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 review of the operating results and financial condition of Purple Innovation, Inc. 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 12, 2024. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements and investors are cautioned not to place undue reliance on any such statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. Overview of Our Business Our mission is to help people feel and live better through innovative comfort solutions. We are an omni-channel company that began as a digitally-native vertical brand founded on comfort product innovation with premium offerings. We design and manufacture a variety of innovative, branded and premium comfort products, including mattresses, pillows, cushions, frames, sheets, duvets, duvet covers, and other products. Our products are the result of over 30 years of innovation and investment in proprietary and patented comfort technologies and the development of our own manufacturing processes. Our proprietary Hyper-Elastic Polymer gel technology underpins many of our comfort products and provides a range of benefits that differentiate our offerings from other competitors’ products. We sell our products via our DTC channels, including Purple.com, online marketplaces (e.g., Amazon), our customer contact center, Purple showrooms and through wholesale retailers. 24 Organization Our business consists of Purple Inc. and its consolidated subsidiary, Purple LLC. As the sole managing member of Purple LLC, Purple Inc., through its officers and directors, is responsible for all operational and administrative decision making and control of the day-to-day business affairs of Purple LLC without the approval of any other member. At June 30, 2024, Purple Inc. had a 99.8% economic interest in Purple LLC while Class B unit holders had the remaining 0.2%. Recent Developments in Our Business Operational Developments 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. The response to our new products and enhanced brand positioning has been extremely positive. 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 June 30, 2024. We have also focused on growing our placements with wholesale partners and improving wholesale door productivity. Improving the sales productivity of both our wholesale partners and existing showrooms remains a significant priority and critical component of our strategy to respond to shifting demand patterns. In addition, we are diligently working to improve e-commerce conversion by determining ways to best optimize traffic on our website. Furthermore, we are concentrating efforts on driving gross margin improvement through various methods such as selective pricing actions, continued mix shift towards our Premium and Luxe collections, and manufacturing and supply chain optimization. With the introduction of our new product lineups, we initiated a new marketing campaign which included enhanced brand positioning and increased media investment at the top of the acquisition funnel. During the second quarter of 2024, we began to realize efficiencies with our media investments 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 also improved our gross margin in the second quarter of 2024 by driving cost savings through supply chain initiatives and manufacturing efficiency. We have delivered direct material cost savings from our supplier diversification efforts, improved scrap and yield results from continuous improvements, and our outbound freight costs are reflecting cost improvements along with improved delivery reliability. We believe we have set the right course for the next stage of growth for the Company. Debt Financing On January 23, 2024, we entered into the Amended and Restated Credit Agreement, which amended and restated the Term Loan Agreement, with the Lenders. The Lenders agreed to assume our obligations under the Term Loan Agreement and agreed to refinance our existing obligations. Pursuant to the Amended and Restated Credit Agreement, we borrowed $61.0 million from the Lenders that was used to repay the $25.0 million of Term Loans outstanding, the $5.0 million of ABL Loans outstanding, loan 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 new loan is payable each month and the principal outstanding matures and is due on December 31, 2026. 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 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 its 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. 