Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Annual Report on Form
10-K, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking
statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933,
as amended (the “Securities Act”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All
statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements
are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and
assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,”
“projects,” “intends,” “plans,” “believes,” “momentum,” “seeks,”
“estimates,” “continues,” “endeavors,” “strives,” “may,” variations of such
words, and similar expressions are intended to identify such forward-looking statements. 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. Readers are cautioned
that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult
to predict, including those under “Part I, Item 1A. Risk Factors,” and elsewhere herein. Therefore, actual results may
differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update
any forward-looking statements for any reason.
The following discussion is
intended to provide a more comprehensive review of the operating results and financial condition of Purple than can be obtained from reading
the consolidated financial statements alone. The discussion should be read in conjunction with the consolidated financial statements and
the notes thereto included in “Part II Item 8. Financial Statements.”
Overview of Our Business
Our mission is to help people
feel and live better through innovative comfort solutions.
We began as a digitally-native
vertical brand founded on comfort product innovation with premium offerings, and are now omni-channel. We design and manufacture a variety
of innovative, branded and premium comfort products, including mattresses, pillows, cushions, bases, sheets, duvets, duvet covers 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 Hyper-Elastic Polymer gel technology underpins many of our comfort
products and provides a range of benefits that differentiate our offerings from other competitors’ products. We market and sell
our products through direct-to-consumer e-commerce and Purple owned retail showrooms (collectively “DTC”), online marketplaces,
and retail wholesale partners.
Organization
The Company 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, we consummated a transaction structured similar to a reverse recapitalization (the
“Business Combination”) pursuant to which Purple Inc. acquired an equity interest in Purple LLC and became its sole managing
member. As the sole managing member of Purple LLC, Purple Inc., through its officers and directors, is responsible for all operational
and administrative decision making and control of the day-to-day business affairs of Purple LLC without the approval of any other member.
At December 31, 2022, Purple Inc. had a 99.5% economic interest in Purple LLC while other Class B unit holders had the remaining 0.5%.
On August 31, 2022, we acquired
all the issued and outstanding stock of Intellibed, which is now a wholly owned subsidiary of Purple LLC. For further discussion see Recent
Developments in Our Business — Acquisition below.
50
Executive Summary – Results of Operations
Net revenues decreased 20.7%
to $575.7 million for the year ended December 31, 2022 compared to $726.2 million for the year ended December 31, 2021 and decreased 11.2%
compared to $648.5 million for the year ended December 31, 2020. These decreases were primarily due to post-Covid changing demand for
home related products as consumer spending shifted towards services and experiences, the negative effect of inflationary pressures on
consumer discretionary spending and our intentional reduction in advertising spend.
Gross profit decreased 28.6%
to $210.6 million in 2022 compared to $295.0 million in the prior year due primarily to the decrease in sales volume. The gross profit
percentage in 2022 was 36.6% as compared to 40.6% in 2021. Our gross profit percentage was adversely impacted by elevated levels of materials,
labor and freight costs, lower demand levels and a shift in revenue to our wholesale channel, which carries a lower average selling price
than sales from our DTC channel. In addition, our efficiency and cost reduction initiatives, including greater balancing of production
and fulfillment operations between facilities, were initiated in the first half of fiscal 2022 and did not become fully impactful until
the second half of the year.
Operating expenses decreased
21.2% to $250.8 million in 2022 compared to $318.3 million in the prior year. This decrease primarily reflected the impact of reduced
advertising spend, workforce reductions and the implementation of other cost-saving measures.
Other income was $163.2 million
in 2022 compared to $26.0 million in 2021. For similar reasons that led to the recording of a full valuation allowance on our deferred
tax assets, we evaluated the probability of amounts being owned pursuant to the Tax Receivable Agreement and determined the likelihood
of a future liability was not probable. As result, we reduced the Tax Receivable Agreement liability to zero at December 31,
2022. As a result, we recognized tax receivable agreement income of $162.0 million in our consolidated statement of operations for the
year ended December 31, 2022.
Income tax expense was $212.9
million in 2022 compared to an income tax benefit of $1.2 million in 2021. Based on available evidence, we concluded it was more likely
than not that our deferred tax assets would not be realized and that a full valuation allowance for deferred tax assets was appropriate.
In 2022, tax expense included $213.5 million related to the increase in our valuation allowance against deferred tax assets.
The net loss attributable
to us was $89.7 million in 2022 as compared to net income attributable to us of $4.0 million in 2021. The net loss reflected an operating
loss of $40.3 million, other income of $163.2 million and income tax expense of $212.9 million.
Recent Developments in
Our Business
Acquisition
On August 31, 2022, we acquired
Intellibed, a premium sleep and health wellness company, offering gel-based mattresses scientifically designed for maximum back support,
spinal alignment and pressure point relief. We believe that the addition of Intellibed will increase product offerings to customers, expand
market opportunities (particularly into the luxury mattress category), capitalize on synergies of the combined companies, and increase
opportunities for innovation. In addition, the acquisition allowed us to consolidate ownership of our intellectual property licensed to
Intellibed and more fully capitalize on growing demand for products with gel technologies. The total purchase consideration for the acquisition
was $28.3 million, which primarily consisted of approximately 8.1 million shares of Class A Stock. In addition, the Intellibed securityholders
are entitled to receive an additional 1.5 million shares of Class A common stock if the closing price does not equal or exceed $5.00 for
at least ten trading days over any period of 30 consecutive trading days during the period beginning on the six-month anniversary of the
closing date and ending on the 18 month anniversary of the closing date. Also, 0.5 million shares of Class A common stock and $1.7 million
are being held in an escrow fund for the purposes of satisfying potential indemnification and other obligations of the securityholders
of Intellibed for up to 12 months following the closing. Purchase consideration also included the fair value of 0.5 million shares of
Class A common stock held in escrow pending resolution of net working capital adjustments and general representation and warranty provisions
of the agreement, the fair value of contingent consideration of 1.5 million shares of Class A common stock issuable to Intellibed securityholders
depending upon the price of the Class A common stock over the next 18 months, $1.4 million gain related to the fair value of a preexisting
legal matter that was effectively settled on the acquisition date, and $0.9 million related to the fair value of other items.
