Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is
intended to provide a more comprehensive review of the operating results and financial condition of Purple Innovation, Inc. than can be
obtained from reading the Unaudited Condensed Consolidated Financial Statements alone. The discussion should be read in conjunction with
the Unaudited Condensed Consolidated Financial Statements and the notes thereto included in “Part I. Item 1. Financial Statements.”
FORWARD-LOOKING STATEMENTS
This quarterly report on Form
10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that represent our current expectations and beliefs.
All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state
securities laws. In some cases, you can identify these statements by forward-looking words such as “believe,” “expect,”
“project,” “anticipate,” “estimate,” “intend,” “plan,” “targets,”
“likely,” “will,” “would,” “could,” “may,” “might,” the negative
of these words and other similar words.
All forward-looking statements
included in this Quarterly Report are made only as of the date thereof. It is routine for our internal projections and expectations to
change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end
of the next quarter or year. In addition, any statements that refer to projections of our future financial performance, our anticipated
growth and trends in our businesses (including the discussion under the heading “Outlook for Growth”), and other characterizations
of future events or circumstances are forward-looking statements.
We caution and advise readers
that these statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including
those included in the “Risk Factors” section of this Quarterly Report and in our Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 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 are an omni-channel Company
that began as a digitally-native vertical brand founded on comfort product innovation with premium offerings. We design and manufacture
a variety of innovative, branded and premium comfort products, including mattresses, pillows, cushions, frames, sheets, 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, online marketplaces and
retail wholesale partners.
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 June 30, 2023,
Purple Inc. had a 99.6% economic interest in Purple LLC while other Class B Unit holders had the remaining 0.4%.
On August 31, 2022, we acquired
all the issued and outstanding stock of Intellibed pursuant to the Merger Agreement. 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. We believe the addition
of Intellibed has increased product offerings to customers, expanded market opportunities, capitalized on synergies of the combined companies,
and increased opportunities for innovation. In addition, the acquisition consolidated ownership of our intellectual property licensed
to Intellibed and we believe will enable us to more fully capitalize on growing demand for products with our proprietary gel technologies.
For further discussion see Note 4 — Acquisition.
31
Executive Summary – Results of Operations
Net revenues decreased 16.1% to $120.9 million and 19.9% to $230.2 million for the three and six months ended June 30, 2023, respectively,
when compared to the corresponding periods in the prior year. These decreases were primarily due to continued softening demand in the
industry for home-related products, inflationary pressure on consumer discretionary spending, forward buying of consumers in recent years,
industry-standard price reductions on the sell-in of new mattress and adjustable base floor models to wholesale partners and increased
discounting of discontinued models sold through our DTC channels. Additionally, although we began ramping up marketing efforts in mid-May
to support our new product lineups, the planned pullback in advertising spend prior to that impacted demand during the quarter.
Gross profit decreased 21.2% to $38.5 million and 18.7% to $81.7 million
for the three and six months ended June 30, 2023, respectively, when compared to the corresponding periods in the prior year. These decreases
were primarily due to corresponding decreases in sales volume. Our gross profit percentage on a year-to-date basis, which increased to
35.5% of net revenues in 2023 from 35.0% in 2022, benefited from the ongoing realization of efficiency and cost saving initiatives put
in place during the first half of 2022. These benefits were offset in part by new mattress and base floor models being sold to our wholesale
partners at reduced pricing coupled with increased discounting of discontinued models sold through our DTC channels as we transitioned
to our new Premium and Luxe product lineups.
Operating
expenses increased 24.4% to $75.7 million and 7.7% to $141.0 million for the three and six months ended June 30, 2023, respectively,
when compared to the corresponding periods in the prior year. These increases were primarily due to legal and professional fees of $8.2
million and $14.1 million incurred by the Special Committee during the three and six months ended June 30, 2023, respectively. Included
in those amounts are a $4.0 million accrual made in the second quarter of 2023 for the settlement amount owed to Coliseum. Marketing
and sales expenses were $6.0 million higher in the second quarter due mainly to the increased number of showrooms and the associated
costs, increased wholesale marketing costs and increased advertising spend to align with the launch of our new Premium and Luxe product
lineups in May 2023.
