Item 7. Management’s Discussion and Analysis
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Annual Report on Form 10-K, including the Management’s Discussion
and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future
results that are subject to the safe harbors created under the Securities Act and the Exchange Act. All statements other than statements
of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations,
estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words
such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,”
“plans,” “believes,” “momentum,” “seeks,” “estimates,” “continues,”
“endeavors,” “strives,” “may,” variations of such words, and similar expressions are intended to identify
such forward-looking statements. 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. Readers are cautioned that these forward-looking statements are only
predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those under “Part
I, Item 1A. Risk Factors,” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed
in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.
The following discussion is intended to provide a more comprehensive
review of our results of operations and financial condition than can be obtained from reading our consolidated financial statements alone.
This discussion should be read in conjunction with our consolidated financial statements and the notes thereto included in “Part
II Item 8. Financial Statements.”
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 via our DTC 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, we consummated a transaction structured similar to a reverse recapitalization
(the “Business Combination”) 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 December 31, 2023, Purple Inc. had a 99.8% economic interest in Purple LLC while other Class B unit
holders had the remaining 0.2%.
On August 31, 2022, we acquired
all the issued and outstanding stock of Intellibed to consolidate ownership of our licensed intellectual property while enhancing our
innovation and manufacturing capabilities and financial profile. For further discussion see Note 4 — Acquisition.
49
Recent Developments in Our Business
Operational Developments – Launch of
New Premium and Luxe Product Lineups
Beginning 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, in 2023, we have continued to experience
softening demand for home-related products that can be attributed to the overall market conditions. 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 showrooms to 60 as
of December 31, 2023. In addition, we have focused on growing our placements with wholesale partners and improving wholesale door productivity.
Over the course of the third and fourth quarters, we transitioned all of our wholesale partners to our new line of mattress products.
Improving the sales productivity of both our wholesale partners and existing showrooms remains a primary focus and critical component
of our strategy to respond to shifting demand patterns. We are also diligently working to improve e-commerce conversion by testing how
to best optimize increased traffic on our website. We experienced several years of hyper growth during the pandemic and increased investments
to support current and future expansion. After right-sizing our operations, improving our execution, and refining our strategies to drive
share gains in the premium mattress category, we are now building the framework for improved operational maturity and accountability to
position us for accelerated growth. With the introduction of our new product lineups, we initiated a new marketing campaign and enhanced
brand positioning and increased media investment at the top of the acquisition funnel. As a result, during the fourth quarter of 2023,
our new product lineup became fully accessible across all sales channels which led to our highest level of quarterly net revenues since
the fourth quarter of 2021. As we move into 2024, we believe we can achieve efficiencies with regard to our media investment, by targeting
specific segments most likely to purchase Purple and by focusing more effort on those consumers currently in the market for a sleep product.
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 on behalf of its funds and managed accounts,
filed a lawsuit against us and several members of our Board of Directors 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. 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 14 — 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. Any future proposed offerings under the shelf registration statement are subject to the pre-emptive
right held by Coliseum or the waiver of such right by Coliseum.
In February 2023, we completed an underwritten follow-up offering of 13.4
million shares of Common Stock at a public offering price of $4.50 per share. The aggregate net proceeds received by us from the
offering, after deducting offering fees and expenses of $3.3 million, totaled $57.0 million. The amount available under the shelf registration
was reduced by the $60.3 million of gross proceeds from this underwritten offering.
Debt Financing
On August 7, 2023, we entered into the Term Loan Agreement with Callodine
Commercial Finance, LLC and a group of financial institutions. Also, on August 7, 2023, we entered into a separate financing arrangement
(the “ABL Agreement”) with the Bank of Montreal and a group of financial institutions (collectively the “ABL Lenders”)
that provided for a $50.0 million revolving asset-based credit facility (the “ABL Loans” and together with the ABL Agreement
and the Term Loan Agreement the “2023 Credit Agreements”). Term loans totaling $25.0 million were fully drawn at closing in
accordance with the Term Loan Agreement and this amount was outstanding at December 31, 2023. Also, since the closing in August 2023,
we have executed $17.0 million in ABL loan draws and then subsequently repaid $12.0 million of those borrowings prior to the end of 2023.
The outstanding balance of ABL Loans totaled $5.0 million at December 31, 2023.
In connection with our execution
of the 2023 Credit Agreements, we terminated our 2020 Credit Agreement. We 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 2023.
50
On January 23, 2024, we entered into the Second Amendment and concurrently
therewith the Amended and Restated Credit Agreement, which amended and restated the Term Loan Agreement, with the Lenders and Delaware
Trust Company, as administrative agent. The Lenders agreed to assume our obligations under the Term Loan Agreement and agreed to refinance
our existing obligations. A term loan in the amount of $61.0 million (the “Loan”) was funded by the Lenders that repaid in
full the $25.0 million of Term Loans outstanding, repaid in full the $5.0 million of ABL Loans outstanding, paid fees, premiums and expenses
incurred in connection with this transaction, and provided net proceeds to us (after payments of outstanding debt, unpaid accrued interest,
and expenses) equal to approximately $27.0 million. Interest on the Loan is payable each month and the principal outstanding is due on
December 31, 2026, the maturity date of the Loan. We may elect for interest to be capitalized and added to the principal amount. The Loan
bears interest at a rate equal to (i) the secured overnight financing rate as administered by the Federal Reserve Bank of New York plus
0.10%, with a floor of 3.5% per annum, plus (ii) 8.25% per annum (or, if Purple LLC elects to pay interest in kind to reduce it cash obligations,
10.25% per annum). Any prepayments on or after August 7, 2024 but before August 7, 2025 are subject to a prepayment penalty of 1.25%,
and any prepayments on or after August 7, 2025 are subject to a prepayment penalty of 2.50%. We may request an additional term loan from
the Lenders in an aggregate amount not to exceed $19.0 million on terms requested by us to the extent agreed to by the Lenders at their
discretion. The Amended and Restated Credit Agreement also removed restrictions and requirements typically associated with an asset-based
loan. In connection with our execution of the Amended and Restated Credit Agreement, all obligations under the 2023 Credit Agreements
were paid in full and the 2023 Agreements were terminated.
