ITEM 1. FINANCIAL STATEMENTS
PURPLE INNOVATION, INC.
Condensed Consolidated Balance Sheets
(unaudited – in thousands, except for
par value)
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
83,616
|
|
|
$
|
122,955
|
|
Accounts receivable, net
|
|
|
27,570
|
|
|
|
29,111
|
|
Inventories, net
|
|
|
84,045
|
|
|
|
65,726
|
|
Prepaid inventory
|
|
|
1,316
|
|
|
|
826
|
|
Other current assets
|
|
|
11,739
|
|
|
|
10,453
|
|
Total current assets
|
|
|
208,286
|
|
|
|
229,071
|
|
Property and equipment, net
|
|
|
101,049
|
|
|
|
61,486
|
|
Operating lease right-of-use assets
|
|
|
61,798
|
|
|
|
41,408
|
|
Intangible assets, net
|
|
|
11,466
|
|
|
|
9,945
|
|
Deferred income taxes
|
|
|
213,951
|
|
|
|
211,244
|
|
Other long-term assets
|
|
|
1,390
|
|
|
|
1,578
|
|
Total assets
|
|
$
|
597,940
|
|
|
$
|
554,732
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
70,407
|
|
|
$
|
69,594
|
|
Accrued sales returns
|
|
|
6,903
|
|
|
|
8,428
|
|
Accrued compensation
|
|
|
13,392
|
|
|
|
14,209
|
|
Customer prepayments
|
|
|
9,283
|
|
|
|
6,253
|
|
Accrued sales tax
|
|
|
4,512
|
|
|
|
6,015
|
|
Accrued rebates and allowances
|
|
|
8,071
|
|
|
|
10,891
|
|
Operating lease obligations – current portion
|
|
|
5,776
|
|
|
|
3,235
|
|
Other current liabilities
|
|
|
15,031
|
|
|
|
13,583
|
|
Total current liabilities
|
|
|
133,375
|
|
|
|
132,208
|
|
Debt, net of current portion
|
|
|
39,899
|
|
|
|
41,410
|
|
Operating lease obligations, net of current portion
|
|
|
75,340
|
|
|
|
48,936
|
|
Warrant liabilities
|
|
|
9,018
|
|
|
|
92,708
|
|
Tax receivable agreement liability, net of current portion
|
|
|
165,632
|
|
|
|
165,426
|
|
Other long-term liabilities, net of current portion
|
|
|
9,826
|
|
|
|
6,503
|
|
Total liabilities
|
|
|
433,090
|
|
|
|
487,191
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Class A common stock; $0.0001 par value, 210,000 shares authorized; 66,449 issued and outstanding at September 30, 2021 and 63,914 issued and outstanding at December 31, 2020
|
|
|
7
|
|
|
|
6
|
|
Class B common stock; $0.0001 par value, 90,000 shares authorized; 448 issued and outstanding at September 30, 2021 and 536 issued and outstanding at December 31, 2020
|
|
|
—
|
|
|
|
—
|
|
Additional paid-in capital
|
|
|
404,214
|
|
|
|
333,047
|
|
Accumulated deficit
|
|
|
(240,283
|
)
|
|
|
(265,856
|
)
|
Total stockholders’ equity
|
|
|
163,938
|
|
|
|
67,197
|
|
Noncontrolling interest
|
|
|
912
|
|
|
|
344
|
|
Total stockholders’ equity
|
|
|
164,850
|
|
|
|
67,541
|
|
Total liabilities and stockholders’ equity
|
|
$
|
597,940
|
|
|
$
|
554,732
|
|
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
PURPLE INNOVATION, INC.
Condensed Consolidated Statements of Operations
(unaudited – in thousands, except per
share amounts)
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Revenues, net
|
|
$
|
170,781
|
|
|
$
|
187,111
|
|
|
$
|
539,796
|
|
|
$
|
474,582
|
|
Cost of revenues
|
|
|
109,701
|
|
|
|
98,857
|
|
|
|
309,505
|
|
|
|
251,515
|
|
Gross profit
|
|
|
61,080
|
|
|
|
88,254
|
|
|
|
230,291
|
|
|
|
223,067
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
|
48,841
|
|
|
|
51,206
|
|
|
|
163,053
|
|
|
|
127,313
|
|
General and administrative
|
|
|
17,037
|
|
|
|
11,087
|
|
|
|
54,024
|
|
|
|
27,312
|
|
Research and development
|
|
|
1,784
|
|
|
|
1,687
|
|
|
|
5,430
|
|
|
|
4,712
|
|
Total operating expenses
|
|
|
67,662
|
|
|
|
63,980
|
|
|
|
222,507
|
|
|
|
159,337
|
|
Operating income (loss)
|
|
|
(6,582
|
)
|
|
|
24,274
|
|
|
|
7,784
|
|
|
|
63,730
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
10
|
|
|
|
(1,232
|
)
|
|
|
(1,129
|
)
|
|
|
(4,045
|
)
|
Other income (expense), net
|
|
|
12
|
|
|
|
3
|
|
|
|
(30
|
)
|
|
|
109
|
|
Change in fair value – warrant liabilities
|
|
|
5,362
|
|
|
|
(103,962
|
)
|
|
|
19,369
|
|
|
|
(212,593
|
)
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
(5,782
|
)
|
|
|
—
|
|
|
|
(5,782
|
)
|
Tax receivable agreement income (expense)
|
|
|
846
|
|
|
|
(567
|
)
|
|
|
639
|
|
|
|
(33,512
|
)
|
Total other income (expense), net
|
|
|
6,230
|
|
|
|
(111,540
|
)
|
|
|
18,849
|
|
|
|
(255,823
|
)
|
Net income (loss) before income taxes
|
|
|
(352
|
)
|
|
|
(87,266
|
)
|
|
|
26,633
|
|
|
|
(192,093
|
)
|
Income tax benefit (expense)
|
|
|
2,479
|
|
|
|
106
|
|
|
|
(1,005
|
)
|
|
|
35,818
|
|
Net income (loss)
|
|
|
2,127
|
|
|
|
(87,160
|
)
|
|
|
25,628
|
|
|
|
(156,275
|
)
|
Net income (loss) attributable to noncontrolling interest
|
|
|
(44
|
)
|
|
|
(147
|
)
|
|
|
55
|
|
|
|
7,178
|
|
Net income (loss) attributable to Purple Innovation, Inc.
|
|
$
|
2,171
|
|
|
$
|
(87,013
|
)
|
|
$
|
25,573
|
|
|
$
|
(163,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
|
$
|
(1.97
|
)
|
|
$
|
0.39
|
|
|
$
|
(5.09
|
)
|
Diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(1.97
|
)
|
|
$
|
0.09
|
|
|
$
|
(5.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
66,335
|
|
|
|
44,266
|
|
|
|
65,741
|
|
|
|
32,117
|
|
Diluted
|
|
|
67,287
|
|
|
|
44,266
|
|
|
|
68,319
|
|
|
|
32,117
|
|
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
PURPLE INNOVATION, INC.
Condensed Consolidated Statements of Stockholders’
Equity (Deficit)
(unaudited – in thousands)
|
|
Class A
|
|
|
Class B
|
|
|
Additional
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Equity
|
|
|
Stockholders’
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Equity
|
|
|
Interest
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2020
|
|
|
63,914
|
|
|
$
|
6
|
|
|
|
536
|
|
|
$
|
—
|
|
|
$
|
333,047
|
|
|
$
|
(265,856
|
)
|
|
$
|
67,197
|
|
|
$
|
344
|
|
|
$
|
67,541
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,824
|
|
|
|
20,824
|
|
|
|
115
|
|
|
|
20,939
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
479
|
|
|
|
—
|
|
|
|
479
|
|
|
|
—
|
|
|
|
479
|
|
Exchange of stock
|
|
|
88
|
|
|
|
—
|
|
|
|
(88
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercise of warrants
|
|
|
2,291
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
64,261
|
|
|
|
—
|
|
|
|
64,262
|
|
|
|
—
|
|
|
|
64,262
|
|
Exercise of stock options
|
|
|
10
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
83
|
|
|
|
—
|
|
|
|
83
|
|
|
|
—
|
|
|
|
83
|
|
Tax Receivable Agreement liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(777
|
)
|
|
|
—
|
|
|
|
(777
|
)
|
|
|
—
|
|
|
|
(777
|
)
|
Deferred income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
971
|
|
|
|
—
|
|
|
|
971
|
|
|
|
—
|
|
|
|
971
|
|
Accrued distributions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(99
|
)
|
|
|
—
|
|
|
|
(99
|
)
|
|
|
—
|
|
|
|
(99
|
)
|
InnoHold
indemnification payment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,142
|
|
|
|
—
|
|
|
|
4,142
|
|
|
|
—
|
|
|
|
4,142
|
|
Impact of transactions affecting NCI
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(265
|
)
|
|
|
—
|
|
|
|
(265
|
)
|
|
|
265
|
|
|
|
—
|
|
Balance – March 31, 2021
|
|
|
66,303
|
|
|
$
|
7
|
|
|
|
448
|
|
|
$
|
—
|
|
|
$
|
401,842
|
|
|
$
|
(245,032
|
)
|
|
$
|
156,817
|
|
|
$
|
724
|
|
|
$
|
157,541
|
|
Net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,578
|
|
|
|
2,578
|
|
|
|
(16
|
)
|
|
|
2,562
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,113
|
|
|
|
—
|
|
|
|
1,113
|
|
|
|
—
|
|
|
|
1,113
|
|
Exercise of warrants
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26
|
|
|
|
—
|
|
|
|
26
|
|
|
|
—
|
|
|
|
26
|
|
Exercise of stock options
|
|
|
45
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
369
|
|
|
|
—
|
|
|
|
369
|
|
|
|
—
|
|
|
|
369
|
|
Tax Receivable Agreement liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
(3
|
)
|
Deferred income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
Accrued distributions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(87
|
)
|
|
|
—
|
|
|
|
(87
|
)
|
|
|
—
|
|
|
|
(87
|
)
|
Issuance of common stock
|
|
|
22
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Impact of transactions affecting NCI
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(192
|
)
|
|
|
—
|
|
|
|
(192
|
)
|
|
|
192
|
|
|
|
—
|
|
Balance – June 30, 2021
|
|
|
66,371
|
|
|
$
|
7
|
|
|
|
448
|
|
|
$
|
—
|
|
|
$
|
403,071
|
|
|
$
|
(242,454
|
)
|
|
$
|
160,624
|
|
|
$
|
900
|
|
|
$
|
161,524
|
|
Net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,171
|
|
|
|
2,171
|
|
|
|
(44
|
)
|
|
|
2,127
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
765
|
|
|
|
—
|
|
|
|
765
|
|
|
|
—
|
|
|
|
765
|
|
Exercise of warrants
|
|
|
6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
149
|
|
|
|
—
|
|
|
|
149
|
|
|
|
—
|
|
|
|
149
|
|
Exercise of stock options
|
|
|
72
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
590
|
|
|
|
—
|
|
|
|
590
|
|
|
|
—
|
|
|
|
590
|
|
Tax Receivable Agreement liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
|
|
4
|
|
Deferred income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
(5
|
)
|
Accrued distributions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(304
|
)
|
|
|
—
|
|
|
|
(304
|
)
|
|
|
—
|
|
|
|
(304
|
)
|
Impact of transactions affecting NCI
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(56
|
)
|
|
|
—
|
|
|
|
(56
|
)
|
|
|
56
|
|
|
|
—
|
|
Balance – September 30, 2021
|
|
|
66,449
|
|
|
$
|
7
|
|
|
|
448
|
|
|
$
|
—
|
|
|
$
|
404,214
|
|
|
$
|
(240,283
|
)
|
|
$
|
163,938
|
|
|
$
|
912
|
|
|
$
|
164,850
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Additional
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Equity
|
|
|
Equity
|
|
|
Noncontrolling
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
(Deficit)
|
|
|
Interest
|
|
|
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance – December 31, 2019
|
|
|
22,494
|
|
|
$
|
2
|
|
|
|
31,394
|
|
|
$
|
3
|
|
|
$
|
2,822
|
|
|
$
|
(28,989
|
)
|
|
$
|
(26,162
|
)
|
|
$
|
(2,378
|
)
|
|
$
|
(28,540
|
)
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,835
|
|
|
|
16,835
|
|
|
|
11,166
|
|
|
|
28,001
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
250
|
|
|
|
—
|
|
|
|
250
|
|
|
|
—
|
|
|
|
250
|
|
Exchange of stock
|
|
|
1,124
|
|
|
|
—
|
|
|
|
(1,124
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercise of warrants
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17
|
|
|
|
—
|
|
|
|
17
|
|
|
|
—
|
|
|
|
17
|
|
Tax Receivable Agreement liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(221
|
)
|
|
|
—
|
|
|
|
(221
|
)
|
|
|
—
|
|
|
|
(221
|
)
|
Accrued distributions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(196
|
)
|
|
|
—
|
|
|
|
(196
|
)
|
|
|
—
|
|
|
|
(196
|
)
|
Issuance of common stock
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Impact of transactions affecting NCI