Other expense totaled $1.7 million for the six months ended June 30, 2023 compared to other income of $2.4 million
for the six months ended June 30, 2022. Other expense in 2023 included a $1.2 million loss on extinguishment of the Company’s term
loan during the first quarter. Other income in 2022 primarily reflected a $4.3 million gain related to a decrease in the fair value of
the sponsor warrants outstanding at the end of June 30, 2022.
Net loss was $37.5 million
and $60.8 million for the three and six months ended June 30, 2023, respectively, compared to net losses of $29.2 million and $21.8 million
for the three and six months ended June 30, 2022, respectively.
32
Recent Developments in Our Business
Operational Developments
In
2022 and continuing into 2023, we expanded our focus on product development and increased our innovation capabilities. As a result, in
May 2023, we launched our new Premium and Luxe product lineups. This launch was supported by enhancements to our in-store presence and
refinements to our marketing programs and brand messaging. Although the response to our new products and new brand positioning has been
positive, we continue to experience softening demand for home-related products in 2023 due to forward buying in recent years and inflationary
pressures on consumer discretionary spending. Also, as consumer spending habits have moved away from the COVID era e-commerce spike in
purchases to brick and mortar buying, we have invested in showroom expansion and grown the number of Purple owned retail showrooms to
56 at June 30, 2023 from 40 at the end of June 30, 2022. Although we added only one new showroom during the first six months of 2023,
we expect to add additional new showrooms across the remainder of the year. In addition, we have focused on growing our placements with
wholesale partners and improving wholesale door productivity. In the second quarter, less than half of our approximately 3,300 wholesale
doors were transitioned to our new line of mattress products. We expect to convert the remaining wholesale doors to our new product lineup
by the end of the year. 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. Beginning in 2022 and continuing into 2023, we purposely
reduced our advertising spending to improve marketing efficiency, conserve profitability in a challenging macroeconomic environment and
align spending with current demand levels. With the introduction of our new product lineups, we initiated a new marketing campaign and
increased advertising spend in May and June 2023. We believe we have set the right course for the next stage of growth for the Company.
June, the first full month with our new product in-market, was the strongest month of 2023 with a revenue run rate up double digits to
the first 5 months of the year.
Coliseum Cooperation Agreement
On February 21, 2023, Coliseum
filed a lawsuit against us and several members of our Board alleging that we 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 our 2023 annual meeting of stockholders. On April 19, 2023, we entered into a Cooperation Agreement
with Coliseum to resolve the litigation. The Cooperation Agreement, which became effective on April 27, 2023, resulted in the following:
● The
size of the Board was increased from seven directors to eight directors.
● We
amended and restated our Second Amended and Restated Bylaws to include references to our Lead Independent Director Charter.
● Board
member and Coliseum managing partner Adam Gray was appointed Chairman of the Board.
● Board
member Gary DiCamillo continued 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 the increased the size of the board
and the resignations of Mr. Zepf and Mr. Anthos.
● Scott
Peterson, a stockholder and Board Observer since our acquisition of Intellibed, was included as a nominee on the Board’s slate
of directors at the 2023 Annual Meeting in place of Dawn Zier, who had previously announced her decision not to stand for re-election.
● Other
than as described above with respect to Dawn Zier, the Board nominated all incumbent directors for election at our annual meetings of
stockholders to be held in 2023 and 2024.
● We
amended our 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.
● We
terminated the stockholder rights agreement 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. As a result, all shares of preferred stock
previously designated as Series A Junior Participating Preferred Stock were eliminated and returned to the status of authorized but unissued
shares of preferred stock, without designation.
● We
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.
As a result, all shares of preferred stock previously designated as PRPLS were eliminated and returned to the status of authorized but
unissued shares of preferred stock, without designation. We made a $0.1 million payment to redeem the PRPLS based on a record date as
of April 28, 2023. The PRPLS redemption payment was reflected in our consolidated balance sheet as a reduction to additional paid-in
capital.
● We
agreed to reimburse Coliseum for up to $4.0 million of out-of-pocket fees, costs, and expenses incurred in connection with the lawsuit.
● We
terminated the Special Committee.
