Toggle SGML Header (+)


Section 1: 10-Q (QUARTERLY REPORT)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018

 

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)
  (IRS Employer
Identification No.)

 

123 EAST 200 NORTH

ALPINE, UTAH 84004

 

(Address of principal executive offices, including zip code)

 

(801) 756-2600

 

(Registrant’s telephone number, including area code)

 

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 þ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ 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   þ
Non-accelerated filer   ¨ Smaller reporting company  ¨
(Do not check if a smaller reporting company) Emerging growth company  þ

 

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 þ

 

As of July 31, 2018, 9,730,636 shares of the registrant’s Class A common stock, $.0001 par value per share, and 44,071,318 shares of the registrant’s Class B common stock, $.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 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 20
  Item 3. Quantitative and Qualitative Disclosures about Market Risk 27
  Item 4. Controls and Procedures 27
       
Part II.  Other Information 28
  Item 1. Legal Proceedings 28
  Item 1A. Risk Factors 28
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Item 5. Other Information 32
  Item 6. Exhibits 33
       
  Signatures 34

 

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

 

We have a number of trademarks registered with the U.S. Patent and Trademark Office, including EquaPressure®, WonderGel® and EquaGel® (for cushions), and Purple®, No Pressure® and Hyper-Elastic Polymer® (for plasticized elastomeric gel and certain types of products, including mattresses); and the color “purple” (for mattresses). We also have a number of common law trademarks, including 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™. 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.

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

PURPLE INNOVATION, INC.

 

Condensed Consolidated Balance Sheets

(In thousands, except par value)

(Unaudited)

  

   June 30,   December 31, 
   2018   2017 
Assets      (Revised)(1) 
Current assets:        
Cash and cash equivalents  $10,431   $3,593 
Accounts receivable, net   7,238    4,182 
Inventories, net   33,241    13,345 
Prepaid inventory   3,990    2,219 
Other current assets   1,156    492 
Total current assets   56,056    23,831 
Property and equipment, net   19,536    13,464 
Intangible assets, net   1,352    1,267 
Other long-term assets   5    22 
Total Assets  $76,949   $38,584 
           
Liabilities and Equity          
Current liabilities:          
Accounts payable  $20,660   $21,131 
Accrued sales returns   5,630    4,825 
Accrued compensation   2,304    2,097 
Customer prepayments   6,921    3,213 
Accrued sales tax   5,848    8,466 
Other accrued liabilities   2,554    1,451 
Current portion of long-term obligations   31    29 
Total current liabilities   43,948    41,212 
Long-term debt   20,019    8,000 
Other long-term liabilities and obligations, net of current portion   3,004    2,368 
Total liabilities   66,971    51,580 
Commitments and contingencies (Note 9)          
Stockholders’ equity:          
Class A common stock; $0.0001 par value, 210,000 shares authorized; 9,731 issued and outstanding at June 30, 2018   1     
Class B common stock; $0.0001 par value, 90,000 shares authorized; 44,071 issued and outstanding at June 30, 2018   4     
Additional paid-in capital   3,569     
Accumulated deficit   (2,213)    
Total stockholders’ equity   1,361     
Noncontrolling interest   8,617     
Member deficit       (12,996)
Total equity   9,978    (12,996)
Total Liabilities and Equity  $76,949   $38,584 

 

(1) See Note 2, “—Correction of Immaterial Misstatements in Prior Period Financial Statements”.

 

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

  

 1 

 

 

PURPLE INNOVATION, INC.

 

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2018   2017   2018   2017 
Revenues, net  $75,397   $47,685   $136,377   $77,809 
Cost of revenues   42,358    26,512    76,938    42,342 
Gross profit   33,039    21,173    59,439    35,467 
Operating expenses:                    
Marketing and sales   30,723    14,524    52,768    28,315 
General and administrative   5,213    2,741    11,975    4,953 
Research and development   555    271    1,066    548 
Total operating expenses   36,491    17,536    65,809    33,816 
Operating (loss) income   (3,452)   3,637    (6,370)   1,651 
Interest expense   971        1,673     
Other (income) expense, net   (82)   6    (101)    
Net (loss) income   (4,341)   3,631    (7,942)   1,651 
Net loss attributable to noncontrolling interest   (3,556)       (5,729)    
Net (loss attributable) income available to Purple Innovation, Inc.  $(785)  $3,631   $(2,213)  $1,651 
Net (loss) income per common share—basic and diluted  $(0.09)  $0.43   $(0.26)  $0.20 
Weighted average common shares outstanding—basic and diluted   8,410    8,389    8,399    8,389 

  

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

 

 2 

 

 

PURPLE INNOVATION, INC.

 

Condensed Consolidated Statements of Equity

(In thousands)

(Unaudited)

 

   Class A   Class B   Additional       Total
Common
             
   Common Stock   Common Stock   Paid-in   Accumulated   Stockholders'   Noncontrolling   Member   Total 
   Shares   Par Value   Shares   Par Value   Capital   Deficit   Equity   Interest   Deficit   Equity 
                                  

(Revised) (1)

     
Balance - December 31, 2017      $       $   $   $   $   $   $(12,996)  $(12,996)
Net (loss) income                       (2,213)   (2,213)   (10,053)   4,324    (7,942)
Effect of the Transaction:                                                  
Proceeds and shares issued in the Transaction   9,683    1    44,071    4    (1,435)       (1,430)   18,670    8,672    25,912 
Assignment of founder shares and sponsor warrants                   4,691        4,691            4,691 
Stock-based compensation                   313        313            313 
Issuance of common stock   48                                     
Balance – June 30, 2018   9,731   $1    44,071   $4   $3,569   $(2,213)  $1,361   $8,617   $   $9,978 

  

  (1) See Note 2, “—Correction of Immaterial Misstatements in Prior Period Financial Statements”.

 

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

 

 3 

 

 

PURPLE INNOVATION, INC.

 

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   Six Months Ended
June 30,
 
   2018   2017 
Cash flows from operating activities:        
Net (loss) income  $(7,942)  $1,651 
Adjustments to reconcile net (loss) income to net cash from operating activities:          
Depreciation and amortization   1,001    242 
Non-cash interest   1,092     
Stock-based compensation   313     
Loss on disposal of property and equipment       10 
Changes in operating assets and liabilities:          
(Increase) decrease in accounts receivable   (3,056)   176 
Increase in inventories   (19,896)   (6,340)
Increase in prepaid inventory and other assets   (2,433)   (1,425)
(Decrease) increase in accounts payable   (544)   5,458 
Increase in accrued sales returns   805    2,094 
Increase in accrued compensation   207    574 
Increase (decrease) in customer prepayments   3,708    (2,892)
(Decrease) increase in other accrued liabilities   (863)   5,312 
Net cash (used in) provided by operating activities   (27,608)   4,860 
           
Cash flows from investing activities:          
Purchase of property and equipment   (6,968)   (3,985)
Investment in intangible assets   (117)    
Net cash used in investing activities   (7,085)   (3,985)
           
Cash flows from financing activities:          
Proceeds from the Transaction   25,912     
Proceeds from credit agreement   24,000     
Payments on line of credit   (8,000)    
Payments for debt issuance costs   (367)    
Principal payments on capital lease obligations   (14)    
Member distributions       (2,389)
Payments on related party notes payable       (300)
Payments on long-term obligations       (40)
Net cash provided by (used in) financing activities   41,531    (2,729)
           
Net increase (decrease) in cash   6,838    (1,854)
Cash, beginning of the period   3,593    4,013 
Cash, end of the period  $10,431   $2,159 
           
Supplemental schedule of non-cash investing and financing activities:          
Property and equipment included in accounts payable  $73   $231 
Assignment of founder shares and sponsor warrants  $4,691   $ 
Equipment acquired under build-to-suit service agreement  $1,288   $ 
Sale-leaseback of equipment under build-to-suit service agreement  $(1,288)  $ 

 

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., collectively with its subsidiary (the “Company” or “Purple”), is a comfort technology company which designs and manufactures products to improve how people sleep, sit and stand. The Company designs and manufactures a range of comfort technology products, including mattresses, pillows, cushions and other products, using its proprietary Hyper-Elastic Polymer® technology designed to improve comfort. The Company markets and sells its products through direct-to-consumer online channels, traditional wholesale partners 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”) for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination involving the Company and one or more businesses. On February 2, 2018, the Company consummated a transaction structured similar to a reverse recapitalization (the “Transaction”) pursuant to which the Company acquired a portion of the equity of Purple Innovation, LLC (“Purple LLC”). At the closing of the Transaction (the “Closing”), the Company became the sole managing member of Purple LLC, and GPAC was renamed Purple Innovation, Inc. (“Purple 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 all of the day-to-day business affairs of Purple LLC without the approval of any other member, unless specified in the amended operating agreement.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The Company consists of Purple Inc and its consolidated subsidiary Purple LLC. Pursuant to the Transaction described in Note 3—Merger Transaction, Purple Inc acquired approximately 18% of the common units of Purple LLC, while InnoHold, LLC (“InnoHold”) retained approximately 82% of the common units in Purple LLC.

 

The Transaction was structured similar to a reverse recapitalization. The historical operations of Purple LLC are deemed to be those of the Company. Thus, the financial statements included in this report reflect (i) the historical operating results of Purple LLC prior to the Transaction; (ii) the combined results of the Company following the Transaction; (iii) the assets and liabilities of Purple LLC at their historical cost; and (iv) the Company’s equity and earnings per share for all periods presented.

 

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 regarding interim financial reporting. Certain information and note disclosures normally included in the 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 financial statements and accompanying notes included in the Company’s Current Report on Form 8-K/A filed March 15, 2018. The unaudited condensed consolidated financial statements were prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all adjustments (all of which were considered of normal recurring nature) considered necessary to present fairly the Company’s financial results. The results of the three and six months ended June 30, 2018 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2018 or for any other interim period or other future year.

 

Variable Interest Entities

 

Purple LLC is a variable interest entity (“VIE”). The Company determined that it is the primary beneficiary of Purple LLC as Purple Inc is the sole managing member and has the power to direct the activities most significant to Purple LLC’s economic performance as well as the obligation to absorb losses and receive benefits that are potentially significant. At June 30, 2018, Purple Inc had approximately 18% 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. At June 30, 2018, InnoHold had approximately 82% of the economic interest in Purple LLC; however, InnoHold has disproportionally fewer voting rights, and is shown as the noncontrolling interest (“NCI”) holder of Purple LLC. For further discussion see Note 10—Stockholders’ Equity and Member Deficit, “Noncontrolling Interest.”

 

 5 

 

 

Use of Estimates

 

The preparation of the unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. The Company regularly makes significant estimates and assumptions including, but not limited to, estimates that affect the Company’s revenue recognition, accounts receivable and allowance for doubtful accounts, valuation of inventories, cost of revenues, sales returns, warranty liabilities, the recognition and measurement of loss contingencies and estimates of current and deferred income taxes, deferred income tax valuation allowances and amounts associated with the Company’s Tax Receivable Agreement with InnoHold (the “Tax Receivable Agreement”). Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. 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. Actual results could differ materially from those estimates.

  

Correction of Immaterial Misstatements in Prior Period Financial Statements

 

In connection with the preparation of the unaudited condensed consolidated financial statements for the three months ended March 31, 2018, the Company identified an error as of December 31, 2017 that caused an overstatement of previously reported net inventory. The error primarily related to a process deficiency in the physical inventory count and reconciliation process that resulted in an overstatement of certain inventory items. The correction of this error reduces net inventory and increases cost of revenues by $2.5 million as of and for the year ended December 31, 2017. This error arose in the fourth quarter of 2017 and did not impact the other quarters in 2017. 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 impact was not material to the results of operations or financial position for the year ended December 31, 2017. The Company has elected to revise the 2017 financial statements when they are subsequently issued and accordingly, the Company corrected the balance sheet as of December 31, 2017 in the current year filings. The Company will correct the statement of operations for 2017 the next time those statements are filed.

 

The impact to the balance sheet as of December 31, 2017 is as follows (in thousands):

 

   As of December 31, 2017 
   As Reported   Adjustment   As Revised 
             
Inventories, net  $15,799   $(2,454)  $13,345 
Total assets   41,038    (2,454)   38,584 
Member deficit   (10,452)   (2,454)   (12,996)
Total liabilities and equity   41,038    (2,454)   38,584 

 

Revenue Recognition

 

The Company generates revenues from the sale of its products. Revenue is recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or the service has been provided; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. Revenue is reported net of estimated sales returns and discounts and excludes sales taxes. As a part of the Company’s normal course of business, sales taxes are collected from customers. Such taxes collected are remitted, in a timely manner, to the appropriate governmental tax authority on behalf of the customer. The Company’s policy is to present revenue and costs, net of sales taxes.

 

With the exception of third-party “white glove” delivery, revenue generated from product sales is recognized when the inventory is shipped to the customer, which is when title passes to the customer. Revenue generated from sales through third-party “white glove” delivery is recognized when the inventory is delivered to the customer and any required set up and removal services are complete. 

 

The Company does not normally charge additional amounts above list price to the customer for shipping and handling. Orders with an exceptionally high shipping cost may result in an additional charge to the customer with those amounts recorded as revenue under the same policy as product revenue. Shipping costs are recorded as a component of cost of revenues.

 

Customer prepayments include cash amounts transacted with customers prior to product delivery.

 

 6 

 

 

Income Taxes

 

The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that the deferred tax assets will be realized. Deferred tax assets and liabilities are calculated by applying existing tax laws and the rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change.

