Notes
to Condensed Consolidated Financial Statements
(unaudited)
1. Organization
The
Company’s mission is to help people feel and live better through innovative comfort solutions.
Purple
Innovation, Inc. collectively with its subsidiary (the “Company” or “Purple Inc.”) is a digitally-native vertical
brand founded on comfort product innovation with premium offerings. The Company designs and manufactures a variety of innovative, branded
and premium comfort products, including mattresses, pillows, cushions, bases, sheets, and other products. The Company markets and sells
its products through its direct-to-consumer (“DTC”) online channels, retail brick-and-mortar wholesale partners, third-party
online retailers and Company showrooms.
The
Company was incorporated in Delaware on May 19, 2015 as a special purpose acquisition company under the name of Global Partnership Acquisition
Corp (“GPAC”). On February 2, 2018, the Company consummated a transaction structured similar to a reverse recapitalization
(the “Business Combination”) pursuant to which the Company acquired a portion of the equity of Purple Innovation, LLC (“Purple
LLC”). At the closing of the Business Combination (the “Closing”), the Company became the sole managing member of Purple
LLC, and GPAC was renamed Purple Innovation, Inc.
As
the sole managing member of Purple LLC, Purple Inc. through its officers and directors is responsible for all operational and administrative
decision making and control of the day-to-day business affairs of Purple LLC without the approval of any other member.
2. Summary
of Significant Accounting Policies
Basis
of Presentation and Principles of Consolidation
The
Company consists of Purple Inc. and its consolidated subsidiary, Purple LLC. As of March 31, 2021, Purple Inc. held approximately 99%
of the common units of Purple LLC and Purple LLC Class B Unit holders held approximately 1% of the common units in Purple LLC.
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting
principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”)
regarding interim financial reporting and reflect the financial position, results of operations and cash flows of the Company. Certain
information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted
pursuant to such rules and regulations. As such, these unaudited condensed consolidated financial statements should be read in conjunction
with the 2020 audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form
10-K/A filed May 10, 2021. The unaudited condensed consolidated financial statements were prepared on the same basis as the audited consolidated
financial statements and, in the opinion of management, reflect all adjustments (all of which were considered of normal recurring nature)
considered necessary to present fairly the Company’s financial results. The results of the three months ended March 31, 2021 are
not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2021 or for any other interim period
or other future year.
On
December 31, 2020, the Company ceased to be an emerging growth company (“EGC”) and was no longer exempt from certain reporting
requirements that apply to public companies. As an EGC prior to this date, Purple Inc. had elected to use extended transition periods
available to private companies for complying with new or revised accounting standards.
PURPLE
INNOVATION, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Variable
Interest Entities
Purple
LLC is a variable interest entity (“VIE”). The Company determined that it is the primary beneficiary of Purple LLC as it
is the sole managing member and has the power to direct the activities most significant to Purple LLC’s economic performance as
well as the obligation to absorb losses and receive benefits that are potentially significant. At March 31, 2021, Purple Inc. had approximately
a 99% economic interest in Purple LLC and consolidated 100% of Purple LLC’s assets, liabilities and results of operations in the
Company’s unaudited condensed consolidated financial statements contained herein. The holders of Purple LLC Class B Units held
approximately 1% of the economic interest in Purple LLC. For further discussion see Note 13 — Stockholders’ Equity.
Reclassification
Certain
amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial
statements. These reclassifications had no effect on net income, cash flows or shareholders’ equity previously reported.
Use
of Estimates
The
preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to establish accounting
policies and to make estimates and judgments that affect the reported amounts of assets and liabilities and disclose contingent assets
and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions believed
to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The Company
regularly makes significant estimates and assumptions including, but not limited to, estimates that affect revenue recognition, accounts
receivable and allowance for doubtful accounts, valuation of inventories, cost of revenues, sales returns, warranty returns, warrant
liability, stock based compensation, the recognition and measurement of loss contingencies, estimates of current and deferred income
taxes, deferred income tax valuation allowances and amounts associated with the Company’s tax receivable agreement with InnoHold.
Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results could differ
materially from those estimates.
Leases
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases
(“ASC 842”), which required an entity to recognize lease liabilities and ROU assets on the balance sheet and to
disclose key information about an entity’s leasing arrangements. Because the Company ceased to be an EGC on December 31, 2020,
the standard became effective for the Company for its annual reporting period beginning January 1, 2020, and interim reporting periods
within the annual period beginning January 1, 2020. The adoption of ASC 842 and all related amendments using the modified retrospective
transition approach effective for the Company’s annual reporting period beginning January 1, 2020 resulted in the initial recognition
of operating lease right-of-use (“ROU”) assets of $27.9 million and operating lease liabilities of $33.0 million in
the Company’s consolidated balance sheet. Pre-existing liabilities for deferred rent and various lease incentives totaling $5.1
million were reclassified to operating lease ROU assets in connection with the adoption. The adoption of ASC 842 did not have a material
impact on the Company's consolidated results of operations or cash flows and had no impact on retained earnings.
At January 1, 2020, the effective date of adoption, the Company’s finance ROU assets and lease liabilities were not material.
The
Company determines if an agreement contains a lease at the inception of a contract. For leases with an initial term greater than 12 months,
a related lease liability is recorded on the balance sheet at the present value of future payments discounted at the estimated fully
collateralized incremental borrowing rate (discount rate) corresponding with the lease term. In addition, an ROU asset is recorded as
the initial amount of the lease liability, plus any lease payments made to the lessor before or at the lease commencement date and any
initial direct costs incurred, less any tenant improvement allowance incentives received.
The
Company calculates the present value of future payments using its incremental borrowing rate when the discount rate implicit in the lease
is not known. The incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow on a collateralized basis
over a similar term at an amount equal to the lease payments in a similar economic environment. The Company determines the applicable
incremental borrowing rate at the lease commencement date based on the rates of its secured borrowings, which is then adjusted for the
appropriate lease term and risk premium. In determining the Company's ROU assets and operating lease liabilities, the Company applies
these incremental borrowing rates to the minimum lease payments within each lease agreement.
Operating
lease expense is recognized on a straight-line basis over the lease term. Tenant incentive allowances received from the lessor are amortized
through the ROU asset as a reduction of rent expense over the lease term. Any variable lease costs are expensed as incurred. Leases
with an initial term of 12 months or less (short-term leases) are not recorded as ROU assets and corresponding lease liabilities. Short-term
lease expense is recognized on a straight-line basis over the lease term. ROU assets are assessed for impairment as part of the impairment
of long-lived assets, which is performed whenever events or changes in circumstances indicate that the carrying amount of an asset or
asset group may not be recoverable.
PURPLE
INNOVATION, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Revenue
Recognition
The
Company markets and sells its products through direct-to-consumer online channels, traditional wholesale partners, third-party online
retailers, and Company showrooms. Revenue is recognized when the Company satisfies its performance obligations under the contract which
is transferring the promised products to the customer. This principle is achieved in the following steps:
Identify
the contract with the customer. A contract with a customer exists when (i) the Company enters into an enforceable contract with a
customer that defines each party’s rights regarding the goods to be transferred and identifies the payment terms related to these
goods, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration
for the goods that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The
Company does not have significant costs to obtain contracts with customers.
Identify
the performance obligations in the contract. The Company’s contracts with customers do not include multiple performance obligations
to be completed over a period of time. The performance obligations generally relate to delivering products to a customer, subject to
the shipping terms of the contract. The Company has made an accounting policy election to account for shipping and handling activities
performed after a customer obtains control of the goods, including “white glove” delivery services, as activities to fulfill
the promise to transfer the goods. The Company does not offer extended warranty or service plans. The Company does not provide an option
to its customers to purchase future products at a discount and therefore there are no material option rights.
Determine
the transaction price. Payment for sale of products through the direct-to-consumer online channels and third-party online retailers
is collected at point of sale in advance of shipping the products. Amounts received for unshipped products are recorded as customer prepayments.
Payment by traditional wholesale customers is due under customary fixed payment terms. None of the Company’s contracts contain
a significant financing component. Revenue is recorded at the net sales price, which includes estimates of variable consideration such
as product returns, volume rebates, and other adjustments. The estimates of variable consideration are based on historical return experience,
historical and projected sales data, and current contract terms. Variable consideration is included in revenue only to the extent that
it is probable that a significant reversal of the revenue recognized will not occur when the uncertainty associated with the variable
consideration is subsequently resolved. Taxes collected from customers relating to product sales and remitted to governmental authorities
are excluded from revenues.
Allocate
the transaction price to performance obligations in the contract. The Company’s contracts with customers do not include multiple
performance obligations. Therefore, the Company recognizes revenue upon transfer of the product to the customer’s control at contractually
stated pricing.
Recognize
revenue when or as we satisfy a performance obligation. The Company satisfies performance obligations at a point in time upon either
shipment or delivery of goods, in accordance with the terms of each contract with the customer. With the exception of third-party “white
glove” delivery and certain wholesale partners, revenue generated from product sales is recognized at shipping point, the point
in time the customer obtains control of the products. Revenue generated from sales through third-party “white glove” delivery
is recognized at the point in time when the product is delivered to the customer. Revenue generated from certain wholesale partners is
recognized at a point in time when the product is delivered to the wholesale partner’s warehouse. The Company does not have service
revenue.
PURPLE
INNOVATION, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Debt
Issuance Costs and Discounts
Debt
issuance costs and discounts that relate to borrowings are presented in the condensed consolidated balance sheet as a direct reduction
from the carrying amount of the related debt liability and are amortized into interest expense using an effective interest rate over
the duration of the debt. Debt issuance costs that relate to revolving lines of credit are carried as an asset in the condensed consolidated
balance sheet and amortized to interest expense on a straight-line basis over the term of the related line of credit facility. Refer
to Note 8 – Debt.
Warrant
Liabilities
The
Company accounted for its Incremental Loan Warrants as liability warrants under the provisions of ASC 480 - Distinguishing Liabilities
from Equity. ASC 480 requires the recording of certain liabilities at their fair value. Changes in the fair value of these liabilities
are recognized in earnings. These warrants contained a repurchase provision which, upon an occurrence of a fundamental transaction as
defined in the warrant agreement, could have given rise to an obligation of the Company to pay cash to the warrant holders. In addition,
other provisions may have led to a reduction in the exercise price of the warrants. The Company determined the fundamental transaction
provisions required the warrants to be accounted for as a liability at fair value on the date of the transaction, with changes in fair
value recognized in earnings in the period of change. The Company used the Monte Carlo Simulation of a Geometric Brownian Motion
stock path model to determine the fair value of the liability. The model uses key assumptions and inputs such as exercise price, fair
market value of common stock, risk free interest rate, warrant life, expected volatility and the probability of a warrant re-price. All
of the Incremental Loan warrants were exercised during fiscal 2020.
