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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.
| ☑ | Accelerated filer | ☐ | |
| Non-accelerated filer | ☐ | Smaller reporting company | |
| Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of August 8, 2022,
PURPLE INNOVATION, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
| Page | |||
| Part I. | Financial Information | 1 | |
| Item 1. | Financial Statements (Unaudited): | 1 | |
| Condensed Consolidated Balance Sheets | 1 | ||
| Condensed Consolidated Statements of Operations | 2 | ||
| Condensed Consolidated Statements of Stockholders’ Equity | 3 | ||
| Condensed Consolidated Statements of Cash Flows | 4 | ||
| Notes to Condensed Consolidated Financial Statements | 5 | ||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 29 | |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 39 | |
| Item 4. | Controls and Procedures | 39 | |
| Part II. | Other Information | 41 | |
| Item 1. | Legal Proceedings | 41 | |
| Item 1A. | Risk Factors | 41 | |
| Item 6. | Exhibits | 45 | |
| Signatures | 46 | ||
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®, and Gel Matrix® (for plasticized elastomeric gel and certain types of products including mattresses, seat cushions, bed linen, mattress foundation and others). Additional registered trademarks include Purple Grid®, The Purple Mattress®, Purple Hybrid®, and Purple Hybrid Premier®. Applications are pending for registration of additional trademarks and some of these listed trademarks for additional classes of goods both in the U.S. and internationally. Our Purple, No Pressure and Hyper-Elastic Polymer trademarks are also registered and have applications pending for various classes of goods in numerous foreign jurisdictions, some of which include Australia, Canada, China, Europe, United Kingdom, Japan and Korea. Certain international trademark applications previously resided with EdiZONE, LLC, which is an entity owned by our founders, and were licensed to Purple LLC and we have taken the necessary steps to have those trademarks assigned to Purple LLC upon registration.
We also have a number of common law trademarks, including Harmony™, Purple Harmony Pillow™, Harmony Pillow™, Purple +™, Purple Plus™, Find Comfort™, Dreams On Dreams™, Reinventing Sleep™, Reinventing Comfort™, Gelflex™, Ascent™, Purple Ascent™, Comfort Reinvented™, Softstretch™, Purple Powerbase™, Purple Powerbase Premier™, Purple Powerbase Plus™, Purple Glove™, Eidertech™, Mattress Max™, WonderGel Original™, WonderGel Extreme™, DoubleGel™, DoubleGel Plus™, DoubleGel Ultra™, Roll n’ Go™, Fold N’ Go™, Purple Bed™, Purple Top™, Purple Pillow™, Portable Purple™, Everywhere Purple™, Simply Purple™, Lite Purple™, Royal Purple™, Double Purple™, Deep Purple™, Ultimate Purple™, Purple Back™, EquaGel Straight Comfort™, EquaGel General™, EquaGel Protector™, and EquaGel Adjustable™.
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.
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PURPLE INNOVATION, INC.
Condensed Consolidated Balance Sheets
(unaudited – in thousands, except for par value)
| June 30, 2022 |
December 31, 2021 |
|||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Deferred income taxes | ||||||||
| Other long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued sales returns | ||||||||
| Accrued compensation | ||||||||
| Customer prepayments | ||||||||
| Accrued sales tax | ||||||||
| Accrued rebates and allowances | ||||||||
| Operating lease obligations – current portion | ||||||||
| Warrant liabilities | — | |||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Debt, net of current portion | ||||||||
| Operating lease obligations, net of current portion | ||||||||
| Warrant liabilities | — | |||||||
| Tax receivable agreement liability, net of current portion | ||||||||
| Other long-term liabilities, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 13) | ||||||||
| Stockholders’ equity: | ||||||||
| Class A common stock; $ |
||||||||
| Class B common stock; $ |
||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Total stockholders’ equity | ||||||||
| Noncontrolling interest | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
PURPLE INNOVATION, INC.
Condensed Consolidated Statements of Operations
(unaudited – in thousands, except per share amounts)
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Marketing and sales | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating income (loss) | ( |
) | ( |
) | ( |
) | ||||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other income (expense), net | ( |
) | ( |
) | ( |
) | ||||||||||
| Change in fair value – warrant liabilities | ||||||||||||||||
| Tax receivable agreement expense | ( |
) | ( |
) | ||||||||||||
| Total other income (expense), net | ( |
) | ||||||||||||||
| Net income (loss) before income taxes | ( |
) | ( |
) | ||||||||||||
| Income tax benefit (expense) | ( |
) | ||||||||||||||
| Net income (loss) | ( |
) | ( |
) | ||||||||||||
| Net income (loss) attributable to noncontrolling interest | ( |
) | ( |
) | ( |
) | ||||||||||
| Net income (loss) attributable to Purple Innovation, Inc. | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Net income (loss) per share: | ||||||||||||||||
| Basic | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Diluted | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
PURPLE INNOVATION, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited – in thousands)
| Class A | Class B | Additional | Total | |||||||||||||||||||||||||||||||||
| Common Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | Noncontrolling | Total | ||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Capital | Deficit | Equity | Interest | Equity | ||||||||||||||||||||||||||||
| Balance - December 31, 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 | $ | |
$ | $ | $ | ( |
) | $ | $ | $ | ||||||||||||||||||||||||||
| Class A | Class B | Additional | Accumulated | Total | ||||||||||||||||||||||||||||||||
| Common Stock | Common Stock | Paid-in | Equity | Stockholders’ | Noncontrolling | Total | ||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Capital | (Deficit) | Equity | Interest | Equity | ||||||||||||||||||||||||||||
| Balance - December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Exchange of stock | ( | ) | ||||||||||||||||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||||||||||||||
| Tax Receivable Agreement liability | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Deferred income taxes | — | — | ||||||||||||||||||||||||||||||||||
| Accrued distributions | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| InnoHold indemnification payment | — | — | ||||||||||||||||||||||||||||||||||
| Impact of transactions affecting NCI | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance – March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| Net income (loss) | — | — | ( | ) | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | |||||||||||||||||||||||||||||||||||
| Tax Receivable Agreement liability | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Deferred income taxes | — | — | ||||||||||||||||||||||||||||||||||
| Accrued distributions | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Issuance of common stock | ||||||||||||||||||||||||||||||||||||
| Impact of transactions affecting NCI | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance – June 30, 2021 | $ | | $ | $ | $ | ( | ) | $ | $ | | $ | |||||||||||||||||||||||||
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, |
||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | ( |
) | $ | ||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Non-cash interest | ||||||||
| Change in fair value – warrant liabilities | ( |
) | ( |
) | ||||
| Tax receivable agreement expense | ||||||||
| Stock-based compensation | ||||||||
| Deferred income taxes | ( |
) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( |
) | ||||||
| Inventories | ||||||||
| Prepaid expenses and other assets | ( |
) | ||||||
| Operating leases, net | ||||||||
| Accounts payable | ( |
) | ( |
) | ||||
| Accrued sales returns | ( |
) | ( |
) | ||||
| Accrued compensation | ( |
) | ||||||
| Customer prepayments | ( |
) | ||||||
| Accrued rebates and allowances | ( |
) | ( |
) | ||||
| Other accrued liabilities | ||||||||
| Net cash provided by (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 | ( |
) | ||||||
| Proceeds from InnoHold indemnification payment | ||||||||
| Tax receivable agreement payments | ( |
) | ( |
) | ||||
| Distributions to members | ( |
) | ||||||
| Proceeds from exercise of warrants | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Net cash provided by financing activities | ||||||||
| Net decrease in cash | ( |
) | ( |
) | ||||
| Cash and cash equivalents, beginning of the year | ||||||||
| Cash and cash equivalents, end of the period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the 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 | $ | $ | ||||||
| Non-cash leasehold improvements | $ | $ | ||||||
| Accrued distributions | $ | $ | ||||||
| Tax receivable agreement liability | $ | $ | ||||||
| Deferred income taxes | $ | $ | ||||||
| Exercise of liability warrants | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Organization
The Company’s mission is to improve the lives of our consumers by delivering innovative better sleep solutions.
Purple Innovation, Inc. collectively with its subsidiary (the “Company” or “Purple Inc.”) is a digitally-native vertical brand founded on comfort product innovation with premium offerings. The Company designs and manufactures a variety of innovative, branded and premium comfort products, including mattresses, pillows, cushions, bases, sheets, and other products. The Company markets and sells its products through its e-commerce online channels, retail brick-and-mortar wholesale partners, Purple retail showrooms, and third-party online retailers.
The Company was incorporated in Delaware on May 19, 2015 as a special purpose acquisition company under the name of Global Partnership Acquisition Corp (“GPAC”). On February 2, 2018, the Company consummated a transaction structured similar to a reverse recapitalization (the “Business Combination”) pursuant to which the Company acquired a portion of the equity of Purple Innovation, LLC (“Purple LLC”). At the closing of the Business Combination (the “Closing”), the Company became the sole managing member of Purple LLC, and GPAC was renamed Purple Innovation, Inc.
As the sole managing member of Purple LLC, Purple Inc. through its officers and directors is responsible for all operational and administrative decision making and control of the day-to-day business affairs of Purple LLC without the approval of any other member.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The condensed consolidated
financial statements include the accounts of Purple Inc. and its controlled subsidiary Purple LLC. All intercompany balances and transactions
have been eliminated in consolidation. As of June 30, 2022, 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, 2021. The unaudited condensed consolidated financial statements were prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which were considered of normal recurring nature) considered necessary to present fairly the Company’s financial results. The results of the three and six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2022 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, 2022, Purple Inc. had a
5
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to establish accounting policies and to make estimates and judgments that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The Company regularly makes significant estimates and assumptions including, but not limited to, estimates that affect revenue recognition, accounts receivable and allowance for doubtful accounts, valuation of inventories, sales returns, warranty returns, 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.
Restructuring Charges
In February and April 2022,
because of lower-than-expected demand and higher labor and overhead costs that adversely affected our results of operations in the fourth
quarter of 2021 which continued into the first quarter of 2022, the Company completed a restructuring of its workforce to balance production,
improve efficiencies and realign the Company’s cost structure to focus on quality of earnings in our current core business. As a
result of the realignment and restructuring, the Company reduced employee headcount and incurred severance charges of $
In June 2022, the Company
incurred a one-time separation fee of $
The Company has also initiated other cost reduction and efficiency efforts to improve costs, increase margins and ensure compliance with debt covenants. If the Company’s cash flow from operations or other sources of financing are less than anticipated, the Company believes it will be able to fund operating expenses and comply with debt covenants based on its ability to scale back operations, reduce marketing spend, use the liquidity available under its revolving line of credit and postpone or discontinue growth strategies. In addition, in order to continue satisfying the conditions of the debt agreement the Company may be required to scale back operations, reduce marketing spend, prepay debt and postpone or discontinue our growth strategies.