 

The Company accounts for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return, which are subject to examination by federal and state taxing authorities. The tax benefit from an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination by taxing authorities based on technical merits of the position. The amount of the tax benefit recognized is the largest amount of the benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The effective tax rate and the tax basis of assets and liabilities reflect management’s estimates of the ultimate outcome of various tax uncertainties. The Company recognizes penalties and interest related to uncertain tax positions within the provision (benefit) for income taxes line in the accompanying condensed consolidated statements of operations.

 

Purple LLC, the Company’s accounting predecessor, is a limited liability company treated as a partnership for U.S. federal income tax purposes that is not subject to U.S. federal income tax.

 

Net Income (Loss) Per Share

 

The two-class method of computing net income (loss) per share is required for entities that have participating securities. The two-class method is an earnings allocation formula that determines net income (loss) per share for participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. The Company’s Class B Stock has no economic interest in the earnings of the Company, resulting in the two-class method not being applicable as of June 30, 2018 or in prior periods. Basic net income (loss) per common share is calculated by dividing net income available (loss attributable) to common shareholders by the weighted average number of shares of Class A Stock outstanding each period. Diluted net income (loss) per share adds to those shares the incremental shares that would have been outstanding assuming exchanges of the Company's outstanding Class B Stock and warrants for Class A Stock, and the vesting of unvested Class A Stock. An anti-dilutive impact is an increase in net income (loss) per share or a reduction in net loss per share resulting from the conversion, exercise or contingent issuance of certain securities.

 

The Company uses the "if-converted" method to determine the potential dilutive effect of conversions of its outstanding Class B Stock, and the treasury stock method to determine the potential dilutive effect of its outstanding warrants exercisable for shares of Class A Stock and the vesting of unvested Class A Stock.

 

Recent Accounting Pronouncements

 

New Revenue Guidance

 

In May 2014, in addition to several amendments issued during 2016, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This pronouncement updated the accounting guidance related to revenue from contracts with customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle is that a company should recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. The standard defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. These updates are effective for public companies for annual periods beginning after December 15, 2017, including interim periods therein. The Company is allowed to use the private company adoption timelines, and therefore the standard is effective for the Company for its annual period beginning January 1, 2019, and interim periods within annual periods beginning January 1, 2020. The standard shall be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is in process of evaluating the impact that the standard will have on its financial statements and related disclosures.

 

 7 

 

 

New Lease Guidance

  

In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which updated the accounting guidance related to leases to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. These updates are effective for public companies for annual periods beginning after December 15, 2018, including interim periods therein. The Company is allowed to use the private company adoption timelines, and therefore the standard is effective for the Company for its annual period beginning January 1, 2020, and interim periods within annual periods beginning January 1, 2021. The standard is to be applied utilizing a modified retrospective approach, with early adoption permitted. The Company has not yet evaluated the impact this new standard may have on its financial statements and related disclosures.

 

Other Recent Accounting Pronouncements

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations: Clarifying the Definition of a Business.” The purpose of this ASU is to clarify the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. These updates are effective for public companies for annual periods beginning after December 15, 2017, including interim periods therein. The Company is allowed to use the private company adoption timelines, and therefore the standard is effective for the Company for its annual period beginning January 1, 2019, and interim periods therein. The guidance in this standard is not expected to have a material impact on the financial statements.

 

In June 2016, the FASB issued ASU No, 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments.” These amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. These updates are effective for public companies for annual periods beginning after December 15, 2019, including interim periods therein. The Company is allowed to use the private company adoption timelines, and therefore the standard is effective for the Company for its annual period beginning January 1, 2021, and interim periods within annual periods beginning January 1, 2022, with early adoption permitted. The guidance in this standard is not expected to have a material impact on the financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting,” which updated the accounting guidance related to stock compensation. This update simplifies the accounting for employee share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. These updates are effective for public companies for annual periods beginning after December 15, 2016, including interim periods therein. The Company is allowed to use the private company adoption timelines, and therefore the standard is effective for the Company for its annual period beginning January 1, 2018, and interim periods within annual periods beginning January 1, 2019, with early adoption permitted. The guidance in this standard is not expected to have a material impact on the financial statements of the Company.

 

 8 

 

 

3. Merger Transaction

 

On February 2, 2018, upon consummation of the Transaction, Purple LLC merged with and into a wholly owned subsidiary of GPAC (PRPL Acquisition, LLC), with Purple LLC being the survivor in that merger pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), by and among GPAC, PRPL Acquisition, LLC, a Delaware limited liability company and a wholly owned subsidiary of GPAC (“Merger Sub”), Purple LLC and InnoHold. In connection with the Closing, the following occurred:

 

  - GPAC was renamed “Purple Innovation, Inc.” and the operating agreement of Purple LLC was amended so that, among other changes, the existing single class of common membership units was reclassified into two new classes of units, Class A membership units (the “Class A Units”) and Class B membership units (the “Class B Units”).
  - 9.7 million Class A Units were issued and are solely held by Purple Inc. They are voting common units entitled to share in the profits and losses of Purple LLC and receive distributions as declared by Purple LLC’s manager. The amended operating agreement appoints Purple Inc as the sole managing member of Purple LLC. As the sole managing member, Purple Inc operates and controls all of the business and affairs of Purple LLC. Accordingly, although Purple Inc has a minority economic interest in Purple LLC, Purple Inc has the sole voting interest in and control of the management and operations of Purple LLC.
  - 44.1 million Class B Units were issued and are solely held by InnoHold who has limited voting rights in Purple LLC and is entitled to share in the profits and losses of Purple LLC and to receive distributions as declared by Purple LLC’s manager. See Note 9—Commitments and Contingencies “—Indemnification Obligations” for discussion of terms related to Class B Stock and Class B Units held in an escrow account.
  - Purple Inc amended its articles of incorporation and renamed its existing common stock as Class A common stock (“Class A Stock”) and created a new class of stock named Class B common stock (“Class B Stock”) (refer to Note 10—Stockholders’ Equity and Member Deficit for a description of the Class A Stock and Class B Stock).
  - Purple Inc issued 44.1 million shares of Class B Stock to InnoHold.
  - Purple LLC obtained approximately $25.9 million in cash for working capital needs.

 

4. Inventories

 

Inventories consisted of the following (in thousands):

  

   June 30,   December 31, 
   2018   2017 
       (Revised) 
Raw materials  $17,738   $10,829 
Work-in-process   2,345    308 
Finished goods   13,773    2,450 
Inventory obsolescence reserve   (615)   (242)
Inventories, net  $33,241   $13,345 

 

5. Property and Equipment

 

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

 

   June 30,   December 31, 
   2018   2017 
Equipment  $14,028   $3,670 
Equipment in progress   4,482    8,609 
Leasehold improvements   1,542    159 
Office equipment   718    168 
Furniture and fixtures   452    469 
Equipment under capital lease   159    1,265 
Total property and equipment   21,381    14,340 
Accumulated depreciation   (1,845)   (876)
Property and equipment, net  $19,536   $13,464 

 

The Company recorded depreciation and amortization related to property and equipment of $0.5 million and $0.2 million during the three months ended June 30, 2018 and 2017. Depreciation and amortization of $1.0 million and $0.2 million were recorded during the six months ended June 30, 2018 and 2017.

 

 9 

 

 

Because the Company made $0.5 million in prepayments for construction work related to utility improvements at its Grantsville, Utah manufacturing and warehouse location, the Company was deemed the accounting owner of the improvements during construction. Accordingly, the Company recorded a build-to-suit asset and corresponding liability during the construction period. In the second quarter 2018, construction on the improvements was completed by the utility provider. The improvements qualified for sale-leaseback treatment as the Company determined the lease to be a normal leaseback, payment terms indicated the utility provider has continuing investment in the improvements and the payment terms transferred risks and rewards of ownership to the utility provider. As such, the Company removed the build-to-suit asset and liability from its condensed consolidated balance sheet as of June 30, 2018. For additional information, see Note 9—Commitments and Contingencies —Service Agreement.”

 

6. Other Accrued Liabilities

 

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

 

   June 30,   December 31, 
   2018   2017 
Current portion of warranty accrual  $861   $640 
Website commissions   790    558 
Accrued interest   514     
Accrued expenses   389    177 
Rent—related party       76 
Total other accrued liabilities  $2,554   $1,451 

 

7. Debt Obligations

 

Debt obligations consisted of the following at June 30, 2018 (in thousands):

 

   Principal
Borrowings
Outstanding
   Unamortized
Debt
Issuance
Costs
and
Discounts
   Net
Carrying
Value
   Interest
Rate
   Maturity
Date
Coliseum credit agreement  $25,719   $(5,700)  $20,019    12.0%  February 2023

 

Debt obligations consisted of the following at December 31, 2017 (in thousands):

 

   Principal
Borrowings
   Unused
Borrowing
   Interest   Maturity
   Outstanding   Capacity   Rate   Date
Wells Fargo line of credit(1)  $8,000   $2,000    4.6%  October 2019

 

(1) Revolving lines of credit are not presented net of unamortized debt issuance costs.

 

Coliseum Credit Agreement

 

On February 2, 2018, Purple LLC entered into a Credit Agreement (the “Credit Agreement”) with Coliseum Capital Partners, L.P. (“CCP”), Blackwell Partners LLC – Series A (“Blackwell”) and Coliseum Debt Fund, L.P. (together with CCP and Blackwell, the “Lenders”), pursuant to which the Lenders agreed to make a loan in an aggregate principal amount of $25.0 million. The Credit Agreement was closed and funded in connection with the Closing on February 2, 2018. As part of the Credit Agreement, the Sponsor agreed to assign to the Lenders an aggregate of 2.5 million warrants to purchase 1.3 million shares of its Class A Stock. The Credit Agreement bears interest at a fixed rate of 12.0% per annum and matures on February 2, 2023. Interest accrues and is payable on the last business day of each fiscal quarter during the term of the Credit Agreement. Any principal pre-payments in the first year are subject to a make-whole payment, while principal pre-payments in years two through four are subject to certain pre-payment penalties. In addition, Purple LLC may elect for interest in excess of 5.0% per annum to be capitalized and added to the principal amounts of the Credit Agreement. The Credit Agreement provides for certain remedies to the Lenders in the event of customary events of default. The Credit Agreement also provides for standard indemnification of the Lenders and contains representations, warranties and certain covenants. While any amounts are outstanding under the Credit Agreement, Purple LLC is subject to a number of affirmative and negative covenants, including covenants regarding dispositions of property, investments, business combinations or acquisitions, incurrence of additional indebtedness and transactions with affiliates, among other customary covenants. In particular, Purple LLC is restricted from (i) making capital expenditures in excess of $20.0 million in any fiscal year, (ii) incurring capital lease obligations in excess of $10.0 million and (iii) incurring asset-based loans in excess of $20.0 million, subject to limited exceptions. Purple LLC is also restricted from making distributions or other payments on its membership interest, subject to limited exceptions.

 

 10 

 

 

The Company paid debt issuance costs, incurred an original issuance discount and discounts related to the Founder Shares and Sponsor Warrants that were assigned in conjunction with the Credit Agreement. The amount of these reductions collectively allocated to debt at the time of the Transaction was $6.1 million.

 

Interest expense related to the Credit Agreement was $0.8 million and $1.2 million for the three and six months ended June 30, 2018. No interest expense under this agreement was incurred in 2017. Of the interest expense incurred in 2018, $0.7 million was paid-in-kind through additions to the principal amount on June 30, 2018.

 

The Credit Agreement is carried at cost. At June 30, 2018, the fair value of the Credit Agreement is $27.1 million.

 

Wells Fargo Line of Credit

 

In February 2018, the Company paid off and closed the line of credit with Wells Fargo by paying $8.1 million in cash including accrued interest and fees.

 

8. Related Party Transactions

 

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

 

Coliseum Capital Management, LLC

 

Immediately following the Closing, Adam Gray, managing partner of Coliseum Capital Management, LLC (“Coliseum”), was appointed to the Company’s board of directors. CCP, one of the lenders under the Credit Agreement is a related party of Coliseum. See Note 7—Debt Obligations.

 

Purple Founder Entities

 

TNT Holdings, LLC (“TNT”), EdiZONE, LLC (“EdiZONE”) and InnoHold (the “Purple Founder Entities”) were entities under common control with Purple LLC prior to the Transaction as TNT, EdiZONE and InnoHold are majority owned and controlled by Terry Pearce and Tony Pearce who also were the founders of Purple LLC and immediately following the Transaction were appointed to the Company’s board of directors (the “Purple Founders”).

 

On February 10, 2017, Purple LLC entered into a Shared Services Agreement with the Founder Entities, effective January 1, 2017, pursuant to which Purple LLC and the Founder Entities agreed to provide certain operational and administrative support services. Pursuant to the Shared Services Agreement, Casey McGarvey, Purple’s Chief Legal Officer, and other employees of Purple provided services to EdiZONE, LLC. Mr. McGarvey also provided similar services to InnoHold, the controlling member of Purple Inc, and to TNT. In the three and six months ended June 30, 2018 and 2017, de minimis amounts of services were performed under this agreement.

 

TNT owns the Alpine facility Purple LLC leases. Effective as of October 31, 2017, Purple LLC entered into an Amended and Restated Lease Agreement with TNT. The Company determined that TNT is not a VIE as it and Purple LLC do not hold any explicit or implicit variable interest in TNT and does not have a controlling financial interest in TNT. The Company incurred $0.3 million and $0.2 million in rent expense to TNT for the building lease of the Alpine facility in the three months ended June 30, 2018 and 2017. The Company incurred $0.6 million and $0.5 million in rent expense to TNT for the building lease of the Alpine facility in the six months ended June 30, 2018 and 2017.

