10-Q 1 f10q0923_purpleinnova.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM _____________ TO _____________

 

Commission File Number: 001-37523

 

 

PURPLE INNOVATION, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   47-4078206
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

4100 NORTH CHAPEL RIDGE ROAD SUITE 200

LEHI, UTAH

  84043
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (801) 756-2600

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Class A Common Stock, par value $0.0001 per share   PRPL   The NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.

 

Large accelerated filer ☐  Accelerated filer
Non-accelerated filer Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No 

 

As of November 13, 2023, 105,545,906 shares of the registrant’s Class A common stock, $0.0001 par value per share, and 204,981 shares of the registrant’s Class B common stock, $0.0001 par value per share, were outstanding.

 

 

 

 

 

PURPLE INNOVATION, INC.

 

QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

      Page
Part I. Financial Information 1
  Item 1. Financial Statements (Unaudited): 1
    Condensed Consolidated Balance Sheets 1
    Condensed Consolidated Statements of Operations 2
    Condensed Consolidated Statements of Stockholders’ Equity 3
    Condensed Consolidated Statements of Cash Flows 4
    Notes to Condensed Consolidated Financial Statements 5
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 36
  Item 3. Quantitative and Qualitative Disclosures about Market Risk 49
  Item 4. Controls and Procedures 49
       
Part II.  Other Information 50
  Item 1. Legal Proceedings 50
  Item 1A. Risk Factors 50
  Item 5. Other Information 55
  Item 6. Exhibits 56
  Signatures 57

 

i

 

 

In this Quarterly Report on Form 10-Q, references to “dollars” and “$” are to United States (“U.S.”) dollars.

 

We have several trademarks registered with the U.S. Patent and Trademark Office (“USPTO”), including EquaPressure®, WonderGel® and EquaGel® (for cushions), and Purple®, No Pressure®, Hyper-Elastic Polymer®, Somnigel®, Gel Matrix®, Matrix®, Gelee®, Ascent®, Softstretch®, Purple Powerbase®, Sleep Genius®, Firm and Soft®, Intellipillow®, and Intellibed®(for plasticized elastomeric gel and certain types of products including mattresses, seat cushions, bed linen, mattress foundation and others). Additional registered trademarks include, but are not limited to, Purple Grid®, Reinventing Comfort®, Comfort Reinvented®, TwinCloud®, Purple Cloud®, Purple Pillow®, The Purple Mattress®, Purple Hybrid®, Purple Hybrid Premier®, The Purple Mattress®, The Purple Plus®, Gelflex® and registration of the color purple as a trademark (for mattresses, pillows, and seat cushions). Applications are pending for registration of additional trademarks and some of these listed trademarks for additional classes of goods both in the U.S. and internationally. Our Purple, No Pressure and Hyper-Elastic Polymer trademarks are also registered and have applications pending for various classes of goods in numerous foreign jurisdictions, some of which include Australia, Canada, China, Europe, United Kingdom, Japan and Korea. Certain international trademark applications previously resided with EdiZONE, LLC, which is an entity owned by our founders, and were licensed to Purple LLC and we have taken the necessary steps to have those trademarks assigned to Purple LLC upon registration.

 

We also have a number of common law trademarks, including Sleep Purple, Live Better™, New Day™, Restore™, RestorePlus™, RestorePremier™, Rejuvenate™, RejuvenatePlus™, RejuvenatePremier™, Perfectstay™, TempBalance™, Success Happens Overnight™, Overnight Success™, Harmony™, Purple Harmony Pillow™, Harmony Pillow™, Purple +™, Purple Plus™, Find Comfort™, Dreams On Dreams™, Reinventing Sleep™, Gelflex Grid™, Gelflex Grid Plus™, Purple Ascent™, Purple Squishy™, Purple Powerbase Premier™, Purple Powerbase Plus™, Purple Glove™, Eidertech™, Mattress Max™, WonderGel Original™, WonderGel Extreme™, DoubleGel™, DoubleGel Plus™, DoubleGel Ultra™, Roll n’ Go™, Fold N’ Go™, Purple Bed™, Purple Top™, Purple Pillow™, Portable Purple™, Everywhere Purple™, Simply Purple™, Lite Purple™, Royal Purple™, Double Purple™, Deep Purple™, Ultimate Purple™, Purple Back™, EquaGel Straight Comfort™, EquaGel General™, EquaGel Protector™, and EquaGel Adjustable™.

 

Many of the common law marks have registrations pending with the USPTO and other international jurisdictions. Solely for convenience, we refer to our trademarks in this Quarterly Report without the  or ® symbol, but such references are not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights to our trademarks.

 

In addition, we maintain copyrights, many of which are registered, to past and present versions of purple.com, onpurple.com, equapressure.com, wondergel.com, marketing content, blogs, logos, graphics, videos and other marketing and promotional materials promoting our products.

 

We protect and enforce our intellectual property rights, including through litigation as necessary.

 

ii

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

PURPLE INNOVATION, INC.

Condensed Consolidated Balance Sheets

(unaudited – in thousands, except for par value)

 

   September 30,
2023
   December 31,
2022
 
Assets       
Current assets:        
Cash, cash equivalents and restricted cash  $26,606   $41,754 
Accounts receivable, net   32,686    34,566 
Inventories, net   72,085    73,197 
Prepaid expenses   8,807    7,821 
Other current assets   1,989    4,117 
Total current assets   142,173    161,455 
Property and equipment, net   129,580    136,673 
Operating lease right-of-use assets   100,739    102,541 
Goodwill   
    4,897 
Intangible assets, net   22,971    26,221 
Other long-term assets   2,510    1,546 
Total assets  $397,973   $433,333 
           
Liabilities and Stockholders’ Equity          
Current liabilities:          
Accounts payable  $45,720   $46,441 
Accrued sales returns   4,971    5,107 
Accrued compensation   6,220    6,691 
Customer prepayments   5,175    4,452 
Accrued sales and use tax   1,876    2,978 
Accrued rebates and allowances   8,575    9,804 
Operating lease obligations – current portion   14,771    13,708 
Other current liabilities   14,664    8,948 
Total current liabilities   101,972    98,129 
Debt   22,483    23,657 
Operating lease obligations, net of current portion   114,196    115,599 
Other long-term liabilities, net of current portion   26,306    20,777 
Total liabilities   264,957    258,162 
Commitments and contingencies (Note 15)   
 
      
Stockholders’ equity:          
Class A common stock; $0.0001 par value, 210,000 shares authorized; 105,333 issued and outstanding at September 30, 2023 and 91,380 issued and outstanding at December 31, 2022   11    9 
Class B common stock; $0.0001 par value, 90,000 shares authorized; 418 issued and outstanding at September 30, 2023 and 448 issued and outstanding at December 31, 2022   
    
 
Additional paid-in capital   590,096    529,466 
Accumulated deficit   (457,636)   (355,212)
Total stockholders’ equity attributable to Purple Innovation, Inc.   132,471    174,263 
Noncontrolling interest   545    908 
Total stockholders’ equity   133,016    175,171 
Total liabilities and stockholders’ equity  $397,973   $433,333 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

1

 

 

PURPLE INNOVATION, INC.

Condensed Consolidated Statements of Operations

(unaudited – in thousands, except per share amounts)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2023   2022   2023   2022 
Revenues, net  $139,996   $142,867   $364,605   $428,896 
Cost of revenues   92,687    83,867    241,244    270,717 
Gross profit   47,309    59,000    123,361    158,179 
Operating expenses:                    
Marketing and sales   52,816    37,007    137,368    127,339 
General and administrative   17,524    19,166    67,628    55,833 
Research and development   2,704    1,927    9,001    5,818 
Loss on impairment of goodwill   6,879        6,879     
Total operating expenses   79,923    58,100    220,876    188,990 
Operating income (loss)   (32,614)   900    (97,515)   (30,811)
Other income (expense):                    
Interest expense   (594)   (717)   (1,148)   (2,447)
Other income, net   205    1,107    315    988 
Change in fair value – warrant liabilities   
    (53)   
    4,221 
Loss on extinguishment of debt   (3,114)   
    (4,331)   
 
Total other income (expense), net   (3,503)   337    (5,164)   2,762 
Net income (loss) before income taxes   (36,117)   1,237    (102,679)   (28,049)
Income tax benefit (expense)   (18)   720    (162)   7,036 
Net income (loss)   (36,135)   1,957    (102,841)   (21,013)
Net income (loss) attributable to noncontrolling interest   (131)   1    (417)   (204)
Net income (loss) attributable to Purple Innovation, Inc.  $(36,004)  $1,956   $(102,424)  $(20,809)
                     
Net income (loss) per share:                    
Basic  $(0.34)  $0.02   $(0.99)  $(0.26)
Diluted  $(0.34)  $0.02   $(0.99)  $(0.27)
                     
Weighted average common shares outstanding:                    
Basic   105,326    85,666    102,962    78,544 
Diluted   105,326    86,115    102,962    78,992 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

2

 

 

PURPLE INNOVATION, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited – in thousands)

 

    Class A     Class B     Additional           Total              
    Common Stock     Common Stock     Paid-in     Accumulated     Stockholders’     Noncontrolling     Total  
    Shares     Par Value     Shares     Par Value     Capital     Deficit     Equity     Interest     Equity  
Balance - December 31, 2022     91,380     $ 9       448     $     $ 529,466     $ (355,212 )   $ 174,263     $ 908     $ 175,171  
Net loss                                   (25,933 )     (25,933 )     (119 )     (26,052 )
Stock-based compensation                             1,192             1,192             1,192  
Issuance of stock under equity compensation plans     265                                                  
Issuance of stock upon underwritten offering, net of costs     13,400       2                   57,198             57,200             57,200  
Impact of transactions affecting NCI                             (103 )           (103 )     103        
Balance – March 31, 2023     105,045     $ 11       448     $     $ 587,753     $ (381,145 )   $ 206,619     $ 892     $ 207,511  
Net loss                                   (40,487 )     (40,487 )     (167 )     (40,654 )
Stock-based compensation                             1,661             1,661             1,661  
Exchange of stock     20             (20 )                                    
Proportional Representation Preferred Linked Stock redemption fee                             (105 )           (105 )           (105 )
Additional costs associated with underwritten public stock offering                             (201 )           (201 )           (201 )
Issuance of stock under equity compensation plans     258                                                  
Impact of transactions affecting NCI                             37             37       (37      
Balance – June 30, 2023     105,323     $ 11       428     $     $ 589,145     $ (421,632 )   $ 167,524     $ 688     $ 168,212  
Net loss                                   (36,004 )     (36,004 )     (131 )     (36,135 )
Stock-based compensation                             939             939             939  
Exchange of stock     10             (10 )                                    
Impact of transactions affecting NCI                             12             12       (12 )      
Balance – September 30, 2023     105,333     $ 11       418     $     $ 590,096     $ (457,636 )   $ 132,471     $ 545     $ 133,016  

  

    Class A     Class B     Additional           Total              
    Common Stock     Common Stock     Paid-in     Accumulated     Stockholders’     Noncontrolling     Total  
    Shares     Par Value     Shares     Par Value     Capital     Deficit     Equity     Interest     Equity  
                                                       
Balance - December 31, 2021     66,493     $ 7       448     $     $ 407,591     $ (262,742 )   $ 144,856     $     762     $ 145,618  
Net loss                                   (14,101 )     (14,101 )     (133 )     (14,234 )
Stock-based compensation                             542             542             542  
Exercise of stock options     20                         166             166             166  
Issuance of stock under equity compensation plans     25                                                  
Issuance of stock upon underwritten public offering, net of costs     16,100       1                   92,894             92,895             92,895  
Accrued distributions                             (228 )           (228 )           (228 )
Impact of transactions affecting NCI                             (141 )           (141 )     141        
Balance – March 31, 2022     82,638     $ 8       448     $     $ 500,824     $ (276,843 )   $ 223,989     $ 770     $ 224,759  
Net loss                                   (8,664 )     (8,664 )     (72 )     (8,736 )
Stock-based compensation                             1,275             1,275             1,275  
Issuance of common stock under equity compensation plans     126                                                  
Additional costs associated with underwritten public stock offering                             (29 )           (29 )           (29 )
Impact of transactions affecting NCI                             (73 )           (73 )     73        
Balance – June 30, 2022     82,764     $ 8       448     $     $ 501,997     $ (285,507 )   $ 216,498     $ 771     $ 217,269  
Net income                                   1,956       1,956       1       1,957  
Stock-based compensation                             795             795             795  
Issuance of common stock under equity compensation plans     1                                                  
Issuance of common stock for Intellibed acquisition     8,613       1                   26,105             26,106             26,106  
Impact of transactions affecting NCI                             75             75       (75 )      
Balance – September 30, 2022     91,378     $ 9       448     $     $ 528,972     $ (283,551 )   $ 245,430     $ 697     $ 246,127  

  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3

 

 

PURPLE INNOVATION, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited – in thousands)

 

   Nine Months Ended
September 30,
 
   2023   2022 
Cash flows from operating activities:        
Net loss  $(102,841)  $(21,013)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   18,963    12,205 
Non-cash interest   920    883 
Loss on extinguishment of debt   4,331    
 
