‘445 patent, regardless of the source of those products, or, in the alternative, Limited Exclusion Orders directed specifically to the four remaining Respondents. The ID further recommended that the ITC issue Cease and Desist Orders directed specifically to the four remaining Respondents. The ITC’s target date for completion of the investigation is currently November 13, 2023.
18
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
On September 22, 2022, Purple
LLC filed an action in the U.S. District Court for the District of Utah, currently styled Purple Innovation, LLC v. Foshan Dirani
Design Furniture Co., Ltd., No. 2:22-cv-00620-HCN-DAO, against numerous entities and individuals from the People’s Republic
of China and South Korea (“Defendants”). Purple LLC subsequently entered into settlement agreements with seven Defendants
and voluntarily dismissed without prejudice its claims against certain other Defendants. On March 7, 2023, Purple LLC filed a First
Amended Complaint.
In December 2022, Terry and
Tony Pearce, Purple’s founders, filed a complaint against Purple Inc. in the Fourth Judicial District Court in the State of Utah.
The Pearces allege that they each entered into employment agreements with Purple LLC in February 2018. The Pearces contend that certain
corporate transactions between May 2019 and June 2020 reduced their “ownership interest and voting power in Purple” and that,
as a result, they should have continued to be paid a salary between August 2020, when they retired from Purple LLC, and December 2021.
The Pearces calculate that they are each owed “no less than $
On April 3, 2023, InnoHold,
LLC, Terry Pearce, and Tony Pearce (collectively, the “InnoHold Parties”) filed a complaint against Purple LLC in the Delaware
Court of Chancery, captioned InnoHold, LLC et al. v. Purple Innovation, LLC, Case No. 2023-0393-PAF (Del. Ch. Apr. 3, 2023).
The complaint alleges that Purple LLC breached the Second Amended and Restated Limited Liability Company Agreement of Purple Innovation,
LLC, dated as of February 2, 2018 (the “LLC Agreement”), and the implied covenant of good faith and fair dealing contained
therein by failing to pay the full amount of tax distributions owed under the LLC Agreement. The complaint also asserts a claim
for indemnification under the LLC Agreement. The InnoHold Parties seek damages of approximately $
On March 24, 2023, Purple LLC filed a complaint against Tempur Sealy International, Inc., Sealy Technology LLC and Sealy Mattress Manufacturing Co., LLC (collectively, “Sealy”) in the U.S. District Court for the Middle District of North Carolina for infringement of Purple LLC’s U.S. Patent No. 11,317,733 entitled “Mattress Including an Elastomeric Cushioning Element and a Pocketed Coil Layer and Related Methods.” On July 17, 2023, Purple LLC filed a First Amended Complaint further detailing Sealy’s infringement of the patent through Sealy’s direct and indirect infringement by making, using, offering for sale, and/or importing into the United States Sealy FlexGrid Hybrid Construction mattresses. Purple seeks judgment of willful infringement, trebled damages, a permanent injunction, prejudgment and post-judgment interest, costs, expenses, and attorneys’ fees. Sealy filed its response to Purple’s First Amended Complaint on July 31, 2023. Discovery has yet to commence; and no trial date has been set. Purple LLC intends to vigorously litigate its claims to resolution.
On March 27, 2023, Sealy Technology, LLC (“Sealy Technology”) filed a Petition for Cancellation with the U.S. Patent and Trademark Office, Trademark Trial and Appeal Board (“TTAB”), seeking cancellation of Purple LLC’s Trademark Registration No. 5,416,146 for HYPER-ELASTIC POLYMER in Class 20 for “elastomeric polymer in pre-shamed form sold as an integral component of pillows” (the “Registration”). On June 6, 2023, Purple LLC filed a motion to dismiss (the “Motion”). On June 9, 2023, the TTAB suspended proceedings pending the resolution of the Motion. On June 18, 2023, Sealy Technology filed a response to the Motion, along with an Amended Petition. The Amended Petition seeks cancellation of the Registration on the basis that the term is generic. Purple LLC filed its reply in support of the Motion, thus completing the briefing, on July 10, 2023. The Motion remains pending, and the proceeding remains suspended pending its resolution. Purple LLC intends to vigorously defend Sealy Technology’s petition.
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.
19
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
15. Related Party Transactions
The Company had various transactions with entities or individuals which are considered related parties.
Coliseum Capital Management, LLC
Immediately following the Business Combination, Adam Gray was appointed to the Company’s Board. Mr. Gray is a manager of Coliseum Capital, LLC, which is the general partner of CCP and CDF, and he is also a managing partner of CCM, which is the investment manager of Blackwell and also manages investment funds and accounts. Mr. Gray has voting and dispositive control over securities held by CCP, CDF and Blackwell which were also Lenders under the Amended and Restated Credit Agreement. See Note 14—Commitments and Contingencies—Subscription Agreement and Preemptive Rights for further discussion.
On September 17, 2022, the
Company received an unsolicited and non-binding proposal from Coliseum on behalf of certain investment funds and accounts to acquire the
remaining outstanding common stock of the Company not already beneficially owned by Coliseum for $
Upon adopting the Rights Agreement,
The initial issuance of the Rights as a dividend had no financial accounting or reporting impact. The fair value of the Rights was nominal since the Rights were not exercisable when issued and no value was attributable to them. Additionally, the Rights did not meet the definition of a liability under GAAP and was therefore not accounted for as a long-term obligation. Accordingly, the Rights Agreement had no impact on the Company’s consolidated financial statements.
On February 14, 2023, the
Company declared a dividend of one new PRPLS for each
On February 21, 2023, Coliseum filed a lawsuit against the Company and several members of its Board alleging that the Company and the named directors authorized an improper dividend of preferred stock in bad faith to impede stockholder voting rights and interfered with Coliseum’s nomination of a competing slate of director candidates ahead of our 2023 annual meeting of stockholders. On April 19, 2023, the Company entered into a Cooperation Agreement with Coliseum to resolve the litigation. The Cooperation Agreement, which became effective on April 27, 2023, resulted in the following:
| ● | The size of the Board was increased from seven directors to eight directors. | |
| ● | The Company amended and restated its Second Amended and Restated Bylaws to include references to the Lead Independent Director Charter. | |
| ● | Board member and Coliseum managing partner Adam Gray was appointed Chairman of the Board. | |
| ● | Board member Gary DiCamillo continued to serve as Lead Independent Director and was appointed chair of the Nomination and Governance Committee. |
20
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
| ● | Paul Zepf and Pano Anthos resigned as directors of the Company. | |
| ● | The Board appointed S. Hoby Darling, R. Carter Pate, and Erika Serow to fill the vacancies created by the increased the size of the board and the resignations of Mr. Zepf and Mr. Anthos. | |
| ● | Scott Peterson, a stockholder and Board Observer since the Company’s acquisition of Intellibed, was included as a nominee on the Board’s slate of directors at the 2023 Annual Meeting in place of Dawn Zier, who had previously announced her decision not to stand for re-election. | |
| ● | Other than as described above with respect to Dawn Zier, the Board nominated all incumbent directors for election at our annual meetings of stockholders to be held in 2023 and 2024. | |
| ● | The Company amended its Corporate Governance Guidelines for Operation of the Board of Directors and adopted a Lead Independent Director Charter to provide for the responsibilities of the Lead Independent Director. |
| ● | The Company terminated the stockholder rights agreement adopted on September 25, 2022 and agreed not to adopt a new stockholder rights agreement prior to the termination of the Cooperation Agreement without Coliseum’s prior consent. As a result, all shares of preferred stock previously designated as Series A Junior Participating Preferred Stock were eliminated and returned to the status of authorized but unissued shares of preferred stock, without designation. | |
| ● | The Company redeemed all outstanding shares of PRPLS and agreed not
to issue any similar security or take any other action prior to the termination of the Cooperation Agreement that would change the stockholder
voting standards from those in effect prior to the issuance of the PRPLS. As a result, all shares of preferred stock previously designated
as PRPLS were eliminated and returned to the status of authorized but unissued shares of preferred stock, without designation. The Company
made a $ |
| ● | The Company agreed to reimburse Coliseum for up to $ | |
| ● | The Company terminated the Special Committee. | |
| ● | Coliseum dismissed its litigation against the Company. | |
| ● | At the 2023 and 2024 annual meetings of stockholders, Coliseum caused or will cause all of the common stock that Coliseum or any of its affiliates had the direct or indirect right to vote as of the applicable record date, to be present in person or by proxy for quorum purposes and to be voted (i) in favor of each of the candidates for election on the Company’s slate of nominees for election to the Board, (ii) against any stockholder nominations for any other directors, and (iii) against any proposals or resolutions to remove any member of the Board other than for cause. | |
| ● | Coliseum agreed to be bound by customary standstill restrictions, including, among others, agreements not to acquire additional shares of the Company’s securities that would cause Coliseum’s ownership of Voting Securities to exceed | |
| ● | Coliseum agreed to condition any proposal from it or any of its affiliates to acquire the Company or all or substantially all of the outstanding stock of the Company held by stockholders unaffiliated with Coliseum on (i) such transaction being negotiated by, and subject to the approval of, a special committee of directors of the Board who are independent with respect to Coliseum and disinterested under Delaware law and (ii) a nonwaivable condition that such transaction be approved by the affirmative vote of the holders of a majority of the Company’s outstanding common stock not beneficially owned by Coliseum or its affiliates or other parties with a material conflict of interest in such transaction. | |
| ● | The Cooperation Agreement shall terminate on the day following the date on which the 2024 annual meeting of stockholders is held. |
21
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Purple Founder Entities
TNT Holdings, LLC (herein “TNT Holdings”), EdiZONE, LLC, (herein EdiZONE an entity wholly owned by TNT Holdings) and InnoHold (collectively the “Purple Founder Entities”) were entities under common control with Purple LLC prior to the Business Combination. TNT Holdings and InnoHold are majority owned and controlled by Terry Pearce and Tony Pearce (the “Purple Founders”), who were appointed to the Company’s Board following the Business Combination. InnoHold was a majority shareholder of the Company until it sold a portion of its interests in a secondary public offering in May 2020 and the remainder of its interests in a secondary public offering in September 2020. The Purple Founders also resigned as employees of Purple LLC and retired from the Company’s Board in August 2020.
TNT Holdings owned the Alpine
facility Purple LLC has been leasing since 2010, and the Purple Founders informed Purple LLC that TNT Holdings recently transferred ownership
to 123E LLC, an entity controlled by the Purple Founders. Effective as of October 31, 2017, Purple LLC entered into an Amended and Restated
Lease Agreement with TNT Holdings. The Company determined that neither TNT Holdings nor 123E LLC are a VIE as neither the Company nor
Purple LLC hold any explicit or implicit variable interest in TNT Holdings or 123E LLC and do not have a controlling financial interest
in TNT Holdings or 123E LLC. Purple LLC incurred $
During the six months ended June 30, 2023, a former employee of Purple LLC who received distributions of Paired Securities from InnoHold exchanged a minimal number of Paired Securities for Class A common stock. There were no such exchanges during the six months ended June 30, 2022.