Recent Accounting Pronouncements
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides guidance to alleviate the burden in accounting for reference rate reform by allowing certain expedients and exceptions in applying generally accepted accounting principles to contracts, hedging relationships, and other transactions impacted by reference rate reform. The provisions of ASU 2020-04 apply only to those transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. This standard is currently effective and upon adoption may be applied prospectively to contract modifications made on or before December 31, 2022, when the reference rate replacement activity is expected to be completed. The interest rates on the Company’s term loan and revolving line of credit were originally based on LIBOR. In February 2022, the Company entered into an amendment to the 2020 Credit Agreement that changed the interest reference rate from LIBOR to the Secured Overnight Financing Rate (“SOFR”). The change to SOFR did not have any impact on the Company’s condensed consolidated financial statements – see Note 10—Debt for discussion of the amendment to the 2020 Credit Agreement.
6
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 is to be applied utilizing a modified retrospective approach. The Company is currently evaluating the impact of this standard on its accounts receivable, cash and cash equivalents, and any other financial assets measured at amortized cost.
3. Underwritten Offering
In March 2022, the Company
completed an underwritten offering of
4. Fair Value Measurements
The Company uses the fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:
Level 1—Quoted market prices in active markets for identical assets or liabilities;
Level 2—Significant other observable inputs (i.e., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable, such as interest rate and yield curves, and market-corroborated inputs); and
Level 3—Unobservable inputs in which there is little or no market data, which require the reporting unit to develop its own assumptions.
7
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The classification of fair value measurements within the established three-level hierarchy is based upon the lowest level of input that is significant to the measurements. Financial instruments, although not recorded at fair value on a recurring basis include cash and cash equivalents, receivables, accounts payable and the Company’s debt obligations. The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair value because of the short-term nature of these accounts. The 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 11 — Warrant Liabilities for more information) are Level 3 instruments and use internal models to estimate fair value using certain significant unobservable inputs which requires determination of relevant inputs and assumptions. Accordingly, changes in these unobservable inputs may have a significant impact on fair value. Such inputs include risk free interest rate, expected average life, expected dividend yield, and expected volatility. These Level 3 liabilities generally decrease (increase) in value based upon an increase (decrease) in risk free interest rate and expected dividend yield. Conversely, the fair value of these Level 3 liabilities generally increase (decrease) in value if the expected average life or expected volatility were to increase (decrease).
The following table presents information about the Company’s liabilities that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value (dollars in thousands):
| Level | June 30, 2022 | December 31, 2021 | ||||||||||
| Sponsor warrants | 3 | $ | $ | |||||||||
The following table summarizes the Company’s total Level 3 liability activity for the six months ended June 30, 2022 and 2021 (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 | $ | |||
| Fair value as of December 31, 2020 | $ | |||
| Fair value of warrants exercised | ( | ) | ||
| Change in valuation inputs(1) | ( | ) | ||
| Fair value as of June 30, 2021 | $ | |||
| (1) | Changes in valuation inputs are recognized as the change in fair value – warrant liabilities in the condensed consolidated statement of operations. |
5. Revenue from Contracts with Customers
The Company markets and sells its products through e-commerce online channels, retail brick-and-mortar wholesale partners, Purple retail showrooms, and third-party online retailers. Revenue is recognized when the Company satisfies its performance obligations. These performance obligations generally relate to delivering products to a customer, subject to the shipping terms of the contract.
8
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 retail showrooms channel that sells directly to consumers who purchase at a Company showroom location. The wholesale category includes all product sales to our retail brick and mortar wholesale partners where consumers make purchases at their retail locations or through their online channels. The Company classifies products into two major types: sleep products and other. Sleep products include mattresses, platforms, adjustable bases, mattress protectors, pillows and sheets. Other products include cushions and various other products.
The following tables present the Company’s net revenue disaggregated by sales category and product type (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| Channel | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| DTC | $ | $ | $ | $ | ||||||||||||
| Wholesale | ||||||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| Product | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Sleep products | $ | $ | $ | $ | ||||||||||||
| Other | ||||||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
Contract Balances
Payment for sale of products
through the e-commerce online channel, third-party online retailers, Purple 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 $
6. Inventories, Net
Inventories, net consisted of the following (in thousands):
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Inventory obsolescence reserve | ( | ) | ( | ) | ||||
| Inventories, net | $ | $ | ||||||
9
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
7. Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| 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, 2022 or December
31, 2021. Interest capitalized on borrowings during the active construction period of major capital projects totaled $
8. Leases
The Company leases its manufacturing
and distribution facilities, corporate offices, Purple retail showrooms and certain equipment under non-cancelable operating leases with
various expiration dates through 2036. The Company’s office and manufacturing leases provide for initial lease terms up to
The following table presents the Company’s lease costs (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Operating lease costs | $ | $ | $ | $ | ||||||||||||
| Variable lease costs | ||||||||||||||||
| Short-term lease costs | ||||||||||||||||
| Total lease costs | $ | $ | $ | $ | ||||||||||||
10
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The table below reconciles
the undiscounted cash flows for each of the first
| 2022 (excluding the six months ended June 30, 2022)(1) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total operating lease payments | ||||
| Less – lease payments representing interest | ( | ) | ||
| Present value of operating lease payments | $ |
| (1) | Amount consists of $ |
As of June 30, 2022 and December 31, 2021, the weighted-average remaining
term of operating leases was
The following table provides supplemental information related to the Company’s condensed consolidated statement of cash flows for the six months ended June 30, 2022 and 2021 (in thousands):
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash paid for amounts included in present value of operating lease liabilities | $ | $ | ||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | ||||||||
9. Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Warranty accrual – current portion | $ | $ | ||||||
| Insurance financing | $ | |||||||
| Long-term debt, net of unamortized issuance costs – current portion | ||||||||
| Tax receivable agreement liability – current portion | ||||||||
| Other | ||||||||
| Total other current liabilities | $ | $ | ||||||
11
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
10. Debt
Debt consisted of the following (in thousands):
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Term loan | $ | $ | ||||||
| Revolving line of credit | ||||||||
| Less: unamortized issuance costs | ( | ) | ( | ) | ||||
| Total debt | ||||||||
| Less: current portion of debt, net of unamortized issuance costs | ( | ) | ( | ) | ||||
| Long-term debt, net | $ | $ | ||||||
Term Loan and Revolving Line of Credit
On September 3, 2020, Purple
LLC entered into a financing arrangement with KeyBank National Association and a group of financial institutions (the “2020 Credit
Agreement”). The 2020 Credit Agreement provides for a $
Pursuant to a Pledge and Security Agreement between Purple LLC, KeyBank and the Company (the “Security Agreement”), the 2020 Credit Agreement is secured by a perfected first-priority security interest in the assets of Purple LLC and the Company, including a security interest in all intellectual property. Also, the Company agreed to an unconditional guaranty of the payment of all obligations and liabilities of Purple LLC under the 2020 Credit Agreement. The Security Agreement contains a pledge, as security for the Company’s guaranty, of all its ownership interest in Purple LLC. The 2020 Credit Agreement also provides for standard events of default, such as for non-payment and failure to perform or observe covenants, and contains standard indemnifications benefitting the lenders.
The 2020 Credit Agreement includes representations, warranties and certain covenants of Purple LLC and the Company. While any amounts are outstanding under the 2020 Credit Agreement, Purple LLC is subject to several affirmative and negative covenants, including covenants regarding dispositions of property, investments, forming or acquiring subsidiaries, business combinations or acquisitions, incurrence of additional indebtedness, and transactions with affiliates, among other customary covenants, subject to certain exceptions. In particular, Purple LLC is (i) subject to annual capital expenditure limits that can be adjusted based on the Company achieving certain net leverage ratio thresholds as provided in the 2020 Credit Agreement, (ii) restricted from incurring additional debt up to certain amounts, subject to limited exceptions, as set forth in the 2020 Credit Agreement, and (iii) maintain minimum consolidated net leverage and fixed charge coverage ratio thresholds at certain measurement dates (as defined in the 2020 Credit Agreement). Purple LLC is also restricted from paying dividends or making other distributions or payments on its capital stock, subject to limited exceptions. If the Company or Purple LLC fail to perform their obligations under these and other covenants, or should any event of default occur, the revolving loan commitments under the 2020 Credit Agreement may be terminated and any outstanding borrowings, together with accrued interest, could be declared immediately due and payable.
12
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company’s operating
and financial results for the year ended December 31, 2021 did not satisfy the financial and performance covenants required under
the 2020 Credit Agreement. On February 28, 2022, prior to the covenant compliance certification date, the Company entered into the first
amendment of the 2020 Credit Agreement to avoid a breach of these covenants and potential default. This amendment contained a covenant
waiver period such that the net leverage ratio and fixed charge coverage ratio would not be tested for the fiscal quarters ended December 31,
2021, March 31, 2022 and June 30, 2022. Other modifications in the amendment included revised leverage ratio and fixed charge coverage
definitions and thresholds, the addition of minimum liquidity requirements with mandatory prepayments of the revolving loan if cash exceeded
$
Pursuant to the first amendment of the 2020 Credit Agreement, the Company
incurred fees and expenses of $
On
March 23, 2022, the Company entered into a second amendment to the 2020 Credit Agreement. This amendment modified the 2020 Credit
Agreement to allow Coliseum Capital Management, LLC (“CCM”) and its investment affiliates to acquire
Pursuant to the second amendment
of the 2020 Credit Agreement, the Company incurred fees and expenses of $
In November 2021, the Company
executed a $
13
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Interest expense under the 2020 Credit Agreement totaled $
11. Warrant Liabilities
The Company issued
During the six months ended
June 30, 2021,
The Company determined the fair value of the sponsor warrants using the Black Scholes model with the following assumptions:
| June 30, 2022 | December 31, 2021 | |||||||
| 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 $
12. Other Long-Term Liabilities
Other long-term liabilities consist of the following (in thousands):
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Warranty accrual | $ | $ | ||||||
| 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)
13. Commitments and Contingencies
Warranty Liabilities
The Company provides a limited warranty on most of the products it sells. The estimated warranty costs, which are expensed at the time of sale and included in cost of revenues, are based on the results of product testing, industry and historical trends and warranty claim rates incurred, and are adjusted for any current or expected trends as appropriate. Actual warranty claim costs could differ from these estimates. The Company regularly assesses and adjusts the estimate of accrued warranty claims by updating claims rates for actual trends and projected claim costs. The Company classifies estimated warranty costs expected to be paid beyond a year as a long-term liability.
The Company had the following activity for warranty liabilities (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| 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,
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.
On May 21, 2021,
15
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Purple LLC Class B Unit Exchange Right
In certain cases, adjustments to the exchange ratio will occur in case of a split, reclassification, recapitalization, subdivision or similar transaction of or relating to the Class B Units or the shares of Class A common stock and Class B common stock or a transaction in which the Class A common stock is exchanged or converted into other securities or property. The exchange ratio will also adjust in certain circumstances when the Company acquires Class B Units other than through an exchange for its shares of Class A common stock.