Loss on impairment of goodwill   6,879    
 
Change in fair value – warrant liabilities   
    (4,221)
Stock-based compensation   3,792    2,612 
Gain from effective settlement of preexisting relationship   
    (1,421)
Deferred income taxes   
    (6,850)
Changes in operating assets and liabilities:          
Accounts receivable   1,465    459 
Inventories, net   696    11,479 
Prepaid expenses and other assets   (1,204)   (108)
Operating leases, net   1,462    6,405 
Accounts payable   544    (26,615)
Accrued sales returns   (136)   (1,816)
Accrued compensation   (801)   1,590 
Customer prepayments   723    (7,122)
Accrued rebates and allowances   (1,229)   (2,118)
Other accrued and current liabilities   10,628    5,177 
Net cash used in operating activities   (55,808)   (30,474)
           
Cash flows from investing activities:          
Excess restricted cash returned to acquiree   (826)   
 
Cash, cash equivalents and restricted cash acquired from acquisition, net of cash paid   
    3,648 
Purchase of property and equipment   (8,769)   (31,422)
Investment in intangible assets   (588)   (2,637)
Net cash used in investing activities   (10,183)   (30,411)
           
Cash flows from financing activities:          
Payments on term loan   (24,656)   (2,531)
Payments on revolving line of credit   
    (55,000)
Proceeds from term loan   25,000    
 
Payments for debt issuance costs   (6,126)   (1,242)
Proceeds from stock offering   60,300    98,210 
Payments for public offering costs   (3,301)   (5,344)
Proportional Representation Preferred Linked Stock redemption fee   (105)   
 
Tax receivable agreement payments   (269)   (5,847)
Proceeds from exercise of stock options   
    166 
Net cash provided by financing activities   50,843    28,412 
           
Net decrease in cash, cash equivalents and restricted cash   (15,148)   (32,473)
Cash, cash equivalents and restricted cash, beginning of the year   41,754    91,616 
Cash, cash equivalents and restricted cash, end of the period  $26,606   $59,143 
           
Supplemental disclosures of cash flow information:          
Cash paid during the period for interest, net of amounts capitalized  $(338)  $1,832 
Cash paid during the period for income taxes  $341   $219 
           
Supplemental schedule of non-cash investing and financing activities:          
Property and equipment included in accounts payable  $2,936   $3,463 
Issuance of common stock for Intellibed acquisition   
   $26,106 
Accrued distributions  $
   $228 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4

 

 

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1. Organization

 

Purple Innovation, Inc.’s mission is to help people feel and live better through innovative comfort solutions.

 

Purple Innovation, Inc. collectively with its subsidiary (the “Company” or “Purple Inc.”) is an omni-channel Company that began as a digitally-native vertical brand founded on comfort product innovation with premium offerings. The Company designs and manufactures a variety of innovative, branded and premium comfort products, including mattresses, pillows, cushions, bases, sheets, and other products. The Company markets and sells its products through its e-commerce online channels, retail brick-and-mortar wholesale partners, Purple owned retail showrooms, and third-party online retailers.

 

The Company was incorporated in Delaware on May 19, 2015 as a special purpose acquisition company under the name of Global Partnership Acquisition Corp (“GPAC”). On February 2, 2018, the Company consummated a transaction structured similar to a reverse recapitalization (the “Business Combination”) pursuant to which the Company acquired a portion of the equity of Purple Innovation, LLC (“Purple LLC”). At the closing of the Business Combination (the “Closing”), the Company became the sole managing member of Purple LLC, and GPAC was renamed Purple Innovation, Inc.

 

As the sole managing member of Purple LLC, Purple Inc. through its officers and directors is responsible for all operational and administrative decision making and control of the day-to-day business affairs of Purple LLC without the approval of any other member.

 

On August 31, 2022, the Company acquired all the issued and outstanding stock of Advanced Comfort Technologies, Inc., dba Intellibed (“Intellibed”) pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), in which Gelato Merger Sub, Inc., a wholly owned subsidiary of Purple Inc., merged with and into Intellibed, with Intellibed continuing as a wholly owned subsidiary of Purple Inc. On October 3, 2022, Purple Inc. contributed 100% of the membership interest in Intellibed to Purple LLC and Intellibed became a wholly owned subsidiary of Purple LLC. For further discussion see Note 5 — Acquisition.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of Purple Inc., its controlled subsidiary Purple LLC, and Intellibed, Purple LLC’s wholly owned subsidiary, from the date of acquisition. All intercompany balances and transactions have been eliminated in consolidation. As of September 30, 2023, Purple Inc. held 99.6% of the common units of Purple LLC and Purple LLC Class B Unit holders held 0.4% 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 audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The unaudited condensed consolidated financial statements were prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which were considered of normal recurring nature) considered necessary to present fairly the Company’s financial results. The results of the three and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2023 or for any other interim period or other future year.

 

Variable Interest Entities

 

Purple LLC is a variable interest entity. The Company determined that it is the primary beneficiary of Purple LLC as it is the sole managing member and has the power to direct the activities most significant to Purple LLC’s economic performance as well as the obligation to absorb losses and receive benefits that are potentially significant. At September 30, 2023, Purple Inc. had a 99.6% 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 0.4% of the economic interest in Purple LLC as of September 30, 2023. For further discussion see Note 17 — Stockholders’ Equity.

 

Use of Estimates

 

The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to establish accounting policies and to make estimates and judgments that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The Company regularly makes significant estimates and assumptions including, but not limited to, estimates that affect revenue recognition, accounts receivable and allowance for credit losses, valuation of inventories, sales returns, warranty returns, fair value of assets acquired and liabilities assumed in a business combination, warrant liabilities, stock based compensation, the recognition and measurement of loss contingencies, estimates of current and deferred income taxes, deferred income tax valuation allowances, and amounts associated with the Company’s tax receivable agreement with InnoHold, LLC (“InnoHold”). Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results could differ materially from those estimates.

 

5

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

Recent Accounting Pronouncements

 

Measurement of Credit Losses

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which was further updated and clarified by the FASB through issuance of additional related ASUs. This guidance replaces the existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost based on expected credit losses. The estimate of expected credit losses requires the incorporation of historical information, current conditions, and reasonable and supportable forecasts. These updates are effective for public companies, excluding Smaller Reporting Companies (“SRC”), for annual periods beginning after December 15, 2019, including interim periods therein. The standard is effective for all other entities for annual periods beginning after December 15, 2022, including interim periods therein. The standard was adopted by the Company on January 1, 2023 utilizing a modified retrospective approach. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

 

3. Revision of Consolidated Financial Statements for Correction of Immaterial Misstatements

 

In October 2023, the Company determined that it had not properly accounted for the warranty terms specified in contracts with its wholesale customers when estimating the liability for warranty related returns. Based on this determination, the Company concluded that its consolidated financial statements should be revised to properly reflect the estimated liability associated with the warranty provisions in its wholesale contracts. In accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company evaluated the error and determined that the related impact was not material to results of operations or financial position for any prior annual or interim period. However, the Company is correcting such errors in the financial statements as of and for the three and nine months ending September 30, 2023 included in this Quarterly Report on Form 10-Q by adjusting prior period financial statements. As a result, the Company has revised, within this quarterly report on Form 10-Q, its unaudited condensed consolidated financial statements as of June 30, 2023 and March 31, 2023 and for each of the quarterly and year-to-date periods therein. Additionally, the following note disclosures have been adjusted to reflect the correction of immaterial errors: Note 7 – Revenue from Contracts with Customers, Note 11 – Other Current Liabilities, Note 14 – Other Long-Term Liabilities and Note 15 – Commitments and Contingencies. The Company has also revised its consolidated financial statements as of December 31, 2022 and December 31, 2021 and for the years then ended, as well as the unaudited condensed consolidated financial statements for the periods ended September 30, 2022, June 30, 2022 and March 31, 2022.

 

The following table sets forth the unaudited condensed consolidated balance sheets, including the balances as reported, adjustments and the as revised balances as of June 30, 2023 and March 31, 2023:

 

   As of June 30, 2023   As of March 31, 2023 
(In thousands)  As Reported   Adjustment   As Revised   As Reported   Adjustment   As Revised 
Other current liabilities  $7,359   $2,049   $9,408   $7,639   $1,396   $9,035 
Total current liabilities   91,856    2,049    93,905    89,599    1,396    90,995 
Other long-term liabilities, net of current portion   17,717    7,305    25,022    17,752    4,968    22,720 
Total liabilities   223,122    9,354    232,476    222,657    6,364    229,021 
Accumulated deficit   (412,323)   (9,309)   (421,632)   (374,814)   (6,331)   (381,145)
Total stockholders’ equity attributable to Purple Innovation, Inc.   176,833    (9,309)   167,524    212,950    (6,331)   206,619 
Noncontrolling interest   733    (45)   688    925    (33)   892 
Total stockholders’ equity  $177,566   $(9,354)  $168,212   $213,875   $(6,364)  $207,511 

 

The following table sets forth the consolidated balance sheet, including the balances as reported, adjustments and the as revised balances as of December 31, 2022:

 

   As of December 31, 2022 
(In thousands)  As Reported   Adjustment   As Revised 
Other current liabilities  $8,130   $818   $8,948 
Total current liabilities   97,311    818    98,129 
Other long-term liabilities, net of current portion   17,876    2,901    20,777 
Total liabilities   254,443    3,719    258,162 
Accumulated deficit   (351,514)   (3,698)   (355,212)
Total stockholders’ equity attributable to Purple Innovation, Inc.   177,961    (3,698)   174,263 
Noncontrolling interest   929    (21)   908 
Total stockholders’ equity   178,890    (3,719)   175,171 

 

6

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

The following table sets forth the unaudited condensed consolidated statements of operations, including the balances as reported, adjustments and the as revised balances for the three and six months ended June 30, 2023:

 

   Three Months Ended
June 30, 2023
   Six Months Ended
June 30, 2023
 
(In thousands, except per share amounts)  As Reported   Adjustment   As Revised   As Reported   Adjustment   As Revised 
Revenues, net  $120,872   $(2,990)  $117,882   $230,244   $(5,635)  $224,609 
Gross profit   38,464    (2,990)   35,474    81,687    (5,635)   76,052 
Operating loss   (37,277)   (2,990)   (40,267)   (59,266)   (5,635)   (64,901)
Net loss before income taxes   (37,592)   (2,990)   (40,582)   (60,927)   (5,635)   (66,562)
Net loss  $(37,664)  $(2,990)  $(40,654)  $(61,071)  $(5,635)  $(66,706)
Net loss attributable to noncontrolling interest  $(155)  $(12)  $(167)  $(262)  $(24)  $(286)
Net loss attributable to Purple Innovation, Inc.  $(37,509)  $(2,978)  $(40,487)  $(60,809)  $(5,611)  $(66,420)
Net loss per common share - basic  $(0.36)  $(0.03)  $(0.39)  $(0.60)  $(0.05)  $(0.65)
Net loss per common share - diluted  $(0.36)  $(0.03)  $(0.39)  $(0.60)  $(0.05)  $(0.65)

 

The following table sets forth the unaudited condensed consolidated statements of operations, including the balances as reported, adjustments and the as revised balances for the three months ended March 31, 2023:

 

   Three Months Ended March 31, 2023 
(In thousands, except per share amounts)  As Reported   Adjustment   As Revised 
Revenues, net  $109,372   $(2,645)  $106,727 
Gross profit   43,223    (2,645)   40,578 
Operating loss   (21,989)   (2,645)   (24,634)
Net loss before income taxes   (23,335)   (2,645)   (25,980)
Net loss   (23,407)   (2,645)   (26,052)
Net loss attributable to noncontrolling interest   (107)   (12)   (119)
Net loss attributable to Purple Innovation, Inc.  $(23,300)  $(2,633)  $(25,933)
Net loss per common share - basic  $(0.24)  $(0.02)  $(0.26)
Net loss per common share - diluted  $(0.24)  $(0.02)  $(0.26)

 

The following table sets forth the consolidated statements of operations, including the balances as reported, adjustments and the as revised balances for the years ended December 31, 2022 and 2021:

 

   Year Ended December 31, 
   2022   2021 
(In thousands, except per share amounts)  As Reported   Adjustment   As Revised   As Reported   Adjustment   As Revised 
Revenues, net   575,692    (2,491)   573,201    726,227    (1,228)   724,999 
Gross profit   210,582    (2,491)   208,091    294,974    (1,228)   293,746 
Operating loss   (40,263)   (2,491)   (42,754)   (23,350)   (1,228)   (24,578)
Net income before income taxes   122,937    (2,491)   120,446    2,654    (1,228)   1,426 
Income tax benefit (expense)   (212,864)   (305)   (213,169)   1,217    305    1,522 
Net income (loss)   (89,927)   (2,796)   (92,723)   3,871    (923)   2,948 
Net loss attributable to noncontrolling interest   (238)   (15)   (253)   (160)   (6)   (166)
Net income (loss) attributable to Purple Innovation, Inc.  $(89,689)  $(2,781)  $(92,470)  $4,031   $(917)  $3,114 
Net income (loss) per common share - basic  $(1.10)  $(0.03)  $(1.13)  $0.06   $(0.02)  $0.04 
Net loss per common share - diluted  $(1.10)  $(0.03)  $(1.13)  $(0.30)  $(0.02)  $(0.32)