 

On November 1, 2017, Purple and EdiZONE executed the Confidential Assignment and License Back Agreement, pursuant to which EdiZONE assigned substantially all of its intellectual property to Purple and Purple licensed back to EdiZONE such intellectual property for use outside the consumer comfort and cushioning field of use reserved by Purple. EdiZONE also agreed to notify Purple of any breach of a third-party license agreement relating to consumer comfort intellectual property or consumer comfort products and Purple reserved the right to enforce EdiZONE’s rights with respect to such violations, provided that Purple agreed to pay the costs of such enforcement and to indemnify EdiZONE for any losses arising therefrom. EdiZONE further agreed not to extend such third-party licenses or waive any such violations, or to settle any claim with respect thereto, without Purple’s consent. In addition, EdiZONE also agreed to not sell or transfer any of its assets or assign any intellectual property or licenses relating to certain consumer comfort products and related intellectual property without Purple’s consent. EdiZONE has agreed not to use any intellectual property in the consumer comfort or cushioning field of use, subject only to its existing third-party licenses. EdiZONE previously granted third party licenses in the consumer comfort and cushioning field of use, and the Confidential Assignment and License Back Agreement allows EdiZONE to maintain these existing license agreements. On March 14, 2018, Purple and EdiZONE further amended and restated the Confidential Assignment and License Back Agreement to correct some inconsistencies in the agreement.

 

 11 

 

 

On February 2, 2018, in connection with the Closing, the Company entered into the Exchange Agreement with InnoHold, which provides for the exchange of Class B Units and of Class B Stock issued in connection with the Transaction into shares of Class A Stock. The initial exchange ratio will be (i) one Class B Unit plus (ii) one share of Class B Stock for one share of Class A Stock, in each case subject to certain adjustments.

 

On February 2, 2018, in connection with the Closing, the Company entered into the Tax Receivable Agreement with InnoHold. Pursuant to the Tax Receivable Agreement, the Company is required to pay InnoHold 80% of the amount of savings, if any, in U.S. federal, state and local income tax that the Company actually realizes (or is deemed to realize in the case of an early termination payment by the Company, or a change of control of the Company) as a result of the increases in tax basis and certain other tax benefits related to the payment of the cash consideration pursuant to the Merger Agreement and the exchange of the Class B Units (together with an equal number of shares of Class B Stock) for Class A Stock. The Company would retain the remaining 20% of cash savings, if any, realized. All payments of tax savings to InnoHold will be the Company’s obligation, and not that of Purple LLC.

 

On February 2, 2018, in connection with the Closing, the Company entered into the Registration Rights Agreement with InnoHold and the Parent Representative. Under the Registration Rights Agreement, InnoHold holds registration rights that obligate the Company to register for resale under the Securities Act, all or any portion of the Equity Consideration (including Class A Stock issued in exchange for the Equity Consideration pursuant to the Exchange Agreement) (the “Registrable Securities”) so long as such shares are not then restricted under the Lock-Up Agreement. InnoHold is entitled to make a written demand for registration under the Securities Act of all or part of its Registrable Securities (up to a maximum of three demands in total), so long as such shares are not then restricted under the Lock-Up Agreement. Subject to certain exceptions, if any time after the Closing, the Company proposes to file a registration statement under the Securities Act with respect to its securities, under the Registration Rights Agreement, the Company shall give notice to InnoHold as to the proposed filing and offer InnoHold an opportunity to register the sale of such number of Registrable Securities as requested by InnoHold in writing. In addition, subject to certain exceptions, InnoHold is entitled under the Registration Rights Agreement to request in writing that the Company register the resale of any or all of its Registrable Securities on Form S-3 and any similar short-form registration that may be available at such time.

 

On February 2, 2018, in connection with the Closing, InnoHold and Terry Pearce and Tony Pearce, who together own a majority of InnoHold (collectively with InnoHold, the “Sellers”), entered into the Non-Competition Agreement with the Company, Purple LLC and their respective successors, affiliates and subsidiaries (referred to as the “Covered Parties”). Pursuant to the Non-Competition Agreement, for a period from the Closing until three years thereafter (or if later, until the one year anniversary of the date on which the Sellers, their affiliates or any of their respective officers, directors or employees are no longer directors, officers, managers or employees of the Company (the “Termination Date”)), each Seller and its affiliates will not, without the Company’s prior written consent, directly or indirectly engage in (or own, manage, finance or control, or become engaged or serve as an officer, director, employee, member, partner, agent, consultant, advisor or representative of), an entity that engages in the business of (i) designing and manufacturing comfort technology products worldwide to improve how people sleep, sit, and stand, including mattresses, pillows, platform bases and cushions, and (ii) marketing, licensing and selling its products worldwide through direct-to-consumer, traditional retail channels and partnerships (collectively, the “Business”) anywhere in the world, subject to certain specified exceptions for existing relationships. However, the Covered Parties and their affiliates are permitted under the Non-Competition Agreement to own passive portfolio company investments of no more than 2% in a competitor of the Covered Parties, so long as the Sellers, their affiliates and their respective shareholders, directors, officer, managers and employees who were involved with the business of the Covered Parties are not involved in the management or control of such competitor.

 

On February 2, 2018, in connection with the Closing, InnoHold entered into a lock-up agreement with the Company and the Parent Representative (“Lock-Up Agreement”) with respect to the equity securities of both the Company and Purple LLC received in the Transaction (the “Restricted Securities”). Pursuant to the Lock-Up Agreement, InnoHold agreed that it will not, from the Closing until the earliest of (x) the one year anniversary of the Closing, (y) the date on which the last sale price of the Class A Stock (or any successor publicly traded common equity security) equals or exceeds $12.00 per share (as equitably adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after the Closing or (z) the date on which the Company consummates a liquidation, merger, share exchange or other similar transaction with an unaffiliated third party that results in all of the Company’s stockholders having the right to exchange either equity holdings in the Company for cash, securities or other property: (i) lend, offer, pledge, hypothecate, encumber, donate, assign, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any of the Restricted Securities, (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any of its Restricted Securities, or (iii) publicly announce any intention to effect any transaction specified in clause (i) or (ii). However, InnoHold is allowed to transfer any of its Restricted Securities under certain limited exceptions, including to affiliates, to family members or to its equity holders, provided in each such case that the transferee thereof agrees to be bound by the restrictions set forth in the Lock-Up Agreement. InnoHold is also permitted to transfer the Restricted Securities pursuant to an underwritten public offering to which all of the parties to the Lock-Up Agreement shall have consented.

 

 12 

 

 

9. Commitments and Contingencies

 

Required Member Distributions

 

Prior to the Transaction 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 InnoHold 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 Transaction. The Second Purple LLC Agreement does not include any mandatory distributions, other than tax distributions. During the three and six months ended June 30, 2017, distributions of $2.4 million were made by Purple LLC under the First Purple LLC Agreement. No distributions have been made under the Second Purple LLC agreement in 2018.

 

Service Agreement

 

In October 2017, the Company entered into an electric service agreement with the local power company. The agreement provided for the construction and installation of certain utility improvements to provide increased power capacity to the manufacturing and warehouse facility in Tooele, Utah. The Company prepaid $0.5 million related to the improvements and agreed to a minimum contract billing amount over a 15-year period based on regulated rate schedules and changes in actual demand during the billing period. The agreement includes an early termination clause that requires the Company to pay a pro-rata termination charge if the Company terminates within the first 10-years of the service start date. The early termination charge and other key terms within the service agreement are in process of being finalized. In the second quarter 2018, the utility improvements construction was completed and were made available to the Company. As such, the Company removed the build-to-suit asset and liability in the second quarter of 2018. See Note 5—Property and Equipment.

 

Operating Leases

 

The Company leases various office and warehouse facilities under two non-cancellable operating leases. Building space for its headquarters facility in Alpine, Utah is leased from TNT, an entity that prior to the Transaction was under common control with Purple LLC. The Company also leases a facility located in Tooele, Utah for use primarily as manufacturing and warehouse space. At June 30, 2018 and December 31, 2017, deferred rent of $2.2 million and $1.9 million, respectively is included in other long-term liabilities on the accompanying balance sheets. The Company recognizes rent expense on a straight-line basis over the non-cancellable lease term. During the three months ended June 30, 2018 and 2017, the Company recognized rent expense in the amount of $0.9 million and $0.7 million. During the six months ended June 30, 2018 and 2017, the Company recognized rent expense in the amount of $1.7 million and $1.3 million.

 

Purchase Agreement

 

In February 2018, the Company entered into a purchase contract with a supplier of mineral oil that includes a minimum purchase commitment over a two-year period. In exchange, the Company is offered a discount per gallon. The Company expects to pay approximately $14.4 million over the two-year period. As of June 30, 2018, the Company expects to fulfill its commitments under the agreement in the normal course of business, and as such, no liability has been recorded.

 

Indemnification Obligations

 

From time to time, the Company enters into contracts that contingently require it to indemnify parties against claims. These contracts primarily relate to provisions in the Company’s services agreements with related parties that may require the Company to indemnify the related parties against services rendered; and certain agreements with the Company’s officers and directors under which the Company may be required to indemnify such persons for liabilities. In connection with the Closing, to secure the payment of a certain portion of specified post-closing indemnification rights of the Company under the Merger Agreement, 0.5 million shares of Class B Stock and 0.5 million Class B Units otherwise issuable to InnoHold as equity consideration have been deposited in an escrow account for up to three years from the Closing pursuant to a contingency escrow agreement.

 

Rights of Securities Holders

 

The holders of certain Warrants exercisable into Class A Stock and certain other unregistered Class A Stock were entitled to registration rights pursuant to certain registration rights agreements of the Company as of the Transaction date. In March 2018, the Company filed a registration statement registering the Warrants (and any shares of Class A Stock issuable upon the exercise of the Warrants), and certain unregistered shares of Class A Common Stock. The registration statement was declared effective on April 3, 2018.

 

 13 

 

 

Purple LLC Class B Unit Exchange Right. 

 

On February 2, 2018, in connection with the Closing, the Company entered into an exchange agreement with Purple LLC and InnoHold (the “Exchange Agreement”), which provides for the exchange of Purple LLC Class B Units (the “Class B Units”) and shares of Class B Stock (together with an equal number of Class B Units, the “Paired Securities”) for, at the Company’s option, either (A) shares of Class A Stock at an initial exchange ratio equal to one Paired Security for one share of Class A Stock or (B) a cash payment equal to the product of the average of the volume-weighted closing price of one share of Class A Stock for the ten trading days immediately prior to the date InnoHold delivers a notice of exchange multiplied by the number of Paired Securities being exchanged.

 

Holders of Class B Units may elect to exchange all or any portion of their Class B Units (together with an equal number of shares of Class B Stock) as described above by delivering a notice to Purple LLC. However, the Class B Units (together with an equal number of shares of Class B Stock) may not be exchanged during a lock-up period ending on the earliest of (x) the one year anniversary of the Closing, (y) the date on which the last sale price of the Class A Stock (or any successor publicly traded common equity security) equals or exceeds $12.00 per share (as equitably adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after the Closing or (z) the date on which the Company consummates a liquidation, merger, share exchange or other similar transaction with an unaffiliated third party that results in all of the Company’s stockholders having the right to exchange either equity holdings in the Company for cash, securities or other property. The exchange will occur automatically upon the occurrence of a change of control or sale of substantially all of the assets of the Company or Purple LLC.

 

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

 

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

 

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

 

Maintenance of One-to-One Ratios.

 

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

 

Legal Proceedings 

 

On January 9, 2018, Chris Knudsen filed a complaint against Purple LLC in the Fourth Judicial District Court of the State of Utah. Mr. Knudsen is a former consultant to Purple LLC. His contract with the company ended in March 2016. Mr. Knudsen alleges that Purple LLC orally agreed before the end of his consulting contract to appoint him as its chief executive officer beginning April 2016. Mr. Knudsen also contends that Purple LLC orally agreed to immediately issue him 4% of Purple LLC’s equity at the time of his appointment as chief executive officer. Mr. Knudsen alleges that Purple LLC breached these alleged oral agreements when it did not appoint him as chief executive officer on April 1, 2016 and did not provide any equity interests to him. Mr. Knudsen alleges that Purple LLC owes him a sum of $44 million for his purported equity stake in Purple LLC, plus interest, based on an initially announced $1.1 billion valuation. Mr. Knudsen also seeks declaratory relief that he owns the 4% equity position in Purple LLC. Purple LLC has responded to the complaint and denies that it reached an agreement with Mr. Knudsen for him to assume the role of chief executive officer, denies that it reached an agreement to provide equity to Mr. Knudsen, believes that this lawsuit is without merit and intends to vigorously contest it. The Company maintains insurance to defend against claims of this nature, which management believes is adequate to cover the cost of its defense of Mr. Knudsen’s claims.

 

 14 

 

 

Purple LLC filed a lawsuit against Honest Reviews, LLC (“HMR”), Ryan Monahan (“Mr. Monahan”) and GhostBed, Inc. (“GhostBed”) (collectively, the “Defendants”), alleging that the Defendants are working together on a competitive campaign to intentionally disseminate false and misleading statements regarding the safety of the Company’s mattresses, while at the same time failing to disclose to the public the fact that Mr. Monahan has, since 2015, provided significant digital marketing services to GhostBed, for which his company received substantial compensation. The Defendants have published a number of articles and related materials claiming, without substantiation, that the non-toxic anti-tack powder used in connection with the Company’s products can cause respiratory distress, exacerbate asthma or other respiratory conditions, and cause cancer or even death. Defendants have widely published these materials, including on the HMR website, honestmattressreviews.com, and all of associated HMR social media pages. On September 22, 2017, the United States District Court in Utah issued a preliminary injunction requiring full disclosure of the relationship between GhostBed and Monahan on the HMR website and social media, the removal of certain prior articles and other content regarding the Company, the anti-tack powder, and the lawsuit from the HMR website and social media, and requiring that any future posts by the Defendants regarding the Company or the lawsuit be accompanied by a full disclosure of the relationship between Monahan and GhostBed. On February 12, 2018, the Court sanctioned the Defendants for their untruthful and misleading statements to the Court by awarding $0.2 million in attorneys’ fees to Purple LLC and dismissing GhostBed’s counterclaims against Purple LLC. The preliminary injunction remains in effect as of this filing. Despite the Court’s favorable rulings to date, Purple LLC is unable to determine, at this stage, the possible outcome of the litigation.

