Purple Innovation, Inc. annual report, FY2016

Filing identity and reporting period

Important mismatch: The supplied filing is Global Partner Acquisition Corp. (GPAC), not Purple Innovation, Inc. It is a Form 10-K for the fiscal year ended December 31, 2016; it includes unaudited fourth-quarter results. The summary below reflects GPAC’s filing, not a Purple Innovation filing.

Business context

GPAC was a pre-revenue special purpose acquisition company formed to complete a business combination. On January 11, 2017, after year-end, it agreed to combine with Sequel Youth and Family Services, a behavioral healthcare provider. The proposed transaction remained subject to conditions, including stockholder approval and a public-share redemption offer. GPAC’s deadline to complete a business combination was August 4, 2017.

Financial results and liquidity

Fourth-quarter 2016 unaudited results were a $2.171 million operating loss and $2.099 million net loss, with $72,000 of interest income. Management attributed much of annual expense to transaction-related professional and consulting fees, including work on the Sequel agreement: approximately $2.180 million, versus approximately $477,000 for governance, reporting, insurance and franchise taxes.

At December 31, 2016, GPAC held $237,000 of cash outside the trust account and $155.543 million in the trust account. Current liabilities were $1.875 million, and working capital was negative $1.597 million. Total liabilities were $6.533 million, including $4.658 million of deferred underwriting compensation payable upon a completed combination. GPAC reported $5.0 million of stockholders’ equity and no long-term debt at year-end.

In January 2017, GPAC borrowed $1.2 million from its sponsor under a note bearing 7.5% annual interest, repayable upon completion of the combination; the note could be converted into common shares at $10 per share. Management said this financing and expected deferral of professional fees would support operations through a combination or, if needed, the August 2017 deadline. The filing provides no operating margin information for Sequel.

Material changes and proposed transaction

• Annual G&A rose to $2.657 million from $0.346 million in the 2015 inception period, principally reflecting acquisition-search and transaction costs.
• Cash outside the trust account declined from $1.048 million to $237,000; trust assets increased from $155.293 million to $155.543 million.
• The proposed Sequel transaction contemplated $105.0 million cash and warrants for Sequel common equity holders, alongside exchangeable equity initially representing 4.5 million GPAC shares. Sequel’s preferred holder was to receive $30.0 million cash and approximately $62.2 million of preferred units, with an initial distribution rate of 9.9% annually, subject to adjustment.
• The transaction also included a tax receivable agreement, under which GPAC would share specified tax savings with certain Sequel equity holders. Redemptions and other transaction terms could materially affect cash available at closing.

Outlook, risks and unusual items

The auditor identified substantial doubt about GPAC’s ability to continue as a going concern because the company had to complete a business combination by August 4, 2017 or wind down and liquidate. GPAC had no operating revenue and depended on completing a transaction, sponsor financing and continued access to services whose fees could be deferred. If no combination closed, public shares were generally to be redeemed from the trust, while warrants would expire worthless; creditor claims could reduce distributions.

Key risks include transaction failure or delay, high shareholder redemptions that could prevent closing, inability to obtain additional financing, dilution from securities issued in the transaction, conflicts of interest involving the sponsor and management, and potential claims against trust assets. The filing states that disclosure controls and internal control over financial reporting were effective as of December 31, 2016. The independent auditor audited the financial statements but was not engaged to opine on internal-control effectiveness.

Most important facts for investors to verify

• Confirm the intended issuer: this filing is GPAC’s, not Purple Innovation’s.
• Check subsequent filings and transaction documents for whether the Sequel combination closed, its final terms, and the resulting ownership, financing and redemption levels.
• Review Sequel’s audited financial statements and operating risks in the proxy materials; this 10-K does not provide Sequel’s revenue, profit, cash flow or debt metrics.
• Verify the sponsor note’s repayment or conversion, deferred fees and actual liquidity after December 31, 2016.
• Assess the going-concern warning, August 4, 2017 deadline, and potential effects of creditor claims on trust-account redemptions.