 

7

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

The following table sets forth the unaudited condensed consolidated statements of operations, including the balances as reported, adjustments and the as revised balances for the three and nine months ended September 30, 2022:

 

   Three Months Ended
September 30, 2022
   Nine Months Ended
September 30, 2022
 
(In thousands, except per share amounts)  As Reported   Adjustment   As Revised   As Reported   Adjustment   As Revised 
Revenues, net  $143,280   $(413)  $142,867   $430,568   $(1,672)  $428,896 
Gross profit   59,413    (413)   59,000    159,851    (1,672)   158,179 
Operating income (loss)   1,313    (413)   900    (29,139)   (1,672)   (30,811)
Net income (loss) before income taxes   1,650    (413)   1,237    (26,377)   (1,672)   (28,049)
Income tax benefit (expense)   631    89    720    6,617    419    7,036 
Net income (loss)  $2,281   $(324)  $1,957   $(19,760)  $(1,253)  $(21,103)
Net income (loss) attributable to noncontrolling interest  $3   $(2)  $1   $(196)  $(8)  $(204)
Net income (loss) attributable to Purple Innovation, Inc.  $2,278   $(322)  $1,956   $(19,564)  $(1,245)  $(20,809)
Net income (loss) per common share - basic  $0.03   $(0.01)  $0.02   $(0.25)  $(0.01)  $(0.26)
Net income (loss) per common share - diluted  $0.03   $(0.01)  $0.02   $(0.25)  $(0.02)  $(0.27)

 

The following table sets forth the unaudited condensed consolidated statements of operations, including the balances as reported, adjustments and the as revised balances for the three and six months ended June 30, 2022:

 

   Three Months Ended
June 30, 2022
   Six Months Ended
June 30, 2022
 
(In thousands, except per share amounts)  As Reported   Adjustment   As Revised   As Reported   Adjustment   As Revised 
Revenues, net  $144,109   $(307)  $143,802   $287,288   $(1,259)  $286,029 
Gross profit   48,812    (307)   48,505    100,438    (1,259)   99,179 
Operating income (loss)   (12,088)   (307)   (12,395)   (30,452)   (1,259)   (31,711)
Net income (loss) before income taxes   (12,585)   (307)   (12,892)   (28,027)   (1,259)   (29,286)
Income tax benefit (expense)   4,175    (19)   4,156    5,986    330    6,316 
Net income (loss)  $(8,410)  $(326)  $(8,736)  $(22,041)  $(929)  $(22,970)
Net income (loss) attributable to noncontrolling interest  $(70)  $(2)  $(72)  $(199)  $(6)  $(205)
Net income (loss) attributable to Purple Innovation, Inc.  $(8,340)  $(324)  $(8,664)  $(21,842)  $(923)  $(22,765)
Net income (loss) per common share - basic  $(0.10)  $   $(0.10)  $(0.29)  $(0.02)  $(0.31)
Net income (loss) per common share - diluted  $(0.10)  $   $(0.10)  $(0.29)  $(0.02)  $(0.31)

 

The following table sets forth the unaudited condensed consolidated statements of operations, including the balances as reported, adjustments and the as restated balances for the three months ended March 31, 2022:

 

   Three Months Ended March 31, 2022 
(In thousands, except per share amounts)  As Reported   Adjustment   As Revised 
Revenues, net  $143,179   $(952)  $142,227 
Gross profit   51,626    (952)   50,674 
Operating income (loss)   (18,364)   (952)   (19,316)
Net income (loss) before income taxes   (15,442)   (952)   (16,394)
Income tax benefit (expense)   1,811    349    2,160 
Net income (loss)   (13,631)   (603)   (14,234)
Net income (loss) attributable to noncontrolling interest   (129)   (4)   (133)
Net income (loss) attributable to Purple Innovation, Inc.  $(13,502)  $(599)  $(14,101)
Net income (loss) per common share - basic  $(0.20)  $(0.01)  $(0.21)
Net income (loss) per common share - diluted  $(0.20)  $(0.01)  $(0.21)

 

8

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

The following table sets forth the unaudited condensed consolidated statements of stockholders’ equity, including the balances as reported, adjustments and the as revised balances for the three months ended June 30, 2023 and March 31, 2023:

 

(In thousands)  Accumulated
Deficit
   Total
Stockholders’
Equity
   Noncontrolling
Interest
   Total
Equity
 
Balance at June 30, 2023, as reported  $(412,323)  $176,833   $733   $177,566 
Adjustments   (9,309)   (9,309)   (45)   (9,354)
Balance at June 30, 2023, as revised   (421,632)   167,524    688    168,212 
Balance at March 31, 2023, as reported  $(374,814)  $212,950   $925   $213,875 
Adjustments   (6,331)   (6,331)   (33)   (6,364)
Balance at March 31, 2023, as revised   (381,145)   206,619    892    207,511 

 

The following table sets forth the consolidated statements of stockholders’ equity, including the balances as reported, adjustments and the as revised balances for the years ended December 31, 2022 and 2021:

 

(In thousands)  Accumulated
Deficit
   Total
Stockholders’
Equity
   Noncontrolling
Interest
   Total
Equity
 
Balance at December 31, 2022, as reported  $(351,514)  $177,961   $929   $178,890 
Adjustments   (3,698)   (3,698)   (21)   (3,719)
Balance at December 31, 2022, as revised   (355,212)   174,263    908    175,171 
Balance at December 31, 2021, as reported  $(261,825)  $145,773   $768   $146,541 
Adjustments   (917)   (917)   (6)   (923)
Balance at December 31, 2021, as revised   (262,742)   144,856    762    145,618 

 

The following table sets forth the unaudited condensed consolidated statements of stockholders’ equity, including the balances as reported, adjustments and the as revised balances for the three months ended September 30, 2022, June 30, 2022 and March 31, 2022:

 

(In thousands)  Accumulated
Deficit
   Total
Stockholders’
Equity
   Noncontrolling
Interest
   Total
Equity
 
Balance at September 30, 2022, as reported  $(281,389)  $247,592   $711   $248,303 
Adjustments   (2,162)   (2,162)   (14)   (2,176)
Balance at September 30, 2022, as revised   (283,551)   245,430    697    246,127 
Balance at June 30, 2022, as reported  $(283,667)  $218,338   $783   $219,121 
Adjustments   (1,840)   (1,840)   (12)   (1,852)
Balance at June 30, 2022, as revised   (285,507)   216,498    771    217,269 
Balance at March 31, 2022, as reported  $(275,327)  $225,505   $780   $226,285 
Adjustments   (1,516)   (1,516)   (10)   (1,526)
Balance at March 31, 2022, as revised   (276,843)   223,989    770    224,759 

 

9

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

The following table sets forth the unaudited condensed consolidated statements of cash flows from operating activities, including the balances as reported, adjustments and the as revised balances for the six months ended June 30, 2023 and 2022. The adjustments had no impact on cash flows from investing or financing activities for each of the six-month periods.

 

   Six Months Ended June 30, 
   2023   2022 
(In thousands)  As Reported   Adjustment   As Revised   As Reported   Adjustment   As Revised 
Cash flows from operating activities:                        
Net loss  $(61,071)  $(5,635)  $(66,706)  $(22,041)  $(929)  $(22,970)
Change in other accrued liabilities   (2,034)   5,635    3,601    1,851    929    2,780 
Net cash used in operating activities  $(38,053)  $
   $(38,053)  $(52,804)  $
   $(52,804)

 

The following table sets forth the unaudited condensed consolidated statements of cash flows from operating activities, including the balances as reported, adjustments and the as revised balances for the three months ended March 31, 2023 and 2022. The adjustments had no impact on cash flows from investing or financing activities for each of the three-month periods.

 

   Three Months Ended March 31, 
   2023   2022 
(In thousands)  As Reported   Adjustment   As Revised   As Reported   Adjustment   As Revised 
Cash flows from operating activities:                        
Net loss  $(23,407)  $(2,645)  $(26,052)  $(13,631)  $(603)  $(14,234)
Change in other accrued liabilities   (1,979)   2,645    666    4,197    603    4,800 
Net cash used in operating activities  $(13,503)  $
   $(13,503)  $(44,281)  $
   $(44,281)

 

The following table sets forth the consolidated statement of cash flows from operating activities, including the balances as reported, adjustments and the as revised balances for the year ended December 31, 2022. The adjustment had no impact on cash flows from investing or financing activities.

 

  

Year Ended

December 31, 2022

 
(In thousands)  As Reported   Adjustment   As Revised 
Cash flows from operating activities:            
Net loss  $(89,927)  $(2,796)  $(92,723)
Change in other accrued liabilities   3,816    2,796    6,612 
Net cash used in operating activities  $(28,773)  $
   $(28,773)

 

The following table sets forth the unaudited condensed consolidated statement of cash flows from operating activities, including the balances as reported, adjustments and the as revised balances for the nine months ended September 30, 2022. The adjustments had no impact on cash flows from investing or financing activities for each of the quarterly periods.

 

  

Nine Months Ended

September 30, 2022

 
(In thousands)  As Reported   Adjustment   As Revised 
Cash flows from operating activities:            
Net loss  $(19,760)  $(1,253)  $(21,103)
Change in other accrued liabilities   3,924    1,253    5,177 
Net cash used in operating activities  $(30,474)  $
   $(30,474)

 

10

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

4. Underwritten Offering of Class A Common Stock

 

In February 2023, the Company completed an underwritten offering of 13.4 million shares of Class A common stock at a price of $4.50 per share. The underwriters did not exercise their over-allotment option. The aggregate net proceeds received by the Company from the offering, after deducting offering fees and expenses of $3.3 million, totaled $57.0 million.

 

5. Acquisition

 

On August 31, 2022, pursuant to the Merger Agreement, the Company acquired Intellibed, a premium sleep and health wellness company, offering gel-based mattresses scientifically designed for maximum back support, spinal alignment and pressure point relief. The addition of Intellibed increased product offerings to customers, expanded market opportunities, capitalized on synergies of the combined companies, and increased opportunities for innovation. In addition, the acquisition allowed the Company to consolidate ownership of its intellectual property licensed to Intellibed and more fully capitalize on growing demand for products with gel technologies.

 

The acquisition date fair value of the consideration transferred for Intellibed was $28.2 million, which consisted of the following (in thousands):

 

Fair value of Class A common stock issued at closing  $23,069 
Fair value of Class A common stock held in escrow   1,349 
Fair value of contingent consideration   1,471 
Fair value of effective settlement of preexisting relationships   1,672 
Transaction expenses paid on behalf of Intellibed   546 
Due to seller   75 
Fair value of total purchase consideration  $28,182 

 

The fair value of common stock issued at closing consisted of approximately 8.1 million shares of Class A common stock valued using the acquisition date closing price of $2.86. The fair value of common stock held in escrow consisted of 0.5 million shares of Class A common stock valued using the acquisition date closing price of $2.86. These shares are being held in escrow pending resolution of net working capital adjustments and certain indemnification matters, as described in the Merger Agreement.

 

Contingent consideration represents the fair value of 1.5 million shares of Class A common stock issuable to Intellibed security holders if the closing price of the Company’s stock does not equal or exceed $5.00 for at least ten trading days over any period of 30 consecutive trading days during the period beginning on the six-month anniversary of the closing date and ending on the 18-month anniversary of the closing date. The contingent shares were valued using a Monte-Carlo simulation model. Because the contingent consideration is payable with a fixed number of shares of the Company’s Class A common stock, it is classified as equity and will not require remeasurement in subsequent periods.

 

The fair value of effective settlement of preexisting relationships includes $1.4 million related to the fair value of a preexisting legal matter with Intellibed that was effectively settled on the acquisition date and $0.3 million related to the fair value of a preexisting royalty liability owed by Intellibed to the Company that was also effectively settled on the acquisition date. As a result of effectively settling the preexisting legal matter with Intellibed, the Company recorded a gain of $1.4 million as other income, net in the consolidated statement of operations during the third quarter of 2022. As a result of effectively settling the preexisting royalty liability, the Company and Intellibed recorded a corresponding receivable and payable, respectively, for the same $0.3 million amount that was eliminated in consolidation.

 

The Company recorded the acquisition based on the fair value of the consideration transferred and then allocated the purchase price to the identifiable assets acquired and liabilities assumed based on their respective preliminary estimated fair values as of the acquisition date. Determining the fair value of assets acquired and liabilities assumed required management to use significant judgment and estimates including the selection of valuation methodologies, estimates of future revenues and cash flows, discount rates, and asset lives, among other items. While the Company used its best estimates and assumptions as a part of the purchase price allocation process to accurately value the assets acquired, including intangible assets, and the liabilities assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject to refinement. Consequently, during the measurement period, which could be up to one year from the acquisition date, the Company may record adjustments to the fair values of the assets acquired and the liabilities assumed, with a corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or the liabilities assumed, whichever comes first, any subsequent adjustments will be reflected in the Company’s consolidated statement of operations.