 

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. 

 

10. Stockholders’ Equity and Member Deficit

 

Prior to the Transaction, GPAC was a shell company with no operations, formed as a vehicle to effect a business combination with one or more operating businesses. After the Closing, the Company became a holding company whose sole material asset consists of its interest in Purple LLC.

 

Class A Common Stock

 

The Company has 210.0 million shares of Class A Stock authorized at a par value of $0.0001 per share. Holders of the Company’s Class A Stock are entitled to one vote for each share held on all matters to be voted on by the stockholders and participate in dividends, if declared by the Board, or receive any portion of any such assets in respect of their shares upon liquidation, dissolution, distribution of assets or winding-up of the Company in excess of the par value of such stock. Holders of the Class A Stock and holders of the Class B Stock voting together as a single class, have the exclusive right to vote for the election of directors and on all other matters properly submitted to a vote of the stockholders. Holders of Class A Stock and Class B Stock are entitled to one vote per share on matters to be voted on by stockholders.

 

In connection with the Transaction, all of GPAC’s issued and outstanding shares of common stock were renamed to Class A Stock. The Company distributed approximately $90.6 million of the cash proceeds from the Company’s initial public offering to redeem approximately 9.0 million shares of Class A Stock, which shares were then cancelled by GPAC. In addition, the Sponsor agreed to forfeit an aggregate of 1.3 million of the 3.9 million shares of common stock it received at GPAC’s formation (the “Founder Shares”), which forfeited shares were then cancelled by the Company. GPAC issued an additional 4.0 million shares of Class A Stock to investors as part of a private investment in public equity (PIPE financing). At June 30, 2018, 9.7 million shares of Class A Stock were outstanding.

 

The Founder Shares are identical to the shares of Class A Stock sold in GPAC’s initial public offering, and holders of these shares have the same stockholder rights as public stockholders, except that the Founder Shares are subject to certain transfer and vesting restrictions described below.

 

The Sponsor agreed not to transfer, assign or sell, except to certain permitted transferees, including to its members or in connection with a business combination, any of its Founder Shares until the earlier of (A) one year after the completion of the Transaction, or earlier if, subsequent to the Transaction, the last sale price of Class A Stock equals or exceeds $12.00 per share (subject to adjustments for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after the Transaction or (B) the date on which the Company completes a liquidation, merger, stock exchange or other similar transaction after the Transaction that results in all of its stockholders having the right to exchange their shares of common stock for cash, securities or other property.

 

 15 

 

 

In accordance with the terms of the Transaction, the Sponsor agreed to subject 0.6 million shares of Class A Stock owned by it to vesting and forfeiture. The shares of Class A Stock subject to vesting will be forfeited eight years from the Closing, unless any of the following events (each a “Triggering Event”) occurs prior to that time:(i) the closing price of the Class A Stock on the principal exchange on which it is listed is at or above $12.50 for 20 trading days over a thirty trading day period (subject to certain adjustments), (ii) a change of control of the Company, (iii) a “going private” transaction by the Company pursuant to Rule 13e-3 under the Exchange Act or such other time as the Company ceases to be subject to the reporting obligations under Section 13 or 15(d) of the Exchange Act, or (iv) the time that the Company’s Class A Stock ceases to be listed on a national securities exchange. Such shares of Class A Stock will no longer be subject to forfeiture upon the occurrence of a Triggering event. In addition, in connection with the Coliseum Private Placement, the Sponsor assigned 1.3 million shares of Class A Stock subject to the same vesting and forfeiture conditions described above. Further, the Sponsor had distributed the remaining Founder Shares to its members during the first quarter of 2018. Such distributed Founder Shares remain subject to the vesting and forfeiture conditions described above.

 

Class B Common Stock

 

The Company has 90.0 million shares of Class B Stock authorized at a par value of $0.0001 per share. Holders of the Company’s Class B Stock will vote together as a single class with holders of the Company’s Class A Stock on all matters properly submitted to a vote of the stockholders. Shares of Class B Stock may be issued only to InnoHold, their respective successors and assigns, as well as any permitted transferees of InnoHold. A holder of Class B Stock may transfer shares of Class B Stock to any transferee (other than the Company) only if such holder also simultaneously transfers an equal number of such holder’s Purple LLC Class B units to such transferee in compliance with the LLC Agreement. Additionally, InnoHold agreed to restrictions on certain transfers of the Company’s securities which include, subject to certain exceptions, restrictions on the transfer of their common stock from the date of the Transaction until the earliest of (i) the one-year anniversary of the date of the Transaction, (ii) the date on which the last sale price of the Class A Stock equals or exceeds $12.00 per share for any 20 trading days within a 30-trading day period commencing at least 150 days after the date of the Transaction and (iii) the date on which the Company consummates a liquidation, merger share exchange or other similar transaction with an unaffiliated third party that results in all of the Company’s stockholders having the right to exchange equity holdings in the Company for cash, securities or other property. The Class B Stock is not entitled to receive dividends, if declared by the Board, or to receive any portion of any such assets in respect of their shares upon liquidation, dissolution, distribution of assets or winding-up of the Company in excess of the par value of such stock.

 

In connection with the Transaction, approximately 44.1 million shares of Series B Stock were issued to InnoHold as part of the equity consideration. At June 30, 2018, 44.1 million shares of Class B Stock were outstanding.

 

Warrants

 

There were 15.5 million public warrants (the “Public Warrants”) issued in connection with GPAC’s IPO and 12.8 million warrants (the “Sponsor Warrants”), issued pursuant to a private placement simultaneously with the IPO. Each of the Company’s warrants entitles the registered holder to purchase one-half of one share of the Company’s Class A Stock at a price of $5.75 per half share ($11.50 per full share), subject to adjustment pursuant the terms of the warrant agreement. Pursuant to the warrant agreement, a warrant holder may exercise its warrants only for a whole number of shares of the Class A Stock. For example, if a warrant holder holds one warrant to purchase one-half of a share of Class A Stock, such warrant will not be exercisable. If a warrant holder holds two warrants, such warrants will be exercisable for one share of the Class A Stock. Warrants must be exercised for a whole share.  In no event will the Company be required to net cash settle any warrant. The warrants have a five-year term which commenced on March 2, 2018, 30 days after the completion of the Transaction, and will expire on February 2, 2023, or earlier upon redemption or liquidation.

 

The Company may call the warrants for redemption if the reported last sale price of the Class A Stock equals or exceeds $24.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date the Company sends the notice of redemption to the warrant holders; provided, however, that the Sponsor Warrants are not redeemable by the Company so long as they are held by the Sponsor or its permitted transferees. In addition, with respect to the Sponsor Warrants, so long as such Sponsor Warrants are held by the Sponsor or its permitted transferee, the holder may elect to exercise the Sponsor Warrants on a cashless basis, by surrendering their Sponsor Warrants for that number of shares of Class A Stock equal to the quotient obtained by dividing (x) the product of the number of shares of Class A Stock underlying the Sponsor Warrants, multiplied by the difference between the exercise price of the Sponsor Warrants and the “fair market value” (defined below), by (y) the fair market value. The “fair market value” means the average reported last sale price of the Class A Stock for the 10 trading days ending on the third trading day prior to the date on which the notice of warrant exercise is sent to the warrant agent. All other terms, rights and obligations of the Sponsor Warrants remain the same as the Public Warrants.

 

There were 12.8 million warrants, issued simultaneously with the IPO, pursuant to a private placement. The private placement warrants expire on the earlier to occur of: (i) 5 years after the date of the Transaction, or (ii) a redemption date if the stock trades over $24.00 for 20 trading days within a 30-day trading period while being exercisable and if there is an effective registration agreement. All other terms, rights and obligations remain the same as the warrants described above.

 

 16 

 

 

From the time of GPAC’s IPO up to the Transaction with Purple LLC, GPAC had 28.3 million warrants outstanding. At June 30, 2018, 28.3 million warrants were outstanding.

 

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 June 30, 2018, there were no shares of preferred stock outstanding.

 

Noncontrolling Interest

 

NCI represents the membership interest held by holders other than the Company. On February 2, 2018, upon the close of the Transaction, and at June 30, 2018, InnoHold’s NCI percentage in Purple LLC was approximately 82%. The Company has consolidated the financial position and results of operations of Purple LLC and reflected the proportionate interest held by InnoHold as NCI.

 

11. 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 future earnings of Purple LLC not attributed to the NCI holder, InnoHold, which will continue to bear its share of income tax on its allocable future earnings of Purple LLC. The income tax burden on the earnings taxed to the NCI is not reported by the Company in its condensed consolidated financial statements under GAAP. As a result, the Company’s effective tax rate is expected to differ materially from the statutory rate.

 

As of June 30, 2018, the Company has a full valuation allowance on its net deferred tax assets. As of December 31, 2017, there were no deferred tax assets or valuation allowances at Purple LLC. In assessing the realizability of deferred tax assets, including the deferred tax assets to be recorded in connection with the Transaction and generated under the Tax Receivable Agreement described below, management determined that it was more likely than not that its net deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and consideration of tax-planning strategies. Considering these factors, a valuation allowance was recorded in the three and six months ended June 30, 2018.

 

The Company currently estimates its annual effective income tax rate to be 0%. The effective tax rate for Purple Inc differs from the federal rate of 21% primarily due to (1) a full valuation allowance, (2) NCI in Purple LLC that is allocated to InnoHold and (3) various other items such as limitations on meals and entertainment, certain stock compensation and other costs.

 

No current income tax liability is recorded as a result of the Transaction since its legal form is treated as a purchase of interests or assets in a non-taxable pass through partnership for U.S. federal income tax purposes such that the Company did not assume an existing tax obligation on the purchased assets. The Company expects that the excess of its tax basis in its investment in Purple LLC over its book carrying value in this investment will result in a deferred tax asset that may reduce certain income tax payments in the future. This deferred tax asset will encompass the basis increase in the assets of Purple LLC as a result of the Transaction and Tax Receivable Agreement as well as the Company’s share of Purple LLC’s unrecognized temporary timing differences between book and tax. The Company is still collecting the necessary information to quantify this net deferred tax asset for the outside basis difference. As noted above due to the uncertainty around the generation of future taxable income the Company will record a valuation allowance against the net deferred tax asset for this outside basis difference in the investment in Purple LLC.

 

In connection with the Transaction the Company entered into the Tax Receivable Agreement with the NCI holder, InnoHold, which provides for the payment by the Company to InnoHold of 80% of the net cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes (or is deemed to realize in certain circumstances) in periods after the Closing as a result of (i) any tax basis increases in the assets of Purple LLC resulting from the distribution to InnoHold of the cash consideration, (ii) the tax basis increases in the assets of Purple LLC resulting from the redemption by Purple LLC or the exchange by the Company, as applicable, of Class B Paired Securities or cash, as applicable, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, payments it makes under the Tax Receivable Agreement. As realization of the tax benefit related to the Transaction is not currently deemed probable, no liability under the Tax Receivable Agreement has been recognized in the accompanying condensed consolidated balance sheet.

 

 17 

 

 

In the future, if and when InnoHold exercises its right to exchange or cause Purple LLC to redeem all or a portion of its Class B Units, a liability under the Tax Receivable Agreement (a “TRA 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 TRA Liability to be recorded will depend on the price of the Company’s Class A Stock at the time of the relevant redemption or exchange. Due to the uncertainty surrounding the amount and timing of future redemptions of Class B Paired Securities by InnoHold and uncertainty about the ability of the Company to realize net cash savings, the Company does not believe it is appropriate to record a TRA Liability related to future exchanges until such time that InnoHold exercises its right to cause Class B Paired Securities to be exchanged or converted into the Company’s Class A Stock or cash and the Company believes that the associated tax benefits are more-likely-than-not to result in net cash savings.

 

The Company is treated as acquiring historical net deferred tax assets of GPAC of approximately $0.3 million in the Transaction. These deferred tax assets, including those to be recorded in connection with the Transaction, the Tax Receivable Agreement and for net operating loss carryforwards generated in 2018, are offset by a valuation allowance such that no net deferred tax assets are presently recorded on the financial statements, as the Company does not presently believe that the deferred tax assets are more likely than not realizable.

 

The effects of uncertain tax positions are recognized in the condensed consolidated financial statements if these positions meet a “more-likely-than-not” threshold. For those uncertain tax positions that are recognized in the condensed 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. As of June 30, 2018. no uncertain tax positions were recognized as liabilities in the condensed consolidated financial statements.

 

12. Net (Loss) Income Per Common Share

 

The Transaction was structured similar to a reverse recapitalization by which the Company issued stock for the net assets of Purple LLC accompanied by a recapitalization. Earnings per share has been recast for all historical periods to reflect the Company’s capital structure of all comparative periods.