Warrants
In connection with the Amended and Restated Credit Agreement, we also
issued the Warrants to the Lenders on January 23, 2024 to purchase 20.0 million shares of our Common Stock equal to 19% of the shares
of Common Stock issued and outstanding. Each Warrant entitles the registered holder to purchase one share of our Common Stock at a price
of $1.50 per share, subject to adjustment. The Warrants will expire on the 10-year anniversary of issuance, or earlier upon redemption.
A holder of the Warrants will not have the right to exercise them, to the extent that after giving effect to such exercise, the holder
(together with its affiliates) would beneficially own in excess of the Beneficial Ownership Cap. Coliseum beneficially owns 58.5 million
shares of Common Stock (which includes 11.6 million shares of Common Stock upon exercise of its Warrants), which constitutes 49.9% of
the Company’s diluted shares outstanding and voting power. Coliseum also beneficially owns 1.8 million additional warrants that
cannot be exercised if doing so would cause Coliseum to exceed the Beneficial Ownership Cap.
Registration Rights Agreement
In connection with the issuance of the Warrants, the Registration Rights
Agreement provided that on or prior to February 22, 2024, the Company was required to prepare and file with the SEC pursuant to Rule 415
of the Securities Act a registration statement to register the resale of the Registrable Securities. The Company received an extension
from the Holders to file the resale registration statement on or prior to March 22, 2024. The Company will be responsible for the payment
of the Holders’ expenses in connection with any offering or sale of Registrable Securities by the Holders, including underwriting
discounts or selling commissions, placement agent or broker fees or similar discounts, commissions or fees relating to the sale of certain
Registrable Securities.
Amended Employment Agreement and Special Recognition
Bonuses
On January 26, 2024, our Board of Directors approved an amendment to
our Chief Executive Officer’s employment agreement. Under the amendment, we agreed that, among other things: (i) the Chief Executive
Officer’s base salary will be increased, effective March 19, 2024, to $0.7 million; (ii) the Chief Executive Officer will be eligible
to earn an incremental aggregate cash bonus equal to $0.9 million that will vest 10% on August 1, 2024, 20% on February 1, 2025, and 70%
on August 1, 2025, provided he continues to be employed by us and subject to the Chief Executive Officer’s obligation to repay any
such bonus actually received in the event his employment is terminated other than by us without cause prior to June 30, 2026, subject
to certain conditions; and (iii) the Chief Executive Officer will be eligible to earn a cash payment of up to $5.0 million, less tax and
other required withholdings, based on the Volume Weighted Average Price per share of our Common Stock on NASDAQ during the period from
March 16, 2026 through June 30, 2026 subject to his continued employment with us. The amount earned will be payable in quarterly installments
commencing with the first payroll period following June 30, 2026.
Also, on January 26, 2024, our Board of Directors unanimously approved
a special recognition bonus payment to certain members of our senior leadership team. Each participant is eligible to earn a special recognition
bonus payment equal to 15 months of their regular salary. The special recognition bonus payment is payable, subject to the employee’s
continued employment with us, 10% on August 1, 2024, 20% on February 1, 2025, and 70% on August 1, 2025.
51
Executive Summary – Results of Operations
Net revenues decreased $62.7
million, or 10.9%, to $510.5 million for the year ended December 31, 2023 as compared to the prior year. The decrease in net revenues
was primarily due to continued soft demand for home-related products. This decline was partially offset by the positive response to the
launch, in May 2023, of our new Premium and Luxe product lineups. During the fourth quarter of 2023, our new product lineup became fully
accessible across all sales channels which led to our highest level of quarterly net revenues since the fourth quarter of 2021.
Gross profit decreased $36.3 million, or 17.4%, to $171.8 million for
the year ended December 31, 2023 as compared to the prior year. This decrease reflected the impact of our gross profit percentage declining
to 33.7% of net revenues in 2023 as compared to 36.3% in 2022. Our reduced gross profit percentage was primarily impacted by the transition
to our new product lineup in 2023. These transitional effects included reduced pricing on sales of new floor models to our wholesale partners,
increased labor and freight costs, decreased manufacturing efficiency, inventory reserves for legacy products and increased discounting
of legacy product line mattresses sold through our DTC channels.
Operating expenses increased
$34.7 million, or 13.8% to $285.5 million in 2023 compared to $250.8 million in the prior year. This increase was primarily due to (i)
an increase of $9.1 million of legal and professional fees incurred in connection with actions conducted by the Special Committee of independent
directors to address an unsolicited offer to buy the Company and resolve subsequent litigation brought against us for actions taken by
the Special Committee in response to the offer; (ii) a $16.9 million increase in marketing and selling expenses driven by showroom expansion
and higher advertising spend which began increasing in mid-May in alignment with the launch of our new product lineup; (iii) a $3.1 million
increase in research and development costs; and (iv) a $6.9 million loss on impairment of goodwill.
Other expense was $7.5 million in 2023 compared to other income of
$163.2 million in 2022. Other expense in 2023 was primarily comprised of interest expense, losses on debt extinguishments, and losses
on disposals of property and equipment. Other income in 2022 primarily related to reducing our Tax Receivable Agreement liability to zero
by the end of that year and recognizing Tax Receivable Agreement income of $162.0 million in 2022. For reasons similar to those that led
to the recording of a full valuation allowance on our deferred tax assets, 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.
