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. Revision of Consolidated Financial Statements for Correction of Immaterial Misstatements This Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the revision of the Company’s unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2022. For further detail regarding the revision, see Note 3 – Revision of Consolidated Financial Statements for Correction of Immaterial Misstatements of the Notes to the consolidated financial statements and Part I, Item 4 - Controls and Procedures herein. 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 September 30, 2023, Purple Inc. had a 99.6% economic interest in Purple LLC while other Class B Unit holders had the remaining 0.4%. 36 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. For further discussion see Note 5 — Acquisition. Executive Summary – Third Quarter Results of Operations Net revenues decreased $2.9 million, or 2.0%, to $140.0 million for the three months ended September 30, 2023 as compared to the corresponding period in the prior year. This decrease reflected the continued impact of softening demand for home-related products due to the normalization of demand distribution. The negative effects of this were mostly offset by additional existing wholesale partners transitioning to our new Premium and Luxe product lineup coupled with the positive response to the new products in our DTC channels. Gross profit decreased $11.7 million, or 19.8%, to $47.3 million for the three months ended September 30, 2023 as compared to the corresponding period in the prior year. This decrease reflected the impact of our gross profit percentage declining to 33.8% of net revenues in the third quarter of 2023 as compared to 41.3% in the third quarter of 2022. The lower gross profit percentage was primarily due to the impact of new mattress and base floor models being sold to our wholesale partners at reduced pricing, increased labor and freight costs related to the transition to our new products, the wrap-around on manufacturing efficiencies from last year when we had a higher amount of inventory production, and a shift in revenue to our wholesale channel which carries a lower average selling price than sales from our DTC channels. Operating expenses increased $21.8 million, or 37.6%, to $79.9 million for the three months ended September 30, 2023 when compared to the corresponding period in the prior year. This increase was primarily due to higher advertising spend which began increasing in mid-May to align with the launch of our new Premium and Luxe product lineups and enhanced brand positioning. Operating expenses in 2023 also included a $6.9 million loss on impairment of goodwill. Other expense totaled $3.5 million for the three months ended September 30, 2023 compared to other income of $0.3 million for the three months ended September 30, 2022. Other expense in 2023 was primarily comprised of a $3.1 million loss on extinguishment of debt associated with the termination of the Company’s 2020 Credit Agreement in August 2023. Net loss was $36.0 million for the three months ended September 30, 2023 compared to net income of $2.0 million for the three months ended September 30, 2022. 37 Recent Developments in Our Business Operational Developments – Launch of New Premium and Luxe Product Lineups 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. While the response to our new products and enhanced brand positioning has been extremely positive, we have continued to experience in 2023 softening demand for home-related products due to a normalization of demand distribution. Also, as consumer spending habits have moved away from the COVID era e-commerce spike to brick and mortar buying, we have grown the number of Purple owned retail showrooms to 57 at September 30, 2023. In addition, we have focused on growing our placements with wholesale partners and improving wholesale door productivity. By the end of the third quarter, more than half of our approximately 3,300 wholesale doors had 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. Improving the sales productivity of both our wholesale doors and existing showrooms remains a primary focus and critical component 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 early 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 in May 2023, we initiated a new marketing campaign and enhanced brand positioning. As a result, in the third quarter of 2023, the first full quarter with our new product lineup in-market, we grew net revenues 31.2% and 18.8% over the first and second quarters of 2023, respectively. Also, sales from our e-commerce channel reached a more normalized level in the third quarter of 2023 as e-commerce net revenues increased 15.8% and 15.4% over the first and second quarters of 2023, respectively. We believe we have set the right course for the next stage of growth for the Company. 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 details of the Cooperation Agreement, which became effective on April 27, 2023, are discussed further in Note 16 — Related Party Transactions — Coliseum Capital Management, LLC. 