 

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

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2018   2017   2018   2017 
Numerator:                
Net (loss attributable) income available to Purple Innovation, Inc.  $(785)  $3,631   $(2,213)  $1,651 
Denominator:                    
Weighted average shares—basic and diluted   8,410    8,389    8,399    8,389 
Net (loss) income per common share:                    
Basic  $(0.09)  $0.43   $(0.26)  $0.20 
Diluted  $(0.09)  $0.43   $(0.26)  $0.20 

 

For the periods presented, the Company excluded 1.3 million shares of issued common stock subject to vesting and 14.2 million shares of common stock issuable upon conversion of the Company’s warrants as the effect was anti-dilutive.

 

 18 

 

 

13. Equity Compensation Plans

 

InnoHold Incentive Units

 

The following table summarizes the total incentive unit activity granted by InnoHold and benefiting the Company for the six months ended June 30, 2018 (in thousands):

 

   Incentive 
   Units 
Incentive units outstanding as of January 1, 2018   8,617 
Cancelled   (8,617)
Granted   10 
Exercised    
Forfeited   (3)
Incentive units outstanding as of June 30, 2018   7 
      
Incentive units vested at June 30, 2018   4 

  

In January 2017 pursuant to the 2016 Equity Incentive Plan that authorized the issuance of 12.0 million incentive units, the Company granted 11.3 million incentive units to Purple Team, LLC, an entity for the benefit of certain employees, which vest over four years (with 25% vesting after the first year and monthly vesting thereafter for the following 36 months) from the later of the first of the month after their respective date of hire or January 1, 2016, whichever is later. These incentive units were non-voting and the unit holders only participate in potential liquidating distributions after a future majority sale of the Company. Incentive unit holders were only eligible to participate after the distribution threshold of approximately $135.0 million was met. The majority sale and $135.0 million threshold were considered performance conditions of the incentive units. As of December 31, 2017, the Company had not recorded any costs related to the incentive units, as the achievement of the performance conditions was not yet deemed probable.

 

In conjunction with the Closing, the incentive units were cancelled and new incentive units were issued by InnoHold under its own limited liability company agreement (the “InnoHold Agreement”), which is considered a modification for accounting purposes. Under the revised terms of the incentive units granted under the InnoHold Agreement, the holders are only eligible to participate in InnoHold’s distributions, if any, after the distribution threshold of approximately $135.0 million is met, which is considered a performance condition. Under the terms of the new incentive units, holders may participate in tax and discretionary distributions once the remaining threshold is met. As of June 30, 2018, the remaining threshold is approximately $96.2 million. As of June 30, 2018, the Company has not recorded any expenses related to the incentive units, as the achievement of the performance condition was not yet deemed probable.

 

2017 Equity Incentive Plan

 

On April 10, 2018, the Company filed a Form S-8 to register 4.1 million shares of Class A Stock authorized for issuance under the Purple Innovation, Inc. 2017 Equity Incentive Plan (the “2017 Incentive Plan”). In May 2018, immediately vested stock awards of $0.3 million were issued under the 2017 Incentive Plan to members of the Company’s board of directors for services performed. As of June 30, 2018, approximately 4.1 million shares remained available under the 2017 Incentive Plan.

 

 19 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion is intended to provide a more comprehensive review of the operating results and financial condition of Purple Innovation, Inc. than can be obtained from reading the Unaudited Condensed Consolidated Financial Statements alone. The discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and the notes thereto included in “Part I. Item 1. Financial Statements.” Unless the context otherwise requires, references to (i) “Purple,” “the Company,” “our company,” “we,” “our” and “us,” or like terms, refer to Purple Innovation, Inc. and its subsidiaries, currently Purple Innovation, LLC, (ii) “Purple Inc” refers to Purple Innovation, Inc. without its subsidiary and (iii) “Purple LLC” refers to Purple Innovation, LLC, an entity of which we act as the sole managing member and of whose common units we currently own approximately 18%. “Global Partner Acquisition Corp.” and “GPAC” refer to the Company prior to the Closing (defined below), and the “Purple Business” or “Purple before the Transaction” refers to the Purple business before it became a wholly owned subsidiary of the Company upon the Closing.

  

On February 2, 2018, we consummated a reverse recapitalization (the “Transaction”) pursuant to which we acquired a portion of the equity of Purple LLC. The Transaction was accounted for as a reverse recapitalization because the former owners of Purple LLC have control over the combined company through their 82% ownership of the common stock of the Company. Although the Company was the legal acquirer, the historical operations of Purple LLC are deemed to be those of the Company. Thus, the financial statements included in this Quarterly Report on Form 10-Q reflect (i) the historical operating results of Purple LLC prior to the Transaction; (ii) the combined results of the Company following the Transaction; (iii) the assets and liabilities of Purple LLC at their historical cost; and (iv) the Company’s equity and earnings per share for all periods (both pre- and post-Transaction) presented.

 

FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that represent our current expectations and beliefs. All statements other than statements of historical fact are "forward-looking statements" for purposes of federal and state securities laws. In some cases, you can identify these statements by forward-looking words such as "believe," "expect," "project," "anticipate," "estimate," "intend," "plan," "targets," "likely," "will," "would," "could," "may," "might," the negative of these words and other similar words.

 

All forward-looking statements included in this Quarterly Report are made only as of the date thereof. It is routine for our internal projections and expectations to change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end of the next quarter or year. Investors are cautioned not to place undue reliance on any such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.

 

We caution and advise readers that these statements are based on assumptions that may not be realized and involve risks and uncertainties that could cause actual results to differ materially from the expectations and beliefs contained herein. For a summary of these risks, see the risk factors included in the “Risk Factors” section in this Quarterly Report, in our quarterly report on Form 10-Q filed May 15, 2018, and in our Current Report on Form 8-K filed with the Securities and Exchange Commission on February 8, 2018, as amended February 14, 2018, March 15, 2018 and April 17, 2018.

 

Introductory Note

 

On February 2, 2018 (the “Closing Date”), our predecessor, Global Partner Acquisition Corp. (“GPAC”) consummated the previously announced merger transaction (the “Transaction”) pursuant to that certain Agreement and Plan of Merger (the “Merger Agreement”), by and among GPAC, PRPL Acquisition, LLC, a Delaware limited liability company and a wholly owned subsidiary of the Company (“Merger Sub”), Purple Innovation, LLC, a Delaware limited liability company (“Purple LLC”), InnoHold, LLC, (“InnoHold”) a Delaware limited liability company and the sole equity holder of Purple LLC, and Global Partner Sponsor I LLC, solely in its capacity thereunder as the representative of GPAC after the consummation of the transactions contemplated by the Merger Agreement (the “Parent Representative” or the “Sponsor”), which provided for the Company’s acquisition of Purple LLC’s business through the merger of Merger Sub with and into Purple LLC, with Purple LLC being the survivor in the Transaction.

  

 20 

 

 

In connection with the closing of the Transaction (the “Closing”), the Company changed its name from “Global Partner Acquisition Corp.” to “Purple Innovation, Inc.”

 

Overview of Our Business

 

Purple is a comfort technology company that designs and manufactures products to improve how people sleep, sit, and stand. We design and manufacture a range of comfort technology products, including mattresses, pillows, and cushions, using our patented Hyper-Elastic Polymer technology designed to improve comfort. We market and sell our products through our direct-to-consumer online channel, traditional wholesale partners and third-party online retailers.

 

Operating Results for the Three Months Ended June 30, 2018 and 2017

 

The following table sets forth for the periods indicated our results of operations and the percentage of total revenue represented in our statements of operations:

 

   Three Months Ended June 30, 
   2018   % of
Net Revenues
   2017   % of
Net Revenues
 
Revenues, net  $75,397    100.0%  $47,685    100.0%
Cost of revenues   42,358    56.2    26,512    55.6 
Gross profit   33,039    43.8    21,173    44.4 
Operating expenses:                    
Marketing and sales   30,723    40.7    14,524    30.5 
General and administrative   5,213    6.9    2,741    5.7 
Research and development   555    0.7    271    0.6 
Total operating expenses   36,491    48.4    17,536    36.8 
Operating (loss) income   (3,452)   (4.6)   3,637    7.6 
Interest expense   971    1.3         
Other (income) expense, net   (82)   (0.1)   6    0.0 
Net (loss) income   (4,341)   (5.8)   3,631    7.6 
Net loss attributable to noncontrolling interest   (3,556)   (4.7)        
Net (loss attributable) income available to Purple Innovation, Inc.  $(785)   (1.0)  $3,631    7.6 

 

Revenue

 

Total net revenue increased $27.7 million, or 58%, to $75.4 million for the three months ended June 30, 2018 from $47.7 million for the three months ended June 30, 2017 due mainly to a $29.4 million increase in mattress sales and a $0.6 million increase in sales of top of bed products. The increase in mattress sales was primarily attributable to higher direct-to-consumer demand driven by increased marketing investments. Of the $27.7 million increase in net revenue, wholesale revenue increased $7.5 million. The increases in sales of top of bed products were attributable to the increased mattress sales. These increases were partially offset by a $2.4 million decrease in sales of bases.

 

 21 

 

 

Cost of Revenues

 

The cost of revenues increased $15.8 million, or 60%, to $42.4 million for the three months ended June 30, 2018 from $26.5 million for the three months ended June 30, 2017. The increase is primarily due to a $5.2 million increase in direct materials related to the increased mattress sales and a $4.2 million increase in freight costs due to third party “white-glove” delivery. The gross profit percentage decreased to 43.8% of net revenues for second quarter 2018 from 44.4% second quarter 2017. The decrease was partially driven by higher freight costs early in the quarter associated with the new mattress models that were initially flat-packed as opposed to rolled following the February launch, combined with higher dollar sales returns, which decreased net revenues. These decreases to gross profit were partially offset by the higher product margins from the new mattress models.

 

Marketing and Sales

 

Marketing and sales expenses increased $16.2 million, or 112%, to $30.7 million for the three months ended June 30, 2018 from $14.5 million for the three months ended June 30, 2017. The increase is primarily due to a $14.6 million increase in advertising costs, a $0.7 million increase in other marketing and sales expenses and a $0.6 million increase in marketing salaries related to an increase in the workforce.

 

General and Administrative

 

General and administrative expenses increased $2.5 million, or 90%, to $5.2 million for the three months ended June 30, 2018 from $2.7 million for the three months ended June 30, 2017. The increase was primarily due to the costs to operate as a public company. Professional fees increased $0.6 million primarily driven by legal and audit fees. Salary and wage expense increased $0.8 million due to an increase in the workforce and incurred a $0.3 million charge for stock-based compensation. Software subscriptions expense increased $0.4 million as we increased systems infrastructure.

 

Research and Development

 

Research and development costs increased $0.3 million, or 105%, to $0.6 million for the three months ended June 30, 2018 from $0.3 million for the three months ended June 30, 2017. The increase is primarily due to increases in salaries and wages.

 

Operating (loss) income

 

Operating loss was $(3.5) million for the three months ended June 30, 2018, a change of $7.1 million from operating income of $3.6 million for the three months ended June 30, 2017. The change was primarily due to higher marketing spend as a percentage of net revenue in 2018.

 

Interest Expense

 

We incurred interest expense in 2018 primarily due to assumption of the Coliseum credit agreement that has an outstanding balance of $25.7 million at June 30, 2018 and accrues interest at a fixed rate of 12%. In addition, we incurred discounts and debt issuance costs related to the debt, which also amortize into interest expense as noncash interest.

 

Noncontrolling Interest

 

As a result of the Transaction in 2018, we attribute net income or loss to the Class B units in Purple LLC, owned by InnoHold, as a noncontrolling interest at its ownership percentage. At June 30, 2018, this ownership percentage was approximately 82%.

 

 22 

 

 

Operating Results for the Six Months Ended June 30, 2018 and 2017

 

The following table sets forth for the periods indicated our results of operations and the percentage of total revenue represented in our statements of operations:

 

   Six Months Ended June 30, 
   2018   % of
Net Revenues
   2017   % of
Net Revenues
 
Revenues, net  $136,377    100.0%  $77,809    100.0%
Cost of revenues   76,938    56.4    42,342    54.4 
Gross profit   59,439    43.6    35,467    45.6 
Operating expenses:                    
Marketing and sales   52,768    38.7    28,315    36.4 
General and administrative   11,975    8.8    4,953    6.4 
Research and development   1,066    0.8    548    0.7 
Total operating expenses   65,809    48.3    33,816    43.5 
Operating (loss) income   (6,370)   (4.7)   1,651    2.1 
Interest expense   1,673    1.2         
Other income, net   (101)   (0.1)        
Net (loss) income   (7,942)   (5.8)   1,651    2.1 
Net loss attributable to noncontrolling interest   (5,729)   (4.2)        
Net (loss attributable) income available to Purple Innovation, Inc.  $(2,213)   (1.6)  $1,651    2.1 

 

Revenue

 

Total net revenue increased $58.6 million, or 75.3%, to $136.4 million for the six months ended June 30, 2018 from $77.8 million for the six months ended June 30, 2017 due mainly to a $57.0 million increase in mattress sales and a $4.2 million increase in sales of top of bed products. The increase in mattress sales was primarily attributable to higher direct-to-consumer demand driven by increased marketing investments and the release of our new higher-priced mattress models, which provides a higher average selling price. The increases in sales of top of bed products were attributable to the increased mattress sales. These increases were partially offset by a $2.7 million decrease in sales of bases. Of the $58.6 million increase in net revenue, wholesale revenue increased $10.3 million. We anticipate our net revenues will continue to increase in absolute dollars over the prior year through the remainder of 2018 as we increase marketing investments and expand our wholesale channel throughout the remainder of the year. We have expanded the number of Mattress Firm stores in which we are testing, and we expect that number to increase in the third quarter of 2018. However, the expected benefit to revenues of the Mattress Firm ramp up may not continue to occur the way we anticipate in 2018.