51
Coliseum Capital Management, LLC Proposal
On September 17, 2022, we received an unsolicited and non-binding proposal
from Coliseum to acquire the remaining outstanding shares of Class A common stock and Class B common stock not already beneficially owned
by Coliseum for $4.35 per share in cash. At the time of the offer, Coliseum beneficially owned approximately 44.7% of our outstanding
common stock. The Coliseum proposal was conditioned upon the transaction being (a) negotiated by, and subject to the approval of, a special
committee of independent and disinterested members of the Board (the “Special Committee”) and (b) subject to a non-waivable
condition requiring approval by the affirmative vote of a majority of shares of common stock not owned by Coliseum or other interested
parties. The Special Committee was formed by the Board to determine the necessary actions to evaluate the Coliseum proposal and determine
the course of action that is in the best interests of all Company’s shareholders. The Board expressly granted the Special Committee
the ability to decline the Coliseum proposal. In addition, the Special Committee adopted a stockholder rights agreement to have the time
and flexibility necessary to evaluate the Coliseum offer and to prevent a change of control without payment of an adequate control premium.
On January 12, 2023, the Company
issued a press release stating the Special Committee had rejected Coliseum’s unsolicited proposal.
On January 13, 2023, Coliseum
submitted a letter to the chairman of the Board setting forth a cooperation proposal (the “Cooperation Proposal”). On January
16, 2023, the Special Committee responded to the Cooperation Proposal.
On January 17, 2023, Coliseum
filed a Schedule 13D/A with the SEC indicating that, in the absence of an agreement, Coliseum intended to nominate a slate of directors
for election at the 2023 annual meeting of the stockholders of the Company, which slate would constitute a majority of the Board. On January
19, 2023, the Special Committee issued a press release stating the position of the Special Committee with respect to the Coliseum proposal.
On February 13, 2023, Coliseum
submitted a notice of its intention to nominate four persons to the Board, replacing four of the seven member Board and retaining only
Mr. DeMartini, the Company’s Chief Executive Officer, Mr. Gray, CCM’s manager, and one of the existing non-executive directors.
In response, on February 13, 2023, the Company issued a press release expressing the Special Committee’s response and position with
respect to Coliseum’s proposal.
On February 14, 2023, the
Company declared a dividend of one new PRPLS for each 100 shares of Purple common stock (“Common Stock”) owned by Purple’s
shareholders. Each PRPLS votes together with the Common Stock in the election of directors, and related matters, and carries 10,000 votes
each. Holders of PRPLS will be entitled to allocate their votes among the nominees in director elections on a cumulative basis. PRPLS
holders can allocate all, none, or a portion of their votes to each director nominee up for election at the Company’s meetings of
shareholders. On February 24, 2023, the Company issued 1.0 million PRPLS shares which trade with the Common Stock. Any new issuance of
Common Stock will automatically include a proportionate number of PRPLS. The PRPLS are redeemable at any time by an affirmative vote of
two-thirds of the members of the Board. PRPLS do not have any dividend rights and will be entitled to only a limited payment upon any
liquidation, dissolution or winding up in priority to any payments on the Common Stock but will not otherwise participate in any liquidating
distributions. On February 21, 2023, Coliseum filed a lawsuit in the Delaware Court of Chancery to invalidate Purple’s issued PRPLS,
alleging that the issuance deprived Purple stockholders of a fair and democratic election of directors at the Company’s 2023 Annual
Meeting and other related allegations.
On February 21, 2023, Coliseum
filed a Complaint against the Company and several members of the Board in the Delaware Court of Chancery, captioned Coliseum Capital
Management, LLC v. Anthos , Case No. 2023-0220-PAF (Del. Ch. Feb. 21, 2023). The complaint alleges that the Company and the named
directors authorized an improper dividend of preferred stock in bad faith to impede stockholder voting rights and interfere with Coliseum’s
nomination of a competing slate of director candidates ahead of the Company’s 2023 annual meeting of stockholders. Coliseum
is seeking: (1) declarations that the authorization of the PRPLS violated the Company’s charter and amounted to a breach of the
named directors’ fiduciary duties; (2) a declaration that the PRPLS is invalid, unenforceable, and void; (3) unspecified damages
resulting from the alleged breach of duties; and (4) an award of costs and expenses incurred in pursuing the action. The parties
have agreed to hold an expedited trial on Coliseum’s claims that will result in a resolution of the dispute before the Company’s
2023 annual meeting of stockholders. The outcome of this litigation cannot be predicted at this early stage. However, Purple
intends to vigorously defend against the claims made by Coliseum.
On
March 9, 2023, the Special Committee offered Coliseum a settlement proposal that included the following provisions, (i) Coliseum would
have the right to identify three of the six non-management members of a seven-member board, (ii) the other three non-management seats
would be filled by two existing independent directors and a new director who is a significant shareholder. In addition to Dawn Zier, who
already announced her intention not to stand for election at the 2023 Annual Meeting due to other commitments, two other current directors
would retire at or before the 2023 Annual Meeting, (iii) Coliseum managing partner Adam Gray would become Chairman of the Board, (iv)
the Special Committee would name one of the existing incumbent independent directors as Lead Independent Director, and (v) Coliseum would
commit to customary standstill provisions to provide stability for the Company for approximately 18 months. On March 16, 2023, the Special
Committee announced that Coliseum has rejected the settlement proposal.
52
Stockholder Rights Agreement
On September 25, 2022, with
the authorization of the Board, the Special Committee approved the adoption of a limited-duration stockholder rights agreement with an
expiration date of September 25, 2023 (the “Rights Agreement”). The Special Committee adopted the Rights Agreement in response
to Coliseum’s substantial increase in ownership of our shares over the last year and the Special Committee’s desire to have
the time and flexibility necessary to evaluate Coliseum’s offer to acquire the outstanding common stock not already beneficially
owned by Coliseum. The Rights Agreement is intended to protect against any coercive or abusive takeover tactics, and to help ensure that
our stockholders are not deprived of the opportunity to realize the full and fair value of their investment. The Rights Agreement applies
equally to all current and future shareholders and does not deter any offer or preclude the Special Committee from considering an offer
that is fair and otherwise in the best interests of our shareholders.