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 provided for a revolving asset-based credit facility (the “ABL Agreement” and together with the Term Loan Agreement the “2023 Credit Agreements”). Pursuant to entering into these agreements, the Company incurred fees and expenses of $3.1 million that were recorded as debt issuance costs in the third quarter of 2023. 38 The Term Loan Agreement provided 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, are being 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. The outstanding balance of the Term Loans was $25.0 million at September 30, 2023. 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 and minimum availability requirements (with sub-facilities for swing line loans and the issuance of letters of credit), with incremental increases available up to $20.0 million (the “ABL Loans”), subject to certain conditions, availability reserves, minimum availability requirements, borrowing base calculations, and restrictive covenants. In October 2023, the ABL Lenders implemented an availability reserve of $5.0 million, which reduces the amount available under our borrowing base. No funds were drawn under the ABL Agreement at closing and there was no outstanding balance at September 30, 2023. We executed $17.0 million in draws on our ABL Loans in October and November 2023 and have given notice to repay $2.0 million. We may use the funds drawn from the ABL Agreement 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. In connection with our execution of the Term Loan Agreement and ABL Agreement, the Company terminated its 2020 Credit Agreement in August 2023. The Company had no outstanding borrowings under the 2020 Credit Agreement 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 were recorded as a loss on extinguishment of debt in the condensed consolidated statement of operations. Amendments to 2023 Credit Agreements On November 6, 2023, we entered into (i) a First Amendment and Waiver to the ABL Agreement (the “ABL Amendment”) and (ii) a First Amendment and Waiver to the Term Loan Agreement (the “Term Loan Amendment”), with the Term Loan Lenders and ABL Lenders, respectively (collectively, the “Lenders”), including waivers of the Subject Events of Default. In addition, the ABL Amendment and Term Loan Amendment also amended certain provisions of the 2023 Credit Agreements, including, among other changes, to require (i) weekly borrowing base certificates, (ii) 13-week cash flow reports and budgets, (iii) budget variance reports, (iv) the appointment of a third-party consultant, and (v) daily cash sweeps from the Loan Parties’ accounts to an account at the ABL Lender (collectively, the “2023 Credit Agreement Amendments”). The foregoing descriptions of the ABL Amendment and Term Loan Amendment do not purport to be complete and are qualified in their entirety by reference to the ABL Amendment and Term Loan Amendment, which are attached as Exhibit 10.2 and Exhibit 10.3, respectively, to this report and are incorporated by reference herein. 39 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. ● Mature our fleet of Purple owned retail showrooms, increase door productivity, provide a brand halo benefit to other channels in the surrounding areas, strengthen the relationship with the consumer, and develop a 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. 40 Operating Results for the Three Months Ended September 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 September 30, 2023 % of Net Revenues 2022 % of Net Revenues Revenues, net $ 139,996 100.0 % $ 142,867 100.0 % Cost of revenues 92,687 66.2 83,867 58.7 Gross profit 47,309 33.8 59,000 41.3 Operating expenses: Marketing and sales 52,816 37.7 37,007 25.9 General and administrative 17,524 12.5 19,166 13.4 Research and development 2,704 1.9 1,927 1.3 Loss on impairment of goodwill 6,879 4.9 — — Total operating expenses 79,923 57.1 58,100 40.7 Operating income (loss) (32,614 ) (23.3 ) 900 0.6 Other income (expense): Interest expense (594 ) (0.4 ) (717 ) (0.5 ) Other income, net 205 0.1 1,107 0.8 Change in fair value – warrant liabilities — — (53 ) — Loss on extinguishment of debt (3,114 ) (2.2 ) — — Total other income (expense), net (3,503 ) (2.5 ) 337 0.2 Net income (loss) before income taxes (36,117 ) (25.8 ) 1,237 0.9 Income tax (expense) benefit (18 ) — 720 0.5 Net income (loss) (36,135 ) (25.8 ) 1,957 1.4 Net income (loss) attributable to noncontrolling interest (131 ) (0.1 ) 1 — Net income (loss) attributable to Purple Innovation, Inc. $ (36,004 ) (25.7 ) $ 1,956 1.4 Revenues, Net Net revenues decreased $2.9 million, or 2.0%, to $140.0 million for the three months ended September 30, 2023 compared to $142.9 million for the three months ended September 30, 2022. This decrease reflected the continued impact of softening demand for home-related products due to the normalization of demand distribution. The negative effects of this were mostly offset by additional existing wholesale partners transitioning to our new Premium and Luxe product lineup coupled with the positive response to the new products in our DTC channels. From a sales channel perspective, wholesale net revenues increased $1.5 million, or 2.6%, offset in part by DTC net revenues decreasing $4.4 million, or 5.2%. The increase in wholesale net revenues was primarily due to additional existing wholesale partners transitioning to our new product lineup