Income tax expense was de
minimis in 2023 compared to $213.2 million in 2022. The income tax expense amount in 2023 resulted from various state income taxes. Income
tax expense in 2022 reflected the impact of establishing a full valuation allowance on our deferred tax assets by the end of that year
and recognizing deferred tax expense of $213.9 million in 2022. Based on available evidence, we concluded it was more likely than not
that our deferred tax assets would not be realized and that a full valuation allowance for deferred tax assets was appropriate.
Net loss attributable to Purple
Innovation, Inc. was $120.8 million for the year ended December 31, 2023 compared to $92.5 million for the year ended December 31, 2022.
The net loss in 2023 reflected an operating loss of $113.7 million and other expense of $7.5 million.
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:
●
Expansion of the Brand in the Premium and Luxe Categories— To complement and support our expansion into the higher-priced, higher margin categories, Purple is evolving its differentiated brand to broaden appeal. We are investing in brand demand-driving marketing and advertising to create awareness, engagement, and preference for the Purple brand and for our products across all our sales channels. We developed a reimagined brand associated with life enhancing sleep. We believe that this strategic focus and investment will support our growth plans in the wholesale channel, in Purple showrooms, on Purple.com and online marketplaces. Our Luxe (“Rejuvenate”) offerings are expected to increase average sales prices significantly. We’ll also continue to harness the evangelism of the ever-growing base of Purple owners whose advocacy of our products is one of our brand’s greatest strengths.
52
●
Further direct-to-consumer growth and penetration— We believe that we are well positioned to leverage our brand, leading product portfolio, vertical integration and strong marketing capabilities to continue to attract new customers via our e-commerce channel. We have invested in substantial improvements to our website and analytics, enhancing the education, shopping and buying experiences, and we have expanded our contact center, enabling live voice, chat and messaging with our sales associates. These actions are intended to drive higher customer satisfaction, higher average order value and higher conversion. Continued successful execution on Purple.com supports our planned e-commerce growth, and also supports further growth in all channels given the importance of the site during the customer decision journey. In addition, as of December 31, 2023, we operated 60 Purple showrooms in cities across the United States. At our showrooms, consumers can experience our brand, learn about and engage with our technology and purchase our products, assisted by our highly-trained retail sales associates who are able to both increase door productivity and trade customers up to higher price points. Our showrooms enable us to strengthen the relationship with the consumer and develop a more profitable DTC revenue mix. We anticipate continued expansion of our showrooms as we optimize the format.
●
Expanded wholesale retail relationships — We continue to work closely with existing retail partners to improve productivity to increase market share and sales, and we are forming new partnerships to expand our wholesale footprint. With our new Premium and Luxe collections, we believe we have an increased opportunity to tap into the large brick-and-mortar category of the sleep products market. As a result of our new product launch in 2023, we increased the number of wholesale partner slots (a term commonly used to describe a section in a wholesale partner’s store to display a particular product). We believe this trend is a result of the developing interest in our Premium and Luxe product categories. This allows retailers to market these products as alternatives to other premium products to increase sales on high-end mattresses with materially higher margins for the retailer and Purple.
●
Existing product innovation— We have a rich
history of product innovation and have developed core competencies in design, prototyping and manufacturing. Our vertical
integration, which enables us to continuously refine our existing products and manufacturing processes, combined with our
strengthened research and development disciplines and go-to-market processes allows us to further develop our current product
categories with new offerings, enhance gross margins through improved pricing, and position our business to eventually expand to
additional categories with the potential to attract new customers and drive repeat sales.
●
New product launches — We focus intensively on innovation, to
support our long-range growth plan. We have a pipeline of future products we are developing. We are constantly exploring new technologies
and ways to expand the benefits of our technologies through new product offerings. These efforts include innovations beyond our Hyper-Elastic
Polymer technology, including products in sleep, comfort and similar categories.
●
International expansion— We believe there is a substantial opportunity for international expansion. We entered the Canada market in 2020 and we plan to expand in other foreign markets in the future. We believe that our differentiated products, multi-channel distribution strategy, manufacturing capabilities, vertical integration and marketing expertise will help enable us to successfully enter new markets.
●
Improve Gross Margin —
We continue to attempt to manage input costs, operating efficiencies, and pricing to help further enhance our gross margin, including
increasing production labor and capacity utilization to promote efficient use of our manufacturing facilities as we grow into our production
footprint.
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 “Part I, Item 1A. 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.
53
Critical Accounting Policies and Estimates
In connection with the preparation of our consolidated financial statements
in conformity with United States generally accepted accounting principles (“GAAP”), we are required to make estimates and
assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities, sales, expenses and the related
disclosures. Predicting future events is inherently an imprecise activity and as such requires the use of judgment. We base our assumptions,
estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time
our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates
and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because
future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and
such differences could be material.
Management believes the accounting
estimates discussed below are the most critical because they require management’s most difficult, subjective or complex judgments,
resulting from the need to make estimates about the effect of matters that are inherently uncertain.
Revenue Recognition
Our revenue recognition accounting
methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the amount and
timing of future sales returns, uncollectible accounts and variable consideration. Our estimates of the amount and timing of sales returns,
uncollectible accounts and variable consideration are based primarily on historical trends, product return rates and current contract
terms. Accrued sales returns increased from $5.1 million at December 31, 2022 to $5.4 million as of December 31, 2023. Our allowance for
credit losses was not material at both December 31, 2023 and 2022. We do not believe there is a reasonable likelihood that there will
be any material changes in our accounting methodology, future estimates or assumptions used to measure our estimated liability for sales
returns and exchanges, our allowance for credit losses or variable consideration. However, if actual results are not consistent with our
estimates or assumptions, we may be exposed to losses or gains that could be material.