33
● Coliseum
dismissed its litigation against us.
● At
the 2023 and 2024 annual meetings of stockholders, Coliseum caused or will cause all of the common stock that Coliseum or any of its
affiliates had 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.
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 $3.3 million, totaled $57.0 million.
Debt Financing
On August 7, 2023, Purple
LLC, Purple Inc. and Intellibed, (collectively the “Loan Parties”) entered into a term loan credit agreement (the “Term
Loan Agreement”) with Callodine Commercial Finance, LLC and a group of financial institutions. Also, on August 7, 2023, the Loan
parties entered into a separate financing arrangement with the Bank of Montreal and a group of financial institutions (collectively the
“ABL Lenders”) that provides for a revolving asset-based credit facility (the “ABL Agreement”). Pursuant to entering
into these agreements, the Company incurred fees and expenses of $3.1 million that will be reflected as debt issuance costs in the third
quarter of 2023.
The Term Loan Agreement provides
for up to $25.0 million of term loans, with up to $5.0 million of incremental term loans available, subject to certain conditions (collectively,
the “Term Loans”). Proceeds from the Term Loans, which were fully drawn at closing, will be used for general corporate purposes.
The borrowing rates under the Term Loan Agreement are based on SOFR, plus a credit spread adjustment of 0.15% per annum, plus 8.5% per
annum, with a SOFR floor of 2.0% per annum. The Term Loans will be repaid at the earlier of (a) a three-year amortization schedule ending
on August 7, 2026 or (b) the payment in full of the ABL Agreement. The Term Loans may be prepaid in whole or in part at any time, but
subject to a prepayment premium. There may also be mandatory prepayment obligations based on certain asset dispositions, casualty events
and extraordinary receipts. Once repaid, no portion of the Term Loans may be reborrowed.
34
Pursuant to a pledge and security
agreement, the Loan Parties’ obligations under the Term Loan Agreement are secured by a perfected second-priority security interest
in the cash, inventory and accounts receivable of the Loan Parties, and a perfected first-priority security interest in substantially
all other assets of the Loan Parties, including, without limitation, the intellectual property and equipment of the Loan Parties, subject
to certain exceptions.
The ABL Agreement provides for up to $50.0 million of revolving loans
subject to a borrowing base calculation (with sub-facilities for swing line loans and the issuance of letters of credit), with incremental
increases available up to $20.0 million, subject to certain conditions (the “ABL Loans”). No funds were drawn under the ABL
Agreement at closing. The Company anticipates that any funds drawn from under the ABL Agreement will be used to finance permitted acquisitions,
as defined in the ABL Agreement and for working capital, capital expenditures and other general corporate purposes. Outstanding principal
and accrued interest on the ABL Loans shall be repaid on August 7, 2026.
The borrowing rates under
the ABL Agreement will accrue on a three-tiered grid based on revolving availability, ranging from (i) SOFR, plus a credit spread adjustment
of 0.10% per annum, plus 2.75% per annum to (ii) SOFR, plus a credit spread adjustment of 0.10% per annum, plus 3.25% per annum, with
a SOFR floor of 0% per annum. The ABL Loans may be prepaid in whole or in part at any time without premium or penalty, subject to reimbursement
of certain costs. There may be mandatory prepayment obligations based on certain asset dispositions, casualty events, equity issuances
and extraordinary receipts.
Pursuant to a pledge and security
agreement, the Loan Parties’ obligations under the ABL Agreement are secured by a perfected first-priority security interest in
the cash, inventory and accounts receivable of the Loan Parties, and a perfected second-priority security interest in substantially all
of the other assets of the Loan Parties, subject to certain exceptions.
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 had a term of five years and carried 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 made a payment of $24.7 million
to satisfy the outstanding balance on the term loan plus accrued interest. The amendment revised various financial covenants and certain
definitions of key terms, reduced the amount available under the revolving line of credit to $50.0 million, provided that the maturity
date of the 2020 Credit Agreement would spring forward to June 30, 2024 if consolidated EBITDA was not greater than $15.0 million
for 2023, reduced limits on maximum growth capital expenditures, and revised the current minimum liquidity covenant. 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.