The right of a holder of Paired Securities to exchange may be limited by the Company if it reasonably determines in good faith that such restrictions are required by applicable law (including securities laws), such exchange would not be permitted under other agreements of such holder with the Company or its subsidiaries, including the Third Purple LLC Agreement, or if such exchange would cause Purple LLC to be treated as a “publicly traded partnership” under applicable tax laws.
The Company and each holder of Paired Securities shall bear its own expense regarding the exchange except that the Company shall be responsible for transfer taxes, stamp taxes and similar duties.
There were no Paired Securities
exchanged for Class A common stock during the six months ended June 30, 2022. During the six months ended June 30, 2021,
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 U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc., No.17-494, reversed a longstanding precedent that remote sellers are not required to collect state and local sales taxes. The Company cannot predict the effect of these and other attempts to impose sales, income or other taxes on e-commerce. The Company currently collects and reports on sales tax in all states in which it does business. However, the application of existing, new or revised taxes on the Company’s business, in particular, sales taxes, VAT and similar taxes would likely increase the cost of doing business online and decrease the attractiveness of selling products over the internet. The application of these taxes on the Company’s business could also create significant increases in internal costs necessary to capture data and collect and remit taxes. There have been, and will continue to be, substantial ongoing costs associated with complying with the various indirect tax requirements in the numerous markets in which the Company conducts or will conduct business.
Legal Proceedings
On September 9, 2019, Purple
LLC filed a Statement of Claim against PerfectSense Home Inc. and PerfectSense Trading Co. Ltd. (collectively, “PerfectSense”)
in the Federal Court of Canada. PerfectSense is a manufacturer and supplier of mattresses and related products. PerfectSense owns the
domain name www.purplesleep.ca, which used to, but no longer, redirects to its website at www.perfectsense.ca. In addition
to this, Purple LLC has alleged that PerfectSense has designed their mattresses with the same look as the Purple mattresses (white mattress
top, purple stripe, and grey bottom); used many of the marketing elements on Purple’s website (including a similar “exploded
view” image of their mattress); and adopted the color purple as their dominant marketing color. Purple LLC is suing for a declaration
that PerfectSense has infringed Purple LLC’s copyright and trademark rights and committed the tort of passing off. Purple LLC is
asking for injunctive relief, damages, an accounting of profits, interest, costs, and delivery up or destruction of the infringing products
(including delivery up of the www.purplesleep.ca domain). After filing the statement of claim, Purple LLC posted $
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 United States District Court for the District of Utah. The lawsuit arises from ReST’s multiple breaches of its obligations
to Purple LLC, including infringing upon Purple LLC’s trademarks, patents, and trade dress, among other claims. 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, 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. On January 19, 2021, ReST 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 they may have had 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 Purple board members were not subject to arbitration,
and the Court stayed ReST’s claims against those individuals. Pursuant to the Court’s order, Purple 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 selected an arbitrator and they have agreed upon a scheduling order. Currently,
the parties are in the fact discovery phase of the arbitration. The parties have scheduled several depositions and exchange documents
and discovery requests. The arbitration hearing is set to begin on April 17, 2023, and it will continue through April 28, 2023. Purple
LLC seeks over $
On November 19, 2020, Purple LLC sued Advanced Comfort Technologies, Inc., dba Intellibed (“Intellibed”) in the U.S. District Court for the District of Utah for patent infringement, trademark infringement, trade secret misappropriation, and a number of related state law based claims. The principal allegations are that Intellibed has manufactured and sold unauthorized, infringing products under the Sleepy’s brand name owned by third-party Mattress Firm. Purple LLC also requested declaratory relief related to certain assignment terms of a license agreement in which Purple LLC is the licensor and Intellibed is the licensee. On December 14, 2020, Intellibed filed a motion to dismiss Counts I through XI of Purple LLC’s Complaint on the ground that these Counts fail to state a claim upon which relief can be granted. On December 15, 2020, Intellibed filed an Answer to Purple LLC’s complaint and also asserted against Purple LLC a total of eight counterclaims, including a number of declaratory judgment claims, breach of contract, and tortious interference claims. Intellibed’s main allegations are that its use of Purple LLC’s patents, trademark, and trade secrets in connection with Mattress Firm’s Sleepy’s products is authorized under the license agreement. On January 19, 2021, Purple LLC filed a motion to dismiss Intellibed’s fifth, sixth, seventh, and eighth counterclaims on the ground that these counterclaims fail to state a claim upon which relief can be granted. Briefing on Purple LLC’s partial motion to dismiss was completed on March 2, 2021. On January 19, 2021, Purple LLC also filed an Answer to Intellibed’s counterclaims, which were not subject to Purple LLC’s motion to dismiss. On January 27, 2021, Purple LLC filed a First Amended Complaint in response to Intellibed’s initial motion to dismiss. On February 10, 2021, Intellibed filed a motion to dismiss Counts I through XI of Purple LLC’s First Amended Complaint. Briefing on Intellibed’s partial motion to dismiss was completed on March 24, 2021. On September 28, 2021, the District Court dismissed Purple’s complaint without prejudice, and also dismissed ACTI’s counterclaim without prejudice, while the parties pursued dispute-resolution procedures set out in the license agreement. Because the Court found that the license agreement required the parties to follow the contractual dispute-resolution procedures prior to filing a lawsuit, Purple initiated those procedures in accordance with the license agreement and intends to continue to vigorously pursue its claims.
18
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
On June 8, 2021, Serta Simmons Bedding, LLC (“SSB”) filed a Complaint against the Company in the Superior Court of Gwinnett County, Georgia, Case No. 21-A-04413-1 (the “Georgia Litigation”). SSB’s Complaint alleges that the Company intentionally interfered with SSB’s business and contractual relations and violated the Georgia Trade Secrets Act by hiring one of SSB’s former employees in the face of an allegedly valid 2015 noncompete agreement. SSB seeks compensatory damages, punitive damages, equitable relief, and attorneys’ fees as a result of the conduct alleged in the Complaint. SSB also initiated arbitration proceedings against its former employee who Purple LLC has agreed to indemnify, subject to certain conditions. On July 12, 2021, the Company filed an Answer to SSB’s Complaint in the Georgia Litigation, denying all allegations of unlawful conduct, and further moved to dismiss the Georgia Litigation on the grounds that Georgia is an inconvenient forum and the parties’ dispute should instead be litigated in Utah. On July 9, 2021, the Company filed its own Complaint in the Fourth Judicial District Court of Salt Lake County, Utah, Case No. 21040011 (the “Utah Litigation”), seeking: (1) a declaratory judgment that the arbitration clause in the former employee’s 2015 noncompete agreement is unenforceable, (2) a declaratory judgment that the restrictive covenants in the former employee’s 2015 noncompete agreement are unenforceable, and (3) an order enjoining arbitration proceedings initiated by SSB and currently pending against the former employee. The Company filed a motion for summary judgment on these claims on August 16, 2021. SSB filed an Answer on August 18, 2021. After attending a mediation, the parties entered in a settlement agreement on December 31, 2021 resolving all claims in the Georgia Litigation and Utah Litigation. The Company did not pay any monetary consideration to SSB in connection with the settlement agreement. On January 12, 2022, pursuant to the terms of the settlement agreement, SSB dismissed the Georgia Litigation without prejudice and the Company dismissed the Utah Litigation without prejudice.
On May 3, 2022, the Company
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’s website architecture and checkout process. Purple paid Photon $
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.
14. Related Party Transactions
The Company had various transactions with entities or individuals which are considered related parties.
Coliseum Capital Management, LLC
Immediately following the Business Combination, Adam Gray was appointed to the Company’s Board of Directors (the “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 Coliseum Capital Management, LLC (“CCM”), which is the investment manager of Blackwell. Mr. Gray has voting and dispositive control over securities held by CCP, CDF and Blackwell which were also Lenders under the Amended and Restated Credit Agreement. See Note 13—Commitments and Contingencies—Subscription Agreement and Preemptive Rights for further discussion.
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.
19
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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, 2021, certain current and former employees of Purple LLC who received distributions of Paired Securities from InnoHold exchanged
During the six months ended
June 30, 2021, Purple LLC paid InnoHold through withholding payments directly to various states, an aggregate of $
15. Stockholders’ Equity
Class A Common Stock
The Company has
20
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Class B Common Stock
The Company has
In connection with the Business
Combination, approximately
Preferred Stock
The Company has
Sponsor Warrants
There were
21
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
There were no sponsor warrants
exercised during the six months ended June 30, 2022. During the six months ended June 30, 2021,
Noncontrolling Interest
Noncontrolling interest (“NCI”)
is the membership interest in Purple LLC held by holders other than the Company. Upon the close of the Business Combination, and at December
31, 2018, InnoHold’s and other Class B Unit holders’ combined NCI percentage in Purple LLC was approximately
16. Income Taxes
At each interim period, the Company estimates its forecasted full-year effective tax rate. That forecasted rate is applied to year-to-date ordinary income or loss to compute the year-to-date income tax provision. In order to compute the annual effective tax rate, the Company estimates its full year ordinary income and total tax provision, including both current and deferred taxes.
For annual periods, the Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that the deferred tax assets will be realized. Deferred tax assets and liabilities are calculated by applying existing tax laws and the rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change. Our effective tax rate is primarily impacted by the allocation of income taxes to the noncontrolling interest and the non-taxable nature of the change in fair value of the warrant liability.
The Company’s sole material asset is Purple LLC, which is treated as a partnership for U.S. federal income tax purposes and for purposes of certain state and local income taxes. Purple LLC’s net taxable income and any related tax credits are passed through to its members and are included in the members’ tax returns, even though such net taxable income or tax credits may not have actually been distributed. While the Company consolidates Purple LLC for financial reporting purposes, the Company will be taxed on its share of earnings of Purple LLC not attributed to the noncontrolling interest holders, which will continue to bear their share of income tax on its allocable earnings of Purple LLC. The income tax burden on the earnings taxed to the noncontrolling interest holders is not reported by the Company in its consolidated financial statements under GAAP. As a result, the Company’s effective tax rate differs from the statutory rate. The primary factors impacting expected tax are the change in fair value of the warrant liabilities and remeasurement of deferred taxes primarily as a result of the change in the estimated state tax rate.
22
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Deferred tax assets at June
30, 2022 totaled $
The Company currently estimates
its annual effective income tax rate to be
For the six months ended June
30, 2022, the Company has recorded an income benefit 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 a result of the initial merger transaction, the subsequent exchanges of Class B Units for Class A common stock
and changes in estimates relating to the expected tax benefits associated with the liability under the agreement, the potential future
tax receivable agreement liability was $
As of December 31, 2021, the
Company estimated $
23
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 income. Accrued interest and penalties would be included on the related tax liability line in the consolidated balance sheet. As of June 30, 2022, no uncertain tax positions were recognized as liabilities in the condensed consolidated financial statements.