Upon adoption of the Rights
Agreement, 300,000 shares of our authorized shares of preferred stock, par value $0.0001 per share, were designated as Series A Junior
Participating Preferred Stock (the “Preferred Shares”). In accordance with the Rights Agreement, on September 25, 2022, the
Special Committee authorized and declared a dividend of one preferred share purchase right (a “Right”) for each outstanding
share of our Class A common stock and Class B common stock to stockholders of record at the close of business on October 6, 2022. Upon
the occurrence of certain triggering events, each Right entitles the holder to purchase from us one one-thousandth of a share of the newly
designated Preferred Shares at an exercise price of $20.00, subject to certain adjustments . The Rights will be exercisable only
if a person or group acquires beneficial ownership (including certain synthetic equity positions created by derivative securities) of
20% or more of our outstanding shares of common stock. Any person or group that beneficially owned more than the triggering percentage
when the Board adopted the Rights Agreement may continue to own its shares of common stock but may not acquire any additional shares without
triggering the Rights Agreement. Unless the Rights become exercisable as discussed above, the Rights Agreement has no impact on our consolidated
financial statements .
Proportional Representation Preferred Linked
Stock
On February 14, 2023, the
Company declared a dividend of one new PRPLS for each 100 shares of Purple common stock (“Common Stock”) owned by Purple’s
shareholders. Each PRPLS votes together with the Common Stock in the election of directors, and related matters, and carries 10,000 votes
each. Holders of PRPLS will be entitled to allocate their votes among the nominees in director elections on a cumulative basis. PRPLS
holders can allocate all, none, or a portion of their votes to each director nominee up for election at the Company’s meetings of
shareholders. On February 24, 2023, the Company issued 1.0 million PRPLS shares which trade with the Common Stock. Any new issuance of
Common Stock will automatically include a proportionate number of PRPLS. The PRPLS are redeemable at any time by an affirmative vote of
two-thirds of the members of the Board. PRPLS do not have any dividend rights and will be entitled to only a limited payment upon any
liquidation, dissolution or winding up in priority to any payments on the Common Stock but will not otherwise participate in any liquidating
distributions.
On February 21, 2023, Coliseum
filed a lawsuit in the Delaware Court of Chancery to invalidate Purple’s issued PRPLS, alleging that the issuance deprived stockholders
of a fair and democratic election of directors at the 2023 Annual Meeting, and other related allegations.
Equity Financing
On March 29, 2022, we 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. We received aggregate net proceeds from the offering, after deducting
offering fees and expenses of $5.3 million, of approximately $92.9 million.
53
On December 27, 2022, we filed
a registration statement on Form S-3 with the SEC using the “shelf” registration process. As a result, we may offer and sell
from time to time, in one or more series or issuances and on terms that we will determine at the time of the offering, any combination
of the securities described in the registration statement, up to an aggregate amount of $90.0 million. The registration became effective
on January 30, 2023.
On February 13, 2023, we completed
an underwritten offering of 13.4 million shares of Class A common stock. The underwriters did not exercise their over-allotment
option. We received aggregate net proceeds from the offering, after deducting offering fees and expenses of $3.3 million, of approximately
$57.0 million. Approximately $27.7 million of the proceeds was used to pay off the outstanding balance of the term loan including interest
and fees.
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, we executed a $55.0 million draw on our revolving line of credit, which represented the full amount available under the
line. On March 31, 2022, we used a portion of the net proceeds from our underwritten public offering, described above, to repay in full
the $55.0 million of principal outstanding on the revolving line of credit.
Our 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, we 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 the secured overnight financing rate (“SOFR”) plus 4.75%.
Pursuant to this amendment, we 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 consolidated balance sheet.
On March 23, 2022, we
entered into a second amendment to the 2020 Credit Agreement. This amendment modified the 2020 Credit Agreement to allow Coliseum to acquire
35% or more of the combined voting power of all our equity interests entitled to vote for the election of members of our Board without
constituting an event of default. Coliseum is considered a related party of the Company in that Adam Gray, a member of our Board, serves
as a manager of Coliseum who manages the Coliseum investment funds and accounts. Pursuant to this amendment, we incurred fees and expenses
of $0.4 million that were recorded as debt issuance costs in the consolidated balance sheet.
On May 13, 2022 and September
9, 2022, the Company entered into a third and fourth amendment, respectively, to the 2020 Credit Agreement. These amendments modified
the permitted leases schedule to reflect a change in showroom locations and a new lease for an innovation building. The amendments did
not meet the criteria for a modification of existing debt and a minimal amount of expenses were recorded as general and administrative
expense in the consolidated statement of operations.
On July 14, 2022, we received
consent under the 2020 Credit Agreement allowing the acquisition of Intellibed to constitute a permitted acquisition under the 2020 Credit
Agreement. We incurred fees and expenses of $0.3 million that were recorded as general and administrative expense in the consolidated
statement of operations.
On December 30, 2022, we made
a $15.0 million prepayment against the outstanding term loan without payment of a premium or penalty. As of December 31, 2022, we were
in compliance with all of the financial covenants related to the 2020 Credit Agreement, as amended. The interest rate on the term loan
was 8.98% at December 31, 2022.
On February 17, 2023, we entered
into a fifth amendment to the 2020 Credit Agreement. In accordance with this amendment, we repaid in full the $24.7 million outstanding
balance of the term loan, plus accrued interest. The amendment also provides that the maximum leverage ratio covenant will not be tested
for the first two quarters of 2023 and revises the ratio to 4.50x for the third quarter of 2023 and 3.00x for all quarters thereafter.