The
Company accounted for its public warrants in accordance with ASC 815-40, “Derivatives and Hedging—Contracts in Entity’s
Own Equity” (“ASC 815”), under which these warrants did not meet the criteria for equity classification and were recorded
as liabilities. Since the public warrants met the definition of a derivative as contemplated in ASC 815, these warrants were measured
at fair value at inception and at each reporting date in accordance with ASC 820, Fair Value Measurement, with changes in fair value
recognized in earnings in the period of change. The Company determined the fair value of the public warrants based on their public trading
price. All of the public warrants were exercised during fiscal 2020.
The
Company accounts for its sponsor warrants in accordance with ASC 815, under which these warrants do not meet the criteria for equity
classification and must be recorded as liabilities. Since the sponsor warrants meet the definition of a derivative as contemplated in
ASC 815, these warrants are measured at fair value at inception and at each reporting date in accordance with ASC 820, Fair Value Measurement,
with changes in fair value recognized in earnings in the period of change. The Company uses the Black Scholes model to determine the
fair value of the liability associated with the sponsor warrants. The model uses key assumptions and inputs such as exercise price, fair
market value of common stock, risk free interest rate, warrant life and expected volatility. At March 31, 2021, there were 1.9 million
sponsor warrants outstanding.
Fair
Value Measurements
The
Company uses the fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair
value hierarchy are:
Level
1—Quoted market prices in active markets for identical assets or liabilities;
Level
2—Significant other observable inputs (e.g. quoted prices for similar items in active markets, quoted prices for identical or similar
items in markets that are not active, inputs other than quoted prices that are observable, such as interest rate and yield curves, and
market-corroborated inputs); and
Level
3—Unobservable inputs in which there is little or no market data, which require the reporting unit to develop its own assumptions.
The
classification of fair value measurements within the established three-level hierarchy is based upon the lowest level of input that is
significant to the measurements. Financial instruments, although not recorded at fair value on a recurring basis include cash and cash
equivalents, receivables, accounts payable, accrued expenses and the Company’s debt obligations. The carrying amounts of cash and
cash equivalents, receivables, accounts payable and accrued expenses approximate fair value because of the short-term nature of these
accounts. The fair value of the Company’s debt instruments is estimated to be face value based on the contractual terms of the
debt arrangements and market-based expectations.
The
public warrant liabilities are Level 1 instruments as they have quoted market prices in an active market. The sponsor and Incremental
Loan warrant liabilities are Level 3 instruments and use internal models to estimate fair value using certain significant unobservable
inputs which requires determination of relevant inputs and assumptions. Accordingly, changes in these unobservable inputs may have a
significant impact on fair value. Such inputs include risk free interest rate, expected average life, expected dividend yield, and expected
volatility. These Level 3 liabilities generally decrease (increase) in value based upon an increase (decrease) in risk free interest
rate and expected dividend yield. Conversely, the fair value of these Level 3 liabilities generally increase (decrease) in value
if the expected average life or expected volatility were to increase (decrease).
PURPLE
INNOVATION, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
The
following table presents information about the Company’s liabilities that are measured at fair value on a recurring basis and indicates
the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
|
|
|
|
|
March
31,
|
|
|
(In thousands)
|
|
Level
|
|
2021
|
|
|
2020
|
|
|
Public warrants
|
|
1
|
|
$
|
—
|
|
|
$
|
11,272
|
|
|
Sponsor warrants
|
|
3
|
|
|
19,415
|
|
|
|
4,531
|
|
|
Incremental Loan warrants
|
|
3
|
|
|
—
|
|
|
|
7,989
|
|
The
following table summarizes the Company’s total Level 3 liability activity for the three months ended March 31, 2021 and 2020:
|
(In thousands)
|
|
Sponsor
Warrants
|
|
|
Incremental
Loan
Warrants
|
|
|
Total
Level
3 Liabilities
|
|
|
Fair value as of December 31, 2019
|
|
$
|
7,689
|
|
|
$
|
21,622
|
|
|
$
|
29,311
|
|
|
Fair value transfer to Level 1 measurement
|
|
|
(117
|
)
|
|
|
—
|
|
|
|
(117
|
)
|
|
Change
in valuation inputs(1)
|
|
|
(3,041
|
)
|
|
|
(13,633
|
)
|
|
|
(16,674
|
)
|
|
Fair value as of March 31, 2020
|
|
$
|
4,531
|
|
|
$
|
7,989
|
|
|
$
|
12,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of December 31, 2020
|
|
$
|
92,708
|
|
|
$
|
—
|
|
|
$
|
92,708
|
|
|
Fair value of warrants exercised
|
|
|
(64,146
|
)
|
|
|
—
|
|
|
|
(64,146
|
)
|
|
Change
in valuation inputs(1)
|
|
|
(9,147
|
)
|
|
|
—
|
|
|
|
(9,147
|
)
|
|
Fair value as of March 31, 2021
|
|
$
|
19,415
|
|
|
$
|
—
|
|
|
$
|
19,415
|
|
|
(1)
|
Changes in valuation inputs are recognized in the change in fair value – warrant liabilities in the Consolidated Statements of Income.
|
Income
Taxes
In
calculating the provision for interim income taxes, in accordance with ASC Topic 740, an estimated annual effective tax rate is applied
to year-to-date ordinary income. At the end of each interim period, the Company estimates the effective tax rate expected to be applicable
for the full fiscal year. This differs from the method utilized at the end of an annual period.
For
annual periods, the Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. In assessing the realizability of deferred tax assets, management
considers whether it is more-likely-than-not that the deferred tax assets will be realized. Deferred tax assets and liabilities are calculated
by applying existing tax laws and the rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the
year of the enacted rate change. Our effective tax rate is primarily impacted by the allocation of income taxes to the noncontrolling
interest and the non-taxable nature of the change in fair value of the warrant liability.
The
Company accounts for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to
be taken in a tax return, which are subject to examination by federal and state taxing authorities. The tax benefit from an uncertain
tax position is recognized when it is more likely than not that the position will be sustained upon examination by taxing authorities
based on technical merits of the position. The amount of the tax benefit recognized is the largest amount of the benefit that has
a greater than 50% likelihood of being realized upon ultimate settlement. The effective tax rate and the tax basis of assets
and liabilities reflect management’s estimates of the ultimate outcome of various tax uncertainties. The Company recognizes penalties
and interest related to uncertain tax positions within the income tax benefit (expense) line in the accompanying condensed consolidated
statements of income.
The
Company files U.S. federal and certain state income tax returns. The income tax returns of the Company are subject to examination by
U.S. federal and state taxing authorities for various time periods, depending on those jurisdictions’ rules, generally after the
income tax returns are filed.
Net
Income Per Share
Basic
net income per common share is calculated by dividing net income attributable to common shareholders by the weighted average number of
shares of Class A Stock outstanding each period. Diluted net income per share adds to those shares the incremental shares that would
have been outstanding and potentially dilutive assuming exchanges of the Company’s outstanding warrants, stock options and Class
B Stock for Class A Stock, and the vesting of unvested and restricted Class A Stock. An anti-dilutive impact represents an increase in
net income per share or a reduction in net loss per share resulting from the conversion, exercise or contingent issuance of certain securities.
PURPLE
INNOVATION, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
The
Company uses the “if-converted” method to determine the potential dilutive effect of conversions of its outstanding Class
B Stock, and the treasury stock method to determine the potential dilutive effect of its outstanding warrants and stock options exercisable
for shares of Class A Stock and the vesting of unvested Class A Stock.
Recent
Accounting Pronouncements
Reference
Rate Reform
In
March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial
Reporting (ASU 2020-04), which provides guidance to alleviate the burden in accounting for reference rate reform by allowing certain
expedients and exceptions in applying generally accepted accounting principles to contracts, hedging relationships, and other transactions
impacted by reference rate reform. The provisions of ASU 2020-04 apply only to those transactions that reference LIBOR or another reference
rate expected to be discontinued due to reference rate reform. This standard is currently effective and upon adoption may be applied
prospectively to contract modifications made on or before December 31, 2022, when the reference rate replacement activity is expected
to be completed. The interest rate on the Company’s term loan is based on LIBOR. The Company plans to apply the amendments in this
update to account for any contract modifications that result from changes in the reference rate used. The Company does not expect these
amendments to have a material impact on its condensed consolidated financial statements and related disclosures.
Simplifying
the Accounting for Income Taxes
In
December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (ASU No. 2019-12). The new guidance
eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in
an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects
of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result
in a step-up in the tax basis of goodwill. The guidance is effective for fiscal years beginning after December 15, 2020 and for interim
periods within those fiscal years. The adoption of this standard by the Company on January 1, 2021 did not have a material impact on
the Company’s financial position, results of operations, or cash flows.
Internal-Use
Software
In
August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350) (“ASU 2018-15”).
The objective of ASU 2018-15 is to align the requirements for capitalizing implementation costs incurred in a hosting arrangement
that is a service contract with those incurred to develop or obtain internal-use software. The guidance is effective for fiscal years
beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The amendments can be
applied either retrospectively or prospectively. Because the Company lost its EGC status on December 31, 2020, the standard became effective
for the Company for its annual period beginning January 1, 2020, and interim periods within the annual period beginning January 1, 2021.
The Company elected to apply the amendments on a prospective basis. Adoption of this standard did not have a material impact on the Company’s
financial position, results of operations, or cash flows.
Measurement
of Credit Losses
In
June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments” (“ASU 2016-13”), which was further updated and clarified by the FASB through issuance of
additional related ASUs. This guidance replaces the existing incurred loss impairment guidance and establishes a single allowance framework
for financial assets carried at amortized cost based on expected credit losses. The estimate of expected credit losses requires the incorporation
of historical information, current conditions, and reasonable and supportable forecasts. These updates are effective for public companies,
excluding Smaller Reporting Companies (“SRC”), for annual periods beginning after December 15, 2019, including interim periods
therein. The standard is effective for all other entities for annual periods beginning after December 15, 2022, including interim periods
therein. Since the Company was considered an SRC on the deferral date of this standard, the guidance is effective for the Company’s
interim and annual financial periods beginning January 1, 2023. This standard is to be applied utilizing a modified retrospective approach.