16. Stockholders’ Equity
Class A Common Stock
The Company has
Class B Common Stock
The Company has
In connection with the Business
Combination, approximately
22
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Preferred Stock
The Company has
On February 14, 2023, the
Company declared a dividend of one new PRPLS for each
Sponsor Warrants
There were
Noncontrolling Interest
Noncontrolling interest (“NCI”)
is the membership interest in Purple LLC held by holders other than the Company. At June 30, 2023 and December 31, 2022, the combined
NCI percentage in Purple LLC was
17. Income Taxes
The Company’s sole material asset is Purple LLC, which is treated as a partnership for U.S. federal income tax purposes and for purposes of certain state and local income taxes. Purple LLC’s net taxable income and any related tax credits are passed through to its members and are included in the members’ tax returns, even though such net taxable income or tax credits may not have actually been distributed. While the Company consolidates Purple LLC for financial reporting purposes, the Company will be taxed on its share of earnings of Purple LLC not attributed to the noncontrolling interest holders, which will continue to bear their share of income tax on its allocable earnings of Purple LLC. The income tax burden on the earnings taxed to the noncontrolling interest holders is not reported by the Company in its consolidated financial statements under GAAP.
23
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company reported income
tax expense related to various state taxes of $
In connection with the Business
Combination, the Company entered into a tax receivable agreement with InnoHold, which provides for the payment by the Company to InnoHold
of
As noncontrolling interest
holders exercise their right to exchange or cause Purple LLC to redeem all or a portion of their Class B Units, a tax receivable agreement
liability may be recorded based on
The estimation of liability
under the tax receivable agreement is by its nature imprecise and subject to significant assumptions regarding the amount and timing of
future taxable income. As of June 30, 2023, the Company estimated that if all the remaining
24
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 June 30, 2023, no material uncertain tax positions were recognized as liabilities in the condensed consolidated financial statements.
18. Net Loss Per Common Share
Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of Class A stock outstanding during each period. Diluted net income (loss) per share reflects the weighted-average number of common shares outstanding during the period used in the basic net income (loss) computation plus the effect of common stock equivalents that are dilutive.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net loss attributable to Purple Innovation, Inc. – basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Less – net loss attributed to noncontrolling interest | ( | ) | ( | ) | ||||||||||||
| Net loss attributable to Purple Innovation, Inc. – diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator: | ||||||||||||||||
| Weighted average shares—basic | ||||||||||||||||
| Add – dilutive effect of Class B shares | ||||||||||||||||
| Weighted average shares—diluted | ||||||||||||||||
| Net loss per common share: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
For the three and six months
ended June 30, 2023, the Company excluded
25
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
19. Equity Compensation Plans
2017 Equity Incentive Plan
The Purple Innovation, Inc.
2017 Equity Incentive Plan, as amended and restated (the “2017 Plan”), provides for grants of stock options, stock appreciation
rights, restricted stock units and other stock-based awards. Directors, officers and other employees and subsidiaries and affiliates,
as well as others performing consulting or advisory services for the Company and its subsidiaries, will be eligible for grants under the
2017 Plan. As of June 30, 2023, an aggregate of
Class A Stock Awards
In June 2023, the Company
granted stock awards under the 2017 Incentive Plan to non-executive directors on the Board. The stock awards vested immediately and the
Company issued
Amended and Restated Grant Agreements
On March 15, 2023, in accordance
with the 2017 Incentive Plan, the Company entered into amended and restated grant agreements relating to stock options and restricted
stock unit awards previously granted to the Company’s chief executive officer in March 2022 and June 2022. The amended agreements
revised the vesting schedule of the awards included in each grant. Pursuant to these agreements,
Employee Stock Options
Following receipt of shareholder
approval of certain amendments to the 2017 Plan at the 2023 Annual Meeting, the
| Fair market value | $ | |||
| Exercise price | $ | |||
| Risk free interest rate | % | |||
| Expected term in years | ||||
| Expected volatility | % | |||
| Expected dividend yield |
| Options (in thousands) | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term in Years | Intrinsic Value (in thousands) | |||||||||||||
| Options outstanding as of January 1, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Forfeited/cancelled | ( | ) | ||||||||||||||
| Options outstanding as of June 30, 2023 | $ | $ | ||||||||||||||
26
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
| Exercise Prices | Number of Options Outstanding (in thousands) | Weighted Average Remaining Life (Years) | Number of Options Exercisable (in thousands) | Weighted Average Remaining Life (Years) | Intrinsic Value (in thousands) | |||||||||||||||||
| $ | $ | |||||||||||||||||||||
| Options (in thousands) | Weighted Average Grant Date Fair Value | |||||||
| Nonvested options as of January 1, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Nonvested options as of June 30, 2023 | $ | |||||||
The estimated fair value of
Company stock options is amortized over the options vesting period on a straight-line basis. For the three and six months ended June 30,
2023, the Company recognized stock option expense of $
As of June 30, 2023, outstanding
stock options had $
27
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Employee Restricted Stock Units
During the second quarter
of 2023, the Company granted
| Trading price of common stock on measurement date | $ | |||
| Risk free interest rate | % | |||
| Expected life in years | ||||
| Expected volatility | % | |||
| Expected dividend yield |
| Number Outstanding (in thousands) |
Weighted Average Grant Date Fair Value |
|||||||
| Nonvested restricted stock units as of January 1, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ( |
) | ||||||
| Forfeited | ( |
) | ||||||
| Nonvested restricted stock units as of June 30, 2023 | $ | |||||||
The Company recorded restricted
stock unit expense of $
As of June 30, 2023, outstanding
restricted stock units had $
28
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 June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Cost of revenues | $ | $ | $ | $ | ||||||||||||
| Marketing and sales | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total non-cash stock-based compensation | $ | $ | $ | $ | ||||||||||||
20. Employee Retirement Plan
In July 2018 the Company established
a 401(k) plan that qualifies as a deferred compensation arrangement under Section 401 of the IRS Code. All eligible employees over
the age of 18 and with 4 months’ service are eligible to participate in the plan.
21. Subsequent Events
New Credit Agreements
On August 7, 2023, Purple
LLC, Purple Inc. and Intellibed, (collectively the “Loan Parties”) entered into a term loan credit agreement (the “Term
Loan Agreement”) with Callodine Commercial Finance, LLC and a group of financial institutions (the “Term Loan Lenders”).
Also, on August 7, 2023, the Loan parties entered into a separate financing arrangement with the Bank of Montreal and a group of financial
institutions (collectively the “ABL Lenders”) that provides for a revolving asset-based credit facility (the “ABL Agreement”).
Pursuant to entering into these agreements, the Company incurred fees and expenses of $
Term Loan Agreement and Term Loan Pledge and Security Agreement
The Term Loan Agreement provides for up to $
Pursuant to a pledge and security agreement, the Loan Parties’ obligations under the Term Loan Agreement are secured by a perfected second-priority security interest in the cash, inventory and accounts receivable of the Loan Parties, and a perfected first-priority security interest in substantially all other assets of the Loan Parties, including, without limitation, the intellectual property and equipment of the Loan Parties, subject to certain exceptions.
The Term Loan Agreement provides for customary events of default such as for non-payment and failure to perform or observe covenants. The Term Loan Agreement contains customary indemnifications that benefit the Term Loan Lenders.
The Term Loan Agreement also contains representations, warranties and certain covenants of the Loan Parties. While any amounts are outstanding under the Term Loan Agreement, the Loan Parties are subject to a number of affirmative and negative covenants, including covenants regarding dispositions of property, investments, forming or acquiring subsidiaries, business combinations or acquisitions, incurrence of additional indebtedness, and transactions with affiliates, among other customary covenants, each of which are subject to certain exceptions. In particular, the Loan Parties are (i) restricted from incurring additional debt up to certain amounts, subject to limited exceptions, as set forth in the Term Loan Agreement, and (ii) required to maintain a minimum revolving loan availability under the ABL Agreement. Each Loan Party is also restricted from paying dividends or making other distributions or payments on its respective capital stock, subject to limited exceptions. If the Loan Parties fail to perform their obligations under these and other covenants, or should any event of default occur, the Term Loans, together with accrued interest, could be declared immediately due and payable.
29
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
ABL Agreement and ABL Pledge and Security Agreement
The ABL Agreement provides for up to $50.0 million of revolving loans subject to a borrowing base calculation (with sub-facilities for swing line loans and the issuance of letters of credit), with incremental increases available up to $20.0 million, subject to certain conditions (the “ABL Loans”). No funds were drawn under the ABL Agreement at closing. The Company anticipates that any funds drawn from under the ABL Agreement will be used to finance permitted acquisitions defined in the agreement and for working capital, capital expenditures and other general corporate purposes. Outstanding principal and accrued interest on the ABL Loans shall be repaid on August 7, 2026.
The borrowing rates under
the ABL Agreement will accrue on a three-tiered grid based on revolving availability, ranging from
Pursuant to a pledge and security agreement, the Loan Parties’ obligations under the ABL Agreement are secured by a perfected first-priority security interest in the cash, inventory and accounts receivable of the Loan Parties, and a perfected second-priority security interest in substantially all of the other assets of the Loan Parties, subject to certain exceptions.
The ABL Agreement provides for customary events of default such as non-payment and failure to perform or observe covenants. The ABL Agreement contains customary indemnifications that benefit the ABL Lenders.
The ABL Agreement also contains representations, warranties and certain covenants of the Loan Parties. The Loan Parties are subject to affirmative and negative covenants, including covenants regarding dispositions of property, investments, forming or acquiring subsidiaries, business combinations or acquisitions, incurrence of additional indebtedness, and transactions with affiliates, among other customary covenants, in each case, subject to certain exceptions. In particular, the Loan Parties are (i) restricted from incurring additional debt up to certain amounts, subject to limited exceptions, as set forth in the ABL Agreement, and (ii) if revolving availability under the ABL Agreement is less than a specified amount, required to maintain a minimum Consolidated Fixed Charge Coverage Ratio (as defined in the ABL Agreement), and (iii) required to maintain a specified minimum revolving availability. Each Loan Party is also restricted from paying dividends or making other distributions or payments on its respective capital stock, subject to limited exceptions. If the Loan Parties fail to perform their obligations under these and other covenants, or should any event of default occur, the revolving loan commitments under the ABL Agreement may be terminated and any outstanding ABL Loans, together with accrued interest, could be declared immediately due and payable and any outstanding letters of credit may be required to be cash collateralized.
Termination of 2020 Credit Agreement
In connection with the Company’s execution of the Term Loan Agreement and ABL Credit Agreement, the Company terminated its 2020 Credit Agreement. The Company had no outstanding borrowings under the term loan or the revolving line of credit at the time of termination.
30
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to provide a more comprehensive review of the operating results and financial condition of Purple Innovation, Inc. than can be obtained from reading the Unaudited Condensed Consolidated Financial Statements alone. The discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and the notes thereto included in “Part I. Item 1. Financial Statements.”
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that represent our current expectations and beliefs. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws. In some cases, you can identify these statements by forward-looking words such as “believe,” “expect,” “project,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “will,” “would,” “could,” “may,” “might,” the negative of these words and other similar words.
All forward-looking statements included in this Quarterly Report are made only as of the date thereof. It is routine for our internal projections and expectations to change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end of the next quarter or year. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses (including the discussion under the heading “Outlook for Growth”), and other characterizations of future events or circumstances are forward-looking statements.
We caution and advise readers that these statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those included in the “Risk Factors” section of this Quarterly Report and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 22, 2023, as amended on May 1, 2023. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements and investors are cautioned not to place undue reliance on any such statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.
