Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is
intended to provide a more comprehensive review of the operating results and financial condition of Purple Innovation, Inc. than can be
obtained from reading the Unaudited Condensed Consolidated Financial Statements alone. The discussion should be read in conjunction with
the Unaudited Condensed Consolidated Financial Statements and the notes thereto included in “Part I. Item 1. Financial Statements.”
FORWARD-LOOKING STATEMENTS
This quarterly report on Form
10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that represent our current expectations and beliefs.
All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state
securities laws. In some cases, you can identify these statements by forward-looking words such as “believe,” “expect,”
“project,” “anticipate,” “estimate,” “intend,” “plan,” “targets,”
“likely,” “will,” “would,” “could,” “may,” “might,” the negative
of these words and other similar words.
All forward-looking statements
included in this Quarterly Report are made only as of the date thereof. It is routine for our internal projections and expectations to
change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end
of the next quarter or year. In addition, any statements that refer to projections of our future financial performance, our anticipated
growth and trends in our businesses (including the discussion under the heading “Outlook for Growth”), and other characterizations
of future events or circumstances are forward-looking statements.
We caution and advise readers
that these statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including
those included in the “Risk Factors” section of this Quarterly Report and in our Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 1, 2022. Therefore, actual results may differ materially and adversely from those expressed
in any forward-looking statements and investors are cautioned not to place undue reliance on any such statements. We undertake no obligation
to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except
as required by law.
Overview of Our Business
Our mission is to improve
the lives of our consumers by delivering innovative better sleep solutions.
We are a digitally-native
vertical brand founded on comfort product innovation with premium offerings. We design and manufacture a variety of innovative, branded
and premium comfort products, including mattresses, pillows, cushions, frames, sheets, and other products. Our products are the result
of over 30 years of innovation and investment in proprietary and patented comfort technologies and the development of our own manufacturing
processes. Our proprietary gel technology, Hyper-Elastic Polymer, underpins many of our comfort products and provides a range of benefits
that differentiate our offerings from other competitors’ products. We market and sell our products directly to consumers through
our e-commerce and Purple retail showroom channels and through our retail brick-and-mortar wholesale partner channel.
Organization
Our business consists of Purple
Inc. and its consolidated subsidiary, Purple LLC. Purple Inc. was incorporated in Delaware on May 19, 2015 as a special purpose acquisition
company under the name of GPAC. On February 2, 2018, Purple Inc. consummated a transaction structured similar to a reverse recapitalization
pursuant to which Purple Inc. acquired an equity interest in Purple LLC and became its sole managing member. As the sole managing member
of Purple LLC, Purple Inc., through its officers and directors, is responsible for all operational and administrative decision making
and control of the day-to-day business affairs of Purple LLC without the approval of any other member. At June 30, 2022, Purple Inc. had
a 99.5% economic interest in Purple LLC while other Class B Unit holders had the remaining 0.5%
29
Executive Summary – Results of Operations
Net revenues decreased 21.1% to $144.1 million
and 22.1% to $287.3 million for the three and six months ended June 30, 2022, respectively, when compared to the corresponding periods
in the prior year. These decreases were primarily due to softening demand for home related products, inflationary pressures on consumer
discretionary spending, management’s decision to reduce advertising spending, and the prior year pull forward of demand driven by
the effects of COVID and economic stimulus experienced in the first half of 2021.
Gross profit decreased 40.2% to $48.8 million and 40.6% to $100.4 million
for the three and six months ended June 30, 2022, respectively, when compared to the corresponding periods in the prior year. These decreases
reflected the impact of lower sales and channel mix combined with unfavorable cost absorption and elevated levels of materials, labor
and overhead costs, partially offset by benefits realized from our workforce restructuring.
Operating expenses decreased 27.7% to $60.9 million
and 15.5% to $130.9 million for the three and six months ended June 30, 2022, respectively, when compared to the corresponding periods
in the prior year. These decreases primarily reflected the impact of management’s decisions to reduce advertising spend, execute
two workforce reductions and implement other cost saving measures.
Net loss was $8.3 million
and $21.8 million for the three and six months ended June 30, 2022, respectively, compared to net income of $2.6 million and $23.4 million
for the three and six months ended June 30, 2021, respectively.
Recent Developments in Our Business
Equity Financing
In March 2022, the Company
completed an underwritten public offering of 16.1 million shares of Class A common stock, which included the additional 2.1
million shares of the over-allotment option that the underwriters exercised in full. The aggregate net proceeds received by the Company
from the offering, after deducting offering expenses of $0.3 million, totaled $92.9 million.