The Company is currently evaluating the impact of this standard on its accounts receivable, cash and cash equivalents, and any other
financial assets measured at amortized cost and do not expect that adoption will have a material impact on its consolidated financial
statements or related disclosures.
PURPLE
INNOVATION, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
3. Revenue
from Contracts with Customers
The
Company markets and sells its products through direct-to-consumer online channels, traditional wholesale partners, third-party online
retailers and Company showrooms. Revenue is recognized when the Company satisfies its performance obligations under the contract which
is transferring the promised products to the customer as described in Note 2 – Summary of Significant Accounting Policies.
Disaggregated
Revenue
The
Company sells products through two channels: Direct-to-Consumer and Wholesale. The Direct-to-Consumer channel includes product sales
through various direct-to-consumer channels including Company showrooms and contact center. The Wholesale channel includes all product
sales to traditional third-party retailers for both in store and online channels. The Company classifies products into two major categories:
Bedding and Other. Bedding products include mattresses, platforms, adjustable bases, mattress protectors, pillows and sheets. Other products
include cushions and various other products.
The
following tables present the Company’s revenue disaggregated by sales channel and product category (in thousands):
|
|
|
Three
Months Ended
March 31,
|
|
|
Channel
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
Direct-to-consumer
|
|
$
|
124,904
|
|
|
$
|
80,687
|
|
|
Wholesale partner
|
|
|
61,525
|
|
|
|
41,688
|
|
|
Revenues, net
|
|
$
|
186,429
|
|
|
$
|
122,375
|
|
|
|
|
Three
Months Ended
March 31,
|
|
|
Product
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
Bedding
|
|
$
|
171,843
|
|
|
$
|
114,501
|
|
|
Other
|
|
|
14,586
|
|
|
|
7,874
|
|
|
Revenues, net
|
|
$
|
186,429
|
|
|
$
|
122,375
|
|
Contract
Balances
Payment
for sale of products through the direct-to-consumer online channels, third-party online retailers, Company showrooms and contact center
is collected at point of sale in advance of shipping the products. Amounts received for unshipped products are recorded as customer prepayments.
Customer prepayments totaled $7.9 million and $6.3 million at March 31, 2021 and December 31, 2020, respectively. During the three months
ended March 31, 2021 and 2020, the Company recognized all revenue that was deferred in customer prepayments at December 31, 2020 and
2019, respectively.
PURPLE
INNOVATION, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
4.
Inventories
Inventories
consisted of the following (in thousands):
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
27,759
|
|
|
$
|
26,372
|
|
|
Work-in-process
|
|
|
3,260
|
|
|
|
3,593
|
|
|
Finished goods
|
|
|
33,284
|
|
|
|
36,280
|
|
|
Inventory obsolescence
reserve
|
|
|
(1,021
|
)
|
|
|
(519
|
)
|
|
Inventories, net
|
|
$
|
63,282
|
|
|
$
|
65,726
|
|
5. Property
and Equipment
Property
and equipment consisted of the following (in thousands):
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Equipment
|
|
$
|
37,033
|
|
|
$
|
30,508
|
|
|
Equipment in progress
|
|
|
21,216
|
|
|
|
18,648
|
|
|
Leasehold improvements
|
|
|
19,981
|
|
|
|
15,758
|
|
|
Furniture and fixtures
|
|
|
5,294
|
|
|
|
5,160
|
|
|
Office equipment
|
|
|
3,547
|
|
|
|
3,185
|
|
|
Total property and equipment
|
|
|
87,071
|
|
|
|
73,259
|
|
|
Accumulated depreciation
|
|
|
(13,240
|
)
|
|
|
(11,773
|
)
|
|
Property and equipment,
net
|
|
$
|
73,831
|
|
|
$
|
61,486
|
|
Equipment
in progress reflects equipment, primarily related to mattress manufacturing, which is being constructed and was not in service at March 31,
2021 or December 31, 2020. Depreciation expense was $1.5 million and $1.2 million during the three months ended March 31, 2021 and 2020,
respectively.
6.
Leases
The
Company leases its manufacturing and distribution facilities, corporate offices, showrooms and certain equipment under non-cancelable
operating leases with various expiration dates through 2036. The Company’s office and manufacturing leases provide for initial
lease terms up to 16 years, while retail showrooms have initial lease terms of up to seven years. Certain leases may contain options
to extend the term of the original lease. The exercise of lease renewal options is at the Company’s discretion. Any lease renewal
options are included in the lease term if exercise is reasonably certain at lease commencement. The Company also leases vehicles and
other equipment under both operating and finance leases with initial lease terms of three to five years. The ROU asset for finance leases
was $0.8 million and $0.6 million as of March 31, 2021 and December 31, 2020, respectively.
PURPLE
INNOVATION, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
The
following table presents the Company’s lease costs (in thousands):
|
|
|
Three
Months Ended
March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
Operating lease costs
|
|
$
|
1,807
|
|
|
$
|
1,208
|
|
|
Variable lease costs
|
|
|
95
|
|
|
|
8
|
|
|
Short-term lease
costs
|
|
|
56
|
|
|
|
58
|
|
|
Total lease costs
|
|
$
|
1,958
|
|
|
$
|
1,274
|
|
The
table below reconciles the undiscounted cash flows for each of the first five years and total remaining years to the operating lease
liabilities recorded on the condensed consolidated balance sheet at March 31, 2021 (in thousands):
|
2021
(excluding the three months ended March 31, 2021) (1)
|
|
$
|
(1,768
|
)
|
|
2022
|
|
|
8,432
|
|
|
2023
|
|
|
7,851
|
|
|
2024
|
|
|
7,874
|
|
|
2025
|
|
|
7,903
|
|
|
Thereafter
|
|
|
62,996
|
|
|
Total
operating lease payments
|
|
|
93,288
|
|
|
Less
– lease payments representing interest
|
|
|
(28,708
|
)
|
|
Present
value of operating lease payments
|
|
$
|
64,580
|
|
(1)
– Amount consists of $4.8 million of undiscounted cash flows offset by $6.6 million of tenant improvement allowances which are
expected to be fully utilized in fiscal 2021.
As
of March 31, 2021 and December 31, 2020, the weighted-average remaining term of operating leases was 12.3 years and 11.8 years, respectively,
and the weighted-average discount rate of operating leases was 5.60% and 6.18%, respectively.
The
following table provides supplemental information related to the Company’s condensed consolidated statement of cash flows for the
three months ended March 31, 2021 and 2020:
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in present value of operating lease liabilities
|
|
$
|
809
|
|
|
$
|
423
|
|
|
Right-of-use assets obtained in exchange for operating lease liabilities
|
|
|
12,517
|
|
|
|
2,381
|
|
7. Other
Current Liabilities
Other
current liabilities consisted of the following (in thousands):
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Warranty accrual – current
portion
|
|
$
|
3,046
|
|
|
$
|
2,806
|
|
|
Long-term debt – current portion
|
|
|
2,007
|
|
|
$
|
2,004
|
|
|
Tax receivable agreement liability –
current portion
|
|
|
5,916
|
|
|
|
6,545
|
|
|
Insurance financing
|
|
|
1,253
|
|
|
|
910
|
|
|
Income taxes payable
|
|
|
1,926
|
|
|
|
—
|
|
|
Other
|
|
|
1,170
|
|
|
|
1,318
|
|
|
Total other current liabilities
|
|
$
|
15,318
|
|
|
$
|
13,583
|
|
PURPLE
INNOVATION, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
8.
Debt
Debt
consisted of the following (in thousands):
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Term loan
|
|
$
|
43,875
|
|
|
$
|
44,438
|
|
|
Less: unamortized debt
issuance costs
|
|
|
(962
|
)
|
|
|
(1,024
|
)
|
|
Total debt
|
|
|
42,913
|
|
|
|
43,414
|
|
|
Less: current portion
of debt
|
|
|
(2,007
|
)
|
|
|
(2,004
|
)
|
|
Long-term debt, net
|
|
$
|
40,906
|
|
|
$
|
41,410
|
|
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 $45.0 million term loan and a $55.0 million revolving
line of credit.
The
borrowing rates for the term loan are based on Purple LLC’s leverage ratio, as defined in the 2020 Credit Agreement, and can range
from LIBOR plus a 3.00% to 3.75% margin with a LIBOR minimum of 0.50%. The initial borrowing rate of 3.50% is based on LIBOR plus 3.00%.
The term loan will be 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. There may be mandatory prepayment obligations based on excess
cash flow.
Pursuant
to a Pledge and Security Agreement between Purple LLC, KeyBank and the Company (the “Security Agreement”), the 2020 Credit
Agreement is secured by a perfected first-priority security interest in the assets of Purple LLC and the Company, including a security
interest in all intellectual property. Also, the Company agreed to an unconditional guaranty of the payment of all obligations and liabilities
of Purple LLC under the 2020 Credit Agreement. The Security Agreement contains a pledge, as security for the Company’s guaranty,
of all its ownership interest in Purple LLC. The 2020 Credit Agreement also provides for standard events of default, such as for non-payment
and failure to perform or observe covenants, and contains standard indemnifications benefitting the lenders.
The
2020 Credit Agreement includes representations, warranties and certain covenants of Purple LLC and the Company. While any amounts are
outstanding under the 2020 Credit Agreement, Purple LLC is subject to several affirmative and negative covenants, including covenants
regarding dispositions of property, investments, forming or acquiring subsidiaries, business combinations or acquisitions, incurrence
of additional indebtedness, and transactions with affiliates, among other customary covenants, subject to certain exceptions. In particular,
Purple LLC is (i) subject to annual capital expenditure limits that can be adjusted based on the Company achieving certain net leverage
ratio thresholds as provided in the 2020 Credit Agreement, (ii) restricted from incurring additional debt up to certain amounts, subject
to limited exceptions, as set forth in the 2020 Credit Agreement, and (iii) maintain minimum consolidated net leverage and fixed charge
coverage ratio thresholds at certain measurement dates (as defined in the 2020 Credit Agreement). Purple LLC is also restricted from
paying dividends or making other distributions or payments on its capital stock, subject to limited exceptions. If the Company or Purple
LLC fail to perform their obligations under these and other covenants, or should any event of default occur, the revolving loan commitments
under the 2020 Credit Agreement may be terminated and any outstanding borrowings, together with accrued interest, could be declared immediately
due and payable. As of March 31, 2021, the Company was in compliance with all of the covenants related to the 2020 Credit Agreement.