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
120
|
|
|
|
—
|
|
|
|
120
|
|
|
|
(120
|
)
|
|
|
—
|
|
Balance – March 31, 2020
|
|
|
23,622
|
|
|
$
|
2
|
|
|
|
30,270
|
|
|
$
|
3
|
|
|
$
|
2,792
|
|
|
$
|
(12,154
|
)
|
|
$
|
(9,357
|
)
|
|
$
|
8,668
|
|
|
$
|
(689
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(93,275
|
)
|
|
|
(93,275
|
)
|
|
|
(3,841
|
)
|
|
|
(97,116
|
)
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
962
|
|
|
|
—
|
|
|
|
962
|
|
|
|
—
|
|
|
|
962
|
|
Exchange of stock
|
|
|
12,760
|
|
|
|
1
|
|
|
|
(12,760
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercise of warrants
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19
|
|
|
|
—
|
|
|
|
19
|
|
|
|
—
|
|
|
|
19
|
|
Exercise of stock options
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(61
|
)
|
|
|
—
|
|
|
|
(61
|
)
|
|
|
—
|
|
|
|
(61
|
)
|
Tax Receivable Agreement liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(45,045
|
)
|
|
|
—
|
|
|
|
(45,045
|
)
|
|
|
—
|
|
|
|
(45,045
|
)
|
Deferred income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
56,636
|
|
|
|
—
|
|
|
|
56,636
|
|
|
|
—
|
|
|
|
56,636
|
|
Accrued distributions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,327
|
)
|
|
|
—
|
|
|
|
(4,327
|
)
|
|
|
—
|
|
|
|
(4,327
|
)
|
Issuance of common stock
|
|
|
80
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
Impact of transactions affecting NCI
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,453
|
|
|
|
—
|
|
|
|
6,453
|
|
|
|
(6,453
|
)
|
|
|
—
|
|
Balance – June 30, 2020
|
|
|
36,468
|
|
|
$
|
4
|
|
|
|
17,510
|
|
|
$
|
2
|
|
|
$
|
17,429
|
|
|
$
|
(105,429
|
)
|
|
$
|
(87,994
|
)
|
|
$
|
(1,626
|
)
|
|
$
|
(89,620
|
)
|
Net income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(87,013
|
)
|
|
|
(87,013
|
)
|
|
|
(147
|
)
|
|
|
(87,160
|
)
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
347
|
|
|
|
—
|
|
|
|
347
|
|
|
|
—
|
|
|
|
347
|
|
Exchange of stock
|
|
|
16,905
|
|
|
|
2
|
|
|
|
(16,905
|
)
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercise of warrants
|
|
|
266
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,240
|
|
|
|
—
|
|
|
|
5,240
|
|
|
|
—
|
|
|
|
5,240
|
|
Exercise of stock options
|
|
|
184
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,394
|
|
|
|
—
|
|
|
|
1,394
|
|
|
|
—
|
|
|
|
1,394
|
|
Tax Receivable Agreement liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(89,677
|
)
|
|
|
—
|
|
|
|
(89,677
|
)
|
|
|
—
|
|
|
|
(89,677
|
)
|
Deferred income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
112,670
|
|
|
|
—
|
|
|
|
112,670
|
|
|
|
—
|
|
|
|
112,670
|
|
Accrued distributions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(176
|
)
|
|
|
—
|
|
|
|
(176
|
)
|
|
|
—
|
|
|
|
(176
|
)
|
Forfeiture of unvested common stock
|
|
|
(36
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Impact of transactions affecting NCI
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,817
|
)
|
|
|
—
|
|
|
|
(1,817
|
)
|
|
|
1,817
|
|
|
|
—
|
|
Balance – September 30, 2020
|
|
|
53,787
|
|
|
$
|
5
|
|
|
|
605
|
|
|
$
|
—
|
|
|
$
|
45,411
|
|
|
$
|
(192,442
|
)
|
|
$
|
(147,026
|
)
|
|
$
|
44
|
|
|
$
|
(146,982
|
)
|
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
PURPLE INNOVATION, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited – in thousands)
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
25,628
|
|
|
$
|
(156,275
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,355
|
|
|
|
6,366
|
|
Non-cash interest
|
|
|
388
|
|
|
|
2,973
|
|
Paid-in-kind interest
|
|
|
—
|
|
|
|
(6,616
|
)
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
5,782
|
|
Change in fair value – warrant liabilities
|
|
|
(19,369
|
)
|
|
|
212,593
|
|
Tax receivable agreement (income) expense
|
|
|
(639
|
)
|
|
|
33,512
|
|
Stock-based compensation
|
|
|
2,357
|
|
|
|
1,559
|
|
Non-cash lease expense
|
|
|
3,361
|
|
|
|
2,210
|
|
Deferred income taxes
|
|
|
(1,737
|
)
|
|
|
(35,818
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,541
|
|
|
|
6,798
|
|
Inventories
|
|
|
(18,319
|
)
|
|
|
(3,147
|
)
|
Prepaid inventory and other assets
|
|
|
2,169
|
|
|
|
(5,740
|
)
|
Accounts payable
|
|
|
(2,199
|
)
|
|
|
9,678
|
|
Accrued sales returns
|
|
|
(1,525
|
)
|
|
|
3,014
|
|
Accrued compensation
|
|
|
(817
|
)
|
|
|
4,561
|
|
Customer prepayments
|
|
|
3,030
|
|
|
|
(51
|
)
|
Accrued rebates and allowances
|
|
|
(2,820
|
)
|
|
|
1,921
|
|
Operating lease obligations
|
|
|
(1,824
|
)
|
|
|
(1,274
|
)
|
Other accrued liabilities
|
|
|
4,552
|
|
|
|
5,354
|
|
Net cash provided by operating activities
|
|
|
132
|
|
|
|
87,400
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(40,146
|
)
|
|
|
(14,194
|
)
|
Investment in intangible assets
|
|
|
(1,352
|
)
|
|
|
(10,890
|
)
|
Net cash used in investing activities
|
|
|
(41,498
|
)
|
|
|
(25,084
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from term loan
|
|
|
—
|
|
|
|
45,000
|
|
Payments on term loan
|
|
|
(1,688
|
)
|
|
|
—
|
|
Payments on related party loan
|
|
|
—
|
|
|
|
(37,497
|
)
|
Payments for debt issuance costs
|
|
|
—
|
|
|
|
(2,460
|
)
|
Proceeds from InnoHold indemnification payment
|
|
|
4,142
|
|
|
|
—
|
|
Tax receivable agreement payments
|
|
|
(628
|
)
|
|
|
—
|
|
Distributions to members
|
|
|
(957
|
)
|
|
|
(5,006
|
)
|
Proceeds from exercise of warrants
|
|
|
116
|
|
|
|
706
|
|
Proceeds from exercise of stock options
|
|
|
1,042
|
|
|
|
1,418
|
|
Net cash provided by financing activities
|
|
|
2,027
|
|
|
|
2,161
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(39,339
|
)
|
|
|
64,477
|
|
Cash and cash equivalents, beginning of the year
|
|
|
122,955
|
|
|
|
33,478
|
|
Cash and cash equivalents, end of the period
|
|
$
|
83,616
|
|
|
$
|
97,955
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest, net of amounts capitalized
|
|
$
|
389
|
|
|
$
|
954
|
|
Cash paid during the period for income taxes
|
|
$
|
4,495
|
|
|
$
|
2,422
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Property and equipment included in accounts payable
|
|
$
|
5,707
|
|
|
$
|
2,786
|
|
Non-cash leasehold improvements
|
|
$
|
3,238
|
|
|
$
|
615
|
|
Accrued distributions
|
|
$
|
304
|
|
|
$
|
4,523
|
|
Tax receivable agreement liability
|
|
$
|
776
|
|
|
$
|
134,943
|
|
Deferred income taxes
|
|
$
|
969
|
|
|
$
|
169,306
|
|
Exercise of liability warrants
|
|
$
|
64,321
|
|
|
$
|
4,570
|
|
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Organization
The Company’s mission
is to help people feel and live better through innovative comfort solutions.
Purple Innovation, Inc. collectively
with its subsidiary (the “Company” or “Purple Inc.”) 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, Company showrooms, and third-party online retailers.
The Company was incorporated
in Delaware on May 19, 2015 as a special purpose acquisition company under the name of Global Partnership Acquisition Corp (“GPAC”).
On February 2, 2018, the Company consummated a transaction structured similar to a reverse recapitalization (the “Business Combination”)
pursuant to which the Company acquired a portion of the equity of Purple Innovation, LLC (“Purple LLC”). At the closing of
the Business Combination (the “Closing”), the Company became the sole managing member of Purple LLC, and GPAC was renamed
Purple Innovation, Inc.
As the sole managing member
of Purple LLC, Purple Inc. through its officers and directors is responsible for all operational and administrative decision making and
control of the day-to-day business affairs of Purple LLC without the approval of any other member.
2. Summary of Significant Accounting Policies
Basis of Presentation
and Principles of Consolidation
The Company consists of Purple
Inc. and its consolidated subsidiary, Purple LLC. As of September 30, 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 and nine months ended September
30, 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.
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 September 30, 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 (the “Class B Units”)
held approximately 1% of the economic interest in Purple LLC. For further discussion see Note 13 — Stockholders’ Equity.
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 (loss), cash flows or stockholders’ 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, LLC (“InnoHold”). Predicting future
events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results could differ materially from those
estimates.
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 assets on the balance sheet and to disclose key information
about an entity’s leasing arrangements. Because the Company ceased being 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, a 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.
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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.
Revenue Recognition
The Company markets and sells
its products through DTC online channels, retail brick-and-mortar wholesale partners, Company showrooms, and third-party online retailers.
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)
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 – Derivatives and Hedging—Contracts in Entity’s Own Equity, 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 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 September 30, 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.
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The classification of fair
value measurements within the established three-level hierarchy is based upon the lowest level of input that is significant to the measurements.
Financial instruments, although not recorded at fair value on a recurring basis include cash and cash equivalents, receivables, accounts
payable and the Company’s debt obligations. The carrying amounts of cash and cash equivalents, receivables, accounts payable and
accrued expenses approximate fair value because of the short-term nature of these accounts. The fair value of the Company’s debt
instruments is estimated to be face value based on the contractual terms of the debt arrangements and market-based expectations.
The 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).
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:
(In thousands)
|
|
Level
|
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Sponsor warrants
|
|
|
3
|
|
|
$
|
9,018
|
|
|
$
|
92,708
|
|
All of the public warrants
(a Level 1 fair value liability) and all of the incremental loan warrants (a Level 3 fair value liability) were exercised during 2020.