Debt Financing
On September 3, 2020, Purple
LLC entered into the 2020 Credit Agreement that provided for a $45.0 million term loan and a $55.0 million revolving line of credit. In
November 2021, the Company executed a $55.0 million draw on its revolving line of credit, which represented the full amount available
under the line. On March 31, 2022, the Company used a portion of the net proceeds from its underwritten public offering, described above,
to repay in full the $55.0 million of principal outstanding on the revolving line of credit.
The Company’s operating
and financial results for the year ended December 31, 2021 did not satisfy the financial and performance covenants required under
the 2020 Credit Agreement. On February 28, 2022, prior to the covenant compliance certification date, the Company entered into the first
amendment of the 2020 Credit Agreement to avoid a breach of these covenants and potential default. This amendment contained a covenant
waiver period such that the net leverage ratio and fixed charge coverage ratio would not be tested for the fiscal quarters ended December 31,
2021, March 31, 2022 and June 30, 2022. Other modifications in the amendment included revised leverage ratio and fixed charge coverage
definitions and thresholds, the addition of minimum liquidity requirements with mandatory prepayments of the revolving loan if cash exceeded
$25.0 million, new weekly and monthly reporting requirements, limits on the amount of capital expenditures, the addition of a lease
incurrence test for opening additional showrooms, additional negative covenants during a covenant amendment period that extends into 2023
until certain conditions are met, and the interest rate was changed from LIBOR plus 3.00% to SOFR plus 4.75%. Pursuant to this amendment,
the Company made a $2.5 million payment on the term loan to cover the four quarterly principal payments due in 2022 and incurred fees
and expenses of $0.8 million that were recorded as debt issuance costs in the condensed consolidated balance sheet.
On
March 23, 2022, the Company entered into a second amendment to the 2020 Credit Agreement. This amendment modified the 2020 Credit
Agreement to allow CCM and its investment affiliates to acquire 35% or more of the combined voting power of all equity interests of the
Company entitled to vote for the election of members of the Company’s board of directors without constituting an event of default.
CCM is considered a related party of the Company in that Adam Gray, a member of our board of directors, serves as a managing partner of
CCM. Pursuant to this amendment, the Company incurred fees and expenses of $0.4 million that were recorded as debt issuance costs
in the condensed consolidated balance sheet.
30
Operational Developments
The COVID-19 pandemic has
impacted many aspects of our operations, directly and indirectly, including disruption of our employees, consumer behavior, distribution
and logistics, our suppliers, and the market overall. The scope and nature of these impacts continue to evolve. Because of the COVID-19
pandemic, we took precautionary measures recommended by the appropriate national and state health agencies to manage our resources and
mitigate the adverse impact of the pandemic, which was intended to help minimize the risk to our Company, employees, customers, and the
communities in which we operate. Soon after the pandemic began, we also experienced an increase in demand in our e-commerce channel, and
in 2020 and 2021 the Company increased its production capacity to match actual and anticipated demand growth. In 2022, after two years
of the pandemic, we are experiencing a pull-back in growth that left us with excess operational capacity in facilities, equipment, and
personnel. Beginning in the first quarter of 2022 and continuing into the second quarter, we have rebalanced production and fulfillment
operations in our different facilities, reduced employee headcount and taken other actions to lower costs.
We are closely monitoring
the impacts of COVID-19 and general economic conditions on global supply chain, manufacturing, and logistics operations. As inflationary
pressures increase, we anticipate that our production and operating costs will similarly increase. In addition, COVID-19 and other events,
including port closures or labor shortages, have resulted in the continuation or worsening of manufacturing and shipping costs, delays
and constraints. While most of our domestic suppliers have been able to continue operations and provide necessary materials when needed,
we have experienced some constraints from certain suppliers, with respect to both the availability and cost of materials. In addition,
as experienced in other industries, in order to remain competitive in hiring and retaining the labor necessary to maintain our production
levels, we have increased wages and other compensation. These increases in materials, labor and freight costs have resulted in higher
cost of goods sold and lower margins. We believe that materials, labor and freight costs will continue to remain at elevated levels or
increase further in the foreseeable future.
In the fourth quarter of 2021
and continuing into 2022, our gross margins and results of operations have been, and we expect will continue to be adversely affected
by elevated levels of materials, labor and freight costs and lower-than-expected demand levels. In early 2022, to offset the impact of
higher costs on our gross margins, we increased prices and initiated several other projects to improve efficiencies and reduce costs.