17. Net Income (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.
The following table sets forth the calculation of basic and diluted weighted average shares outstanding and earnings (loss) per share for the periods presented (in thousands, except per share amounts):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net income (loss) attributable to Purple Innovation, Inc.-basic | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Less – dilutive effect of change in fair value of warrant liabilities | ( | ) | ( | ) | ||||||||||||
| Less – net loss attributed to noncontrolling interest | ( | ) | ( | ) | ||||||||||||
| Net income (loss) attributable to Purple Innovation, Inc.-diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| Denominator | ||||||||||||||||
| Weighted average shares—basic | ||||||||||||||||
| Add – dilutive effect of equity awards | — | |||||||||||||||
| Add – dilutive effect of warrants | ||||||||||||||||
| Add – dilutive effect of Class B shares | ||||||||||||||||
| Weighted average shares—diluted | ||||||||||||||||
| Net income (loss) per common share: | ||||||||||||||||
| Basic | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
24
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
For the three and six months
ended June 30, 2022, the Company excluded
18. Equity Compensation Plans
2017 Equity Incentive Plan
The Purple Innovation, Inc.
2017 Equity Incentive Plan (the “2017 Incentive Plan”) provides for grants of stock options, stock appreciation rights, restricted
stock units and other stock-based awards. Directors, officers and other employees and subsidiaries and affiliates, as well as others performing
consulting or advisory services for the Company and its subsidiaries, will be eligible for grants under the 2017 Incentive Plan. As of
June 30, 2022, an aggregate of
Class A Stock Awards
In May 2022, the Company granted
stock awards under the 2017 Incentive Plan to independent directors on the Board. The stock awards vested immediately and the Company
issued
Employee Stock Options
In March and June 2022, the
Company granted
The Company determined the fair value of the options granted during the six months ended June 30, 2022 using the Black Scholes method with the following weighted average assumptions:
| Fair market value | $ | |||
| Exercise price | $ | |||
| Risk free interest rate | % | |||
| Expected term in years | ||||
| Expected volatility | % | |||
| Expected dividend yield |
The following table summarizes the Company’s total stock option activity for the six months ended June 30, 2022:
| Options (in thousands) | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term in Years | Intrinsic Value (in thousands) | |||||||||||||
| Options outstanding as of January 1, 2022 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Forfeited/cancelled | ( | ) | ||||||||||||||
| Options outstanding as of June 30, 2022 | $ | $ | ||||||||||||||
25
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Outstanding and exercisable stock options as of June 30, 2022 are as follows:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
| Exercise Prices | Number of Options Outstanding (in thousands) | Weighted Average Remaining Life (Years) | Number of Options Exercisable (in thousands) | Weighted Average Remaining Life (Years) | Intrinsic Value (in thousands) | |||||||||||||||||
| $ | $ | |||||||||||||||||||||
The following table summarizes the Company’s unvested stock option activity for the six months ended June 30, 2022:
| Options (in thousands) | Weighted Average Grant Date Fair Value | |||||||
| Nonvested options as of January 1, 2022 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Nonvested options as of June 30, 2022 | $ | |||||||
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,
2022, the Company recognized stock option expense of $
As of June 30, 2022, outstanding
stock options had $
26
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Employee Restricted Stock Units
In March and June 2022, the
Company granted
During the second quarter of 2022, the Company granted
| Trading price of common stock on measurement date | $ | |||
| Risk free interest rate | % | |||
| Expected life in years | ||||
| Expected volatility | % | |||
| Expected dividend yield |
The following table summarizes the Company’s restricted stock unit activity for the six months ended June 30, 2022:
| Number Outstanding (in thousands) | Weighted Average Grant Date Fair Value | |||||||
| Nonvested restricted stock units as of January 1, 2022 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Nonvested restricted stock units as of June 30, 2022 | $ | |||||||
The Company recorded restricted
stock unit expense of $
As of June 30, 2022, outstanding
restricted stock units had $
27
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Aggregate Non-Cash Stock-Based Compensation
The Company has accounted for all stock-based compensation under the provisions of ASC 718 Compensation—Stock Compensation. This standard requires the Company to record a non-cash expense associated with the fair value of stock-based compensation over the requisite service period.
The following table summarizes the aggregate non-cash stock-based compensation recognized in the statement of operations for stock awards, employee stock options and employee restricted stock units (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Cost of revenues | $ | $ | $ | $ | ||||||||||||
| Marketing and sales | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total non-cash stock-based compensation | $ | $ | $ | $ | ||||||||||||
19. Employee Retirement Plan
In July 2018 the Company established
a 401(k) plan that qualifies as a deferred compensation arrangement under Section 401 of the IRS Code. All eligible employees over
the age of 18 and with 4 months’ service are eligible to participate in the plan.
20. Subsequent Events
On July 20, 2022, the Company entered into an amendment to its Alpine facility lease agreement with 123E LLC. The amendment rescinded the Company’s previous notice of termination that was scheduled to be effective September 30, 2022 and extended the term such that the lease will remain in effect until September 30, 2023.
On August 5, 2022, the Company filed a Complaint with the United States 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’s intellectual property rights related to pillow and seat cushion products. The Complaint alleges that the proposed Respondents are violating 19 U.S.C. § 1337 (“Section 337”) by importing into the United States, selling for importation into the United States, and/or selling in the United States after importation pillow and seat cushion products that infringe Purple’s trade dress rights or otherwise constitute unfair competition, infringe a certain Purple design patent, infringe Purple trademarks, and/or infringe Purple utility patents. The Complaint requests that the ITC issue at least the following relief: (i) a General Exclusion Order excluding from entry into the United States all pillow and seat cushion products that infringe any asserted Purple intellectual property right; (ii) Limited Exclusion Orders excluding from entry into the United States all pillow and cushion products of the proposed Respondents named in the Complaint that infringe any asserted Purple intellectual property right; and (iii) Cease and Desist Orders against the proposed Respondents named in the Complaint barring them from marketing, selling, advertising, or distributing infringing products in the United States, including via on-line retailers. The ITC is currently determining whether to institute an unfair import investigation under Section 337 in connection with Purple’s Complaint.
28
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 1, 2022. 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 improve the lives of our consumers by delivering innovative better sleep solutions.
We are a digitally-native vertical brand founded on comfort product innovation with premium offerings. We design and manufacture a variety of innovative, branded and premium comfort products, including mattresses, pillows, cushions, frames, sheets, and other products. Our products are the result of over 30 years of innovation and investment in proprietary and patented comfort technologies and the development of our own manufacturing processes. Our proprietary gel technology, Hyper-Elastic Polymer, underpins many of our comfort products and provides a range of benefits that differentiate our offerings from other competitors’ products. We market and sell our products directly to consumers through our e-commerce and Purple retail showroom channels and through our retail brick-and-mortar wholesale partner channel.
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 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, 2022, Purple Inc. had a 99.5% economic interest in Purple LLC while other Class B Unit holders had the remaining 0.5%
29
Executive Summary – Results of Operations
Net revenues decreased 21.1% to $144.1 million and 22.1% to $287.3 million for the three and six months ended June 30, 2022, respectively, when compared to the corresponding periods in the prior year. These decreases were primarily due to softening demand for home related products, inflationary pressures on consumer discretionary spending, management’s decision to reduce advertising spending, and the prior year pull forward of demand driven by the effects of COVID and economic stimulus experienced in the first half of 2021.
Gross profit decreased 40.2% to $48.8 million and 40.6% to $100.4 million for the three and six months ended June 30, 2022, respectively, when compared to the corresponding periods in the prior year. These decreases reflected the impact of lower sales and channel mix combined with unfavorable cost absorption and elevated levels of materials, labor and overhead costs, partially offset by benefits realized from our workforce restructuring.
Operating expenses decreased 27.7% to $60.9 million and 15.5% to $130.9 million for the three and six months ended June 30, 2022, respectively, when compared to the corresponding periods in the prior year. These decreases primarily reflected the impact of management’s decisions to reduce advertising spend, execute two workforce reductions and implement other cost saving measures.
Net loss was $8.3 million and $21.8 million for the three and six months ended June 30, 2022, respectively, compared to net income of $2.6 million and $23.4 million for the three and six months ended June 30, 2021, respectively.
Recent Developments in Our Business
Equity Financing
In March 2022, the Company completed an underwritten public offering of 16.1 million shares of Class A common stock, which included the additional 2.1 million shares of the over-allotment option that the underwriters exercised in full. The aggregate net proceeds received by the Company from the offering, after deducting offering expenses of $0.3 million, totaled $92.9 million.
Debt Financing
On September 3, 2020, Purple LLC entered into the 2020 Credit Agreement that provided for a $45.0 million term loan and a $55.0 million revolving line of credit. In November 2021, the Company executed a $55.0 million draw on its revolving line of credit, which represented the full amount available under the line. On March 31, 2022, the Company used a portion of the net proceeds from its underwritten public offering, described above, to repay in full the $55.0 million of principal outstanding on the revolving line of credit.
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. This amendment contained a covenant waiver period such that the net leverage ratio and fixed charge coverage ratio would not be tested for the fiscal quarters ended December 31, 2021, March 31, 2022 and June 30, 2022. Other modifications in the amendment included revised leverage ratio and fixed charge coverage definitions and thresholds, the addition of minimum liquidity requirements with mandatory prepayments of the revolving loan if cash exceeded $25.0 million, new weekly and monthly reporting requirements, limits on the amount of capital expenditures, the addition of a lease incurrence test for opening additional showrooms, additional negative covenants during a covenant amendment period that extends into 2023 until certain conditions are met, and the interest rate was changed from LIBOR plus 3.00% to SOFR plus 4.75%. Pursuant to this amendment, the Company made a $2.5 million payment on the term loan to cover the four quarterly principal payments due in 2022 and incurred fees and expenses of $0.8 million that were recorded as debt issuance costs in the condensed consolidated balance sheet.
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 CCM and its investment affiliates to acquire 35% or more of the combined voting power of all equity interests of the Company entitled to vote for the election of members of the Company’s board of directors without constituting an event of default. CCM is considered a related party of the Company in that Adam Gray, a member of our board of directors, serves as a managing partner of CCM. Pursuant to this amendment, the Company incurred fees and expenses of $0.4 million that were recorded as debt issuance costs in the condensed consolidated balance sheet.
30
Operational Developments
The COVID-19 pandemic has impacted many aspects of our operations, directly and indirectly, including disruption of our employees, consumer behavior, distribution and logistics, our suppliers, and the market overall. The scope and nature of these impacts continue to evolve. Because of the COVID-19 pandemic, we took precautionary measures recommended by the appropriate national and state health agencies to manage our resources and mitigate the adverse impact of the pandemic, which was intended to help minimize the risk to our Company, employees, customers, and the communities in which we operate. Soon after the pandemic began, we also experienced an increase in demand in our e-commerce channel, and in 2020 and 2021 the Company increased its production capacity to match actual and anticipated demand growth. In 2022, after two years of the pandemic, we are experiencing a pull-back in growth that left us with excess operational capacity in facilities, equipment, and personnel. Beginning in the first quarter of 2022 and continuing into the second quarter, we have rebalanced production and fulfillment operations in our different facilities, reduced employee headcount and taken other actions to lower costs.