Overview of Our Business
Our mission is to help people feel and live better through innovative comfort solutions.
We are an omni-channel Company that began as a digitally-native vertical brand founded on comfort product innovation with premium offerings. We design and manufacture a variety of innovative, branded and premium comfort products, including mattresses, pillows, cushions, frames, sheets, duvets, duvet covers, and other products. Our products are the result of over 30 years of innovation and investment in proprietary and patented comfort technologies and the development of our own manufacturing processes. Our proprietary Hyper-Elastic Polymer gel technology underpins many of our comfort products and provides a range of benefits that differentiate our offerings from other competitors’ products. We market and sell our products directly to consumers through our e-commerce and Purple owned retail showroom channels, online marketplaces and retail wholesale partners.
Organization
Our business consists of Purple Inc. and its consolidated subsidiary, Purple LLC. Purple Inc. was incorporated in Delaware on May 19, 2015 as a special purpose acquisition company under the name of GPAC. On February 2, 2018, Purple Inc. consummated a transaction structured similar to a reverse recapitalization pursuant to which Purple Inc. acquired an equity interest in Purple LLC as holder of all Class A units and became its sole managing member. As the sole managing member of Purple LLC, Purple Inc., through its officers and directors, is responsible for all operational and administrative decision making and control of the day-to-day business affairs of Purple LLC without the approval of any other member. At June 30, 2023, Purple Inc. had a 99.6% economic interest in Purple LLC while other Class B Unit holders had the remaining 0.4%.
On August 31, 2022, we acquired all the issued and outstanding stock of Intellibed pursuant to the Merger Agreement. On October 3, 2022, Purple Inc. contributed 100% of the membership interest in Intellibed to Purple LLC and Intellibed became a wholly owned subsidiary of Purple LLC. We believe the addition of Intellibed has increased product offerings to customers, expanded market opportunities, capitalized on synergies of the combined companies, and increased opportunities for innovation. In addition, the acquisition consolidated ownership of our intellectual property licensed to Intellibed and we believe will enable us to more fully capitalize on growing demand for products with our proprietary gel technologies. For further discussion see Note 4 — Acquisition.
31
Executive Summary – Results of Operations
Net revenues decreased 16.1% to $120.9 million and 19.9% to $230.2 million for the three and six months ended June 30, 2023, respectively, when compared to the corresponding periods in the prior year. These decreases were primarily due to continued softening demand in the industry for home-related products, inflationary pressure on consumer discretionary spending, forward buying of consumers in recent years, industry-standard price reductions on the sell-in of new mattress and adjustable base floor models to wholesale partners and increased discounting of discontinued models sold through our DTC channels. Additionally, although we began ramping up marketing efforts in mid-May to support our new product lineups, the planned pullback in advertising spend prior to that impacted demand during the quarter.
Gross profit decreased 21.2% to $38.5 million and 18.7% to $81.7 million for the three and six months ended June 30, 2023, respectively, when compared to the corresponding periods in the prior year. These decreases were primarily due to corresponding decreases in sales volume. Our gross profit percentage on a year-to-date basis, which increased to 35.5% of net revenues in 2023 from 35.0% in 2022, benefited from the ongoing realization of efficiency and cost saving initiatives put in place during the first half of 2022. These benefits were offset in part by new mattress and base floor models being sold to our wholesale partners at reduced pricing coupled with increased discounting of discontinued models sold through our DTC channels as we transitioned to our new Premium and Luxe product lineups.
Operating expenses increased 24.4% to $75.7 million and 7.7% to $141.0 million for the three and six months ended June 30, 2023, respectively, when compared to the corresponding periods in the prior year. These increases were primarily due to legal and professional fees of $8.2 million and $14.1 million incurred by the Special Committee during the three and six months ended June 30, 2023, respectively. Included in those amounts are a $4.0 million accrual made in the second quarter of 2023 for the settlement amount owed to Coliseum. Marketing and sales expenses were $6.0 million higher in the second quarter due mainly to the increased number of showrooms and the associated costs, increased wholesale marketing costs and increased advertising spend to align with the launch of our new Premium and Luxe product lineups in May 2023.
Other expense totaled $1.7 million for the six months ended June 30, 2023 compared to other income of $2.4 million for the six months ended June 30, 2022. Other expense in 2023 included a $1.2 million loss on extinguishment of the Company’s term loan during the first quarter. Other income in 2022 primarily reflected a $4.3 million gain related to a decrease in the fair value of the sponsor warrants outstanding at the end of June 30, 2022.
Net loss was $37.5 million and $60.8 million for the three and six months ended June 30, 2023, respectively, compared to net losses of $29.2 million and $21.8 million for the three and six months ended June 30, 2022, respectively.
32
Recent Developments in Our Business
Operational Developments
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. Although the response to our new products and new brand positioning has been positive, we continue to experience softening demand for home-related products in 2023 due to forward buying in recent years and inflationary pressures on consumer discretionary spending. Also, as consumer spending habits have moved away from the COVID era e-commerce spike in purchases to brick and mortar buying, we have invested in showroom expansion and grown the number of Purple owned retail showrooms to 56 at June 30, 2023 from 40 at the end of June 30, 2022. Although we added only one new showroom during the first six months of 2023, we expect to add additional new showrooms across the remainder of the year. In addition, we have focused on growing our placements with wholesale partners and improving wholesale door productivity. In the second quarter, less than half of our approximately 3,300 wholesale doors were transitioned to our new line of mattress products. We expect to convert the remaining wholesale doors to our new product lineup by the end of the year. Showroom expansion and improving the sales productivity of both our wholesale doors and existing showrooms remain primary focuses and are critical components of our strategy to respond to shifting demand patterns. After several years of hyper growth and increased investments to support current and future expansion, we are building the framework for improved operational maturity and accountability after focusing on right-sizing our operations, improving our execution, and refining our strategies that will drive share gains in the premium mattress category and position us for accelerated growth. Beginning in 2022 and continuing into 2023, we purposely reduced our advertising spending to improve marketing efficiency, conserve profitability in a challenging macroeconomic environment and align spending with current demand levels. With the introduction of our new product lineups, we initiated a new marketing campaign and increased advertising spend in May and June 2023. We believe we have set the right course for the next stage of growth for the Company. June, the first full month with our new product in-market, was the strongest month of 2023 with a revenue run rate up double digits to the first 5 months of the year.
Coliseum Cooperation Agreement
On February 21, 2023, Coliseum filed a lawsuit against us and several members of our Board alleging that we and the named directors authorized an improper dividend of preferred stock in bad faith to impede stockholder voting rights and interfered with Coliseum’s nomination of a competing slate of director candidates ahead of our 2023 annual meeting of stockholders. On April 19, 2023, we entered into a Cooperation Agreement with Coliseum to resolve the litigation. The Cooperation Agreement, which became effective on April 27, 2023, resulted in the following:
| ● | The size of the Board was increased from seven directors to eight directors. |
| ● | We amended and restated our Second Amended and Restated Bylaws to include references to our Lead Independent Director Charter. |
| ● | Board member and Coliseum managing partner Adam Gray was appointed Chairman of the Board. |
| ● | Board member Gary DiCamillo continued to serve as Lead Independent Director and was appointed chair of the Nomination and Governance Committee. |
| ● | Paul Zepf and Pano Anthos resigned as directors of the Company. |
| ● | The Board appointed S. Hoby Darling, R. Carter Pate, and Erika Serow to fill the vacancies created by the increased the size of the board and the resignations of Mr. Zepf and Mr. Anthos. |
| ● | Scott Peterson, a stockholder and Board Observer since our acquisition of Intellibed, was included as a nominee on the Board’s slate of directors at the 2023 Annual Meeting in place of Dawn Zier, who had previously announced her decision not to stand for re-election. |
| ● | Other than as described above with respect to Dawn Zier, the Board nominated all incumbent directors for election at our annual meetings of stockholders to be held in 2023 and 2024. |
| ● | We amended our Corporate Governance Guidelines for Operation of the Board of Directors and adopted a Lead Independent Director Charter to provide for the responsibilities of the Lead Independent Director. |
| ● | We terminated the stockholder rights agreement adopted on September 25, 2022 and agreed not to adopt a new stockholder rights agreement prior to the termination of the Cooperation Agreement without Coliseum’s prior consent. As a result, all shares of preferred stock previously designated as Series A Junior Participating Preferred Stock were eliminated and returned to the status of authorized but unissued shares of preferred stock, without designation. |
| ● | We redeemed all outstanding shares of PRPLS and agreed not to issue any similar security or take any other action prior to the termination of the Cooperation Agreement that would change the stockholder voting standards from those in effect prior to the issuance of the PRPLS. As a result, all shares of preferred stock previously designated as PRPLS were eliminated and returned to the status of authorized but unissued shares of preferred stock, without designation. We made a $0.1 million payment to redeem the PRPLS based on a record date as of April 28, 2023. The PRPLS redemption payment was reflected in our consolidated balance sheet as a reduction to additional paid-in capital. |
| ● | We agreed to reimburse Coliseum for up to $4.0 million of out-of-pocket fees, costs, and expenses incurred in connection with the lawsuit. |
| ● | We terminated the Special Committee. |
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| ● | Coliseum dismissed its litigation against us. |
| ● | At the 2023 and 2024 annual meetings of stockholders, Coliseum caused or will cause all of the common stock that Coliseum or any of its affiliates had the direct or indirect right to vote as of the applicable record date, to be present in person or by proxy for quorum purposes and to be voted (i) in favor of each of the candidates for election on the Company’s slate of nominees for election to the Board, (ii) against any stockholder nominations for any other directors, and (iii) against any proposals or resolutions to remove any member of the Board other than for cause. |
| ● | Coliseum agreed to be bound by customary standstill restrictions, including, among others, agreements not to acquire additional shares of the Company’s securities that would cause Coliseum’s ownership of Voting Securities to exceed 44.4% of the total outstanding Common Stock (other than acquisitions directly from the Company), engage in proxy solicitations and related matters, form or join any “group” with respect to shares of the Company, encourage others to pursue a “contested solicitation,” or make any public proposals, subject to certain exceptions. |
| ● | Coliseum agreed to condition any proposal from it or any of its affiliates to acquire the Company or all or substantially all of the outstanding stock of the Company held by stockholders unaffiliated with Coliseum on (i) such transaction being negotiated by, and subject to the approval of, a special committee of directors of the Board who are independent with respect to Coliseum and disinterested under Delaware law and (ii) a nonwaivable condition that such transaction be approved by the affirmative vote of the holders of a majority of the Company’s outstanding common stock not beneficially owned by Coliseum or its affiliates or other parties with a material conflict of interest in such transaction. |
| ● | The Cooperation Agreement shall terminate on the day following the date on which the 2024 annual meeting of stockholders is held. |
Shelf Registration Statement and Equity Financing
On January 30, 2023, the Form S-3 shelf registration statement we filed with the SEC in December 2022 became effective. As a result, we may offer and sell from time to time, in one or more series or issuances and on terms that we will determine at the time of the offering, any combination of the securities described in the registration statement, up to an aggregate amount of $90.0 million.
In February 2023, we completed an underwritten offering of 13.4 million shares of Class A common stock at a public offering price of $4.50 per share. The underwriters did not exercise their over-allotment option. The aggregate net proceeds received by us from the offering, after deducting offering fees and expenses of $3.3 million, totaled $57.0 million.