 

11

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

Due to the close proximity of the acquisition date to the Company’s first reporting date after the transaction, the Company recorded the assets acquired and liabilities assumed at preliminary estimates of fair value. During the measurement period that ended August 31, 2023, the Company finalized the determination of the working capital adjustments and the fair values allocated to various assets and liabilities, income tax provision, intangible assets and the residual amount allocated to goodwill. The table below reflects final measurement period adjustments made to various assets acquired and liabilities assumed based on updated information, and revisions to reflect the final fair value analysis associated with the two intangible assets. The corresponding offsets for these final measurement period adjustments was goodwill. The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed as of the date of acquisition, the final measurement period adjustments and the final adjusted balances as of September 30, 2023 (in thousands):

 

Net tangible assets (liabilities):   At date of
acquisition
    Measurement
period
adjustments
    Final
September 30,
2023
 
Cash, cash equivalents and restricted cash   $ 4,194     $ (418 )   $ 3,776  
Accounts receivable     5,051       (443 )     4,608  
Inventory     4,182       (1,135 )     3,047  
Other current assets     126       200       326  
Property and equipment     7,000      
      7,000  
Operating lease right-of-use assets     5,491      
      5,491  
Other long-term assets     68      
      68  
Accounts payable     (2,285 )     (460 )     (2,745 )
Other current liabilities     (2,818 )     (313 )     (3,131 )
Operating lease obligations     (4,373 )    
      (4,373 )
Deferred tax liabilities     (3,868 )     (416 )     (4,284 )
Net tangible assets (liabilities)     12,768       (2,985 )     9,783  
Goodwill     6,441       438       6,879  
Customer relationships     8,476       2,400       10,876  
Developed technology     615       29       644  
Net assets acquired and liabilities assumed   $ 28,300     $ (118 )   $ 28,182  

   

The amount of goodwill that resulted from the purchase price allocation was attributed to expected synergies from the assembled workforce, an increase in development capabilities, increased offerings to customers, expanded market opportunities, and enhanced opportunities for growth and innovation. Goodwill was not being amortized but instead tested for impairment at least annually or more frequently if certain indicators of impairment were present. The goodwill recorded was not deductible for income tax purposes.

 

The ongoing decline in the Company’s market capitalization, along with other qualitative considerations was determined to be a triggering event for potential goodwill impairment. Accordingly, the Company performed a goodwill impairment analysis as of September 30, 2023. The Company, considered as a single reporting unit, estimated the implied fair value of its goodwill using a variety of valuation methods, including both the income and market approaches. As a result of the impairment assessment performed, the Company determined goodwill was impaired and recorded an impairment charge to write off the entire $6.9 million balance of goodwill. The impairment charge was recorded during the third quarter of 2023 in the consolidated statement of operations as a loss on impairment of goodwill.

 

The two identified definite lived intangible assets, comprised of customer relationships and developed technology, are being amortized over their estimated useful lives of ten and two years, respectively. The customer relationships intangible asset represents the estimated fair value of the underlying relationships with Intellibed customers, valued utilizing the multi-period excess earnings method. The developed technology intangible represents the fair value of Intellibed industry-specific cloud and mobile software and related technologies, valued using the cost to recreate method.

 

The acquired cash, cash equivalents and restricted cash amounts included $1.7 million of cash deposited by Intellibed in a separate account pursuant to an escrow agreement with the Company that ended on August 31, 2023. The purpose of the escrow cash amount was to cover Intellibed’s estimated state income tax liabilities, sales tax liabilities and related filing expenses that existed prior to the acquisition date. If the actual liabilities were less than estimated, any excess cash was to be returned to the previous shareholders of Intellibed. If payments for these items exceeded the escrow balance, the Company would have been required to pay the excess. The Company recorded the escrow account balance of $1.7 million as an acquired restricted cash balance on the date of acquisition and used $0.9 million of the escrow account balance for actual expenses incurred. The excess escrow balance of $0.8 million was returned by the Company to the previous shareholders of Intellibed.

 

12

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

6. Fair Value Measurements

 

The Company uses the fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:

 

Level 1—Quoted market prices in active markets for identical assets or liabilities;

 

Level 2—Significant other observable inputs (i.e., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable, such as interest rate and yield curves, and market-corroborated inputs); and

 

Level 3—Unobservable inputs in which there is little or no market data, which require the reporting unit to develop its own assumptions.

 

The classification of fair value measurements within the established three-level hierarchy is based upon the lowest level of input that is significant to the measurements. Financial instruments, although not recorded at fair value on a recurring basis include cash and cash equivalents, receivables, accounts payable and the Company’s debt obligations. The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair value because of the short-term nature of these accounts. The Company’s debt instruments are Level 2 instruments and fair value is estimated to be face value based on the contractual terms of the debt arrangements and market-based expectations.

 

The sponsor warrant liabilities (see Note 13 — Warrant Liabilities for more information) were Level 3 instruments and used internal models to estimate fair value using certain significant unobservable inputs which required determination of relevant inputs and assumptions. Accordingly, changes in these unobservable inputs may have had a significant impact on fair value. Such inputs included risk free interest rate, expected average life, expected dividend yield, and expected volatility. These Level 3 liabilities generally decreased (increased) in value based upon an increase (decrease) in risk free interest rate and expected dividend yield. Conversely, the fair value of these Level 3 liabilities generally increased (decreased) in value if the expected average life or expected volatility were to increase (decrease). Unexercised sponsor warrants totaling 1.9 million expired in February 2023 and were cancelled pursuant to the terms of the warrant agreement.

 

There were no sponsor warrants outstanding on September 30, 2023 and the 1.9 million sponsor warrants outstanding on December 31, 2022 had a negligible fair value. As a result, activity for the nine months ended September 30, 2023 was de minimis. The following table summarizes the Company’s total Level 3 liability activity for the nine months ended September 30, 2022. 

 

(In thousands)  Sponsor
Warrants
 
Fair value as of December 31, 2021  $4,343 
Fair value of warrants exercised    
Change in valuation inputs(1)   (4,221)
Fair value as of September 30, 2022  $122 

 

(1) Changes in valuation inputs are recognized as the change in fair value – warrant liabilities in the condensed consolidated statement of operations.

 

13

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

7. Revenue from Contracts with Customers

 

The Company markets and sells its products through e-commerce online channels, retail brick-and-mortar wholesale partners, Purple owned retail showrooms, and third-party online retailers. Revenue is recognized when the Company satisfies its performance obligations under the contract which involves transferring the promised products to the customer, subject to shipping terms.

 

Disaggregated Revenue

 

The Company classifies revenue into two sales categories: direct-to-consumer (“DTC”) and wholesale. The DTC category is comprised of the Company’s e-commerce channel that sells directly to consumers who purchase online and through our contact center, and the Purple owned retail showrooms channel that sells directly to consumers who purchase at a showroom location. The wholesale channel includes all product sales to our wholesale partners where consumers make purchases at their retail locations or through their online channels. The Company classifies products into two major types: sleep products and other. Sleep products include mattresses, platforms, adjustable bases, mattress protectors, pillows and sheets. Other products include cushions and various other products.

 

The following tables present the Company’s net revenue disaggregated by sales category and product type (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
Sales Category  2023   2022   2023   2022 
DTC  $80,197   $84,601   $214,558   $251,765 
Wholesale   59,799    58,266    150,047    177,131 
Revenues, net  $139,996   $142,867   $364,605   $428,896 

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
Product Type   2023     2022     2023     2022  
Sleep products   $ 126,579     $ 130,723     $ 328,074     $

390,168

 
Other     13,417       12,144       36,531      

38,728

 
Revenues, net   $ 139,996     $ 142,867     $ 364,605     $ 428,896  

 

Contract Balances

 

Payment for sale of products through the e-commerce online channel, third-party online retailers, Purple owned retail showrooms and contact center is collected at point of sale in advance of shipping the products. Amounts received for unshipped products are recorded as customer prepayments. Customer prepayments totaled $5.2 million and $4.5 million at September 30, 2023 and December 31, 2022, respectively. During the three months ended September 30, 2023 and 2022, the Company recognized all revenue that was deferred in customer prepayments at June 30, 2023 and 2022, respectively.

 

8. Inventories, Net

 

Inventories, net consisted of the following (in thousands):

 

    September 30,     December 31,  
    2023     2022  
Raw materials   $ 24,675     $ 31,803  
Work-in-process     5,143       2,261  
Finished goods     43,232       40,476  
Inventory obsolescence reserve     (965 )     (1,343 )
Inventories, net   $ 72,085     $ 73,197  

 

14

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

9. Property and Equipment, Net

 

Property and equipment, net consisted of the following (in thousands):

 

   September  30,   December 31, 
   2023   2022 
Equipment  $72,224   $66,533 
Equipment in progress   15,706    19,099 
Leasehold improvements   59,314    56,114 
Furniture and fixtures   28,094    26,290 
Office equipment   3,869    4,393 
Total property and equipment   179,207    172,429 
Accumulated depreciation   (49,627)   (35,756)
Property and equipment, net  $129,580   $136,673 

 

Equipment in progress reflects equipment, primarily related to mattress manufacturing, which is being constructed and was not in service at September 30, 2023 or December 31, 2022. Interest capitalized on borrowings during the active construction period of major capital projects totaled $0.4 million and $0.9 million during the three and nine months ended September 30, 2023, respectively, and totaled $0.2 million and $0.6 million during the three and nine months ended September 30, 2022, respectively. Depreciation expense was $5.0 million and $14.7 million during the three and nine months ended September 30, 2023, respectively, and totaled $4.3 million and $11.4 million during the three and nine months ended September 30, 2022, respectively.

 

10. Leases

 

The Company leases its manufacturing and distribution facilities, corporate offices, Purple owned retail showrooms and certain equipment under non-cancelable operating leases with various expiration dates through 2036. The Company’s office and manufacturing leases provide for initial lease terms up to 16 years, while Purple owned 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 right-of-use asset balances for finance leases, which totaled $0.8 million and $1.0 million at September 30, 2023 and December 31, 2022, respectively, were included with operating lease right-of-use assets on the condensed consolidated balance sheets.

 

The following table presents the Company’s lease costs (in thousands):

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2023     2022     2023     2022  
Operating   $ 5,065     $ 4,213     $ 14,570     $ 11,051  
Variable     1,063       386       3,240       1,509  
Short-term                       11  
Total lease costs   $ 6,128     $ 4,599     $ 17,810     $ 12,571  

 

15

 

 

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, 2023 (in thousands): 

 

2023 (excluding the nine months ended September 30, 2023)(a)  $4,251 
2024   21,906 
2025   21,615 
2026   20,241 
2027   20,338 
Thereafter   74,164 
Total operating lease payments   162,515 
Less – lease payments representing interest   (33,548)
Present value of operating lease payments  $128,967 

 

(a)Amount consists of $5.3 million of undiscounted cash flows offset by $1.1 million of tenant improvement allowances which are expected to be fully utilized in fiscal 2023.

 

As of September 30, 2023 and December 31, 2022, the weighted-average remaining term of operating leases was 8.2 years and 8.8 years, respectively, and the weighted-average discount rate of operating leases was 5.69% and 5.51%, 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, 2023 and 2022 (in thousands):

 

   Nine Months Ended
September 30,
 
   2023   2022 
Cash paid for amounts included in present value of operating lease liabilities (b)  $9,525   $5,866 
Right-of-use assets obtained in exchange for operating lease liabilities   7,031    34,712 

 

(b)Operating cash flows paid for operating leases are included within the change in other assets and liabilities within the Condensed Consolidated Statement of Cash Flows offset by non-cash right-of-use asset amortization and lease liability accretion.

 

11. Other Current Liabilities

 

Other current liabilities consisted of the following (in thousands):

 

   September 30,   December 31, 
   2023   2022 
Warranty expense accrual – current portion  $5,275   $4,985 
Warranty returns accrual – current portion   2,508    818 
Insurance financing   2,181    1,010 
Debt – current portion   1,487    
 
Accrued sales tax liability assumed in acquisition   46    753 
Accrued property taxes   710    28 
Tax receivable agreement liability – current portion   
    269 
Other   2,457    1,085 
Total other current liabilities  $14,664   $8,948 

  

16

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

12. Debt

 

Debt consisted of the following (in thousands):

 

    September 30,     December 31,  
    2023     2022  
Term loan – 2023 credit agreement   $ 25,000     $  
Term loan – 2020 credit agreement           24,656  
Less: unamortized issuance costs     (1,030 )     (999 )
Total debt     23,970       23,657  
Less: current portion of debt, net of unamortized issuance costs     (1,487 )      
Long-term debt, net   $ 22,483     $ 23,657  

 

2023 Credit Agreements

 

On August 7, 2023, Purple LLC, Purple Inc. and Intellibed, (collectively the “Loan Parties”) entered into a term loan credit agreement (the “Term Loan Agreement”) with Callodine Commercial Finance, LLC and a group of financial institutions (the “Term Loan Lenders”). Also, on August 7, 2023, the Loan parties entered into a separate financing arrangement with the Bank of Montreal and a group of financial institutions (collectively the “ABL Lenders”) that provides for a revolving asset-based credit facility (the “ABL Agreement”). Pursuant to entering into these agreements (the “2023 Credit Agreements”), the Company incurred fees and expenses of $3.1 million that were recorded as debt issuance costs in the third quarter of 2023.