We are closely monitoring the impacts of COVID-19 and general economic conditions on global supply chain, manufacturing, and logistics operations. As inflationary pressures increase, we anticipate that our production and operating costs will similarly increase. In addition, COVID-19 and other events, including port closures or labor shortages, have resulted in the continuation or worsening of manufacturing and shipping costs, delays and constraints. While most of our domestic suppliers have been able to continue operations and provide necessary materials when needed, we have experienced some constraints from certain suppliers, with respect to both the availability and cost of materials. In addition, as experienced in other industries, in order to remain competitive in hiring and retaining the labor necessary to maintain our production levels, we have increased wages and other compensation. These increases in materials, labor and freight costs have resulted in higher cost of goods sold and lower margins. We believe that materials, labor and freight costs will continue to remain at elevated levels or increase further in the foreseeable future.
In the fourth quarter of 2021 and continuing into 2022, our gross margins and results of operations have been, and we expect will continue to be adversely affected by elevated levels of materials, labor and freight costs and lower-than-expected demand levels. In early 2022, to offset the impact of higher costs on our gross margins, we increased prices and initiated several other projects to improve efficiencies and reduce costs. Also, we have continued to invest in showroom expansion and growing wholesale partner door count and productivity in response to a return to more normalized consumption patterns where consumer demand has shifted away from e-commerce and back to brick and mortar buying. We ended the second quarter with 40 showrooms after opening 6 net new locations during the quarter and we plan to add 14 more showrooms over the remainder of the year. In addition, at the end of the second quarter, our products are being sold through approximately 3,200 wholesale doors, having added approximately 700 net new doors during the first six months of 2022. Improving the sales productivity of our wholesale doors remains a primary focus and a critical component of our strategy to combat shifting demand patterns. After several years of hyper growth and increased investments to support current and future expansion, we are now building the framework for strong operational maturity and accountability after focusing on right-sizing our operations, improving our execution, and refining our strategies to drive profitable growth in the current market environment. We have also intentionally reduced our advertising spending in 2022 to improve marketing efficiency and stabilize profitability in a challenging macroeconomic environment.
Outlook for Growth
To support our plans for future growth, we are focusing on the following opportunities:
| ● | Develop and execute on strategies to meaningfully expand our wholesale presence. | |
| ● | Build premium brand position to grow market share of the premium mattress category. | |
| ● | 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 adjacent 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 offset gross margin erosion and exit the year with gross margins close to 40%. |
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.
31
Operating Results for the Three 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 condensed consolidated statements of operations:
| Three Months Ended June 30, | ||||||||||||||||
| 2022 | % of Net Revenues | 2021 | % of Net Revenues | |||||||||||||
| Revenues, net | $ | 144,109 | 100.0 | % | $ | 182,586 | 100.0 | % | ||||||||
| Cost of revenues | 95,297 | 66.1 | 100,899 | 55.3 | ||||||||||||
| Gross profit | 48,812 | 33.9 | 81,687 | 44.7 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Marketing and sales | 40,373 | 28.0 | 59,844 | 32.8 | ||||||||||||
| General and administrative | 18,779 | 13.0 | 22,461 | 12.3 | ||||||||||||
| Research and development | 1,748 | 1.2 | 1,923 | 1.1 | ||||||||||||
| Total operating expenses | 60,900 | 42.3 | 84,228 | 46.1 | ||||||||||||
| Operating income (loss) | (12,088 | ) | (8.4 | ) | (2,541 | ) | (1.4 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (707 | ) | (0.5 | ) | (569 | ) | (0.3 | ) | ||||||||
| Other income (expense), net | (136 | ) | (0.1 | ) | 26 | — | ||||||||||
| Change in fair value – warrant liabilities | 346 | 0.2 | 4,860 | 2.7 | ||||||||||||
| Tax receivable agreement expense | — | — | (381 | ) | (0.2 | ) | ||||||||||
| Total other income (expense), net | (497 | ) | (0.3 | ) | 3,936 | 2.2 | ||||||||||
| Net income (loss) before income taxes | (12,585 | ) | (8.7 | ) | 1,395 | 0.8 | ||||||||||
| Income tax benefit | 4,175 | 2.9 | 1,167 | 0.6 | ||||||||||||
| Net income (loss) | (8,410 | ) | (5.8 | ) | 2,562 | 1.4 | ||||||||||
| Net loss attributable to noncontrolling interest | (70 | ) | — | (16 | ) | — | ||||||||||
| Net income (loss) attributable to Purple Innovation, Inc. | $ | (8,340 | ) | (5.8 | ) | $ | 2,578 | 1.4 | ||||||||
Revenues, Net
Net revenues decreased $38.5 million, or 21.1%, to $144.1 million for the three months ended June 30, 2022 compared to $182.6 million for the three months ended June 30, 2021. The decline in net revenues reflected a $32.3 million decrease in mattress sales, a $2.7 million decrease in other sleep product sales and a $3.5 million decrease in other product sales. The decrease in net revenues for all three product types was primarily due to softening demand for home related products, inflationary pressures on consumer discretionary spending, management’s decision to reduce advertising spend, and the prior year pull forward of demand driven by the effects of COVID and economic stimulus in the first half of 2021. The decline in net revenues from a sales channel perspective consisted of DTC net revenues decreasing $34.6 million, or 29.8% and wholesale net revenues decreasing $3.9 million, or 5.9%. In addition to the factors discussed above, the decrease in DTC net revenues was impacted by a return to more normalized consumption patterns after two years of COVID-driven demand coupled with customers shifting back to brick and mortar buying. The decrease in wholesale net revenues reflected reduced purchases by our existing wholesale partners, offset in part by the impact of adding approximately 700 net new wholesale partner doors during the first six months of 2022.
Cost of Revenues
Cost of revenues decreased $5.6 million, or 5.6%, to $95.3 million for the three months ended June 30, 2022 compared to $100.9 million for the three months ended June 30, 2021. This decrease was primarily due to the corresponding decrease in sales volume, offset in part by increases in materials, freight and overhead costs. Our gross profit percentage, which decreased to 33.9% of net revenues in the second quarter of 2022 from 44.7% in the second quarter of 2021, was adversely impacted by lower sales with an increased proportion of wholesale channel revenue which carries a lower average selling price than sales from our DTC channel and unfavorable cost absorption from lower than planned production volumes in prior months. Additionally, our gross profit percentage reflects the impact of elevated levels of materials, labor and overhead costs, partially offset by benefits realized from our workforce restructuring.
32
Marketing and Sales
Marketing and sales expense decreased $19.5 million, or 32.5%, to $40.4 million for the three months ended June 30, 2022 compared to $59.8 million for the three months ended June 30, 2021. This decrease reflected a $24.1 million decline in advertising spending and a $2.7 million decrease in other marketing costs due in part to workforce reductions. The intentional reduction in advertising spending was due to management’s efforts to improve marketing efficiency and stabilize profitability in a challenging macroeconomic environment. These decreases were offset in part by a $2.0 million increase in wholesale-related marketing and sales costs as we continue to focus on improving the sales productivity of our wholesale doors and a $5.3 million increase in marketing and sales costs associated with our continued showroom expansion. Marketing and sales expense as a percentage of net revenues was 28.0% in the second quarter of 2022 compared to 32.8% in the second quarter of 2021. This decrease was primarily due to the reduction we made in advertising spending.
General and Administrative
General and administrative expense decreased $3.7 million, or 16.4%, to $18.8 million for the three months ended June 30, 2022 compared to $22.5 million for the three months ended June 30, 2021. This decrease was primarily due to a $5.3 million decrease in legal and professional fees, offset in part by a $1.4 million increase in payroll costs related to planned increases in general and administrative personnel over the past twelve months and a $0.2 million increase in other expenses. The decrease in legal and professional fees was primarily due to $7.9 million of underwriting commissions and other related costs we paid in the prior year second quarter for shares sold by Coliseum Capital Partners. This decrease was partially offset by a one-time $3.1 million separation fee incurred by the Company during the second quarter of 2022 for not continuing with the services of a professional services provider.
Research and Development
Research and development costs decreased $0.2 million, or 9.1%, to $1.7 million for the three months ended June 30, 2022 from $1.9 million for the three months ended June 30, 2021. This decrease was primarily due to lower professional services costs as product development priorities were being refocused. This decrease was offset in part by an increase in payroll costs related to planned increases in our research and development workforce including the addition of a chief innovation officer.
Operating Income (Loss)
Operating loss increased $9.5 million to $12.1 million for the three months ended June 30, 2022 compared to $2.5 million for the three months ended June 30, 2021. This increase was primarily due to the decrease in gross profit, offset in part by lower operating expenses.
Interest Expense
Interest expense totaled $0.7 million for the three months ended June 30, 2022 compared to $0.6 million for the three months ended June 30, 2021. The $0.1 million increase was primarily due to the term loan interest rate increasing from 3.50% during the second quarter of 2021 to 6.07% during the second quarter of 2022. In February 2022, the Company entered into the first amendment to the 2020 Credit Agreement which, among other things, changed the reference interest rate from LIBOR to SOFR and increased the applicable margins. The impact of this increase was offset in part by $0.2 million of interest capitalized during the second quarter of 2022. There was no interest capitalized during the three months ended June 30, 2021.
Change in Fair Value – Warrant Liabilities
The 1.9 million sponsor warrants outstanding at both June 30, 2022 and 2021 had fair values of $0.1 million and $14.5 million, respectively. The decrease in fair value was primarily due to the Company’s Class A stock price, one of the primary assumptions used to re-measure the warrant liability, declining from $26.41 at June 30, 2021 to $3.06 at June 30, 2022. During the three months ended June 30, 2022 and 2021, we recognized gains of $0.3 million and $4.9 million, respectively, in our condensed consolidated statements of operations related to decreases in the fair value of the warrants outstanding at the end of the respective periods.
Income Tax (Expense) Benefit
We had an income tax benefit of $4.2 million for the three months ended June 30, 2022 compared to an income tax benefit of $1.2 million for the three months ended June 30, 2021. The income tax benefit in the second quarter of 2022 was primarily the result of the Company having a net loss before income taxes of $12.6 million.
Noncontrolling Interest
The Company calculates net income or loss attributable to noncontrolling interests on a quarterly basis using their weighted average ownership percentage. Net loss attributed to noncontrolling interests was $0.1 million in the second quarter of 2022 while net loss attributed to noncontrolling interests was negligible for the three months ended June 30, 2021.