Debt Financing
On August 7, 2023, Purple LLC, Purple Inc. and Intellibed, (collectively the “Loan Parties”) entered into a term loan credit agreement (the “Term Loan Agreement”) with Callodine Commercial Finance, LLC and a group of financial institutions. Also, on August 7, 2023, the Loan parties entered into a separate financing arrangement with the Bank of Montreal and a group of financial institutions (collectively the “ABL Lenders”) that provides for a revolving asset-based credit facility (the “ABL Agreement”). Pursuant to entering into these agreements, the Company incurred fees and expenses of $3.1 million that will be reflected as debt issuance costs in the third quarter of 2023.
The Term Loan Agreement provides for up to $25.0 million of term loans, with up to $5.0 million of incremental term loans available, subject to certain conditions (collectively, the “Term Loans”). Proceeds from the Term Loans, which were fully drawn at closing, will be used for general corporate purposes. The borrowing rates under the Term Loan Agreement are based on SOFR, plus a credit spread adjustment of 0.15% per annum, plus 8.5% per annum, with a SOFR floor of 2.0% per annum. The Term Loans will be repaid at the earlier of (a) a three-year amortization schedule ending on August 7, 2026 or (b) the payment in full of the ABL Agreement. The Term Loans may be prepaid in whole or in part at any time, but subject to a prepayment premium. There may also be mandatory prepayment obligations based on certain asset dispositions, casualty events and extraordinary receipts. Once repaid, no portion of the Term Loans may be reborrowed.
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Pursuant to a pledge and security agreement, the Loan Parties’ obligations under the Term Loan Agreement are secured by a perfected second-priority security interest in the cash, inventory and accounts receivable of the Loan Parties, and a perfected first-priority security interest in substantially all other assets of the Loan Parties, including, without limitation, the intellectual property and equipment of the Loan Parties, subject to certain exceptions.
The ABL Agreement provides for up to $50.0 million of revolving loans subject to a borrowing base calculation (with sub-facilities for swing line loans and the issuance of letters of credit), with incremental increases available up to $20.0 million, subject to certain conditions (the “ABL Loans”). No funds were drawn under the ABL Agreement at closing. The Company anticipates that any funds drawn from under the ABL Agreement will be used to finance permitted acquisitions, as defined in the ABL Agreement and for working capital, capital expenditures and other general corporate purposes. Outstanding principal and accrued interest on the ABL Loans shall be repaid on August 7, 2026.
The borrowing rates under the ABL Agreement will accrue on a three-tiered grid based on revolving availability, ranging from (i) SOFR, plus a credit spread adjustment of 0.10% per annum, plus 2.75% per annum to (ii) SOFR, plus a credit spread adjustment of 0.10% per annum, plus 3.25% per annum, with a SOFR floor of 0% per annum. The ABL Loans may be prepaid in whole or in part at any time without premium or penalty, subject to reimbursement of certain costs. There may be mandatory prepayment obligations based on certain asset dispositions, casualty events, equity issuances and extraordinary receipts.
Pursuant to a pledge and security agreement, the Loan Parties’ obligations under the ABL Agreement are secured by a perfected first-priority security interest in the cash, inventory and accounts receivable of the Loan Parties, and a perfected second-priority security interest in substantially all of the other assets of the Loan Parties, subject to certain exceptions.
On September 3, 2020, Purple LLC entered into a financing arrangement with KeyBank National Association and a group of financial institutions (the “2020 Credit Agreement”). The 2020 Credit Agreement provided for a $45.0 million term loan and a $55.0 million revolving line of credit. The term loan was to be repaid in accordance with a five-year amortization schedule or prepaid in whole or in part at any time without premium or penalty, subject to reimbursement of certain costs. The revolving credit facility had a term of five years and carried the same interest provisions as the term debt.
On February 17, 2023, we entered into a fifth amendment to the 2020 Credit Agreement. As a condition of entering into the amendment, we made a payment of $24.7 million to satisfy the outstanding balance on the term loan plus accrued interest. The amendment revised various financial covenants and certain definitions of key terms, reduced the amount available under the revolving line of credit to $50.0 million, provided that the maturity date of the 2020 Credit Agreement would spring forward to June 30, 2024 if consolidated EBITDA was not greater than $15.0 million for 2023, reduced limits on maximum growth capital expenditures, and revised the current minimum liquidity covenant. Pursuant to this amendment, we incurred fees and expenses of $2.9 million that were recorded as debt issuance costs in the condensed consolidated balance sheet. The amendment was accounted for as an extinguishment of debt and $1.2 million of unamortized debt issuance costs related to the term loan were recorded as loss on extinguishment of debt in the condensed consolidated statement of operations.
In connection with our execution of the Term Loan Agreement and ABL Agreement, the Company terminated its 2020 Credit Agreement. The Company had no outstanding borrowings under the term loan or the revolving line of credit at the time of termination. The termination was accounted for as an extinguishment of debt and $3.1 million of unamortized debt issuance costs related to the 2020 Credit Agreement will be recorded as a loss on extinguishment of debt in the third quarter of 2023.
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Outlook for Growth
We believe that our four strategic initiatives – accelerating innovation, brand elevation, developing our three distribution channels and operational excellence – will be fundamental to our future success.
To support our plans for future growth and sustained profitability, we are focusing on the following opportunities:
| ● | Strengthen our wholesale relationships, prioritize existing door productivity, and develop and execute our other strategies to meaningfully expand our wholesale business. |
| ● | Expand and mature our fleet of Purple owned retail showrooms in 2023, increase door productivity, provide a brand halo benefit to other channels in the surrounding areas, strengthen the relationship with the consumer, and increase the share of more profitable DTC revenue mix. |
| ● | Build brand position to grow our market share of the premium and luxury mattress categories. We launched our new Premium and Luxe product lineups in the second quarter of 2023. This launch was supported by enhancements to our in-store presence and refinements to our marketing programs and brand messaging. |
| ● | Refine and enhance marketing strategies to reach a broader audience, increase customer engagement and reduce dependency on price promotions as a means of driving sales. |
| ● | Strengthen research and development disciplines and go-to-market processes to further develop our current product categories and position our business to eventually expand to additional categories. |
| ● | Manage production labor and capacity utilization to promote efficient use of our manufacturing facilities as we grow into our production footprint. |
| ● | Manage input costs, operating efficiencies, and pricing to further enhance our gross margin. |
There is no guarantee that we will be able to effectively execute on these opportunities, which are subject to risks, uncertainties, and assumptions that are difficult to predict, including the risks described under “Risk Factors” and elsewhere herein. Therefore, actual results may differ materially and adversely from those described above. In addition, we may, in the future, adapt these focuses in response to changes in the market or our business.
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Operating Results for the Three Months Ended June 30, 2023 and 2022
The following table sets forth for the periods indicated, our results of operations and the percentage of total revenue represented in our condensed consolidated statements of operations:
| Three Months Ended June 30, | ||||||||||||||||
| 2023 | % of Net Revenues |
2022 | % of Net Revenues |
|||||||||||||
| Revenues, net | $ | 120,872 | 100.0 | % | $ | 144,109 | 100.0 | % | ||||||||
| Cost of revenues | 82,408 | 68.2 | 95,297 | 66.1 | ||||||||||||
| Gross profit | 38,464 | 31.8 | 48,812 | 33.9 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Marketing and sales | 46,379 | 38.4 | 40,373 | 28.0 | ||||||||||||
| General and administrative | 26,437 | 21.9 | 18,779 | 13.0 | ||||||||||||
| Research and development | 2,925 | 2.4 | 1,748 | 1.2 | ||||||||||||
| Total operating expenses | 75,741 | 62.7 | 60,900 | 42.3 | ||||||||||||
| Operating loss | (37,277 | ) | (30.8 | ) | (12,088 | ) | (8.4 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (352 | ) | (0.3 | ) | (707 | ) | (0.5 | ) | ||||||||
| Other income (expense), net | 37 | — | (136 | ) | (0.1 | ) | ||||||||||
| Change in fair value – warrant liabilities | — | — | 346 | 0.2 | ||||||||||||
| Total other expense, net | (315 | ) | (0.3 | ) | (497 | ) | (0.3 | ) | ||||||||
| Net loss before income taxes | (37,592 | ) | (31.1 | ) | (12,585 | ) | (8.7 | ) | ||||||||
| Income tax (expense) benefit | (72 | ) | (0.1 | ) | 4,175 | 2.9 | ||||||||||
| Net loss | (37,664 | ) | (31.2 | ) | (8,410 | ) | (5.8 | ) | ||||||||
| Net loss attributable to noncontrolling interest | (155 | ) | (0.1 | ) | (70 | ) | — | |||||||||
| Net loss attributable to Purple Innovation, Inc. | $ | (37,509 | ) | (31.0 | ) | $ | (8,340 | ) | (5.8 | ) | ||||||
Revenues, Net
Net revenues decreased $23.2 million, or 16.1%, to $120.9 million for the three months ended June 30, 2023 compared to $144.1 million for the three months ended June 30, 2022. The decrease in net revenues was primarily due to continued softening demand in the industry for home related products, inflationary pressure on consumer discretionary demand,forward buying of consumers in recent years, price reductions of floor models and increased discounting on discontinued models sold through our DTC channels as we launched our new Premium and Luxe product lineups. The decline in net revenues from a sales channel perspective consisted of DTC net revenues decreasing $13.6 million, or 16.6% and wholesale net revenues declining $9.7 million, or 15.5%. Within DTC, e-commerce net revenues decreased $15.5 million, or 23.1%, while Purple owned retail showroom net revenues increased $2.0 million, or 13.5%. The decrease in e-commerce net revenues reflected the impact of the reasons previously stated. The increase in Purple owned retail showroom net revenue was driven by showrooms increasing from 40 at the end of June 2022 to 56 at the end of June 2023. The decrease in wholesale net revenues, which reflected the impact of the reasons previously stated, was also affected by reduced purchases from existing wholesale partners ahead of the launch of our new Premium and Luxe product lineups coupled with floor models of our new mattress and base products being sold to our wholesale partners at reduced pricing.
Cost of Revenues
Cost of revenues decreased $12.9 million, or 13.5%, to $82.4 million for the three months ended June 30, 2023 compared to $95.3 million for the three months ended June 30, 2022. This decrease was primarily due to a corresponding decrease in sales volume. Our gross profit percentage, which decreased to 31.8% of net revenues in the second quarter of 2023 from 33.9% in the second quarter of 2022, was negatively impacted by the transition to our new Premium and Luxe product lineups whereby floor models of our new mattress and base products were sold to our wholesale partners at reduced pricing coupled with increased discounting of discontinued models sold through our DTC channels.
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Marketing and Sales
Marketing and sales expense increased $6.0 million, or 14.9%, to $46.4 million for the three months ended June 30, 2023 compared to $40.4 million for the three months ended June 30, 2022. Marketing and sales expense as a percentage of net revenues was 38.4% in the second quarter of 2023 compared to 28.0% in the second quarter of 2022. This increase reflected a $3.7 million increase in costs associated with showroom expansion, and a $2.6 million increase in wholesale marketing. In addition, advertising spending increased $1.2 million, or 6.0%, to $20.1 million for the three months ended June 30, 2023 compared to $18.9 million for the three months ended June 20, 2022. Advertising spend began increasing in mid-May to align with the launch of our new Premium and Luxe product lineups. These increases were offset in part by a $1.5 million decrease in other marketing and sales costs.