In connection with our execution of the Term Loan Agreement and ABL
Agreement, the Company terminated its 2020 Credit Agreement. The Company had no outstanding borrowings under the term loan or the revolving
line of credit at the time of termination. The termination was accounted for as an extinguishment of debt and $3.1 million of unamortized
debt issuance costs related to the 2020 Credit Agreement will be recorded as a loss on extinguishment of debt in the third quarter of
2023.
35
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:
● Strengthen our wholesale relationships, prioritize existing door productivity,
and develop and execute our other strategies to meaningfully expand our wholesale business.
●
Expand and mature our fleet of Purple owned retail showrooms in 2023,
increase door productivity, provide a brand halo benefit to other channels in the surrounding areas, strengthen the relationship with
the consumer, and increase the share of more profitable DTC revenue mix.
●
Build brand position to grow our market share of the premium and luxury mattress categories. We launched our new Premium and Luxe product lineups in the second quarter of 2023. This launch was supported by enhancements to our in-store presence and refinements to our marketing programs and brand messaging.
● 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.
36
Operating Results for the Three Months Ended June 30, 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:
Three Months Ended June 30,
2023
% of
Net
Revenues
2022
% of
Net
Revenues
Revenues, net
$
120,872
100.0
%
$
144,109
100.0
%
Cost of revenues
82,408
68.2
95,297
66.1
Gross profit
38,464
31.8
48,812
33.9
Operating expenses:
Marketing and sales
46,379
38.4
40,373
28.0
General and administrative
26,437
21.9
18,779
13.0
Research and development
2,925
2.4
1,748
1.2
Total operating expenses
75,741
62.7
60,900
42.3
Operating loss
(37,277
)
(30.8
)
(12,088
)
(8.4
)
Other income (expense):
Interest expense
(352
)
(0.3
)
(707
)
(0.5
)
Other income (expense), net
37
—
(136
)
(0.1
)
Change in fair value – warrant liabilities
—
—
346
0.2
Total other expense, net
(315
)
(0.3
)
(497
)
(0.3
)
Net loss before income taxes
(37,592
)
(31.1
)
(12,585
)
(8.7
)
Income tax (expense) benefit
(72
)
(0.1
)
4,175
2.9
Net loss
(37,664
)
(31.2
)
(8,410
)
(5.8
)
Net loss attributable to noncontrolling interest
(155
)
(0.1
)
(70
)
—
Net loss attributable to Purple Innovation, Inc.
$
(37,509
)
(31.0
)
$
(8,340
)
(5.8
)
Revenues, Net
Net revenues decreased $23.2 million, or 16.1%, to $120.9 million for the three months ended June 30, 2023 compared to $144.1 million
for the three months ended June 30, 2022. The decrease in net revenues was primarily due to continued softening demand in the industry
for home related products, inflationary pressure on consumer discretionary demand,forward buying of consumers in recent years, price reductions
of floor models and increased discounting on discontinued models sold through our DTC channels as we launched our new Premium and Luxe
product lineups. The decline in net revenues from a sales channel perspective consisted of DTC net revenues decreasing $13.6 million,
or 16.6% and wholesale net revenues declining $9.7 million, or 15.5%. Within DTC, e-commerce net revenues decreased $15.5 million, or
23.1%, while Purple owned retail showroom net revenues increased $2.0 million, or 13.5%. 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 driven by showrooms increasing
from 40 at the end of June 2022 to 56 at the end of June 2023. The decrease in wholesale net revenues, which reflected the impact of the
reasons previously stated, was also affected by reduced purchases from existing wholesale partners ahead of the launch of our new Premium
and Luxe product lineups coupled with floor models of our new mattress and base products being sold to our wholesale partners at reduced
pricing.
Cost of Revenues
Cost of revenues decreased $12.9 million, or 13.5%, to $82.4 million
for the three months ended June 30, 2023 compared to $95.3 million for the three months ended June 30, 2022. This decrease was primarily
due to a corresponding decrease in sales volume. Our gross profit percentage, which decreased to 31.8% of net revenues in the second quarter
of 2023 from 33.9% in the second quarter of 2022, was negatively impacted by the transition to our new Premium and Luxe product lineups
whereby floor models of our new mattress and base products were sold to our wholesale partners at reduced pricing coupled with increased
discounting of discontinued models sold through our DTC channels.