In addition, the minimum fixed charge coverage ratio covenant will not be tested for the first two quarters of 2023 and revised to 1.50x
for the third and fourth quarters of 2023, and 2.00x for all quarters thereafter. Both the maximum leverage ratio and minimum fixed charge
coverage ratio will be calculated on a build-up basis for the third quarter of 2023, and then on a last twelve-month basis for the fourth
quarter of 2023 and thereafter. The amendment also revises the lease incurrence test which will allow us to incur ten new showroom leases
for stores scheduled to open in 2023 and six new leases for stores that will open in 2024. Beginning in the fourth quarter of 2023, we
may begin incurring leases for stores that will open in 2024, subject to leverage ratio requirements. The leverage ratio must be less
than 2.50x to sign leases, with up to a maximum of six new leases per quarter, increasing to eight new leases per quarter if the leverage
ratio is less than 2.00x. The amendment also provides certain minimum consolidated EBITDA covenants for the first and second quarters
of 2023 based on our total unrestricted cash and unused revolver availability. The amendment further (i) reduces the amount available
under the revolving line of credit to $50.0 million, (ii) provides that the maturity date of the 2020 Credit Agreement
will spring forward to June 30, 2024 if our consolidated EBITDA is not greater than $15.0 million for 2023, (iii) reduces limits
on maximum growth capital expenditures to $32.0 million for 2023 and $35.0 million for 2024 and 2025, and (iv) revises
the current minimum liquidity covenant of $25.0 million to provide that it will increase to $30.0 million for
each three-month period following the applicable fiscal quarter if the leverage ratio is greater than 3.00x for any fiscal quarter ending
on or after the third quarter of 2023 . Pursuant to this amendment, we incurred fees and expenses of $2.7 million that were recorded
as debt issuance costs. There are no amounts currently drawn on the revolver and the available amount to draw is the full $50
million. In order to draw any amounts on the revolver, the Company must be in compliance with the covenants outlined in the fifth amendment.
54
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. Soon after the pandemic began, we experienced an increase in demand in our e-commerce
channel, and in 2020 and 2021 we increased our production capacity to match actual and anticipated demand growth. In 2022, after two years
of the pandemic, we began 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, net of showroom growth, we reduced employee headcount approximately 45% and took other
actions to lower costs.
We continue to closely monitor
the impacts of general economic conditions on global supply chain, manufacturing, and logistics operations. As inflationary pressures
remain elevated, 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,
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.
In 2022, our gross profit
and results of operations were adversely affected by elevated levels of materials, labor and freight costs and lower demand levels. In
early 2022, to offset the impact of higher costs on our gross profits, we increased prices and initiated several other projects to improve
efficiencies and reduce costs, including pursuing greater balancing of production between facilities to reduce freight costs and shorten
delivery times. As the softening of demand for home related products continues, with consumers shifting spending towards services and
experiences, and consumer spending habits shift from e-commerce to brick and mortar, we have been investing in showroom expansion where
we continue to develop our capabilities. We also are growing our placements with wholesale partners and focusing on improving wholesale
door productivity. We ended 2022 with 55 Purple showrooms after adding 27 net new locations during the year and we plan to add additional
showrooms in 2023. In addition, at the end of fiscal 2022, our products were being sold through approximately 3,400 wholesale doors, having
added approximately 900 net new doors during 2022. Showroom expansion and improving the sales productivity of our wholesale doors remain
a primary focus and are critical components of our strategy to respond to 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 improved operational maturity
and accountability after focusing on right-sizing our operations, improving our execution, and refining our strategies that will drive
share gains in the premium mattress category and position us for accelerated growth. We also intentionally reduced our advertising spending
in 2022 to improve marketing efficiency and conserve profitability in a challenging macroeconomic environment.
We believe the acquisition
of Intellibed was a strong strategic addition because of shared technology, geographic proximity of their primary facility, and an immediate
impact on our target luxury market expansion. We also expect to capitalize on synergies of the combined companies and benefit from expanding
the market presence of premium product offerings. In addition, the acquisition has allowed us to consolidate ownership of our intellectual
property and more fully capitalize on growing demand for products with gel technologies. Moreover, the acquisition accelerated our product
development program by several years and allowed us to immediately enter the luxury segment of the sleep and wellness industry as these
higher price points are a natural extension of our existing product offerings.
Other Developments
On
February 9, 2023, Dawn Zier, a member of the Board since November 2020, notified the Company of her decision to not stand for reelection
at the Company’s 2023 annual meeting of stockholders, in order to prioritize her time to other commitments. Ms. Zier’s
decision not to stand for reelection was not the result of any disagreement with the Company or the Board on any matter relating to the
Company’s operations, policies, or practices. Ms. Zier intends to remain on the Company’s Board until her term ends following
the Company’s 2023 annual meeting of stockholders.
55
Outlook for Growth
We believe that our four strategic initiatives;
accelerating innovation, brand elevation, developing our three distribution channels and operational excellence, will be fundamental to
our future success.
To support our plans for future growth and sustained
profitability, we are focusing on the following opportunities:
●
Develop and execute on strategies to meaningfully expand our wholesale business by strengthening our wholesale relationships and prioritizing existing door productivity. With our new product line-up, initial testing with our wholesale partners has been very positive with product placement commitments exceeding our goal and dozens of shop-in-shops have confirmed with interest for several hundreds more.
●
Expand and mature our fleet of 11 additional Purple company owned showrooms in 2023 to increase door productivity, provide a brand halo benefit to other channels in the surrounding areas, control the relationship with the consumer and increase share of more profitable DTC revenues.
●
Build premium brand position to grow market share of the premium mattress category. We plan to launch our elevated brand positioning in the second quarter of 2023.
● 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 additional 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 profit erosion.
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 “Part I, Item 1A. 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.
Critical Accounting Estimates
In connection with the preparation
of our consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”), we are
required to make estimates and assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities,
sales, expenses and the related disclosures. Predicting future events is inherently an imprecise activity and as such requires the use
of judgment. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management
believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting
policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance
with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our
assumptions and estimates, and such differences could be material.
Management believes the accounting
estimates discussed below are the most critical because they require management’s most difficult, subjective or complex judgments,
resulting from the need to make estimates about the effect of matters that are inherently uncertain.
Revenue Recognition
Our revenue recognition
accounting methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate
the amount and timing of future sales returns and uncollectible accounts. Our estimates of the amount and timing of sales returns
and uncollectible accounts are based primarily on historical transaction experience. Our sales return liability decreased from $7.1
million at December 31, 2021 million to $5.1 million as of December 31, 2022. Our allowance for doubtful accounts was not material
at both December 31, 2022 and 2021. We do not believe there is a reasonable likelihood that there will be any material changes in
the accounting methodology, future estimates or assumptions used to measure the estimated liability for sales returns and exchanges
or credit losses. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or
gains that could be material.