The following table summarizes
the Company’s total Level 3 liability activity for the nine months ended September 30, 2021 and 2020:
(In thousands)
|
|
Sponsor
Warrants
|
|
|
Incremental
Loan
Warrants
|
|
|
Total Level 3
Liabilities
|
|
Fair value as of December 31, 2020
|
|
$
|
92,708
|
|
|
$
|
—
|
|
|
$
|
92,708
|
|
Fair value transfer to Level 1 measurement
|
|
|
(64,321
|
)
|
|
|
—
|
|
|
|
(64,321
|
)
|
Change in valuation inputs(1)
|
|
|
(19,369
|
)
|
|
|
—
|
|
|
|
(19,369
|
)
|
Fair value as of September 30, 2021
|
|
$
|
9,018
|
|
|
$
|
—
|
|
|
$
|
9,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of December 31, 2019
|
|
$
|
7,689
|
|
|
$
|
21,622
|
|
|
$
|
29,311
|
|
Fair value of warrants exercised
|
|
|
(4,965
|
)
|
|
|
—
|
|
|
|
(4,965
|
)
|
Change in valuation inputs(1)
|
|
|
57,434
|
|
|
|
43,308
|
|
|
|
100,742
|
|
Fair value as of September 30, 2020
|
|
$
|
60,158
|
|
|
$
|
64,930
|
|
|
$
|
125,088
|
|
(1)
|
Changes in valuation inputs are recognized in the change in fair value – warrant liabilities in the condensed consolidated statements of operations.
|
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.
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 operations.
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 (Loss) Per
Share
Basic net income (loss) per
common share is calculated by dividing net income (loss) attributable to common shareholders by the weighted average number of shares
of Class A Common Stock, par value $0.0001 per share (the “Class A Stock”), outstanding each period. Diluted net income (loss)
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 shares of Class B Common Stock, par value $0.0001 per share (the “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.
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.
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Simplifying the Accounting
for Income Taxes
In December 2019, the FASB
issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (“ASU 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. ASU 2019-12 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. ASU 2016-13 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.
3. Revenue from Contracts with Customers
The Company markets and sells
its products through DTC online channels, retail brick-and-mortar wholesale partners, Company showrooms, and third-party online retailers.
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.
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Disaggregated Revenue
The Company sells products
through two channels: Direct-to-Consumer and Wholesale. The Direct-to-Consumer channel includes product sales through various DTC 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
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
Channel
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Direct-to-consumer
|
|
$
|
112,863
|
|
|
$
|
134,252
|
|
|
$
|
353,985
|
|
|
$
|
360,119
|
|
Wholesale partner
|
|
|
57,918
|
|
|
|
52,859
|
|
|
|
185,811
|
|
|
|
114,463
|
|
Revenues, net
|
|
$
|
170,781
|
|
|
$
|
187,111
|
|
|
$
|
539,796
|
|
|
$
|
474,582
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
Product
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Bedding
|
|
$
|
156,077
|
|
|
$
|
172,806
|
|
|
$
|
494,628
|
|
|
$
|
437,809
|
|
Other
|
|
|
14,704
|
|
|
|
14,305
|
|
|
|
45,168
|
|
|
|
36,773
|
|
Revenues, net
|
|
$
|
170,781
|
|
|
$
|
187,111
|
|
|
$
|
539,796
|
|
|
$
|
474,582
|
|
Contract Balances
Payment for sale of products
through the DTC 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 $9.3
million and $6.3 million at September 30, 2021 and December 31, 2020, respectively. During the three months ended September 30, 2021 and
2020, the Company recognized all revenue that was deferred in customer prepayments at June 30, 2021 and 2020, respectively.
4. Inventories
Inventories consisted of the
following (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Raw materials
|
|
$
|
28,788
|
|
|
$
|
26,372
|
|
Work-in-process
|
|
|
4,203
|
|
|
|
3,593
|
|
Finished goods
|
|
|
52,481
|
|
|
|
36,280
|
|
Inventory obsolescence reserve
|
|
|
(1,427
|
)
|
|
|
(519
|
)
|
Inventories, net
|
|
$
|
84,045
|
|
|
$
|
65,726
|
|
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
5. Property and Equipment
Property and equipment consisted
of the following (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Equipment
|
|
$
|
54,008
|
|
|
$
|
30,508
|
|
Equipment in progress
|
|
|
19,099
|
|
|
|
18,648
|
|
Leasehold improvements
|
|
|
30,676
|
|
|
|
15,758
|
|
Furniture and fixtures
|
|
|
10,759
|
|
|
|
5,160
|
|
Office equipment
|
|
|
4,465
|
|
|
|
3,185
|
|
Total property and equipment
|
|
|
119,007
|
|
|
|
73,259
|
|
Accumulated depreciation
|
|
|
(17,958
|
)
|
|
|
(11,773
|
)
|
Property and equipment, net
|
|
$
|
101,049
|
|
|
$
|
61,486
|
|
Equipment in progress reflects
equipment, primarily related to mattress manufacturing, which is being constructed and was not in service at September 30, 2021 or December
31, 2020. Depreciation expense was $2.8 million and $6.2 million during the three and nine months ended September 30, 2021, respectively,
and totaled $1.4 million and $4.0 million during the three and nine months ended September 30, 2020, respectively.
The Company capitalizes interest on borrowings during the active construction
period of major capital projects. Capitalized interest is added to the cost of the underlying assets and is amortized over the useful
lives of the assets. Capitalized interest as of September 30, 2021 totaled $0.8 million of which $0.6 million related to an error affecting
periods prior to the third quarter of 2021 relating to unrecorded capitalized interest. Such amount was
determined to not be material to prior or current financial statements and was recorded as an out-of-period correction
in the third quarter of 2021.
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 ten 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 $0.7 million and $0.6 million as of September 30,
2021 and December 31, 2020, respectively.
The following table presents
the Company’s lease costs (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Operating lease costs
|
|
$
|
2,329
|
|
|
$
|
1,530
|
|
|
$
|
6,200
|
|
|
$
|
4,005
|
|
Variable lease costs
|
|
|
819
|
|
|
|
6
|
|
|
|
1,396
|
|
|
|
32
|
|
Short-term lease costs
|
|
|
67
|
|
|
|
59
|
|
|
|
191
|
|
|
|
178
|
|
Total lease costs
|
|
$
|
3,215
|
|
|
$
|
1,595
|
|
|
$
|
7,787
|
|
|
$
|
4,215
|
|
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 September 30, 2021 (in thousands):
2021 (excluding the nine months ended September 30, 2021) (1)
|
|
$
|
(123
|
)
|
2022
|
|
|
10,496
|
|
2023
|
|
|
10,211
|
|
2024
|
|
|
10,222
|
|
2025
|
|
|
10,186
|
|
Thereafter
|
|
|
70,391
|
|
Total operating lease payments
|
|
|
111,383
|
|
Less – lease payments representing interest
|
|
|
(30,267
|
)
|
Present value of operating lease payments
|
|
$
|
81,116
|
|
(1)
|
– Amount consists of $2.2 million of undiscounted cash flows offset by $2.3 million of tenant improvement allowances which are expected to be fully utilized in fiscal 2021.
|
As of September 30, 2021 and
December 31, 2020, the weighted-average remaining term of operating leases was 11.2 years and 11.8 years, respectively, and the weighted-average
discount rate of operating leases was 5.38% and 6.18%, respectively.
The following table provides
supplemental information related to the Company’s condensed consolidated statement of cash flows for the nine months ended September
30, 2021 and 2020:
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Cash paid for amounts included in present value of operating lease liabilities
|
|
$
|
1,824
|
|
|
$
|
1,274
|
|
Right-of-use assets obtained in exchange for operating lease liabilities
|
|
|
23,751
|
|
|
|
15,821
|
|
7. Other Current Liabilities
Other current liabilities
consisted of the following (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Warranty accrual – current portion
|
|
$
|
4,259
|
|
|
$
|
2,806
|
|
Long-term debt – current portion
|
|
|
2,012
|
|
|
$
|
2,004
|
|
Tax receivable agreement liability – current portion
|
|
|
5,847
|
|
|
|
6,545
|
|
Insurance financing
|
|
|
2,133
|
|
|
|
910
|
|
Other
|
|
|
780
|
|
|
|
1,318
|
|
Total other current liabilities
|
|
$
|
15,031
|
|
|
$
|
13,583
|
|
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
8. Debt
Debt consisted of the following
(in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Term loan
|
|
$
|
42,750
|
|
|
$
|
44,438
|
|
Less: unamortized debt issuance costs
|
|
|
(839
|
)
|
|
|
(1,024
|
)
|
Total debt
|
|
|
41,911
|
|
|
|
43,414
|
|
Less: current portion of debt
|
|
|
(2,012
|
)
|
|
|
(2,004
|
)
|
Long-term debt, net
|
|
$
|
39,899
|
|
|
$
|
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 September 30, 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 September 30, 2021, there was no balance
outstanding on the revolving credit facility.
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 $0.5 million and $1.6 million for the three and nine months ended September 30, 2021, respectively, and
totaled $0.2 million and $0.2 million during the three and nine months ended September 30, 2020, respectively.
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 $1.0 million
and $3.8 million for the three and nine months ended September 30, 2020, respectively.
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 and nine months
ended September 30, 2020, the Company recognized losses of $18.0 million and $43.3 million, respectively, in its condensed consolidated
statements of operations related to increases in the 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 September 30, 2020:
Trading price of common stock on measurement date
|
|
$
|
24.86
|
|
Exercise price
|
|
$
|
—
|
|
Risk free interest rate
|
|
|
0.16
|
%
|
Warrant life in years
|
|
|
3.4
|
|
Expected volatility
|
|
|
51.30
|
%
|
Expected dividend yield
|
|
|
—
|
|
Probability of warrant re-price
|
|
|
100.00
|
%
|
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 nine months ended
September 30, 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 September 30, 2021 had a fair value of $9.0 million. All of the public warrants were exercised
during fiscal 2020.
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:
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Trading price of common stock on measurement date
|
|
$
|
21.02
|
|
|
$
|
24.86
|
|
Exercise price
|
|
$
|
5.75
|
|
|
$
|
5.75
|
|
Risk free interest rate
|
|
|
0.09
|
%
|
|
|
0.13
|
%
|
Warrant life in years
|
|
|
1.3
|
|
|
|
2.3
|
|
Expected volatility
|
|
|
34.99
|
%
|
|
|
46.90
|
%
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
During the three and nine
months ended September 30, 2021, the Company recognized gains of $5.4 million and $19.4 million, respectively, in its condensed consolidated
statements of operations related to decreases in the fair value of the sponsor warrants exercised during the respective periods or that
were outstanding at the end of the respective period. For the three and nine months ended September 30, 2020, the Company recognized losses
of $86.0 million and $169.3 million, respectively, in its condensed consolidated statements of operations related to increases 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
period.
10. Other Long-Term Liabilities
Other long-term liabilities
consist of the following (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Warranty accrual
|
|
$
|
13,135
|
|
|
$
|
8,397
|
|
Other
|
|
|
950
|
|
|
|
912
|
|
Total
|
|
|
14,085
|
|
|
|
9,309
|
|
Less: current portion of warranty accrual
|
|
|
(4,259
|
)
|
|
|
(2,806
|
)
|
Other long-term liabilities, net of current portion
|
|
$
|
9,826
|
|
|
$
|
6,503
|
|
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 nine months ended September 30, 2021, the Company paid $1.0 million
in tax distributions under the Third Purple LLC Agreement. At September 30, 2021, the Company’s condensed consolidated balance sheet
had a minimal amount 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 September 30, 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.
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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.
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
these 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.
On May 21, 2021, 7.3 million
shares of Class A common stock were sold in a secondary offering by the Coliseum Investors at a price of $30.00 per share. The Company
did not receive any of the proceeds from the secondary offering. The underwriting discount, commission and other related costs incurred
by the Company for the secondary offering totaled $7.9 million and was recorded in May 2021 as general and administrative expense.
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
these 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. On November 9, 2020, the Company issued 2.6 million shares of Class A common stock in exchange for the exercised Incremental
Loan Warrants.
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 Third Purple LLC Agreement, or if such exchange would cause Purple LLC to be treated as a “publicly
traded partnership” under applicable tax laws.
The Company and each holder
of Paired Securities shall bear its own expense regarding the exchange except that the Company shall be responsible for transfer taxes,
stamp taxes and similar duties.