Also, we have continued to invest in showroom expansion and growing wholesale partner door count and productivity in response to a return
to more normalized consumption patterns where consumer demand has shifted away from e-commerce and back to brick and mortar buying. We ended the second quarter with 40 showrooms after opening 6 net new
locations during the quarter and we plan to add 14 more showrooms over the remainder of the year. In addition, at
the end of the second quarter, our products are being sold through approximately 3,200 wholesale doors, having added approximately 700
net new doors during the first six months of 2022. Improving the sales productivity of our wholesale doors remains a primary
focus and a critical component of our strategy to combat shifting demand patterns. After several years of hyper growth and increased investments
to support current and future expansion, we are now building the framework for strong operational maturity and accountability after focusing
on right-sizing our operations, improving our execution, and refining our strategies to drive profitable growth in the current market
environment. We have also intentionally reduced our advertising spending in 2022 to improve marketing efficiency and stabilize profitability
in a challenging macroeconomic environment.
Outlook for Growth
To support our plans for future growth, we are
focusing on the following opportunities:
●
Develop and execute on strategies to meaningfully expand our wholesale presence.
●
Build premium brand position to grow market share of the premium mattress category.
●
Refine and enhance marketing strategies to reach a broader audience, increase customer engagement and reduce dependency on price promotions as a means of driving sales.
●
Strengthen research and development disciplines and go-to-market processes to further develop our current product categories and position our business to eventually expand to adjacent categories.
●
Manage production labor and capacity utilization to promote efficient use of our manufacturing facilities as we grow into our production footprint.
●
Manage input costs, operating efficiencies, and pricing to offset gross margin erosion and exit the year with gross margins close to 40%.
There is no guarantee that
we will be able to effectively execute on these opportunities, which are subject to risks, uncertainties, and assumptions that are difficult
to predict, including the risks described under “Risk Factors” and elsewhere herein. Therefore, actual results may differ
materially and adversely from those described above. In addition, we may, in the future, adapt these focuses in response to changes in
the market or our business.
31
Operating Results for the Three Months Ended June 30, 2022 and 2021
The following table sets forth
for the periods indicated, our results of operations and the percentage of total revenue represented in our condensed consolidated statements
of operations:
Three Months Ended June 30,
2022
% of
Net
Revenues
2021
% of
Net
Revenues
Revenues, net
$ 144,109
100.0 %
$ 182,586
100.0 %
Cost of revenues
95,297
66.1
100,899
55.3
Gross profit
48,812
33.9
81,687
44.7
Operating expenses:
Marketing and sales
40,373
28.0
59,844
32.8
General and administrative
18,779
13.0
22,461
12.3
Research and development
1,748
1.2
1,923
1.1
Total operating expenses
60,900
42.3
84,228
46.1
Operating income (loss)
(12,088 )
(8.4 )
(2,541 )
(1.4 )
Other income (expense):
Interest expense
(707 )
(0.5 )
(569 )
(0.3 )
Other income (expense), net
(136 )
(0.1 )
26
—
Change in fair value – warrant liabilities
346
0.2
4,860
2.7
Tax receivable agreement expense
—
—
(381 )
(0.2 )
Total other income (expense), net
(497 )
(0.3 )
3,936
2.2
Net income (loss) before income taxes
(12,585 )
(8.7 )
1,395
0.8
Income tax benefit
4,175
2.9
1,167
0.6
Net income (loss)
(8,410 )
(5.8 )
2,562
1.4
Net loss attributable to noncontrolling interest
(70 )
—
(16 )
—
Net income (loss) attributable to Purple Innovation, Inc.
$ (8,340 )
(5.8 )
$ 2,578
1.4
Revenues, Net
Net revenues decreased $38.5
million, or 21.1%, to $144.1 million for the three months ended June 30, 2022 compared to $182.6 million for the three months ended June
30, 2021. The decline in net revenues reflected a $32.3 million decrease in mattress sales, a $2.7 million decrease in other sleep product
sales and a $3.5 million decrease in other product sales. The decrease in net revenues for all three product types was primarily due to
softening demand for home related products, inflationary pressures on consumer discretionary spending, management’s decision to
reduce advertising spend, and the prior year pull forward of demand driven by the effects of COVID and economic stimulus in the first
half of 2021. The decline in net revenues from a sales channel perspective consisted of DTC net revenues decreasing $34.6 million, or
29.8% and wholesale net revenues decreasing $3.9 million, or 5.9%. In addition to the factors discussed above, the decrease in DTC net
revenues was impacted by a return to more normalized consumption patterns after two years of COVID-driven demand coupled with customers
shifting back to brick and mortar buying. The decrease in wholesale net revenues reflected reduced purchases by our existing wholesale
partners, offset in part by the impact of adding approximately 700 net new wholesale partner doors during the first six months of 2022.