 

Term Loan Agreement and Term Loan Pledge and Security Agreement

 

The Term Loan Agreement provides for up to $25.0 million of term loans, with up to $5.0 million of incremental term loans available, subject to certain conditions (collectively, the “Term Loans”). Proceeds from the Term Loans, which were fully drawn at closing, are to be used for general corporate purposes. The borrowing rates under the Term Loan Agreement are based on SOFR, plus a credit spread adjustment of 0.15% per annum, plus 8.5% per annum, with a SOFR floor of 2.0% per annum. The Term Loans will be repaid at the earlier of (a) a three-year amortization schedule ending on August 7, 2026 or (b) the payment in full of the ABL Agreement. The Term Loans may be prepaid in whole or in part at any time, but subject to a prepayment premium. There may also be mandatory prepayment obligations based on certain asset dispositions, casualty events and extraordinary receipts. Once repaid, no portion of the Term Loans may be reborrowed.

 

Pursuant to a pledge and security agreement, the Loan Parties’ obligations under the Term Loan Agreement are secured by a perfected second-priority security interest in the cash, inventory and accounts receivable of the Loan Parties, and a perfected first-priority security interest in substantially all other assets of the Loan Parties, including, without limitation, the intellectual property and equipment of the Loan Parties, subject to certain exceptions.

 

The Term Loan Agreement provides for customary events of default which include non-payment and failure to perform or observe covenants. The Term Loan Agreement contains customary indemnifications that benefit the Term Loan Lenders.

 

The Term Loan Agreement also contains representations, warranties and certain covenants of the Loan Parties. While any amounts are outstanding under the Term Loan Agreement, the Loan Parties are subject to a number of affirmative and negative covenants, including covenants regarding dispositions of property, investments, forming or acquiring subsidiaries, business combinations or acquisitions, incurrence of additional indebtedness, and transactions with affiliates, among other customary covenants, each of which are subject to certain exceptions. In particular, the Loan Parties are (i) restricted from incurring additional debt up to certain amounts, subject to limited exceptions, as set forth in the Term Loan Agreement, and (ii) required to maintain a minimum revolving loan availability under the ABL Agreement. Each Loan Party is also restricted from paying dividends or making other distributions or payments on its respective capital stock, subject to limited exceptions. If the Loan Parties fail to perform their obligations under these and other covenants, or should any event of default occur, the Term Loans, together with accrued interest, could be declared immediately due and payable.

 

ABL Agreement and ABL Pledge and Security Agreement

 

The ABL Agreement provides for up to $50.0 million of revolving loans subject to a borrowing base calculation and minimum availability requirements (with sub-facilities for swing line loans and the issuance of letters of credit), with incremental increases available up to $20.0 million (the “ABL Loans”), subject to certain conditions, availability reserves, minimum availability requirements, borrowing base calculations, and restrictive covenants. In October 2023, the ABL Lenders implemented an availability reserve of $5.0 million, which reduces the amount available under our borrowing base. No funds were drawn under the ABL Agreement at closing and there was no balance outstanding at September 30, 2023. Since September 30, 2023, we have drawn approximately $17.0 million in ABL Loans and given notice to repay $2.0 million. Based on our borrowing base calculation, including application of the $5.0 million availability reserve and a minimum availability requirement of $11.0 million applicable as of November 13, 2023, we have approximately $4.6 million available for borrowings under our ABL Agreement. As of November 13, 2023, the Company had $31.0 million in cash. However, the amount available under the ABL Agreement depends on our borrowing base calculations and minimum availability requirements at the time of any draw. Therefore, the amount available to us under the ABL Agreement will change from time to time. We may use the funds drawn from the ABL Agreement to finance permitted acquisitions defined in the agreement and for working capital, capital expenditures and other general corporate purposes. Outstanding principal and accrued interest on the ABL Loans shall be repaid on August 7, 2026.

 

17

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

The borrowing rates under the ABL Agreement will accrue on a three-tiered grid based on revolving availability, ranging from (i) SOFR, plus a credit spread adjustment of 0.10% per annum, plus 2.75% per annum to (ii) SOFR, plus a credit spread adjustment of 0.10% per annum, plus 3.25% per annum, with a SOFR floor of 0% per annum. The ABL Loans may be prepaid in whole or in part at any time without premium or penalty, subject to reimbursement of certain costs. There may be mandatory prepayment obligations based on certain asset dispositions, casualty events, equity issuances and extraordinary receipts.

 

Pursuant to a pledge and security agreement, the Loan Parties’ obligations under the ABL Agreement are secured by a perfected first-priority security interest in the cash, inventory and accounts receivable of the Loan Parties, and a perfected second-priority security interest in substantially all of the other assets of the Loan Parties, subject to certain exceptions.

 

The ABL Agreement provides for customary events of default such as non-payment and failure to perform or observe covenants. The ABL Agreement contains customary indemnifications that benefit the ABL Lenders.

 

The ABL Agreement also contains representations, warranties and certain covenants of the Loan Parties. The Loan Parties are subject to affirmative and negative covenants, including covenants regarding dispositions of property, investments, forming or acquiring subsidiaries, business combinations or acquisitions, incurrence of additional indebtedness, and transactions with affiliates, among other customary covenants, in each case, subject to certain exceptions. In particular, the Loan Parties are (i) restricted from incurring additional debt up to certain amounts, subject to limited exceptions, as set forth in the ABL Agreement, and (ii) if revolving availability under the ABL Agreement is less than a specified amount, required to maintain a minimum Consolidated Fixed Charge Coverage Ratio (as defined in the ABL Agreement), and (iii) required to maintain a specified minimum revolving availability. Each Loan Party is also restricted from paying dividends or making other distributions or payments on its respective capital stock, subject to limited exceptions. If the Loan Parties fail to perform their obligations under these and other covenants, or should any event of default occur, the revolving loan commitments under the ABL Agreement may be terminated and any outstanding ABL Loans, together with accrued interest, could be declared immediately due and payable and any outstanding letters of credit may be required to be cash collateralized.

 

2023 Credit Agreement Defaults

 

As of September 30, 2023 the Company was not in compliance with its debt covenants under each of the 2023 Credit Agreements due to (i) the Company’s failure to (a) provide certain financial reporting and related materials on a timely basis and (b) complete certain post-closing deliverables as required under the ABL Agreement and (ii) the Company drawing on the loan under the ABL Agreement while the above events of default were in existence (collectively, the “Subject Events of Default”).

 

On November 6, 2023, we entered into (i) a First Amendment and Waiver to the ABL Agreement (the “ABL Amendment”) and (ii) a First Amendment and Waiver to the Term Loan Agreement (the “Term Loan Amendment”), with the Term Loan Lenders and ABL Lenders, respectively (collectively, the “Lenders”), including waivers of the Subject Events of Default. In addition, the ABL Amendment and Term Loan Amendment also amended certain provisions of the 2023 Credit Agreements, including, among other changes, to require (i) weekly borrowing base certificates, (ii) 13-week cash flow reports and budgets, (iii) budget variance reports, (iv) the appointment of a third-party consultant, and (v) daily cash sweeps from the Loan Parties’ accounts to an account at the ABL Lender (collectively, the “2023 Credit Agreement Amendments”). In addition, the ABL Amendment and Term Loan Amendment increased our reporting obligations under the 2023 Credit Agreements and if we are not able to maintain compliance with such additional requirements we may experience future events of default, which could limit our ability to access the ABL Loans and adversely affect our financial position and operations.

 

Our principal sources of funds are cash flows from operations and cash and cash equivalents on hand, supplemented with borrowings made pursuant to our asset-based lending facility and proceeds received from offerings of our equity capital. Principal uses of funds consist of payments of principal and interest on our debt facilities, capital expenditures, working capital needs, and operating lease payment obligations. Our working capital needs depend largely upon the timing of cash receipts from product sales, payments to vendors and others, changes in inventories, and operating lease payment obligations. Our unrestricted cash and working capital positions were $26.6 million and $40.2 million, respectively, as of September 30, 2023 compared to $40.0 million and $62.4 million, respectively, as of December 31, 2022. Cash used for capital expenditures decreased from $34.1 million in the first nine months of 2022 to $9.4 million during the first nine months of 2023. Our capital expenditures in 2023 have primarily consisted of additional investments made in our manufacturing and showroom facilities.

 

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 use the liquidity we have available under our ABL Loans.

 

18

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

If we experience further events of default in the future, we will not be able to access the ABL Loans unless such defaults are resolved, including by obtaining required waivers from the ABL Lenders. Even if we are able to obtain such waivers, the ABL Lenders may adopt additional availability reserves, which would limit the amount we can draw under the ABL Loans.

 

We may also need to seek additional funding sources including new debt from subordinated lenders or equity capital. However, such additional debt or equity capital may not be available on terms favorable to us or at all. In addition, our ability to raise additional debt financing is restricted by our covenants under the 2023 Credit Agreements and would require the consent of the Lenders.

 

If we are unable to access sufficient liquidity, we will need to take other actions to fund operational expenses, such as scaling back operations, reducing marketing spend, and postponing or discontinuing our growth strategies. Such actions could result in slower growth or no growth, and we may lose key suppliers, be unable to timely satisfy customer orders, and be unable to retain all of our employees. In addition, we may be forced to restructure our obligations to creditors, pursue work-out options or other protective measures.

 

Based on our current projections, we believe our cash on hand, amounts available under our asset-based lending arrangement, and expected cash to be generated from our operations will be sufficient to meet our working capital requirements and cover anticipated capital expenditures for at least the next 12 months.

 

2020 Credit Agreement

 

On September 3, 2020, Purple LLC entered into a financing arrangement with KeyBank National Association and a group of financial institutions (the “2020 Credit Agreement”). The 2020 Credit Agreement provided for a $45.0 million term loan and a $55.0 million revolving line of credit. The term loan was to be repaid in accordance with a five-year amortization schedule or prepaid in whole or in part at any time without premium or penalty, subject to reimbursement of certain costs. The revolving credit facility had a term of five years and carried the same interest provisions as the term debt. A commitment fee was due quarterly based on the applicable margin applied to the unused total revolving commitment. In connection with the Company’s execution of the 2023 Credit Agreements, the Company terminated its 2020 Credit Agreement. The Company had no outstanding borrowings under the 2020 Credit Agreement at the time of termination.

 

On February 17, 2023, the Company entered into a fifth amendment to the 2020 Credit Agreement. The amendment, among other things, revised various covenants associated with the 2020 Credit Agreement. As a condition of entering into the amendment, the Company repaid the $24.7 million outstanding balance on the term loan plus accrued interest. Pursuant to this amendment, the Company incurred fees and expenses of $2.9 million that were recorded as debt issuance costs in the condensed consolidated balance sheet. The amendment was accounted for as an extinguishment of debt and $1.2 million of unamortized debt issuance costs related to the term loan were recorded as loss on extinguishment of debt in the condensed consolidated statement of operations.

 

On April 26, 2023, the Company received consent under the 2020 Credit Agreement that allowed the Company’s redemption of Proportional Representation Preferred Linked Stock (“PRPLS”) issued by the Company on February 24, 2023, in an aggregate amount not to exceed $0.2 million as agreed by the Company in an April 19, 2023 Cooperation Agreement (the “Cooperation Agreement”) entered into with Coliseum. (See Note 16—Related Party TransactionsColiseum Capital Management, LLC for information regarding events leading up to the Company’s issuance of the PRPLS, and for information regarding terms of the Cooperation Agreement and redemption of the PRPLS.)

 

19

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

In connection with the Company’s execution of the Term Loan Agreement and ABL Agreement, the Company terminated its 2020 Credit Agreement in August 2023. The Company had no outstanding borrowings under the 2020 Credit Agreement at the time of termination. The termination was accounted for as an extinguishment of debt and $3.1 million of unamortized debt issuance costs related to the 2020 Credit Agreement were recorded as a loss on extinguishment of debt in the condensed consolidated statement of operations. 

 

Interest expense under the 2023 Credit Agreements was $0.9 million for the three and nine months ended September 30, 2023. Interest expense under the 2020 Credit Agreement totaled $0.2 million and $1.3 million for the three and nine months ended September 30, 2023, respectively, and totaled $0.9 million and $2.9 million for the three and nine months ended September 30, 2022, respectively.

 

13. Warrant Liabilities

 

The Company issued 12.8 million sponsor warrants pursuant to a private placement conducted simultaneously with its initial public offering. Each of these warrants entitled the registered holder to purchase one-half of one share of the Company’s Class A common 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. These sponsor warrants contained certain provisions that do not meet the criteria for equity classification and therefore were recorded as liabilities. The liability for these warrants was recorded at 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.

 

Unexercised sponsor warrants totaling 1.9 million expired in February 2023 and were cancelled pursuant to the terms of the warrant agreement. These sponsor warrants had no fair value on the date of expiration.

 

There were no sponsor warrants exercised during the nine months ended September 30, 2022. The 1.9 million sponsor warrants outstanding at September 30, 2022 had a fair value of $0.1 million.