During the nine months ended
September 30, 2021 and 2020, 0.1 million and 30.8 million, respectively, of Paired Securities were exchanged for shares of Class A Stock.
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Maintenance of One-to-One
Ratios
The Third Purple LLC Agreement
includes provisions intended to ensure that the Company at all times maintains a one-to-one ratio between (a) (i) the number of outstanding
shares of Class A 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 engaged in litigation
discovery, exchanged affidavits of documents and scheduled examinations for discovery. Shortly thereafter, discovery adjourned and continues
to be stayed while the parties negotiate formal terms of settlement. The Company believes settlement will be finalized soon and the action
then dismissed, but if not, Purple LLC will resume vigorously pursuing its claims.
On September 20, 2020, Purple
LLC filed a complaint in 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 Purple
LLC’s. On July 6, 2021, the court granted a preliminary injunction against liquidation of any unliquidated entries. If successful,
this litigation could result in a refund of some or all of the Section 301 duties.
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
On October 13, 2020, Purple
LLC filed a lawsuit against Responsive Surface Technology, LLC and its parent company, PatienTech, LLC (collectively referred to as “ReST”)
in the United States District Court for the District of Utah. The lawsuit arises from ReST’s multiple breaches of its obligations
to Purple LLC, including infringing upon Purple LLC’s trademarks, patents, and trade dress, among other claims. Purple seeks monetary
damages, injunctive relief, and declaratory judgment based on certain conduct by ReST (“Case I”). On October 21, 2020, shortly
after the complaint was filed in Case I, ReST filed a retaliatory lawsuit against Purple LLC, Gary DiCamillo, Adam Gray, Joseph Megibow,
Terry Pearce, and Tony Pearce, also in the United States District Court for the District of Utah (“Case II”). Subsequently,
the two cases were consolidated into one. Case II (now combined with Case I) involves many of the same facts and transactions as Case
I. On January 19, 2021, ReST filed a motion to compel arbitration of the claims in Case I. Purple LLC opposed the motion to compel arbitration,
arguing that ReST waived any rights they may have had to arbitration and that all the claims in both cases should stay in the courts.
However, the Court granted ReST’s motion to compel arbitration, and stayed the proceedings in the United States District Court for
the District of Utah. Additionally, the Court ruled that ReST’s claims against the Purple board members were not subject to arbitration,
and the Court stayed ReST’s claims against those individuals. Pursuant to the Court’s order, Purple filed a demand for
arbitration with the American Arbitration Association (the “AAA”) on September 1, 2021. ReST filed its counterclaim
with the AAA on September 21, 2021. The parties are currently working with the AAA to select an arbitrator for the arbitration hearing.
No date for the arbitration hearing has been set. 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. On September 28, 2021, the District Court dismissed Purple’s complaint without prejudice,
and also dismissed ACTI’s counterclaim without prejudice, while the parties pursued dispute-resolution procedures set out in the
license agreement. Because the Court found that the license agreement required the parties to follow the contractual dispute-resolution
procedures prior to filing a lawsuit, Purple initiated those procedures in accordance with the license agreement and intends to continue
to vigorously pursue its claims.
On June 8, 2021, Serta Simmons
Bedding, LLC (“SSB”) filed a Complaint against the Company in the Superior Court of Gwinnett County, Georgia, Case No. 21-A-04413-1
(the “Georgia Litigation”). SSB’s Complaint alleges that the Company intentionally interfered with SSB’s business
and contractual relations and violated the Georgia Trade Secrets Act by hiring one of SSB’s former employees in the face of an allegedly
valid 2015 noncompete agreement. SSB seeks compensatory damages, punitive damages, equitable relief, and attorneys’ fees as a result
of the conduct alleged in the Complaint. SSB also initiated arbitration proceedings against its former employee who Purple LLC has agreed
to indemnify, subject to certain conditions. On July 12, 2021, the Company filed an Answer to SSB’s Complaint in the Georgia
Litigation, denying all allegations of unlawful conduct, and further moved to dismiss the Georgia Litigation on the grounds that Georgia
is an inconvenient forum and the parties’ dispute should instead be litigated in Utah. The Company’s motion to dismiss
is fully briefed and oral argument is scheduled to occur on October 26, 2021. The Court is expected to render a decision on the
Company’s motion to dismiss in November 2021. On July 9, 2021, the Company filed its own Complaint in the Fourth Judicial District
Court of Salt Lake County, Utah, Case No. 21040011 (the “Utah Litigation”), seeking: (1) a declaratory judgment that the arbitration
clause in the former employee’s 2015 noncompete agreement is unenforceable, (2) a declaratory judgment that the restrictive covenants
in the former employee’s 2015 noncompete agreement are unenforceable, and (3) an order enjoining arbitration proceedings initiated
by SSB and currently pending against the former employee. The Company filed a motion for summary judgment on these claims on August
16, 2021. SSB filed an Answer on August 18, 2021. The Company and SSB attended a mediation on August 30, 2021 and the parties anticipate
that all claims between the parties will be resolved and that the Georgia Litigation and the Utah Litigation will each be dismissed without
prejudice.
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 (the “Board”). Mr. Gray is a manager
of Coliseum Capital, LLC, which is the general partner of CCP and CDF, and he is also a managing partner of Coliseum Capital Management,
LLC (“CCM”), which is the investment manager of Blackwell. Mr. Gray has voting and dispositive control over securities held
by CCP, CDF and Blackwell which were also Lenders under the Amended and Restated Credit Agreement. 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, LLC, (herein EdiZONE an entity wholly owned by TNT Holdings) and InnoHold (collectively the “Purple
Founder Entities”) were entities under common control with Purple LLC prior to the Business Combination. TNT Holdings and InnoHold
are majority owned and controlled by Terry Pearce and Tony Pearce (the “Purple Founders”), who were appointed to the Company’s
Board following the Business Combination. InnoHold was a majority shareholder of the Company until it sold a portion of its interests
in a secondary public offering in May 2020 and the remainder of its interests in a secondary public offering in September 2020. The Purple
Founders also resigned as employees of Purple LLC and retired from the Company’s Board in August 2020.
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
TNT Holdings owned the Alpine
facility Purple LLC has been leasing since 2010, and the Purple Founders informed Purple LLC that TNT Holdings recently transferred ownership
to 123E LLC, an entity controlled by the Purple Founders. Effective as of October 31, 2017, Purple LLC entered into an Amended and Restated
Lease Agreement with TNT Holdings. The Company determined that neither TNT Holdings nor 123E LLC are a VIE as neither the Company nor
Purple LLC hold any explicit or implicit variable interest in TNT Holdings or 123E LLC and do not have a controlling financial interest
in TNT Holdings or 123E LLC. Purple LLC incurred $0.2 million and $0.2 million in rent expense to 123E LLC or TNT Holdings for the building
lease of the Alpine facility for the three months ended September 30, 2021 and 2020, respectively and $0.7 million and $0.7 million for
the nine months ended September 30, 2021 and 2020, respectively. Purple LLC continues to lease the Alpine facility that was formerly the
Company headquarters, for use in production, research and development and video production. In accordance with the terms of that lease,
on September 3, 2021, Purple LLC gave notice to 123E LLC that it intended to exercise its right to an early termination of the lease to
occur on September 30, 2022.
During the nine months ended
September 30, 2021, certain current and former employees of Purple LLC 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.
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.
During the nine months ended
September 30, 2021, Purple LLC paid InnoHold through withholding payments directly to various states, an aggregate of $0.4 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 September 30, 2021, 66.4 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, these shares of Class A Stock are no longer subject to vesting or forfeiture.
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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.
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 September 30, 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 September 30, 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.
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 nine months ended
September 30, 2021, 6.6 million sponsor warrants were exercised resulting in the issuance of 2.3 million shares of Class A common stock.
At September 30, 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.
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 September
30, 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.
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 September 30, 2021 totaled $214.0 million, which is net
of a $70.8 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 $18.8 million in the valuation allowance
from December 31, 2020 to September 30, 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 7.53%. 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 nine months ended
September 30, 2021, the Company has recorded income tax expense of $1.0 million. The effective tax rate for the nine months ended September
30, 2021 was 3.77%, 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.
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.
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 $171.5 million. Of the tax receivable agreement liability recorded during the
nine months ended September 30, 2021, $0.8 million relates to current year exchanges and was recorded as an adjustment to stockholders’
equity and $0.6 million was recorded as income in the condensed consolidated statement of operations to reflect the impact of recording
the 2020 provision to return adjustments.
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 September 30, 2021, no uncertain tax positions were recognized as liabilities in the condensed consolidated financial
statements.
15. Net Income (Loss) Per Common Share
The following table sets forth
the calculation of basic and diluted weighted average shares outstanding and earnings (loss) per share for the periods presented (in thousands,
except per share amounts):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Purple Innovation, Inc.-basic
|
|
$
|
2,171
|
|
|
$
|
(87,013
|
)
|
|
$
|
25,573
|
|
|
$
|
(163,453
|
)
|
Less: Dilutive effect of change in fair value – warrant liabilities
|
|
|
(5,362
|
)
|
|
|
—
|
|
|
|
(19,369
|
)
|
|
|
—
|
|
Less: Net loss attributed to noncontrolling interest
|
|
|
(44
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income (loss) attributable to Purple Innovation, Inc.-diluted
|
|
$
|
(3,235
|
)
|
|
$
|
(87,013
|
)
|
|
$
|
6,204
|
|
|
$
|
(163,453
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares—basic
|
|
|
66,335
|
|
|
|
44,266
|
|
|
|
65,741
|
|
|
|
32,117
|
|
Add: Dilutive effect of equity awards
|
|
|
504
|
|
|
|
—
|
|
|
|
2,578
|
|
|
|
—
|
|
Add: Dilutive effect of Class B shares
|
|
|
448
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average shares—diluted
|
|
|
67,287
|
|
|
|
44,266
|
|
|
|
68,319
|
|
|
|
32,117
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
|
$
|
(1.97
|
)
|
|
$
|
0.39
|
|
|
$
|
(5.09
|
)
|
Diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(1.97
|
)
|
|
$
|
0.09
|
|
|
$
|
(5.09
|
)
|
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
For the three months ended
September 30, 2021, the Company excluded 1.3 million shares of Class A Stock issuable upon conversion of certain stock options, restricted
stock and Class A shares subject to vesting as the effect was anti-dilutive. For the nine months ended September 30, 2021, the Company
excluded 0.5 million of Paired Securities convertible into an equal number of Class A shares as the effect was anti-dilutive. For the
three months ended September 30, 2020, the Company excluded 10.0 million of Paired Securities convertible into shares of Class A Stock
and 10.4 million shares of Class A Stock issuable upon conversion of certain Company warrants, stock options and Class A shares subject
to vesting as the effect was anti-dilutive. For the nine months ended September 30, 2020, the Company excluded 21.6 million of Paired
Securities convertible into shares of Class A Stock and 7.1 million shares of Class A Stock issuable upon conversion of certain Company
warrants, stock options and Class A shares 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
September 30, 2021, an aggregate of 1.8 million shares remain available for issuance or use under the 2017 Incentive Plan.
Class A Stock Awards
In May 2021, the Company granted
stock awards under the Company’s 2017 Equity Incentive Plan to independent directors on the Board. The stock awards vested immediately
and the Company recognized $0.6 million in expense during the nine months ended September 30, 2021 which represented the fair value of
the stock award on the grant date.