Cost of Revenues
Cost of revenues decreased $5.6 million, or 5.6%, to $95.3 million
for the three months ended June 30, 2022 compared to $100.9 million for the three months ended June 30, 2021. This decrease was primarily
due to the corresponding decrease in sales volume, offset in part by increases in materials, freight and overhead costs. Our gross profit
percentage, which decreased to 33.9% of net revenues in the second quarter of 2022 from 44.7% in the second quarter of 2021, was adversely
impacted by lower sales with an increased proportion of wholesale channel revenue which carries a lower average selling price than sales
from our DTC channel and unfavorable cost absorption from lower than planned production volumes in prior months. Additionally, our gross
profit percentage reflects the impact of elevated levels of materials, labor and overhead costs, partially offset by benefits realized
from our workforce restructuring.
32
Marketing and Sales
Marketing and sales expense
decreased $19.5 million, or 32.5%, to $40.4 million for the three months ended June 30, 2022 compared to $59.8 million for the three months
ended June 30, 2021. This decrease reflected a $24.1 million decline in advertising spending and a $2.7 million decrease in other marketing
costs due in part to workforce reductions. The intentional reduction in advertising spending was due to management’s efforts to
improve marketing efficiency and stabilize profitability in a challenging macroeconomic environment. These decreases were offset in part
by a $2.0 million increase in wholesale-related marketing and sales costs as we continue to focus on improving the sales productivity
of our wholesale doors and a $5.3 million increase in marketing and sales costs associated with our continued showroom expansion. Marketing
and sales expense as a percentage of net revenues was 28.0% in the second quarter of 2022 compared to 32.8% in the second quarter of 2021.
This decrease was primarily due to the reduction we made in advertising spending.
General and Administrative
General and administrative expense decreased $3.7 million, or 16.4%,
to $18.8 million for the three months ended June 30, 2022 compared to $22.5 million for the three months ended June 30, 2021. This decrease
was primarily due to a $5.3 million decrease in legal and professional fees, offset in part by a $1.4 million increase in payroll
costs related to planned increases in general and administrative personnel over the past twelve months and a $0.2 million increase
in other expenses. The decrease in legal and professional fees was primarily due to $7.9 million of underwriting commissions and other
related costs we paid in the prior year second quarter for shares sold by Coliseum Capital Partners. This decrease was partially offset
by a one-time $3.1 million separation fee incurred by the Company during the second quarter of 2022 for not continuing with the services
of a professional services provider.
Research and Development
Research and development costs
decreased $0.2 million, or 9.1%, to $1.7 million for the three months ended June 30, 2022 from $1.9 million for the three months ended
June 30, 2021. This decrease was primarily due to lower professional services costs as product development priorities were being refocused.
This decrease was offset in part by an increase in payroll costs related to planned increases in our research and development workforce
including the addition of a chief innovation officer.
Operating Income (Loss)
Operating loss increased $9.5
million to $12.1 million for the three months ended June 30, 2022 compared to $2.5 million for the three months ended June 30, 2021. This
increase was primarily due to the decrease in gross profit, offset in part by lower operating expenses.
Interest Expense
Interest expense totaled $0.7
million for the three months ended June 30, 2022 compared to $0.6 million for the three months ended June 30, 2021. The $0.1 million increase
was primarily due to the term loan interest rate increasing from 3.50% during the second quarter of 2021 to 6.07% during the second quarter
of 2022. In February 2022, the Company entered into the first amendment to the 2020 Credit Agreement which, among other things, changed
the reference interest rate from LIBOR to SOFR and increased the applicable margins. The impact of this increase was offset in part by
$0.2 million of interest capitalized during the second quarter of 2022. There was no interest capitalized during the three months ended
June 30, 2021.
Change in Fair Value – Warrant Liabilities
The 1.9 million sponsor warrants
outstanding at both June 30, 2022 and 2021 had fair values of $0.1 million and $14.5 million, respectively. The decrease in fair value
was primarily due to the Company’s Class A stock price, one of the primary assumptions used to re-measure the warrant liability,
declining from $26.41 at June 30, 2021 to $3.06 at June 30, 2022. During the three months ended June 30, 2022 and 2021, we recognized
gains of $0.3 million and $4.9 million, respectively, in our condensed consolidated statements of operations related to decreases in the
fair value of the warrants outstanding at the end of the respective periods.