The
$55.0 million revolving credit facility established under the 2020 Credit Agreement 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. The agreement for this revolving credit facility contains customary covenants and events of default. As of March 31, 2021,
there was no balance outstanding on the revolving credit facility.
The
Company incurred $2.5 million in debt issuance costs for the 2020 Credit Agreement. These costs relate to the entire credit arrangement
and therefore were allocated between the term loan and the revolving line of credit. The Company determined $1.1 million of the debt
issuance costs related to the term debt and are presented in the condensed consolidated balance sheet as a direct reduction from the
carrying amount of the debt liability. This amount is being amortized into interest expense using an effective interest rate over the
duration of the debt. The remaining $1.4 million of debt issuance costs were allocated to the revolving line of credit facility. This
amount is classified as other assets and is being amortized to interest expense on a straight-line basis over the term of the revolving
credit facility.
Interest
expense under the 2020 Credit Agreement totaled $0.6 million for the three months ended March 31, 2021.
PURPLE
INNOVATION, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Related
Party Loan
On
March 27, 2020, the Company entered into an amendment to Purple LLC’s Credit Agreement dated February 3, 2018 and all subsequent
amendments and agreements (collectively referred to as the “Related Party Loan”) that provided for the deferral of the full
amount of the interest payment due on March 31, 2020 and June 30, 2020 to reduce cash disbursements during the COVID-19 pandemic. The
Company accounted for this amendment as a modification of existing debt in accordance with ASC 470 - Debt. Interest expense on
the Related Party Loan was $1.2 million for the three months ended March 31, 2020, all of which was paid-in-kind through additions to
the principal amount.
On
September 3, 2020, the Company paid $45.0 million to retire, in full, all indebtedness related to the Related Party Loan. The payment
included $25.0 million for the original loan under the agreement, $10.0 million for a subsequent incremental loan, $6.6 million for paid-in-kind
interest, $2.5 million for a prepayment fee and $0.9 million for accrued interest. As a result of paying off the Related Party Loan during
the third quarter of fiscal 2020, the Company recognized a $5.8 million loss on extinguishment of debt.
9.
Warrant Liabilities
On
February 26, 2019, two of the lenders who originally financed the Related Party loan (the “Incremental Lenders”) funded a
$10.0 million increase in the loan and received 2.6 million warrants (“Incremental Loan Warrants”) to purchase 2.6 million
shares of the Company’s Class A Stock at a price of $5.74 per share, subject to certain adjustments. In May 2020, Tony Pearce or
Terry Pearce individually or together ceased to beneficially own at least 50% of the voting securities of the Company. As a result, the
exercise price of the warrants was reduced to zero based on the formula established in the agreement. The Company accounted for the Incremental
Loan Warrants as liabilities in accordance with ASC 480 - Distinguishing Liabilities from Equity and recorded them at fair value
on the date of the transaction and subsequently re-measured to fair value at each reporting date with changes in the fair value included
in earnings. On November 9, 2020, the Company issued 2.6 million shares of Class A Stock pursuant to the exercise of all of the warrants
held by the Incremental Lenders.
For
the three months ended March 31, 2020, the Company recorded a $13.6 million gain on the decrease in fair value of the Incremental Loan
Warrants. The fair value of the Incremental Loan Warrants was calculated using a Monte Carlo Simulation of a Geometric Brownian Motion
stock path model. The following are the assumptions used in calculating fair value on March 31, 2020:
|
Trading price of common stock on
measurement date
|
|
$
|
5.68
|
|
|
Exercise price
|
|
$
|
5.74
|
|
|
Risk free interest rate
|
|
|
0.37
|
%
|
|
Warrant life in years
|
|
|
3.9
|
|
|
Expected volatility
|
|
|
44.16
|
%
|
|
Expected dividend yield
|
|
|
—
|
|
|
Probability of warrant re-price
|
|
|
50.00
|
%
|
The
public and sponsor warrants that were issued in connection with the Company’s IPO and simultaneous private placement contain certain
provisions that do not meet the criteria for equity classification and therefore must be recorded as liabilities. The liability for these
warrants was recorded at fair value on the date of the Business Combination and subsequently re-measured to fair value at each reporting
date or exercise date with changes in the fair value included in earnings.
During
the three months ended March 31, 2021, 6.6 million sponsor warrants were exercised resulting in the issuance of 2.3 million shares of
Class A common stock. The 1.9 million sponsor warrants outstanding at March 31, 2021 had a fair value of $19.4 million. All of the public
warrants were exercised during fiscal 2020. At March 31, 2020 the fair value of the 18.8 million public warrants and the 9.6 million
sponsor warrants outstanding was $15.8 million.
The
Company used public trading prices of the public warrants to determine their fair value. The Company determined the fair value of the
sponsor warrants using the Black Scholes model with the following assumptions:
|
|
|
March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Trading price of common stock on
measurement date
|
|
$
|
31.65
|
|
|
$
|
5.68
|
|
|
Exercise price
|
|
$
|
5.75
|
|
|
$
|
5.75
|
|
|
Risk free interest rate
|
|
|
0.16
|
%
|
|
|
0.29
|
%
|
|
Warrant life in years
|
|
|
1.8
|
|
|
|
2.8
|
|
|
Expected volatility
|
|
|
53.48
|
%
|
|
|
55.84
|
%
|
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
During
the three months ended March 31, 2021 and 2020, the Company recognized gains of $9.1 million and $8.0 million, respectively, in its condensed
consolidated statements of income related to decreases in the fair value of the public and sponsor warrants exercised during the respective
periods or that were outstanding at the end of the respective periods.
PURPLE
INNOVATION, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
10.
Other Long-Term Liabilities
Other
long-term liabilities consist of the following (in thousands):
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Warranty accrual
|
|
$
|
9,375
|
|
|
$
|
8,397
|
|
|
Other
|
|
|
932
|
|
|
|
912
|
|
|
Total
|
|
|
10,307
|
|
|
|
9,309
|
|
|
Less: current portion
of warranty accrual
|
|
|
(3,046
|
)
|
|
|
(2,806
|
)
|
|
Other long-term liabilities,
net of current portion
|
|
$
|
7,261
|
|
|
$
|
6,503
|
|
11. Commitments
and Contingencies
Required
Member Distributions
Prior
to the Business Combination and pursuant to the then applicable First Amended and Restated Limited Liability Company Agreement (the “First
Purple LLC Agreement”), Purple LLC was required to distribute to its members an amount equal to 45 percent of Purple LLC’s
net taxable income following the end of each fiscal year. The First Purple LLC Agreement was amended and replaced by the Second Amended
and Restated Limited Liability Company Agreement (the “Second Purple LLC Agreement”) on February 2, 2018 as part of
the Business Combination. The Second Purple LLC Agreement was amended and replaced by the Third Amended and Restated Limited Liability
Company Agreement (the “Third Purple LLC Agreement”) on September 3, 2020. The Second Purple LLC Agreement and the Third
Purple LLC Agreement do not include any mandatory distributions, other than tax distributions. During the three months ended March 31,
2021, the Company paid $0.2 million in tax distributions under the Third Purple LLC Agreement. At March 31, 2021, the Company’s
condensed consolidated balance sheet had $0.2 million of accrued tax distributions included in other current liabilities.
Service
Agreement
In
October 2017, the Company entered into an electric service agreement with the local power company in Grantsville, Utah. The agreement
provided for the construction and installation of certain utility improvements to provide increased power capacity to the manufacturing
and warehouse facility in Grantsville, Utah. The Company prepaid $0.5 million related to the improvements and agreed to a minimum contract
billing amount over a 15-year period based on regulated rate schedules and changes in actual demand during the billing period. The agreement
includes an early termination clause that requires the Company to pay a pro-rata termination charge if the Company terminates within
the first 10 years of the service start date. The original early termination charge was $1.3 million and is reduced annually on a straight-line
basis over the 10-year period. During 2018, the utility improvements construction was completed and were made available to the Company.
As of March 31, 2021, the early termination penalty was $0.8 million and the Company expects to fulfill its commitments under the agreement
in the normal course of business, and as such, no liability has been recorded.
Purchase
Agreement
In
February 2018, the Company entered into a purchase contract with a supplier of mineral oil that includes a minimum purchase commitment
over a two-year period. In April 2019, the contract was amended to provide for a minimum purchase commitment over a four-year period
ending in April 2023. In exchange, the Company agreed to a further discount per gallon. During the three months ended March 31, 2021
and 2020, the Company made purchases under the contract totaling $3.6 million and $2.4 million, respectively. As of March 31, 2021, the
Company had met its commitment under the purchase contract.
Indemnification
Obligations
From
time to time, the Company enters into contracts that contingently require it to indemnify parties against claims. These contracts primarily
relate to provisions in the Company’s services agreements with related parties that may require the Company to indemnify the related
parties against services rendered; and certain agreements with the Company’s officers and directors under which the Company may
be required to indemnify such persons for liabilities. In connection with the Business Combination, to secure payment of a certain portion
of specified post-closing indemnification rights of the Company under the Merger Agreement, 0.5 million shares of Class B Stock and 0.5
million Class B Units otherwise issuable to InnoHold as equity consideration were deposited in an escrow account for up to three years
from the date of the Business Combination pursuant to a contingency escrow agreement. In September 2020, an amendment to the escrow agreement
was signed whereby the 0.5 million shares of Class B Stock and 0.5 million Class B Units held in escrow were exchanged for $5.0 million.
On February 3, 2021 the Company received $4.1 million from InnoHold as reimbursement for amounts that qualified for indemnification from
the $5.0 million being held in escrow. The remaining $0.9 million in escrow was returned to InnoHold. The amount received from InnoHold
was recorded as additional paid-in capital in the condensed consolidated balance sheet.