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 nine months ended September 30, 2021:
|
|
Options
(in
thousands)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term in
Years
|
|
|
Intrinsic
Value
(in thousands)
|
|
Options outstanding as of January 1, 2021
|
|
|
2,234
|
|
|
$
|
8.71
|
|
|
|
3.5
|
|
|
$
|
54,133
|
|
Granted
|
|
|
55
|
|
|
|
32.28
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(128
|
)
|
|
|
8.14
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited/cancelled
|
|
|
(154
|
)
|
|
|
8.56
|
|
|
|
—
|
|
|
|
—
|
|
Options outstanding as of September 30, 2021
|
|
|
2,007
|
|
|
$
|
9.40
|
|
|
|
2.7
|
|
|
$
|
24,056
|
|
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Outstanding and exercisable stock options as of
September 30, 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
(in thousands)
|
|
$
|
5.75
|
|
|
|
210
|
|
|
|
2.4
|
|
|
|
121
|
|
|
|
2.4
|
|
|
$
|
1,855
|
|
|
5.95
|
|
|
|
538
|
|
|
|
2.0
|
|
|
|
392
|
|
|
|
2.0
|
|
|
|
5,912
|
|
|
6.51
|
|
|
|
241
|
|
|
|
2.6
|
|
|
|
130
|
|
|
|
2.6
|
|
|
|
1,885
|
|
|
6.65
|
|
|
|
173
|
|
|
|
2.6
|
|
|
|
90
|
|
|
|
2.6
|
|
|
|
1,289
|
|
|
7.99
|
|
|
|
19
|
|
|
|
3. 2
|
|
|
|
8
|
|
|
|
3.2
|
|
|
|
106
|
|
|
8.17
|
|
|
|
24
|
|
|
|
0.2
|
|
|
|
24
|
|
|
|
0.2
|
|
|
|
310
|
|
|
8.32
|
|
|
|
187
|
|
|
|
2.8
|
|
|
|
72
|
|
|
|
2.8
|
|
|
|
912
|
|
|
8.55
|
|
|
|
179
|
|
|
|
3.0
|
|
|
|
86
|
|
|
|
3.0
|
|
|
|
1,072
|
|
|
12.76
|
|
|
|
25
|
|
|
|
3.5
|
|
|
|
9
|
|
|
|
3.5
|
|
|
|
77
|
|
|
13.12
|
|
|
|
174
|
|
|
|
3.5
|
|
|
|
68
|
|
|
|
3.3
|
|
|
|
540
|
|
|
15.12
|
|
|
|
3
|
|
|
|
3.6
|
|
|
|
1
|
|
|
|
3.6
|
|
|
|
7
|
|
|
21.70
|
|
|
|
179
|
|
|
|
4.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
32.28
|
|
|
|
55
|
|
|
|
4.5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
The following table summarizes
the Company’s unvested stock option activity for the nine months ended September 30, 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
|
|
|
(464
|
)
|
|
|
2.18
|
|
Forfeited
|
|
|
(154
|
)
|
|
|
1.86
|
|
Nonvested options as of September 30, 2021
|
|
|
1,005
|
|
|
$
|
4.33
|
|
The estimated fair value of
Company stock options, less expected forfeitures, is amortized over the options vesting period on a straight-line basis. For the three
and nine months ended September 30, 2021, the Company recognized stock option expense of $0.4 million and $1.3 million, respectively.
The Company recorded stock option expense of $0.3 million and $0.9 million during the three and nine months ended September 30, 2020,
respectively.
As of September 30, 2021,
outstanding stock options had $3.7 million of unrecognized stock compensation cost with a remaining recognition period of 2.0 years.
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Employee Restricted
Stock Units
During the first nine months of 2021, the Company granted 0.1 million
of restricted stock units under the Company’s 2017 Equity Incentive Plan to certain management of the Company. Approximately half
of the restricted stock units granted included a market vesting condition. The restricted stock awards that do not have the market vesting
condition had a weighted average grant date fair value of $27.80 per share. The estimated fair value of these awards is recognized on
a straight-line basis over the four-year vesting period. For those awards that include a market vesting condition, the estimated fair
value of the restricted stock was measured on the grant date and incorporated the probability of vesting occurring. The estimated fair
value is recognized over the derived service period (as determined by the valuation model), with such recognition occurring regardless
of whether the market condition is met. The Company determined the weighted average grant date fair value of the awards with the market
vesting condition to be $18.29 per share using a Monte Carlo Simulation of a Geometric Brownian Motion stock path model with the following
weighted average assumptions:
Trading price of common stock on measurement date
|
|
$
|
27.59
|
|
Risk free interest rate
|
|
|
0.34
|
%
|
Expected life in years
|
|
|
2.6
|
|
Expected volatility
|
|
|
77.2
|
%
|
Expected dividend yield
|
|
|
—
|
|
The following table summarizes
the Company’s restricted stock unit activity for the nine months ended September 30, 2021:
|
|
Number
Outstanding (in thousands)
|
|
|
Weighted Average
Grant
Date
Fair Value
|
|
Nonvested restricted stock units as of January 1, 2021
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
111
|
|
|
|
23.39
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Nonvested restricted stock units as of September 30, 2021
|
|
|
111
|
|
|
$
|
23.39
|
|
The Company recorded restricted
stock unit expense of $0.3 million and $0.3 million during the three and nine months ended September 30, 2021, respectively. There was
no restricted stock unit expense recorded in 2020.
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 September 30, 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 employee restricted stock units.
(in thousands)
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
Non-Cash Stock-Based Compensation
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Cost of revenues
|
|
$
|
119
|
|
|
$
|
44
|
|
|
$
|
208
|
|
|
$
|
124
|
|
Marketing and sales
|
|
|
209
|
|
|
|
76
|
|
|
|
427
|
|
|
|
224
|
|
General and administrative
|
|
|
414
|
|
|
|
181
|
|
|
|
1,689
|
|
|
|
840
|
|
Research and development
|
|
|
23
|
|
|
|
46
|
|
|
|
33
|
|
|
|
371
|
|
Total non-cash stock-based compensation
|
|
$
|
765
|
|
|
$
|
347
|
|
|
$
|
2,357
|
|
|
$
|
1,559
|
|
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 $0.8 million and $0.5 million for the three months ended September 30, 2021 and 2020, respectively, and $2.3 million
and $1.7 million for the nine months ended September 30, 2021 and 2020, respectively.
18. Subsequent Events
On October 11, 2021, Purple
LLC sued The Sleep Company, an Indian private limited company, in Delhi High court case CS(COMM) 517/2021, for among other things infringement
of Purple LLC’s intellectual property. On October 12, 2021, the Delhi High Court awarded Purple LLC a limited injunction against
The Sleep Company for its infringement. Further legal proceedings are pending, and the Company intends to vigorously pursue its claims
against The Sleep Company.
On November 8, 2021, Purple LLC
and Mattress Firm agreed to terminate the Master Retailer Agreement (the “Agreement”) dated September 18, 2018 between Purple
and Mattress Firm. The Agreement was replaced by a new Master Retailer Agreement with terms consistent with the Company’s standard
retailer agreement. The replacement agreement eliminates all of the prior exclusivity arrangements.
On November 8, 2021, pursuant
to the 2020 Credit Agreement, the Company provided notice to KeyBank National Association requesting a $55.0 million draw on the revolving
line of credit, which represents the full amount available under the revolving line of credit. The initial borrowing rate will be 3.50%,
based on the LIBOR floor of 0.5% plus 3.00%.
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is
intended to provide a more comprehensive review of the operating results and financial condition of Purple Innovation, Inc. than can be
obtained from reading the Unaudited Condensed Consolidated Financial Statements alone. The discussion should be read in conjunction with
the Unaudited Condensed Consolidated Financial Statements and the notes thereto included in “Part I. Item 1. Financial Statements.”
FORWARD-LOOKING STATEMENTS
This quarterly report on Form
10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that represent our current expectations and beliefs.
All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state
securities laws. In some cases, you can identify these statements by forward-looking words such as “believe,” “expect,”
“project,” “anticipate,” “estimate,” “intend,” “plan,” “targets,”
“likely,” “will,” “would,” “could,” “may,” “might,” the negative
of these words and other similar words.
All forward-looking statements
included in this Quarterly Report are made only as of the date thereof. It is routine for our internal projections and expectations to
change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end
of the next quarter or year. Investors are cautioned not to place undue reliance on any such forward-looking statements. We undertake
no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise,
except as required by law.
We caution and advise readers
that these statements are based on assumptions that may not be realized and involve risks and uncertainties that could cause actual results
to differ materially from the expectations and beliefs contained herein. These risks include, among others, the evolving impact and duration
of the COVID-19 pandemic, global supply chain issues, including increased shipping, material, and labor costs, and the impact of production
and delivery issues on demand for our products. For a summary of these risks, see the risk factors included in the “Risk Factors”
section in this Quarterly Report and in our Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on May 10,
2021.
Overview of Our Business
Our mission is to help people
feel and live better through innovative comfort solutions.
We are a digitally-native
vertical brand founded on comfort product innovation with premium offerings. We design and manufacture a variety of innovative, branded
and premium comfort products, including mattresses, pillows, cushions, frames, sheets, and other products. Our products are the result
of over 30 years of innovation and investment in proprietary and patented comfort technologies and the development of our own manufacturing
processes. Our proprietary gel technology, Hyper-Elastic Polymer, underpins many of our comfort products and provides a range of benefits
that differentiate our offerings from other competitors’ products. We market and sell our products through our DTC online channels,
retail brick-and-mortar wholesale partners, Company showrooms and third-party online retailers.
Organization
Our business consists of Purple
Inc. and its consolidated subsidiary, Purple LLC. Purple Inc. was incorporated in Delaware on May 19, 2015 as a special purpose acquisition
company under the name of GPAC. On February 2, 2018, Purple Inc. consummated a transaction structured similar to a reverse recapitalization
(the “Business Combination”) pursuant to which Purple Inc. acquired an equity interest in Purple LLC and became its sole managing
member. As the sole managing member of Purple LLC, Purple Inc., through its officers and directors, is responsible for all operational
and administrative decision making and control of the day-to-day business affairs of Purple LLC without the approval of any other member.
In connection with the Business Combination, InnoHold retained an 82% economic interest in Purple LLC. InnoHold subsequently transferred
a portion of its Class B Units to permitted transferees and exchanged its remaining shares for shares of Class A Stock that it sold. At
September 30, 2021, Purple Inc. had a 99% economic interest in Purple LLC while other Class B Unit holders had the remaining 1%.
COVID-19 Pandemic Developments
The COVID-19 pandemic has
impacted many aspects of our operations, directly and indirectly, including disruption of our employees, consumer behavior, distribution
and logistics, our suppliers, and the market overall. The scope and nature of these impacts continue to evolve. Because of the COVID-19
pandemic, we have taken precautionary measures recommended by the appropriate national and state health agencies to manage our resources
and mitigate the adverse impact of the pandemic, which is intended to help minimize the risk to our Company, employees, customers, and
the communities in which we operate.
Although we have taken measures
to protect our business, we cannot predict the specific duration for which precautionary measures relating to COVID-19 will stay in effect,
and we may elect or be required to take additional measures as the information available to us continues to develop, including with respect
to our employees, manufacturing facilities and distribution center, and relationships with our suppliers and customers. Also, we do not
know the impact proposed government mandated vaccine policies for employers will have on our workforce. Subject to certain assumptions
regarding the duration and severity of the COVID-19 pandemic, and government, consumer, and our responses thereto, based on our current
projections we believe our cash on hand, ongoing cash generated from e-commerce, liquidity available under our line of credit, and
continuing ramp up of store operations and our wholesale business, will be sufficient to cover our working capital requirements
and anticipated capital expenditures for the next 12 months.
While most state and local
governments have eased restrictions on commercial retail activity, it is possible that a resurgence in cases of COVID-19 or one of its
variants could prompt a return to tighter restrictions in certain areas of the country. Furthermore, while the bedding industry has fared
much better during the pandemic than certain other sectors of the economy, continued economic weakness may eventually
have an adverse impact upon the industry and our business. Therefore, significant uncertainty remains regarding the ongoing impact of
the COVID-19 outbreak upon our financial condition and future results of operations, as well as upon the significant estimates and assumptions
we utilize in reporting certain assets and liabilities.
Recent Developments in our Business
Production and Demand Developments
During the second quarter
of 2021, following an accident resulting in the death of an employee and subsequent safety improvements involving the Mattress Max machines,
we encountered isolated production challenges caused by unanticipated mechanical and maintenance issues when bringing the machines back
online. As a result, we experienced significantly reduced production levels causing shipment backlogs that unfavorably affected both second
and third quarter net revenues. We exited the month of July with production from our existing machines back at planned levels and emerged
from our backlog position at the end of August. We are confident that these mechanical and maintenance challenges are an isolated event
and will have no impact on our ability to scale production beyond 2021. With our production back at planned levels, we were able to increase our finished goods inventory to adequate stock
levels to enable timely shipments to our customers.