25 Warrants In connection with the Amended and Restated Credit Agreement, we issued Warrants to the Lenders to purchase 20.0 million shares of our Class A common stock. Each Warrant entitles the registered holder to purchase one share of our Class A 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 49.9% of the shares of Class A common stock outstanding immediately after giving effect to such exercise. The Warrants contain certain provisions that do not meet the criteria for equity classification and therefore were recorded as liabilities. The liability for these Warrants was recorded at a fair value of $19.6 million on the date of issuance with the offset included in debt issuance costs. This liability is re-measured to fair value at each reporting date or exercise date with changes in the fair value included in earnings. During the six months ended June 30, 2024, we recognized a loss of $4.9 million in our condensed consolidated statement of operations related to an increase in the fair value of the Warrants outstanding at June 30, 2024. Registration Rights Agreement In connection with the issuance of the Warrants, we entered into the Registration Rights Agreement with the Holders, providing for the registration of Registrable Securities, subject to customary terms and conditions. We are 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. The registration statement filed by the Company on March 21, 2024 to register the Registrable Securities became effective on June 4, 2024. Stockholder Rights Agreement On June 27, 2024, our Board approved the adoption of the NOL Rights Plan with a stated expiration date of June 30, 2025. The Board approved the NOL Rights Plan to protect stockholder value by attempting to safeguard our ability to use Current NOLs of approximately $238 million to reduce potential future federal income tax obligations from becoming substantially limited by future ownership of our Common Stock. Upon adopting the NOL Rights Plan, 0.3 million shares of our authorized shares of preferred stock were designated as Series C Preferred Shares. Pursuant to the NOL Rights Plan, the Board authorized and declared a dividend of one Right for each outstanding share of Common Stock to stockholders of record at the close of business on July 26, 2024. Upon a stockholder acquiring greater than a 4.9% ownership percentage threshold (or, if a stockholder has beneficial ownership of in excess of 4.9%, then the ownership percentage that is one-half of one percentage point greater than their current beneficial ownership percentage), the Rights will become exercisable to significantly dilute any stockholder who violates the ownership limitations of the NOL Rights Plan. NOL Protective Charter Amendment In connection with the NOL Rights Plan, the Board adopted, and recommended that our stockholders approve, the NOL Protective Charter Amendment that adds an additional layer of protection to our Current NOLs until June 30, 2025 by voiding any transfer of Common Stock that results in a stockholder acquiring beyond a 4.9% ownership percentage threshold (or, if a stockholder has current beneficial ownership of in excess of 4.9%, then the ownership percentage that is one-half of one percentage point greater than their current beneficial ownership percentage). The NOL Rights Plan and the NOL Protective Charter Amendment will be submitted for stockholder approval at the Special Meeting. Executive Summary – Results of Operations Net revenues increased 2.0% to $120.3 million for the three months ended June 30, 2024 compared to $117.9 million for the three months ended June 30, 2023. Our revenue growth was primarily due to a $3.6 million, or 7.2%, increase in wholesale channel net revenues driven primarily by the continued positive response of our wholesale partners and strong demand for our new product lineups we launched in 2023. Within our DTC channel, e-commerce net revenues decreased $2.9 million, or 5.7%, while Purple showroom net revenues increased $1.7 million, or 10.6%. The decrease in e-commerce net revenues reflected the ongoing impact of deteriorating industry trends that led to softness for most big-ticket home related discretionary items and delays in our efforts to improve personalization and streamline the website. The growth in Purple showroom net revenues was driven by an increase in average selling prices from both strategic price adjustments and a sizeable mix shift into our higher priced Luxe Products. We also expanded the number of retail locations from 56 at the end of the prior year second quarter to 60 at the end of the second quarter of 2024. 26 Gross profit increased 38.0% to $48.9 million for the three months ended June 30, 2024 compared to $35.5 million for the three months ended June 30, 2023. The gross profit percentage in 2024 was 40.7% as compared to 30.1% in 2023. These increases reflected improved production efficiency due primarily to supply chain initiatives and manufacturing efficiency. We realized direct material cost savings from our supplier diversification efforts to become less dependent on sole-sourced materials, generated strong efficiency gains in our plants, improved scrap and yield results through continuous improvements, and our scheduled delivery program for outbound freight is giving us both cost improvements and improved delivery reliability. The gross profit percentage in 2023 was adversely impacted by the transition to our new product lineup in the second quarter