Income Tax (Expense) Benefit
We had an income tax benefit
of $4.2 million for the three months ended June 30, 2022 compared to an income tax benefit of $1.2 million for the three months ended
June 30, 2021. The income tax benefit in the second quarter of 2022 was primarily the result of the Company having a net loss before income
taxes of $12.6 million.
Noncontrolling Interest
The Company calculates net
income or loss attributable to noncontrolling interests on a quarterly basis using their weighted average ownership percentage. Net loss
attributed to noncontrolling interests was $0.1 million in the second quarter of 2022 while net loss attributed to noncontrolling interests
was negligible for the three months ended June 30, 2021.
33
Operating Results for the Six Months Ended
June 30, 2022 and 2021
The following table sets forth
for the periods indicated, our results of operations and the percentage of total revenue represented in our statements of operations:
Six Months Ended June 30,
2022
% of
Net
Revenues
2021
% of
Net
Revenues
Revenues, net
$ 287,288
100.0 %
$ 369,015
100.0 %
Cost of revenues
186,850
65.0
199,804
54.1
Gross profit
100,438
35.0
169,211
45.9
Operating expenses:
Marketing and sales
90,332
31.4
114,212
31.0
General and administrative
36,667
12.8
36,987
10.0
Research and development
3,891
1.4
3,646
1.0
Total operating expenses
130,890
45.6
154,845
42.0
Operating income (loss)
(30,452 )
(10.6 )
14,366
3.9
Other income (expense):
Interest expense
(1,730 )
(0.6 )
(1,139 )
(0.3 )
Other expense, net
(119 )
—
(42 )
—
Change in fair value – warrant liabilities
4,274
1.5
14,007
3.8
Tax receivable agreement expense
—
—
(207 )
(0.1 )
Total other income, net
2,425
0.8
12,619
3.4
Net income (loss) before income taxes
(28,027 )
(9.8 )
26,985
7.3
Income tax benefit (expense)
5,986
2.1
(3,484 )
(0.9 )
Net income (loss)
(22,041 )
(7.7 )
23,501
6.4
Net income (loss) attributable to noncontrolling interest
(199 )
(0.1 )
99
—
Net income (loss) attributable to Purple Innovation, Inc.
$ (21,842 )
(7.6 )
$ 23,402
6.3
Revenues, Net
Net revenues decreased $81.7
million, or 22.1%, to $287.3 million for the six months ended June 30, 2022 compared to $369.0 million for the six months ended June 30,
2021. The decline in net revenues reflected a $69.8 million decrease in mattress sales, an $8.0 million decrease in other sleep product
sales and a $3.9 million decrease in other product sales. The decrease in net revenues for all three product types was primarily due to
softening demand for home related products, inflationary pressures on consumer discretionary spending, management’s decision to
reduce advertising spend, and the prior year pull forward of demand driven by the effects of COVID and economic stimulus in the first
half of 2021. The decline in net revenues from a sales channel perspective consisted of DTC net revenues decreasing $74.0 million, or
30.7% and wholesale net revenues decreasing $7.8 million, or 6.1%. In addition to the factors discussed above, the decrease in DTC net
revenues was impacted by a return to more normalized consumption patterns after two years of COVID-driven demand coupled with customers
shifting back to brick and mortar buying. The decrease in wholesale net revenues reflected reduced purchases by our existing wholesale
partners during the first six months of 2022, offset in part by the impact of adding approximately 700 net new wholesale partner doors
during the same time frame.
Cost of Revenues
Cost of revenues decreased $13.0 million, or 6.5%, to $186.9 million
for the six months ended June 30, 2022 compared to $199.9 million for the six months ended June 30, 2021. This decrease was primarily
due to the corresponding decrease in sales volume, offset in part by an increase in materials, freight overhead costs. Our gross profit
percentage, which decreased to 35.0% of net revenues during the first six months of 2022 from 45.9% for the first six months of 2021,
was adversely impacted by lower sales with an increased proportion of wholesale channel revenue which carries a lower average selling
price than sales from our DTC channel and unfavorable cost absorption from lower than planned production volumes in prior months. Additionally,
our gross profit percentage reflects the impact of elevated levels of materials, labor and overhead costs, partially offset by benefits
realized from our workforce restructuring.