during the third quarter partially offset by an increase in the warranty reserve for products sold to our wholesale customers. Within DTC, e-commerce net revenues decreased $6.2 million, or 9.5%, while Purple owned retail showroom net revenues increased $1.8 million, or 9.7%. Although e-commerce net revenues decreased as compared to the prior year corresponding quarter, the positive response to our new product lineups resulted in e-commerce revenue increasing 15.8% and 15.4% over the first and second quarters of 2023, respectively. The increase in Purple owned retail showroom net revenue was driven by the positive response to our new product lineups coupled with the impact of showroom expansion. Cost of Revenues Cost of revenues increased $8.8 million, or 10.5%, to $92.7 million for the three months ended September 30, 2023 compared to $83.9 million for the three months ended September 30, 2022. This increase was due in part to increased labor and freight costs associated with the transition to our new products. Our gross profit percentage, which decreased to 33.8% of net revenues in the third quarter of 2023 from 41.3% in the prior year third quarter, was adversely impacted by new mattress and base floor models being sold to our wholesale partners at reduced pricing, increased labor and freight costs related to the transition to our new products, the wrap-around on manufacturing efficiencies from last year when we had a higher amount of inventory production, and increased discounting of mattresses sold through our online channels as we transitioned to our new Premium and Luxe product lineups. In addition, the gross profit percentage in the third quarter of 2023 was negatively impacted by a shift in revenue to our wholesale channel, which carries a lower average selling price than sales from our DTC channels. 41 Marketing and Sales Marketing and sales expense increased $15.8 million, or 42.7%, to $52.8 million for the three months ended September 30, 2023 compared to $37.0 million for the three months ended September 30, 2022. Marketing and sales expense as a percentage of net revenues was 37.7% in the third quarter of 2023 compared to 25.9% in the third quarter of 2022. Advertising spending increased $12.6 million to $25.4 million for the three months ended September 30, 2023 compared to $12.7 million for the three months ended September 30, 2022. Advertising spend began increasing in mid-May to align with the launch of our new Premium and Luxe product lineups, whereas ad spend in the third quarter of 2022 had been reduced to align spending with then current demand levels. The increase in marketing and sales expense also reflected a $2.0 million increase in costs associated with showroom expansion and a $1.3 million increase in wholesale marketing and sales costs as the majority of our existing wholesale partners transitioned to our new Premium and Luxe product lineup during the third quarter of 2023. General and Administrative General and administrative expense decreased $1.6 million, or 8.6%, to $17.5 million for the three months ended September 30, 2023 compared to $19.2 million for the three months ended September 30, 2022. This decrease was primarily due to a $1.5 million decline in legal and professional fees as the prior year comparative quarter included transaction costs associated with the Intellibed acquisition. Research and Development Research and development costs increased $0.8 million, or 40.3%, to $2.7 million for the three months ended September 30, 2023 compared to $1.9 million for the three months ended September 30, 2022. This increase primarily reflected our continued focus on new product innovation initiatives to remain competitive and advance our current product line. Loss on Impairment of Goodwill The ongoing decline in the Company’s market capitalization, along with other qualitative considerations was determined to be a triggering event for potential goodwill impairment. Accordingly, the Company performed a goodwill impairment analysis as of September 30, 2023. The Company, considered as a single reporting unit, estimated the implied fair value of its goodwill using a variety of valuation methods, including both the income and market approaches. As a result of the impairment assessment performed, the Company determined goodwill was impaired and recorded an impairment charge to write off the entire $6.9 million balance of goodwill. Operating Loss Operating loss was $32.6 million for the three months ended September 30, 2023 compared to operating income of $0.9 million for the three months ended September 30, 2022. The operating loss in 2023 primarily reflected a decrease in gross profit that was driven by a reduced gross profit percentage, an increase in marketing and sales costs associated with our new product launch, and a loss on impairment of goodwill. Interest Expense Interest expense totaled $0.6 million for the three months ended September 30, 2023 compared to $0.7 million for the three months ended September 30, 2022. In August 2023, the Company entered into a new $25.0 million Term Loan Agreement and a separate ABL Agreement that provided for up to $50.0 million of revolving loans. Interest expense in the third quarter of 2023 totaled $0.9 million related to