Purple Innovation, Inc. 10-Q

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 22, 2023, as amended on May 1, 2023. 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 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, frames, 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 directly to consumers through our e-commerce and Purple owned retail showroom channels (collectively “DTC”), online marketplaces and retail wholesale partners. 29 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 as holder of all Class A units 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 March 31, 2023, Purple Inc. had a 99.6% economic interest in Purple LLC while Class B unit holders had the remaining 0.4%. On August 31, 2022, the Company acquired all the issued and outstanding stock of Intellibed pursuant to the Merger Agreement in which Gelato Merger Sub, Inc., a wholly owned subsidiary of Purple Inc., merged with and into Intellibed, with Intellibed continuing as a wholly owned subsidiary of Purple Inc. On October 3, 2022, Purple Inc. contributed 100% of the membership interest in Intellibed to Purple LLC and Intellibed became a wholly owned subsidiary of Purple LLC. For further discussion see Note 4 — Acquisition. Executive Summary – Results of Operations Net revenues decreased 23.6% to $109.4 million for the three months ended March 31, 2023 compared to $143.2 million for the three months ended March 31, 2022. This decrease was primarily due to continued softening demand for home related products as consumer spending patterns shift more towards services and experiences, the negative effect of inflationary pressures on consumer discretionary spending, and our intentional reduction in advertising spend. This decrease was also due in part to wholesale demand for our legacy mattress models being negatively impacted by the upcoming launch of our new premium and luxury product lineup in the second quarter of 2023. Gross profit decreased 16.3% to $43.2 million for the three months ended March 31, 2023 compared to $51.6 million for the three months ended March 31, 2022 due primarily to the decrease in sales volume. The gross profit percentage in 2023 was 39.5% as compared to 36.1% in 2022. Our gross profit percentage in the prior year was adversely impacted by elevated levels of materials, labor and freight costs. In the first quarter of 2023, we benefited from our efficiency and cost reduction initiatives, including greater balancing of production and fulfillment operations between facilities, that were initiated in the first half of fiscal 2022 and became fully impactful during the second half of that year. Operating expenses decreased 6.8% to $65.2 million for the three months ended March 31, 2023 compared to $70.0 million for the three months ended March 31, 2022. This decrease primarily reflected a $12.0 million reduction in advertising spend due to the intentional reduction to improve marketing efficiency, stabilize profitability and align spending with current demand levels. Approximately $3.0 million in launch related expenses were shifted into the second quarter. The decrease in advertising spending was offset in part by $5.9 million of non-recurring legal and professional expenses incurred by the Board’s Special Committee. Other expense totaled $1.3 million for the three months ended March 31, 2023 compared to other income of $2.9 million for the three months ended March 31, 2022. Other expense in 2023 included a $1.2 million loss on extinguishment of the Company’s term loan during the quarter. Other income in 2022 primarily reflected a $3.9 million gain related to a decrease in the fair value of the sponsor warrants outstanding at the end of March 31, 2022. Net loss increased $9.8 million to $23.3 million for the three months ended March 31, 2023 compared to $13.5 million for the three months ended March 31, 2022. The increase in net loss in 2023 was due to an $8.4 million decrease in gross profit due primarily to the decrease in net revenues, a decrease of $6.2 million in other income and income tax benefit partially offset by $4.8 million in reduced operating costs. 30 Recent Developments in Our Business Coliseum Cooperation Agreement On February 21, 2023, Coliseum filed a complaint against the Company and several members of the Board alleging that the Company and the named directors authorized an improper dividend of preferred stock in bad faith to impede stockholder voting rights and interfered with Coliseum’s nomination of a competing slate of director candidates ahead of the Company’s 2023 annual meeting of stockholders. On April 19, 2023, the Company entered into a Cooperation Agreement with Coliseum in connection with the previously disclosed complaint. The Cooperation Agreement became effective on April 27, 2023 and included the following provisions: ● The size of the Board was increased from seven directors to eight directors. ● The Company amended and restated the Company’s Second Amended and Restated Bylaws to include references to the Company’s Lead Independent Director Charter. ● Current Board member and Coliseum managing partner Adam Gray was appointed Chairman of the Board. ● Current Board member Gary DiCamillo continues to serve as Lead Independent Director and was appointed chair of the Nomination and Governance Committee. ● Paul Zepf and Pano Anthos resigned as directors of the Company. ● The Board appointed S. Hoby Darling, R. Carter Pate, and Erika Serow to fill the vacancies created