34
Marketing and Sales
Marketing and sales expense
decreased $23.9 million, or 20.9%, to $90.3 million for the six months ended June 30, 2022 compared to $114.2 million for the six months
ended June 30, 2021. This decrease reflected a $39.7 million decline in advertising spending and a $1.3 million decrease in other marketing
costs due in part to workforce reductions. The intentional reduction in advertising spending was due to management’s efforts to
improve marketing efficiency and stabilize profitability in a challenging macroeconomic environment. These decreases were offset in part
by a $7.0 million increase in wholesale-related marketing and sales costs as we continue to focus on improving the sales productivity
of our wholesale doors and a $10.1 million increase in marketing and sales costs associated with our continued showroom expansion. Marketing
and sales expense as a percentage of net revenues was 31.4% during the first six months of 2022 compared to 31.0% for the first six months
of 2021.
General and Administrative
General and administrative expense decreased to $36.7 million for the
six months ended June 30, 2022 compared to $37.0 million for the six months ended June 30, 2021. This decrease was primarily due to a
$4.6 million decrease in legal and professional fees, offset in part by a $3.6 million increase in payroll costs related to
planned increases in general and administrative personnel over the past twelve months and a $0.7 million increase in other expenses.
The decrease in legal and professional fees was primarily due to $7.9 million of underwriting commissions and other costs we paid in the
prior year second quarter for shares sold by Coliseum Capital Partners. This decrease was partially offset by a one-time $3.1 million
separation fee incurred by the Company during the second quarter of 2022 for not continuing with the services of a professional services provider.
Research and Development
Research and development costs
increased $0.2 million, or 6.7%, to $3.9 million for the six months ended June 30, 2022 from $3.6 million for the six months ended June
30, 2021. This increase was primarily due to an increase in payroll costs related to planned increases in our research and development
workforce including the addition of a chief innovation officer, offset in part by a decrease in professional services costs as product
development priorities were being refocused.
Operating Income (Loss)
Operating income decreased
$44.8 million to an operating loss of $30.5 million for the six months ended June 30, 2022 compared to operating income of $14.4 million
for the six months ended June 30, 2021. This decrease was primarily due to the decrease in gross profit, offset in part by lower operating
expenses.
Interest Expense
Interest expense totaled $1.7
million for the six months ended June 30, 2022 compared to $1.1 million for the six months ended June 30, 2021. The $0.6 million increase
was primarily due to interest expense of $0.6 million incurred on the $55.0 million revolving line of credit that was drawn down by the
Company in November 2021 and repaid in full on March 31, 2022. The increase was also impacted by the term loan average interest rate increasing
from 3.50% during the first six months of 2021 to 5.10% during the first six months of 2022. In February 2022, the Company entered into
the first amendment to the 2020 Credit Agreement which, among other things, changed the reference interest rate from LIBOR to SOFR and
increased the applicable margins. The impact of these increases was offset in part by $0.4 million of interest capitalized during the
first six months of 2022. There was no interest capitalized during the six months ended June 30, 2021.
35
Change in Fair Value – Warrant Liabilities
The 1.9 million sponsor warrants
outstanding at both June 30, 2022 and 2021 had fair values of $0.1 million and $14.5 million, respectively. The decrease in fair value
was primarily due to the Company’s Class A stock price, one of the primary assumptions used to re-measure the warrant liability,
declining from $26.41 at June 30, 2021 to $3.06 at June 30, 2022. During the six months ended June 30, 2022 and 2021, we recognized gains
of $4.3 million and $14.0 million, respectively, in our condensed consolidated statements of operations related to decreases in the fair
value of the warrants outstanding at the end of the respective periods.
Income Tax (Expense) Benefit
We had an income tax benefit
of $6.0 million for the six months ended June 30, 2022 compared to income tax expense of $3.5 million for the six months ended June 30,
2021. The income tax benefit in the first six months of 2022 was primarily the result of the Company having a net loss before income taxes
of $28.0 million.
Noncontrolling Interest
The Company calculates net income or loss attributable
to noncontrolling interests on a quarterly basis using their weighted average ownership percentage. Net loss attributed to noncontrolling
interests was $0.2 million for the six months ended June 30, 2022 compared to net income of $0.1 million for the six months ended June
30, 2021.