these new financing arrangements. Interest expense was reduced by capitalized interest that totaled $0.4 million and $0.2 million during the three months ended September 30, 2023 and 2022, respectively. Other Income (Expense) Other income was $0.2 million for the three months ended September 30, 2023 compared to $1.1 million for the three months ended September 30, 2022. This decrease primarily resulted from the prior year third quarter including an estimated fair value gain of $1.4 million related to the effective settlement of a preexisting legal matter between the Company and Intellibed upon the Company’s acquisition of Intellibed on August 31, 2022. Loss on Extinguishment of Debt In August 2023, the Company entered into a new $25.0 million Term Loan Agreement and a separate ABL Agreement that provided for up to $50.0 million of revolving loans. In connection with the execution of these new financing arrangements, the Company terminated its 2020 Credit Agreement. While the Company had no outstanding borrowings under the 2020 Credit Agreement at that time, the termination was accounted for as an extinguishment of debt during the third quarter of 2023 and $3.1 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 a negligible income tax expense for the three months ended September 30, 2023 compared to an income tax benefit of $0.7 million for the three months ended September 30, 2022. The income tax expense amount in 2023 resulted from various state income taxes. 42 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 the three months ended September 30, 2023 compared to a negligible net income amount for the three months ended September 30, 2022. Operating Results for the Nine Months Ended September 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 statements of operations: Nine Months Ended September 30, 2023 % of Net Revenues 2022 % of Net Revenues Revenues, net $ 364,605 100.0 % $ 428,896 100.0 % Cost of revenues 241,244 66.2 270,717 63.1 Gross profit 123,361 33.8 158,179 36.9 Operating expenses: Marketing and sales 137,368 37.7 127,339 29.7 General and administrative 67,628 18.5 55,833 13.0 Research and development 9,001 2.5 5,818 1.4 Loss on impairment of goodwill 6,879 1.9 — — Total operating expenses 220,876 60.6 188,990 44.1 Operating loss (97,515 ) (26.7 ) (30,811 ) (7.2 ) Other income (expense): Interest expense (1,148 ) (0.3 ) (2,447 ) (0.6 ) Other income, net 315 0.1 988 0.2 Change in fair value – warrant liabilities — — 4,221 1.0 Loss on extinguishment of debt (4,331 ) (1.2 ) — — Total other income (expense), net (5,164 ) (1.4 ) 2,762 0.6 Net loss before income taxes (102,679 ) (28.2 ) (28,049 ) (6.5 ) Income tax benefit (expense) (162 ) — 7,036 1.6 Net loss (102,841 ) (28.2 ) (21,013 ) (4.9 ) Net loss attributable to noncontrolling interest (417 ) (0.1 ) (204 ) — Net loss attributable to Purple Innovation, Inc. $ (102,424 ) (28.1 ) $ (20,809 ) (4.9 ) Revenues, Net Net revenues decreased $64.3 million, or 15.0%, to $364.6 million for the nine months ended September 30, 2023 compared to $428.9 million for the nine months ended September 30, 2022. The decrease in net revenues was primarily due to softening demand for home-related products due to the normalization of demand distribution. This decline was partially offset by the positive response to the launch of our new Premium and Luxe product lineups in May 2023. The decline in net revenues from a sales channel perspective consisted of DTC net revenues decreasing $37.0 million, or 14.7%, and wholesale net revenues declining $27.3 million, or 15.4%. Within DTC, e-commerce net revenues decreased $43.8 million, or 21.2%, while Purple owned retail showroom net revenues increased $6.8 million, or 15.1%. 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 in part by the positive response to our new products coupled with the impact of showroom expansion. The decrease in wholesale net revenues, which reflected the impact of the reasons previously stated, was also affected by an increase in the warranty reserve for products sold to our wholesale customers, reduced purchases from existing wholesale partners prior to them transitioning to 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 $29.5 million, or 10.9%, to $241.2 million for the nine months ended September 30, 2023 compared to $270.7 million for the nine months ended September 30, 2022. This decrease was due in part to lower sales volume. Our gross profit percentage, which decreased to 33.8% of net revenues in 2023 from 36.9% in 2022, was adversely impacted by new mattress and base floor models being sold to our wholesale partners at reduced pricing, increased labor and freight costs related to the transition to our new products, the wrap-around on manufacturing efficiencies from last year when we had a higher amount of inventory production, and increased discounting of mattresses sold through our online channels as we transitioned to our new Premium and Luxe product lineups. 