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.” Capitalized terms used in this “Part I. Item 1. Management’s Discussion and Analysis of Financial Condition and Results of Operations and not otherwise defined shall have the meanings set forth 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 hereof. 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. 25 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 September 30, 2024, Purple Inc. had a 99.8% economic ownership interest in Purple LLC while Class B unit holders had the remaining 0.2%. Recent Developments in Our Business Restructuring Activities In August 2024, we initiated the Restructuring Plan to strategically realign our operational focus to achieve operations efficiencies that are expected to improve profitability and provide for reinvesting in technology and marketing initiatives. The Restructuring Plan is comprised of the permanent closure of both Utah manufacturing facilities to consolidate mattress production in our Georgia plant, and a headcount reduction at our Utah headquarters to drive additional operating efficiencies. Closure of the two Utah manufacturing facilities is projected to be completed during the first quarter of 2025 while consolidation into the Georgia facility is expected to be finalized by December 31, 2024. The reduction in workforce at the Utah headquarters was completed in August 2024. During the third quarter of 2024, we recognized $32.7 million of restructuring, impairment and other related charges, which included $3.6 million of employee-related and other costs, $9.0 million of accelerated depreciation, $9.1 million related to write-downs of inventory and long-lived assets to be disposed of or equipment in progress that will not be put in service, and $11.0 million of impairment charges associated with entering into a sublease for one of the Utah manufacturing facilities to be closed and impairment of an intangible asset. We expect to record additional restructuring and other related charges in the amount of $9.9 million through the second quarter of 2025. These charges include certain estimates that are provisional and include management judgments and assumptions that could change materially as we complete the execution of our plans. Actual results may differ from these estimates, and the completion of our plan could result in additional restructuring, impairment or other related charges not reflected. 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 was 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 59 as of September 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 2024, we have been realizing 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. Moreover, we have improved gross margin in the second and third quarters 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 consolidation of our manufacturing footprint pursuant to our Restructuring Plan is an important step to advance our grid innovation and build momentum to achieve positive operating cash flow and market share growth over the long term. 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) of 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. To reduce cash obligations, we have elected 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, because Purple LLC has elected to pay interest in kind to reduce its cash obligations, 10.25% per annum). Any prepayments of principal on or after August 7, 2024 but before August 7, 2025 are subject to a prepayment penalty of 1.25%, and any prepayments of principal 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. 26 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 nine months ended September 30, 2024, we recognized a loss of $0.1 million in our condensed consolidated statement of operations related to an increase in the fair value of the Warrants outstanding at September 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. NOL Rights Plan 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. The NOL Rights Plan was ratified by the Company’s stockholders at the Special Meeting. 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 Protective Charter Amendment was approved by the Company’s stockholders at the Special Meeting. Executive Summary – Results of Operations Net revenues decreased $21.4 million, or 15.3%, to $118.6 million for the three months ended September 30, 2024 compared to $140.0 million for the three months ended September 30, 2023. The drop in revenue was primarily driven by industry-wide demand softness for home-related products in addition to a reduction in advertising spend. From a sales channel perspective, DTC net revenues decreased $9.4 million, or 11.7%, and wholesale net revenues decreased $12.0 million, or 20.1%. Within DTC, e-commerce net revenues decreased $9.3 million, or 15.7%, while Purple showroom net revenues were flat. The decrease in wholesale channel net revenues also reflected our decision to exit our relationship with certain customers. 