of 2023. Operating expenses decreased 16.2% to $63.5 million for the three months ended June 30, 2024 compared to $75.7 million for the three months ended June 30, 2023. This decrease primarily reflected a $5.0 million decrease in marketing and sales costs related to lower advertising spend coupled with an $8.3 million reduction in general and administrative expense. The decrease in general and administrative expense was primarily due to the prior year comparative quarter including non-recurring legal and professional costs incurred by the Board’s special committee. Other income totaled $14.6 million for the three months ended June 30, 2024 compared to other expense of $0.3 million for the three months ended June 30, 2023. Other income in 2024 included an $18.7 million gain related to a decrease in the fair value of Warrants outstanding at June 30, 2024, partially offset by $4.2 million of interest expense related to the Related Party Loan associated with the Amended and Restated Credit Agreement. Net income attributable to Purple Inc. was de minimis for the three months ended June 30, 2024 compared to a net loss of $40.5 million for the three months ended June 30, 2023. The $40.5 million reduction in net loss was primarily due to the $18.7 million gain associated with the decrease in the fair value of the Warrants outstanding at June 30, 2024, the $13.4 million increase in gross profit and the $12.2 million reduction in operating expenses. Outlook for Growth We believe that we are well positioned to build on our recent trends due to our differentiated product and growing brand strength. We remain focused on five key initiatives to drive sustainable and profitable market share gains: ● Improving the productivity of our existing wholesale and showroom doors. With our wholesale partners, we are continuing to focus on deepening our partnerships at each functional touch point, including joint business planning, collaborative marketing and sales associate training to maximize productivity and continued brand awareness. In Purple showrooms, we are focusing on increasing productivity and profitability over door expansion. This includes establishing a more focused selling environment with new demand driven tactics, a new consumer financing partnership and store expense optimization. ● Improving our marketing effectiveness. Our marketing will support growth in two ways – by enhancing creative and by improving media efficiency. Our premium branding has been performing well and we believe there is potential to further evolve the marketing creative to attract more consumers to the brand. We will focus on media efficiency by directing spend based on geography and high sales potential, adjusting the cadence of our spend to match consumer demand periods and shifting some of our upper funnel spend closer to key wholesale distribution points. Additionally, we recently moved digital media management back in house to increase agility and performance. ● Driving e-commerce conversion. We intend to drive conversion improvements through personalization and streamlining of the website. Our efforts will focus on altering the website experience by visitor intent and product focus and simplifying the experience for potential customers. ● Bringing new products and innovations to market. We continue to accelerate innovation, keeping our product and technology pipelines robust and vibrant. Recent initiatives are generating new and more cost-effective technologies which positions us for the next stage of growth. We expect multiple new product launches across each of our major product categories over the next 12 months as we continue to drive our Path to Premium Sleep strategy with holistic, sleep system solutions. ● Driving gross margin improvements. We believe we can continue to drive gross margin improvements through various strategies that include selective pricing actions, continued mix shift towards our Premium and Luxe collections and manufacturing and supply chain optimization. We have generated strong efficiency gains in our plants. In addition, we have delivered direct material cost savings from our supplier diversification efforts, improved scrap and yield results from continuous improvements, and our outbound freight costs are reflecting cost improvements along with improved delivery reliability. There is no guarantee that we will be able to effectively continue to execute these initiatives, which are subject to risks, uncertainties, and assumptions that are difficult to predict, including the risks described 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 12, 2024 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. 