56
Warranty Liabilities
We provide a limited warranty
on most of the products we sell. The estimated warranty costs, which are expensed at the time of sale and included in cost of revenues,
are based on the results of product testing, industry and historical trends and warranty claim rates incurred and are adjusted for any
current or expected trends as appropriate. We regularly assess and adjust the estimate of accrued warranty claims by updating claims rates
for actual trends and projected claim costs. We classify as non-current those estimated warranty costs expected to be paid out in greater
than one year. As of December 31, 2022, the current and non-current portions of our warranty liabilities were $5.0 million
and $15.6 million, respectively, compared to $3.9 million and $11.1 million, respectively, at December 31, 2021. We have not made
any material changes in the warranty liability assessment methodology used and we do not believe there is a reasonable likelihood that
a material change in the estimates or assumptions we use to calculate our warranty liability will occur. However, if actual results are
not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
Income Taxes
Accounting for income taxes
requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included
in the financial statements or tax returns. 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 temporary differences are expected to be recovered or
settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change.
Our effective tax rate is primarily impacted by the allocation of income taxes to the noncontrolling interest and changes in our valuation
allowance. Also, changes in existing federal and state tax laws and corporate income tax rates could affect future tax results and the
realization of deferred tax assets over time.
For purposes of evaluating
our deferred tax assets and liabilities, we entered a cumulative 3-year loss position in Q4 2022 due primarily to the impact of positive
2020 operating results rolling out of the cumulative 3-year period analysis. Based on this and other available evidence, we concluded
it was more likely than not that our deferred tax assets would not be realized and a full valuation allowance for our net deferred tax
assets was appropriate at December 31, 2022. Due to the increase in the valuation allowance, we recognized deferred tax expense of $213.5
million in our consolidated statement of operations for the year ended December 31, 2022. We had previously recognized deferred tax benefits
of $3.6 million and $45.8 million in our consolidated statements of operations for the years ended December 31, 2021 and 2020, respectively,
based on our previous conclusion that it was more likely than not that some of our deferred tax assets would be realized and that a full
valuation allowance for our deferred tax assets was not appropriate.
We account 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. Judgment is required in evaluating uncertain tax positions. We evaluate our uncertain tax
positions quarterly based on various factors, including changes in facts or circumstances, tax laws or the status of audits by tax authorities.
Changes in the recognition or measurement of uncertain tax positions could have a material impact on our consolidated financial statements
in the period in which we make the change. As of December 31, 2022 and 2021, no uncertain tax positions were recognized as liabilities
in the consolidated balance sheets.
Tax Receivable Agreement
In connection with the Business
Combination, we entered into an agreement with InnoHold LLC (InnoHold), which provides for the payments to InnoHold of 80% of the net
cash savings, if any, in U.S. federal, state and local income tax that we realize (or are deemed to realize in certain circumstances)
in periods after the closing of the Business Combination 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, as applicable, of Class B Paired Securities or cash, as applicable, and (iii) imputed interest
deemed to be paid by us as a result of, and additional tax basis arising from, payments it makes under the agreement.
As noncontrolling interest
holders exercise their right to exchange or cause Purple LLC to redeem all or a portion of its Class B Units, a liability under the Tax
Receivable Agreement may be recorded based on 80% of the estimated future cash tax savings that we may realize as a result of increases
in the basis of the assets of Purple LLC attributed to us as a result of such exchange or redemption. The amount of the increase in asset
basis, the related estimated cash tax savings and the attendant tax receivable agreement liability to be recorded will depend on the price
of our Class A common stock at the time of the relevant redemption or exchange.
57
As a result of the initial
merger transaction and subsequent exchanges of Class B Units for Class A common stock, the long-term portion of the potential future tax
receivable agreement liability was $162.2 million as of December 31, 2021. This balance was reduced in 2022 by $0.3 million for a payment
to be made in 2023 that we classified as a short-term liability. We evaluated the probability of amounts being owed pursuant to the Tax
Receivable Agreement and determined the likelihood of a future liability was not probable. As result, we reduced the Tax Receivable Agreement
liability to zero at December 31, 2022 and we recognized tax receivable agreement income of $162.0 million in our consolidated statement
of operations for the year ended December 31, 2022.
We are currently unable to
determine the 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 tax receivable
agreement.
Results of Operations
A discussion regarding our
financial condition and results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021 is presented
below. A separate discussion regarding our financial condition and results of operations for the year ended December 31, 2021 compared
to the year ended December 31, 2020 can be found under Item 7 of Part II of our Annual Report on Form 10-K/A for the fiscal year ended
December 31, 2021, filed with the SEC on March 16, 2022.
Operating Results for the Year Ended December 31, 2022 compared
to the year ended December 31, 2021
The following table sets
forth for the periods indicated, our results of operations and the percentage of total net revenues represented in our consolidated statements
of operations:
Year Ended December 31,
2022
% Net
Revenues
2021
% Net
Revenues
Revenues, net
$ 575,692
100.0 %
$ 726,227
100.0 %
Cost of revenues
365,110
63.4
431,253
59.4
Gross profit
210,582
36.6
294,974
40.6
Operating expenses:
Marketing and sales
165,388
28.7
239,290
33.0
General and administrative
76,702
13.3
72,095
9.9
Research and development
8,755
1.5
6,939
1.0
Total operating expenses
250,845
43.6
318,324
43.8
Operating loss
(40,263 )
(7.0 )
(23,350 )
(3.2 )
Other income (expense):
Interest expense
(3,536 )
(0.6 )
(1,872 )
(0.3 )
Other income (expense), net
423
0.1
(194 )
—
Change in fair value – warrant liabilities
4,343
0.8
24,054
3.3
Tax receivable agreement income
161,970
28.1
4,016
0.6
Total other income, net
163,200
28.3
26,004
3.6
Net income before income taxes
122,937
21.4
2,654
0.4
Income tax benefit (expense)
(212,864 )
(37.0 )
1,217
0.2
Net income (loss)
(89,927 )
(15.6 )
3,871
0.5
Net loss attributable to noncontrolling
interest
(238 )
—
(160 )
—
Net income (loss) attributable to Purple
Innovation, Inc.