by increasing the size of the board and the resignations of Mr. Zepf and Mr. Anthos. ● Scott Peterson, who is a stockholder and has served as Board Observer since the Company’s acquisition of Intellibed, will be a nominee on the Board’s slate of directors at the 2023 Annual Meeting in place of Dawn Zier, who previously announced her intention not to stand for re-election. ● Other than as described above with respect to Dawn Zier, the Board will nominate all incumbent directors for election at the Company’s annual meetings of stockholders to be held in 2023 and 2024. ● The Company amended its Corporate Governance Guidelines for Operation of the Board of Directors and adopted a Lead Independent Director Charter to provide for the responsibilities of the Lead Independent Director. ● The Company terminated the stockholder rights agreement it adopted on September 25, 2022 and agreed not to adopt a new stockholder rights agreement prior to the termination of the Cooperation Agreement without Coliseum’s prior consent. ● The Company redeemed all outstanding shares of PRPLS and agreed not to issue any similar security or take any other action prior to the termination of the Cooperation Agreement that would change the stockholder voting standards from those in effect prior to the issuance of the PRPLS. The PRPLS redemption payment record date will be as of April 28, 2023. ● The Company will reimburse Coliseum for all out-of-pocket fees, costs, and expenses incurred in connection with the complaint, provided that such an amount shall not exceed $4 million in the aggregate. ● The Company terminated the Special Committee. ● Coliseum dismissed its litigation against the Company. ● At the 2023 and 2024 annual meetings of stockholders, Coliseum will cause all of the common stock that Coliseum or any of its affiliates has the direct or indirect right to vote as of the applicable record date, to be present in person or by proxy for quorum purposes and to be voted (i) in favor of each of the candidates for election on the Company’s slate of nominees for election to the Board, (ii) against any stockholder nominations for any other directors, and (iii) against any proposals or resolutions to remove any member of the Board other than for cause. ● Coliseum agreed to be bound by customary standstill restrictions, including, among others, agreements not to acquire additional shares of the Company’s securities that would cause Coliseum’s ownership of Voting Securities to exceed 44.4% of the total outstanding Common Stock (other than acquisitions directly from the Company), engage in proxy solicitations and related matters, form or join any “group” with respect to shares of the Company, encourage others to pursue a “contested solicitation,” or make any public proposals, subject to certain exceptions. ● Coliseum agreed to condition any proposal from it or any of its affiliates to acquire the Company or all or substantially all of the outstanding stock of the Company held by stockholders unaffiliated with Coliseum on (i) such transaction being negotiated by, and subject to the approval of, a special committee of directors of the Board who are independent with respect to Coliseum and disinterested under Delaware law and (ii) a nonwaivable condition that such transaction be approved by the affirmative vote of the holders of a majority of the Company’s outstanding common stock not beneficially owned by Coliseum or its affiliates or other parties with a material conflict of interest in such transaction. ● The Cooperation Agreement shall terminate on the day following the date on which the 2024 annual meeting of stockholders is held. 31 Shelf Registration Statement and Equity Financing On January 30, 2023, the Form S-3 shelf registration statement we filed with the SEC in December 2022 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. In February 2023, we completed an underwritten offering of 13.4 million shares of Class A common stock at a public offering price of $4.50 per share. The underwriters did not exercise their over-allotment option. The aggregate net proceeds received by us from the offering, after deducting offering fees and expenses of $3.1 million, totaled $57.2 million. Debt Financing On September 3, 2020, Purple LLC entered into a financing arrangement with KeyBank National Association and a group of financial institutions (the “2020 Credit Agreement”). The 2020 Credit Agreement provided for a $45.0 million term loan and a $55.0 million revolving line of credit. The term loan was to be repaid in accordance with a five-year amortization schedule or 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. On February 17, 2023, we entered into a fifth amendment to the 2020 Credit Agreement. As a condition of entering into the amendment, we repaid the $24.7 million outstanding balance on the term loan plus accrued interest. The amendment provided that the maximum leverage ratio covenant will not be tested for the first and second quarters of 2023, revised the ratio to 4.50x for the third quarter of 2023, and revised the ratio to 3.00x for all quarters thereafter. In addition, the minimum fixed charge coverage ratio covenant will not be tested for the first and second quarters of 2023, was revised to 1.50x for the third and fourth quarters of 2023, and was revised to 2.00x for all quarters thereafter. The amendment also revised the lease incurrence test which allows us to incur ten new showroom leases for stores that will open