37
Marketing and Sales
Marketing and sales expense increased $6.0 million, or 14.9%, to $46.4 million for the three months ended June 30, 2023 compared to $40.4
million for the three months ended June 30, 2022. Marketing and sales expense as a percentage of net revenues was 38.4% in the second
quarter of 2023 compared to 28.0% in the second quarter of 2022. This increase reflected a $3.7 million increase in costs associated with
showroom expansion, and a $2.6 million increase in wholesale marketing. In addition, advertising spending increased $1.2 million, or 6.0%,
to $20.1 million for the three months ended June 30, 2023 compared to $18.9 million for the three months ended June 20, 2022. Advertising
spend began increasing in mid-May to align with the launch of our new Premium and Luxe product lineups. These increases were offset in
part by a $1.5 million decrease in other marketing and sales costs.
General and Administrative
General and administrative
expense increased $7.7 million, or 40.8%, to $26.4 million for the three months ended June 30, 2023 compared to $18.8 million for the
three months ended June 30, 2022. This increase was primarily due to legal and professional fees incurred by the Special Committee, which
included a $4.0 million accrual for the settlement amount owed to Coliseum.
Research and Development
Research and development costs
increased $1.2 million, or 67.3%, to $2.9 million for the three months ended June 30, 2023 compared to $1.7 million for the three months
ended June 30, 2022. This increase primarily reflected our focus on new product innovation initiatives to remain competitive and advance
our current product line.
Operating Loss
Operating loss increased $25.2
million to $37.3 million for the three months ended June 30, 2023 compared to $12.1 million for the three months ended June 30, 2022.
The larger operating loss primarily resulted from a decrease in gross profit that was driven by lower sales and a reduced gross profit
percentage, an increase in higher marketing and sales costs primarily associated with our new product launch, and an increase in general
and administrative expense resulting from legal and professional fees incurred by the Special Committee and attributable to the Cooperation
Agreement with Coliseum.
Interest Expense
Interest expense totaled $0.4
million for the three months ended June 30, 2023 compared to $0.7 million for the three months ended June 30, 2022. This decrease was
primarily due to interest expense incurred during the three months ended June 30, 2022 on the term loan that was paid off in February
2023.
Change in Fair Value – Warrant Liabilities
Unexercised sponsor warrants
totaling 1.9 million expired in February 2023 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 June 30, 2022, we recognized a gain of $0.3 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 June 30, 2022 had a fair value of $0.1 million.
Income Tax (Expense) Benefit
We had income tax expense
of $0.1 million for the three months ended June 30, 2023 compared to an income tax benefit of $4.2 million for the three months ended
June 30, 2022. The income tax expense amount in 2023 resulted from various state income 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 $0.2 million for the three months ended June 30, 2023 compared to a net loss of $0.1 million for the three
months ended June 30, 2022.
38
Operating Results for the Six Months Ended
June 30, 2022 and 2021
The following table sets forth
for the periods indicated, our results of operations and the percentage of total revenue represented in our statements of operations:
Six Months Ended June 30,
2023
% of
Net
Revenues
2022
% of
Net
Revenues
Revenues, net
$ 230,244
100.0 %
$ 287,288
100.0 %
Cost of revenues
148,557
64.5
186,850
65.0
Gross profit
81,687
35.5
100,438
35.0
Operating expenses:
Marketing and sales
84,552
36.7
90,332
31.4
General and administrative
50,104
21.8
36,667
12.8
Research and development
6,297
2.7
3,891
1.4
Total operating expenses
140,953
61.2
130,890
45.6
Operating loss
(59,266 )
(25.7 )
(30,452 )
(10.6 )
Other income (expense):
Interest expense
(554 )
(0.2 )
(1,730 )
(0.6 )
Other income (expense), net
110
—
(119 )
—
Change in fair value – warrant liabilities
—
—
4,274
1.5
Loss on extinguishment of debt
(1,217 )
(0.5 )
—
—
Total other income (expense), net
(1,661 )
(0.7 )
2,425
0.8
Net loss before income taxes
(60,927 )
(26.5 )
(28,027 )
(9.8 )
Income tax benefit (expense)
(144 )
(0.1 )
5,986
2.1
Net loss
(61,071 )
(26.5 )
(22,041 )
(7.7 )
Net loss attributable to noncontrolling interest
(262 )
(0.1 )
(199 )
(0.1 )
Net loss attributable to Purple Innovation, Inc.