PURPLE
INNOVATION, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Subscription
Agreement and Preemptive Rights
In
February 2018, in connection with the Business Combination, the Company entered into a subscription agreement with Coliseum Capital
Partners (“CCP”) and Blackwell Partners LLC – Series A (“Blackwell”), pursuant to which CCP and Blackwell
agreed to purchase from the Company an aggregate of 4.0 million shares of Class A Stock at a purchase price of $10.00 per share
(the “Coliseum Private Placement”). In connection with the Coliseum Private Placement, the Sponsor assigned (i) an aggregate
of 1.3 million additional shares of Class A Stock to CCP and Blackwell and (ii) an aggregate of 3.3 million warrants to purchase
1.6 million shares of Class A Stock to CCP, Blackwell, and Coliseum Co-Invest Debt Fund, L.P. (“CDF”). The subscription
agreement provides CCP and Blackwell with preemptive rights with respect to future sales of the Company’s securities. It also provides
them with a right of first refusal with respect to certain debt and preferred equity financings by the Company. The Company also entered
into a registration rights agreement with CCP, Blackwell, and CDF, providing for the registration of the shares of Class A Stock
issued and assigned to CCP and Blackwell in the Coliseum Private Placement, as well as the shares of Class A Stock underlying the
warrants received by CCP, Blackwell and CDF. The Company has filed a registration statement with respect to such securities.
Rights
of Securities Holders
The
holders of certain Warrants exercisable into Class A Stock, including CCP, Blackwell and CDF, were entitled to registration rights pursuant
to certain registration rights agreements of the Company as of the Business Combination date. In March 2018, the Company filed a registration
statement registering the Warrants (and any shares of Class A Stock issuable upon the exercise of the Warrants), and certain unregistered
shares of Class A Stock. The registration statement was declared effective on April 3, 2018. Under the Registration Rights Agreement
dated February 2, 2018 between the Company and CCP, Blackwell, and CDF (the “Coliseum Investors”), the Coliseum Investors
have the right to make written demands for up to three registrations of certain Warrants and shares of Class A Stock held by them, including
in underwritten offerings. In an underwritten offering of such Warrants and shares of Class A Stock by the Coliseum Investors, the Company
will pay underwriting discounts and commissions and certain expenses incurred by the Coliseum Investors.
The
holders of the Incremental Loan Warrants exercisable into Class A Stock were entitled to registration rights pursuant to the registration
rights agreement of the Company in connection with the Amended and Restated Credit Agreement. In March 2019, the Company filed a registration
statement registering the Warrants (and any shares of Class A Stock issuable upon the exercise of the Warrants). The registration statement
was declared effective on May 17, 2019, pursuant to which, the Company issued 2.6 million shares of Class A common stock in exchange
for the Incremental Loan Warrants on November 9, 2020.
On
February 2, 2018, in connection with the closing of the Business Combination, the Company entered into a Registration Rights Agreement
with InnoHold and the Parent Representative (the “InnoHold Registration Rights Agreement”). Under the InnoHold Registration
Rights Agreement, InnoHold holds registration rights that obligate the Company to register for resale under the Securities Act, all or
any portion of the Equity Consideration (including Class A Stock issued in exchange for the equity consideration received in the
Business Combination) (the “Registrable Securities”). InnoHold is entitled to make a written demand for registration under
the Securities Act of all or part of its Registrable Securities (up to a maximum of three demands in total). Pursuant to the InnoHold
Registration Rights Agreement, the Company filed a registration statement on Form S-3 that was declared effective on November 8, 2019,
pursuant to which InnoHold, Tony Pearce and Terry Pearce sold 11.5 million shares of Class A Stock. The Company filed a second registration
statement on Form S-3 that was declared effective on May 14, 2020, pursuant to which InnoHold sold 12.4 million shares of Class A Stock.
The Company filed a third and final registration statement on Form S-3 that was declared effective on September 9, 2020, pursuant to
which InnoHold sold 16.8 million shares of Class A Stock.
Purple
LLC Class B Unit Exchange Right
On
February 2, 2018, in connection with the closing of the Business Combination, the Company entered into an exchange agreement with Purple
LLC and InnoHold and Class B Unit holders who become a party thereto (the “Exchange Agreement”), which provides for the exchange
of Purple LLC Class B Units (the “Class B Units”) and shares of Class B Stock (together with an equal number of Class B Units,
the “Paired Securities”) for, at the Company’s option, either (A) shares of Class A Stock at an initial exchange ratio
equal to one Paired Security for one share of Class A Stock or (B) a cash payment equal to the product of the average of the volume-weighted
closing price of one share of Class A Stock for the ten trading days immediately prior to the date InnoHold or other Class B Unit holders
deliver a notice of exchange multiplied by the number of Paired Securities being exchanged. In December 2018, InnoHold distributed Paired
Securities to Terry Pearce and Tony Pearce who also agreed to become parties to the Exchange Agreement. In June 2019, InnoHold distributed
Paired Securities to certain current and former employees who also agreed to become parties to the exchange agreement. Holders of Class
B Units may elect to exchange all or any portion of their Paired Securities as described above by delivering a notice to Purple LLC.
In
certain cases, adjustments to the exchange ratio will occur in case of a split, reclassification, recapitalization, subdivision or similar
transaction of or relating to the Class B Units or the shares of Class A Stock and Class B Stock or a transaction in which the Class
A Stock is exchanged or converted into other securities or property. The exchange ratio will also adjust in certain circumstances when
the Company acquires Class B Units other than through an exchange for its shares of Class A Stock.
The
right of a holder of Paired Securities to exchange may be limited by the Company if it reasonably determines in good faith that such
restrictions are required by applicable law (including securities laws), such exchange would not be permitted under other agreements
of such holder with the Company or its subsidiaries, including the Operating Agreement, or if such exchange would cause Purple LLC to
be treated as a “publicly traded partnership” under applicable tax laws.
PURPLE
INNOVATION, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
The
Company and each holder of Paired Securities shall bear its own expense regarding the exchange except that the Company shall be responsible
for transfer taxes, stamp taxes and similar duties.
During
the three months ended March 31, 2021 and 2020, 0.1 million and 1.1 million, respectively, of Paired Securities were exchanged for shares
of Class A Stock.
Maintenance
of One-to-One Ratios
The
Third Purple LLC Agreement includes provisions intended to ensure that the Company at all times maintains a one-to-one ratio between
(a) (i) the number of outstanding shares of Class A Stock and (ii) the number of Class A Units owned by the Company (subject to certain
exceptions for certain rights to purchase equity securities of the Company under a “poison pill” or similar stockholder rights
plan, if any, certain convertible or exchangeable securities issued under the Company’s equity compensation plan and certain equity
securities issued pursuant to the Company’s equity compensation plan (other than a stock option plan) that are restricted or have
not vested thereunder) and (b) (i) the number of other outstanding equity securities of the Company (including the warrants exercisable
for shares of Class A Stock) and (ii) the number of corresponding outstanding equity securities of Purple LLC. These provisions are intended
to result in non-controlling interest holders having a voting interest in the Company that is identical to their economic interest in
Purple LLC.
Non-Income
Related Taxes
The
U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc., No.17-494, reversed a longstanding precedent that remote sellers are
not required to collect state and local sales taxes. The Company cannot predict the effect of these and other attempts to impose sales,
income or other taxes on e-commerce. The Company currently collects and reports on sales tax in all states in which it does business.
However, the application of existing, new or revised taxes on the Company’s business, in particular, sales taxes, VAT and similar
taxes would likely increase the cost of doing business online and decrease the attractiveness of selling products over the internet.
The application of these taxes on the Company’s business could also create significant increases in internal costs necessary to
capture data and collect and remit taxes. There have been, and will continue to be, substantial ongoing costs associated with complying
with the various indirect tax requirements in the numerous markets in which the Company conducts or will conduct business.
Legal
Proceedings
On
September 9, 2019, Purple LLC filed a Statement of Claim against PerfectSense Home Inc. and PerfectSense Trading Co. Ltd. (collectively,
“PerfectSense”) in the Federal Court of Canada. PerfectSense is a manufacturer and supplier of mattresses and related products.
PerfectSense owns the domain name www.purplesleep.ca, which used to, but no longer, redirects to its website at www.perfectsense.ca.
In addition to this, Purple LLC has alleged that PerfectSense has: designed their mattresses with the same look as the Purple mattresses
(white mattress top, purple stripe, and grey bottom); used many of the marketing elements on Purple’s website (including a similar
“exploded view” image of their mattress); and adopted the color purple as their dominant marketing color. Purple LLC is suing
for a declaration that PerfectSense has infringed Purple LLC’s copyright and trademark rights and committed the tort of passing
off. Purple LLC is asking for injunctive relief, damages, an accounting of profits, interest, costs, and delivery up or destruction of
the infringing products (including delivery up of the www.purplesleep.ca domain). After filing the statement of claim,
Purple LLC posted $15,000 CAD as security for PerfectSense’s costs. PerfectSense brought a motion to strike that was
resolved on consent. Pleadings are now closed, and the action is proceeding under case management. Counsel for the defendant
was removed from the record at their own request by Court Order. The Court further ordered the defendant to either appoint counsel
or file a motion to permit an officer or director to represent the defendant in legal proceedings. On November 6, 2020, the defendant
informally requested that the Court permit Mr. Henderson, the CEO and shareholder of the defendant, to represent the defendant in the
action until such time as a lawyer could be appointed. Purple opposed this informal request, and it was denied by the Court. After granting
PerfectSense a final extension of time to either appoint counsel or file a motion to permit Mr. Henderson to represent the defendant,
PerfectSense appointed new counsel. The parties are engaged in litigation discovery and recently exchanged affidavits of documents.
PURPLE
INNOVATION, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
On September 20, 2020, Purple LLC filed a complaint at the U.S. Court of International Trade seeking to recover approximately $7.0 million of Section 301 duties
paid at the time of importation on certain Chinese-origin goods. More than 4,000 other complaints have been filed by other companies
seeking similar refunds. On March 12, 2021 the United States filed a master answer that applies to all the Section 301 cases, including
the Company’s. If successful, this litigation could result in a refund of some or all of the Section 301 duties.
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. Briefing is complete on ReST’s motion to compel arbitration,
and the Court has set a hearing for May 25, 2021 to hear argument from the lawyers on the motion. On March 5, 2021, Purple LLC,
Gary DiCamillo, Adam Gray, Joseph Megibow, Terry Pearce, and Tony Pearce, filed a motion to dismiss the claims set forth in Case II.
Briefing on the motion to dismiss is ongoing. Purple LLC seeks over $4 million in damages from ReST, whereas ReST claims that Purple
is liable to it for tens of millions of dollars. The outcome of this litigation cannot be predicted at this early stage. However, Purple
intends to vigorously pursue its claims and defend against the claims made by ReST.