Liquidity and Capital Resources
Our
principal sources of funds are cash flows from operations and cash and cash equivalents on hand, supplemented with borrowings made pursuant
to our credit facilities and proceeds received from offerings of our equity capital. Principal uses of funds consist of payments of principal
and interest on our debt facilities, capital expenditures and working capital needs as well as other contractual obligations described
below. Our working capital needs depend largely upon the timing of cash receipts from product sales, payments to vendors and others,
changes in inventories, and operating lease payment obligations. Our cash and working capital positions were $41.2 million and $80.1 million,
respectively, as of June 30, 2022 compared to $91.6 million and $87.5 million, respectively, as of December 31, 2021. Cash used for capital
expenditures decreased from $26.4 million in the first six months of 2021 to $26.1 million during the first six months of 2022. Our capital
expenditures in the first six months of 2022 primarily consisted of leasehold improvements and furniture and fixtures associated with
the opening of new Purple retail showrooms.
In
the event our cash flow from operations or other sources of financing are less than anticipated, we believe we will be able to fund operating
expenses and comply with debt covenants based on our ability to scale back operations, reduce marketing spend, use the liquidity we have
available under our revolving line of credit and postpone or discontinue our growth strategies. Our 2020 Credit Agreement, as amended,
includes various covenants and obligations that may make it difficult to obtain additional capital on terms that are favorable to us and
to execute on our growth strategies. In addition, in order to continue satisfying the conditions of the debt agreement we may be required
to scale back operations, reduce marketing spend, prepay debt and postpone or discontinue our growth strategies. We may also be forced
to restructure our obligations to current creditors, pursue work-out options or seek additional funding sources including new debt or
equity capital .
Based on our current projections, we believe our cash on hand, amounts
available under our revolving line of credit, and expected cash to be generated from e-commerce, wholesale, and Purple retail store channels will
be sufficient to meet our working capital requirements, comply with debt covenants and cover anticipated capital expenditures for the
next 12 months and beyond.
36
Underwritten Offering
In March 2022, the Company
completed an underwritten public offering of 16.1 million shares of Class A common stock, which included the additional 2.1
million shares of the over-allotment option that the underwriters exercised in full. The aggregate net proceeds received by the Company
from the offering, after deducting offering expenses of $0.3 million, totaled $92.9 million.
Debt
On September 3, 2020, Purple
LLC entered into the 2020 Credit Agreement that provided for a $45.0 million term loan and a $55.0 million revolving line of credit. The
term loan is being repaid in accordance with a five-year amortization schedule and may be prepaid in whole or in part at any time without
premium or penalty, subject to reimbursement of certain costs. The revolving credit facility has a term of five years and carries the
same interest provisions as the term debt. A commitment fee is due quarterly based on the applicable margin applied to the unused total
revolving commitment. In November 2021, the Company executed a $55.0 million draw on its revolving line of credit, which represented the
full amount available under the line. On March 31, 2022, the Company used a portion of the net proceeds from the offering to repay in
full the $55.0 million of principal outstanding on the revolving line of credit.
The Company’s operating
and financial results for the year ended December 31, 2021 did not satisfy the financial and performance covenants required under
the 2020 Credit Agreement. On February 28, 2022, prior to the covenant compliance certification date, the Company entered into the first
amendment of the 2020 Credit Agreement to avoid a breach of these covenants and potential default. This amendment contained a covenant
waiver period such that the net leverage ratio and fixed charge coverage ratio would not be tested for the fiscal quarters ended December 31,
2021, March 31, 2022 and June 30, 2022. Other modifications in the amendment included revised leverage ratio and fixed charge coverage
definitions and thresholds, the addition of minimum liquidity requirements with mandatory prepayments of the revolving loan if cash exceeded
$25.0 million, new weekly and monthly reporting requirements, limits on the amount of capital expenditures, the addition of a lease
incurrence test for opening additional showrooms, and additional negative covenants during a covenant amendment period that extends into
2023 until certain conditions are met. In addition, the interest rate on any outstanding borrowings under the 2020 Credit Agreement was
changed from LIBOR with a floor of 0.5% plus an applicable margin (historically at 3.0%) to an initial rate of SOFR with a floor of 0.5%
plus 4.75%, for a total rate of 5.25% if the applicable liquidity threshold is met. If the Company does not meet this threshold, the interest
rate would increase to SOFR with a floor of 0.5% plus 9.00%. Once the Company achieves a consolidated leverage ratio that is below 3.00
to 1.00, the interest rate will be based on SOFR with a floor of 0.5% plus a 3.00% to 3.75% margin depending on the consolidated leverage
ratio. The interest rate on the term loan was 6.07% as of June 30, 2022.
Pursuant to the first amendment of the 2020 Credit Agreement, the Company
incurred fees and expenses of $0.9 million that were recorded as debt issuance costs in the condensed consolidated balance sheet and made
a $2.5 million payment on the term loan to cover the four quarterly principal payments due in 2022. The Company accounted for this amendment
as a modification of existing debt in accordance with ASC 470 – Debt .