General and Administrative
General and administrative expense increased $7.7 million, or 40.8%, to $26.4 million for the three months ended June 30, 2023 compared to $18.8 million for the three months ended June 30, 2022. This increase was primarily due to legal and professional fees incurred by the Special Committee, which included a $4.0 million accrual for the settlement amount owed to Coliseum.
Research and Development
Research and development costs increased $1.2 million, or 67.3%, to $2.9 million for the three months ended June 30, 2023 compared to $1.7 million for the three months ended June 30, 2022. This increase primarily reflected our focus on new product innovation initiatives to remain competitive and advance our current product line.
Operating Loss
Operating loss increased $25.2 million to $37.3 million for the three months ended June 30, 2023 compared to $12.1 million for the three months ended June 30, 2022. The larger operating loss primarily resulted from a decrease in gross profit that was driven by lower sales and a reduced gross profit percentage, an increase in higher marketing and sales costs primarily associated with our new product launch, and an increase in general and administrative expense resulting from legal and professional fees incurred by the Special Committee and attributable to the Cooperation Agreement with Coliseum.
Interest Expense
Interest expense totaled $0.4 million for the three months ended June 30, 2023 compared to $0.7 million for the three months ended June 30, 2022. This decrease was primarily due to interest expense incurred during the three months ended June 30, 2022 on the term loan that was paid off in February 2023.
Change in Fair Value – Warrant Liabilities
Unexercised sponsor warrants totaling 1.9 million expired in February 2023 and were cancelled pursuant to the terms of the agreement. These sponsor warrants had no fair value on the date of expiration. During the three months ended June 30, 2022, we recognized a gain of $0.3 million in our condensed consolidated statement of operations related to a decrease in the fair value of the warrants outstanding at the end of the quarter. The 1.9 million sponsor warrants outstanding at June 30, 2022 had a fair value of $0.1 million.
Income Tax (Expense) Benefit
We had income tax expense of $0.1 million for the three months ended June 30, 2023 compared to an income tax benefit of $4.2 million for the three months ended June 30, 2022. The income tax expense amount in 2023 resulted from various state income taxes.
Noncontrolling Interest
We calculate net income or loss attributable to noncontrolling interests on a quarterly basis using their weighted average ownership percentage. Net loss attributed to noncontrolling interests was $0.2 million for the three months ended June 30, 2023 compared to a net loss of $0.1 million for the three months ended June 30, 2022.
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Operating Results for the Six Months Ended June 30, 2022 and 2021
The following table sets forth for the periods indicated, our results of operations and the percentage of total revenue represented in our statements of operations:
| Six Months Ended June 30, | ||||||||||||||||
| 2023 | % of Net Revenues | 2022 | % of Net Revenues | |||||||||||||
| Revenues, net | $ | 230,244 | 100.0 | % | $ | 287,288 | 100.0 | % | ||||||||
| Cost of revenues | 148,557 | 64.5 | 186,850 | 65.0 | ||||||||||||
| Gross profit | 81,687 | 35.5 | 100,438 | 35.0 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Marketing and sales | 84,552 | 36.7 | 90,332 | 31.4 | ||||||||||||
| General and administrative | 50,104 | 21.8 | 36,667 | 12.8 | ||||||||||||
| Research and development | 6,297 | 2.7 | 3,891 | 1.4 | ||||||||||||
| Total operating expenses | 140,953 | 61.2 | 130,890 | 45.6 | ||||||||||||
| Operating loss | (59,266 | ) | (25.7 | ) | (30,452 | ) | (10.6 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (554 | ) | (0.2 | ) | (1,730 | ) | (0.6 | ) | ||||||||
| Other income (expense), net | 110 | — | (119 | ) | — | |||||||||||
| Change in fair value – warrant liabilities | — | — | 4,274 | 1.5 | ||||||||||||
| Loss on extinguishment of debt | (1,217 | ) | (0.5 | ) | — | — | ||||||||||
| Total other income (expense), net | (1,661 | ) | (0.7 | ) | 2,425 | 0.8 | ||||||||||
| Net loss before income taxes | (60,927 | ) | (26.5 | ) | (28,027 | ) | (9.8 | ) | ||||||||
| Income tax benefit (expense) | (144 | ) | (0.1 | ) | 5,986 | 2.1 | ||||||||||
| Net loss | (61,071 | ) | (26.5 | ) | (22,041 | ) | (7.7 | ) | ||||||||
| Net loss attributable to noncontrolling interest | (262 | ) | (0.1 | ) | (199 | ) | (0.1 | ) | ||||||||
| Net loss attributable to Purple Innovation, Inc. | $ | (60,809 | ) | (26.4 | ) | $ | (21,842 | ) | (7.6 | ) | ||||||
Revenues, Net
Net revenues decreased $57.0 million, or 19.9%, to $230.2 million for the six months ended June 30, 2023 compared to $287.3 million for the six months ended June 30, 2022. The decrease in net revenues was primarily due to continued softening demand in the industry for home-related products, inflationary pressure on consumer discretionary demand, forward buying of consumers in recent years, price reductions of floor models and increased discounting on discontinued models sold through our DTC channels as we launched our new Premium and Luxe product lineups. The decline in net revenues from a sales channel perspective consisted of DTC net revenues decreasing $32.6 million, or 19.5% and wholesale net revenues declining $24.4 million, or 20.4%. Within DTC, e-commerce net revenues decreased $37.6 million, or 26.7%, while Purple owned retail showroom net revenues increased $5.0 million, or 18.9%. The decrease in e-commerce net revenues reflected the impact of the reasons previously stated. The increase in Purple owned retail showroom net revenue was driven by showrooms increasing from 40 at the end of June 2022 to 56 at the end of June 2023. The decrease in wholesale net revenues, which reflected the impact of the reasons previously stated, was also affected by reduced purchases from existing wholesale partners ahead of the launch of our new Premium and Luxe product lineups coupled with floor models of our new mattress and base products being sold to our wholesale partners at reduced pricing.
Cost of Revenues
Cost of revenues decreased $38.3 million, or 20.5%, to $148.6 million for the six months ended June 30, 2023 compared to $186.9 million for the six months ended June 30, 2022. This decrease was primarily due to a corresponding decrease in sales volume. Our gross profit percentage, which increased to 35.5% of net revenues in 2023 from 35.0% in 2022, benefited from the ongoing realization of efficiency and cost saving initiatives put in place during the first half of 2022, offset in part floor models of our new mattress and base products being sold to our wholesale partners at reduced pricing coupled with increased discounting of discontinued models sold through our DTC channels as we transitioned to our new Premium and Luxe product lineups. The gross profit percentage in 2022 was adversely impacted by unfavorable cost absorption from lower than planned production volumes in prior months, and elevated levels of materials, labor and overhead costs.
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Marketing and Sales
Marketing and sales expense decreased $5.8 million, or 6.4%, to $84.6 million for the six months ended June 30, 2023 compared to $90.3 million for the six months ended June 30, 2022. This decrease reflected a $10.9 million decline in advertising spending and a $4.9 million decrease in other marketing costs. The reduction in advertising spending was primarily due to management focusing its efforts on improving marketing efficiency with its legacy products and then increasing advertising spend to align with the launch of our new Premium and Luxe product lineups in May 2023. The decrease in other marketing costs reflected the impact of management restructuring the marketing organization in the first half of 2022. These decreases were offset in part by a $9.5 million increase in marketing and sales costs associated with showroom expansion. Marketing and sales expense as a percentage of net revenues was 36.7% during the first six months of 2023 compared to 31.4% for the first six months of 2022. The higher percentage of revenues reflected the impact of lower sales coupled with management’s expanded marketing efforts in the second quarter of 2023 to support the launch of our new Premium and Luxe product lineups in May 2023.
General and Administrative
General and administrative expense increased $13.4 million, or 36.6%, to $50.1 million for the six months ended June 30, 2023 compared to $36.7 million for the six months ended June 30, 2022. This increase was primarily due to legal and professional fees incurred by the Special Committee, which included a $4.0 million accrual made in the second quarter of 2023 for the settlement amount owed to Coliseum.
Research and Development
Research and development costs increased $2.4 million, or 61.8%, to $6.3 million for the six months ended June 30, 2023 compared to $3.9 million for the six months ended June 30, 2022. This increase primarily reflected our focus on new product innovation initiatives to remain competitive and advance our current product line
Operating Income (Loss)
Operating loss increased $28.8 million to $59.3 million for the six months ended June 30, 2023 compared to $30.5 million for the six months ended June 30, 2022. The larger operating loss primarily resulted from a decrease in gross profit that was driven by lower sales coupled with an increase in general and administrative expense resulting from legal and professional fees incurred by the Special Committee and attributable to the Cooperation Agreement with Coliseum.
Interest Expense
Interest expense totaled $0.6 million for the six months ended June 30, 2023 compared to $1.7 million for the six months ended June 30, 2022. The lower amount in 2023 was primarily due to the six months ended June 30, 2022 including a greater amount of interest expense related to the term loan that was paid off in February 2023 and interest expense for the $55.0 million revolving line of credit that was drawn down by the Company in November 2021 and repaid in full on March 31, 2022.
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Change in Fair Value – Warrant Liabilities
Unexercised sponsor warrants totaling 1.9 million expired in February 2023 and were cancelled pursuant to the terms of the agreement. These sponsor warrants had no fair value on the date of expiration and a de minimis fair value at the previous reporting date. During the six months ended June 30, 2022, we recognized a gain of $4.3 million in our condensed consolidated statement of operations related to a decrease in the fair value of the warrants outstanding at the end of the quarter.
Loss on Extinguishment of Debt
On February 17, 2023, the Company entered into a fifth amendment to the 2020 Credit Agreement and repaid in full the $24.7 million outstanding balance of the term loan plus accrued interest. The amendment was accounted for as an extinguishment of debt during the first quarter of 2023 and $1.2 million of unamortized debt issuance costs were recorded as loss on extinguishment of debt in the condensed consolidated statement of operations.
Income Tax (Expense) Benefit
We had income tax expense of $0.1 million for the six months ended June 30, 2023 compared to an income tax benefit of $6.0 million for the six months ended June 30, 2022. The income tax expense amount in 2023 resulted from various state income taxes.
Noncontrolling Interest
We calculate net income or loss attributable to noncontrolling interests on a quarterly basis using their weighted average ownership percentage. Net loss attributed to noncontrolling interests was $0.3 million for the six months ended June 30, 2023 compared to a net loss of $0.2 million for the six months ended June 30, 2022.
Liquidity and Capital Resources
Our principal sources of funds are cash flows from operations and cash and cash equivalents on hand, supplemented with borrowings made pursuant to our asset-based lending facility and proceeds received from offerings of our equity capital. Principal uses of funds consist of payments of principal and interest on our debt facilities, capital expenditures, working capital needs, and operating lease payment obligations. Our working capital needs depend largely upon the timing of cash receipts from product sales, payments to vendors and others, changes in inventories, and operating lease payment obligations. Our unrestricted cash and working capital positions were $25.2 million and $43.9 million, respectively, as of June 30, 2023 compared to $40.0 million and $62.4 million, respectively, as of December 31, 2022. Cash used for capital expenditures decreased from $26.1 million in the first six months of 2022 to $5.8 million during the first six months of 2023. Our capital expenditures in the first six months of 2023 primarily consisted of primarily consisted of additional investments made in our manufacturing facilities in Utah and Georgia.