$ (60,809 )
(26.4 )
$ (21,842 )
(7.6 )
Revenues, Net
Net revenues decreased $57.0 million, or 19.9%, to $230.2 million for the six months ended June 30, 2023 compared to $287.3 million for
the six months ended June 30, 2022. The decrease in net revenues was primarily due to continued softening demand in the industry for home-related
products, inflationary pressure on consumer discretionary demand, forward buying of consumers in recent years, price reductions of floor
models and increased discounting on discontinued models sold through our DTC channels as we launched our new Premium and Luxe product
lineups. The decline in net revenues from a sales channel perspective consisted of DTC net revenues decreasing $32.6 million, or 19.5%
and wholesale net revenues declining $24.4 million, or 20.4%. Within DTC, e-commerce net revenues decreased $37.6 million, or 26.7%, while
Purple owned retail showroom net revenues increased $5.0 million, or 18.9%. 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 driven by showrooms increasing from 40
at the end of June 2022 to 56 at the end of June 2023. The decrease in wholesale net revenues, which reflected the impact of the reasons
previously stated, was also affected by reduced purchases from existing wholesale partners ahead of the launch of our new Premium and
Luxe product lineups coupled with floor models of our new mattress and base products being sold to our wholesale partners at reduced pricing.
Cost of Revenues
Cost of revenues decreased $38.3 million, or 20.5%, to $148.6 million
for the six months ended June 30, 2023 compared to $186.9 million for the six months ended June 30, 2022. This decrease was primarily
due to a corresponding decrease in sales volume. Our gross profit percentage, which increased to 35.5% of net revenues in 2023 from 35.0%
in 2022, benefited from the ongoing realization of efficiency and cost saving initiatives put in place during the first half of 2022,
offset in part floor models of our new mattress and base products being sold to our wholesale partners at reduced pricing coupled with
increased discounting of discontinued models sold through our DTC channels as we transitioned to our new Premium and Luxe product lineups.
The gross profit percentage in 2022 was adversely impacted by unfavorable cost absorption from lower than planned production volumes in
prior months, and elevated levels of materials, labor and overhead costs.
39
Marketing and Sales
Marketing and sales expense decreased $5.8 million, or 6.4%, to $84.6
million for the six months ended June 30, 2023 compared to $90.3 million for the six months ended June 30, 2022. This decrease reflected
a $10.9 million decline in advertising spending and a $4.9 million decrease in other marketing costs. The reduction in advertising spending
was primarily due to management focusing its efforts on improving marketing efficiency with its legacy products and then increasing advertising
spend to align with the launch of our new Premium and Luxe product lineups in May 2023. The decrease in other marketing costs reflected
the impact of management restructuring the marketing organization in the first half of 2022. These decreases were offset in part by a
$9.5 million increase in marketing and sales costs associated with showroom expansion. Marketing and sales expense as a percentage of
net revenues was 36.7% during the first six months of 2023 compared to 31.4% for the first six months of 2022. The higher percentage of
revenues reflected the impact of lower sales coupled with management’s expanded marketing efforts in the second quarter of 2023
to support the launch of our new Premium and Luxe product lineups in May 2023.
General and Administrative
General and administrative
expense increased $13.4 million, or 36.6%, to $50.1 million for the six months ended June 30, 2023 compared to $36.7 million for the
six months ended June 30, 2022. This increase was primarily due to legal and professional fees incurred by the Special Committee, which
included a $4.0 million accrual made in the second quarter of 2023 for the settlement amount owed to Coliseum.