On November 19, 2020, Purple
LLC sued Advanced Comfort Technologies, Inc., dba Intellibed (“Intellibed”) in the U.S. District Court for the District of
Utah for patent infringement, trademark infringement, trade secret misappropriation, and a number of related state law based claims.
The principal allegations are that Intellibed has manufactured and sold unauthorized, infringing products under the Sleepy’s brand
name owned by third-party Mattress Firm. Purple LLC also requested declaratory relief related to certain assignment terms of a license
agreement in which Purple LLC is the licensor and Intellibed is the licensee. On December 14, 2020, Intellibed filed a motion to
dismiss Counts I through XI of Purple LLC’s Complaint on the ground that these Counts fail to state a claim upon which relief can
be granted. On December 15, 2020, Intellibed filed an Answer to Purple LLC’s complaint and also asserted against Purple LLC
a total of eight counterclaims, including a number of declaratory judgment claims, breach of contract, and tortious interference claims.
Intellibed’s main allegations are that its use of Purple LLC’s patents, trademark, and trade secrets in connection with Mattress
Firm’s Sleepy’s products is authorized under the license agreement. On January 19, 2021, Purple LLC filed a motion to
dismiss Intellibed’s fifth, sixth, seventh, and eighth counterclaims on the ground that these counterclaims fail to state a claim
upon which relief can be granted. Briefing on Purple LLC’s partial motion to dismiss was completed on March 2, 2021.
On January 19, 2021, Purple LLC also filed an Answer to Intellibed’s counterclaims, which were not subject to Purple LLC’s
motion to dismiss. On January 27, 2021, Purple LLC filed a First Amended Complaint in response to Intellibed’s initial motion to
dismiss. On February 10, 2021, Intellibed filed a motion to dismiss Counts I through XI of Purple LLC’s First Amended Complaint.
Briefing on Intellibed’s partial motion to dismiss was completed on March 24, 2021. Both motions to dismiss are still pending
before the Court. The case is in the early stages. No substantial discovery has taken place. The Court has not yet entered
a Scheduling Order governing the case, and no trial date has been set.
PURPLE
INNOVATION, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
The
Company is from time to time involved in various other claims, legal proceedings and complaints arising in the ordinary course of business.
The Company does not believe that adverse decisions in any such pending or threatened proceedings, or any amount that the Company might
be required to pay by reason thereof, would have a material adverse effect on the financial condition or future results of the Company.
12.
Related Party Transactions
The
Company had various transactions with entities or individuals which are considered related parties.
Coliseum
Capital Management, LLC
Immediately
following the Business Combination, Adam Gray was appointed to the Company’s board of directors. Mr. Gray is a manager of Coliseum
Capital, LLC, which is the general partner of CCP and CDF, and he is also a managing partner of Coliseum Capital Management, LLC (“CCM”),
which is the investment manager of Blackwell. Mr. Gray has voting and dispositive control over securities held by CCP, CDF and Blackwell
which were also Lenders under the Amended and Restated Credit Agreement. In 2018, the Lenders agreed to make the Related Party Loan in
an aggregate principal amount of $25.0 million pursuant to an agreement entered into as part of the Business Combination. In conjunction
with this agreement, the Sponsor agreed to assign to the Lenders an aggregate of 2.5 million warrants to purchase 1.3 million shares
of its Class A Stock. In 2019, the Incremental Lenders funded a $10.0 million increase in the Related Party Loan and were granted 2.6
million warrants to purchase 2.6 million shares of the Company’s Class A Stock at a price of $5.74 per share, subject to certain
adjustments. In accordance with an amendment to the Related Party Loan dated March 27, 2020, the Company did not make any cash interest
payments to the Lenders during the first and second quarters of 2020. On September 3, 2020, the Company paid $45.0 million to retire,
in full, the Related Party Loan. The payment included the $25.0 million original loan under the agreement, $10.0 million for the subsequent
incremental loan, $6.6 million of paid-in-kind interest, $2.5 million in a prepayment fee and $0.9 million in accrued interest .In connection
with the Business Combination, the Company entered into a subscription agreement with CCP and Blackwell, pursuant to which CCP and Blackwell
agreed to purchase from the Company an aggregate of 4.0 million shares of Class A Stock at a purchase price of $10.00 per share
(the “Coliseum Private Placement”). In connection with the Coliseum Private Placement, the Sponsor assigned (i) an aggregate
of 1.3 million additional shares of Class A Stock to CCP and Blackwell and (ii) an aggregate of 3.3 million warrants to purchase
1.6 million shares of Class A Stock to CCP, Blackwell, and CDF. The subscription agreement provides CCP and Blackwell with preemptive
rights with respect to future sales of the Company’s securities. It also provides them with a right of first refusal with respect
to certain debt and preferred equity financings by the Company. The Company also entered into a registration rights agreement with CCP,
Blackwell, and CDF, providing for the registration of the shares of Class A Stock issued and assigned to CCP and Blackwell in the
Coliseum Private Placement, as well as the shares of Class A Stock underlying the warrants received by CCP, Blackwell and CDF. The
Company has filed a registration statement with respect to such securities.
In
May 2020, pursuant to the terms of the warrant agreement upon the condition that Tony Pearce or Terry Pearce individually or together
ceased to beneficially own at least 50% of the voting securities of the Company, the exercise price of the Incremental Loan Warrants
was adjusted to zero. On November 9, 2020, the Company issued 2.6 million shares of Class A common stock in exchange for the Incremental
Loan Warrants held by the Incremental Lenders.
Purple
Founder Entities
TNT
Holdings, LLC (herein “TNT Holdings”), EdiZONE, (wholly owned by TNT Holdings) and InnoHold (the “Purple Founder Entities”)
were entities under common control with Purple LLC prior to the Business Combination. TNT Holdings and InnoHold are majority owned and
controlled by Terry Pearce and Tony Pearce (the “Purple Founders”), who were appointed to the Company’s Board of Directors
following the Business Combination. InnoHold was a majority shareholder of the Company until it sold a portion of its interests in a
secondary public offering in May 2020 and the remainder of its interests in a secondary public offering in September 2020. The Purple
Founders also resigned as employees of the Company and retired from the Board in August 2020.
PURPLE
INNOVATION, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
TNT
Holdings owns the Alpine facility Purple LLC has been leasing since 2010. Effective as of October 31, 2017, Purple LLC entered into an
Amended and Restated Lease Agreement with TNT Holdings. The Company determined that TNT Holdings is not a VIE as neither the Company
nor Purple LLC hold any explicit or implicit variable interest in TNT Holdings and do not have a controlling financial interest in TNT
Holdings. The Company incurred $0.2 million and $0.2 million in rent expense to TNT Holdings for the building lease of the Alpine facility
for the three months ended March 31, 2021 and 2020, respectively. The Company continues to lease the Alpine facility that was formerly
the Company headquarters, for use in production, research and development and video production.
During
the three months ended March 31, 2021, certain current and former employees of the Company who received distributions of Paired Securities
from InnoHold exchanged 0.1 million of Paired Securities for Class A Stock.
On November 9, 2018, Purple
LLC and EdiZONE executed the Second Amended and Restated Confidential Assignment and License Back Agreement (the “Revised License
Agreement”), pursuant to which EdiZONE assigned all of its comfort and cushioning intellectual property to Purple LLC and further
limited the subset of such intellectual property licensed back to EdiZONE to only those uses that enabled EdiZONE to comply with its obligations
under previously existing contracts, agreements and licenses. On August 14, 2020, Purple LLC entered into a separate agreement whereby
EdiZONE, for consideration of $8.5 million, assigned a license agreement with Advanced Comfort Technologies, Inc., dba Intellibed (“Intellibed”),
and related royalties payable thereunder, to Purple LLC, along with the trademarks GEL MATRIX and INTELLIPILLOW. In connection with such
assignment, the Company agreed to indemnify EdiZONE against claims by Intellibed relating to EdiZONE’s breach under the agreement.
During
the three months ended March 31, 2021, Purple LLC paid InnoHold through withholding payments directly to various states, an aggregate
of $0.3 million in required tax distributions pursuant to the Third Purple LLC Agreement.
13.
Stockholders’ Equity
Prior
to the Business Combination, GPAC was a shell company with no operations, formed as a vehicle to effect a business combination with one
or more operating businesses. After the Closing, the Company became a holding company whose sole material asset consists of its interest
in Purple LLC.
Class
A Common Stock
The
Company has 210.0 million shares of Class A Stock authorized at a par value of $0.0001 per share. Holders of the Company’s Class
A Stock are entitled to one vote for each share held on all matters to be voted on by the stockholders and participate in dividends,
if declared by the Board, or receive any portion of any such assets in respect of their shares upon liquidation, dissolution, distribution
of assets or winding-up of the Company in excess of the par value of such stock. Holders of the Class A Stock and holders of the Class
B Stock voting together as a single class, have the exclusive right to vote for the election of directors and on all other matters properly
submitted to a vote of the stockholders. Holders of Class A Stock and Class B Stock are entitled to one vote per share on matters to
be voted on by stockholders. At March 31, 2021, 66.3 million shares of Class A Stock were outstanding.
In
accordance with the terms of the Business Combination, approximately 1.3 million shares of Class A Stock were subject to vesting and
forfeiture. The shares of Class A Stock subject to vesting will be forfeited eight years from the Closing, unless any of the following
events (each a “Triggering Event”) occurs prior to that time:(i) the closing price of the Class A Stock on the principal
exchange on which it is listed is at or above $12.50 for 20 trading days over a thirty trading day period (subject to certain adjustments),
(ii) a change of control of the Company, (iii) a “going private” transaction by the Company pursuant to Rule 13e-3 under
the Exchange Act or such other time as the Company ceases to be subject to the reporting obligations under Section 13 or 15(d) of the
Exchange Act, or (iv) the time that the Company’s Class A Stock ceases to be listed on a national securities exchange. During fiscal
2020, a Triggering Event occurred as the closing price of the Class A Stock on the principal exchange on which it is listed was at or
above $12.50 for 20 trading days over a thirty-trading day period. Accordingly, the shares of Class A Stock are no longer subject to
vesting or forfeiture.