 

Cost of Revenues

 

The cost of revenues increased $34.6 million, or 81.7%, to $76.9 million for the six months ended June 30, 2018 from $42.3 million for the six months ended June 30, 2017. The increase is primarily due to a $17.2 million increase in direct materials in line with mattress sales and inefficiencies we experienced in quality control and the manufacturing process in the first quarter. In addition, freight costs increased $7.4 million as we initially flat-packed the new mattress models to achieve our launch date. The gross profit percentage decreased to 43.6% of net revenues in the first half of 2018 from 45.6% in the first half of 2017 primarily due to these identified inefficiencies in the manufacturing process. We anticipate our gross profit percentage will increase through the remainder of 2018 as we execute on improvements in the manufacturing process and costs containment through process automation and leveraging fixed components of our manufacturing cost structure.

 

Marketing and Sales

 

Marketing and sales expenses increased $24.5 million, or 86.4%, to $52.8 million for the six months ended June 30, 2018 from $28.3 million for the six months ended June 30, 2017. The increase is primarily due to a $22.0 million increase in advertising costs, a $0.7 million increase in other marketing and sales expenses and a $1.2 million increase in marketing salaries related to an increase in the workforce.

 

 23 

 

 

General and Administrative

 

General and administrative expenses increased $7.0 million, or 142%, to $12.0 million for the six months ended June 30, 2018 from $5.0 million for the six months ended June 30, 2017. The increase was primarily due to the costs incurred with completing the Transaction and costs incurred as we operate as a public company. Professional fees increased $3.7 million, primarily driven by Transaction costs. Salary and wage expense increased $1.4 million as we increased our workforce and incurred a $0.3 million charge for stock-based compensation. Software subscriptions expense increased $0.8 million as we increased systems infrastructure. We anticipate that our general and administrative costs, excluding Transaction costs and other one-time charges, will continue to increase in absolute dollars through the remainder of 2018 as we have scaled our infrastructure to operate as a public company.

 

Research and Development

 

Research and development costs increased $0.5 million, or 94.5%, to $1.1 million for the six months ended June 30, 2018 from $0.5 million for the six months ended June 30, 2017. The increase is primarily due to increases in salaries and wages. We anticipate research and administrative costs will increase through the remainder of 2018 as we strive to produce innovative and high-quality products.

 

Operating (loss) income

 

Operating loss was $(6.4) million for the six months ended June 30, 2018, a change of $8.0 million from operating income of $1.6 million for the six months ended June 30, 2017. The change was primarily due to costs incurred to close the Transaction and inefficiencies in our manufacturing and logistics.

 

Interest Expense

 

We incurred interest expense in 2018 primarily due to assumption of the Coliseum credit agreement that has an outstanding balance of $25.7 million at June 30, 2018 and accrues interest at a fixed rate of 12%. In addition, we incurred discounts and debt issuance costs related to the debt, which also amortize into interest expense as noncash interest. We anticipate interest expense will increase slightly on a quarterly basis through the remainder of 2018.

 

Noncontrolling Interest

 

As a result of the Transaction in 2018, we attribute net income or loss to the Class B units in Purple LLC, owned by InnoHold, as a noncontrolling interest at its ownership percentage. At June 30, 2018, this ownership percentage was approximately 82%. We currently anticipate this percentage to remain consistent through the remainder of 2018.

 

Liquidity and Capital Resources

 

Our primary cash needs have historically consisted of working capital, capital expenditures, member distributions and debt service. Our working capital needs depend upon the timing of cash receipts from sales, payments to vendors and others, changes in inventories, and capital and operating lease payment obligations. We had positive working capital of $12.1 million as of June 30, 2018, and we had negative working capital of $(17.4) million as of December 31, 2017. In 2018, we increased inventory balances due to an expanded product line, growing demand for our product and stocking of new models at third-party distribution centers for “white glove” delivery service. In addition, purchases of raw materials and production were ramped up related to initial revenue forecasts for the year that have since been reduced. Our capital expenditures primarily relate to acquiring and maintaining manufacturing equipment. Our cash used for capital expenditures was $7.0 million and $4.0 million for the six months ended June 30, 2018 and 2017. We financed these capital expenditures through cash provided by operating activities and the cash received through the Transaction. We expect our capital expenditures for our facilities and equipment to be between $10.0 million and $15.0 million in 2018.  Actual amounts for capital expenditures or capital needed to fund operations could differ significantly from current expectations because of operating needs, growth needs, regulatory changes, other expenses, or other factors.

 

 24 

 

 

Debt service consists of principal and interest payments on the outstanding balance of the Credit Agreement, certain equipment loans and capital leases. On February 2, 2018, we entered into the Credit Agreement and received approximately $24.0 million in proceeds after original issue discounts. 

 

In 2017, we entered into a $10.0 million debt facility with Wells Fargo Bank and as of December 31, 2017, approximately $8.0 million had been drawn against that facility. We were in breach of terms of the agreement by failing to facilitate collateral audits in accordance with the provisions of the agreement, but we received a waiver from Wells Fargo Bank of its default rights so long as we facilitated collateral audits by January 19, 2018. We delivered the collateral audit information to Wells Fargo by that deadline. Subsequent to the repayment of the loan, we determined that it would have breached the term to meet a certain EBITDA covenant as of December 31, 2017. On February 2, 2018, in connection with the Transaction, we paid off and closed the debt facility by paying $8.1 million in cash including accrued interest and fees. There were no events of default identified at that time.

 

On February 2, 2018, we also added approximately $25.9 million in cash to our balance sheet as part of the Closing, which cash will support future growth and operations.

 

During the six months ended June 30, 2017, the $0.3 million principal plus accrued interest of the related-party notes payable to InnoHold was paid and the notes were extinguished.

 

We believe that our cash flow from operations, together with other available sources of liquidity, will be sufficient to fund anticipated operating expenses and our other anticipated liquidity needs for the next twelve months, based on our current operating conditions. If we are unable to satisfy our liquidity and capital resource requirements, we may have to scale back, postpone or discontinue our growth strategies, which could result in slower growth or no growth, and we may run the risk of losing key suppliers, we may not be able to timely satisfy customer orders, and we may not be able to retain all of our employees. In addition, we may be forced to restructure our obligations to creditors or pursue work-out options.

  

Our ability to obtain additional capital on acceptable terms or at all is subject to a variety of uncertainties. Adequate financing may not be available or, if available, may only be available on unfavorable terms. There is no assurance we will obtain the capital we require. As a result, there can be no assurance that we will be able to fund our current operations or growth strategies. In addition, future financings through equity investments are likely to be dilutive to our existing shareholders. Newly issued securities may include preferences or superior voting rights or be combined with the issuance of warrants or other derivative securities, which each may have additional dilutive effects. Furthermore, we may incur substantial costs in pursuing future capital and financing, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition. To meet the capital needs of our growing business, we may need to obtain additional financing from new investors and investors with whom we currently have arrangements. If any of the financial institutions that currently provide financing decide not to invest in the future due to general market conditions, concerns about our business or prospects or any other reason, or decide to invest at levels that are inadequate to support our anticipated needs or materially change the terms under which they are willing to provide future financing, we will need to identify new financial institutions and companies to provide financing and negotiate new financing terms. If we are unable to raise additional capital in a timely manner, our ability to meet our capital needs and fund future growth may be limited.

 

We are required to make certain payments to InnoHold under the Tax Receivable Agreement, which payments may have a material adverse effect on our liquidity and capital resources. We are currently unable to anticipate the amount of these payments due to the unpredictable nature of several factors, including when we will have taxable income, the timing of exchanges, the market price of shares of Class A Stock at the time of the exchange, the extent to which such exchanges are taxable and the amount and timing of income.

 

Credit Agreement with Coliseum

        

For additional information regarding our credit agreement with Coliseum, refer to Note 7—Debt Obligations of the condensed consolidated financial statements.

 

 25 

 

 

Cash Flows for the Six Months Ended June 30, 2018 and 2017

 

The following summarizes our cash flows for the six months ended June 30, 2018 and 2017 as reported in our condensed consolidated statements of cash flows (in thousands):

 

   Six Months Ended
June 30,
 
   2018   2017 
Net cash (used in) provided by operating activities  $(27,608)  $4,860 
Net cash used in investing activities   (7,085)   (3,985)
Net cash (used in) provided by financing activities   41,531    (2,729)
Net (decrease) increase in cash   6,838    (1,854)
Cash, beginning of the period   3,593    4,013 
Cash, end of the period  $10,431   $2,159 

 

Six months ended June 30, 2018 compared to the six months ended June 30, 2017

 

Cash used in operating activities was $27.6 million for the six months ended June 30, 2018, a change of $32.5 million from cash provided by operating activities of $4.9 million during the six months ended June 30, 2017. This increase in cash used in operations was primarily due to increased operating costs as evidenced by the change in net loss of $9.6 million to $7.9 million from net income of $1.7 million. Cash used to purchase inventories increased $13.6 million, which purchases were made due to an expanded product line, the growing demand for our product and the stocking of new models at third-party distribution centers for “white glove” delivery service. In addition, purchases of raw materials and production were ramped up related to initial revenue forecasts for the year that have since been reduced. We also paid down accounts payable balances resulting in a change of $5.1 million in 2018. The additional payments to vendors and purchases of inventory were facilitated by the infusion of cash resulting from the Transaction.

  

Cash used in investing activities was $7.1 million for the six months ended June 30, 2018, an increase of $3.1 million from cash used in investing activities of $4.0 million during the six months ended June 30, 2017. This increase in cash used in investing activities was primarily due to increased investment in property and equipment. 

 

Cash provided by financing activities was $41.5 million in the six months ended June 30, 2018, a change of $44.3 million from cash used in financing of $2.8 million during the six months ended June 30, 2017. The increase was primarily due to proceeds from the Transaction and draw down of debt under the Coliseum credit agreement. These cash inflows were partially offset by the repayment of $8.0 million in principal balance on the Wells Fargo line of credit.

 

Critical Accounting Policies

 

For changes to our critical accounting policies during the six months ended June 30, 2018, refer to Note 2—Summary of Significant Accounting Policies of our condensed consolidated financial statements.

 

Contractual Obligations

 

Apart from a minimum purchase agreement entered into in February 2018, there were no significant changes to our contractual obligations as of June 30, 2018 from those disclosed in our Current Report on Form 8-K/A filed on March 15, 2018. Under the purchase agreement, we are required to purchase a minimum amount of mineral oil over two years. In exchange, we are offered a discount per gallon. We expect to pay approximately $14.4 million over the two-year period. As of June 30, 2018, we expect to fulfill our commitments under the agreement in the normal course of business, and as such, no liability has been recorded.

 

Seasonality and Cyclicality

 

Sales of our products fluctuate with periods of greater demand corresponding to different periods of the consumer spending cycle, holidays and seasonality. Our sales may also vary with the performance of the broader economy consistent with the market. However, the true extent of these fluctuations may have been masked by our historical growth rates and thus may not be readily apparent from our historical operating results and may be difficult to predict. As such, our historical operating results may not be indicative of future performance.

 

 26 

 

 

Available Information

 

Our website address is www.purple.com. We make available free of charge on the Investor Relations portion of our website, investors.purple.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

 

We also use the Investor Relations portion of our website, investors.purple.com, as a channel of distribution of additional Company information that may be deemed material. Accordingly, investors should monitor this channel, in addition to following our press releases, Securities and Exchange Commission filings and public conference calls and webcasts. The contents of our website shall not be deemed to be incorporated herein by reference.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

In connection with the Closing, the Wells Fargo facility was repaid in full and Purple LLC entered into a $25.0 million fixed interest rate credit agreement. As such, we do not have any variable rate debt. Otherwise, there have been no material changes in our market risk since December 31, 2017. For further information on our market risk, please see “Item 2.01. Completion of Acquisition or Disposition of Assets – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures About Market Risk” in our Current Report on Form 8-K/A filed March 15, 2018.

  

We are exposed to various market risks, which include potential losses arising from adverse changes in market rates and prices, such as interest rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

  

ITEM 4. CONTROLS AND PROCEDURES

 

Prior to the completion of the Transaction, Purple LLC was a private company with accounting personnel and other supervisory resources sufficient for its reporting requirements as a private company. Upon the Closing, the sole business conducted by the Company is the business conducted by Purple LLC. As a result of the Transaction, the internal control over financial reporting utilized by Purple LLC prior to the Transaction became the internal control over financial reporting of the Company. As an emerging growth company, we are exempt from the auditor attestation requirements with respect to internal control over financial reporting under Section 404(b) of the Sarbanes Oxley Act of 2002.

 

(a) Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act”). 

 

Based on that evaluation, our CEO and our CFO concluded that our disclosure controls and procedures were not effective as of June 30, 2018 as a result of material weaknesses in our internal control over financial reporting as previously disclosed in our Current Report on Form 8-K/A filed March 15, 2018 and in the first quarter of 2018.

 

Previously Reported Material Weakness

 

In connection with the preparation of our annual financial statements for the fiscal year ended December 31, 2016, we identified material weaknesses in our internal controls over financial reporting. Specifically, approximately $0.1 million and $4.3 million of post-closing net adjustments were made to our 2016 balance sheet and statement of operations, respectively, as a result of the material weaknesses. In addition, we revised our 2017 year-end inventory balance and cost of revenues in the amount of $2.5 million due to a material weakness identified during our first quarter of 2018 inventory accounting close procedures. We continue to remediate these material weaknesses and other existing deficiencies. If our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our financial statements may contain material misstatements and we could be required to restate our financial results, which could lead to substantial additional costs for accounting and legal fees and shareholder litigation.