33
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, | ||||||||||||||||
| 2022 | % of Net Revenues | 2021 | % of Net Revenues | |||||||||||||
| Revenues, net | $ | 287,288 | 100.0 | % | $ | 369,015 | 100.0 | % | ||||||||
| Cost of revenues | 186,850 | 65.0 | 199,804 | 54.1 | ||||||||||||
| Gross profit | 100,438 | 35.0 | 169,211 | 45.9 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Marketing and sales | 90,332 | 31.4 | 114,212 | 31.0 | ||||||||||||
| General and administrative | 36,667 | 12.8 | 36,987 | 10.0 | ||||||||||||
| Research and development | 3,891 | 1.4 | 3,646 | 1.0 | ||||||||||||
| Total operating expenses | 130,890 | 45.6 | 154,845 | 42.0 | ||||||||||||
| Operating income (loss) | (30,452 | ) | (10.6 | ) | 14,366 | 3.9 | ||||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (1,730 | ) | (0.6 | ) | (1,139 | ) | (0.3 | ) | ||||||||
| Other expense, net | (119 | ) | — | (42 | ) | — | ||||||||||
| Change in fair value – warrant liabilities | 4,274 | 1.5 | 14,007 | 3.8 | ||||||||||||
| Tax receivable agreement expense | — | — | (207 | ) | (0.1 | ) | ||||||||||
| Total other income, net | 2,425 | 0.8 | 12,619 | 3.4 | ||||||||||||
| Net income (loss) before income taxes | (28,027 | ) | (9.8 | ) | 26,985 | 7.3 | ||||||||||
| Income tax benefit (expense) | 5,986 | 2.1 | (3,484 | ) | (0.9 | ) | ||||||||||
| Net income (loss) | (22,041 | ) | (7.7 | ) | 23,501 | 6.4 | ||||||||||
| Net income (loss) attributable to noncontrolling interest | (199 | ) | (0.1 | ) | 99 | — | ||||||||||
| Net income (loss) attributable to Purple Innovation, Inc. | $ | (21,842 | ) | (7.6 | ) | $ | 23,402 | 6.3 | ||||||||
Revenues, Net
Net revenues decreased $81.7 million, or 22.1%, to $287.3 million for the six months ended June 30, 2022 compared to $369.0 million for the six months ended June 30, 2021. The decline in net revenues reflected a $69.8 million decrease in mattress sales, an $8.0 million decrease in other sleep product sales and a $3.9 million decrease in other product sales. The decrease in net revenues for all three product types was primarily due to softening demand for home related products, inflationary pressures on consumer discretionary spending, management’s decision to reduce advertising spend, and the prior year pull forward of demand driven by the effects of COVID and economic stimulus in the first half of 2021. The decline in net revenues from a sales channel perspective consisted of DTC net revenues decreasing $74.0 million, or 30.7% and wholesale net revenues decreasing $7.8 million, or 6.1%. In addition to the factors discussed above, the decrease in DTC net revenues was impacted by a return to more normalized consumption patterns after two years of COVID-driven demand coupled with customers shifting back to brick and mortar buying. The decrease in wholesale net revenues reflected reduced purchases by our existing wholesale partners during the first six months of 2022, offset in part by the impact of adding approximately 700 net new wholesale partner doors during the same time frame.
Cost of Revenues
Cost of revenues decreased $13.0 million, or 6.5%, to $186.9 million for the six months ended June 30, 2022 compared to $199.9 million for the six months ended June 30, 2021. This decrease was primarily due to the corresponding decrease in sales volume, offset in part by an increase in materials, freight overhead costs. Our gross profit percentage, which decreased to 35.0% of net revenues during the first six months of 2022 from 45.9% for the first six months of 2021, was adversely impacted by lower sales with an increased proportion of wholesale channel revenue which carries a lower average selling price than sales from our DTC channel and unfavorable cost absorption from lower than planned production volumes in prior months. Additionally, our gross profit percentage reflects the impact of elevated levels of materials, labor and overhead costs, partially offset by benefits realized from our workforce restructuring.
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Marketing and Sales
Marketing and sales expense decreased $23.9 million, or 20.9%, to $90.3 million for the six months ended June 30, 2022 compared to $114.2 million for the six months ended June 30, 2021. This decrease reflected a $39.7 million decline in advertising spending and a $1.3 million decrease in other marketing costs due in part to workforce reductions. The intentional reduction in advertising spending was due to management’s efforts to improve marketing efficiency and stabilize profitability in a challenging macroeconomic environment. These decreases were offset in part by a $7.0 million increase in wholesale-related marketing and sales costs as we continue to focus on improving the sales productivity of our wholesale doors and a $10.1 million increase in marketing and sales costs associated with our continued showroom expansion. Marketing and sales expense as a percentage of net revenues was 31.4% during the first six months of 2022 compared to 31.0% for the first six months of 2021.
General and Administrative
General and administrative expense decreased to $36.7 million for the six months ended June 30, 2022 compared to $37.0 million for the six months ended June 30, 2021. This decrease was primarily due to a $4.6 million decrease in legal and professional fees, offset in part by a $3.6 million increase in payroll costs related to planned increases in general and administrative personnel over the past twelve months and a $0.7 million increase in other expenses. The decrease in legal and professional fees was primarily due to $7.9 million of underwriting commissions and other costs we paid in the prior year second quarter for shares sold by Coliseum Capital Partners. This decrease was partially offset by a one-time $3.1 million separation fee incurred by the Company during the second quarter of 2022 for not continuing with the services of a professional services provider.
Research and Development
Research and development costs increased $0.2 million, or 6.7%, to $3.9 million for the six months ended June 30, 2022 from $3.6 million for the six months ended June 30, 2021. This increase was primarily due to an increase in payroll costs related to planned increases in our research and development workforce including the addition of a chief innovation officer, offset in part by a decrease in professional services costs as product development priorities were being refocused.
Operating Income (Loss)
Operating income decreased $44.8 million to an operating loss of $30.5 million for the six months ended June 30, 2022 compared to operating income of $14.4 million for the six months ended June 30, 2021. This decrease was primarily due to the decrease in gross profit, offset in part by lower operating expenses.
Interest Expense
Interest expense totaled $1.7 million for the six months ended June 30, 2022 compared to $1.1 million for the six months ended June 30, 2021. The $0.6 million increase was primarily due to interest expense of $0.6 million incurred on 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. The increase was also impacted by the term loan average interest rate increasing from 3.50% during the first six months of 2021 to 5.10% during the first six months of 2022. In February 2022, the Company entered into the first amendment to the 2020 Credit Agreement which, among other things, changed the reference interest rate from LIBOR to SOFR and increased the applicable margins. The impact of these increases was offset in part by $0.4 million of interest capitalized during the first six months of 2022. There was no interest capitalized during the six months ended June 30, 2021.
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Change in Fair Value – Warrant Liabilities
The 1.9 million sponsor warrants outstanding at both June 30, 2022 and 2021 had fair values of $0.1 million and $14.5 million, respectively. The decrease in fair value was primarily due to the Company’s Class A stock price, one of the primary assumptions used to re-measure the warrant liability, declining from $26.41 at June 30, 2021 to $3.06 at June 30, 2022. During the six months ended June 30, 2022 and 2021, we recognized gains of $4.3 million and $14.0 million, respectively, in our condensed consolidated statements of operations related to decreases in the fair value of the warrants outstanding at the end of the respective periods.
Income Tax (Expense) Benefit
We had an income tax benefit of $6.0 million for the six months ended June 30, 2022 compared to income tax expense of $3.5 million for the six months ended June 30, 2021. The income tax benefit in the first six months of 2022 was primarily the result of the Company having a net loss before income taxes of $28.0 million.
Noncontrolling Interest
The Company calculates 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 six months ended June 30, 2022 compared to net income of $0.1 million for the six months ended June 30, 2021.
Liquidity and Capital Resources
Our principal sources of funds are cash flows from operations and cash and cash equivalents on hand, supplemented with borrowings made pursuant to our credit facilities 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 and working capital needs as well as other contractual obligations described below. Our working capital needs depend largely upon the timing of cash receipts from product sales, payments to vendors and others, changes in inventories, and operating lease payment obligations. Our cash and working capital positions were $41.2 million and $80.1 million, respectively, as of June 30, 2022 compared to $91.6 million and $87.5 million, respectively, as of December 31, 2021. Cash used for capital expenditures decreased from $26.4 million in the first six months of 2021 to $26.1 million during the first six months of 2022. Our capital expenditures in the first six months of 2022 primarily consisted of leasehold improvements and furniture and fixtures associated with the opening of new Purple retail showrooms.
In the event our cash flow from operations or other sources of financing are less than anticipated, we believe we will be able to fund operating expenses and comply with debt covenants based on our ability to scale back operations, reduce marketing spend, use the liquidity we have available under our revolving line of credit and postpone or discontinue our growth strategies. Our 2020 Credit Agreement, as amended, includes various covenants and obligations that may make it difficult to obtain additional capital on terms that are favorable to us and to execute on our growth strategies. In addition, in order to continue satisfying the conditions of the debt agreement we may be required to scale back operations, reduce marketing spend, prepay debt and postpone or discontinue our growth strategies. We may also be forced to restructure our obligations to current creditors, pursue work-out options or seek additional funding sources including new debt or equity capital.
Based on our current projections, we believe our cash on hand, amounts available under our revolving line of credit, and expected cash to be generated from e-commerce, wholesale, and Purple retail store channels will be sufficient to meet our working capital requirements, comply with debt covenants and cover anticipated capital expenditures for the next 12 months and beyond.
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Underwritten Offering
In March 2022, the Company completed an underwritten public offering of 16.1 million shares of Class A common stock, which included the additional 2.1 million shares of the over-allotment option that the underwriters exercised in full. The aggregate net proceeds received by the Company from the offering, after deducting offering expenses of $0.3 million, totaled $92.9 million.
Debt
On September 3, 2020, Purple LLC entered into the 2020 Credit Agreement that provided for a $45.0 million term loan and a $55.0 million revolving line of credit. The term loan is being repaid in accordance with a five-year amortization schedule and may be prepaid in whole or in part at any time without premium or penalty, subject to reimbursement of certain costs. The revolving credit facility has a term of five years and carries the same interest provisions as the term debt. A commitment fee is due quarterly based on the applicable margin applied to the unused total revolving commitment. In November 2021, the Company executed a $55.0 million draw on its revolving line of credit, which represented the full amount available under the line. On March 31, 2022, the Company used a portion of the net proceeds from the offering to repay in full the $55.0 million of principal outstanding on the revolving line of credit.
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. This amendment contained a covenant waiver period such that the net leverage ratio and fixed charge coverage ratio would not be tested for the fiscal quarters ended December 31, 2021, March 31, 2022 and June 30, 2022. Other modifications in the amendment included revised leverage ratio and fixed charge coverage definitions and thresholds, the addition of minimum liquidity requirements with mandatory prepayments of the revolving loan if cash exceeded $25.0 million, new weekly and monthly reporting requirements, limits on the amount of capital expenditures, the addition of a lease incurrence test for opening additional showrooms, and additional negative covenants during a covenant amendment period that extends into 2023 until certain conditions are met. In addition, the interest rate on any outstanding borrowings under the 2020 Credit Agreement was changed from LIBOR with a floor of 0.5% plus an applicable margin (historically at 3.0%) to an initial rate of SOFR with a floor of 0.5% plus 4.75%, for a total rate of 5.25% if the applicable liquidity threshold is met. If the Company does not meet this threshold, the interest rate would increase to SOFR with a floor of 0.5% plus 9.00%. Once the Company achieves a consolidated leverage ratio that is below 3.00 to 1.00, the interest rate will be based on SOFR with a floor of 0.5% plus a 3.00% to 3.75% margin depending on the consolidated leverage ratio. The interest rate on the term loan was 6.07% as of June 30, 2022.