$ (89,689 )
(15.6 )
$ 4,031
0.6
Revenues, Net
Net revenues decreased $150.5 million, or 20.7%, to $575.7 million
for year ended December 31, 2022 compared to $726.2 million for the year ended December 31, 2021. The decline in net revenues reflected
a $124.9 million decrease in mattress sales, a $14.8 million decrease in other sleep product sales and a $10.8 million decrease in other
product sales. The decrease in net revenues was primarily due to softening demand for home related products and the negative effect of
inflationary pressures on consumer discretionary spending, with consumer spending shifting towards services and experiences. In addition,
net revenues in the prior year were positively impacted by demand in the first half of 2021 that was driven by the effects of COVID and
economic stimulus. The decline in net revenues from a sales channel perspective consisted of DTC net revenues decreasing $143.7 million,
or 30.3% and wholesale net revenues decreasing $6.8 million, or 2.7%. Within the DTC channel, e-commerce net revenue declined $174.4 million,
or 39.5%, and Purple owned retail showroom net revenue increased $30.7 million, or 94.7%. The decrease in e-commerce net revenues reflected
the impact of the reasons stated above coupled with customers shifting away from e-commerce buying. The increase in Purple owned retail
showroom net revenue was mainly driven by showrooms increasing from 28 at the end of 2021 to 55 at the end of 2022. The decrease in wholesale
net revenues primarily reflected reduced purchases by our existing wholesale partners during 2022 due primarily to declining wholesale
door productivity. This decrease was offset in part by the effects of adding approximately 900 net new wholesale partner doors in fiscal
2022 coupled with the $9.7 million in net revenues from the Intellibed acquisition, which contributed primarily wholesale net revenues.
In addition to the continued macroeconomic effects described above, we anticipate that net revenue in the first quarter of 2023 will be
impacted by our introduction of new product models, as our retail partners sell through our legacy mattress models ahead of taking delivery
of new models in the second quarter.
58
Cost of Revenues
Cost of revenues decreased $66.1 million, or 15.3%, to $365.1 million
for the year ended December 31, 2022 compared to $431.3 million for the year ended December 31, 2021 due primarily to the decrease in
sales volume. Our gross profit percentage, which decreased to 36.6% of net revenues in 2022 from 40.6% in 2021, was adversely impacted
by elevated levels of materials, labor and freight costs and lower demand levels and the shift to a higher proportion of wholesale channel
revenue, which carries a lower average selling price than sales from our e-commerce and retail showroom channels, partially offset by
savings realized from cost reduction initiatives. Our efficiency and cost saving initiatives, including greater balancing of production
and fulfillment operations between the facilities, were initiated during the first half of fiscal 2022 and did not become fully impactful
until the second half of the year. We anticipate that we will continue to realize the benefits of our efficiency and cost saving initiatives
in 2023.
Marketing and Sales
Marketing and sales expense
decreased $73.9 million, or 30.9%, to $165.4 million for the year ended December 31, 2022 compared to $239.3 million for the year ended
December 31, 2021. This decrease was driven by a $95.5 million, or 58.9%, decline in advertising spending and a $15.0 million decrease
in other marketing costs. The reduction in advertising spending was primarily due to management’s ongoing efforts to improve marketing
efficiency, conserve profitability in a challenging macroeconomic environment and align spending with current demand levels. The decrease
in other marketing costs reflected the impact of cost management efforts, including marketing headcount reductions, executed earlier in
2022. These decreases were offset in part by a $13.8 million increase in wholesale-related marketing and sales costs due in part to growing
the sales organization of our wholesale business and a $22.8 million increase in marketing and sales costs associated with showroom expansion.
Marketing and sales expense as a percentage of net revenues was 28.7% in 2022 compared to 33.0% in 2021.
General and Administrative
General and administrative
expense increased $4.6 million, or 6.4%, to $76.7 million for the year ended December 31, 2022 compared to $72.1 million for the year
ended December 31, 2021. This increase was primarily due to a $3.7 million increase in payroll and benefits expense and $1.2 million
in costs associated with the Intellibed acquisition, offset in part by a $0.7 million decrease in legal and professional fees. The
increase in payroll and benefit costs mainly reflected the impact of job reclassifications for certain employees in the first half of
2022. 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. This decrease was partially offset by a one-time separation fee for not
continuing with the services of a professional services provider, expenses incurred by the Special Committee and Intellibed transaction
costs.
Research and Development
Research and development
costs increased $1.8 million, or 26.2%, to $8.8 million for the year ended December 31, 2022 from $6.9 million for the year ended December
31, 2021. This increase primarily reflected higher payroll and benefit costs as our renewed focus on product innovation resulted in the
growth of our research and development team, which included the addition of our chief innovation officer.
Operating Income (Loss)
Operating loss increased
$16.9 million to $40.3 million for the year ended December 31, 2022 compared to $23.4 million for the year ended December 31, 2021. This
increase primarily resulted from a decrease in gross profit that was driven by lower sales and a reduced gross profit margin, offset
in part by a decrease in operating expenses related primarily to lower advertising spend.
Interest Expense
Interest expense totaled $3.5
million for the year ended December 31, 2022 compared to $1.9 million for the year ended December 31, 2021. Interest paid on the term
loan increased $1.0 million as the average interest rate paid increased from 3.50% in 2021 to 6.31% in 2022, due mainly to the change
in terms from our credit agreement amendment in February of 2022. Interest expense was also impacted by a $0.3 million increase in interest
paid on the $55.0 million revolving line of credit that we drew down in November 2021 and repaid in full on March 31, 2022. In addition,
interest expense reflected a $0.4 million increase in debt issuance cost amortization. We incurred $2.5 million in debt issuance costs upon
entering into the 2020 Credit Agreement and incurred an additional $1.2 million in debt issuance costs for two of the amendments
entered into in 2022.
59
Other Income (Expense), Net
Other income totaled $0.4
million for the year ended December 31, 2022 compared to other expense of $0.2 million for the year ended December 31, 2021. The increase
in other income primarily resulted from the effective settlement of a preexisting legal matter upon our acquisition of Intellibed on August
31, 2022 at an estimated fair value gain of $1.4 million. The impact of this gain was offset in part by a $0.6 million loss recorded on
the disposal of production machinery and equipment.