 

The Company determined the fair value of the sponsor warrants using the Black Scholes model with the following assumptions:

 

   September 30,
2022
 
Trading price of common stock on measurement date  $4.05 
Exercise price  $5.75 
Risk free interest rate   3.33%
Warrant life in years   0.3 
Expected volatility   117.78%
Expected dividend yield   
 

 

During the three months ended September 30, 2022, the Company recognized a loss of $0.1 million in its condensed consolidated statement of operations related to an increase in the fair value of the sponsor warrants outstanding at the end of the period. For the nine months ended September 30, 2022, the Company recognized a gain of $4.2 million in its condensed consolidated statements of operations related to a decrease in the fair value of the sponsor warrants outstanding at the end of the period.

 

14. Other Long-Term Liabilities

 

Other long-term liabilities consist of the following (in thousands):

 

   September 30,   December 31, 
   2023   2022 
Warranty expense accrual  $20,856   $20,744 
Warranty returns accrual   11,029    3,719 
Asset retirement obligations   2,197    2,098 
Other   7    19 
Total   34,089    26,580 
Less – current portion of warranty accrual   (7,783)   (5,803)
Other long-term liabilities, net of current portion  $26,306   $20,777 

 

20

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

15. Commitments and Contingencies

 

Warranty Liabilities

 

The Company provides a limited warranty on most of the products it sells. The estimated warranty costs associated with products sold through DTC channels are expensed at the time of sale and included in cost of revenues. The estimated warranty return costs associated with products sold through the wholesale channel are recorded at the time of sale and included as an offset to net revenues. Estimates for warranty costs are based on the results of product testing, industry and historical trends and warranty claim rates incurred, and are adjusted for any current or expected trends as appropriate. Actual warranty claim costs could differ from these estimates. The Company regularly assesses and adjusts the estimate of accrued warranty claims by updating claims rates for actual trends and projected claim costs. The Company classifies estimated warranty costs expected to be paid beyond a year as a long-term liability.

 

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. There were no tax distributions paid during the nine months ended September 30, 2023 and 2022. At September 30, 2023, the Company’s condensed consolidated balance sheet had $0.1 million of accrued tax distributions included in other current 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 common stock to CCP and Blackwell and (ii) an aggregate of 3.3 million warrants to purchase 1.6 million shares of Class A common 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 common stock issued and assigned to CCP and Blackwell in the Coliseum Private Placement, as well as the shares of Class A common 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 common stock, including CCP, Blackwell and CDF, were entitled to registration rights pursuant to certain registration rights agreements of the Company as of the Business Combination date. In March 2018, the Company filed a registration statement registering these warrants (and any shares of Class A common stock issuable upon the exercise of the warrants), and certain unregistered shares of Class A common stock. The registration statement was declared effective on April 3, 2018. Under the Registration Rights Agreement dated February 2, 2018 between the Company and CCP, Blackwell, and CDF (the “Coliseum Investors”), the Coliseum Investors have the right to make written demands for up to three registrations of certain warrants and shares of Class A common stock held by them, including in underwritten offerings. In an underwritten offering of such warrants and shares of Class A common stock by the Coliseum Investors, the Company will pay underwriting discounts and commissions and certain expenses incurred by the Coliseum Investors. In May 2021, the Coliseum Investors exercised the first of their three written demands for registration in an underwritten offering.

 

21

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

Purple LLC Class B Unit Exchange Right

 

On February 2, 2018, in connection with the closing of the Business Combination, the Company entered into an exchange agreement with Purple LLC and InnoHold and Class B Unit holders who become a party thereto (the “Exchange Agreement”), which provides for the exchange of Purple LLC Class B Units (the “Class B Units”) and shares of Class B common stock (together with an equal number of Class B Units, the “Paired Securities”) for, at the Company’s option, either (A) shares of Class A common stock at an initial exchange ratio equal to one Paired Security for one share of Class A common stock or (B) a cash payment equal to the product of the average of the volume-weighted closing price of one share of Class A common stock for the ten trading days immediately prior to the date InnoHold or other Class B Unit holders deliver a notice of exchange multiplied by the number of Paired Securities being exchanged. In December 2018, InnoHold distributed Paired Securities to Terry Pearce and Tony Pearce who agreed to become parties to the Exchange Agreement. In June 2019, InnoHold distributed Paired Securities to certain current and former employees who also agreed to become parties to the exchange agreement. Holders of Class B Units may elect to exchange all or any portion of their Paired Securities as described above by delivering a notice to Purple LLC.

 

In certain cases, adjustments to the exchange ratio will occur in case of a split, reclassification, recapitalization, subdivision or similar transaction of or relating to the Class B Units or the shares of Class A common stock and Class B common stock or a transaction in which the Class A common stock is exchanged or converted into other securities or property. The exchange ratio will also adjust in certain circumstances when the Company acquires Class B Units other than through an exchange for its shares of Class A common stock.

 

The right of a holder of Paired Securities to exchange may be limited by the Company if it reasonably determines in good faith that such restrictions are required by applicable law (including securities laws), such exchange would not be permitted under other agreements of such holder with the Company or its subsidiaries, including the Third Purple LLC Agreement, or if such exchange would cause Purple LLC to be treated as a “publicly traded partnership” under applicable tax laws.

 

The Company and each holder of Paired Securities shall bear its own expense regarding the exchange except that the Company shall be responsible for transfer taxes, stamp taxes and similar duties.

 

During the nine months ended September 30, 2023, 29,965 of Paired Securities were exchanged for Class A common stock. There were no Paired Securities exchanged for Class A common stock during the nine months ended September 30, 2022.

 

22

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

Maintenance of One-to-One Ratios

 

The Third Purple LLC Agreement includes provisions intended to ensure that the Company at all times maintains a one-to-one ratio between (a) (i) the number of outstanding shares of Class A common stock and (ii) the number of Class A Units owned by the Company (subject to certain exceptions for certain rights to purchase equity securities of the Company under a “poison pill” or similar stockholder rights plan, if any, certain convertible or exchangeable securities issued under the Company’s equity compensation plan and certain equity securities issued pursuant to the Company’s equity compensation plan (other than a stock option plan) that are restricted or have not vested thereunder) and (b) (i) the number of other outstanding equity securities of the Company (including the warrants exercisable for shares of Class A common stock) and (ii) the number of corresponding outstanding equity securities of Purple LLC. These provisions are intended to result in non-controlling interest holders having a voting interest in the Company that is identical to their economic interest in Purple LLC.

 

Non-Income Related Taxes

 

The Company complies with current law and collects and reports on sales tax and other taxes and required fees in all states in which it does business. The application of existing, new or revised taxes and fees on the Company’s business, in particular, sales taxes, VAT and similar taxes would likely increase the cost of doing business online and decrease the attractiveness of selling products over the internet. The application of these taxes and fees on the Company’s business could also create significant increases in internal costs necessary to capture data and collect and remit taxes and pay the fees. There have been, and will continue to be, substantial ongoing costs associated with complying with the various indirect tax requirements in the numerous markets in which the Company conducts or will conduct business.

 

Legal Proceedings

 

On October 13, 2020, Purple LLC filed a lawsuit against Responsive Surface Technology, LLC and its parent company, PatienTech, LLC (collectively referred to as “ReST”) in the U.S. District Court for the District of Utah. The lawsuit arises from ReST’s multiple breaches of its obligations to Purple LLC, including infringing upon Purple LLC’s trademarks, patents, and trade dress, among other claims. Purple seeks monetary damages, injunctive relief, and declaratory judgment based on certain conduct by ReST (“Case I”). On October 21, 2020, shortly after the complaint was filed in Case I, ReST filed a retaliatory lawsuit against Purple LLC, and some of the Company’s board members, Gary DiCamillo, Adam Gray, Joseph Megibow, Terry Pearce, and Tony Pearce, also in the United States District Court for the District of Utah (“Case II”). Subsequently, the two cases were consolidated into one. Case II (now combined with Case I) involves many of the same facts and transactions as Case I. ReST subsequently filed a motion to compel arbitration of the claims in Case I. Purple LLC opposed the motion to compel arbitration, arguing that ReST waived any rights to arbitration and that all the claims in both cases should stay in the courts. However, the Court granted ReST’s motion to compel arbitration, and stayed the proceedings in the United States District Court for the District of Utah. Additionally, the Court ruled that ReST’s claims against the Company’s board members were not subject to arbitration, and the Court stayed ReST’s claims against those individuals. Pursuant to the Court’s order, Purple LLC filed a demand for arbitration with the American Arbitration Association (the “AAA”) on September 1, 2021.  ReST filed its counterclaim with the AAA on September 21, 2021. In the course of the pre-hearing litigation, ReST was sanctioned for improper litigation conduct, and certain defenses and claims were stricken and costs were ordered to be paid by ReST to Purple LLC. A two-week arbitration hearing was held between July 31, 2023 and August 11, 2023. The parties presented evidence, and subsequently presented post-hearing briefing to the Arbitrator. At this time, the Arbitrator has not issued a decision, though a decision is expected before the end of November 2023. Purple LLC seeks over $5 million in damages from ReST, whereas ReST claims that Purple LLC is liable to it for approximately $4 million. The outcome of the Arbitration cannot be predicted at this stage. However, Purple LLC has vigorously pursued its claims and defended against the claims made by ReST.

 

23

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

On May 3, 2022, Purple LLC filed a complaint against Photon Interactive UK Limited (“Photon”) in the U.S. District Court for the District of Delaware regarding a Master Professional Services Agreement with Photon dated on or around November 1, 2019. Pursuant to the agreement, Photon was required to rebuild Purple Innovation LLC’s website architecture and checkout process. Purple LLC paid Photon $0.9 million under the Agreement. However, Photon failed to deliver any of the required deliverables as specified in the agreement. Purple LLC withheld payment of the final $0.1 million due pursuant to Photon’s invoices pending a resolution with Photon. Since resolution discussions with Photon failed, Purple LLC filed its complaint for breach of contract against Photon seeking, among other damages, reimbursement for all amounts paid to Photon under the agreement. Photon counter-sued, seeking payment for the $0.1 million withheld by Purple LLC, and also advancing a vague claim for tortious interference. On August 31, 2022, Purple LLC filed an amended complaint adding additional claims pertaining to Photon’s failure to deliver a point-of-sale system pursuant to the Master Professional Services Agreement. Purple LLC is seeking judgment against Photon in the amount of $4 million. The case was stayed in September 2023 to allow the parties to mediate the dispute. Mediation is scheduled for November 15, 2023.

 

On August 5, 2022, Purple LLC filed a complaint with the U.S. International Trade Commission (“ITC”) against numerous entities and individuals from the People’s Republic of China and South Korea (“Respondents”) that have been violating Purple LLC’s intellectual property rights related to pillow and seat cushion products. The complaint alleged that the Respondents have been violating 19 U.S.C. § 1337 by importing into the United States, selling for importation into the United States, and/or selling in the United States after importation pillow and seat cushion products that infringe Purple LLC’s trade dress rights or otherwise constitute unfair competition, infringe a certain Purple LLC design patent, infringe certain Purple LLC registered trademarks, and/or infringe certain Purple LLC utility patents, specifically including U.S. Patent No. 10,772,445.  The complaint requested at least the following relief:  (i) a General Exclusion Order excluding from entry into the United States all pillow and seat cushion products, regardless of the source of those products, that infringe Purple LLC’s asserted intellectual property right; (ii) Limited Exclusion Orders excluding from entry into the United States all pillow and cushion products of the Respondents named in the complaint that infringe any asserted intellectual property rights; and (iii) Cease and Desist Orders against the Respondents named in the complaint barring them from marketing, selling, advertising, or distributing infringing products in the United States, including via on-line retailers. On September 6, 2022, the ITC instituted Investigation No. 337-TA-1328 in response to Purple LLC’s complaint.  Fact and expert discovery have been completed. Purple LLC has entered into settlement agreements with seven Respondents, and the ITC issued Consent Orders under which those seven Respondents agreed to no longer import infringing products into the United States. Purple LLC also has voluntarily terminated the Investigation as to a number of other Respondents. No actively litigating Respondents remain in the case.  On July 13, 2023, the ITC Administrative Law Judge issued an Initial Determination (“ID”) in which she granted Purple LLC’s Motion for Summary Determination finding that the four remaining Respondents have violated Section 337. The ID also recommended that the ITC issue a General Exclusion Order excluding from entry into the United States all pillows that infringe certain asserted claims of the ’445 patent, regardless of the source of those products, or, in the alternative, Limited Exclusion Orders directed specifically to the four remaining Respondents. The ID further recommended that the ITC issue Cease and Desist Orders directed specifically to the four remaining Respondents. On August 28, 2023, the ITC announced that it had determined it would not review the ALJ’s determination that the four remaining respondents had violated Section 337 through the infringement of the asserted claims of the ‘445 patent. The ITC’s decision regarding remedy remains pending. The ITC’s target date for completion of the investigation is currently November 13, 2023.