However, even though we were
able to return to planned production capacity in the third quarter, our results of operations have not yet returned to expected levels,
which we believe is due primarily to slower than expected acceleration back to prior trending demand levels, as well as increases in the
costs of shipping, materials and labor. We believe that the production challenges experienced in the second and third quarters adversely
affected the confidence of consumers and our wholesale partners in our ability to timely deliver our products, which resulted in reduced
orders and increased cancellations in both our DTC and wholesale channels. Further, in an effort to manage costs as we worked to resolve
the production issues described above, we reduced our spending on marketing, which reduced demand for our products, particularly in our
DTC channel. In addition to adversely impacting demand for our products, these issues also interrupted our momentum in growth. While our
production has returned to normal and we have ramped up our marketing efforts, it is unclear how long it will take for demand, in both
our DTC and wholesale channels, to return to expected levels. Given that we had not yet returned to normal levels by the end of the third
quarter of 2021, we expect such issues to adversely impact our operating results for the fourth quarter of 2021.
In addition to a slower recovery
to expected demand levels following our return to full production capacity, our business has also been adversely impacted by increases
in the cost of shipping, raw materials and labor. While we are still able to obtain necessary materials when needed, the costs of such
materials have increased materially, consistent with general macroeconomic trends. In addition, as experienced in other industries, in
order to remain competitive in hiring the labor necessary to maintain our production, we have had to increase wages and other compensation.
These increases in materials and labor costs have resulted in higher cost of goods sold and lower margins. We believe that shipping, material
and labor costs will continue to remain at elevated levels or increase further in the foreseeable future.
In addition to the above issues,
we are also closely monitoring the impacts of COVID-19 and general economic conditions on global supply chain, manufacturing, and logistics
operations. As inflationary pressures increase, we anticipate that our production and operating costs will similarly increase. In addition,
COVID-19 and other events, including port closures or labor shortages, have resulted in the continuation or worsening of manufacturing
and shipping costs, delays and constraints. While most of our domestic suppliers have been able to continue operations and provide necessary
materials when needed, we have experienced some constraints from certain suppliers, with respect to both the availability and cost of
materials. We have also experienced some delays in shipments from our suppliers. Any significant delay or interruption in our supply chain
could impair our ability to meet the demands of our customers and could harm our business.
Mattress Firm Relationship
On November 8, 2021, Purple LLC
and Mattress Firm agreed to terminate the Master Retailer Agreement (the “Agreement”) dated September 18, 2018 between Purple
and Mattress Firm. The Agreement was replaced by a new Master Retailer Agreement with terms consistent with the Company’s standard
retailer agreement. The replacement agreement eliminates all of the prior exclusivity arrangements.
The new agreement provides
opportunity for continued partnership and growth with Mattress Firm. With this new agreement in place, our ability to work with new wholesale
customers will no longer be limited because of contractual exclusivity with specialty retailers and other constraints on entering markets
in which Mattress Firm conducts business, which creates new opportunities.
Operating Results for the Three Months Ended
September 30, 2021 and 2020
The following table sets forth
for the periods indicated, our results of operations and the percentage of total revenue represented in our condensed consolidated statements
of operations:
|
|
Three Months Ended September 30,
|
|
|
|
2021
|
|
|
% of
Net Revenues
|
|
|
2020
|
|
|
% of
Net Revenues
|
|
Revenues, net
|
|
$
|
170,781
|
|
|
|
100.0
|
%
|
|
$
|
187,111
|
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
109,701
|
|
|
|
64.2
|
|
|
|
98,857
|
|
|
|
52.8
|
|
Gross profit
|
|
|
61,080
|
|
|
|
35.8
|
|
|
|
88,254
|
|
|
|
47.2
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
|
48,841
|
|
|
|
28.6
|
|
|
|
51,206
|
|
|
|
27.4
|
|
General and administrative
|
|
|
17,037
|
|
|
|
10.0
|
|
|
|
11,087
|
|
|
|
5.9
|
|
Research and development
|
|
|
1,784
|
|
|
|
1.0
|
|
|
|
1,687
|
|
|
|
0.9
|
|
Total operating expenses
|
|
|
67,662
|
|
|
|
39.6
|
|
|
|
63,980
|
|
|
|
34.2
|
|
Operating income (loss)
|
|
|
(6,582
|
)
|
|
|
(3.9
|
)
|
|
|
24,274
|
|
|
|
13.0
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
10
|
|
|
|
—
|
|
|
|
(1,232
|
)
|
|
|
(0.7
|
)
|
Other income, net
|
|
|
12
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
Change in fair value – warrant liabilities
|
|
|
5,362
|
|
|
|
3.1
|
|
|
|
(103,962
|
)
|
|
|
(55.6
|
)
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,782
|
)
|
|
|
(3.1
|
)
|
Tax receivable agreement income (expense)
|
|
|
846
|
|
|
|
0.5
|
|
|
|
(567
|
)
|
|
|
(0.3
|
)
|
Total other income (expense), net
|
|
|
6,230
|
|
|
|
3.6
|
|
|
|
(111,540
|
)
|
|
|
(59.6
|
)
|
Net loss before income taxes
|
|
|
(352
|
)
|
|
|
(0.2
|
)
|
|
|
(87,266
|
)
|
|
|
(46.6
|
)
|
Income tax benefit
|
|
|
2,479
|
|
|
|
1.5
|
|
|
|
106
|
|
|
|
0.1
|
|
Net income (loss)
|
|
|
2,127
|
|
|
|
1.2
|
|
|
|
(87,160
|
)
|
|
|
(46.6
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
(44
|
)
|
|
|
—
|
|
|
|
(147
|
)
|
|
|
(0.1
|
)
|
Net income (loss) attributable to Purple Innovation, Inc.
|
|
$
|
2,171
|
|
|
|
1.3
|
|
|
$
|
(87,013
|
)
|
|
|
(46.5
|
)
|
Revenue
Net revenues decreased $16.3
million, or 8.7%, to $170.8 million for the three months ended September 30, 2021 compared to $187.1 million for the three months ended
September 30, 2020. We believe that third quarter 2020 revenues were positively impacted during the COVID-19 pandemic, as individuals
focused on home improvement activities, including purchasing mattresses and bedding products. The year-over-year decrease in net revenues
consisted of DTC net revenues declining $21.4 million, or 15.9%, offset in part by net revenue growth of $5.1 million, or 9.6%, in our
wholesale business. DTC net revenues were unfavorably impacted by the impact of production delays on our ability to manufacture and deliver
products to our DTC customers in the third quarter, as well as reduced demand in our DTC channel in the same period. While our wholesale
business was favorably impacted by wholesale partner expansion combined with a reopening of wholesale partner doors, we also experienced
lower than expected demand from our wholesale customers. We believe that wholesale and DTC demand were adversely affected by the production
issues we experienced in the second and third quarters of 2021, as our ability to manufacture and deliver our products to both DTC and
wholesale customers was interrupted. In addition, in response to production delays we temporarily reduced our marketing spending, which
reduced demand for our products, particularly with respect to our DTC channel. While we have returned to planned production and marketing
activities, it is unclear when customer demand will return to expected levels. We currently anticipate that net revenues in the fourth
quarter of 2021 will continue to be adversely impacted by slower than anticipated recovery to prior demand levels. Net revenues from a
product perspective reflected a $20.5 million decrease in mattress sales, a $3.8 million increase in other bedding product sales and a
$0.4 million increase in other product sales.
Cost of Revenues
The cost of revenues increased
$10.8 million, or 11.0%, to $109.7 million for the three months ended September 30, 2021 compared to $98.9 million for the three months
ended September 30, 2020. This increase reflected an increase in direct material costs coupled with higher labor and overhead costs. Our
gross profit percentage decreased to 35.8% of net revenues for the three months ended September 30, 2021 compared to 47.2% for the same
period in 2020. The decrease in our gross profit percentage was primarily impacted by inefficiencies as we worked to resolve production
issues, rising shipping, raw material and labor costs and a higher proportion of wholesale channel revenue, which carries a lower gross
margin than revenue from the DTC channel. We anticipate that shipping, raw material and labor costs will remain at elevated levels or
continue to increase in the foreseeable future.
Marketing and Sales
Marketing and sales expenses
decreased $2.4 million, or 4.6%, to $48.8 million for the three months ended September 30, 2021 from $51.2 million for the three months
ended September 30, 2020. The decrease reflected a $10.1 million decrease in advertising spend in response to production delays, offset
in part by a $4.7 million increase in personnel costs related to planned growth of our workforce and a $3.0 million increase in other
marketing and sales expenses. Marketing and sales expense as a percentage of net revenues was 28.6% for the three months ended September
30, 2021 compared to 27.4% for the comparative prior period. The higher percentage in the current quarter was due in part to net revenues
being unfavorably impacted by production and demand issues, as described above.
General and Administrative
General and administrative
expenses increased $6.0 million, or 53.7%, to $17.0 million for the three months ended September 30, 2021 compared to $11.1 million for
the three months ended September 30, 2020. The increase was primarily due to a $2.5 million increase in legal and professional fees associated
with increased expenses for consulting, professional staffing and executive placement costs, a $1.9 million increase in personnel costs
related to planned growth of our workforce, and a $1.5 million increase in all other expenses.
Research and Development
Research and development costs
increased $0.1 million, or 5.7%, to $1.8 million for the three months ended September 30, 2021 from $1.7 million for the three months
ended September 30, 2020. The increase was primarily due to an increase in professional services costs related to product development
activities.
Operating Income (Loss)
Operating income (loss) decreased
$30.9 million to an operating loss of $6.6 million for the three months ended September 30, 2021 compared to operating income of $24.3
million for the three months ended September 30, 2020. This decrease was primarily due to net revenues being unfavorably impacted during
the quarter by production and demand issues (as described above), increased costs and a higher proportion of wholesale channel revenue,
which carries a lower gross margin than revenue from the DTC channel.
Interest Expense
During the three months ended
September 30, 2021, interest expense totaling $0.8 million was offset by $0.8 million of capitalized interest, of which $0.6 million related
to periods prior to the third quarter of 2021 and was recorded as an out-of-period correction in the third quarter of 2021. The Company
incurred interest expense of $1.2 million for the three months ended September 30, 2020. The $0.4 million decrease
in interest expense was primarily due to the $35.0 million Related Party Loan, which carried an interest rate of 12.00%, being refinanced
in the third quarter of 2020 with a $45.0 million term loan at an initial interest rate of 3.50%. Interest expense in 2021 also includes
amortization of deferred loan costs associated with the 2020 Credit Agreement and fees related to the revolving line of credit.
Change in Fair Value –
Warrant Liabilities
On February 26, 2019, the
Incremental Lenders funded a $10.0 million increase in the Related Party Loan and received 2.6 million warrants to purchase 2.6 million
shares of our Class A Stock at a price of $5.74 per share, subject to certain adjustments. We accounted for the Incremental Loan Warrants
as liabilities 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. We determined the fair value of the Incremental Loan Warrants to be $64.9 million
at September 30, 2020. During the three months ended September 30, 2020, we recognized a loss of $18.0 million in our condensed consolidated
statement of operations related to the change in fair value of these warrants. There was no gain or loss on the Incremental Loan Warrants
for the three months ended September 30, 2021 as they were exercised in 2020.
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 simultaneous
private placement with the IPO. We have accounted for these warrants as liabilities 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 fair value included in earnings. The 1.9
million sponsor warrants outstanding at September 30, 2021 had a fair value of $9.0 million. The fair value of the public and sponsor
warrants outstanding at September 30, 2020 was $188.5 million. During the three months ended September 30, 2021, we recognized a gain
of $5.4 million in our condensed consolidated statement of operations related to a decrease in the fair value of the sponsor warrants
exercised during the quarter or that were outstanding at the end of the quarter. During the three months ended September 30, 2020, we
recognized a loss of $86.0 million in our condensed consolidated statement of operations related to an increase in the fair value of the
public and sponsor warrants exercised during the prior year quarter or that were outstanding at the end of the prior year quarter.