In the event our cash flow from operations or other sources of financing are less than anticipated, we believe we will be able to fund operating expenses based on our ability to scale back operations, reduce marketing spend, use the liquidity we have available under our new credit facility and postpone or discontinue our growth strategies. In such event, this could result in slower growth or no growth, and we may run the risk of losing key suppliers, we may not be able to timely satisfy customer orders, and we may not be able to retain all of our employees. We may also consider seeking additional funding sources including new debt or equity capital.
Based on our current projections, we believe our cash on hand, amounts available under our asset-based lending arrangement, and expected cash to be generated from our operations will be sufficient to meet our working capital requirements and cover anticipated capital expenditures for at least the next 12 months.
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Shelf Registration Statement and Offering of Class A Common Stock
On January 30, 2023, the Form S-3 shelf registration statement we filed with the SEC in December 2022 became effective. As a result, we may offer and sell from time to time, in one or more series or issuances and on terms that we will determine at the time of the offering, any combination of the securities described in the registration statement, up to an aggregate amount of $90.0 million.
In February 2023, we completed an underwritten offering of 13.4 million shares of Class A common stock at a public offering price of $4.50 per share. The underwriters did not exercise their over-allotment option. The aggregate net proceeds received by us from the offering, after deducting offering fees and expenses of $3.1 million, totaled $57.0 million.
Debt
On August 7, 2023, the Loan Parties entered into the Term Loan Agreement with Callodine Commercial Finance, LLC and a group of financial institutions. Also, on August 7, 2023, the Loan parties entered into a separate financing arrangement with the ABL Lenders. that provides for the ABL Agreement. Pursuant to entering into these agreements, the Company incurred fees and expenses of $3.1 million that will be reflected as debt issuance costs in the third quarter of 2023.
The Term Loan Agreement provides for up to $25.0 million of term loans, with up to $5.0 million of incremental Term Loans, subject to certain conditions (collectively, the “Term Loans”). Proceeds from the Term Loans, which were fully drawn at closing, will be used for general corporate purposes. The borrowing rates under the Term Loan Agreement are based on SOFR, plus a credit spread adjustment of 0.15% per annum, plus 8.5% per annum, with a SOFR floor of 2.0% per annum. The Term Loans will be repaid at the earlier of (a) a three-year amortization schedule or (b) the payment in full of the ABL Agreement. The Term Loans may be prepaid in whole or in part at any time, but subject to a prepayment premium. There may also be mandatory prepayment obligations based on certain asset dispositions, casualty events and extraordinary receipts. Once repaid, no portion of the Term Loans may be reborrowed.
Pursuant to a pledge and security agreement, the Loan Parties’ obligations under the Term Loan Agreement are secured by a perfected second-priority security interest in the cash, inventory and accounts receivable of the Loan Parties, and a perfected first-priority security interest in substantially all other assets of the Loan Parties, including, without limitation, the intellectual property and equipment of the Loan Parties, subject to certain exceptions.
The ABL Agreement provides for up to $50.0 million of revolving loans subject to a borrowing base calculation (with sub-facilities for swing line loans and the issuance of letters of credit), with incremental increases available up to $20.0 million, subject to certain conditions. No funds were drawn under the ABL Agreement at closing. The Company anticipates that any funds drawn from under the ABL Agreement will be used to finance permitted acquisitions, as defined in the ABL Agreement, and for working capital, capital expenditures and other general corporate purposes. Outstanding principal and accrued interest on the ABL Loans shall be repaid on August 7, 2026.
The borrowing rates under the ABL Agreement will accrue on a three-tiered grid based on revolving availability, ranging from (i) SOFR, plus a credit spread adjustment of 0.10% per annum, plus 2.75% per annum to (ii) SOFR, plus a credit spread adjustment of 0.10% per annum, plus 3.25% per annum, with a SOFR floor of 0% per annum. The ABL Loans may be prepaid in whole or in part at any time without premium or penalty, subject to reimbursement of certain costs. There may be mandatory prepayment obligations based on certain asset dispositions, casualty events, equity issuances and extraordinary receipts.
Pursuant to a pledge and security agreement, the Loan Parties’ obligations under the ABL Agreement are secured by a perfected first-priority security interest in the cash, inventory and accounts receivable of the Loan Parties, and a perfected second-priority security interest in substantially all of the other assets of the Loan Parties, subject to certain exceptions.
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In connection with the Company’s execution of the Term Loan Agreement and ABL Agreement, the Company terminated its 2020 Credit Agreement. The Company had no outstanding borrowings under the term loan or the revolving line of credit at the time of termination.
Tax Receivable Agreement
We are required to make certain payments to InnoHold under the tax receivable agreement, which may have a material adverse effect on our liquidity and capital resources. As of both June 30, 2023 and December 31, 2022, there was no tax receivable agreement liability reflected in either of these consolidated balance sheets. For reasons similar to those that led to the recording of a full valuation allowance on our deferred tax assets in the fourth quarter of 2022, we evaluated the probability of amounts being owed pursuant to the tax receivable agreement and determined the likelihood of a future liability was not probable. As result, we continued to record no tax receivable agreement liability in the second quarter of 2023. We are currently unable to determine the total future amount of these payments due to the unpredictable nature of several factors, including the timing of future exchanges, the market price of shares of Class A common stock at the time of the exchanges, the extent to which such exchanges are taxable and the amount and timing of future taxable income sufficient to utilize tax attributes that give rise to the payments under the agreement.
Other Contractual Obligations
Other material contractual obligations primarily include operating lease payment obligations. Also, as discussed above regarding the Cooperation Agreement, we will reimburse Coliseum for all out-of-pocket fees, costs, and expenses incurred in connection with their complaint, provided that such an amount shall not exceed $4.0 million in the aggregate. See Notes 9 and 15 of the condensed consolidated financial statements for additional information on leases and the Cooperation Agreement, respectively.
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Cash Flows for the Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022
The following summarizes our cash flows for the six months ended June 30, 2023 and 2022 as reported in our condensed consolidated statements of cash flows (in thousands):
| Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
Net cash used in operating activities | $ | (38,053 | ) | $ | (52,804 | ) | ||
| Net cash used in investing activities | (5,823 | ) | (26,055 | ) | ||||
| Net cash provided by financing activities | 29,071 | 28,412 | ||||||
| Net decrease in cash | (14,805 | ) | (50,447 | ) | ||||
| Cash, beginning of the period | 41,754 | 91,616 | ||||||
| Cash, end of the period | $ | 26,949 | $ | 41,169 | ||||
Cash used in operating activities was $37.9 million and $52.8 million for the six months ended June 30, 2023 and 2022, respectively. Cash used in operating activities in 2023 was primarily comprised of a net loss of $61.1 million, offset in part by non-cash adjustments totaling $17.6 million. These non-cash adjustments primarily related to $12.9 million of depreciation and amortization, a $1.2 million loss on the extinguishment of debt and $2.9 million of stock-based compensation. Changes in operating assets and liabilities increased cash used in operating activities by $5.4 million in 2023. This increase primarily reflected a $11.5 million decrease in accounts receivable and a $3.3 million increase in accounts payable, offset by a $5.1 million increase in inventories combined with a $4.0 million decrease in accrued rebates and allowances. The decline in accounts receivable was due in part to a $13.6 million decrease in wholesale net revenues in the second quarter of 2023 compared to the fourth quarter of 2022. The increase in inventories was primarily due to an increase in finished goods inventory. The decrease in accrued rebates and allowances primarily resulted from a large credit memo issued in the first quarter to a wholesale partner for volume rebates related to 2022 purchases.
Cash used in investing activities reflected capital expenditures of $5.8 million for the six months ended June 30, 2023 compared to $26.1 million for the six months ended June 30, 2022. Capital expenditures during the first six months of 2023 primarily consisted of additional investments made in our manufacturing facilities in Utah and Georgia.
Cash provided by financing activities was $28.9 million during the six months ended June 30, 2023 compared to $28.4 million during the six months ended June 30, 2022. Financing activities during the first six months of 2023 included $57.0 million of net proceeds received from the stock offering, offset in part by a $24.7 million term loan payment, $2.9 million in other debt related payments, and $0.4 million of other payments.
Critical Accounting Policies
We discuss our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Annual Report on Form 10-K filed March 22, 2023. There were no significant changes in our critical accounting policies since the end of fiscal 2022.
Available Information
Our website address is www.purple.com. We make available free of charge on the Investor Relations portion of our website, investors.purple.com, our annual report on Form 10-K and Form 10-K/A, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The inclusion of our website address in this report does not include or incorporate by reference into this report any information on our website.
We also use the Investor Relations portion of our website, investors.purple.com, as a channel of distribution of additional Company information that may be deemed material. Accordingly, investors should monitor this channel, in addition to following our press releases, SEC filings and public conference calls and webcasts. The contents of our website shall not be deemed to be incorporated herein by reference.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our operating results are subject to risk from interest rate fluctuations on our outstanding borrowings. Our revolving line of credit under our 2020 Credit Agreement bore interest at a variable rate, which exposed us to market risks relating to changes in interest rates. Interest rate risk is highly sensitive due to many factors, including U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our control. As of June 30, 2023, we had no variable rate debt outstanding as our term loan was paid in full during the first quarter of 2023 and we had no borrowings outstanding under our revolving line of credit.
The proceeds we received from the Term Loans entered into in August 2023 bear interest at variable rates which exposes us to market risks relating to changes in interest rates. On August 7, 2023, we had $25.0 million of variable rate debt outstanding under our Term Loans. Based on these debt levels, an increase of 100 basis points in the effective interest rates on these outstanding debt amounts would result in an increase in interest expense of approximately $0.3 million over the next 12 months.
We do not use derivative financial instruments for speculative or trading purposes, but this does not preclude our adoption of specific hedging strategies in the future.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Interim Chief Financial Officer (“CFO” and together with the CEO, the “Certifying Officers”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Certifying Officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
We acquired Intellibed on August 31, 2022 and are currently in the process of integrating Intellibed into our assessment of internal control over financial reporting. Management’s assessment and conclusions on the effectiveness of our internal control over financial reporting as of June 30, 2023 excludes an assessment of the internal control over financial reporting of Intellibed. We are in the process of implementing our internal control structure at Intellibed and expect that this effort will be completed in fiscal 2023.
Based upon this evaluation, and the above criteria, our CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2023 at the reasonable assurance level.
Changes in Internal Controls Over Financial Reporting.
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is from time to time involved in various claims, legal proceedings and complaints arising in the ordinary course of business. Please refer to Note 14 — Commitments and Contingencies to the condensed consolidated financial statements contained in this report for certain information regarding our legal proceedings.
ITEM 1A. RISK FACTORS
Except as described below, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K filed with the SEC on March 22, 2023.The disclosure of risks identified below does not imply that the risk has not already materialized.
We may need additional capital to execute our business plan and fund operations and may not be able to obtain such capital on acceptable terms or at all.