Class
B Common Stock
The Company has 90.0 million
shares of Class B Stock authorized at a par value of $0.0001 per share. Holders of the Company’s Class B Stock will vote together
as a single class with holders of the Company’s Class A Stock on all matters properly submitted to a vote of the stockholders. Shares
of Class B Stock may be issued only to InnoHold, their respective successors and assigns, as well as any permitted transferees of InnoHold.
A holder of Class B Stock may transfer shares of Class B Stock to any transferee (other than the Company) only if such holder also simultaneously
transfers an equal number of such holder’s Purple LLC Class B Units to such transferee in compliance with the Third Purple LLC Agreement.
The Class B Stock is not entitled to receive dividends, if declared by the Board, or to receive any portion of any such assets in respect
of their shares upon liquidation, dissolution, distribution of assets or winding-up of the Company in excess of the par value of such
stock.
PURPLE
INNOVATION, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
In
connection with the Business Combination, approximately 44.1 million shares of Class B Stock were issued to InnoHold as part of the equity
consideration. InnoHold subsequently transferred a portion of its shares to permitted transfers and exchanged its remaining shares for
Class A Stock that it sold. All of the 0.4 million shares of Class B Stock outstanding at March 31, 2021 were held by other parties.
Preferred
Stock
The
Company has 5.0 million shares of preferred stock authorized at a par value of $0.0001 per share. The preferred stock may be issued from
time to time in one or more series. The directors are expressly authorized to provide for the issuance of shares of the preferred stock
in one or more series and to establish from time to time the number of shares to be included in each such series and to fix the voting
rights, designations and other special rights or restrictions. At March 31, 2021, there were no shares of preferred stock outstanding.
Public
and Sponsor Warrants
There
were 15.5 million public warrants issued in connection with GPAC’s formation and IPO and 12.8 million sponsor warrants issued pursuant
to a private placement simultaneously with the IPO. Each of the Company’s warrants entitles the registered holder to purchase one-half
of one share of the Company’s Class A Stock at a price of $5.75 per half share ($11.50 per full share), subject to adjustment pursuant
to the terms of the warrant agreement. Pursuant to the warrant agreement, a warrant holder may exercise its warrants only for a whole
number of shares of the Class A Stock. For example, if a warrant holder holds one warrant to purchase one-half of one share of Class
A Stock, such warrant will not be exercisable. If a warrant holder holds two warrants, such warrants will be exercisable for one share
of the Class A Stock. In no event will the Company be required to net cash settle any warrant. The warrants have a five-year term which
commenced on March 2, 2018, 30 days after the completion of the Business Combination, and will expire on February 2, 2023, or earlier
upon redemption or liquidation.
The
Company may call the warrants for redemption if the reported last sale price of the Class A Stock equals or exceeds $24.00 per share
for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date the Company sends the notice
of redemption to the warrant holders; provided, however, that the sponsor warrants are not redeemable by the Company so long as they
are held by the Sponsor or its permitted transferees. In addition, with respect to the sponsor warrants, so long as such sponsor warrants
are held by the Sponsor or its permitted transferee, the holder may elect to exercise the sponsor warrants on a cashless basis, by surrendering
their sponsor warrants for that number of shares of Class A Stock equal to the quotient obtained by dividing (x) the product of the number
of shares of Class A Stock underlying the sponsor warrants, multiplied by the difference between the exercise price of the Sponsor Warrants
and the “fair market value” (defined below), by (y) the fair market value. The “fair market value” means the
average reported last sale price of the Class A Stock for the 10 trading days ending on the third trading day prior to the date on which
the notice of warrant exercise is sent to the warrant agent. All other terms, rights and obligations of the sponsor warrants remain the
same as the public warrants. Both the public and sponsor warrants are classified as equity instruments in the accompanying condensed
consolidated balance sheet.
On
October 27, 2020, the Company provided notice to the holders of the public warrants that the Company was exercising its right under the
terms of the Public Warrants to redeem such warrants by paying to the warrant holders the redemption price of $0.01 per warrant on November
30, 2020. Any exercise of the warrants prior to that date was to be done on a cashless basis, in accordance with the terms of the warrants.
All of the public warrants were exercised or redeemed by November 30, 2020.
During
the three months ended March 31, 2021, 6.6 million sponsor warrants were exercised resulting in the issuance of 2.3 million shares of
Class A common stock. At March 31, 2021, there were 1.9 million warrants outstanding all of which were sponsor warrants.
Incremental
Loan Warrants
In
connection with the Amended and Restated Credit Agreement, the Company issued to the Incremental Lenders 2.6 million Incremental Loan
Warrants to purchase 2.6 million shares of the Company’s Class A Stock. Each Incremental Loan Warrant entitled the registered
holder to purchase one share of the Company’s Class A Stock at a price of $5.74 per share, subject to adjustment pursuant to the
terms of the warrant agreement. In May 2020, Tony Pearce and Terry Pearce individually or together ceased to beneficially own at least
50% of the voting securities of the Company. As a result, the exercise price of the warrants was reduced to zero based on the formula
established in the agreement.
PURPLE
INNOVATION, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
On
October 27, 2020, the Company provided notice to the holders of the Incremental Loan Warrants that the Company was exercising its right
to redeem such warrants by paying to the warrant holders the redemption price of $0.01 per warrant on November 30, 2020. Any exercise
of the warrants prior to that date was to be done on a cashless basis, in accordance with the terms of the warrants. On November 9, 2020,
upon the exercise of all the Incremental Loan Warrants, the Company issued 2.6 million shares of Class A common stock in exchange for
the Incremental Loan Warrants held by the Incremental Lenders.
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 82%. At March 31, 2021, the combined NCI percentage in Purple LLC was approximately 1%. The Company has consolidated the
financial position and results of operations of Purple LLC and reflected the proportionate interest held by all such Purple LLC Class
B Unit holders as NCI.
14.
Income Taxes
The
Company’s sole material asset is Purple LLC, which is treated as a partnership for U.S. federal income tax purposes and for purposes
of certain state and local income taxes. Purple LLC’s net taxable income and any related tax credits are passed through to its
members and are included in the members’ tax returns, even though such net taxable income or tax credits may not have actually
been distributed. While the Company consolidates Purple LLC for financial reporting purposes, the Company will be taxed on its share
of earnings of Purple LLC not attributed to the noncontrolling interest holders, which will continue to bear their share of income tax
on its allocable earnings of Purple LLC. The income tax burden on the earnings taxed to the noncontrolling interest holders is not reported
by the Company in its consolidated financial statements under GAAP. As a result, the Company’s effective tax rate differs from
the statutory rate. The primary factors impacting the expected tax are the allocation of tax benefit to noncontrolling interest and the
non-taxable nature of the change in fair value of the warrant liability.
Prior
to the second quarter of 2020, the Company maintained a full valuation allowance on its net deferred tax assets which are comprised primarily
of basis differences in Purple LLC. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income sufficient to utilize the deferred tax assets on income tax returns. In periods prior to the second quarter of 2020, management
made the determination that its net deferred tax assets were not more likely than not going to be realized because the Company was in
a three-year cumulative loss position and the generation of future taxable income was uncertain. Considering this and other factors,
the Company maintained a full valuation allowance of $44.3 million through the period ending March 31, 2020.
During
fiscal 2020, the Company achieved three-year cumulative income for the first time and determined that it would likely generate sufficient
taxable income to utilize some of its deferred tax assets. Based on this and other positive evidence, the Company concluded it was more
likely than not that some of its deferred tax assets would be realized and that a full valuation allowance for its deferred tax assets
was no longer appropriate. As a result, $35.5 million of the valuation allowance associated with the Company’s federal and state
deferred tax assets was released during 2020 and recorded as an income tax benefit. The deferred tax assets at March 31, 2021 totaled
$210.4 million, which is net of a $69.7 million valuation allowance that has been recorded against the residual outside partnership basis
for the amount the Company believes is not more likely than not realizable. As a result, there was an overall increase of $17.8 million
in the valuation allowance from December 31, 2020 to March 31, 2021, primarily as a result of an increase in the residual outside partnership
basis.
The
Company currently estimates its annual effective income tax rate to be 26.35%. The annualized effective tax rate for the Company differs
from the federal rate of 21% primarily due to the non-taxable nature of the change in fair value of the warrant liability and state and
local income taxes.
For
the three months ended March 31, 2021, the Company has recorded income tax expense of $4.7 million. The effective tax rate for the three
months ended March 31, 2021 was 18.20%, which is less than the federal statutory rate because the gain related to the change in fair
value of the warrant liability is excluded from taxable income for income tax purposes.
PURPLE
INNOVATION, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
In
response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in March 2020.
The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (2017 Tax Act). Corporate taxpayers
may carryback net operating losses (NOLs) originating during 2018 through 2020 for up to five years, which was not previously allowed
under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize
NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted
taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020. The
CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead
of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act.
On
March 11, 2021, Congress passed, and the President signed into law, the American Rescue Plan Act, 2021 (the “ARP”), which
includes certain business tax provisions. At this point the Company does not believe that these changes will have a material impact on
its income tax provision for 2021. The Company will continue to evaluate the impact of new legislation on its financial position, results
of operations, and cash flows.
In
connection with the Business Combination, the Company entered into a tax receivable agreement with InnoHold, which provides for the payment
by the Company to InnoHold of 80% of the net cash savings, if any, in U.S. federal, state and local income tax that the Company actually
realizes (or is deemed to realize in certain circumstances) in periods after the Closing as a result of (i) any tax basis increases in
the assets of Purple LLC resulting from the distribution to InnoHold of the cash consideration, (ii) the tax basis increases in the assets
of Purple LLC resulting from the redemption by Purple LLC or the exchange by the Company, as applicable, of Class B Paired Securities
or cash, as applicable, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising
from, payments it makes under the tax receivable agreement.
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 80% of the estimated future cash tax savings that the Company may realize
as a result of increases in the basis of the assets of Purple LLC attributed to the Company as a result of such exchange or redemption.
The amount of the increase in asset basis, the related estimated cash tax savings and the attendant tax receivable agreement liability
to be recorded will depend on the price of the Company’s Class A Stock at the time of the relevant redemption or exchange.
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 and the subsequent exchanges of Class B
Units for Class A Stock, the potential future tax receivable agreement liability is $171.9 million. Of the tax receivable agreement liability
recorded during the three months ended March 31, 2021, $0.8 million relates to current year exchanges and was recorded as an adjustment
to stockholders’ equity and $0.2 million was recorded as income in the condensed consolidated statement of income to reflect the
impact of the change in rate associated with state income taxes.