Change in Fair Value – Warrant Liabilities
The 1.9 million sponsor warrants
outstanding had a negligible fair value at December 31, 2022 compared to a fair value of $4.3 million at December 31, 2021. This decrease
in fair value was primarily due to the five-year term of the sponsor warrants ending on February 2, 2023 coupled with our Class A common
stock price declining 63.9% to $4.79 at the end of 2022. During the years ended December 31, 2022 and 2021, we recognized gains of $4.3
million and $24.1 million, respectively, in our consolidated statements of operations related to decreases in the fair value of the sponsor
warrants exercised during the respective periods or that were outstanding at the end of the respective periods.
Tax Receivable Agreement Income
In connection with the Business Combination, we entered into a Tax
Receivable Agreement which generally provides for the payment by us to InnoHold of 80% of certain tax benefits, if any, that we realize
as a result of increases in our allocable share of the tax basis of the tangible and intangible assets of Purple LLC. As a result of the
initial merger transaction and subsequent exchanges of Class B Units for Class A common stock, the long-term portion of the potential
future tax receivable agreement liability totaled $162.2 million at December 31, 2021. This balance was reduced by $0.2 million for a
future payment that was classified as a short-term liability during 2022. For similar reasons that led to the recording of a full valuation
allowance on our deferred tax assets, we evaluated the probability of amounts being owed pursuant to the Tax Receivable Agreement and
determined the likelihood of a future liability was not probable. As result, we reduced the Tax Receivable Agreement liability to zero at
December 31, 2022 and we recognized tax receivable agreement income of $162.0 million in our consolidated statement of operations for
the year ended December 31, 2022.
Income Tax Benefit (Expense)
Income tax expense was $212.9
million for the year ended December 31, 2022 compared to an income tax benefit of $1.2 million for the year ended December 31, 2021. For
purposes of evaluating our deferred tax assets, we entered a cumulative 3-year loss position during Q4 of 2022 due primarily to the impact
of positive 2020 operating results rolling out of the cumulative 3-year period analysis. Based on this and other available evidence, we
concluded it was more likely than not that our deferred tax assets would not be realized and a full valuation allowance for our net deferred
tax assets was appropriate. Due to the increase in our valuation allowance, we recognized deferred tax expense of $213.5 million in our
consolidated statement of operations for the year ended December 31, 2022. This was offset in part by a current tax benefit of $0.6 million
recorded in 2022.
Noncontrolling Interest
We calculate net income or
loss attributable to noncontrolling interests on a quarterly basis using their weighted average ownership percentage. Net loss attributed
to noncontrolling interests was $0.2 million in both 2022 and 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 facility and proceeds received from offerings of
our equity capital. Principal uses of funds consist of payments of principal and interest on our debt facilities, capital expenditures
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 unrestricted cash and working capital positions were $40.0 million and $62.0 million, respectively, as of December 31, 2022 compared
to $91.6 million and $87.5 million, respectively, as of December 31, 2021. Cash used for capital expenditures decreased from $57.1 million
in 2021 to $38.2 million in 2022. Our capital expenditures in 2022 primarily consisted of leasehold improvements and furniture and fixtures
associated with the opening of new Purple owned retail showrooms. In 2023, we believe our capital expenditures will be approximately $35.0
million.
60
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 continue
satisfying the conditions of our 2020 Credit Agreement, as amended, based on our ability to scale back operations, reduce marketing spend,
use available liquidity under our revolving line of credit, and postpone or discontinue our growth strategies. In such event, this could
result in slower growth or no growth, and we may run the risk of losing key suppliers, we may not be able to timely satisfy customer orders,
and we may not be able to retain all of our employees. We may also consider restructuring our obligations with current creditors, pursue
work-out options or seek additional funding sources including new debt or equity capital. In addition, 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.
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 our DTC and
wholesale 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.
Underwritten Offering
In March 2022, we completed an underwritten public offering of 16.1
million shares of Class A common stock, which included 2.1 million shares relating to the over-allotment option that the underwriters
exercised in full. The aggregate net proceeds we received from the offering, after deducting offering fees and expenses of $5.3 million,
totaled approximately $92.9 million.
Shelf Registration Statement and Subsequent
Underwritten Offering
On December 27, 2022, we filed
a registration statement on Form S-3 with the SEC using the “shelf” registration process and on January 30, 2023, it became
effective. As a result, we may offer and sell from time to time, in one or more series or issuances and on terms that we will determine
at the time of the offering, any combination of the securities described in the registration statement, up to an aggregate amount of $90.0
million.
On February 13, 2023, we completed an underwritten offering of 13.4
million shares of Class A Stock. The underwriters did not exercise their over-allotment option. We received aggregate net proceeds
from the offering, after deducting offering fees and expenses of $3.3 million, of approximately $57.0 million. Approximately $27.7 million
of the proceeds was used to pay off the outstanding balance of the term loan including interest and fees.
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, we
executed a $55.0 million draw on our revolving line of credit, which represented the full amount available under the line.
Our 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, we 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, we 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 2022 consolidated balance sheet.
On March 23, 2022, we
entered into a second amendment to the 2020 Credit Agreement. This amendment modified the 2020 Credit Agreement to allow Coliseum to acquire
35% or more of the combined voting power of all our equity interests entitled to vote for the election of members of our Board without
constituting an event of default. Coliseum is considered a related party of the Company in that Adam Gray, a member of our Board, serves
as a manager of Coliseum who manages the Coliseum investments funds and accounts. Pursuant to this amendment, we incurred fees and expenses
of $0.4 million that were recorded as debt issuance costs in the 2022 consolidated balance sheet.
61
On March 31, 2022, we used
a portion of the net proceeds from the underwritten offering to repay in full the $55.0 million of principal outstanding on the revolving
line of credit.
On May 13, 2022 and September
9, 2022, we entered into a third and fourth amendment, respectively, to the 2020 Credit Agreement. These amendments modified the permitted
leases schedule to reflect a change in showroom locations and a new lease for an innovation building. The amendments did not meet the
criteria for a modification of existing debt and the minimal expenses were recorded as general and administrative expenses in the 2022
consolidated statement of operations.
On July 14, 2022, we received
consent under the 2020 Credit Agreement allowing our acquisition of Intellibed to constitute a permitted acquisition under the 2020 Credit
Agreement. We incurred fees and expenses of $0.3 million that were recorded as general and administrative expense in the 2022 consolidated
statement of operations.