 

In connection with the identification of material weaknesses in our internal control over financial reporting, we are evaluating, designing and implementing controls and procedures to address these weaknesses. The measures include the hiring and contracting of additional personnel and other supervisory resources to strengthen internal control over financial reporting, specifically in the areas of technical accounting and financial reporting, information technology and income taxes supplemented by external resources as necessary. To date, certain personnel have been added in each of these specific areas and additional training of existing resources has taken place. We are enhancing risk assessment and monitoring controls to ensure that control activities are appropriately designed, implemented and operating effectively and have engaged an external accounting firm to assist with this process. A material weakness in internal control over financial reporting is a matter that may require an extended period to correct. We will continue to evaluate, design and implement policies and procedures to address these material weaknesses, including the enhancement of accounting personnel to adequately execute our accounting processes and address our internal control over financial reporting as a public company.

 

(b) Changes in Internal Controls Over Financial Reporting.

 

Other than the changes described above, there have been no changes in our internal control over financial reporting that occurred during the six months ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

 27 

 

  

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The Company is from time to time involved in various other claims, legal proceedings and complaints arising in the ordinary course of business. Please refer to Note 9—Commitments and Contingencies to the condensed consolidated financial statements contained in this report for certain information regarding our legal proceedings. In addition, the following legal proceedings have occurred following the date of our financial statements.

 

On July 6, 2018 Purple sued Antoinette Suchenko and Lisa Gathers in federal court in the district of Utah for a declaration from the court that the defendants lack standing to pursue claims against Purple under the ADA for, allegedly, not making its website accessible to the blind and that the defendants made negligent representations and committed fraud when making their claims against Purple. On July 23, 2018, the defendants sued Purple in federal court in the western district of Pennsylvania alleging that Purple violated the ADA by not making its website accessible to the blind. The Company denies that it has violated any ADA regulation or statute. No answer has been filed in either case. The Company maintains insurance to defend against claims of this nature, which management believes is adequate to cover the cost of its defense of Antoinette Suchenko’s and Lisa Gathers’ claims against Purple.

 

On July 2, 2018, the Company sued Layla Sleep, Inc. for trade dress and patent infringement in federal court in the district of Utah. No answer has yet been filed by Layla Sleep, Inc. In the absence of a settlement, the Company intends to vigorously prosecute its claims. The Company is unaware of any actual or potential counterclaims that may be asserted.

 

ITEM 1A. RISK FACTORS

 

Except as described below, there have been no material changes from the risk factors previously disclosed in our Current Report on Form 8-K filed with the Securities and Exchange Commission on February 8, 2018, as amended February 14, 2018, March 15, 2018 and April 17, 2018, and our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 2018.

 

Our success is highly dependent on our ability to provide timely delivery to our customers, and any disruption in our delivery capabilities or our related planning and control processes may adversely affect our operating results.

 

An important part of our success is due to our ability to deliver our products to our customers in a timely manner. This in turn is due to our successful planning and distribution infrastructure, including ordering, transportation and receipt processing, the ability of our suppliers to meet our distribution requirements and the ability of our contractors to meet our delivery requirements. Our ability to maintain this success depends on the continued identification and implementation of improvements to our planning processes, distribution infrastructure and supply chain. We also need to ensure that our distribution infrastructure and supply chain keep pace with our anticipated growth and increased product output. The cost of these enhanced processes could be significant and any failure to maintain, grow or improve them could adversely affect our operating results.

 

We rely on FedEx and other carriers to deliver our products to customers on a timely, convenient, and cost-effective basis. We also rely on the systems of such carriers to provide us with accurate information about the status and delivery of our products. Any significant delay in deliveries to our customers could lead to increased returns and cause us to lose sales. Any increase in freight charges could increase our costs of doing business and harm our sales, profitability, cash flows and financial condition. Lack of accurate information from such carriers could damage our brand and our relationship with our customers.

 

Our business could also be adversely affected if there are delays in product shipments to us due to freight difficulties, delays in product shipments clearing U.S. Customs for reasons of non-compliance or otherwise, challenges with our suppliers or contractors involving strikes or other difficulties at their principal transport providers or otherwise. Such delays could adversely affect our profitability and reputation.

 

 28 

 

 

We recently have experienced during the rollout of our new mattress lines through our direct-to-consumer sales channel delays in the timely delivery of our new mattress products. These delays have caused customer dissatisfaction with their experience with the Company and, in some cases, customers have cancelled their orders or returned their mattresses. We are working to rectify these delays with both internal operating and customer service controls and assistance offered to our third-party delivery providers. We are also seeking to qualify other delivery providers who can meet our standards. If we are unable to improve the timely delivery of our new mattress models, our business could continue to be adversely affected.

 

Regulatory requirements, including, but not limited to, trade, customs, environmental, health and safety requirements, may require costly expenditures and expose us to liability.

 

Our products and our marketing and advertising programs are subject to regulation in the U.S. by various federal, state and local regulatory authorities, including the Federal Trade Commission and U.S. Customs and Border Protection. In addition, our operations are subject to federal, state and local consumer protection regulations and other laws relating specifically to the bedding industry. These rules and regulations may change from time to time or may conflict. There may be continuing costs of regulatory compliance including continuous testing, additional quality control processes and appropriate auditing of design and process compliance. For example, the CPSC and other jurisdictions have adopted rules relating to fire retardancy standards for the mattress industry. Some states and the U.S. Congress continue to consider fire retardancy regulations that may be different from or more stringent than the current standard. Additionally, California, Rhode Island and Connecticut have all enacted laws requiring the recycling of mattresses discarded in their states. State and local bedding industry regulations vary among the states in which we operate but generally impose requirements as to the proper labeling of bedding merchandise, restrictions regarding the identification of merchandise as “new” or otherwise, controls as to hygiene and other aspects of product handling, disposal, sales, resales and penalties for violations. We or our suppliers may be required to incur significant expense to the extent that these regulations change and require new and different compliance measures. For example, new legislation aimed at improving the fire retardancy of mattresses, regulating the handling of mattresses in connection with preventing or controlling the spread of bed bugs could be passed, or requiring the recycling of discarded mattresses, could result in product recalls or in a significant increase in the cost of operating our business. In addition, failure to comply with these various regulations may result in penalties, the inability to conduct business as previously conducted or at all, or adverse publicity, among other things. Adoption of multi-layered regulatory regimes, particularly if they conflict with each other, could increase our costs, alter our manufacturing processes and impair the performance of our products which may have an adverse effect on our business. We are also subject to various health and environmental provisions, such as California Proposition 65 (the Safe Drinking Water and Toxic Enforcement Act of 1986) and 16 CFR Part 1633 (Standard for the Flammability (Open Flame) of Mattress Sets).

 

Our marketing and advertising practices could also become the subject of proceedings before regulatory authorities or the subject of civil claims by competitors and other parties, which could result in civil litigation or regulatory penalties and require us to alter or end these practices or adopt new practices that are not as effective or are more expensive.

 

In addition, we are subject to federal, state and local laws and regulations relating to pollution, environmental protection and occupational health and safety. We may not be in complete compliance with all such requirements at all times, and we have been required in the past to make changes to our facilities in order to comply with these requirements. We have made and will continue to make capital and other expenditures to comply with environmental and health and safety requirements. If a release of harmful or hazardous substances occurs on or from our properties or any associated offsite disposal location, or if contamination from prior activities is discovered at any of our properties, we may be held liable and the amount of such liability could be material. As a manufacturer of mattresses, pillows, cushions and related products, we use and dispose of a number of substances, such as glue, oil, solvents and other petroleum products, as well as certain foam ingredients, that may subject us to regulation under numerous foreign, federal and state laws and regulations governing the environment. Among other laws and regulations, we are subject in the U.S. to the Federal Water Pollution Control Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Resource Conservation and Recovery Act, the Clean Air Act and related state and local statutes and regulations.

 

We are also subject to federal laws and regulations relating to international shipments, customs, and import controls. We may not be in complete compliance with all such requirements at all times, and if we are not in compliance with such requirements may be subject to penalties or fines, which could have an adverse impact on our financial condition and results of operations.

 

Our operations could also be impacted by a number of pending legislative and regulatory proposals to address greenhouse gas emissions in the U.S. and other countries. Certain countries have adopted the Kyoto Protocol. New greenhouse gas reduction targets have been established under the Kyoto Protocol, as amended. This and other initiatives under consideration could affect our operations. These actions could increase costs associated with our manufacturing operations, including costs for raw materials, pollution control equipment and transportation. Because it is uncertain what laws will be enacted, we cannot predict the potential impact of such laws on our future consolidated financial condition, results of operations, or cash flows.

 

We are also subject to regulations and laws specifically governing the Internet, e-commerce, electronic devices, and other services. These regulations and laws may cover taxation, privacy, data protection, pricing, content, copyrights, distribution, mobile communications, electronic device certification, electronic waste, energy consumption, electronic contracts and other communications, competition, consumer protection, trade and protectionist measures, web services, the provision of online payment services, information reporting requirements, unencumbered Internet access to our services or access to our facilities, the design and operation of websites and the characteristics and quality of products and services. It is not clear how existing laws governing issues such as property ownership, libel, and personal privacy apply to the Internet, e-commerce, digital content, and web services. Unfavorable regulations and laws could diminish the demand for, or availability of, our products and services and increase our cost of doing business.

 

 29 

 

 

Nasdaq may delist our securities from trading on its exchange, which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.

 

Our securities are currently listed on Nasdaq. However, we cannot assure you that our securities will continue to be listed on Nasdaq in the future. In order to continue listing our securities on Nasdaq, we must maintain certain financial, distribution and stock price levels. Generally, we must maintain a minimum amount in stockholders’ equity and a minimum number of holders of our securities. Additionally, in connection with the Transaction, we are required to demonstrate compliance with Nasdaq’s initial listing requirements, which are more rigorous than Nasdaq’s continued listing requirements, in order to continue to maintain the listing of our securities on Nasdaq. We cannot assure you that we will be able to meet those initial listing requirements or obtain all the necessary approvals.

 

On March 29, 2018, we received written notice from the Nasdaq staff stating that the staff has determined that we have not demonstrated that we meet the minimum 400 round lot holder requirement for initial listing of our Warrants set forth in Nasdaq Listing Rule 5515(a)(4) following the completion of the Transaction on February 2, 2018.

 

The notice provided that unless we request an appeal of the staff’s determination to a Nasdaq Hearings Panel (the “Panel”), the Warrants will be scheduled for delisting from Nasdaq and will be suspended at the opening of business on April 9, 2018, after which Nasdaq will remove the Warrants from listing and registration on Nasdaq.

 

We appealed the staff’s determination by submitting a timely request for a hearing, and on May 10, 2018 we presented at the hearing our request for an extension of time to come into compliance with the round lot holder requirement with respect to the Warrants. The request for a hearing stayed any suspension of trading in the Warrants on Nasdaq pending the issuance of the Panel’s decision following the hearing and the expiration of any extension granted by the panel. On May 17, 2018, the Company received a letter from the Panel informing the Company that the Panel granted the Company’s request to continue its listing of its warrants on the Nasdaq Stock Market, subject to certain conditions. First, on or before June 15, 2018, the Company was required to provide the Panel an update on the number of warrant holders. And if the Company did not at that time have 400 round lot holders, the Company must continue to provide updates to the Panel on the 15th of each month thereafter. The Company provided the required updates on or before June 15 and July 15, 2018 indicating that the Company did not yet have 400 round lot holders. Second, on or before September 15, 2018, the Company must demonstrate that it has a minimum of 400 round lot warrant holders. If the Company fails to demonstrate compliance by that date, the Panel will issue a final delist determination and the Company will be suspended from trading on Nasdaq.

 

The shares of our Class A Stock will continue to trade on Nasdaq regardless of the panel’s decision on the continued listing of the Warrants following the hearing.

 

If Nasdaq delists our securities from trading on its exchange and we are not able to list our securities on another national securities exchange, we expect our securities could be quoted on an over-the-counter market. If this were to occur, we could face significant material adverse consequences, including:

 

  a limited availability of market quotations for our securities;

 

  reduced liquidity for our securities;

 

  a determination that our Common Stock is a “penny stock” which will require brokers trading in our Common Stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities;

 

  a limited amount of news and analyst coverage; and

 

  a decreased ability to issue additional securities or obtain additional financing in the future.

 

The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” If our Class A Stock and Warrants continue to be listed on Nasdaq, our Class A Stock and Warrants will be covered securities. Although the states are preempted from regulating the sale of our securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case.

 

Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results.

 

Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business are complex and involve many subjective assumptions, estimates and judgments by our management, including but not limited to revenue recognition, estimating valuation allowances and accrued liabilities (including allowances for returns, credit card chargebacks, doubtful accounts), valuation of inventory, internal-use software and website development (acquired and developed internally), accounting for income taxes, valuation of intangible assets, equity-based compensation and loss contingencies. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance, and could have a material adverse effect on our business.

 

The Company’s financial statements were audited in connection with the Transaction. As a result of this audit and in anticipation of becoming a public company, the Company made many changes to its accounting policies. The Company may determine in the future that these new policies are not effective or appropriate for the Company. Moreover, the Company may determine that the assumptions it has relied on in preparing its financial statements are not appropriate. These determinations could lead to significant changes in the accounting policies of and assumptions used by the Company in the future, which could negatively impact your investment.

 

 30 

 

 

Our business could suffer if we are unsuccessful in making, integrating, and maintaining commercial agreements, strategic alliances, and other business relationships.