Impairment
We review our long-lived assets and definite-lived intangible assets
for impairment as of December 31 and whenever events or changes in indicate the carrying amount
may not be recoverable. If there are any indications of impairment, we perform a recoverability test by comparing the carrying
value of the assets to the estimated future cash flows. Cash flow models are reliant on various assumptions, including projected business
results and long-term growth factors. During 2023, there were indicators of impairment and a recoverability test was required. Based on
the results of the recoverability test, we concluded that the long-lived assets and definite-lived assets were not impaired as of December
31, 2023 and no impairment charges were recorded.
We
do not amortize goodwill but test it for impairment each December 31 or whenever events or changes in circumstances indicate the carrying
amount may not be recoverable. The recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit’s
carrying amount, including goodwill, to the fair value of the reporting unit. The ongoing decline in our market capitalization,
along with other qualitative considerations was determined to be a triggering event for potential goodwill impairment. Accordingly, in
2023 we performed a goodwill impairment assessment analysis. As a single reporting unit, we estimated the implied fair value of our goodwill
using a variety of valuation methods, including both the income and market approaches. As a result of the impairment assessment performed,
we concluded goodwill was impaired and recorded an impairment charge to write off the entire $6.9 million balance of goodwill.
Accrued Warranty Liabilities
We provide a limited warranty on most of the products we sell. Our
warranty liability assessment methodology includes estimates in both our DTC and wholesale channels. The estimated warranty costs associated
with products sold through DTC channels are expensed at the time of sale and included in cost of revenues. The estimated warranty costs
associated with products sold through the wholesale channel are recorded at the time of sale and included as an offset to net revenues.
Estimates for warranty costs are based primarily on historical trends and warranty claim rates incurred, and are adjusted for any current
or expected trends as appropriate. We regularly assess and adjust the estimate of accrued warranty claims by updating claims rates for
actual trends and projected claim costs. We expect the estimated warranty liability to continue to increase as we have not yet reached
the full 10 years of history on our 10-year mattress warranty. We classify as non-current those estimated warranty costs expected to be
paid out in greater than one year. As of December 31, 2023, the current and non-current portions of our warranty liabilities
were $9.8 million and $25.8 million, respectively, compared to $5.8 million and $18.7 million, respectively, at December 31, 2022.
We do not believe there is a reasonable likelihood that a material change in the estimates or assumptions we use to calculate our warranty
liability will occur. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or
gains that could be material.
Income Taxes
Accounting for income taxes
requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included
in our financial statements or tax returns. Under this method, deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that
the deferred tax assets will be realized.
54
Deferred tax assets and liabilities
are calculated by applying existing tax laws and the rates expected to apply to taxable income in the years in which temporary differences
are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in
the year of the enacted rate change. Our effective tax rate is primarily impacted by the allocation of income taxes to the noncontrolling
interest and changes in our valuation allowance. Also, changes in existing federal and state tax laws and corporate income tax rates
could affect future tax results and the realization of deferred tax assets over time.
For purposes of evaluating our 2022 deferred tax assets and liabilities,
we entered a cumulative three-year loss position in the fourth quarter of 2022 due primarily to the impact of 2020’s positive results
of operations rolling out of the cumulative three-year period analysis. Based on this and other available evidence, we concluded it was
more likely than not that our deferred tax assets would not be realized and a full valuation allowance for our net deferred tax assets
was appropriate at December 31, 2022. Due to the increase in the valuation allowance, we recognized deferred tax expense of $213.9 million
for 2022. We had previously recognized a deferred tax benefit of $3.9 million for 2021, based on our previous conclusion that it was more
likely than not that some of our deferred tax assets would be realized and that a full valuation allowance for our deferred tax assets
was not appropriate. Income tax expense in 2023 was de minimis and we have continued to maintain a full valuation allowance on our deferred
tax assets based on our cumulative three-year results of operations.
We account for uncertainty
in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return, which are
subject to examination by federal and state taxing authorities. The tax benefit from an uncertain tax position is recognized when it is
more likely than not that the position will be sustained upon examination by taxing authorities based on technical merits of the position. The
amount of the tax benefit recognized is the largest amount of the benefit that has a greater than 50% likelihood of being realized
upon ultimate settlement. The effective tax rate and the tax basis of assets and liabilities reflect management’s estimates of the
ultimate outcome of various tax uncertainties. Judgment is required in evaluating uncertain tax positions. We evaluate our uncertain tax
positions quarterly based on various factors, including changes in facts or circumstances, tax laws or the status of audits by tax authorities.
Changes in the recognition or measurement of uncertain tax positions could have a material impact on our consolidated financial statements
in the period in which we make the change. As of December 31, 2023 and 2022, the cumulative balance of unrecognized tax benefits were
$0.9 million and 0.6 million, respectively.
Tax Receivable Agreement
In connection with the Business
Combination, we entered into an agreement with InnoHold LLC (“InnoHold”), which provides for the payments to InnoHold of 80%
of the net cash savings, if any, in United States federal, state and local income tax that we realize (or are deemed to realize in certain
circumstances) in periods after the closing of the Business Combination as a result of (i) any tax basis increases in the assets of Purple
LLC resulting from the distribution to InnoHold of the cash consideration, (ii) the tax basis increases in the assets of Purple LLC resulting
from the redemption by Purple LLC or the exchange, as applicable, of Class B Paired Securities or cash, as applicable, and (iii) imputed
interest deemed to be paid by us as a result of, and additional tax basis arising from, payments it makes under the agreement.
As noncontrolling interest holders exercise their right to exchange
or cause Purple LLC to redeem all or a portion of its Class B Units, a liability under the Tax Receivable Agreement may be recorded based
on 80% of the estimated future cash tax savings that we may realize as a result of increases in the basis of the assets of Purple LLC
attributed to us as a result of such exchange or redemption. The amount of the increase in asset basis, the related estimated cash tax
savings and the attendant Tax Receivable Agreement liability to be recorded will depend on the price of our Common Stock at the time of
the relevant redemption or exchange.
