Purple Innovation, Inc. annual report, FY2017

Business context and reporting period

Important entity distinction: Despite the request metadata, this filing is Global Partner Acquisition Corp. (GPAC), not Purple Innovation, Inc. It is a special purpose acquisition company with no operating business or operating revenue. This Form 10-K reports the year ended December 31, 2017, including fourth-quarter information; it does not report Purple’s operating results.

GPAC had agreed to acquire Purple Innovation, LLC, a mattress, bedding and cushioning company, at a stated enterprise value of $500 million, subject to adjustments for Purple’s debt, cash and transaction expenses. The merger agreement was signed November 2, 2017 and amended January 8, 2018. Closing required, among other conditions, stockholder approval and completion of a redemption offer. GPAC anticipated closing February 2, 2018 and had a February 5, 2018 deadline to complete a business combination.

Financial results and liquidity

2017 earnings included $2.5 million of transaction-fee income and $1.036 million of trust-account interest, offset by operating expenses, $107,000 of related-party financing costs and $406,000 of income tax expense. FY 2017 basic and diluted earnings per share were $0.16 and $0.05, respectively; FY 2016 loss per share was $0.49. The filing provides no operating margins for Purple because GPAC had no revenue.

Fourth-quarter 2017 general and administrative expense was $723,000 and net loss was $647,000; quarterly interest income was $302,000. At year-end, GPAC reported $5.801 million of total liabilities, including a $4.0 million deferred underwriting commission, and $5.0 million of stockholders’ equity. Current liabilities were $1.801 million, against $230,000 of current assets, resulting in negative working capital of approximately $1.571 million. The company had drawn $600,000 under a non-interest-bearing sponsor note, with a further $400,000 available; the note was due at the earliest of the merger closing, February 28, 2018, or winding up.

Material changes versus the prior comparable period

• GPAC moved from a $2.327 million net loss in 2016 to $803,000 net income in 2017, primarily because of the $2.5 million transaction fee and higher trust interest income; the company remained pre-revenue.
• Trust assets fell by $33.492 million year over year, chiefly following the August 2017 redemption of 3,416,480 public shares for approximately $34.3 million. About 11.15 million shares remained subject to possible redemption at year-end.
• Operating cash use improved by $194,000 year over year. The $34.165 million investing cash inflow and corresponding financing outflow chiefly reflected the 2017 redemption process, rather than operating cash generation.
• The deferred underwriting commission was reduced from approximately $4.658 million to $4.0 million in 2017. The company also replaced its repaid $1.2 million, 7.5% sponsor note with a new facility of up to $1.0 million.

Outlook, risks and unusual items

• The merger was pending at the time of the filing. If GPAC did not complete a business combination by February 5, 2018, it was required to cease operations, redeem public shares and liquidate; warrants would expire worthless. The auditor identified this deadline and mandatory liquidation as raising substantial doubt about GPAC’s ability to continue as a going concern.
• Merger consideration included cash and equity, with cash consideration dependent on closing cash, redemptions and transaction expenses. Purple’s stated $500 million enterprise value is not a reported purchase price or a measure of Purple’s 2017 financial performance.
• The merger terms contemplated sponsor forfeiture of 1,293,750 founder shares, performance-based vesting or forfeiture of another 1,293,750 shares, and transfer of up to 12,815,000 private placement warrants to Purple’s equity holder. The transaction also contemplated a tax receivable agreement sharing certain tax savings with specified Purple equity holders.
• Key risks included high public-share redemptions reducing available transaction cash, lack of assured additional financing, limited funds outside the trust, potential creditor claims against trust assets, conflicts of interest and possible dilution. GPAC also had Nasdaq listing-compliance issues involving its minimum public-holder count and annual-meeting requirement; delisting could jeopardize the merger.
• GPAC’s prior proposed merger with Sequel Youth and Family Services was terminated in May 2017. GPAC received a $2.5 million fee in September 2017 for releasing a third party from a related non-circumvention agreement; this nonrecurring income drove the reported annual profit.

Important facts for investors to verify

• Confirm the correct issuer: this filing is GPAC’s, not Purple Innovation, Inc.’s 10-K.
• Check subsequent filings for whether the Purple merger closed, final redemption totals, financing and final merger consideration.
• Review Purple’s own audited financial statements and the definitive proxy materials for revenue, profitability, cash flow, debt, operating risks and transaction dilution; those metrics are not supplied here.
• Verify the status and consequences of GPAC’s Nasdaq compliance matters and the February 5, 2018 business-combination deadline.
• Assess trust-account protections, creditor claims, sponsor-note repayment and the risk that public-share redemption proceeds could be below approximately $10 per share.