43 Marketing and Sales Marketing and sales expense increased $10.0 million, or 7.9%, to $137.4 million for the nine months ended September 30, 2023 compared to $127.3 million for the nine months ended September 30, 2022. This increase was comprised of a $1.8 million increase in advertising spending, a $9.7 million increase in marketing and sales costs associated with showroom expansion, and a $1.8 million increase in wholesale marketing and sales costs. These increases were offset in part by a $3.2 million decrease in other marketing costs. The increase in advertising spend began in mid-May to align with the launch of our new Premium and Luxe product lineups. The increase in wholesale marketing and sales costs was primarily due to additional existing wholesale partners transitioning to our new Premium and Luxe product lineup during the third quarter of 2023. The decrease in other marketing costs reflected the impact of management restructuring the marketing organization in the first half of 2022. Marketing and sales expense as a percentage of net revenues was 36.5% during the first nine months of 2023 compared to 29.6% for the first nine months of 2022. The higher percentage of revenues reflected the impact of lower sales coupled with management’s expanded marketing efforts beginning in the second quarter of 2023 to support the launch of our new Premium and Luxe product lineups. General and Administrative General and administrative expense increased $11.8 million, or 21.1%, to $67.6 million for the nine months ended September 30, 2023 compared to $55.8 million for the nine months ended September 30, 2022. This increase was primarily due to legal and professional fees incurred by the Special Committee. We are pursuing insurance claims with our D&O and business interruption policy carriers relating to costs incurred (i) in connection with the litigation and settlement relating to Coliseum and (ii) due to the interruption of our business following the death of an employee in 2021. However, there can be no guarantee that we will be able to recover on such claims in amount to cover such costs, or at all. Research and Development Research and development costs increased $3.2 million, or 54.7%, to $9.0 million for the nine months ended September 30, 2023 compared to $5.8 million for the nine months ended September 30, 2022. This increase primarily reflected our continued focus on new product innovation initiatives to remain competitive and advance our current product line. Loss on Impairment of Goodwill The ongoing decline in the Company’s market capitalization, along with other qualitative considerations was determined to be a triggering event for potential goodwill impairment. Accordingly, the Company performed a goodwill impairment analysis as of September 30, 2023. The Company, considered as a single reporting unit, estimated the implied fair value of its goodwill using a variety of valuation methods, including both the income and market approaches. As a result of the impairment assessment performed, the Company determined goodwill was impaired and recorded an impairment charge to write off the entire $6.9 million balance of goodwill. Operating Loss Operating loss increased $66.7 million to $97.5 million for the nine months ended September 30, 2023 compared to $30.8 million for the nine months ended September 30, 2022. The larger operating loss primarily resulted from a decrease in gross profit that was driven by reduced sales and a lower gross profit percentage, an increase in marketing and sales costs related to the launch of our new products and showroom expansion, an increase in general and administrative expense resulting from legal and professional fees incurred by the Special Committee, and a loss on impairment of goodwill. Interest Expense Interest expense totaled $1.1 million for the nine months ended September 30, 2023 compared to $2.4 million for the nine months ended September 30, 2022. Interest expense for the nine months ended September 30, 2023 was primarily comprised of $0.9 million related to the new asset based financing arrangements entered into in August 2023 and $1.1 million related to the 2020 Credit Agreement that was terminated upon entering into the new financing arrangements, Interest expense was reduced by capitalized interest that totaled $0.9 million and $0.6 million during the nine months ended September 30, 2023 and 2022, respectively. Other Income (Expense) Other income was $0.3 million for the nine months ended September 30, 2023 compared to $1.0 million for the nine months ended September 30, 2022. This decrease primarily resulted from the prior year third quarter including an estimated fair value gain of $1.4 million related to the effective settlement of a preexisting legal matter between the Company and Intellibed upon the Company’s acquisition of Intellibed on August 31, 2022. 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 nine months ended September 30, 2022, we recognized a gain of $4.2 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. 