55
There was no Tax Receivable Agreement liability outstanding at both
December 31, 2023 and 2022. 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. We continued to conclude during 2023 that the likelihood of a future liability
was not probable. 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 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. As of December 31, 2023 though, we estimated that if all the remaining 0.2 million Class B units
were redeemed for shares of its Common Stock, the Tax Receivable Agreement liability would be approximately $168.6 million. If the Company
experiences a change of control (as defined under the Tax Receivable Agreement, which includes certain mergers, asset sales and other
forms of business combinations and change of control events), it could be required to make an immediate lump-sum payment under the terms
of the Tax Receivable Agreement. Management currently estimates the liability associated with this lump-sum payment (or “early termination
payment”) at December 31, 2023 would be approximately $119.8 million on a discounted basis.
Results of Operations
Results of Operations for the Year Ended December 31, 2023 compared
to the year ended December 31, 2022
The following table sets forth for the periods indicated, our results
of operations and the percentage of total net revenues represented by each line item in our consolidated statements of operations:
Years Ended December 31,
2023
% of
Net
Revenues
2022
% of
Net
Revenues
Revenues, net
$ 510,541
100.0 %
$ 573,201
100.0 %
Cost of revenues
338,716
66.3
365,110
63.7
Gross profit
171,825
33.7
208,091
36.3
Operating expenses:
Marketing and sales
182,313
35.7
165,388
28.9
General and administrative
84,446
16.5
76,702
13.4
Research and development
11,898
2.3
8,755
1.5
Loss on impairment of goodwill
6,879
1.3
—
—
Total operating expenses
285,536
55.9
250,845
43.8
Operating loss
(113,711 )
(22.3 )
(42,754 )
(7.5 )
Other (expense) income:
Interest expense
(1,967 )
(0.4 )
(3,536 )
(0.6 )
Other (expense) income, net
(1,198 )
(0.2 )
423
0.1
Loss on extinguishment of debt
(4,331 )
(0.8 )
—
—
Change in fair value – warrant liabilities
—
—
4,343
0.8
Tax Receivable Agreement income
—
—
161,970
28.3
Total other (expense) income, net
(7,496 )
(1.5 )
163,200
28.5
Net (loss) income before income taxes
(121,207 )
(23.7 )
120,446
21.0
Income tax expense
(8 )
—
(213,169 )
(37.2 )
Net loss
(121,215 )
(23.7 )
(92,723 )
(16.2 )
Net loss attributable to noncontrolling interest
(458 )
(0.1 )
(253 )
—
Net loss attributable to Purple Innovation, Inc.
$ (120,757 )
(23.7 )
$ (92,470 )
(16.1 )
56
Revenues, Net
Net revenues decreased $62.7 million, or 10.9%, to $510.5 million for
2023 compared to $573.2 million for 2022. The decrease in net revenues was primarily due to continued soft demand for home-related products.
This decline was partially offset by the positive response to the launch, in May 2023, of our new Premium and Luxe product lineups. During
the fourth quarter of 2023, our new product lineup became fully accessible across all sales channels which led to our highest level of
net revenues since the fourth quarter of 2021. The decline in net revenues from a sales channel perspective in 2023 consisted of DTC net
revenues decreasing $33.8 million, or 10.2%, and wholesale net revenues declining $28.9 million, or 11.9%. Within DTC, e-commerce net
revenues decreased $43.8 million, or 16.4%, while Purple showroom net revenues increased $10.0 million, or 15.8%. The decrease in e-commerce
net revenues reflected the ongoing impact of softening demand and increased discounting on our legacy products. The growth in Purple showroom
net revenues was driven by the number of our retail locations more than doubling over the past two years and the positive response to
our new products, especially those at higher price points in our Luxe product line. The decrease in wholesale net revenues, which was
due in part to continued soft demand, was also affected by an increase in the warranty reserve for products sold to our wholesale customers
(for further information, see Item 9A – Previously Reported Material Weakness ) and discounted sales of floor models of our
new mattress and base products to our wholesale partners. These decreases were offset in part by the impact of increasing new wholesale
partner “slots” (a term commonly used to describe a section in a wholesale partner’s store to display a particular product)
by approximately 10% in 2023 due to our wholesale partners positive response to the new product collection.
Cost of Revenues
Cost of revenues decreased $26.4 million, or 7.2%, to $338.7 million
for 2023 compared to $365.1 million for 2022. This decrease was due in part to lower sales volume. Our gross profit percentage, which
decreased to 33.7% of net revenues in 2023 from 36.3% in 2022, was adversely impacted by the transition to our new product lineup in 2023.
These transitional effects included reduced pricing on sales of new floor models to our wholesale partners, increased labor and freight
costs, decreased manufacturing efficiency, inventory reserves for legacy products and increased discounting of our legacy product line
mattresses sold through our DTC channels.
Marketing and Sales
Marketing and sales expense increased $16.9 million, or 10.2%, to $182.3
million for 2023 compared to $165.4 million for 2022. This increase was comprised of a $12.2 million, or 32.1%, increase in showroom marketing
and sales costs attributable to showroom expansion, a $5.7 million increase in advertising spending, and a $1.7 million increase in wholesale
marketing and sales costs. These increases were offset in part by a $2.6 million decrease in other marketing costs. The increase in advertising
spend began in mid-May to support the launch of our new Premium and Luxe product lineups. The increase in wholesale marketing and sales
costs was primarily due to our wholesale partners transitioning to the new Premium and Luxe product lineup during the third and fourth
quarters 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 35.7% in 2023 compared to 28.9% in 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 product lineup.