Research and Development
Research and development costs increased $2.4 million, or 61.8%, to
$6.3 million for the six months ended June 30, 2023 compared to $3.9 million for the six months ended June 30, 2022. This increase primarily
reflected our focus on new product innovation initiatives to remain competitive and advance our current product line
Operating Income (Loss)
Operating loss increased $28.8
million to $59.3 million for the six months ended June 30, 2023 compared to $30.5 million for the six months ended June 30, 2022. The
larger operating loss primarily resulted from a decrease in gross profit that was driven by lower sales coupled with an increase in general
and administrative expense resulting from legal and professional fees incurred by the Special Committee and attributable to the Cooperation
Agreement with Coliseum.
Interest Expense
Interest expense totaled $0.6
million for the six months ended June 30, 2023 compared to $1.7 million for the six months ended June 30, 2022. The lower amount in 2023
was primarily due to the six months ended June 30, 2022 including a greater amount of interest expense related to the term loan that was
paid off in February 2023 and interest expense for 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.
40
Change in Fair Value – Warrant Liabilities
Unexercised sponsor warrants
totaling 1.9 million expired in February 2023 and were cancelled pursuant to the terms of the agreement. These sponsor warrants had no
fair value on the date of expiration and a de minimis fair value at the previous reporting date. During the six months ended June 30,
2022, we recognized a gain of $4.3 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.
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.
Income Tax (Expense) Benefit
We had income tax expense
of $0.1 million for the six months ended June 30, 2023 compared to an income tax benefit of $6.0 million for the six months ended June
30, 2022. The income tax expense amount in 2023 resulted from various state income 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 $0.3 million for the six months ended June 30, 2023 compared to a net loss of $0.2 million for the six months ended June
30, 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 asset-based lending 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, changes
in inventories, and operating lease payment obligations. Our unrestricted cash and working capital positions were $25.2 million and $43.9
million, respectively, as of June 30, 2023 compared to $40.0 million and $62.4 million, respectively, as of December 31, 2022. Cash used
for capital expenditures decreased from $26.1 million in the first six months of 2022 to $5.8 million during the first six months of 2023.
Our capital expenditures in the first six months of 2023 primarily consisted of 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 based on
our ability to scale back operations, reduce marketing spend, use the liquidity we have available under our new credit facility 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.
Based on our current projections,
we believe our cash on hand, amounts available under our asset-based lending arrangement, and expected cash to be generated from our operations will
be sufficient to meet our working capital requirements and cover anticipated capital expenditures for at least the next 12 months.
41
Shelf Registration Statement and Offering of
Class A Common Stock
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 $57.0 million.
Debt
On August 7, 2023, the Loan Parties entered into the Term Loan Agreement
with Callodine Commercial Finance, LLC and a group of financial institutions. Also, on August 7, 2023, the Loan parties entered into a
separate financing arrangement with the ABL Lenders. that provides for the ABL Agreement. Pursuant to entering into these agreements,
the Company incurred fees and expenses of $3.1 million that will be reflected as debt issuance costs in the third quarter of 2023.
The Term Loan Agreement provides
for up to $25.0 million of term loans, with up to $5.0 million of incremental Term Loans, subject to certain conditions (collectively,
the “Term Loans”). Proceeds from the Term Loans, which were fully drawn at closing, will be used for general corporate purposes.
The borrowing rates under the Term Loan Agreement are based on SOFR, plus a credit spread adjustment of 0.15% per annum, plus 8.5% per
annum, with a SOFR floor of 2.0% per annum. The Term Loans will be repaid at the earlier of (a) a three-year amortization schedule or
(b) the payment in full of the ABL Agreement. The Term Loans may be prepaid in whole or in part at any time, but subject to a prepayment
premium. There may also be mandatory prepayment obligations based on certain asset dispositions, casualty events and extraordinary receipts.
Once repaid, no portion of the Term Loans may be reborrowed.
Pursuant to a pledge and security
agreement, the Loan Parties’ obligations under the Term Loan Agreement are secured by a perfected second-priority security interest
in the cash, inventory and accounts receivable of the Loan Parties, and a perfected first-priority security interest in substantially
all other assets of the Loan Parties, including, without limitation, the intellectual property and equipment of the Loan Parties, subject
to certain exceptions.