On December 30, 2022, we made
a $15.0 million prepayment against the outstanding term loan without payment of a premium or penalty. As of December 31, 2022, we were
in compliance with all of the financial covenants related to the 2020 Credit Agreement, as amended. The interest rate on the term loan
was 8.98% at December 31, 2022.
On February 17, 2023, we entered
into a fifth amendment to the 2020 Credit Agreement. In accordance with this amendment, we repaid in full the $24.7 million outstanding
balance of the term loan plus accrued interest. The amendment also provided that the maximum leverage ratio covenant will not be tested
for the first two quarters of 2023 and revises the ratio to 4.50x for the third quarter of 2023 and 3.00x for all quarters thereafter.
In addition, the minimum fixed charge coverage ratio covenant will not be tested for the first two quarters of 2023 and revised to 1.50x
for the third and fourth quarters of 2023, and 2.00x for all quarters thereafter. Both the maximum leverage ratio and minimum fixed charge
coverage ratio will be calculated on a build-up basis for the third quarter of 2023, and then on a last twelve-month basis for the fourth
quarter of 2023 and thereafter. The amendment will also revise the lease incurrence test which will allow us to incur ten new showroom
leases in 2023 and six new showroom leases in 2024. Moreover, beginning in the fourth quarter of 2023, we will be allowed to begin incurring
leases for additional stores that will open in 2024, subject to maximum leverage ratio requirements. The leverage ratio must be less than
2.50x to sign leases, with up to a maximum of six new leases per quarter, increasing to eight new leases per quarter if the leverage ratio
is less than 2.00x. The amendment will also provide certain minimum consolidated EBITDA covenants for the first and second quarters of
2023 based on our total unrestricted cash and unused revolver availability. The amendment further (i) reduces the amount available
under the revolving line of credit to $50.0 million, (ii) provides that the maturity date of amounts drawn under the 2020
Credit Agreement will accelerate to June 30, 2024 if our consolidated EBITDA is not greater than $15.0 million for 2023, (iii)
reduces limits on maximum growth capital expenditures to $32.0 million for 2023 and $35.0 million for 2024 and 2025, and (iv) revises
the current minimum liquidity covenant of $25.0 million to provide that it will increase to $30.0 million for
each three-month period following the applicable fiscal quarter if the leverage ratio is greater than 3.00x for any fiscal quarter ending
on or after the third quarter of 2023. Pursuant to this amendment, we incurred fees and expenses of $2.7 million that were recorded
as debt issuance costs. There are no amounts currently drawn on the revolver and the available amount to draw is the full $50
million. In order to draw any amounts on the revolver, we must be in compliance with the covenants outlined in the fifth amendment.
Tax Receivable Agreement
We are required to make certain payments to InnoHold under the Tax
Receivable Agreement, which may have a material adverse effect on our liquidity and capital resources. As of December 31, 2021, the long-term
portion of the potential future tax receivable agreement liability totaled $162.2 million. This balance was reduced by $0.3 million for
a payment to be made in 2023 that was classified as a short-term liability during 2022. For similar reasons that led to the recording
of a full valuation allowance on our deferred tax assets, we evaluated the probability of amounts being owed pursuant to the Tax Receivable
Agreement and determined the likelihood of a future liability was not probable. As result, we reduced the Tax Receivable Agreement
liability to zero at December 31, 2022 We are currently unable to determine the total future amount of these payments due to the
unpredictable nature of several factors, including the timing of future exchanges, the market price of shares of Class A Stock at the
time of the exchanges, the extent to which such exchanges are taxable and the amount and timing of future taxable income sufficient to
utilize tax attributes that give rise to the payments under the agreement.
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 consolidated financial statements for additional information.
Cash Flows for the year ended December 31, 2022 compared to the
year ended December 31, 2021
The following summarizes
our cash flows for the years ended December 31, 2022 and 2021 as reported in our consolidated statements of cash flows (in thousands):
Years Ended December 31,
2022
2021
Net cash provided by (used in) operating activities
$ (28,773 )
$ (30,903 )
Net cash used in investing activities
(34,501 )
(57,059 )
Net cash provided by financing activities
13,412
56,623
Net increase (decrease) in cash
(49,862 )
(31,339 )
Cash, beginning of the period
91,616
122,955
Cash, end of the period
$ 41,754
$ 91,616
62
Cash used in operating activities
was $28.8 million and $30.9 million for the years ended December 31, 2022 and 2021, respectively. Cash used in operating activities in
2022 was primarily comprised of a net loss of $89.9 million, offset in part by non-cash adjustments totaling $68.4 million.
These non-cash adjustments primarily related to deferred income taxes of $213.5 million and depreciation and amortization of $17.5 million,
partially offset by Tax Receivable Agreement income of $162.0 million. Changes in operating assets and liabilities further reduced cash
used in operating activities by $7.2 million in 2022. This decrease related mostly to a $33.6 million decrease in accounts payable combined
with a $4.1 million increase in accounts receivable due to timing of receipts, offset in part by a $29.0 million decrease in inventories.
The decline in accounts payable was mainly due to the balance at the end of 2021 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 inventories was primarily due to management’s
efforts to rebalance production and fulfillment operations during 2022.
Cash used in investing activities
was $34.5 million for the year ended December 31, 2022 compared to $57.1 million for the year ended December 31, 2021. Our capital
expenditures in 2022 primarily consisted of leasehold improvements and furniture and fixtures associated with the opening of new Purple
owned retail showrooms. In 2021, our capital expenditures included competing the build out of our manufacturing facility in Georgia, and
enhancing manufacturing and safety capabilities at our manufacturing facility in Utah.
Cash provided by financing
activities was $13.4 million for the year ended December 31, 2022 compared to $56.6 million for the year ended December 31, 2021. Financing
activities in 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 $15.0 million prepayment made on the term loan, a $5.8 million payment on the Tax Receivable Agreement,
and $3.8 million in other debt related payments.
Recent Accounting Pronouncements
For a description of recently
adopted and issued accounting standards, including the respective dates of adoption and expected effects on our results of operations
and financial condition, refer to Note 2 to our financial statements included in this Annual Report on Form 10-K.