General and Administrative
General and administrative
expense increased $7.7 million, or 10.1%, to $84.4 million for 2023 compared to $76.7 million for 2022. This was primarily due to an $11.9
million increase in legal and professional fees associated with actions conducted by the Special Committee to address an unsolicited offer
to buy the Company and resolve subsequent litigation brought against us for actions taken by the Special Committee in response to the
offer. These costs were offset in part by $2.8 million of proceeds received from claims filed under our directors and officers insurance
to reimburse us for a portion of the legal and professional fees incurred by the Special Committee.
57
Research and Development
Research and development costs
increased $3.1 million, or 35.9%, to $11.9 million for 2023 compared to $8.8 million for 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 our
market capitalization, along with other qualitative considerations was determined to be a triggering event for potential goodwill impairment.
Accordingly, we performed a goodwill impairment analysis as of September 30, 2023. The Company is considered as a single reporting unit.
We estimated the implied fair value of our goodwill using a variety of valuation methods, including both the income and market approaches.
As a result of the impairment assessment performed, we determined goodwill was impaired and recorded an impairment charge to write off
our entire $6.9 million balance of goodwill.
Operating Loss
Operating loss increased $71.0
million, or 166.0% to $113.7 million for 2023 compared to $42.8 million for 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 $2.0
million for 2023 compared to $3.5 million for 2022. Interest expense in 2023 was primarily comprised of $2.1 million related to the 2023
Credit Agreements entered into in August 2023 and $1.3 million related to the 2020 Credit Agreement that was terminated upon entering
into the 2023 Credit Agreements. Interest expense was reduced by capitalized interest of $1.5 million and $0.7 million during 2023 and
2022, respectively.
Other (Expense) Income, Net
Other expense was $1.2 million for 2023 compared to other income of
$0.4 million for 2022. Other expense in 2023 was primarily comprised of a $1.7 million loss on the disposal of property and equipment,
partially offset by other income of $0.5 million. Other income in 2022 included an estimated fair value gain of $1.4 million related to
a preexisting legal matter between us and Intellibed that was effectively settled upon our acquisition of Intellibed in August 2022.
Loss on Extinguishment of Debt
In August 2023, we entered
into the 2023 Credit Agreements that terminated our 2020 Credit Agreement. While we had no outstanding borrowings under the 2020 Credit
Agreement at that time, the termination was accounted for as an extinguishment of debt and $3.1 million of unamortized debt issuance costs
were recorded as loss on extinguishment of debt in 2023. In February 2023, we entered into a fifth amendment to the since terminated 2020
Credit Agreement and repaid in full the $24.7 million outstanding balance of the related term loan plus accrued interest. This amendment
was accounted for as an extinguishment of debt and $1.2 million of unamortized debt issuance costs were recorded as loss on extinguishment
of debt in 2023.
58
Change in Fair Value – Warrant Liabilities
Unexercised 1.9 million sponsor warrants expired in February 2023 and
were cancelled. These sponsor warrants had no fair value on the date of expiration and a de minimis fair value at the end of 2022. During
2022, we recognized a gain of $4.3 million related to a decrease in the fair value of the warrants outstanding at the end of 2022.
Tax Receivable Agreement Income
In connection with the Business Combination, we entered into an agreement
which generally provides for the payment by us to InnoHold of 80% of certain tax benefits, if any, that we realize as a result of increases
in our allocable share of the tax basis of the tangible and intangible assets of Purple LLC. For reasons similar to those that led to
the recording of a full valuation allowance on our deferred tax assets, 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 reduced this liability
to zero at December 31, 2022 and recognized Tax Receivable Agreement income of $162.0 million in 2022. There was no Tax Receivable Agreement
liability recorded during 2023.
Income Tax Expense
Income tax expense was de minimis for 2023 compared to $213.2 million
for 2022. Income tax expense in 2022 primarily reflected the impact of establishing a full valuation allowance on our deferred tax assets
by the end of that year and recognizing deferred tax expense of $213.9 million in 2022. Based on available evidence, we concluded it was
more likely than not that our deferred tax assets would not be realized and that a full valuation allowance for deferred tax assets was
appropriate.
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 $0.5 million
for 2023 compared to a net loss of $0.3 million for 2022.
Results of Operations for the Year Ended December 31, 2022 compared
to the year ended December 31, 2021
The following table sets forth for the periods indicated, our results
of operations and the percentage of total net revenues represented by each line item in our consolidated statements of operations:
Year Ended December 31,
2022
% Net
Revenues
2021
% Net
Revenues
Revenues, net
$ 573,201
100.0 %
$ 724,999
100.0 %
Cost of revenues
365,110
63.7
431,253
59.5
Gross profit
208,091
36.3
293,746
40.5
Operating expenses:
Marketing and sales
165,388
28.9
239,290
33.0
General and administrative
76,702
13.4
72,095
9.9
Research and development
8,755
1.5
6,939
1.0
Total operating expenses
250,845
43.8
318,324
43.9
Operating loss
(42,754 )
(7.5 )
(24,578 )
(3.4 )
Other (expense) income:
Interest expense
(3,536 )
(0.6 )
(1,872 )
(0.3 )
Other (expense) income, net
423
0.1
(194 )
—
Change in fair value – warrant liabilities
4,343
0.8
24,054
3.3
Tax Receivable Agreement income
161,970
28.3
4,016
0.6
Total other income, net
163,200
28.5
26,004
3.6
Net income before income taxes
120,446
21.0
1,426
0.2
Income tax (expense) benefit
(213,169 )
(37.2 )
1,522
0.2
Net (loss) income
(92,723 )
(16.2 )
2,948
0.4
Net loss attributable to noncontrolling interest
(253 )
—
(166 )
—
Net (loss) income attributable to Purple Innovation, Inc.