27 Operating Results for the Three Months Ended June 30, 2024 and 2023 The following table sets forth for the periods indicated, our results of operations and the percentage of total revenue represented in our condensed consolidated statements of operations (dollars in thousands): Three Months Ended June 30, 2024 % of Net Revenues 2023 % of Net Revenues Revenues, net $ 120,271 100.0 % $ 117,882 100.0 % Cost of revenues 71,331 59.3 82,408 69.9 Gross profit 48,940 40.7 35,474 30.1 Operating expenses: Marketing and sales 41,377 34.4 46,379 39.3 General and administrative 18,117 15.1 26,437 22.4 Research and development 3,986 3.3 2,925 2.5 Total operating expenses 63,480 52.8 75,741 64.3 Operating loss (14,540 ) (12.1 ) (40,267 ) (34.2 ) Other income (expense): Interest expense (4,161 ) (3.5 ) (352 ) (0.3 ) Other income, net 53 — 37 — Loss on extinguishment of debt — — — — Change in fair value – warrant liabilities 18,693 15.5 — — Total other expense, net 14,585 12.1 (315 ) (0.3 ) Net income (loss) before income taxes 45 — (40,582 ) (34.4 ) Income tax expense (54 ) — (72 ) (0.1 ) Net loss (9 ) — (40,654 ) (34.5 ) Net loss attributable to noncontrolling interest (36 ) — (167 ) (0.1 ) Net income (loss) attributable to Purple Innovation, Inc. $ 27 — $ (40,487 ) (34.3 ) Revenues, Net Net revenues increased $2.4 million, or 2.0%, to $120.3 million for the three months ended June 30, 2024 compared to $117.9 million for the three months ended June 30, 2023. Our revenue growth was primarily due to a $3.6 million, or 7.2%, increase in wholesale channel net revenues, driven primarily by the continued positive response of our wholesale partners and strong demand for our new product lineups we launched in 2023. Within our DTC channel, e-commerce net revenues decreased $2.9 million, or 5.7%, while Purple showroom net revenues increased $1.7 million, or 10.6%. The decrease in e-commerce net revenues reflected the ongoing impact of deteriorating industry trends that led to softness for most big-ticket home related discretionary items and delays in our efforts to improve personalization and streamline the website. The growth in Purple showroom net revenues was driven by an increase in average selling prices from both strategic price adjustments and a sizeable mix shift into our higher priced Luxe Products. We also expanded the number of retail locations from 56 at the end of the prior year second quarter to 60 at the end of the second quarter of 2024. Cost of Revenues Cost of revenues decreased $11.1 million, or 13.4%, to $71.3 million for the three months ended June 30, 2024 compared to $82.4 million for the three months ended June 30, 2023. The decrease in our cost of revenues was largely due to the operational efficiency improvements implemented over the last 12 months along with increased costs in 2023 due to significant non-recurring costs related to our new product launch. Our gross profit percentage increased to 40.7% of net revenues in the second quarter of 2024 from 30.1% in the prior year second quarter. This increase reflected improved production efficiency in 2024 due primarily to supply chain initiatives and manufacturing efficiency. We realized direct material cost savings from our supplier diversification efforts to become less dependent on sole-sourced materials, generated strong efficiency gains in our plants, improved scrap and yield results through continuous improvements, and our scheduled delivery program for outbound freight is giving us both cost improvements and improved delivery reliability. The gross profit percentage in 2023 was adversely impacted by the transition to our new product lineup in the second quarter of 2023. 28 Marketing and Sales Marketing and sales expense decreased $5.0 million, or 10.8%, to $41.4 million for the three months ended June 30, 2024 compared to $46.4 million for the three months ended June 30, 2023. This decrease primarily consisted of a $4.2 million decrease in advertising spending. As a percentage of net revenues, advertising spend was 13.2% in the second quarter of 2024 compared to 17.0% in the second quarter of 2023. The lower percentage of revenues reflected the impact of using more efficient advertising techniques in 2024 as compared to management’s expanded marketing efforts in the second quarter of 2023 to support the launch of the new Premium and Luxe product lineups in May 2023. General and Administrative General and administrative expense decreased $8.3 million, or 31.5%, to $18.1 million for the three months ended June 30, 2024 compared to $26.4 million for the three months ended June 30, 2023. This decrease was primarily due to the prior year comparative quarter including non-recurring legal and professional costs incurred by the Board’s special committee. Research and Development Research and development costs increased $1.1 million, or 36.3%, to $4.0 million for the three months ended June 30, 2024 compared to $2.9 million for the three months ended June 30, 2023. This increase was primarily due to the loss incurred on the write off of a project. Operating Loss Operating loss decreased $(25.7) million to $(14.5) million, or 63.9% for the three months ended June 30, 2024 compared to $(40.3) million for the three months ended June 30, 2023. The smaller operating loss