Pursuant to the first amendment of the 2020 Credit Agreement, the Company incurred fees and expenses of $0.9 million that were recorded as debt issuance costs in the condensed consolidated balance sheet and made a $2.5 million payment on the term loan to cover the four quarterly principal payments due in 2022. The Company accounted for this amendment as a modification of existing debt in accordance with ASC 470 – Debt.
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 CCM and its investment affiliates to acquire 35% or more of the combined voting power of all equity interests of the Company entitled to vote for the election of members of the Company’s board of directors without constituting an event of default. CCM is considered a related party of the Company in that Adam Gray, a member of our board of directors, serves as a managing partner of CCM.
Pursuant to the second amendment of the 2020 Credit Agreement, the Company incurred fees and expenses of $0.4 million that were recorded as debt issuance costs in the condensed consolidated balance sheet. The Company accounted for this amendment as a modification of existing debt in accordance with ASC 470 – Debt.
Tax Receivable Agreement
We are required to make certain payments to InnoHold under a tax receivable agreement, which may have a material adverse effect on our liquidity and capital resources. We are currently unable to determine the total future amount of these payments due to the unpredictable nature of several factors, including the timing of future exchanges, the market price of shares of Class A 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. As of June 30, 2022 and December 31, 2021, the tax receivable agreement liability reflected in the Company’s consolidated balance sheet was $162.2 million and $168.1 million, respectively. This decrease was due to a $5.8 million payment that was made during the first quarter of 2022.
Other Contractual Obligations
In addition to the material contractual obligations discussed above, other material contractual obligations primarily include operating lease payments obligations. See Note 8 of the condensed consolidated financial statements for additional information.
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Cash Flows for the Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021
The following summarizes our cash flows for the six months ended June 30, 2022 and 2021 as reported in our condensed consolidated statements of cash flows (in thousands):
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash provided by (used in) operating activities | $ | (52,804 | ) | $ | 11,469 | |||
| Net cash used in investing activities | (26,055 | ) | (26,447 | ) | ||||
| Net cash provided by financing activities | 28,412 | 2,104 | ||||||
| Net decrease in cash | (50,447 | ) | (12,874 | ) | ||||
| Cash, beginning of the period | 91,616 | 122,955 | ||||||
| Cash, end of the period | $ | 41,169 | $ | 110,081 | ||||
Cash used in operating activities of $52.8 million for the six months ended June 30, 2022 primarily resulted from a $22.0 million net loss combined with a $30.1 million decrease in operating cash flow related to net changes of operating assets and liabilities. These decreases related mostly to a $6.1 million increase in accounts receivable and a $37.0 million decrease in accounts payable, offset in part by a $13.8 million decrease in inventories. The increase in accounts receivable was primarily due to the timing of wholesale partner payments. The decline in accounts payable was mainly due to the balance at prior year-end being higher than normal because of payment timing coupled with the impact of larger advertising spend in the fourth quarter of 2021. The decrease in inventory was primarily due to management’s efforts to rebalance production and fulfillment operations during the first half of 2022.
Cash used in investing activities reflected capital expenditures of $26.1 million during the six months ended June 30, 2022 compared to $26.4 million for the six months ended June 30, 2021. Capital expenditures during the first six months of 2022 primarily consisted of investments in leasehold improvements and furniture and fixtures related to the opening of new Purple retail showrooms.
Cash provided by financing activities was $28.4 million during the six months ended June 30, 2022 compared to $2.1 million during the six months ended June 30, 2021. Financing activities during the first six months of 2022 included $92.9 million of net proceeds received from the underwritten stock offering, offset in part by a $55.0 million revolving line of credit payment, a $5.8 million payment on the tax receivable agreement, and $3.8 million in other debt related payments.
Critical Accounting Policies
We discuss our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Annual Report on Form 10-K filed March 1, 2022. There were no significant changes in our critical accounting policies since the end of fiscal 2021.
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, 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.
We also use the Investor Relations portion of our website, investors.purple.com, as a channel of distribution of additional Company information that may be deemed material. Accordingly, investors should monitor this channel, in addition to following our press releases, SEC filings and public conference calls and webcasts. The contents of our website shall not be deemed to be incorporated herein by reference.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our operating results are subject to risk from interest rate fluctuations on the outstanding borrowings under our 2020 Credit Agreement. Our term loan and revolving line of credit both bear interest at variable rates, which exposes us to market risks relating to changes in interest rates. Interest rate risk is highly sensitive due to many factors, including U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our control. As of June 30, 2022, we had $39.7 million of variable rate debt outstanding under our term loan. We had no borrowings outstanding under our revolving line of credit as of June 30, 2022. An increase of 100 basis points in the effective interest rate on our outstanding debt at June 30, 2022 would result in an increase in interest expense of approximately $0.4 million over the next 12 months. We do not use derivative financial instruments for speculative or trading purposes, but this does not preclude our adoption of specific hedging strategies in the future.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
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.
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Based upon this evaluation, and the above criteria, our CEO and CFO concluded that due to the previously reported material weakness described below, the Company’s disclosure controls and procedures were not effective as of June 30, 2022.
Previously Reported Material Weakness in Internal Control
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
As previously reported, we determined a material weakness existed relating to ineffective information technology general controls (“ITGCs”) in the areas of user access and segregation of duties related to certain information technology (“IT”) systems that support the Company’s financial reporting processes. We believe that these control deficiencies were a result of turnover of critical IT leadership; insufficient training of IT personnel; and inadequate risk-assessment processes to identify and assess user access in certain IT systems that could impact internal controls over financial reporting. As a result, we determined that we did not have effective controls to prevent or detect a material financial statement misstatement on a timely basis.
In response to this material weakness, management, with oversight of the Audit Committee of the Board of Directors, has identified and is in the process of implementing steps to remediate the material weakness. The Company has allocated resources to remediate user access related control and segregation of duties deficiencies. Our remediation efforts also include providing training to personnel associated with reviewing IT user access. In addition, we continue to engage consultants to advise us on making further improvements to our ITGCs. Although we intend to complete the remediation process as promptly as possible, we cannot at this time estimate how long it will take to remediate this material weakness. Until this material weakness is remediated, we plan to continue to perform additional analyses and other procedures to ensure that our consolidated financial statements are prepared in accordance with GAAP.
The material weakness did not result in any identified misstatements in our condensed consolidated financial statements, and there were no changes to previously issued financial results. However, because the material weakness creates a reasonable possibility that a material misstatement to our condensed consolidated financial statements would not be prevented or detected on a timely basis, the Company’s management concluded that at June 30, 2022, the Company’s internal control over financial reporting was ineffective.
(b) Changes in Internal Controls Over Financial Reporting.
Other than the remediation efforts related to the design and implementation of sufficient controls and processes around ITGCs, there were no changes in our internal control over financial reporting during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is from time to time involved in various claims, legal proceedings and complaints arising in the ordinary course of business. Please refer to Note 13 — Commitments and Contingencies and Note 20 – Subsequent Events to the condensed consolidated financial statements contained in this report for certain information regarding our legal proceedings.
ITEM 1A. RISK FACTORS
Except as described below, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K filed with the SEC on March 1, 2022.The disclosure of risks identified below does not imply that the risk has not already materialized.
Changes in economic conditions, including inflationary trends in the price of our input costs, such as raw materials and labor, and impacts on our consumers, could adversely affect our business and financial results.
The bedding industry is subject to volatility in the price of petroleum-based and steel products, which affects the cost of certain raw materials. The price and availability of these raw materials are subject to market conditions affecting supply and demand. Given the significance of the cost of these materials to our products, volatility in the prices of the underlying commodities can significantly affect profitability.
We have experienced and may continue to experience, volatility and increases in the price of certain of these raw materials as a result of a global market and supply chain disruptions, continuing impacts of the COVID-19 pandemic, and the broader inflationary environment.
In addition, persistent inflation has and may continue to erode consumer discretionary spending. Reductions in consumer discretionary spending have and we anticipate will continue to adversely affect demand for our products.
We may not be able to successfully anticipate consumer trends and demand and our failure to do so may lead to loss of consumer acceptance of the products we sell, resulting in reduced net sales.
Our success depends in part on our ability to anticipate and respond to changing trends and consumer demands in a timely manner. Changes in consumers’ tastes and trends and the resulting change in our product mix, as well as failure to offer our consumers multiple avenues for purchasing our products, could adversely affect our business and operating results. For example, as retail stores began to reopen following the elimination or easing of restrictions in connection with the COVID-19 pandemic, consumers began to shift away from online retail purchases towards brick-and-mortar shopping. Our gross margins for sales through wholesale customers are lower than those in our DTC channel and, as a result, this shift in customer preference has and we anticipate will continue to adversely impact our gross margins.
Further, general macroeconomic conditions, including persistent inflation, has and may continue to adversely affect consumer demand for our products, which are generally priced at a premium. Any reductions in consumer demand for our products has and may continue to adversely affect our sales and financial position.
If we fail to identify and respond to emerging trends, consumer acceptance of the products we manufacture and sell and our image with current or potential customers may be harmed, which could reduce our net sales. If we misjudge market trends, we may significantly overstock inventory and be forced to take significant inventory markdowns, which would have a negative impact on our gross profit and cash flow. Conversely, shortages of inventory or time to fulfillment of our products that prove popular could also reduce our sales.
The previous growth of our business placed significant strain on our resources and if we are unable to manage future growth, we may not have profitable operations or sufficient capital resources.
Historically, we have expanded our operations, including expanding our workforce, increasing our product offerings and scaling our infrastructure to support expansion of our manufacturing capacity, our wholesale channel expansion and the opening of Purple retail showrooms. Our planned growth includes increasing our manufacturing efficiencies, developing and introducing new products and developing new and broader distribution channels, including wholesale and Purple retail showrooms, and extending our global reach to other countries. This expansion increases the complexity of our business and places significant strain on our management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions.
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Our continued success depends, in part, upon our ability to manage and expand our operations and facilities and production capacity. The growth in our operations has placed, and may continue to place, significant demands on our management and operational and financial infrastructure. If we do not manage growth effectively, the quality of our products and fulfillment capabilities may suffer which could adversely affect our operating results. Our revenue growth may not be sustainable, and our percentage growth rates may decrease. 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, no growth, or shrinking, 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 or pursue work-out options.