 

24

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

In December 2022, Terry and Tony Pearce, Purple’s founders, filed a complaint against Purple Inc. in the Fourth Judicial District Court in the State of Utah. The Pearces allege that they each entered into employment agreements with Purple LLC in February 2018. The Pearces contend that certain corporate transactions between May 2019 and June 2020 reduced their “ownership interest and voting power in Purple” and that, as a result, they should have continued to be paid a salary between August 2020, when they retired from Purple LLC, and December 2021. The Pearces calculate that they are each owed “no less than $500,000” in unpaid salary. Purple Inc. has moved to dismiss the Pearces’ claims in full, arguing that the Pearces’ legal theories are flawed and that the amended pleading reflects the Pearces’ inability to rehabilitate their claims. In October 2023, the Fourth Judicial District Court granted Purple’s motion and ordered that the claims brought by the Pearces be dismissed in full, with prejudice. As of this update, the final judgment for this action is pending. The Company maintains insurance to cover the costs of defending against claims of this nature and intends to continue to vigorously defend against these claims.

 

On April 3, 2023, InnoHold, LLC, Terry Pearce, and Tony Pearce (collectively, the “InnoHold Parties”) filed a complaint against Purple LLC in the Delaware Court of Chancery, captioned InnoHold, LLC et al. v. Purple Innovation, LLC, Case No. 2023-0393-PAF (Del. Ch. Apr. 3, 2023). The complaint alleges that Purple LLC breached the Second Amended and Restated Limited Liability Company Agreement of Purple Innovation, LLC, dated as of February 2, 2018 (the “LLC Agreement”), and the implied covenant of good faith and fair dealing contained therein by failing to pay the full amount of tax distributions owed under the LLC Agreement. The complaint also asserts a claim for indemnification under the LLC Agreement. The InnoHold Parties seek damages of approximately $3.0 million in allegedly unpaid tax distributions as well as its legal fees and expenses incurred in connection with the litigation. On June 13, 2023, Purple LLC filed an answer to the complaint denying the InnoHold Parties’ allegations, setting forth its affirmative defenses, and requesting dismissal of all claims and entry of judgment in Purple LLC’s favor. The outcome of the litigation cannot be predicted at this early stage in the proceedings. Purple LLC intends to vigorously defend against these claims.

 

On March 24, 2023, Purple LLC filed a complaint against Tempur Sealy International, Inc., Sealy Technology LLC and Sealy Mattress Manufacturing Co., LLC (collectively, “Sealy”) in the U.S. District Court for the Middle District of North Carolina for infringement of Purple LLC’s U.S. Patent No. 11,317,733 entitled “Mattress Including an Elastomeric Cushioning Element and a Pocketed Coil Layer and Related Methods.” On July 17, 2023, Purple LLC filed a First Amended Complaint further detailing Sealy’s infringement of the patent through Sealy’s direct and indirect infringement by making, using, offering for sale, and/or importing into the United States Sealy FlexGrid Hybrid Construction mattresses. Purple seeks judgment of willful infringement, trebled damages, a permanent injunction, prejudgment and post-judgment interest, costs, expenses, and attorneys’ fees. Sealy filed its response to Purple’s First Amended Complaint on July 31, 2023. Discovery is scheduled to conclude April 18, 2024; no trial date has been set. Purple LLC intends to vigorously litigate its claims to resolution.

 

On March 27, 2023, Sealy Technology, LLC (“Sealy Technology”) filed a Petition for Cancellation with the U.S. Patent and Trademark Office, Trademark Trial and Appeal Board (“TTAB”), seeking cancellation of Purple LLC’s Trademark Registration No. 5,416,146 for HYPER-ELASTIC POLYMER in Class 20 for “elastomeric polymer in pre-shaped form sold as an integral component of pillows” (the “Registration”). On June 18, 2023, Sealy Technology filed an Amended Petition, which seeks cancellation of the Registration on the basis that the term is generic. On September 25, 2023, the TTAB denied Purple LLC’s previously filed motion to dismiss and issued a new schedule. On October 16, 2023, Purple LLC filed its Answer to the Amended Petition. Discovery is scheduled to open on November 14, 2023, and to conclude on May 12, 2024. Trial and post-trial briefing is scheduled to conclude March 8, 2025. Purple LLC intends to vigorously defend against Sealy Technology’s petition.

 

On August 16, 2023, Sealy Technology filed a Notice of Opposition with the TTAB, requesting that the U.S. Patent and Trademark Office deny Purple LLC’s pending Trademark Application No. 97,650,658 for HYPER-ELASTIC POLYMER in Class 20 for “mattresses; seat cushions” (the “Application”), on the grounds that the mark is merely descriptive or deceptively misdescriptive. On September 25, 2023, Purple LLC filed a motion to dismiss all claims. On October 5, 2023, the TTAB suspended all deadlines in the proceeding, pending the outcome of the motion to dismiss. On October 17, 2023, Sealy Technology filed its opposition to the motion to dismiss. Purple LLC’s reply in support of its motion to dismiss is due November 6, 2023. Purple LLC intends to vigorously defend against Sealy Technology’s opposition.

 

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.

 

25

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

16. Related Party Transactions

 

The Company had various transactions with entities or individuals which are considered related parties.

 

Coliseum Capital Management, LLC

 

Immediately following the Business Combination, Adam Gray was appointed to the Company’s Board. Mr. Gray is a manager of Coliseum Capital, LLC, which is the general partner of CCP and CDF, and he is also a managing partner of CCM, which is the investment manager of Blackwell and also manages investment funds and accounts. Mr. Gray has voting and dispositive control over securities held by CCP, CDF and Blackwell which were also Lenders under the Amended and Restated Credit Agreement. See Note 15—Commitments and ContingenciesSubscription Agreement and Preemptive Rights for further discussion.

 

On September 17, 2022, the Company received an unsolicited and non-binding proposal from Coliseum on behalf of certain investment funds and accounts to acquire the remaining outstanding common stock of the Company not already beneficially owned by Coliseum for $4.35 per share in cash. At the time of the offer, Coliseum beneficially owned approximately 44.7% of the outstanding equity of the Company. On September 25, 2022, with the authorization of the Board, a special committee of independent and disinterested directors of the Company (the “Special Committee”) was formed to determine the necessary actions to evaluate the Coliseum proposal and determine the course of action that was in the best interests of all the Company’s shareholders. Initially, the Special Committee approved the adoption of a limited-duration stockholder rights agreement (the “Rights Agreement”) with an expiration date of September 25, 2023. The Special Committee adopted the Rights Agreement in response to Coliseum’s substantial increase in ownership of the Company’s shares over the last year and the Special Committee’s desire to have the time and flexibility necessary to evaluate the unsolicited and non-binding proposal from Coliseum to acquire the outstanding common stock of the Company not already beneficially owned by Coliseum. On January 12, 2023, the Company issued a press release stating the Special Committee had rejected Coliseum’s unsolicited proposal.

  

Upon adopting the Rights Agreement, 300,000 shares of the Company’s authorized shares of preferred stock, par value $0.0001 per share, were designated as Series A Junior Participating Preferred Shares (the “Preferred Shares”). In accordance with the Rights Agreement, on September 25, 2022, the Special Committee authorized and declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of the Company’s Class A common stock and Class B common stock to stockholders of record at the close of business on October 6, 2022.

 

The initial issuance of the Rights as a dividend had no financial accounting or reporting impact. The fair value of the Rights was nominal since the Rights were not exercisable when issued and no value was attributable to them. Additionally, the Rights did not meet the definition of a liability under GAAP and was therefore not accounted for as a long-term obligation.  Accordingly, the Rights Agreement had no impact on the Company’s consolidated financial statements.

 

On February 14, 2023, the Company declared a dividend of one new PRPLS for each 100 shares of its common stock owned by the Company’s shareholders. Each PRPLS would have voted together with the common stock in the election of directors, and related matters, and carried 10,000 votes each. Holders of PRPLS were entitled to allocate their votes among the nominees in director elections on a cumulative basis. PRPLS holders could have allocated all, none, or a portion of their votes to each director nominee up for election at the Company’s meetings of shareholders. On February 24, 2023, the Company issued 1.0 million PRPLS shares which traded with the common stock. While the PRPLS were outstanding, any new issuance of common stock would have automatically included a proportionate number of PRPLS. The PRPLS were redeemable at any time by an affirmative vote of two-thirds of the members of the Board. The PRPLS did not have any dividend rights and were entitled to only a limited payment upon any liquidation, dissolution or winding up in priority to any payments on the common stock but would not have otherwise participated in any liquidating distributions.

 

On February 21, 2023, Coliseum filed a lawsuit against the Company and several members of its Board alleging that the Company and the named directors authorized an improper dividend of preferred stock in bad faith to impede stockholder voting rights and interfered with Coliseum’s nomination of a competing slate of director candidates ahead of our 2023 annual meeting of stockholders. On April 19, 2023, the Company entered into a Cooperation Agreement with Coliseum to resolve the litigation. The Cooperation Agreement, which became effective on April 27, 2023, resulted in the following:

 

  The size of the Board was increased from seven directors to eight directors.
     
  The Company amended and restated its Second Amended and Restated Bylaws to include references to the Lead Independent Director Charter.
     
  Board member and Coliseum managing partner Adam Gray was appointed Chairman of the Board.
     
  Board member Gary DiCamillo continued to serve as Lead Independent Director and was appointed chair of the Nomination and Governance Committee.

 

26

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

  Paul Zepf and Pano Anthos resigned as directors of the Company.
     
  The Board appointed S. Hoby Darling, R. Carter Pate, and Erika Serow to fill the vacancies created by the increased the size of the board and the resignations of Mr. Zepf and Mr. Anthos.
     
  Scott Peterson, a stockholder and Board Observer since the Company’s acquisition of Intellibed, was included as a nominee on the Board’s slate of directors at the 2023 Annual Meeting in place of Dawn Zier, who had previously announced her decision not to stand for re-election.
     
  Other than as described above with respect to Dawn Zier, the Board nominated all incumbent directors for election at our annual meetings of stockholders to be held in 2023 and 2024. 
     
  The Company amended its Corporate Governance Guidelines for Operation of the Board of Directors and adopted a Lead Independent Director Charter to provide for the responsibilities of the Lead Independent Director.

  

  The Company terminated the stockholder rights agreement adopted on September 25, 2022 and agreed not to adopt a new stockholder rights agreement prior to the termination of the Cooperation Agreement without Coliseum’s prior consent. As a result, all shares of preferred stock previously designated as Series A Junior Participating Preferred Stock were eliminated and returned to the status of authorized but unissued shares of preferred stock, without designation.
     
  The Company redeemed all outstanding shares of PRPLS and agreed not to issue any similar security or take any other action prior to the termination of the Cooperation Agreement that would change the stockholder voting standards from those in effect prior to the issuance of the PRPLS. As a result, all shares of preferred stock previously designated as PRPLS were eliminated and returned to the status of authorized but unissued shares of preferred stock, without designation. The Company made a $0.1 million payment to redeem the PRPLS based on a record date as of April 28, 2023. The PRPLS redemption payment was reflected in the Company’s consolidated balance sheet as a reduction to additional paid-in capital.

 

  The Company agreed to reimburse Coliseum for up to $4.0 million of out-of-pocket fees, costs, and expenses incurred in connection with the lawsuit.
     
  The Company terminated the Special Committee.
     
  Coliseum dismissed its litigation against the Company.
     
  At the 2023 and 2024 annual meetings of stockholders, Coliseum caused or will cause all of the common stock that Coliseum or any of its affiliates had the direct or indirect right to vote as of the applicable record date, to be present in person or by proxy for quorum purposes and to be voted (i) in favor of each of the candidates for election on the Company’s slate of nominees for election to the Board, (ii) against any stockholder nominations for any other directors, and (iii) against any proposals or resolutions to remove any member of the Board other than for cause.
     
  Coliseum agreed to be bound by customary standstill restrictions, including, among others, agreements not to acquire additional shares of the Company’s securities that would cause Coliseum’s ownership of Voting Securities to exceed 44.4% of the total outstanding Common Stock (other than acquisitions directly from the Company), engage in proxy solicitations and related matters, form or join any “group” with respect to shares of the Company, encourage others to pursue a “contested solicitation,” or make any public proposals, subject to certain exceptions.
     
  Coliseum agreed to condition any proposal from it or any of its affiliates to acquire the Company or all or substantially all of the outstanding stock of the Company held by stockholders unaffiliated with Coliseum on (i) such transaction being negotiated by, and subject to the approval of, a special committee of directors of the Board who are independent with respect to Coliseum and disinterested under Delaware law and (ii) a nonwaivable condition that such transaction be approved by the affirmative vote of the holders of a majority of the Company’s outstanding common stock not beneficially owned by Coliseum or its affiliates or other parties with a material conflict of interest in such transaction.
     
  The Cooperation Agreement shall terminate on the day following the date on which the 2024 annual meeting of stockholders is held.

 

27

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

Purple Founder Entities

 

TNT Holdings, LLC (herein “TNT Holdings”), EdiZONE, LLC, (herein EdiZONE an entity wholly owned by TNT Holdings) and InnoHold (collectively the “Purple Founder Entities”) were entities under common control with Purple LLC prior to the Business Combination. TNT Holdings and InnoHold are majority owned and controlled by Terry Pearce and Tony Pearce (the “Purple Founders”), who were appointed to the Company’s Board following the Business Combination. InnoHold was a majority shareholder of the Company until it sold a portion of its interests in a secondary public offering in May 2020 and the remainder of its interests in a secondary public offering in September 2020. The Purple Founders also resigned as employees of Purple LLC and retired from the Company’s Board in August 2020.