27 Gross profit decreased $12.1 million, or 25.6%, to $35.2 million for the three months ended September 30, 2024 compared to $47.3 million for the three months ended September 30, 2023. This decrease was due to $12.9 million in restructuring related charges associated with the Restructuring Plan recognized in cost of revenues and lower sales volume. These decreases were partially offset by increases in gross profit due to reduced costs that were largely attributable to supply chain initiatives and operational efficiency improvements implemented over the last 12 months. We also experienced increased costs in 2023 due to non-recurring costs associated with the transition to our new product lineup. Our gross profit percentage, which decreased to 29.7% of net revenues in the third quarter of 2024 from 33.8% in the third quarter of 2023, was negatively impacted by the restructuring related costs offset by the supply chain initiatives and manufacturing efficiencies previously noted. We expect our Restructuring Plan will further streamline our operations and provide increased gross profits. Operating expenses increased $2.1 million, or 2.6% to $82.0 million for the three months ended September 30, 2024 compared to $79.9 million for the three months ended September 30, 2023. This increase was driven by $19.8 million in restructuring related charges as part of the consolidation of our manufacturing operations to achieve operational efficiencies. This increase was offset in part by a $9.1 million decrease in advertising spend and the benefit of a reduced prior period comparison due to a $6.9 loss on impairment of goodwill recorded in the prior year third quarter. Other income totaled $7.6 million for the three months ended September 30, 2024 compared to other expense of $3.5 million for the three months ended September 30, 2023. Other income in 2024 included $7.3 million associated with proceeds received in July 2024 for the final settlement payment of a previously filed business interruption insurance claim and a $4.8 million gain resulting from a decrease in the fair value of the Warrants outstanding at September 30, 2024. These increases were partially offset by $4.4 million of non-cash interest expense related to the Related Party Loan. In 2023, other expense was primarily due to a $3.1 million loss on extinguishment of debt due to a refinancing. Net loss attributable to Purple Inc. was $39.2 million for the three months ended September 30, 2024 compared to a net loss of $36.0 million for the three months ended September 30, 2023. The $3.2 million increase in net loss was primarily due to $32.7 million of restructuring, impairment and other related charges associated with the Restructuring Plan, partially offset by a $17.7 million decrease in operating expenses, excluding the impact of restructuring, impairment and other related charges, and a $11.1 million increase in other income. Outlook for Growth We believe, given our announced cost actions, that we are well positioned to grow our business in this market, that remains challenged. We remain focused on five key initiatives to drive sustainable and profitable market share gains: ● Drive 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, supply chain optimization, and consolidation of our mattress manufacturing. We have generated strong efficiency gains in our plants and believe our Restructuring Plan will achieve further operational efficiencies. 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. ● Improve the productivity of our existing showroom and wholesale doors. 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. 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. ● Drive 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. ● Improve 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. ● Bring 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. 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. 28 Operating Results for the Three Months Ended September 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 September 30, 2024 % of Net Revenues 2023 % of Net Revenues Revenues, net $ 118,598 100.0 % $ 139,996 100.0 % Cost of revenues: Cost of revenues 70,546 59.5 92,687 66.2 Cost of revenues - restructuring related charges 12,859 10.8 — — Total cost of revenues 83,405 70.3 92,687 66.2 Gross profit 35,193 29.7 47,309 33.8 Operating expenses: Marketing and sales 42,939 36.2 52,816 37.7 General and administrative 17,266 14.6 17,524 12.5 Research and development 2,920 2.5 2,704 1.9 Restructuring, impairment and other related charges 18,881 15.9 — — Loss on impairment of goodwill — — 6,879 4.9 Total operating expenses 82,006 69.1 79,923 57.1 Operating loss (46,813 ) (39.5 ) (32,614 ) (23.3 ) Other income (expense): Interest expense (4,394 ) (3.7 ) (594 ) (0.4 ) Other income, net 7,165 6.0 205 0.1 Change in fair value – warrant liabilities 4,795 4.0 — — Loss on extinguishment of debt — — (3,114 ) (2.2 ) Total other income (expense), net 7,566 6.4 (3,503 ) (2.5 ) Net loss before income taxes (39,247 ) (33.1 ) (36,117 ) (25.8 ) Income tax expense (63 ) (0.1 ) (18 ) — Net loss (39,310 ) (33.1 ) (36,135 ) (25.8 ) Net loss attributable to noncontrolling interest (82 ) (0.1 ) (131 ) (0.1 ) Net loss attributable to Purple Innovation, Inc. $ (39,228 ) (33.1 ) $ (36,004 ) (25.7 ) Revenues, Net Net revenues decreased $21.4 million, or 15.3%, to $118.6 million for the three months ended September 30, 2024 compared to $140.0 million for the three months ended September 30, 2023. This decrease was primarily driven by industry-wide demand softness for home-related products in addition to a reduction in advertising spend. From a sales channel perspective, DTC net revenues decreased $9.4 million, or 11.7%, and wholesale net revenues decreased $12.0 million, or 20.1%. Within DTC, e-commerce net revenues decreased $9.3 million, or 15.7%, while Purple showroom net revenues were flat. The decrease in wholesale channel net revenues also reflected our decision to exit our relationship with certain customers. Total Cost of Revenues Total cost of revenues decreased $9.3 million, or 10.0%, to $83.4 million for the three months ended September 30, 2024 compared to $92.7 million for the three months ended September 30, 2023. This decrease was due primarily to reduced sales volumes coupled with lower production costs that were largely attributable to supply chain initiatives and operational efficiency improvements implemented over the last 