In connection with the development and expansion of our business, we expect to incur significant capital and operational expenses. We believe that we can increase our sales and net income by implementing a growth strategy that focuses on (i) increasing our manufacturing efficiency; (ii) increasing our marketing; (iii) expanding our distribution channels; (iv) elevating the premium customer experience of our products; (v) opening additional Purple owned retail showrooms; (vi) expanding our global sales; (vii) engaging global partners to improve distribution efficiencies and cost savings; and (viii) product assortment and category expansion.
Our ability to obtain other capital resources and sources of liquidity may not be sufficient to support future growth strategies. If we are unable to satisfy our liquidity and capital resource requirements, we may have to scale back, postpone or discontinue our growth strategies, which could result in slower growth or no growth, and we may run the risk of losing key suppliers, we may not be able to timely satisfy customer orders, and we may not be able to retain our employees. In addition, we may be forced to restructure our obligations to creditors, pursue work-out options or other protective measures.
While we have access to a revolving asset-based credit facility of up to $50 million under the ABL Credit Agreement and have borrowed $25 million of term loans under the Term Loan Credit Agreement our ability to access funds under the ABL Credit Agreement (each a “Revolving Loan” and collectively, the “Revolving Loans”) is subject to certain conditions and restrictive covenants, and there is no guarantee that we will be able to satisfy such conditions and restrictive covenants. For example, we did not satisfy certain financial and performance covenants under our prior credit agreement and were required to amend such credit agreement to avoid non-compliance. To the extent that waivers and amendments are necessary under either of the Credit Agreements, there can be no guarantee that we will be able to obtain waivers or amendments from the applicable Agent and Lenders if, in the future, we are unable to comply with the covenants and other terms of the Credit Agreements. Our failure to satisfy the required conditions under the Credit Agreements or maintain compliance with the financial and performance covenants under the Credit Agreements could result in a default, which would adversely affect our financial condition and results of operations, including, potentially, as a result of acceleration of our outstanding debt. In addition, any default under the Credit Agreements would adversely affect our ability to obtain alternative financing.
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Further, our ability to obtain additional capital on acceptable terms or at all is subject to a variety of uncertainties. Adequate alternative financing may not be available or, if available, may only be available on unfavorable terms or subject to covenants that we may not be able to satisfy.
There is no assurance we will obtain the capital we require. As a result, there can be no assurance that we will be able to fund our future operations or growth strategies.
Future equity or debt financings may require us to also issue warrants or other equity securities that are likely to be dilutive to our existing stockholders. For example, on February 13, 2023, we completed an offering of our Class A Shares that increased the number of outstanding Class A Shares from 91,380,323 to 104,780,323. Newly issued securities may include preferences or superior voting rights or may be combined with the issuance of warrants or other derivative securities, which each may have additional dilutive effects. Furthermore, we may incur substantial costs in pursuing future capital and financing, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition. If we cannot raise additional funds on favorable terms or at all, we may not be able to carry out all or parts of our long-term growth strategy, maintain our growth and competitiveness or continue in business.
Anti-takeover provisions in our Second Amended and Restated Certificate of Incorporation, our Third Amended and Restated Bylaws as well as provisions of Delaware law, contain anti-takeover provisions, any of which could delay or discourage a merger, tender offer, or assumption of control of the Company not approved by our Board of Directors that some stockholders may consider favorable.
Provisions of Delaware law, our Second Amended and Restated Certificate of Incorporation, and our Third Amended and Restated Bylaws could hamper a third party’s acquisition of us, or discourage a third party from attempting to acquire control of us. You may not have the opportunity to participate in these transactions. These provisions could also limit the price that investors might be willing to pay in the future for equity interests in the Company. These provisions include:
| ● | the right of our Board to elect a director to fill a vacancy created by the expansion of our Board or the resignation, death or removal of a director in certain circumstances, which prevents stockholders from being able to fill vacancies on our Board; |
| ● | a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; |
| ● | a prohibition on stockholders calling a special meeting and the requirement that a meeting of stockholders may only be called by members of our Board, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; |
| ● | the requirement that changes or amendments to certain provisions of our certificate of incorporation or bylaws must be approved by holders of at least two-thirds of our common stock; and |
| ● | advance notice procedures that stockholders must comply with in order to nominate candidates to our Board or to propose matters to be acted upon at a meeting of stockholders, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us. |
In December 2022, we amended our bylaws to add requirements relating to stockholder nominations of directors, including a requirement that stockholder nominees complete a written questionnaire and that stockholder nominees make themselves available for interviews by our Board upon request.
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain transactions with stockholders owning 15% or more of our outstanding voting stock or require us to obtain stockholder approval prior to engaging in such transactions. Coliseum collectively holds approximately 44.7% of our outstanding voting stock. Any delay or prevention of a change in control transaction or changes in our Board could adversely affect our ability to execute transactions that are needed to carry out our operations and growth strategies and cause the market price of our common stock to decline.
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We may not be able to identify, complete or successfully integrate acquisitions, and any such acquisitions may not achieve the anticipated financial benefits, all of which could have a negative impact on our growth, financial condition, and results of operations.
We may seek to acquire businesses in the future as we encounter acquisition prospects that would complement our current product offerings, increase the size and geographic scope of our operations, or otherwise offer strategic, growth and operating efficiency opportunities. We cannot assure investors that we will be able to identify and acquire acceptable acquisition candidates on terms favorable to us in the future, or that any acquisitions will achieve the anticipated strategic or financial benefits. Even if we do identify opportunities to acquire businesses, we may not be able to consummate such acquisitions due to a number of factors, including lacking access to sufficient capital to fund such acquisitions.
In addition, acquisitions involve numerous risks and uncertainties and may be of businesses in which we lack operational or market experience. The financing for any of these acquisitions could dilute the interests of our stockholders, result in an increase in our indebtedness or both. Future acquisitions could entail numerous risks, including:
| ● | difficulties in integrating acquired technologies, operations or products; |
| ● | the difficulties of imposing financial and operating controls on the acquired companies and their management and the potential costs of doing so; |
| ● | the potential loss of key employees, customers, suppliers or distributors from acquired businesses and disruption to our direct selling channel; |
| ● | diversion of management’s attention from our core business; |
| ● | the failure to achieve the strategic objectives of these acquisitions; |
| ● | increased fixed costs; |
| ● | the failure of the acquired businesses to achieve the results we have projected in either the near or long term; |
| ● | the assumption of unexpected liabilities, including compliance and litigation risks; |
| ● | adverse effects on existing business relationships with our suppliers, sales force or consumers; | |
| ● | Failure to gain consumer or wholesale market acceptance of acquired brands and products; and |
| ● | risks associated with entering markets or industries in which we have limited or no prior experience, including limited expertise in running the business, developing the technology, and selling and servicing the products. |
Our failure to successfully complete the integration of any acquired business, or a failure to effectively identify and pursue such acquisitions, could have a material adverse effect on our business, financial condition and operating results.
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Our business and our reputation could be adversely affected by the failure to protect sensitive employee, customer and consumer data, or to comply with evolving regulations relating to our obligation to protect such data.
In the ordinary course of our business, we collect and store certain personal information from individuals, such as our customers and suppliers, and we process customer payment card and check information for purchases via our website. In addition, we may share with third-parties personal information we have collected. Cyber-attacks designed to gain access to sensitive information by breaching security systems of large organizations leading to unauthorized release of confidential information have occurred at a number of major U.S. companies despite widespread recognition of the cyber-attack threat and improved data protection methods. Computer hackers may attempt to penetrate our computer system or the systems of third-parties with which we have shared personal information and, if successful, misappropriate personal information, payment card or check information or confidential Company business information. In addition, a Company employee, contractor or other third party with whom we do business may attempt to circumvent our security measures in order to obtain such information and may purposefully or inadvertently cause a breach involving such information. For example, though it did not involve access to or release of personal information, we recently experienced an unauthorized intrusion into one of our vendor’s system using a former contractor’s credentials that resulted in access to email addresses and an unauthorized email being sent under a valid Purple email address. Breaches involving any personal information could be more likely to the extent we have any material weakness in internal control over financial reporting related to information technology general controls in the areas of user access and segregation of duties related to certain IT systems that support the Company’s financial reporting processes.
We and third parties with which we have shared personal information have been subject to attempts to breach the security of networks, IT infrastructure, and controls through cyber-attack, malware, computer viruses, social engineering attacks, ransomware attacks, and other means of unauthorized access. For example, in 2022, we experienced a spear-phishing attack that resulted in the unauthorized change to a significant vendor’s bank account to which we made payments that were lost in part until the scheme was discovered. We expect that this attack will result in costs to us of up to $250,000. We anticipate that we may, in the future, continue to be subject to these and similar cyber threats. A breach of systems resulting in the unauthorized release of sensitive data could also adversely affect our reputation and lead to financial losses from remedial actions or potential liability, possibly including punitive damages, and could also materially increase the costs we already incur to protect against these risks. In addition, cyber-attacks, such as ransomware attacks, if successful, could interfere with our ability to access and use systems and records that are necessary to operate our business. Such attacks could materially adversely affect our reputation, relationships with customers, and operations and could require us to expend significant resources to resolve such issues. We continue to balance the additional risk with the cost to protect us against a breach. Additionally, while losses arising from a breach may be covered in part by insurance that we carry, such coverage may not be adequate for liabilities or losses actually incurred.
We may be subject to data privacy and data breach laws in the states in which we do business, and as we expand into other countries, we may be subject to additional data privacy laws and regulations. In many states, state data privacy laws (such as the California Consumer Privacy Act), including application and interpretation, are rapidly evolving. The rapidly evolving nature of state and federal privacy laws, including potential inconsistencies between such laws and uncertainty as to their application, adds additional compliance costs and increases our risk of non-compliance. While we attempt to comply with such laws, we may not be in compliance at all times in all respects. Failure to comply with such laws may subject us to fines, administrative actions, and reputational harm.
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Our level of indebtedness and related covenants could limit our operational and financial flexibility and adversely affect our business if we breach such covenants and default on such indebtedness.
Under the Credit Agreements, we are subject to a number of affirmative and negative covenants, including covenants regarding dispositions of property, investments, forming or acquiring subsidiaries, business combinations or acquisitions, incurrence of additional indebtedness, and transactions with affiliates, among other customary covenants, in each case, subject to certain exceptions. In particular, we are (i) restricted from incurring additional debt up to certain amounts, subject to limited exceptions, as set forth in each Credit Agreement, and (ii) required to maintain minimum revolving availability under the ABL Credit Agreement, and, if revolving availability falls beneath a specified amount, a specified Consolidated Fixed Charge Coverage Ratio (as such term is defined in the ABL Credit Agreement). The Loan Parties are also restricted from paying dividends or making other distributions or payments on their capital stock, subject to limited exceptions.
These restrictions may prevent us from taking actions that we believe would be in the best interests of the business and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. If we determine that we need to take any action that is restricted under any Credit Agreement, we will need to first obtain a waiver from the applicable Agent and Lenders. Obtaining such waivers, if needed, may impose additional costs on the Company or we may be unable to obtain such waivers. Our ability to comply with these restrictive covenants in future periods will largely depend on our ability to successfully implement our overall business strategy. The breach of any of these covenants or restrictions could result in a default, which could potentially result in the acceleration of our outstanding debt. In the event of an acceleration of such debt, we could be forced to apply all available cash flows to repay such debt, which could also force us into bankruptcy or liquidation.