 

TNT Holdings owned the Alpine facility Purple LLC has been leasing since 2010, and the Purple Founders informed Purple LLC that TNT Holdings 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 $0.3 million and $0.8 million in rent expense to 123E LLC or TNT Holdings for the building lease of the Alpine facility for the three and nine months ended September 30, 2023, respectively, and $0.2 million and $0.7 million for the three and nine months ended September 30, 2022, respectively. Purple LLC continued 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. On July 20, 2022, the Company entered into an amendment to its Alpine facility lease agreement with 123E LLC. The amendment rescinded the Company’s previous notice of termination that was scheduled to be effective September 30, 2022 and extended the term such that the lease remained in effect until September 30, 2023. The Company vacated the Alpine facility and returned the property back to 123E LLC on September 30, 2023, in accordance with the terms of the lease agreement and notice of termination.

 

17. Stockholders’ Equity

 

Class A Common Stock

 

The Company has 210.0 million shares of Class A common stock authorized at a par value of $0.0001 per share. Holders of the Company’s Class A common 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 Class A common stock and holders of Class B common 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 common stock and Class B common stock are entitled to one vote per share on matters to be voted on by stockholders. At September 30, 2023, 105.3 million shares of Class A common stock were outstanding.

 

Class B Common Stock

 

The Company has 90.0 million shares of Class B common stock authorized at a par value of $0.0001 per share. Holders of the Company’s Class B common stock will vote together as a single class with holders of the Company’s Class A common stock on all matters properly submitted to a vote of the stockholders. Shares of Class B common stock may be issued only to InnoHold, their respective successors and assigns, as well as any permitted transferees of InnoHold. A holder may transfer their shares of Class B common 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 common 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 common 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 common stock that it sold. All of the 0.4 million shares of Class B common stock outstanding at September 30, 2023 were held by other parties.

 

28

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

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, 2023, there were no shares of preferred stock outstanding.

 

On February 14, 2023, the Company declared a dividend of one new PRPLS for each 100 shares of its common stock owned by the Company’s shareholders. Each PRPLS had the right to vote together with the common stock in the election of directors, and related matters, and carried 10,000 votes each. Holders of PRPLS were entitled to allocate their votes among the nominees in director elections on a cumulative basis. PRPLS holders could have allocated all, none, or a portion of their votes to each director nominee up for election at the Company’s meetings of shareholders. On February 24, 2023, the Company issued 1.0 million PRPLS shares which traded with the common stock. While the PRPLS were outstanding, any new issuance of common stock would have automatically included a proportionate number of PRPLS. The PRPLS were redeemable at any time by an affirmative vote of two-thirds of the members of the Board. The PRPLS did not have any dividend rights and were entitled to only a limited payment upon any liquidation, dissolution or winding up in priority to any payments on the common stock but would not have otherwise participated in any liquidating distributions. As a result of the Cooperation Agreement, all shares of preferred stock previously designated as PRPLS were eliminated and returned to the status of authorized but unissued shares of preferred stock, without designation. The Company made a $0.1 million payment to redeem the PRPLS based on a record date as of April 28, 2023. The PRPLS redemption payment was reflected in the Company’s consolidated balance sheet as a reduction to additional paid-in capital. At September 30, 2023 there were no PRPLS issued or outstanding. See Note 16—Related PartiesColiseum Capital Management, LLC for additional detail regarding redemption of the PRPLS.

 

Sponsor Warrants

 

There were 12.8 million sponsor warrants issued pursuant to a private placement simultaneously with the Company’s initial public offering. The 1.9 million sponsor warrants that remained outstanding at December 31, 2022 expired in February 2023 and were cancelled pursuant to the terms of the warrant agreement. These sponsor warrants had no fair value on the date of expiration. There were no sponsor warrants exercised during the nine months ended September 30, 2022.

 

Noncontrolling Interest

 

Noncontrolling interest (“NCI”) is the membership interest in Purple LLC held by holders other than the Company. At September 30, 2023 and December 31, 2022, the combined NCI percentage in Purple LLC was 0.4% and 0.5%, respectively. 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.

 

18. 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.

 

29

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

The Company reported income tax expense related to various state taxes of $0.2 million on a pretax loss of $102.7 million for the nine months ended September 30, 2023 as compared to an income tax benefit of $7.0 million on a pretax loss of $28.0 million for the nine months ended September 30, 2022. This resulted in an effective tax rate of (0.2)% for the nine months ended September 30, 2023 as compared to 25.1% for the nine months ended September 30, 2022. The Company’s effective tax rate for the nine months ended September 30, 2023 differs from the statutory federal rate of 21% primarily due to the impact of the full valuation allowance recorded against the Company’s deferred tax assets at September 30, 2023.

 

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 agreement.

 

As noncontrolling interest holders exercise their right to exchange or cause Purple LLC to redeem all or a portion of their Class B Units, a tax receivable agreement liability may be recorded based on 80% of the estimated future cash tax savings that the Company may realize as a result of increases in the basis of the assets of Purple LLC attributed to the Company as a result of such exchange or redemption. The amount of the increase in asset basis, the related estimated cash tax savings and the attendant liability to be recorded will depend on the price of the Company’s Class A common 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 of September 30, 2023, the Company estimated that if all the remaining 0.4 million Class B units were redeemed for shares of its Class A common stock, the tax receivable agreement liability would be approximately $168.5 million. If the Company experiences a change of control (as defined under the tax receivable agreement, which includes certain mergers, asset sales and other forms of business combinations and change of control events), it could be required to make an immediate lump-sum payment under the terms of the tax receivable agreement. Management currently estimates the liability associated with this lump-sum payment (or “early termination payment”) would be approximately $110.6 million on a discounted basis. This potential early termination payment can be significantly impacted by the discounted interest rate at the time of termination.

 

30

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

The effects of uncertain tax positions are recognized in the consolidated financial statements if these positions meet a “more-likely-than-not” threshold. For those uncertain tax positions that are recognized in the consolidated financial statements, liabilities are established to reflect the portion of those positions it cannot conclude “more-likely-than-not” to be realized upon ultimate settlement. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. Accrued interest and penalties would be included on the related tax liability line in the consolidated balance sheet. As of September 30, 2023, no material uncertain tax positions were recognized as liabilities in the condensed consolidated financial statements.

 

19. Net Loss Per Common Share

 

Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of Class A stock outstanding during each period. Diluted net income (loss) per share reflects the weighted-average number of common shares outstanding during the period used in the basic net income (loss) computation plus the effect of common stock equivalents that are dilutive.

 

The following table sets forth the calculation of basic and diluted weighted average shares outstanding and net loss per share for the periods presented (in thousands, except per share amounts):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2023   2022   2023   2022 
Numerator:                
Net loss attributable to Purple Innovation, Inc. – basic  $(36,004)  $1,956   $(102,424)  $(20,809)
Net income (loss) attributed to noncontrolling interest   
    1    
    (204)
Net loss attributable to Purple Innovation, Inc. – diluted  $(36,004)  $1,957   $(102,424)  $(21,013)
Denominator:                    
Weighted average shares—basic   105,326    85,666    102,962    78,544 
Add – dilutive effect of equity awards   
    1    
    
 
Add – dilutive effect of Class B shares   
    448    
    448 
Weighted average shares—diluted   105,326    86,115    102,962    78,992 
Net loss per common share:                    
Basic  $(0.34)  $0.02   $(0.99)  $(0.26)
Diluted  $(0.34)  $0.02   $(0.99)  $(0.27)

 

For the three and nine months ended September 30, 2023, the Company excluded 2.8 million and  4.4 million, respectively, of Paired Securities convertible into an equal number of Class A shares, stock options and restricted stock as the effect was anti-dilutive. For the three and nine months ended September 30, 2022, the Company excluded 3.2 million and 3.5 million, respectively, of Class A common shares issuable upon conversion of certain warrants, stock options, restricted stock and Class A shares subject to vesting as the effect was anti-dilutive.

 

31

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

20. Equity Compensation Plans

 

2017 Equity Incentive Plan

 

The Purple Innovation, Inc. 2017 Equity Incentive Plan, as amended and restated (the “2017 Plan”), provides for grants of stock options, stock appreciation rights, restricted stock units and other stock-based awards. Directors, officers and other employees and subsidiaries and affiliates, as well as others performing consulting or advisory services for the Company and its subsidiaries, will be eligible for grants under the 2017 Plan. As of September 30, 2023, an aggregate of 2.6 million shares remain available for issuance or use under the 2017 Plan.

 

Class A Stock Awards

 

In June 2023, the Company granted stock awards under the 2017 Incentive Plan to non-executive directors on the Board. The stock awards vested immediately and the Company issued 0.2 million shares of Class A common stock and recognized $0.6 million in expense during the three months ended June 30, 2023, which represented the fair value of the stock awards on the grant date.

 

Amended and Restated Grant Agreements

 

On March 15, 2023, in accordance with the 2017 Incentive Plan, the Company entered into amended and restated grant agreements relating to stock options and restricted stock unit awards previously granted to the Company’s chief executive officer in March 2022 and June 2022. The amended agreements revised the vesting schedule of the awards included in each grant. Pursuant to these agreements, 0.3 million of restricted stock units and stock options fully vested on March 25, 2023, another 0.3 million of restricted stock units and stock options, which included conditionally granted awards that were approved by shareholders at the 2023 Annual Meeting, will vest on March 25, 2024, and the remaining 0.3 million of conditionally granted awards approved by shareholders at the 2023 Annual Meeting will vest in full on March 25, 2025. These amendments resulted in the acceleration of $0.8 million of stock-based compensation expense into the first quarter of 2023 compared to the expense that would have been recorded based on vesting under the original agreements.

 

Employee Stock Options

 

Following receipt of shareholder approval of certain amendments to the 2017 Plan at the 2023 Annual Meeting, the 0.3 million stock options granted to the Company’s chief executive officer in June 2023 have an exercise price of $6.82 per option, expire in four years and vest over a two-year period. The Company determined the fair value of this award to be $0.1 million on the effective date, which will be expensed on a straight-line basis over the vesting period.

 

The Company determined the fair value of the options granted during the nine months ended September 30, 2023 using the Black Scholes method with the following weighted average assumptions:

 

Fair market value  $0.22 
Exercise price  $6.82 
Risk free interest rate   4.48%
Expected term in years   2.58 
Expected volatility   44.98%
Expected dividend yield    

 

The following table summarizes the Company’s total stock option activity for the nine months ended September 30, 2023:

 

   Options
(in thousands)
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Term in
Years
   Intrinsic
Value
(in thousands)
 
Options outstanding as of January 1, 2023   819   $8.68    2.3   $ 
Granted   295    6.82         
Exercised                
Forfeited/cancelled   (240)   7.26         
Options outstanding as of September 30, 2023   874   $8.44    2.5   $ 

 

32

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

Outstanding and exercisable stock options as of September 30, 2023 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)
 
$6.51    151    0.6    151    0.6   $          
 6.82    500    3.5    167    3.5     
 7.99    19    1.2    19    1.2     
 8.32    108    0.8    108    0.8     
 13.12    61    1.6    53    1.6     
 32.28    35    2.5    24    2.5     

 

The following table summarizes the Company’s unvested stock option activity for the nine months ended September 30, 2023:

 

   Options
(in thousands)
   Weighted
Average
Grant Date
Fair Value
 
Nonvested options as of January 1, 2023   307   $2.84 
Granted   295    0.22 
Vested   (228)   2.48 
Forfeited   (22)   2.70 
Nonvested options as of September 30, 2023   352   $0.83 

 

The estimated fair value of Company stock options is amortized over the options vesting period on a straight-line basis. For the three and nine months ended September 30, 2023, the Company recognized stock option expense of $0.1 million and $0.5 million, respectively. The Company recorded stock option expense of $0.2 million and $0.5 million during the three and nine months ended September 30, 2022, respectively.

 

As of September 30, 2023, outstanding stock options had $0.2 million of unrecognized stock compensation cost with a remaining recognition period of 1.1 years.

 

33

 

 

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

 

Employee Restricted Stock Units

 

During the second quarter of 2023, the Company granted 2.4 million restricted stock units under the 2017 Incentive Plan to certain members of the Company’s management team. Approximately one-half of the restricted stock units granted included a market vesting condition. The restricted stock awards that did not have a market vesting condition had a weighted average grant date fair value of $2.75 per share. The estimated fair value of these awards is recognized on a straight-line basis over the 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 $1.92 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  $2.72 
Risk free interest rate   4.29%
Expected life in years   2.7 
Expected volatility   89.9%
Expected dividend yield    

 

The following table summarizes the Company’s restricted stock unit activity for the nine months ended September 30, 2023:

 

   Number
Outstanding
(in thousands)
   Weighted
Average
Grant Date
Fair Value
 
Nonvested restricted stock units as of January 1, 2023   1,235   $5.47 
Granted   2,429    2.33 
Vested   (306)   6.25