in 2024 primarily resulted from an increase in gross profit that was driven by production efficiencies coupled with a reduction in operating expenses. Interest Expense Interest expense totaled $4.2 million for the three months ended June 30, 2024 compared to $0.4 million for the three months ended June 30, 2023. This increase was primarily due to interest incurred on the new $61.0 million loan that was entered into in January 2024 to refinance the term loan and revolving line of credit associated with the 2023 Credit Agreements. Interest expense in the second quarter of 2023 was comprised of only debt issuance cost amortization and commitment fees associated with the line of credit under the 2020 Credit Agreement as the related term loan associated with the 2020 Credit Agreement was repaid in full in February 2023. Change in Fair Value – Warrant Liabilities In January 2024, in connection with the Amended and Restated Credit Agreement, we issued 20.0 million Warrants to the Lenders. These Warrants contain certain provisions that do not meet the criteria for equity classification and therefore are recorded as liabilities. This liability is re-measured to fair value at each reporting date or exercise date with changes in the fair value included in earnings. At June 30, 2024, the outstanding Warrants had a fair value of $24.5 million. During the three months ended June 30, 2024, we recognized a gain of $18.7 million in our condensed consolidated statement of operations for the decrease in fair value of the Warrants outstanding at June 30, 2024 as compared to the fair value of the Warrants outstanding at the end of the first quarter of 2024. Income Tax (Expense) Benefit We had income tax expense of $0.1 million for the three months ended June 30, 2024 compared to income tax expense of $0.1 million for the three months ended June 30, 2023. The income tax expense amounts in both the second quarter of 2024 and 2023 were related to various state taxes. Noncontrolling Interest We calculate net income or loss attributable to noncontrolling interests on a quarterly basis using their weighted average ownership percentage. Net loss attributed to noncontrolling interests was de minimis for the three months ended June 30, 2024 and $0.2 million for the three months ended June 30, 2023. 29 Operating Results for the Six Months Ended June 30, 2024 and 2023 The following table sets forth for the periods indicated, our results of operations and the percentage of total revenue represented in our statements of operations: Six Months Ended June 30, 2024 % of Net Revenues 2023 % of Net Revenues Revenues, net $ 240,304 100.0 % $ 224,609 100.0 % Cost of revenues 149,644 62.3 148,557 66.1 Gross profit 90,660 37.7 76,052 33.9 Operating expenses: Marketing and sales 82,839 34.5 84,552 37.6 General and administrative 37,845 15.7 50,104 22.3 Research and development 7,652 3.2 6,297 2.8 Total operating expenses 128,336 53.4 140,953 62.8 Operating loss (37,676 ) (15.7 ) (64,901 ) (28.9 ) Other income (expense): Interest expense (8,635 ) (3.6 ) (554 ) (0.2 ) Other income, net 4,447 1.9 110 — Loss on extinguishment of debt (3,394 ) (1.4 ) (1,217 ) (0.5 ) Change in fair value – warrant liabilities (4,906 ) (2.0 ) — — Total other expense, net (12,488 ) (5.2 ) (1,661 ) (0.7 ) Net loss before income taxes (50,164 ) (20.9 ) (66,562 ) (29.6 ) Income tax expense (113 ) — (144 ) (0.1 ) Net loss (50,277 ) (20.9 ) (66,706 ) (29.7 ) Net loss attributable to noncontrolling interest (87 ) — (286 ) (0.1 ) Net loss attributable to Purple Innovation, Inc. $ (50,190 ) (20.9 ) $ (66,420 ) (29.6 ) Revenues, Net Net revenues increased $15.7 million, or 7.0%, to $240.3 million for the six months ended June 30, 2024 compared to $224.6 million for the six months ended June 30, 2023. Net revenue growth was primarily due to a $17.0 million, or 18.8%, increase in wholesale channel net revenues, driven primarily by the continued positive response of our wholesale partners and strong demand for our new product lineups we launched in 2023. Within our DTC channel, e-commerce net revenues decreased $4.7 million, or 4.6%, while Purple showroom net revenues increased $3.4 million, or 10.9%. The decrease in e-commerce net revenues reflected the ongoing impact of deteriorating industry trends that led to softness for most big-ticket home related discretionary items and delays in our efforts to improve personalization and streamline the website. The growth in Purple showroom net revenues was driven by an increase in average selling prices from both strategic price adjustments and a sizeable mix shift into our higher priced Luxe Products. We also expanded the number of retail locations from 56 at the end of the prior year second quarter to 60 at the end of the second quarter of 2024. Cost of Revenues Cost of revenues increased $1.1 million, or 0.7%, to $149.6 million for the six months ended June 30, 2024 compared to $148.6 million for the six months ended June 30, 2023. The increase