Loss on Extinguishment of Debt
On September 3, 2020, the
Company paid $45.0 million to retire, in full, all indebtedness related to Purple LLC’s 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, the
Company recognized a $5.8 million loss on extinguishment of debt during the three months ended September 30, 2020.
Tax Receivable Agreement Expense
We are party to a tax receivable
agreement which generally provides for the payment by us to InnoHold of 80% of certain tax benefits, if any, that we realize as a result
of increases in its allocable share of the tax basis of the tangible and intangible assets of Purple LLC. Because of the Business Combination,
subsequent exchanges of 43.5 million Class B Units for Class A Stock and changes in estimates relating to the expected tax benefits associated
with the tax receivable agreement, the tax receivable agreement liability totaled $171.5 million and $172.0 million at September 30, 2021
and December 31, 2020, respectively. During the third quarter of 2021, we realized $0.8 million of tax receivable agreement income due
to the impact of recording the 2020 provision to return adjustments. Of the $90.2 million liability recorded during the three months ended
September 30, 2020, $89.7 million related to current period exchanges and was recorded as an adjustment to stockholders’ equity
and $0.6 was recorded to expense as it related to reestablishing the tax receivable agreement liability related to prior year exchanges.
Income Tax Benefit
Our income tax benefit was
$2.5 million for the three months ended September 30, 2021, compared to $0.1 million for the three months ended September 30, 2020. This
increase primarily resulted from a change in the effective tax rate due to a portion of the valuation allowance being released in 2020
and the change in fair value of the warrant liability which is treated as a permanent item for tax purposes.
Noncontrolling Interest
We attribute net income or
loss to the Class B Units in Purple LLC as a noncontrolling interest at their aggregate ownership percentage. We calculate net income
or loss attributable to noncontrolling interests on a quarterly basis using their weighted average ownership percentage. Net loss attributed
to noncontrolling interests was negligible for the three months ended September 30, 2021 compared to a net loss of $0.1 million for the
three months ended September 30, 2020. The decrease in the net income level attributed to noncontrolling interests primarily resulted
from the noncontrolling ownership interest declining to approximately 1% for the three months ended September 30, 2021 from approximately
18% for the three months ended September 30, 2020.
Operating Results for the Nine Months Ended
September 30, 2021 and 2020
The following table sets forth
for the periods indicated, our results of operations and the percentage of total revenue represented in our statements of operations:
|
|
Nine Months Ended September 30,
|
|
|
|
2021
|
|
|
% of Net
Revenues
|
|
|
2020
|
|
|
% of Net
Revenues
|
|
Revenues, net
|
|
$
|
539,796
|
|
|
|
100.0
|
%
|
|
$
|
474,582
|
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
309,505
|
|
|
|
57.3
|
|
|
|
251,515
|
|
|
|
53.0
|
|
Gross profit
|
|
|
230,291
|
|
|
|
42.7
|
|
|
|
223,067
|
|
|
|
47.0
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
|
163,053
|
|
|
|
30.2
|
|
|
|
127,313
|
|
|
|
26.8
|
|
General and administrative
|
|
|
54,024
|
|
|
|
10.0
|
|
|
|
27,312
|
|
|
|
5.8
|
|
Research and development
|
|
|
5,430
|
|
|
|
1.0
|
|
|
|
4,712
|
|
|
|
1.0
|
|
Total operating expenses
|
|
|
222,507
|
|
|
|
41.2
|
|
|
|
159,337
|
|
|
|
33.6
|
|
Operating income
|
|
|
7,784
|
|
|
|
1.4
|
|
|
|
63,730
|
|
|
|
13.4
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,129
|
)
|
|
|
(0.2
|
)
|
|
|
(4,045
|
)
|
|
|
(0.9
|
)
|
Other income (expense), net
|
|
|
(30
|
)
|
|
|
—
|
|
|
|
109
|
|
|
|
—
|
|
Change in fair value – warrant liabilities
|
|
|
19,369
|
|
|
|
3.6
|
|
|
|
(212,593
|
)
|
|
|
(44.8
|
)
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,782
|
)
|
|
|
(1.2
|
)
|
Tax receivable agreement income (expense)
|
|
|
639
|
|
|
|
0.1
|
|
|
|
(33,512
|
)
|
|
|
(7.1
|
)
|
Total other income (expense), net
|
|
|
18,849
|
|
|
|
3.5
|
|
|
|
(255,823
|
)
|
|
|
(53.9
|
)
|
Net income (loss) before income taxes
|
|
|
26,633
|
|
|
|
4.9
|
|
|
|
(192,093
|
)
|
|
|
(40.5
|
)
|
Income tax benefit (expense)
|
|
|
(1,005
|
)
|
|
|
(0.2
|
)
|
|
|
35,818
|
|
|
|
7.5
|
|
Net income (loss)
|
|
|
25,628
|
|
|
|
4.7
|
|
|
|
(156,275
|
)
|
|
|
(32.9
|
)
|
Net income attributable to noncontrolling interest
|
|
|
55
|
|
|
|
—
|
|
|
|
7,178
|
|
|
|
1.5
|
|
Net income (loss) attributable to Purple Innovation, Inc.
|
|
$
|
25,573
|
|
|
|
4.7
|
|
|
$
|
(163,453
|
)
|
|
|
(34.4
|
)
|
Revenue
Net revenues increased $65.2
million, or 13.7%, to $539.8 million for the nine months ended September 30, 2021 compared to $474.6 million for the nine months ended
September 30, 2020. This increase consisted of wholesale net revenues increasing $71.3 million, or 62.3%, offset in part by DTC net revenues
decreasing $6.1 million, or 1.7%. Our wholesale business was favorably impacted by wholesale partner expansion combined with a reopening
of wholesale partner doors. However, this favorable impact was offset by lower-than expected demand from our wholesale customers in the
third quarter of 2021, primarily due to production delays experienced in the second and third quarter of 2021, as described above. DTC
net revenues were also unfavorably impacted by the impact of production and demand issues on second and third quarter net revenues. The
increase in net revenues from a product perspective reflected a $37.8 million increase in mattress sales, a $19.0 million increase in
other bedding product sales and an $8.4 million increase in other product sales. This growth was primarily driven by an increase in wholesale
customer demand. However, we believe that wholesale and DTC demand were adversely affected by the production issues we experienced in
the second and third quarters of 2021, as our ability to manufacture and deliver our products to both DTC and wholesale customers was
interrupted. In addition, in response to production delays, we temporarily reduced our marketing spending, which reduced demand for our
products, particularly with respect to our DTC channel. While we have returned to planned production and marketing activities, it is unclear
when customer demand will return to expected levels. We currently anticipate that net revenues in the fourth quarter of 2021 will continue
to be adversely impacted by slower than anticipated recovery to prior demand levels.
Cost of Revenues
The cost of revenues increased
$58.0 million, or 23.1%, to $309.5 million for the nine months ended September 30, 2021 compared to $251.5 million for the nine months
ended September 30, 2020. The increase, which was primarily due to a $32.7 million increase in direct material costs, a $21.3 million
increase in labor and overhead costs, and a $4.0 million increase in other costs, was primarily associated with increased product sales
and higher production, shipping, material and labor costs. The gross profit percentage decreased to 42.7% of net revenues for the nine
months ended September 30, 2021 from 47.0% for the comparative prior year period. The decrease in our gross profit percentage was primarily
driven by a higher proportion of wholesale channel revenue, which carries a lower gross margin than revenue from the DTC channel, rising
raw material and labor costs and the unfavorable impact of production issues. While we have returned to planned production capacity, we
anticipate that shipping, raw material and labor costs will continue to remain at elevated levels or increase in the foreseeable future.
Marketing and Sales
Marketing and sales expenses
increased $35.7 million, or 28.1%, to $163.1 million for the nine months ended September 30, 2021 compared to $127.3 million for the nine
months ended September 30, 2020. This increase reflected a $12.8 million increase in advertising costs due to higher advertising rates
in 2021 and advertising costs in the prior year second quarter being uncharacteristically low due to the pandemic, a $12.3 million increase
in personnel costs related to planned growth of our workforce and a $10.7 million increase in other marketing and sales expenses. Marketing
and sales expense as a percentage of net revenues was 30.2% for the nine months ended September 30, 2021 compared to 26.8% for the nine
months ended September 30, 2020. The higher percentage of net revenues in the first nine months of 2021 was due in part to product sales
being unfavorably impacted by production and demand issues experienced in the second and third quarters of 2021, as described above, coupled
with higher advertising rates in 2021 and advertising costs in the prior year second quarter being uncharacteristically low because of
the pandemic.
General and Administrative
General and administrative
expenses increased $26.7 million, or 97.8%, to $54.0 million for the nine months ended September 30, 2021 compared to $27.3 million for
the nine months ended September 30, 2020. This increase was primarily due to a $16.8 million increase in legal and professional
fees related to offering costs, including underwriting commissions related to shares sold by Coliseum Capital Partners, and increased
expenses for consulting, professional staffing and executive placement costs, a $5.3 million increase related to planned increases
in our workforce, and a $4.6 million increase in all other expenses.
Research and Development
Research and development costs
increased $0.7 million, or 15.2%, to $5.4 million for the nine months ended September 30, 2021 from $4.7 million for the nine months ended
September 30, 2020. This increase was primarily due to an increase in professional services costs related to product development activities.
Operating Income
Operating income decreased
$55.9 million, or 87.8%, to $7.8 million for the nine months ended September 30, 2021, from operating income of $63.7 million for the
nine months ended September 30, 2020. This decrease was primarily due to net revenues being unfavorably impacted by production and demand
issues in the second and third quarters of 2021, increased costs and a higher proportion of wholesale channel revenue, which carries a
lower gross margin than revenue from the DTC channel.
Interest Expense
Interest expense totaled $1.1 million
for the nine months ended September 30, 2021 as compared to $4.0 million for the nine months ended September
30, 2020. Interest expense in 2021 was offset in part by $0.8 million of capitalized interest of which $0.6 million related to periods
prior to the third quarter of 2021 and was recorded as an out-of-period correction in the third quarter of 2021. The $2.9 million
decrease was also due to the $35.0 million Related Party Loan, which carried an interest rate of 12.00%, being refinanced in the third
quarter of 2020 with a $45.0 million term loan at an initial interest rate of 3.50%. Interest expense in 2021 also includes amortization
of deferred loan costs associated with the 2020 Credit Agreement and fees related to the revolving line of credit.
Change in Fair Value – Warrant Liabilities
On February 26, 2019, the
Incremental Lenders funded a $10.0 million increase in the Related Party Loan and received 2.6 million warrants to purchase 2.6 million
shares of our Class A Stock at a price of $5.74 per share, subject to certain adjustments. We accounted for the Incremental Loan Warrants
as liabilities 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. We determined the fair value of the Incremental Loan Warrants to be $64.9 million
at September 30, 2020. During the nine months ended September 30, 2020, we recognized a loss of $43.3 million in our condensed consolidated
statement of operations related to the change in fair value of these warrants. There was no gain or loss on the Incremental Loan Warrants
for the nine months ended September 30, 2021 as they were all exercised in 2020.
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 simultaneous
private placement with the IPO. We have accounted for these warrants as liabilities 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 fair value included in earnings. The 1.9
million sponsor warrants outstanding at September 30, 2021 had a fair value of $9.0 million. The fair value of the public and sponsor
warrants outstanding at September 30, 2020 was $188.5 million. During the nine months ended September 30, 2021, we recognized a gain of
$19.4 million in our condensed consolidated statement of operations related to a decrease in the fair value of the sponsor warrants exercised
during the nine-month period or that were outstanding at September 30, 2021. During the nine months ended September 30, 2020, we recognized
a loss of $169.3 million in our condensed consolidated statement of operations related to an increase in the fair value of the public
and sponsor warrants exercised during the prior year nine-month period or that were outstanding at the end of September 30, 2020.