The ABL Agreement provides
for up to $50.0 million of revolving loans subject to a borrowing base calculation (with sub-facilities for swing line loans and the issuance
of letters of credit), with incremental increases available up to $20.0 million, subject to certain conditions. No funds were drawn under
the ABL Agreement at closing. The Company anticipates that any funds drawn from under the ABL Agreement will be used to finance permitted
acquisitions, as defined in the ABL Agreement, and for working capital, capital expenditures and other general corporate purposes. Outstanding
principal and accrued interest on the ABL Loans shall be repaid on August 7, 2026.
The borrowing rates under
the ABL Agreement will accrue on a three-tiered grid based on revolving availability, ranging from (i) SOFR, plus a credit spread adjustment
of 0.10% per annum, plus 2.75% per annum to (ii) SOFR, plus a credit spread adjustment of 0.10% per annum, plus 3.25% per annum, with
a SOFR floor of 0% per annum. The ABL Loans may be prepaid in whole or in part at any time without premium or penalty, subject to reimbursement
of certain costs. There may be mandatory prepayment obligations based on certain asset dispositions, casualty events, equity issuances
and extraordinary receipts.
Pursuant to a pledge and security
agreement, the Loan Parties’ obligations under the ABL Agreement are secured by a perfected first-priority security interest in
the cash, inventory and accounts receivable of the Loan Parties, and a perfected second-priority security interest in substantially all
of the other assets of the Loan Parties, subject to certain exceptions.
42
In connection with the Company’s
execution of the Term Loan Agreement and ABL Agreement, the Company terminated its 2020 Credit Agreement. The Company had no outstanding
borrowings under the term loan or the revolving line of credit at the time of termination.
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 June 30, 2023 and December 31, 2022, there was no tax receivable agreement liability reflected in either of these consolidated
balance sheets. 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
second 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.
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 $4.0 million in the aggregate. See Notes 9 and 15 of the condensed consolidated financial statements for additional
information on leases and the Cooperation Agreement, respectively.
43
Cash Flows for the Six Months Ended June 30,
2023 Compared to the Six Months Ended June 30, 2022
The following summarizes our
cash flows for the six months ended June 30, 2023 and 2022 as reported in our condensed consolidated statements of cash flows (in
thousands):
Six Months Ended
June 30,
2023
2022
Net cash used in operating activities
$ (38,053 )
$ (52,804 )
Net cash used in investing activities
(5,823 )
(26,055 )
Net cash provided by financing activities
29,071
28,412
Net decrease in cash
(14,805 )
(50,447 )
Cash, beginning of the period
41,754
91,616
Cash, end of the period
$ 26,949
$ 41,169
Cash used in operating activities
was $37.9 million and $52.8 million for the six months ended June 30, 2023 and 2022, respectively. Cash used in operating activities in
2023 was primarily comprised of a net loss of $61.1 million, offset in part by non-cash adjustments totaling $17.6 million.
These non-cash adjustments primarily related to $12.9 million of depreciation and amortization, a $1.2 million loss on the extinguishment
of debt and $2.9 million of stock-based compensation. Changes in operating assets and liabilities increased cash used in operating activities
by $5.4 million in 2023. This increase primarily reflected a $11.5 million decrease in accounts receivable and a $3.3 million increase
in accounts payable, offset by a $5.1 million increase in inventories combined with a $4.0 million decrease in accrued rebates and allowances.
The decline in accounts receivable was due in part to a $13.6 million decrease in wholesale net revenues in the second 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 in the first quarter to a wholesale partner
for volume rebates related to 2022 purchases.
Cash used in investing activities
reflected capital expenditures of $5.8 million for the six months ended June 30, 2023 compared to $26.1 million for the six months ended
June 30, 2022. Capital expenditures during the first six months of 2023 primarily consisted of additional investments made in our
manufacturing facilities in Utah and Georgia.
Cash provided by financing
activities was $28.9 million during the six months ended June 30, 2023 compared to $28.4 million during the six months ended June 30,
2022. Financing activities during the first six months of 2023 included $57.0 million of net proceeds received from the stock offering,
offset in part by a $24.7 million term loan payment, $2.9 million in other debt related payments, and $0.4 million of other 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.
44