in our cost of revenues is due to the increase in revenues partially offset by decreases in costs largely due to the operational efficiency improvements implemented over the last 12 months. In addition, our costs in 2023 increased due to significant non-recurring costs related to our new product launch. Our gross profit percentage increased to 37.7% of net revenues in 2024 from 33.9% in 2023. This increase reflected improved production efficiency in 2024 due primarily to supply chain initiatives and manufacturing efficiency. We realized direct material cost savings from our supplier diversification efforts to become less dependent on sole-sourced materials, generated strong efficiency gains in our plants, improved scrap and yield results through continuous improvements, and our scheduled delivery program for outbound freight is giving us both cost improvements and improved delivery reliability. These savings were offset in part by a shift in revenue to our wholesale channel, which carries a lower average selling price than sales from our DTC channels. The gross profit percentage in 2023 was adversely impacted by costs associated with the transition to our new product lineup in the second quarter of 2023. Marketing and Sales Marketing and sales expense decreased $1.7 million, or 2.0%, to $82.8 million for the six months ended June 30, 2024 compared to $84.6 million for the six months ended June 30, 2023. This decrease primarily reflected a $3.1 million decrease in advertising spending, offset in part by a $1.8 million increase in showroom marketing and sales costs attributable to showroom expansion. As a percentage of net revenues, advertising spend was 12.0% in 2024 compared to 14.2% in 2023. The lower percentage of revenues reflected the impact of using more efficient advertising techniques in 2024 as compared to management’s expanded marketing efforts that began in the second quarter of 2023 to support the launch of our new Premium and Luxe product lineups in May 2023. 30 General and Administrative General and administrative expense decreased $12.3 million, or 24.5%, to $37.8 million for the six months ended June 30, 2024 compared to $50.1 million for the six months ended June 30, 2023. This decrease was primarily due to 2023 including non-recurring legal and professional costs incurred by the Board’s special committee. Research and Development Research and development costs increased $1.4 million, or 21.5%, to $7.7 million for the six months ended June 30, 2024 compared to $6.3 million for the six months ended June 30, 2023. This increase was primarily due to the loss incurred on the write off of a project. Operating Loss Operating loss decreased $(27.2) million, or 41.9%, to $(37.7) million for the six months ended June 30, 2024 compared to $(64.9) million for the six months ended June 30, 2023. The smaller operating loss in 2024 primarily resulted from an increase in gross profit that was driven by higher sales and production efficiencies coupled with a reduction in operating expenses. Interest Expense Interest expense totaled $8.6 million for the six months ended June 30, 2024 compared to $0.6 million for the six months ended June 30, 2023. This increase was primarily due to interest incurred on the new $61.0 million loan that was entered into in January 2024 to refinance the term loan and revolving line of credit associated with the 2023 Credit Agreements. Interest expense in the first six months of 2023 was lower because the term loan associated with the 2020 Credit Agreement was repaid in full in February 2023. Other Income, Net Other income increased to $4.4 million for the six months ended June 30, 2024 compared to $0.1 million for the six months ended June 30, 2023. This increase was primarily due to $4.3 million of proceeds received in January 2024 as partial settlement for a previously filed business interruption insurance claim. Loss on Extinguishment of Debt In January 2024, we entered into the Amended and Restated Credit Agreement that terminated and paid off our 2023 Credit Agreements. This termination was accounted for as an extinguishment of debt and $3.4 million of unamortized debt issuance costs were recorded as loss on extinguishment of debt in 2024. In February 2023, we entered into a fifth amendment to the since terminated 2020 Credit Agreement and repaid in full the 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. Change in Fair Value – Warrant Liabilities In January 2024, in connection with the Amended and Restated Credit Agreement, we issued 20.0 million Warrants to the Lenders. These Warrants contain certain provisions that do not meet the criteria for equity classification and therefore are recorded as liabilities. The initial liability for these Warrants was recorded at a fair value of $19.6 million on the date of issuance with the offset included in debt issuance costs. This liability is being re-measured to fair value at each reporting date or exercise date with changes in