$ (92,470 )
(16.1 )
$ 3,114
0.4
59
Revenues, Net
Net revenues decreased $151.8 million, or 20.9%, to $573.2 million
for 2022 compared to $725.0 million for 2021. The decline in net revenues reflected a $126.1 million decrease in mattress sales, a $16.9
million decrease in other sleep product sales and a $8.7 million decrease in other product sales. The decrease in net revenues was primarily
due to softening demand for home related products and the negative effect of inflationary pressures on consumer discretionary spending,
with consumer spending shifting towards services and experiences. In addition, net revenues in 2021 were positively impacted by demand
in the first half of 2021 that was driven by the effects of COVID and economic stimulus. The decline in net revenues from a sales channel
perspective consisted of DTC net revenues decreasing $143.7 million, or 30.3% and wholesale net revenues decreasing $8.1 million, or 3.2%.
Within the DTC channel, e-commerce net revenue declined $174.4 million, or 39.5%, and Purple showroom net revenue increased $30.7 million,
or 94.7%. The decrease in e-commerce net revenues reflected the impact of the reasons stated above coupled with customers shifting away
from e-commerce buying. The increase in Purple showroom net revenue was mainly driven by the number of our showrooms increasing from 28
at the end of 2021 to 55 at the end of 2022. The decrease in wholesale net revenues primarily reflected reduced purchases by our existing
wholesale partners during 2022 due primarily to declining wholesale door productivity. This decrease was offset in part by the effects
of adding approximately 900 net new wholesale partner doors in fiscal 2022 coupled with the $9.7 million in net revenues from the Intellibed
acquisition, which contributed primarily wholesale net revenues.
Cost of Revenues
Cost of revenues decreased
$66.1 million, or 15.3%, to $365.1 million for 2022 compared to $431.3 million for 2021 due primarily to the decrease in sales volume.
Our gross profit percentage, which decreased to 36.3% of net revenues in 2022 from 40.5% in 2021, was adversely impacted by elevated levels
of materials, labor and freight costs and lower demand levels and the shift to a higher proportion of wholesale channel revenue, which
carries a lower average selling price than sales from our e-commerce and retail showroom channels, partially offset by savings realized
from cost reduction initiatives. Our efficiency and cost saving initiatives, including greater balancing of production and fulfillment
operations between the facilities, were initiated during the first half of fiscal 2022 and did not become fully impactful until the second
half of the year.
Marketing and Sales
Marketing and sales expense
decreased $73.9 million, or 30.9%, to $165.4 million for 2022 compared to $239.3 million for 2021. This decrease was driven by a $95.5
million, or 58.9%, decline in advertising spending and a $15.0 million decrease in other marketing costs. The reduction in advertising
spending was primarily due to management’s ongoing efforts to improve marketing efficiency, conserve profitability in a challenging
macroeconomic environment and align spending with current demand levels. The decrease in other marketing costs reflected the impact of
cost management efforts, including marketing headcount reductions, executed earlier in 2022. These decreases were offset in part by a
$13.8 million increase in wholesale-related marketing and sales costs due in part to growing the sales organization of our wholesale business
and a $22.8 million increase in marketing and sales costs associated with showroom expansion. Marketing and sales expense as a percentage
of net revenues was 28.7% in 2022 compared to 33.0% in 2021.
General and Administrative
General and administrative expense increased $4.6 million, or 6.4%,
to $76.7 million for 2022 compared to $72.1 million for 2021. This increase was primarily due to a $3.7 million increase in payroll
and benefits expense and $1.2 million in costs associated with the Intellibed acquisition, offset in part by a $0.7 million decrease
in legal and professional fees. The increase in payroll and benefit costs mainly reflected the impact of job reclassifications for certain
employees in the first half of 2022. The decrease in legal and professional fees was primarily due to $7.9 million of underwriting commissions
and other costs we paid in the prior year for shares sold by Coliseum. This decrease was partially offset by a one-time separation fee
for not continuing with the services of a professional services provider, expenses incurred by the Special Committee and Intellibed transaction
costs.
60
Research and Development
Research and development costs increased $1.8 million, or 26.2%, to
$8.8 million for 2022 from $6.9 million for 2021. This increase primarily reflected higher payroll and benefit costs as our renewed focus
on product innovation resulted in the growth of our research and development team, which included the addition of our chief innovation
officer.
Operating (Loss) Income
Operating loss increased $18.2 million, or 174.0% to $42.8 million
for 2022 compared to $24.6 million for 2021. This increase primarily resulted from a decrease in gross profit that was driven by lower
sales and a reduced gross profit margin, offset in part by a decrease in operating expenses related primarily to lower advertising spend.
Interest Expense
Interest expense totaled $3.5
million for 2022 compared to $1.9 million for 2021. Interest paid on our borrowings increased $1.0 million as the average interest rate
paid increased from 3.50% in 2021 to 6.31% in 2022, due mainly to the change in terms from our credit agreement amendment in February
of 2022. Interest expense was also impacted by a $0.3 million increase in interest paid on the $55.0 million revolving line of credit
that we drew down in November 2021 and repaid in full on March 31, 2022. In addition, interest expense reflected a $0.4 million increase
in debt issuance cost amortization. We incurred $2.5 million in debt issuance costs upon entering into the 2020 Credit Agreement
and incurred an additional $1.2 million in debt issuance costs for two of the amendments entered into in 2022.
Other (Expense) Income, Net
Other income totaled $0.4 million
for 2022 compared to other expense of $0.2 million for 2021. The increase in other income primarily resulted from the effective settlement
of a preexisting legal matter upon our acquisition of Intellibed on August 31, 2022 at an estimated fair value gain of $1.4 million. The
impact of this gain was offset in part by a $0.6 million loss recorded on the disposal of production machinery and equipment.