in 2023 and six new leases for stores that will open in 2024. Moreover, beginning in the fourth quarter of 2023, we will be allowed to 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 further provided 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 also modified the definition of consolidated EBITDA to allow for nonrecurring / one-time and non-cash expenses and certain other expenses that are cash capped. In addition, for purposes of the definition of consolidated EBITDA, annual non-recurring and unusual out-of-pocket legal expenses were capped at $5.0 million for 2023 and $2.0 million per year thereafter. Moreover, the amendment (i) reduced the amount available under the revolving line of credit to $50.0 million, (ii) provided that the maturity date of the 2020 Credit Agreement will spring forward to June 30, 2024 if consolidated EBITDA is not greater than $15.0 million for 2023, (iii) reduced limits on maximum growth capital expenditures to $32.0 million for 2023 and $35.0 million for 2024 and 2025, and (iv) revised 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 $2.9 million that were recorded as debt issuance costs in the condensed consolidated balance sheet. The amendment was accounted for as an extinguishment of debt and $1.2 million of unamortized debt issuance costs related to the term loan were recorded as loss on extinguishment of debt in the condensed consolidated statement of operations. For us to draw on our revolving line of credit, we must be in compliance with the covenants outlined in the fifth amendment. As of March 31, 2023, we complied with all the financial covenants associated with the 2020 Credit Agreement, as amended, and the full $50.0 million of the revolving line of credit was available to draw upon. 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 2021 we doubled our production capacity by opening a second, larger plant in Georgia to match actual and anticipated demand growth. After two years of the pandemic, we experienced a pull-back in growth. In 2022, our gross profit and results of operations were adversely affected by elevated levels of materials, labor and freight costs and the lower demand levels. In the first quarter of 2023, we benefited from various efficiency and cost reduction initiatives at the plant level that became fully impactful during the second half of 2022. These efficiency and cost saving initiatives helped increase our gross margin in the first quarter of 2023 to 39.5% compared to 36.1% in the first quarter of 2022. 32 In the first quarter of 2023, we continued to experience a softening of demand for home-related products as consumers shift spending patterns more towards services and experiences. As consumer spending habits shift away from e-commerce purchases to brick and mortar buying, we have invested in showroom expansion while continuing to develop our capabilities and improving productivity. We have also focused on growing our placements with wholesale partners and improving wholesale door productivity. Although we ended both the first quarter of 2023 and year-end 2022 with 55 Purple owned retail showrooms, we expect to start adding new showrooms again across the remainder of 2023. In addition, at March 31, 2023, our products were being sold through approximately 3,400 wholesale doors, having added approximately 300 net new doors during the past 12 months. Showroom expansion and improving the sales productivity of both our wholesale doors and existing showrooms remain primary focuses 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 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. In 2022 and continuing into the first quarter of 2023, we have purposely reduced our advertising spending to improve marketing efficiency, conserve profitability in a challenging macroeconomic environment and align spending with current demand levels. As we have expanded our focus on product development and increased our innovation capabilities, in the first quarter of 2023 we announced the upcoming May 2023 launch of our new Premium and Luxe product lineup. This launch is being supported by enhancements to our in-store presence, refinements to our marketing programs and brand messaging and the shift of approximately $3.0 million of launch related expenses into the second quarter of 2023. We believe the acquisition of Intellibed was a strong strategic addition because of shared technology and geographic proximity of their primary facility. The acquisition also provided an immediate impact on our target luxury market expansion. We also expect to capitalize on synergies of the combined companies and to 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 has accelerated our product development program by several years and allowed us to immediately enter the higher price point luxury segment of the sleep and wellness industry that are a natural extension of our existing product offerings. 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 our strategies to meaningfully expand our wholesale business by strengthening wholesale relationships and prioritizing existing door productivity. The initial testing of our new product line-up with our wholesale partners was positive and we currently have increased our existing footprint by 1,900 slots, a 15% increase, and we continue to receive orders to further expand our existing footprint. ● Expand and mature our fleet of Purple company owned showrooms in 2023 to increase door productivity, provide a brand halo benefit to other channels in the surrounding areas, strengthen the relationship with the consumer, and increase share of more profitable DTC revenues. ● Build brand position to grow our market share of the premium and luxury mattress categories. 