Loss on Extinguishment of Debt
On September 3, 2020, the
Company paid $45.0 million to retire, in full, all indebtedness related to Purple LLC’s 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, the
Company recognized a $5.8 million loss on extinguishment of debt during the nine months ended September 30, 2020.
Tax Receivable Agreement Expense
The tax receivable agreement
liability totaled $171.5 million and $172.0 million at September 30, 2021 and December 31, 2020, respectively. During the first nine months
of 2021, we realized $0.6 million of tax receivable agreement income due to the impact of recording the 2020 provision to return adjustments.
Of the $168.3 million liability recorded during the nine months ended September 30, 2020, $134.9 million relates to current year exchanges
and was recorded as an adjustment to stockholders’ equity and $33.5 million was recorded to expense as it related to reestablishing
the tax receivable agreement liability related to prior year exchanges.
Income Tax Benefit (Expense)
Income tax expense was $1.0
million for the nine months ended September 30, 2021, compared to an income tax benefit of $35.8 million for the nine months ended September
30, 2020. Income tax expense for the nine months ended September 30, 2021 was primarily the result of no longer having a full valuation
allowance, the decrease in noncontrolling interest, and the change in fair value of the warrant liability which is treated as a permanent
item for tax purposes. The income tax benefit in the comparative prior nine-month period was primarily due to a portion of the valuation
allowance associated with the Company’s federal and state deferred tax assets being released and recorded as an income tax benefit
during the nine months ended September 30, 2020.
Noncontrolling Interest
Net income attributed to noncontrolling
interests was $0.1 million for the nine months ended September 30, 2021, compared to $7.2 million for the nine months ended September
30, 2020. This decrease is the result of the noncontrolling interest ownership percentage being significantly lower in 2021 than 2020.
Liquidity and Capital Resources
Our primary cash needs have historically consisted of working capital,
capital expenditures and debt service. Our working capital needs depend upon the timing of cash receipts from sales, payments to vendors
and others, changes in inventories, and operating lease payment obligations. Our cash and working capital positions were $83.6 million
and $74.9 million, respectively, as of September 30, 2021 compared to $123.0 million and $96.9 million, respectively, as of December 31,
2020. Inventories as of September 30, 2021 totaled $84.0 million compared with $65.7 million as of December 31, 2020 as production returned
to planned levels and we were able to increase our finished goods inventory to adequate stock levels to enable timely shipments to our
customers. Cash used for purchases of property and equipment increased from $14.2 million during the first nine months of 2020 to $40.1
million during the first nine months of 2021. This increase primarily resulted from continuing to invest in our business by building out
our new manufacturing facility in Georgia that began operations in March 2021, enhancing our manufacturing capabilities in Utah, scaling
our infrastructure to support the growth of our workforce, and opening 11 new Company showrooms during the first nine months of 2021.
In response to the COVID-19
pandemic, we took a number of precautionary measures to manage our resources and mitigate its adverse impact. Given the initial difficulty
in predicting how long the pandemic would persist and its full impact, we managed our business and opportunities to preserve liquidity.
In the second half of 2020, we ended most of the cash preservation programs and returned to full production to meet increased demand.
During 2021, we have increased our inventory levels and invested in our manufacturing capacity and showroom expansion. Subject to certain
assumptions regarding the duration and severity of the COVID-19 pandemic, and our responses thereto, based on our current projections
we believe our cash on hand, ongoing cash generated from our DTC business, amounts available under our line of credit, increasing
demand of our products in the wholesale channel and continuing ramp up of store operations, will be sufficient to cover
our working capital requirements and anticipated capital expenditures for the next 12 months.
On September 3, 2020, we paid
$45.0 million to retire, in full, all indebtedness related to Purple LLC’s 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.
Also on September 3, 2020,
Purple LLC entered into the 2020 Credit Agreement that provided for a $45.0 million term loan (the “Term Loan”) and a $55.0
million revolving line of credit. The agreement has a five-year term and borrowing rates for both the Term Loan and revolving line of
credit are based on Purple LLC’s leverage ratio and can range from LIBOR plus a 3.00% to 3.75% margin with a LIBOR minimum of 0.50%.
As of September 30, 2021, there was no balance outstanding on the revolving credit facility. Proceeds from the Term Loan
were used to retire all indebtedness associated with the Related Party Loan.
During the nine months ended
September 30, 2021, 6.6 million sponsor warrants were exercised on a cash and cashless basis resulting in the issuance of 2.3 million
shares of Class A Stock. The proceeds received for the cash exercise was $0.1 million. At September 30, 2021, there were 1.9 million sponsor
warrants outstanding.
In the event our cash flow from operations or other sources of financing
are less than anticipated, we believe we will be able to fund operating expenses based on our ability to scale back operations, reduce
marketing spend and postpone or discontinue our growth strategies. In such event, this could result in slower growth or no growth, and
we may run the risk of losing key suppliers, we may not be able to timely satisfy customer orders, and we may not be able to retain all
of our employees. In addition, we may be forced to restructure our obligations to current creditors or pursue work-out options.
On November 8, 2021, we provided
notice to KeyBank National Association requesting a $55.0 million draw on our revolving line of credit under the 2020 Credit Agreement,
which represents the full amount available under the revolving line of credit. The initial borrowing rate will be 3.50%, based on the
LIBOR floor of 0.5% plus 3.00%.
As described above, we experienced
production and demand issues in the second and third quarters of 2021 that adversely affected net revenues. We have also experienced increases
in shipping, raw material and labor costs. While we have returned to planned production levels, we currently anticipate that the impact
of lower-than-expected demand and higher shipping, material and labor costs will continue to adversely affect our business and results
of operations through the fourth quarter of 2021. These issues may adversely affect our ability to comply with covenants under the 2020
Credit Agreement, which could result in our default under such covenants. If we are unable to comply with the covenants and other conditions
under the 2020 Credit Agreement, we will need to seek a waiver or amendment to avoid a default. However, we may not be able to obtain
such a waiver or amendment or may be required to incur additional expenses or accept unfavorable terms.
If cash flow from operations
or available financing under the 2020 Credit Agreement are not sufficient to fund our operating expenses or our growth strategies, we
may need to raise additional capital. Our ability to obtain additional or alternative capital on acceptable terms or at all is subject
to a variety of uncertainties, including instability in the credit and financial markets resulting from macroeconomic factors and approval
from the lenders under the 2020 Credit Agreement. Adequate financing may not be available or, if offered, may only be available on unfavorable
terms. The restrictive covenants in the 2020 Credit Agreement may make it difficult to obtain additional capital on terms that are favorable
to us, and we may not be able to satisfy the conditions necessary to obtain additional funds pursuant to the revolving credit facility
under the 2020 Credit Agreement. There is no assurance we will obtain the capital we require. As a result, there can be no assurance that
we will be able to fund our future operations or growth strategies. In addition, future equity or debt financings may require us to also
issue warrants or other equity securities that are likely to be dilutive to our existing stockholders. Newly issued securities may include
preferences or superior voting rights or, as described above, may be combined with the issuance of warrants or other derivative securities,
which each may have additional dilutive effects. Furthermore, we may incur substantial costs in pursuing future capital and financing,
including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required
to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will
adversely impact our financial condition. If we cannot raise additional funds on favorable terms or at all, we may not be able to carry
out all or parts of our long-term growth strategy, maintain our growth and competitiveness or continue in business.
We are required to make certain
payments to InnoHold under the tax receivable agreement, which may have a material adverse effect on our liquidity and capital resources.
We are currently unable to determine the total future amount of these payments due to the unpredictable nature of several factors, including
the timing of future exchanges, the market price of shares of Class A Stock at the time of the exchanges, the extent to which such exchanges
are taxable and the amount and timing of future taxable income sufficient to utilize tax attributes that give rise to the payments under
the tax receivable agreement. As of September 30, 2021, the tax receivable agreement liability reflected in our condensed consolidated
balance sheet is $171.5 million of which $5.9 million is classified as other current liabilities in the condensed consolidated balance
sheet.
Cash Flows for the Nine months Ended September
30, 2021 and 2020
The following summarizes our
cash flows for the nine months ended September 30, 2021 and 2020 as reported in our condensed consolidated statements of cash flows (in
thousands):
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Net cash provided by operating activities
|
|
$
|
132
|
|
|
$
|
87,400
|
|
Net cash used in investing activities
|
|
|
(41,498
|
)
|
|
|
(25,084
|
)
|
Net cash provided by financing activities
|
|
|
2,027
|
|
|
|
2,161
|
|
Net (decrease) increase in cash
|
|
|
(39,339
|
)
|
|
|
64,477
|
|
Cash, beginning of the period
|
|
|
122,955
|
|
|
|
33,478
|
|
Cash, end of the period
|
|
$
|
83,616
|
|
|
$
|
97,955
|
|
Nine months ended September 30, 2021 Compared
to the Nine months ended September 30, 2020
Cash provided by operating
activities was minimal during the nine months ended September 30, 2021 compared to $87.4 million for the nine months ended September 30,
2020. The decrease in cash provided by operations primarily resulted from a $49.9 million decrease in cash provided by operating income
which was mainly driven by net revenues being unfavorably impacted by production and demand issues experienced in the second and third
quarters of 2021, coupled with higher marketing and sales expenses, increased legal and professional fees and planned increases in our
workforce. The decrease in cash provided by operations was further impacted by a $37.3 million decrease in operating cash flows related
to net changes in operating assets and liabilities for the nine months ended September 30, 2021 compared to the corresponding nine-month
period in the prior year. This decrease consisted of decreased cash from changes in period-over-period fluctuations in accounts receivable,
inventories and liabilities, offset in part by an increase in cash related to a change in the year-over-year fluctuation in prepaid inventory
and other assets. We currently anticipate that our operating results for the fourth quarter of 2021, including cash provided by operating
activities, will continue to be adversely impacted by slower recovery to prior demand levels, and rising shipping, material and labor
costs.
Cash used in investing activities
was $41.5 million for the nine months ended September 30, 2021 compared to $25.1 million for the nine months ended September 30, 2020. This
increase primarily resulted from continuing to invest in our business by building out our new manufacturing facility in Georgia that began
operations in March 2021, enhancing our manufacturing capabilities in Utah, scaling our infrastructure to support the growth of our workforce,
and opening 11 new Company showrooms during the first nine months of 2021.
Cash provided by financing
activities during the nine months ended September 30, 2021 was $2.0 million compared to $2.2 million of cash provided by financing activities
during the nine months ended September 30, 2020. Financing activities in the first nine months of 2021 included $4.1 million in proceeds
from an InnoHold indemnification payment and $1.2 million of proceeds from warrant and stock option exercises, offset in part by $1.7
million in principal payments on the Term Loan, member tax distributions of $1.0 million and a $0.6 million payment for the tax receivable
agreement.
Critical Accounting Policies
We
discuss our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and
Results of Operations in our 2020 Annual Report on Form 10-K/A filed May 10, 2021. There were no significant changes in our critical
accounting policies since the end of fiscal 2020.
Off-Balance-Sheet Arrangements and Contractual
Obligations
As of September 30, 2021,
we were not involved in any unconsolidated special purpose entity transactions and did not have any off-balance-sheet financing. Also,
there was no balance outstanding on our $55.0 million revolving credit facility as of September 30, 2021.
There have been no material
changes to our contractual obligations during the three months ended September 30, 2021 from those previously disclosed in our Form 10-Q
for the quarterly period ended March 31, 2021.
Seasonality and Cyclicality
We believe that sales of our
products are typically subject to seasonality corresponding to different periods of the consumer spending cycle, holidays and other seasonal
factors. Our sales may also vary with the performance of the broader economy consistent with the market.
Available Information
Our website address is www.purple.com.
We make available free of charge on the Investor Relations portion of our website, investors.purple.com, our annual report on Form 10-K/A,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or
furnish it to, the SEC.
We also use the Investor Relations
portion of our website, investors.purple.com, as a channel of distribution of additional Company information that may be deemed material.
Accordingly, investors should monitor this channel, in addition to following our press releases, SEC filings and public conference calls
and webcasts. The contents of our website shall not be deemed to be incorporated herein by reference.