44 Loss on Extinguishment of Debt In August 2023, the Company entered into a new $25.0 million Term Loan Agreement and a separate ABL Agreement that provided for up to $50.0 million of revolving loans. In connection with the execution of these new financing arrangements, the Company terminated its 2020 Credit Agreement. While the Company had no outstanding borrowings under the 2020 Credit Agreement at that time, the termination was accounted for as an extinguishment of debt during the third quarter of 2023 and $3.1 million of unamortized debt issuance costs were recorded as loss on extinguishment of debt in the condensed consolidated statement of operations. In February 2023, the Company entered into a fifth amendment to the since terminated 2020 Credit Agreement and repaid in full the $24.7 million outstanding balance of the term loan plus accrued interest. This 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 $0.2 million for the nine months ended September 30, 2023 compared to an income tax benefit of $7.0 million for the nine months ended September 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 $0.4 million for the nine months ended September 30, 2023 compared to a net loss of $0.2 million for the nine months ended September 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 $26.6 million and $40.2 million, respectively, as of September 30, 2023 compared to $40.0 million and $62.4 million, respectively, as of December 31, 2022. Cash used for capital expenditures decreased from $34.1 million in the first nine months of 2022 to $9.4 million during the first nine months of 2023. Our capital expenditures in 2023 have primarily consisted of additional investments made in our manufacturing and showroom facilities. 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 use the liquidity we have available under our ABL Loans. In October 2023, the ABL Lenders implemented an availability reserve of $5.0 million, which reduces the amount available under our borrowing base. Since September 30, 2023, we have drawn approximately $17.0 million in ABL Loans and have given notice to repay $2.0 million. Based on our borrowing base calculation, including application of the $5.0 million availability reserve and a minimum availability requirement of $11.0 million, as of November 13, 2023, we have approximately $4.6 million available for borrowings under our ABL Agreement. However, the amount available under the ABL Agreement depends on our borrowing base calculations and minimum availability requirements at the time of any draw. Therefore, the amount available to us under the ABL Agreement will change from time to time. Our cash balance as of November 13, 2023, was $31.0 million. In addition, the ABL Amendment and Term Loan Amendment increased our reporting obligations under the 2023 Credit Agreements and if we are not able to maintain compliance with such additional requirements we may experience future events of default, which could limit our ability to access the ABL Loans and adversely affect our financial position and operations. 45 If we experience further events of default in the future, we may not, without the approval of the ABL Lenders, be able to access the ABL Loans unless such defaults are resolved, including by obtaining required waivers from the ABL Lenders. Even if we are able to obtain such waivers, the ABL Lenders may adopt additional availability reserves, which would limit the amount we can draw under the ABL Loans. We may also need to seek additional funding sources including new debt from subordinated lenders or equity capital. However, such additional debt or equity capital may not be available on terms favorable to us or at all. In addition, our ability to raise additional debt financing is restricted by our covenants under the 2023 Credit Agreements and would require the consent of the Lenders. If we are unable to access sufficient liquidity, we will need to take other actions to fund operational expenses, such as scaling back operations, reducing marketing spend, and postponing or discontinuing our growth strategies. Such actions could result in slower growth or no growth, and we may lose key suppliers, be unable to timely satisfy customer orders, and be unable to retain all of our employees. In addition, we may be forced to restructure our obligations to creditors, pursue work-out options or other protective measures. 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. 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 were recorded 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, are being 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. The outstanding balance of the Term Loans was $25.0 million at September 30, 2023. 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 and minimum availability requirements (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, availability reserves, minimum availability requirements, borrowing base calculations, and restrictive covenants. In October 2023, the ABL Lenders implemented an availability reserve of $5.0 million, which reduces the amount available under our borrowing base. No funds were drawn under the ABL Agreement at closing and there was no outstanding balance at September 30, 2023. We executed $17.0 million in draws on our ABL Loans in October and November 2023 and have given notice to repay $2.0 million. We may use the funds drawn from the ABL Agreement 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. 