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 further enhance our gross margin. 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. 33 Operating Results for the Three Months Ended March 31, 2023 and 2022 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 (dollars in thousands): Three Months Ended March 31, 2023 % of Net Revenues 2022 % of Net Revenues Revenues, net $ 109,372 100.0 % $ 143,179 100.0 % Cost of revenues 66,149 60.5 91,553 63.9 Gross profit 43,223 39.5 51,626 36.1 Operating expenses: Marketing and sales 38,173 34.9 49,959 34.9 General and administrative 23,667 21.6 17,888 12.5 Research and development 3,372 3.1 2,143 1.5 Total operating expenses 65,212 59.6 69,990 48.9 Operating loss (21,989 ) (20.1 ) (18,364 ) (12.8 ) Other income (expense): Interest expense (202 ) (0.2 ) (1,023 ) (0.7 ) Other income, net 73 0.1 17 — Loss on extinguishment of debt (1,217 ) (1.1 ) — — Change in fair value – warrant liabilities — — 3,928 2.7 Total other income (expense), net (1,346 ) (1.2 ) 2,922 2.0 Net loss before income taxes (23,335 ) (21.3 ) (15,442 ) (10.8 ) Income tax (expense) benefit (72 ) (0.1 ) 1,811 1.3 Net loss (23,407 ) (21.4 ) (13,631 ) (9.5 ) Net loss attributable to noncontrolling interest (107 ) (0.1 ) (129 ) (0.1 ) Net loss attributable to Purple Innovation, Inc. $ (23,300 ) (21.3 ) $ (13,502 ) (9.4 ) Revenues, Net Net revenues decreased $33.8 million, or 23.6%, to $109.4 million for the three months ended March 31, 2023 compared to $143.2 million for the three months ended March 31, 2022. The decrease in net revenues was primarily due to continued softening demand for home related products as consumer spending patterns shift more towards services and experiences, the negative effect of inflationary pressures on consumer discretionary spending, and our intentional reduction in advertising spend. This decrease was also due in part to wholesale demand for our legacy mattress models being impacted by the upcoming launch of our new Premium and Luxe product lineup in the second quarter. The decline in net revenues from a sales channel perspective consisted of DTC net revenues decreasing $19.2 million, or 22.5% and wholesale net revenues decreasing $14.6 million, or 25.3%. Within DTC, e-commerce net revenues decreased $22.2 million, or 30.1%, while Purple owned retail showroom net revenues increased $2.9 million, or 24.4%. The decrease in e-commerce net revenues reflected the impact of the reasons previously stated. The increase in Purple owned retail showroom net revenue was mainly driven by showrooms increasing from 34 at the end of March 2022 to 55 at the end of March 2023. The decrease in wholesale net revenues was due in part to reduced purchases by our existing wholesale partners ahead of taking delivery of new models in conjunction with the upcoming launch of our new premium product lineup in the second quarter. The decrease in wholesale net revenues was offset in part by the effects of adding $5.3 million of Intellibed wholesale net revenues. Cost of Revenues Cost of revenues decreased $25.4 million, or 27.7%, to $66.1 million for the three months ended March 31, 2023 compared to $91.6 million for the three months ended March 31, 2022. This decrease was primarily due to the corresponding decrease in sales volume. Our gross profit percentage, which increased to 39.5% of net revenues in the first quarter of 2023 from 36.1% in the first quarter of 2022, benefited from the continued realization of efficiency and cost saving initiatives that we introduced in the first half of fiscal 2022 and became more fully impactful during the second half of the year and into 2023. 34 Marketing and Sales Marketing and sales expense decreased $11.8 million, or 23.6%, to $38.2 million for the three months ended March 31, 2023 compared to $50.0 million for the three months ended March 31, 2022. This decrease reflected a decline in advertising spending of $12.0 million, or 50.7% to $11.7 million in 2023 from $23.7 million in 2022. This reduction was primarily due to management focusing its efforts on improving marketing efficiency with its legacy products and delaying advertising spend increases to align with the upcoming launch of our new premium and luxury product lineup in the second quarter. Marketing and sales expense as a percentage of net revenues was 34.9% in both the first quarter of 2023 and the first quarter of 2022. General and Administrative General and administrative expense increased $5.8 million, or 32.3%, to $23.7 million for the three months ended March 31, 2023 compared to $17.9 million for the three months ended March 31, 2022. This increase was primarily due to $5.9 million in legal and professional fees associated with expenses incurred by the Special Committee. Research and Development Research and development costs increased $1.2 million, or 57.3%, to $3.4 million for the three months ended March 31, 2023 compared to $2.1 million for the three months ended March 31, 2022. This increase primarily reflected higher costs associated with our renewed focus on product innovation. Operating Income (Loss) Operating loss increased $3.6 million to $22.0 million for the three months ended March 31, 2023 compared to $18.4 million for the three