Change in Fair Value – Warrant Liabilities
The 1.9 million sponsor warrants outstanding had a negligible fair
value at December 31, 2022 compared to a fair value of $4.3 million at December 31, 2021. This decrease in fair value was primarily due
to the five-year term of the sponsor warrants ending on February 2, 2023 coupled with our Common Stock price declining 63.9% to $4.79
at the end of 2022. During 2022 and 2021, we recognized gains of $4.3 million and $24.1 million, respectively, related to decreases in
the fair value of the sponsor warrants exercised during the respective periods or that were outstanding at the end of the respective periods.
Tax Receivable Agreement Income
In connection with the Business
Combination, we entered into a Tax Receivable Agreement which generally provides for the payment by us to InnoHold of 80% of certain tax
benefits, if any, that we realize as a result of increases in our allocable share of the tax basis of the tangible and intangible assets
of Purple LLC. As a result of the initial merger transaction and subsequent exchanges of Class B Units for Common Stock, the long-term
portion of the potential future Tax Receivable Agreement liability totaled $162.2 million at December 31, 2021. This balance was reduced
by $0.2 million for a future payment that was classified as a short-term liability during 2022. For similar reasons that led to the recording
of a full valuation allowance on our deferred tax assets, 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 reduced the Tax Receivable Agreement liability
to zero at December 31, 2022 and we recognized Tax Receivable Agreement income of $162.0 million for 2022.
61
Income Tax (Expense) Benefit
Income tax expense was $213.2 million for 2022 compared to an income
tax benefit of $1.5 million for 2021. For purposes of evaluating our deferred tax assets, we entered a cumulative three-year loss position
during the fourth quarter of 2022 due primarily to the impact of positive 2020 results of operations rolling out of the cumulative three-year
period analysis. Based on this and other available evidence, we concluded it was more likely than not that our deferred tax assets would
not be realized and a full valuation allowance for our net deferred tax assets was appropriate. Due to the increase in our valuation allowance,
we recognized deferred tax expense of $213.9 million for 2022. This was offset in part by a current tax benefit of $0.7 million recorded
in 2022.
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 and $0.2 million in 2022 and 2021, respectively.
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 Amended and Restated
Credit Agreement and proceeds received from offerings of our equity capital. Principal uses of funds consist of interest
payments on our Loan , 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 $26.9 million and $30.8 million, respectively,
as of December 31, 2023 compared to $40.0 million and $61.6 million, respectively, as of December 31, 2022. Cash used for capital expenditures
decreased from $38.2 million in 2022 to $15.2 million in 2023. Our capital expenditures in 2023 primarily consisted of additional investments
made in our manufacturing operations and showroom facilities. After entering into the Amended and Restated Credit Agreement in January
2024, our unrestricted cash balance increased to approximately $48.0 million. Additional details about our Amended and Restated Credit
Agreement is described above under “ Recent Developments in our Business – Debt Financing ”
Based on our current projections, we believe our cash on hand, amounts
available under our Amended and Restated Credit Agreement, and expected cash to be generated from our operations will be sufficient
to meet our working capital requirements and cover anticipated capital expenditures for the next 12 months. 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, and postpone or discontinue 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. 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. Our ability to raise
additional debt financing would require the consent of the Lenders.
62
Other Contractual Obligations
Other material contractual
obligations primarily include operating lease payment obligations. See Note 8 of our consolidated financial statements for additional
information on leases.
Cash Flows for the year ended December 31, 2023 compared to the
year ended December 31, 2022
The following summarizes
our cash flows for the years ended December 31, 2023 and 2022 as reported in our consolidated statements of cash flows (in thousands):
Years Ended December 31,
2023
2022
Net cash used in operating activities
$ (54,662 )
$ (28,773 )
Net cash used in investing activities
(16,061 )
(34,501 )
Net cash provided by financing activities
55,826
13,412
Net decrease in cash
(14,897 )
(49,862 )
Cash, beginning of the period
41,754
91,616
Cash, end of the period
$ 26,857
$ 41,754
Cash used in operating activities increased $25.9 million to $54.7
million in 2023 as compared to 2022. The increase in cash used in operating activities was offset in part by proceeds received from an
underwritten stock offering. The increase in cash used in operating activities primarily reflected the impact of a $28.5 million increase
in our net loss.
63
Cash used in investing activities was $16.1 million for 2023 compared
to $34.5 million for 2022. Capital expenditures of $15.2 million in 2023 primarily consisted of additional investments made to our
manufacturing operations and the addition of new showroom facilities. Our capital expenditures of $38.2 million in 2022 primarily consisted
of additional investments made for 27 new showroom facilities opened during the year. In 2022, cash flows used in investing activities
were offset in part by the net impact of cash received 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 $55.8 million in 2023 compared
to $13.4 million in 2022. Financing activities during 2023 included $57.0 million of net proceeds received from a stock offering, $25.0
million from the Term Loan Agreement entered into in August 2023, and $17.0 million in draws on the ABL Loans. These cash proceeds were
partially offset by a $24.7 million payment to pay off the term loan from the 2020 Credit Agreement, $12.0 million in repayments against
the ABL Loans, $6.1 million in payments on debt issuance costs, and $0.4 million of other payments. Financing activities in 2022 included
$92.9 million of net proceeds received from an underwritten stock offering, offset in part by a $55.0 million revolving line of credit
payment, a $15.0 million prepayment made on the term loan, a $5.8 million payment on the Tax Receivable Agreement, and $3.8 million in
other debt-related payments.
Recent Accounting Pronouncements
For a description of accounting
standards recently issued or adopted, including the respective dates of adoption and expected effects on our results of operations and
financial condition, refer to Note 2 of our consolidated financial statements included in this Annual Report on Form 10-K.