On
March 23, 2022, the Company entered into a second amendment to the 2020 Credit Agreement. This amendment modified the 2020 Credit
Agreement to allow CCM and its investment affiliates to acquire 35% or more of the combined voting power of all equity interests of the
Company entitled to vote for the election of members of the Company’s board of directors without constituting an event of default.
CCM is considered a related party of the Company in that Adam Gray, a member of our board of directors, serves as a managing partner of
CCM.
Pursuant to the second amendment
of the 2020 Credit Agreement, the Company incurred fees and expenses of $0.4 million that were recorded as debt issuance costs in the
condensed consolidated balance sheet. The Company accounted for this amendment as a modification of existing debt in accordance with ASC
470 – Debt .
Tax Receivable Agreement
We are required to make certain
payments to InnoHold under a tax receivable agreement, which may have a material adverse effect on our liquidity and capital resources.
We are currently unable to determine the total future amount of these payments due to the unpredictable nature of several factors, including
the timing of future exchanges, the market price of shares of Class A common stock at the time of the exchanges, the extent to which such
exchanges are taxable and the amount and timing of future taxable income sufficient to utilize tax attributes that give rise to the payments
under the agreement. As of June 30, 2022 and December 31, 2021, the tax receivable agreement liability reflected in the Company’s
consolidated balance sheet was $162.2 million and $168.1 million, respectively. This decrease was due to a $5.8 million payment that was
made during the first quarter of 2022.
Other Contractual Obligations
In addition to the material
contractual obligations discussed above, other material contractual obligations primarily include operating lease payments obligations.
See Note 8 of the condensed consolidated financial statements for additional information.
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Cash Flows for the Six Months Ended June 30,
2022 Compared to the Six Months Ended June 30, 2021
The following summarizes our
cash flows for the six months ended June 30, 2022 and 2021 as reported in our condensed consolidated statements of cash flows (in
thousands):
Six Months Ended
June 30,
2022
2021
Net cash provided by (used in) operating activities
$ (52,804 )
$ 11,469
Net cash used in investing activities
(26,055 )
(26,447 )
Net cash provided by financing activities
28,412
2,104
Net decrease in cash
(50,447 )
(12,874 )
Cash, beginning of the period
91,616
122,955
Cash, end of the period
$ 41,169
$ 110,081
Cash used in operating activities
of $52.8 million for the six months ended June 30, 2022 primarily resulted from a $22.0 million net loss combined with a $30.1 million
decrease in operating cash flow related to net changes of operating assets and liabilities. These decreases related mostly to a $6.1 million
increase in accounts receivable and a $37.0 million decrease in accounts payable, offset in part by a $13.8 million decrease in inventories.
The increase in accounts receivable was primarily due to the timing of wholesale partner payments. The decline in accounts payable was
mainly due to the balance at prior year-end being higher than normal because of payment timing coupled with the impact of larger advertising
spend in the fourth quarter of 2021. The decrease in inventory was primarily due to management’s efforts to rebalance production
and fulfillment operations during the first half of 2022.
Cash used in investing activities
reflected capital expenditures of $26.1 million during the six months ended June 30, 2022 compared to $26.4 million for the six months
ended June 30, 2021. Capital expenditures during the first six months of 2022 primarily consisted of investments in leasehold improvements
and furniture and fixtures related to the opening of new Purple retail showrooms.
Cash provided by financing
activities was $28.4 million during the six months ended June 30, 2022 compared to $2.1 million during the six months ended June 30, 2021.
Financing activities during the first six months of 2022 included $92.9 million of net proceeds received from the underwritten stock offering,
offset in part by a $55.0 million revolving line of credit payment, a $5.8 million payment on the tax receivable agreement, and $3.8 million
in other debt related payments.
Critical Accounting Policies
We
discuss our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and
Results of Operations in our 2021 Annual Report on Form 10-K filed March 1, 2022. There were no significant changes in our critical
accounting policies since the end of fiscal 2021.
Available Information
Our website address is www.purple.com.
We make available free of charge on the Investor Relations portion of our website, investors.purple.com, our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or
furnish it to, the SEC.
We also use the Investor Relations
portion of our website, investors.purple.com, as a channel of distribution of additional Company information that may be deemed material.
Accordingly, investors should monitor this channel, in addition to following our press releases, SEC filings and public conference calls
and webcasts. The contents of our website shall not be deemed to be incorporated herein by reference.
38
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.