months ended March 31, 2022. The larger operating loss primarily resulted from a decrease in gross profit that was driven by lower sales, offset in part by a decrease in operating expenses related primarily to lower advertising spend. Interest Expense Interest expense totaled $0.2 million for the three months ended March 31, 2023 compared to $1.0 million for the three months ended March 31, 2022. This decrease was primarily due to higher interest expense of $0.7 million incurred during the three months ended March 31, 2022 on the term loan that was paid off in February 2023 and 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. Loss on Extinguishment of Debt On February 17, 2023, the Company entered into a fifth amendment to the 2020 Credit Agreement and repaid in full the $24.7 million outstanding balance of the term loan plus accrued interest. The amendment was accounted for as an extinguishment of debt during the first quarter of 2023 and $1.2 million of unamortized debt issuance costs were recorded as loss on extinguishment of debt in the condensed consolidated statement of operations. 35 Change in Fair Value – Warrant Liabilities In February 2023, the 1.9 million of sponsor warrants outstanding expired and were cancelled pursuant to the terms of the agreement. These sponsor warrants had no fair value on the date of expiration. During the three months ended March 31, 2022, we recognized a gain of $3.9 million in our condensed consolidated statement of operations related to a decrease in the fair value of the warrants outstanding at the end of the quarter. The 1.9 million sponsor warrants outstanding at March 31, 2022 had a fair value of $0.4 million. Income Tax (Expense) Benefit We had income tax expense of $0.1 million for the three months ended March 31, 2023 compared to an income tax benefit of $1.8 million for the three months ended March 31, 2022. The income tax expense amount in the first quarter of 2023 related to various state taxes. 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 $0.1 million for both the three months ended March 31, 2023 and 2022. 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, working capital needs, and operating lease payment obligations. Our working capital needs depend largely upon the timing of cash receipts from product sales, payments to vendors and others, and changes in inventories. Our unrestricted cash and working capital positions were $52.8 million and $77.5 million, respectively, as of March 31, 2023 compared to $40.0 million and $62.4 million, respectively, as of December 31, 2022. Cash used for capital expenditures decreased from $13.1 million in the first quarter of 2022 to $2.9 million in the first quarter of 2023. Our capital expenditures in the first quarter of 2023 primarily consisted of additional investments made in our manufacturing facilities in Utah and Georgia. 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 the liquidity we have available 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 seeking additional funding sources including new debt or equity capital. 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 e-commerce, wholesale, and Purple owned retail store channels will be sufficient to meet our working capital requirements, comply with debt covenants and cover anticipated capital expenditures for at least the next 12 months. Shelf Registration Statement and Offering of Class A Common Stock On January 30, 2023, the registration statement we filed in December 2022 on Form S-3 with the SEC using the “shelf” registration process 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. In February 2023, the Company completed an underwritten offering of 13.4 million shares of Class A common stock at a public offering price of $4.50 per share. The underwriters did not exercise their over-allotment option. The aggregate net proceeds received by the Company from the offering, after deducting offering fees and expenses of $3.1 million, totaled $57.2 million. 36 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 was to be repaid in accordance with a five-year amortization schedule and could 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. On February 17, 2023, we entered into a fifth amendment to the 2020 Credit Agreement. As a condition of entering into the amendment, we repaid the $24.7 million outstanding balance on the term loan plus accrued interest. The amendment provided that the maximum leverage ratio covenant will not be tested for the first and second quarters of 2023, revised the ratio to 4.50x for the third quarter of 2023, and revised the ratio to 3.00x for all quarters thereafter. In addition, the minimum fixed charge coverage ratio covenant will not be tested for the first and second quarters of 2023, was revised to 1.50x for the third and fourth quarters of 2023, and was revised to 2.00x for all quarters thereafter. The amendment also revised the lease incurrence test which allows us to incur ten new showroom leases for stores that will open in 2023 and six new leases for stores that will open in 2024. Moreover, beginning in the fourth quarter of 2023, we will be allowed to begin incurring additional 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 further provided 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 also modified the definition of consolidated EBITDA to allow for nonrecurring / one-time and non-cash expenses and certain other expenses that are cash capped. In addition, for purposes of