 

To successfully operate our business, we rely on commercial agreements and strategic relationships with suppliers, service providers and certain wholesale partners and customers. These arrangements can be complex and require substantial infrastructure capacity, personnel, and other resource commitments. Further, our business partners may have disruptions in their businesses, file for bankruptcy or choose to no longer do business with us. We may not be able to implement, maintain, or develop the components of these commercial relationships. Moreover, we may not be able to enter into additional commercial relationships and strategic alliances on favorable terms or at all.

 

As our agreements terminate or relationships unwind, we may be unable to renew or replace these agreements on comparable terms, or at all. We may in the future enter into amendments on less favorable terms or encounter parties that have difficulty meeting their contractual obligations to us, which could adversely affect our operating results.

 

Our present and future services agreements, other commercial agreements, and strategic relationships create additional risks such as:

 

  disruption of our ongoing business, including loss of management focus on existing businesses;

 

  impairment of other relationships;

 

  variability in revenue and income from entering into, amending, or terminating such agreements or relationships; and

 

  difficulty integrating under the commercial agreements.

 

We have entered into a memorandum of understanding with Mattress Firm, Inc. concerning a potential vendor agreement, pursuant to which Mattress Firm, Inc. is permitted to sell certain of our products in its retail stores. We are currently conducting a trial phase with Mattress Firm, Inc. to assess the viability of a such an arrangement. There can be no guarantee that we will enter into a vendor agreement with Mattress Firm, Inc. Even if we do enter into such agreement, the relationship may not be profitable to us or may impose additional costs that we would not otherwise incur under our current operations. Further, establishing and maintaining this relationship may require the commitment of significant amounts of time, financial resources and management attention, and it may result in prohibitions on certain sales channels through exclusivity requirements, which may adversely affect other aspects of our business.

 

 31 

 

 

We depend on a few key employees, and if we lose the services of certain of our principal executive officers, we may not be able to run our business effectively.

 

Our future success depends in part on our ability to attract and retain key executive, merchandising, marketing, sales, finance, operations and engineering personnel. If any of our executive officers cease to be employed by us, we would have to hire additional qualified personnel. Our ability to successfully attract and hire other experienced and qualified executive officers cannot be assured and may be difficult because we face competition for these professionals from our competitors, our suppliers and other companies operating in our industry.

 

Further, the involvement of Tony and Terry Pearce has been crucial to the success of our company because of their extensive experience with and technical knowledge of our products. Pursuant to the employment agreements that have been entered into with them in connection with the consummation of the Transaction, they are not required to work a particular number of hours for us or to be based at any particular location. The loss or reduction of their services could adversely affect our operations and our ability to achieve our business objectives. The continued growth of our business depends upon their continued involvement.  

 

We could be subject to additional sales tax or other indirect tax liabilities.

 

The application of indirect taxes (such as sales and use tax, value-added tax (VAT), goods and services tax, business tax and gross receipt tax) to e-commerce businesses and to our users is a complex and evolving issue and we may be unable to timely or accurately determine our obligations with respect to such indirect taxes, if any, in various jurisdictions. Many of the fundamental statutes and regulations that impose these taxes were established before the adoption and growth of the Internet and e-commerce. In many cases, it is not clear how existing statutes apply to the Internet or e-commerce.

 

An increasing number of states and foreign jurisdictions have considered or adopted laws or administrative practices, with or without notice, that impose additional obligations on remote sellers and online marketplaces to collect transaction taxes such as sales, consumption, value added, or similar taxes. We may not have sufficient lead time to build systems and processes to collect these taxes. Failure to comply with such laws or administrative practices, or a successful assertion by such states or foreign jurisdictions requiring us to collect taxes where we do not, could result in substantial tax liabilities, including for past sales, as well as penalties and interest. In conjunction with our expanded mattress product offering in 2018 delivered via third-party “white glove” service, we determined that we are subject to sales tax as imposed by the jurisdictions in the contiguous 48 U.S. states and have begun collecting and remitting such sales tax (in addition to those jurisdictions in which we had already begun collecting and remitting sales tax). If the tax authorities in jurisdictions where we are already subject to sales tax or other indirect tax obligations were successfully to challenge our positions, our tax liability could increase substantially. In the U.S., Supreme Court decisions restrict states’ rights to require remote sellers to collect state and local sales taxes, although some states currently are seeking to have the Supreme Court revisit these decisions. Notwithstanding these issues, we have begun collecting sales tax in all lower forty-eight states that have sales taxes.

 

We may be subject to laws, regulations, and administrative practices that require us to collect information from our customers, vendors, merchants, and other third parties for tax reporting purposes and report such information to various government agencies. The scope of such requirements continues to expand, requiring us to develop and implement new compliance systems. Failure to comply with such laws and regulations could result in significant penalties.

 

Several proposals have been made at the U.S. state and local levels that would impose additional taxes on the sale of goods and services over the Internet. These proposals, if adopted, could substantially impair the growth of e-commerce and our brands, and could diminish our opportunity to derive financial benefit from our activities. While the U.S. federal government’s moratorium on state and local taxation of Internet access or multiple or discriminatory taxes on e-commerce has been temporarily extended, this moratorium does not prohibit federal, state or local authorities from collecting taxes on our income or from collecting certain taxes that were in effect prior to the enactment of the moratorium and one of its extensions.

 

 

ITEM 5. OTHER INFORMATION

 

Amendment to the Merger Agreement

 

On June 14, 2018, we entered into Amendment No. 3 (the “Amendment”) to the Merger Agreement. The Amendment extends the deadline by which the Parent Representative is required to provide a closing statement to InnoHold, setting forth (a) a consolidated balance sheet of GPAC as of the Closing and (b) a good faith calculation of the combined GPAC’s indebtedness, cash and cash equivalents and expenses related to the Transaction as of the Closing, and the resulting calculation of the consideration due to InnoHold.

 

The foregoing description of the Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of the Amendment, a copy of which is attached as Exhibit 2.1 hereto, and is incorporated herein by reference. For the full text and a detailed discussion of the Merger Agreement, see the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on November 3, 2017.

  

 32 

 

 

ITEM 6. EXHIBITS

 

Number   Description
2.1   Amendment No. 3 to Agreement and Plan of Merger, dated June 14, 2018, by and among Purple Innovation, Inc., Purple Innovation, LLC, Global Partner Sponsor I LLC and InnoHold, LLC.*
     
31.1   Certification by Terry V. Pearce, Chief Executive Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
     
31.2   Certification by Mark A. Watkins, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
     
32.1   Certification by Terry V. Pearce, Chief Executive Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
     
32.2   Certification by Mark A. Watkins, Chief Financial Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

101.INS XBRL Instance Document
   
101.SCH XBRL Taxonomy Extension Schema Document
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

  * Filed herewith.

 

 33 

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

      PURPLE INNOVATION, INC.
         
Date: August 9, 2018   By: /s/ Terry V. Pearce
        Terry V. Pearce
        Chief Executive Officer
        (Principal Executive Officer)
         
Date: August 9, 2018   By: /s/ Mark A. Watkins
        Mark A. Watkins
        Chief Financial Officer
        (Principal Financial and Accounting Officer)

  

 34 

 

 

(Back To Top)

Section 2: EX-2.1 (AMENDMENT NO. 3 TO AGREEMENT AND PLAN OF MERGER, DATED JUNE 14, 2018, BY AND AMONG PURPLE INNOVATION, INC., PURPLE INNOVATION, LLC, GLOBAL PARTNER SPONSOR I LLC AND INNOHOLD, LLC.)

Exhibit 2.1

 

THIRD AMENDMENT TO MERGER AGREEMENT

 

This Third Amendment to Merger Agreement (this “Amendment”), effective as of June 14, 2018, is entered into by and among Purple Innovation, Inc., a Delaware corporation (“Purple”), Purple Innovation, LLC, a Delaware limited liability company (“Purple LLC”), InnoHold, LLC, a Delaware limited liability company (“InnoHold”) and Global Partner Sponsor I LLC, a Delaware limited liability company, in the capacity as the representative of Global Partner Acquisition Corp., the predecessor to Purple (the “Parent Representative”). Purple, Purple LLC, InnoHold and Parent Representative are hereinafter sometimes individually referred to as a “Party” and collectively, as the “Parties.”

 

WITNESSETH:

 

A.The Parties, or their respective predecessors, are each signatories to that certain Agreement and Plan of Merger dated November 2, 2018 (as amended by the First Amendment dated January 8, 2018 and the Second Amendment, effective May 1, 2018, the “Merger Agreement”); and

 

B.The Parties desire to amend the Merger Agreement as provided for herein, with the effect that the Merger shall be subject to terms and subject to the conditions set forth in the Merger Agreement and this Amendment and otherwise in accordance with Delaware law.

 

NOW, THEREFORE, in consideration of the premises set forth above, which are incorporated in this Amendment as if fully set forth below, and the representations, warranties, covenants and agreements contained in the Merger Agreement, and intending to be legally bound hereby, and in accordance with Section 9.3 of the Merger Agreement, the Parties hereby agree to amend the Merger Agreement as follows:

 

1. Unless otherwise expressly defined herein, all capitalized terms used in this Amendment shall have the same meaning as they are defined in the Merger Agreement.

 

2. The first sentence of paragraph (a) of Section 1.14 of the Merger Agreement is hereby amended to read in its entirety as follows:

 

“Within sixty (60) days after the filing of Parent’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, the Parent Representative shall deliver to InnoHold a statement (the “Closing Statement”) setting forth (a) a consolidated balance sheet of the Company as of the Reference Time (the “Closing Balance Sheet”) and (b) a good faith calculation of the Indebtedness, cash and cash equivalents, and Total Expenses, in each case, with respect to the Company as of the Reference Time, and the resulting Merger Consideration and Cash Consideration.”

 

3. Except as expressly provided in this Amendment, all of the terms and provisions in the Merger Agreement and the Related Agreements are and shall remain in full force and effect, on the terms and subject to the conditions set forth therein. This Amendment does not constitute, directly or by implication, an amendment, modification or waiver of any provision of the Merger Agreement or any Related Agreement, or any other right, remedy, power or privilege of any party to the Merger Agreement, except as expressly set forth herein. Any reference to the Merger Agreement in the Merger Agreement or any other agreement, document, instrument or certificate entered into or issued in connection therewith shall hereinafter mean the Merger Agreement, as amended or modified, or the provisions thereof waived, by this Amendment (or as the Merger Agreement may be further amended or modified after the date hereof in accordance with the terms thereof). The Merger Agreement, as amended and modified by this Amendment, and the documents or instruments attached hereto or referenced herein, constitutes the entire agreement between the parties with respect to the subject matter of the Merger Agreement, as amended by this Amendment, and supersedes all prior agreements and understandings, both oral and written, between the parties with respect to its subject matter. The provisions of Article X of the Merger Agreement are hereby incorporated herein by reference and apply to this Amendment as if all references to the “Agreement” contained therein were instead references to this Amendment.

 

[Signature Page Follows]

 

 

 

IN WITNESS WHEREOF, each Party hereto has caused this Amendment to be signed and delivered by its respective duly authorized officer as of the date first above written.

 

 

PURPLE INNOVATION, INC.

     
  By: /s/ Terry V. Pearce
    Name: Terry Pearce
    Title: Chief Executive Officer
     
 

PURPLE INNOVATION, LLC

     
  By: /s/ Terry V. Pearce
    Name: Terry Pearce
    Title: Chief Executive Officer
     
 

GLOBAL PARTNER SPONSOR I LLC,
solely in its capacity as the Parent Representative

 

  By: /s/ Paul Zepf
    Name: Paul Zepf
    Title: Manager

 

 

INNOHOLD, LLC

 

  By: /s/ Terry V. Pearce
    Name: Terry Pierce
    Title: Manager

 

 

{Signature Page to Third Amendment to Merger Agreement}

 

 

(Back To Top)

Section 3: EX-31.1 (CERTIFICATION)

EXHIBIT 31.1

 

CERTIFICATIONS

 

I, Terry V. Pearce, certify that:

 

1.I have reviewed this quarterly report on Form 10-Q of Purple Innovation, Inc.;

 

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: August 9, 2018 /s/ Terry V. Pearce
  Terry V. Pearce, Chief Executive Officer
  (Principal Executive Officer)

 

(Back To Top)

Section 4: EX-31.2 (CERTIFICATION)

EXHIBIT 31.2

 

CERTIFICATIONS

 

I, Mark A. Watkins, certify that:

 

1.I have reviewed this quarterly report on Form 10-Q of Purple Innovation, Inc.;

 

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: August 9, 2018 /s/ Mark A. Watkins
 

Mark A. Watkins, Chief Financial Officer

(Principal Financial and Accounting Officer)

 

(Back To Top)

Section 5: EX-32.1 (CERTIFICATION)

EXHIBIT 32.1

 

CERTIFICATION

 

In connection with the Quarterly Report on Form 10-Q of Purple Innovation, Inc. (the “Corporation”) for the quarter ended June 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Terry V. Pearce, Chief Executive Officer of the Corporation, hereby certifies, pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

 

Dated: August 9, 2018 /s/ Terry V. Pearce
 

Terry V. Pearce, Chief Executive Officer

(Principal Executive Officer)

 

(Back To Top)

Section 6: EX-32.2 (CERTIFICATION)

EXHIBIT 32.2

 

CERTIFICATION

 

In connection with the Quarterly Report on Form 10-Q of Purple Innovation, Inc. (the “Corporation”) for the quarter ended June 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Mark A. Watkins, Chief Financial Officer of the Corporation, hereby certifies, pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

 

Dated: August 9, 2018 /s/ Mark A. Watkins
 

Mark A. Watkins, Chief Financial Officer

(Principal Financial and Accounting Officer)

 

(Back To Top)