The
Company has no federal net operating loss (“NOL”) carryforwards after utilization of the remaining carryforwards in 2020.
The
effects of uncertain tax positions are recognized in the consolidated financial statements if these positions meet a “more-likely-than-not”
threshold. For those uncertain tax positions that are recognized in the consolidated financial statements, liabilities are established
to reflect the portion of those positions it cannot conclude “more-likely-than-not” to be realized upon ultimate settlement.
The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits on the income tax expense line
in the accompanying consolidated statement of income. Accrued interest and penalties would be included on the related tax liability line
in the consolidated balance sheet. As of March 31, 2021, no uncertain tax positions were recognized as liabilities in the condensed consolidated
financial statements.
PURPLE
INNOVATION, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
15.
Net Income Per Common Share
The
following table sets forth the calculation of basic and diluted weighted average shares outstanding and earnings per share for the periods
presented (in thousands, except per share amounts):
|
|
|
Three
Months Ended
March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
income attributable to Purple Innovation, Inc. – basic
|
|
$
|
20,824
|
|
|
$
|
16,835
|
|
|
Less:
dilutive effect of change in fair value – warrant liabilities
|
|
|
(9,147
|
)
|
|
|
(5,958
|
)
|
|
Net
income attributable to Purple Innovation, Inc. – diluted
|
|
$
|
11,677
|
|
|
$
|
10,877
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted
average shares—basic
|
|
|
64,592
|
|
|
|
22,675
|
|
|
Add:
dilutive effects of equity awards
|
|
|
1,545
|
|
|
|
1,390
|
|
|
Add:
dilutive effects of warrants
|
|
|
2,235
|
|
|
|
1,262
|
|
|
Weighted
average shares—diluted
|
|
|
68,372
|
|
|
|
25,327
|
|
|
Net
income per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.32
|
|
|
$
|
0.74
|
|
|
Diluted
|
|
$
|
0.17
|
|
|
$
|
0.43
|
|
For
the three months ended March 31, 2021, the Company excluded 0.4 million Paired Securities convertible into shares of Class A Stock as
the effect was anti-dilutive. For the three months ended March 31, 2020, the Company excluded 31.3 million Paired Securities convertible
into shares of Class A Stock, 14.2 million shares of Class A Stock issuable upon conversion of certain Company warrants and stock options
and 0.1 million shares of issued Class A Stock subject to vesting as the effect was anti-dilutive.
16. Equity
Compensation Plans
2017
Equity Incentive Plan
The Purple Innovation, Inc.
2017 Equity Incentive Plan (the “2017 Incentive Plan”) provides for grants of stock options, stock appreciation rights, restricted
stock and other stock-based awards. Directors, officers and other employees and subsidiaries and affiliates, as well as others performing
consulting or advisory services for the Company and its subsidiaries, will be eligible for grants under the 2017 Incentive Plan. As of
March 31, 2021, an aggregate of 1.9 million shares remain available for issuance or use under the 2017 Incentive Plan.
PURPLE
INNOVATION, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Employee
Stock Options
In
March 2021, the Company granted 0.1 million stock options under the Company’s 2017 Equity Incentive Plan to certain management
of the Company. The stock options have an exercise price of $32.28 per option. The stock options expire in five years and vest over a
four-year period. The estimated fair value of the stock options, less expected forfeitures, is amortized over the options vesting period
on a straight-line basis. The Company determined the fair value of these options using the Black Scholes method with the following assumptions:
|
Fair market value
|
|
$
|
11.71
|
|
|
Exercise price
|
|
$
|
32.28
|
|
|
Risk free interest rate
|
|
|
0.45
|
%
|
|
Expected term in years
|
|
|
3.46
|
|
|
Expected volatility
|
|
|
52.46
|
%
|
|
Expected dividend yield
|
|
|
—
|
|
The
following table summarizes the Company’s total stock option activity for the three months ended March 31, 2021:
|
|
|
Options
(in
thousands)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
in
Years
|
|
|
Intrinsic
Value
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of January 1, 2021
|
|
|
2,234
|
|
|
$
|
8.71
|
|
|
|
3.5
|
|
|
$
|
54,133
|
|
|
Granted
|
|
|
55
|
|
|
|
32.28
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
(10
|
)
|
|
|
8.31
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited/cancelled
|
|
|
(5
|
)
|
|
|
8.07
|
|
|
|
—
|
|
|
|
—
|
|
|
Options outstanding as of March 31, 2021
|
|
|
2,274
|
|
|
$
|
9.28
|
|
|
|
3.3
|
|
|
$
|
50,905
|
|
Outstanding
and exercisable stock options as of March 31, 2021 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
|
|
|
$
|
5.75
|
|
|
|
210
|
|
|
|
2.89
|
|
|
|
90
|
|
|
|
2.89
|
|
|
$
|
2,336
|
|
|
|
5.95
|
|
|
|
538
|
|
|
|
2.50
|
|
|
|
325
|
|
|
|
2.50
|
|
|
|
8,354
|
|
|
|
6.51
|
|
|
|
261
|
|
|
|
3.14
|
|
|
|
105
|
|
|
|
3.14
|
|
|
|
2,653
|
|
|
|
6.65
|
|
|
|
173
|
|
|
|
3.11
|
|
|
|
65
|
|
|
|
3.11
|
|
|
|
1,617
|
|
|
|
7.99
|
|
|
|
19
|
|
|
|
3.67
|
|
|
|
5
|
|
|
|
3.67
|
|
|
|
111
|
|
|
|
8.17
|
|
|
|
225
|
|
|
|
3.50
|
|
|
|
62
|
|
|
|
3.50
|
|
|
|
1,468
|
|
|
|
8.32
|
|
|
|
216
|
|
|
|
3.25
|
|
|
|
70
|
|
|
|
3.25
|
|
|
|
1,634
|
|
|
|
8.55
|
|
|
|
179
|
|
|
|
3.50
|
|
|
|
64
|
|
|
|
3.50
|
|
|
|
1,467
|
|
|
|
12.76
|
|
|
|
25
|
|
|
|
3.95
|
|
|
|
6
|
|
|
|
3.95
|
|
|
|
118
|
|
|
|
13.12
|
|
|
|
191
|
|
|
|
4.13
|
|
|
|
48
|
|
|
|
4.13
|
|
|
|
884
|
|
|
|
15.12
|
|
|
|
3
|
|
|
|
4.13
|
|
|
|
1
|
|
|
|
4.13
|
|
|
|
14
|
|
|
|
21.70
|
|
|
|
179
|
|
|
|
4.50
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32.28
|
|
|
|
55
|
|
|
|
4.96
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
PURPLE
INNOVATION, INC.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
The
following table summarizes the Company’s unvested stock option activity for the three months ended March 31, 2021:
|
|
|
Options
(in thousands)
|
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
|
Nonvested options as of January 1, 2021
|
|
|
1,568
|
|
|
|
3.20
|
|
|
Granted
|
|
|
55
|
|
|
|
11.71
|
|
|
Vested
|
|
|
(185
|
)
|
|
|
2.50
|
|
|
Forfeited
|
|
|
(5
|
)
|
|
|
2.31
|
|
|
Nonvested options as of March 31, 2021
|
|
|
1,433
|
|
|
|
3.61
|
|
The
estimated fair value of Company stock options, less expected forfeitures, is amortized over the options vesting period on a straight-line
basis. The Company recognized $0.5 million and $0.2 million in stock-based compensation expense related to stock options during the three
months ended March 31, 2021 and 2020, respectively.
As
of March 31, 2021, outstanding stock options had $4.8 million of unrecognized stock compensation cost with a remaining recognition period
of 2.3 years.
InnoHold
Incentive Units
In
January 2017, pursuant to the 2016 Equity Incentive Plan approved by InnoHold and Purple LLC that authorized the issuance of 12.0 million
incentive units, Purple LLC granted 11.3 million incentive units to Purple Team LLC, an entity for the benefit of certain employees who
were participants in that plan. In conjunction with the Business Combination, Purple Team LLC was merged into InnoHold with InnoHold
being the surviving entity and the Purple Team LLC incentive units were cancelled and new incentive units were issued by InnoHold under
its own limited liability company agreement (the “InnoHold Agreement”). On February 8, 2019, InnoHold initiated a tender
offer to each of these incentive unit holders, some of which are current employees of Purple LLC, to distribute to each a pro rata number
of 2.5 million Paired Securities held by InnoHold in exchange for the cancellation of their ownership interests in InnoHold. All InnoHold
incentive unit holders accepted the offer, and the terms and distribution of each transaction were finalized and closed on June 25, 2019.
At the closing of the tender offer, those incentive unit holders received, based on their pro rata holdings of InnoHold Class B
Units, a portion of 2.5 million Paired Securities held by InnoHold. As of March 31, 2021, 0.4 million of the Paired Securities remain
to be exchanged for Class A Stock by the incentive unit holders.
Aggregate
Non-Cash Stock-Based Compensation
The
Company has accounted for all stock-based compensation under the provisions of ASC 718 Compensation—Stock Compensation. This standard
requires the Company to record a non-cash expense associated with the fair value of stock-based compensation over the requisite service
period. The table below summarizes the aggregate non-cash stock-based compensation recognized in the statement of operations for stock
awards, employee stock options and the distribution by InnoHold of Paired Securities.
|
(in thousands)
|
|
Three
Months Ended
March 31,
|
|
|
Non-Cash
Stock-Based Compensation
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
45
|
|
|
$
|
35
|
|
|
Marketing and sales
|
|
|
104
|
|
|
|
60
|
|
|
General and administrative
|
|
|
324
|
|
|
|
151
|
|
|
Research
and development
|
|
|
6
|
|
|
|
4
|
|
|
Total non-cash stock-based
compensation
|
|
$
|
479
|
|
|
$
|
250
|
|
17. Employee
Retirement Plan
In
July 2018 the Company established a 401(k) plan that qualifies as a deferred compensation arrangement under Section 401 of the IRS
Code. All eligible employees over the age of 18 and with 4 months’ service are eligible to participate in the plan. The plan provides
for Company matching of employee contributions up to 5% of eligible earnings. Company contributions immediately vest. The Company’s
matching contribution expense was $0.7 million and $0.4 million for the three months ended March 31, 2021 and 2020, respectively.