the fair value included in earnings. At June 30, 2024, the Warrants had a fair value of $24.5 million. During the six months ended June 30, 2024, we recognized a loss of $4.9 million in our condensed consolidated statement of operations for the increase in fair value of the Warrants outstanding at June 30, 2024 as compared to the fair value of the Warrants on the date of issuance. Income Tax (Expense) Benefit We had income tax expense of $0.1 million for the six months ended June 30, 2024 compared to income tax expense of $0.1 million for the six months ended June 30, 2023. The income tax expense amounts in both 2024 and 2023 were related to various state taxes. Noncontrolling Interest We calculate net income or loss attributable to noncontrolling interests on a quarterly basis using their weighted average ownership percentage. Net loss attributed to noncontrolling interests was $0.1 million and $0.3 million for the six months ended June 30, 2024 and 2023, respectively. 31 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 capital expenditures, working capital needs, and operating lease payment obligations. In accordance with the Amended and Restated Credit Agreement, we have elected to pay interest in kind on our new loan to reduce cash 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 cash and cash equivalents and working capital positions were $23.4 million and $39.5 million, respectively, as of June 30, 2024 compared to $26.9 million and $30.8 million, respectively, as of December 31, 2023. Cash used for capital expenditures totaled $5.3 million and $5.8 million for the six months ended June 30, 2024 and 2023, respectively. Our capital expenditures in 2024 have primarily consisted of additional investments made in our manufacturing operations and showroom facilities. Additional details about our Amended and Restated Credit Agreement are described above under “ Recent Developments in our Business – Debt Financing. ” Based on our current projections, which includes the remaining $7.3 million settlement amount received in July 2024 pursuant to a previously filed business interruption claim, we believe our cash on hand, expected cash to be generated from our operations and up to $19.0 million additional cash available under our Amended and Restated Credit Agreement, 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. Other Contractual Obligations Other material contractual obligations primarily include operating lease payment obligations. See Note 8 - Leases of the condensed consolidated financial statements for additional information on leases. Cash Flows for the Six Months Ended June 30, 2024 Compared to the Three Months Ended June 30, 2023 The following summarizes our cash flows for the six months ended June 30, 2024 and 2023 as reported in our condensed consolidated statements of cash flows (in thousands): Six Months Ended June 30, 2024 2023 Net cash used in operating activities $ (25,730 ) $ (38,053 ) Net cash used in investing activities (5,253 ) (5,823 ) Net cash provided by financing activities 27,534 29,071 Net increase in cash (3,449 ) (14,805 ) Cash, beginning of the period 26,857 41,754 Cash, end of the period $ 23,408 $ 26,949 Cash used in operating activities was $25.7 million and $38.1 million for the six months ended June 30, 2024 and 2023, respectively. Cash used in operating activities during the first six months of 2024 was offset by the net proceeds received from entering into the Amended and Restated Credit Agreement in January 2024. Significant components of the year-over-year change in cash used in operating activities included a $16.4 million decrease in net loss, offset in part by a $4.9 million increase in the fair value of Warrants issued in January 2024. Cash used in investing activities reflected capital expenditures of $5.2 million and $5.8 million for the six months ended June 30, 2024 and 2023, respectively. Capital expenditures in the first six months of 2024 primarily consisted of additional investments made in our manufacturing operations and showroom facilities. Cash provided by financing activities was $27.5 million during the six months ended June 30, 2024 compared to $29.1 million during the six months ended June 30, 2023. Financing activities during the first six months of 2024 included $61.0 million of proceeds received from the Related Party Loan under the Amended and Restated Credit Agreement, offset in part by a $25.0 million payment to pay off the Term Loans from the 2023 Credit Agreement, a $5.0 million payment to pay off the ABL Loans from the 2023 Credit Agreement, and payments of $3.5 million for debt issuance costs associated with entering into the Amended and Restated Credit Agreement. 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 2023 Annual Report on Form 10-K filed March 12, 2024. There have been no significant changes in our critical accounting policies since the end of fiscal 2023. 32 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.