Our growth depends in part on our ability to manage the opening and operating of new production facilities and Purple retail showrooms, which will require our entering into leases and other obligations. To be successful, we will need to continue developing retail expertise and we will need to hire new employees in states that may have employment laws that could increase our expenses. In general, operating new facilities and opening Purple retail showrooms in new locations exposes us to laws in other states, including California, that may not be as employer-friendly as those in which we currently operate, and may expose us to new liabilities. If we are not able to successfully manage the process of expanding operations geographically, opening Purple retail showrooms and maintaining operations in an expanding number of facilities and Purple retail showrooms, we may have to close Purple retail showrooms or operations facilities and incur sunk costs and continuing obligations that could put a strain upon our resources, damage our brand and reputation and limit our growth.
To manage growth effectively, we would need to continue to implement operational, financial and management controls and reporting systems and procedures and improve the systems and procedures that are currently in place. There is no assurance that we will be able to fulfill our staffing requirements for our business, successfully train and assimilate new employees, or expand our management base and enhance our operating and financial systems. Failure to achieve any of these goals will prevent us from managing our growth in an effective manner and could have a material adverse effect on our business, financial condition or results of operations. In addition, a softening of demand, whether caused by changes in customer preferences or a weakening of the U.S. or global economies, may result and has resulted in decreased revenue or growth. For example, we are experiencing weaker demand in part as a result of current inflationary trends. Further, we may not be able to accurately forecast our growth rate. We base our expense levels and investment plans on sales estimates. A significant portion of our expenses and investments is fixed, and we may not be able to adjust our spending quickly enough if our sales are less than expected.
We have identified the need for improved processes and procedures to avoid delays in the timely delivery of our mattress products and to improve the customer’s experience. Also, we have experienced rapid growth in our employee base, and the need to implement processes and procedures for improving employee training and retention. Competition for employees where our production facilities are located also has increased the costs for employee retention. We have implemented improved processes and procedures in an environment of continuous change, but our use of resources may not be as effective as intended or we may need to apply more resources than expected to continue to make changes to improve our employee retention and effectiveness and the quality of our products and services over time. If we are unable to make continuous improvement, achieve greater efficiencies in our operating expenses and improve our products and services, our business could be adversely affected.
Our expansion into new products, market segments and geographic regions subjects us to additional business, legal, financial, and competitive risks.
The majority of our sales are made directly to consumers through our DTC channels. We have been expanding our business into the wholesale distribution channel through relationships with our wholesale partners but there can be no assurance that we will continue to experience success with our wholesale partners or that anticipated new locations will be successful.
We may be unsuccessful in generating additional sales through wholesale channels. We may extend credit terms in connection with such relationships and such relationships may expose us to the risk of unpaid or late paid invoices. In addition, we may provide fixtures to such partners that may be difficult to recover or re-use. Our wholesale customers may not purchase our products in the volume we expect.
Profitability, if any, from sales to wholesale customers and new product offerings may be lower than from our DTC model and current products, and we may not be successful enough in these newer activities to recoup our investments in them. If any of these issues were to arise, they could damage our reputation, limit our growth, and negatively affect our operating results.
We may be unsuccessful in opening any Purple retail showrooms beyond those already opened in cities across the U.S. Operating Purple retail showrooms includes additional risks. For example, we will incur expenses and accept obligations related to additional leases, insurance, distribution and delivery challenges, increased employee management, and new marketing challenges. If we are not successful in our efforts to profitably operate these new stores, our reputation and brand could be damaged, growth could be limited, and our business may be harmed.
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In addition, offerings of new products through our e-commerce, wholesale distribution channel and Purple retail showrooms may present new and difficult challenges, and we may be subject to claims if customers of these offerings experience service disruptions or failures or other quality issues. Expansion of sales channels may require the development of additional, differentiated products to avoid price and distribution conflicts between and within sales channels. Wholesale expansion increases our risk as our wholesale partners will require delaying payments to us on net terms ranging from a few days to 60 or more days, or they may delay paying us beyond the agreed-upon net terms or fail to pay. Our Company showroom expansion increases our risk for inventory shrinkage from destruction, theft, obsolescence and other factors that render such inventory unusable or unsellable.
New products may come with unknown warranty and return risks. New product offerings or expansion into new market channels or geographic regions may subject us to new or additional regulation, which would impose potentially significant compliance and distribution costs.
Our future growth and profitability depend upon the strength of our Purple brand and the effectiveness and efficiency of our marketing programs and our ability to attract and retain customers.
We are highly dependent on the effectiveness of our marketing messages and the efficiency of our advertising expenditures in generating consumer awareness and sales of our products. We continue to evolve our marketing strategies, adjusting our messages, the amount we spend on advertising and where we spend it. We may not always be successful in developing effective messages and new marketing channels, as consumer preferences and competition change, and in achieving efficiency in our advertising expenditures.
We depend heavily on internet-based advertising to market our products through internet-based media and e-commerce platforms. If we are unable to continue utilizing such platforms, if those media and platforms diminish in efficacy, importance or size, if consumer usage of the platform decreases, or if we are unable to direct our advertising to our target consumer groups, our advertising efforts may be ineffective, and our business could be adversely affected. The costs of advertising through these platforms have increased significantly, which has resulted in decreased efficiency in the use of our advertising expenditures, and we expect these costs may continue to increase in the future.
We have relationships with traditional and digital media partners, online services, search engines, affiliate marketing websites, directories and other website and e-commerce businesses to provide content, advertising and other links that direct customers to our website. We rely on these relationships as significant sources of traffic to our website and to generate new customers. If we are unable to develop or maintain these relationships or develop and maintain new relationships for newly developed and necessary marketing services on acceptable terms, our ability to attract new customers and our financial condition would suffer. In addition, current or future relationships or agreements may fail to produce the sales that we anticipate. The cost of advertising for web-based platforms, such as Facebook, are increasing. Increasing advertising costs erode the efficiency of our advertising efforts. If we are unable to effectively manage our advertising costs or if our advertising efforts fail to produce the sales that we anticipate, our business could be adversely affected.
On October 20, 2020, the United States Department of Justice brought an antitrust lawsuit against Google claiming that Google improperly uses its monopoly over Internet search to impede competition and harm consumers. Our cost of advertising on Google may remain high if Google’s monopoly over internet searches is not prevented and competitive search engines are not allowed to compete. Alternatively, if Google is required because of this lawsuit to split up the company or sell assets, there is no assurance this will decrease advertising costs and it may lead to increased costs due to an increased number of service providers who obtain oligopoly power to control advertising costs or inefficiencies from a reduction in scale. Although this lawsuit may lower our advertising costs, there is risk that it may not and would lead to increased costs which would reduce our profitability and harm our business.
Consumers are increasingly using digital tools as a part of their shopping experience. As a result, our future growth and profitability will depend in part on (i) the effectiveness and efficiency of our online experience for disparate worldwide audiences, including advertising and search optimization programs in generating consumer awareness and sales of our products, (ii) our ability to prevent confusion among consumers that can result from search engines that allow competitors to use or bid on our trademarks to direct consumers to competitors’ websites, (iii) our ability to prevent internet publication or television broadcast of false or misleading information regarding our products or our competitors’ products, (iv) the nature and tone of consumer sentiment published on various social media sites, and (v) the stability of our website. In recent years, a number of direct to consumer, internet-based retailers, like us, have emerged and have driven up the cost of basic search terms, which has and may continue to increase the cost of our internet-based marketing programs. More recently, the large traditional mattress manufacturers have been increasing their efforts to increase their direct to consumer sales which also is increasing the cost of our internet-based marketing programs and cost of customer conversion.
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In the past, we have been the target of publications by purported consumer reviewers who claim to have identified health and safety concerns with our products. While we believe such claims to be baseless, refuting such claims requires us to expend significant resources to educate current and potential customers on the safety of our products. Even if we are able to broadly disseminate factual information to refute such claims and reinforce the safety of our products, such claims and attendant adverse publicity could persist and damage our reputation and brand value and result in lower sales.
The number of third-party review websites is increasing and customers have many platforms on which they can review our products, and such reviews are becoming increasingly influential with consumers. Negative reviews from such sources may receive widespread attention from consumers, which could damage our reputation and brand value and result in lower sales. If we are unable to effectively manage relationships with such reviewers to promote accurate reviews of our products, reviewers may decline to review our products or may post reviews with misleading information, which could damage our reputation and make it more difficult for us to improve our brand value.
If our marketing messages are ineffective or our advertising expenditures, geographic price-points, and other marketing programs, including digital programs, are inefficient in creating awareness and consideration of our products and brand name and in driving consumer traffic to our website, our sales, profitability, cash flows and financial condition may be adversely impacted. In addition, if we are not effective in preventing the publication of confusing, false or misleading information regarding our brand or our products, or if there arises significant negative consumer sentiment on social media regarding our brand or our products, our sales, profitability, cash flows and financial condition may be adversely impacted.
We are required to make certain prepayments to any revolving loans and thereafter may not be able to draw upon our revolving line of credit.
Under the 2020 Credit Agreement, as amended, if the aggregate amount of cash and cash equivalents we hold exceeds $25.0 million, we are required to prepay an amount equal to the lesser of (i) the outstanding revolving loans and (ii) the amount of cash and cash equivalents in excess of $25.0 million. In addition, we are prohibited from making additional borrowings under the revolver if after giving effect to any borrowing, and any transactions to be consummated therewith, the aggregate amount of cash and cash equivalents exceeds $25.0 million. As a result of these two restrictions, our ability to accumulate cash in excess of $25.0 million is limited. If for any reason we are unable to borrow on our revolving credit facility, we would be limited in available cash to pay expenses and meet our obligations, which lack of liquidity could impair our relationships with suppliers and vendors, delay our growth plans or prevent us from taking actions in our best interest or even continue in business.
We may issue debt and equity securities or securities convertible into equity securities, any of which may be senior to our Class A Stock as to distributions and in liquidation, which could negatively affect the value of our Class A Stock.
In the future, we may attempt to increase our capital resources by entering into additional debt or debt-like financing that is unsecured or secured by up to all of our assets, or by issuing additional debt or equity securities, which could include issuances of secured or unsecured notes, preferred stock, hybrid securities or securities convertible into or exchangeable for equity securities. For example, in March 2022 we completed a public offering of shares of Class A Stock. In the event of our liquidation, our lenders and holders of our debt would receive distributions of our available assets before distributions to holders of our Class A Stock, and holders of securities senior to the Class A Stock would receive distributions of our available assets before distributions to the holders of our Class A Stock. Because our decision to incur debt and issue securities in future offerings may be influenced by market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings or debt financings. Further, market conditions could require us to accept less favorable terms for the issuance of our securities in the future.
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ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS to be updated
| * | Filed herewith. |
| + | Indicates management contract or compensatory plan. |
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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, 2022 | By: | /s/ Robert T. DeMartini |
| Robert T. DeMartini | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: August 9, 2022 | By: | /s/ Bennett L. Nussbaum |
| Bennett L. Nussbaum | ||
| Interim Chief Financial Officer | ||
| (Principal Financial Officer) | ||
| Date: August 9, 2022 | By: | /s/ George T. Ulrich |
| George T. Ulrich | ||
| VP Accounting and Financial Reporting | ||
| (Principal Accounting Officer) |
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