the definition of consolidated EBITDA, annual non-recurring and unusual out-of-pocket legal expenses were capped at $5.0 million for 2023 and $2.0 million per year thereafter. Moreover, the amendment (i) reduced the amount available under the revolving line of credit to $50.0 million, (ii) provided that the maturity date of the 2020 Credit Agreement will spring forward to June 30, 2024 if consolidated EBITDA is not greater than $15.0 million for 2023, (iii) reduced limits on maximum growth capital expenditures to $32.0 million for 2023 and $35.0 million for 2024 and 2025, and (iv) revised 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 $2.9 million that were recorded as debt issuance costs in the condensed consolidated balance sheet. The amendment was accounted for as an extinguishment of debt and $1.2 million of unamortized debt issuance costs related to the term loan were recorded as loss on extinguishment of debt in the condensed consolidated statement of operations. For us to draw on the revolving line of credit, we must be in compliance with the covenants outlined in the fifth amendment. As of March 31, 2023, we complied with all the financial covenants associated with the 2020 Credit Agreement, as amended, and the full $50.0 million of the revolving line of credit was available to draw upon. 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 both March 31, 2023 and December 31, 2022, there was no tax receivable agreement liability reflected in the Company’s consolidated balance sheet. For reasons similar to those that led to the recording of a full valuation allowance on our deferred tax assets in the fourth quarter of 2022, 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 continued to record no tax receivable agreement liability in the first quarter of 2023. 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. 37 Other Contractual Obligations Other material contractual obligations primarily include operating lease payment obligations. Also, as discussed above regarding the Cooperation Agreement, we will reimburse Coliseum for all out-of-pocket fees, costs, and expenses incurred in connection with their complaint, provided that such an amount shall not exceed $4 million in the aggregate. See Note 9 of the condensed consolidated financial statements for additional information on leases. Cash Flows for the Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022 The following summarizes our cash flows for the three months ended March 31, 2023 and 2022 as reported in our condensed consolidated statements of cash flows (in thousands): Three Months Ended March 31, 2023 2022 Net cash used in operating activities $ (13,503 ) $ (44,281 ) Net cash used in investing activities (3,098 ) (13,078 ) Net cash provided by financing activities 29,377 28,441 Net decrease in cash 12,776 (28,918 ) Cash, beginning of the period 41,754 91,616 Cash, end of the period $ 54,530 $ 62,698 Cash used in operating activities was $13.5 million and $44.3 million for the three months ended March 31, 2023 and 2022, respectively. Cash used in operating activities in 2023 was primarily comprised of a net loss of $23.3 million, offset in part by non-cash adjustments totaling $9.6 million. These non-cash adjustments primarily related to $6.9 million of depreciation and amortization, a $1.2 million loss on the extinguishment of debt and $1.2 million of stock-based compensation. Changes in operating assets and liabilities increased cash used in operating activities by $0.3 million in 2023. This increase primarily reflected a $20.1 million decrease in accounts receivable and a $1.2 million increase in accounts payable, offset by a $14.5 million increase in inventories combined with a $6.8 million decrease in accrued rebates and allowances. The decline in accounts receivable was due in part to a $23.3 million decrease in wholesale net revenues in the first quarter of 2023 compared to the fourth quarter of 2022. The increase in inventories was primarily due to an increase in finished goods inventory. The decrease in accrued rebates and allowances primarily resulted from a large credit memo issued to a wholesale partner for volume rebates related to 2022 purchases. Cash used in investing activities reflected capital expenditures of $3.1 million for the three months ended March 31, 2023 compared to $13.1 million for the three months ended March 31, 2022. Capital expenditures in the first quarter of 2023 primarily consisted of additional investments made in our manufacturing facilities in Utah and Georgia. Cash provided by financing activities was $29.4 million during the three months ended March 31, 2023 compared to $28.4 million during the three months ended March 31, 2022. Financing activities in the first quarter of 2023 included $57.2 million of net proceeds received from the stock offering, offset in part by a $24.7 million term loan payment, a $0.3 million payment on the tax receivable agreement, and $2.9 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 2022 Annual Report on Form 10-K filed March 22, 2023. There were no significant changes in our critical accounting policies since the end of fiscal 2022. 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 and Form 10-K/A, 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. The inclusion of our website address in this report does not include or incorporate by reference into this report any information on our website. 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