46 Certain events of default occurred under each of the 2023 Credit Agreements due to (i) the Company’s failure to (a) provide certain financial reporting and related materials on a timely basis and (b) complete certain post-closing deliverables as required under the ABL Agreement and (ii) the Company drawing on the loan under the ABL Agreement while the above events of default were in existence. On November 6, 2023, we entered into (i) the ABL Amendment and (ii) the Term Loan Amendment, with the Term Loan Lenders and ABL Lenders, respectively, including waivers of the Subject Events of Default. In addition, the ABL Amendment and Term Loan Amendment also amended certain provisions of the 2023 Credit Agreements, including, among other changes, to require (i) weekly borrowing base certificates, (ii) 13-week cash flow reports and budgets, (iii) budget variance reports, (iv) the appointment of a third-party consultant, and (v) daily cash sweeps from the Loan Parties’ accounts to an account at the ABL Lender. The foregoing descriptions of the ABL Amendment and Term Loan Amendment do not purport to be complete and are qualified in their entirety by reference to the ABL Amendment and Term Loan Amendment, which are attached as Exhibit 10.2 and Exhibit 10.3, respectively, to this report and are incorporated by reference herein. If we experience further events of default in the future, we will not be able to access the ABL Loans unless such defaults are resolved, including by obtaining required waivers from the ABL Lenders. Even if we are able to obtain such waivers, the ABL Lenders may adopt additional availability reserves, which would limit the amount we can draw under the ABL Loans. We may also need to seek additional funding sources including new debt from subordinated lenders or equity capital. However, such additional debt or equity capital may not be available on terms favorable to us or at all. In addition, our ability to raise additional debt financing is restricted by our covenants under the 2023 Credit Agreements and would require the consent of the Lenders. If we are unable to access sufficient liquidity, we will need to take other actions to fund operational expenses, such as scaling back operations, reducing marketing spend, and postponing or discontinuing our growth strategies. Such actions could result in slower growth or no growth, and we may lose key suppliers, be unable to timely satisfy customer orders, and be unable to retain all of our employees. In addition, we may be forced to restructure our obligations to creditors, pursue work-out options or other protective measures. 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. In connection with the Company’s execution of the Term Loan Agreement and ABL Agreement, the Company terminated its 2020 Credit Agreement in August 2023. While the Company had no outstanding borrowings under the 2020 Credit Agreement at that time, the termination was accounted for as an extinguishment of debt during the third quarter of 2023 and $3.1 million of unamortized debt issuance costs were recorded as loss on extinguishment of debt in the condensed consolidated statement of operations. 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 September 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 third 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. See Note 10 of the condensed consolidated financial statements for additional information on leases. 47 Cash Flows for the Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022 The following summarizes our cash flows for the nine months ended September 30, 2023 and 2022 as reported in our condensed consolidated statements of cash flows (in thousands): Nine Months Ended September 30, 2023 2022 Net cash used in operating activities $ (55,808 ) $ (30,474 ) Net cash used in investing activities (10,183 ) (30,411 ) Net cash provided by financing activities 50,843 28,412 Net decrease in cash (15,148 ) (32,473 ) Cash, beginning of the period 41,754 91,616 Cash, end of the period $ 26,606 $ 59,143 Cash used in operating activities increased $25.3 million in the nine months ended September 30, 2023 as compared to the same period in the prior year. The increase in cash used in operating activities was negatively impacted by an increase in our net loss, offset in part by an increase in cash related to the net change in accounts payable in 2023 compared to 2022. Cash used in investing activities primarily reflected capital expenditures of $9.4 million for the nine months ended September 30, 2023 compared to $34.1 million for the nine months ended September 30, 2022. Capital expenditures during the first nine months of 2023 primarily consisted of additional investments made in our manufacturing and showroom facilities. Cash flows from investing activities in the prior year also included the impact of cash acquired in the acquisition of Intellibed that consisted of $1.9 million of cash and cash equivalents and $1.7 million of restricted cash. Cash provided by financing activities was $50.8 million during the nine months ended September 30, 2023 compared to $28.4 million during the nine months ended September 30, 2022. Financing activities during the first nine months of 2023 included $57.0 million of net proceeds received from the stock offering and $25.0 million from the term loans entered into in August 2023, offset in part by a $24.7 million payment to pay off the term loan from the 2020 Credit Agreement, $6.1 million in payments on debt issuance costs, 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. 48