In the past, we have been required to negotiate with our lenders to obtain amendments to our prior credit agreement to avoid non-compliance with certain of our covenants thereunder. If we are not able to maintain compliance with our covenants under the Credit Agreements, we may need to seek amendments or waivers to the Term Loan Agreement and ABL Agreement in the future.
To the extent that waivers and amendments under any Credit Agreement are necessary, there can be no guarantee that we will be able to obtain waivers or amendments from the applicable Lenders if, in the future, we are unable to comply with the covenants and other terms of any Credit Agreement. Our failure to satisfy the required conditions under the Credit Agreements, any amendments thereof, or maintain compliance with the financial and performance covenants under the Credit Agreements could result in a default, which would adversely affect our financial condition and results of operations, including, potentially, as a result of acceleration of our outstanding debt. In addition, any default under would adversely affect our ability to obtain alternative financing, and significantly limit our ability to execute our business strategies.
ITEM 5. OTHER INFORMATION
10b5-1 Trading Plans
During
the second quarter of 2023, none of our directors or executive officers
Credit Agreement
On August 7, 2023, the Loan Parties entered into the Term Loan Credit Agreement with the Term Loan Lenders and the Term Loan Agent and consummated the transactions contemplated thereby (the “Callodine Closing”). In connection with the Callodine Closing, the Loan Parties also entered a Term Loan Pledge and Security Agreement as described in greater detail below. The Company is the sole managing member of Purple LLC. Intellibed is a wholly owned subsidiary of Purple LLC.
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On August 7, 2023, the Loan Parties also entered into the ABL Credit Agreement with the ABL Lenders the ABL Agent), Swing Line Lender and Letter of Credit Issuer and consummated the transactions contemplated thereby (the “BMO Closing”). In connection with the BMO Closing, the Loan Parties also entered an ABL Pledge and Security Agreement as described in greater detail below.
All defined terms used herein and not otherwise defined herein shall have the meanings set forth in the Term Loan Credit Agreement and the ABL Credit Agreement, as applicable. The Company and Intellibed are guarantors under the Term Loan Credit Agreement and the ABL Credit Agreement.
Term Loan Credit Agreement and Term Loan Pledge and Security Agreement
The Term Loan Credit Agreement provides for up to $25 million of term loans, with up to $5 million of incremental Term Loans, subject to certain conditions. Proceeds from the term loan, which were fully drawn at closing, will be used for general corporate purposes.
The borrowing rates under the Term Loan Credit Agreement will be based SOFR, plus a credit spread adjustment of 0.15% per annum, plus 8.5% per annum, with a SOFR floor of 2.0% per annum.
The Term Loans will be repaid at the earlier of (a) a three-year amortization schedule ending on August 7, 2026 or (b) the payment in full of the ABL Credit Agreement. The Term Loans may be prepaid in whole or in part at any time, but subject to a prepayment premium. There may also be mandatory prepayment obligations based on certain asset dispositions, casualty events and extraordinary receipts. Once repaid, no portion of the Term Loans may be reborrowed.
Pursuant to a Pledge and Security Agreement (the “Term Loan Pledge and Security Agreement”), the Loan Parties’ obligations under the Term Loan Credit Agreement are secured by a perfected second-priority security interest in the cash, inventory and accounts receivable of the Loan Parties, and a perfected first-priority security interest in substantially all of other assets of the Loan Parties, including, without limitation, the intellectual property and equipment of the Loan Parties, subject to certain exceptions.
The Term Loan Credit Agreement provides for customary events of default such as for non-payment and failure to perform or observe covenants. The Term Loan Credit Agreement contains customary indemnifications benefiting the Term Loan Agent and the Term Loan Lenders.
The Term Loan Credit Agreement also contains representations, warranties and certain covenants of the Loan Parties. While any amounts are outstanding under the Term Loan 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, each of which are subject to certain exceptions. In particular, the Loan Parties are (i) restricted from incurring additional debt, subject to limited exceptions, as set forth in the Term Loan Credit Agreement, and (ii) required to maintain a minimum revolving loan availability under the ABL Credit Agreement. Each Loan Party is also restricted from paying dividends or making other distributions or payments on its respective capital stock, subject to limited exceptions. If the Loan Parties fail to perform their obligations under these and other covenants, or should any event of default occur, the Term Loans under the Term Loan, together with accrued interest, under the Term Loan Credit Agreement could be declared immediately due and payable.
The representations, warranties and covenants contained in the Term Loan Credit Agreement are made only for purposes of the Term Loan Credit Agreement and as of specific dates; are solely for the benefit of the parties to the Term Loan Credit Agreement; and may be subject to limitations agreed upon by the parties, including being qualified by confidential disclosures made by each contracting party to the other for the purposes of allocating contractual risk between them that differ from those applicable to investors. Investors should not rely on the representations, warranties and covenants or any description thereof as characterizations of the actual state of facts or condition of any Loan Party, or the Term Loan Lenders, the Term Loan Agent or any of their respective subsidiaries, affiliates, businesses, or stockholders. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of the Term Loan Credit Agreement, which subsequent information may or may not be fully reflected in public disclosures of the Company or statements by any Loan Party, the Term Loan Agent or the Term Loan Lenders. Accordingly, investors should read the representations and warranties in the Term Loan Credit Agreement not in isolation but only in conjunction with the other information about the Loan Parties, the Term Loan Agent or the Term Loan Lenders and their respective subsidiaries that the respective companies include in reports, statements and other filings made with the SEC.
The foregoing descriptions of the Term Loan Credit Agreement and the Term Loan Pledge and Security Agreement do not purport to be complete and are qualified in their entirety by reference to the Term Loan Credit Agreement and the Term Loan Pledge and Security Agreement, which are attached as Exhibit 10.8 and Exhibit 10.9, respectively, to this report and are incorporated by reference herein.
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ABL Credit Agreement and ABL Pledge and Security Agreement
The ABL Credit Agreement provides for up to $50 million of revolving loans (with subfacilities for Swing Line Loans and the issuance of Letters of Credit), with incremental ABL Loans available up to $20 million, subject to certain conditions. No funds were drawn under the ABL Credit Agreement at closing. The Company anticipates that any funds drawn from under the ABL Credit Agreement will be used to finance Permitted Acquisitions and for working capital, capital expenditures and other general corporate purposes. Outstanding principal and accrued interest on the ABL Loans shall be repaid on August 7, 2026.
The borrowing rates under the ABL Credit Agreement will accrue on a three-tiered grid based on revolving availability, ranging from (i) SOFR, plus a credit spread adjustment of 0.10% per annum, plus 2.75% per annum to (ii) SOFR, plus a credit spread adjustment of 0.10% per annum, plus 3.25% per annum, with a SOFR floor of 0% per annum.
The ABL Loans under the ABL Credit Agreement may be prepaid in whole or in part at any time without premium or penalty, subject to reimbursement of certain costs. There may be mandatory prepayment obligations based on certain asset dispositions, casualty events, equity issuances and extraordinary receipts.
Pursuant to a Pledge and Security Agreement (the “ABL Pledge and Security Agreement”), the Loan Parties’ obligations under the ABL Credit Agreement are secured by a perfected first-priority security interest in the cash, inventory and accounts receivable of the Loan Parties, and a perfected second-priority security interest in substantially all of the other assets of the Loan Parties, subject to certain exceptions.
The ABL Credit Agreement provides for customary events of default such as non-payment and failure to perform or observe covenants. The ABL Credit Agreement contains customary indemnifications benefitting the ABL Agent and the ABL Lenders.
The ABL Credit Agreement also contains representations, warranties and certain covenants of the Loan Parties. The Loan Parties are subject to affirmative and negative covenants, including covenants regarding dispositions of property, investments, forming or acquiring subsidiaries, business combinations or acquisitions, incurrence of additional indebtedness, and transactions with affiliates, among other customary covenants, in each case, subject to certain exceptions. In particular, the Loan Parties are (i) restricted from incurring additional debt, subject to limited exceptions, as set forth in the ABL Credit Agreement, (ii) if revolving availability under the ABL Credit Agreement is less than a specified amount, required to maintain a minimum Consolidated Fixed Charge Coverage Ratio (as defined in the ABL Credit Agreement), and (iii) required to maintain a specified minimum revolving availability. Each Loan Party is also restricted from paying dividends or making other distributions or payments on its respective capital stock, subject to limited exceptions. If the Loan Parties fail to perform their obligations under these and other covenants, or should any event of default occur, the revolving loan commitments under the ABL Credit Agreement may be terminated and any outstanding ABL Loans and Swing Lien Loans, together with accrued interest, under the ABL Credit Agreement could be declared immediately due and payable and any outstanding Letters of Credit may be required to be cash collateralized.
The representations, warranties and covenants contained in the ABL Credit Agreement are made only for purposes of the ABL Credit Agreement and as of specific dates; are solely for the benefit of the parties to the ABL Credit Agreement; and may be subject to limitations agreed upon by the parties, including being qualified by confidential disclosures made by each contracting party to the other for the purposes of allocating contractual risk between them that differ from those applicable to investors. Investors should not rely on the representations, warranties and covenants or any description thereof as characterizations of the actual state of facts or condition of any Loan Party, the ABL Agent or the ABL Lenders or any of their respective subsidiaries, affiliates, businesses or stockholders. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of the ABL Credit Agreement, which subsequent information may or may not be fully reflected in public disclosures of the Loan Parties or statements by any Loan Party, the ABL Agent or the ABL Lenders. Accordingly, investors should read the representations and warranties in the ABL Credit Agreement not in isolation but only in conjunction with the other information about the Loan Parties, the ABL Agent or the ABL Lenders and their respective subsidiaries that the respective companies include in reports, statements and other filings made with the SEC.
The foregoing descriptions of the ABL Credit Agreement and ABL Pledge and Security Agreement do not purport to be complete and are qualified in their entirety by reference to the ABL Credit Agreement and the ABL Pledge and Security Agreement, which are attached as Exhibits 10.10 and Exhibit 10.11, respectively, to this report and are incorporated by reference herein.
Termination of the 2020 Credit Agreement
In connection with the Company’s execution of the Term Loan Agreement and ABL Credit Agreement, the Company terminated its 2020 Credit Agreement. The Company had no outstanding borrowings under the term loan or the revolving line of credit at the time of termination. The termination was accounted for as an extinguishment of debt and $3.1 million of unamortized debt issuance costs related to the 2020 Credit Agreement will be recorded as a loss on extinguishment of debt in the third quarter of 2023.
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ITEM 6. EXHIBITS
| * | Filed herewith. |
| + | Indicates management contract or compensatory plan. |
| # | Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted exhibit or schedule will be furnished supplementally to the SEC or its staff upon request. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| PURPLE INNOVATION, INC. | ||
| Date: August 9, 2023 | By: | /s/ Robert T. DeMartini |
| Robert T. DeMartini | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: August 9, 2023 | By: | /s/ Bennett L. Nussbaum |
| Bennett L. Nussbaum | ||
| Interim Chief Financial Officer | ||
| (Principal Financial Officer) | ||
| Date: August 9, 2023 | By: | /s/ George T. Ulrich |
| George T. Ulrich | ||
| VP Accounting and Financial Reporting | ||
| (Principal Accounting Officer) |
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