12 months. This decrease was offset in part by $12.9 million of restructuring related charges associated with the Restructuring Plan. We also experienced non-recurring costs in 2023 associated with the transition to our new product lineup. Our gross profit percentage, which decreased to 29.7% of net revenues in the third quarter of 2024 from 33.8% in the third quarter of 2023, was negatively impacted by the $12.9 million of restructuring related charges offset in part by improved production effectiveness due primarily to supply chain initiatives and manufacturing efficiencies. We expect the Restructuring Plan will achieve further operational efficiencies and provide increased gross profits. We expect to record additional cost of revenue restructuring related charges in the amount of $5.2 million through the second quarter of 2025. These charges include certain estimates that are provisional and include management judgments and assumptions that could change materially as we complete the execution of our plans. Actual results may differ from these estimates, and the completion of our plan could result in additional restructuring related charges not reflected. 29 Marketing and Sales Marketing and sales expense decreased $9.9 million, or 18.7%, to $42.9 million for the three months ended September 30, 2024 compared to $52.8 million for the three months ended September 30, 2023. This decrease primarily consisted of a $9.1 million decrease in advertising spending over last year when we invested heavily to support our new product launch. As a percentage of net revenues, advertising spend was 13.7% in the third quarter of 2024 compared to 18.1% in the third quarter of 2023. The lower percentage of revenues reflected the impact of using more efficient advertising techniques in 2024 as compared to management’s use of expanded marketing efforts in 2023 to support the launch of our new product lineups. General and Administrative General and administrative expense decreased $0.3 million, or 1.5%, to $17.3 million for the three months ended September 30, 2024 compared to $17.5 million for the three months ended September 30, 2023. This decrease primarily reflected the net effect of a $1.7 million decrease in legal and professional fees that was partially offset by a $1.3 million increase in compensation expense, which included severance costs associated with the Restructuring Plan. There will be no additional severance cost associated with the Restructuring Plan recorded in General and Administrative expenses. Research and Development Research and development costs increased $0.2 million, or 8.0%, to $2.9 million for the three months ended September 30, 2024 compared to $2.7 million for the three months ended September 30, 2023. This increase is consistent with our continued focus on product development and generating new products. Restructuring, Impairment and Other Related Charges In August 2024, we initiated a Restructuring Plan to permanently close our two Utah manufacturing facilities and consolidate mattress production in our Georgia plant. The Restructuring Plan also provided for a headcount reduction at our Utah headquarters to drive additional operating efficiencies. The $18.9 million of restructuring and impairment charges recorded during the third quarter of 2024 included $2.4 million of employee-related costs, $0.4 million of accelerated depreciation on non-manufacturing assets, $5.1 million related to write-downs of long-lived assets to be disposed of or equipment in progress that will not be put in service, and $11.0 million of impairment charges which included $2.5 million associated with entering into a sublease for one of the Utah manufacturing facilities to be closed and $8.5 million for the write-off of an indefinite-lived intangible asset. We expect to record additional restructuring and other related charges in the amount of $4.7 million through the second quarter of 2025. These charges include certain estimates that are provisional and include management judgments and assumptions that could change materially as we complete the execution of our plans. Actual results may differ from these estimates, and the completion of our plan could result in additional restructuring, impairment or other related charges not reflected. Loss on Impairment of Goodwill We recorded a $6.9 million loss on impairment of goodwill in the third quarter of 2023 as a result of an impairment assessment performed that determined goodwill was impaired. An ongoing decline in our market capitalization, along with other qualitative considerations, was determined to be a triggering event for potential goodwill impairment. The Company, considered as a single reporting unit, estimated the implied fair value of its goodwill as of September 30, 2023 using a variety of valuation methods, including both the income and market approaches. Operating Loss Operating loss increased $14.2 million, or 43.5%, to $46.8 million, for the three months ended September 30, 2024 compared to $32.6 million for the three months ended September 30, 2023. The larger operating loss in 2024 primarily resulted from restructuring and impairment charges recorded during the third quarter of 2024. We expect to record additional restructuring and other related charges of $4.7 million through the second quarter of 2025. These charges include certain estimates that are provisional and include management judgments and assumptions that could change materially as we complete the execution of our plans. Actual results may differ from these estimates, and the completion of our plan could result in additional restructuring, impairment or other related charges not reflected. Interest Expense Interest expense totaled $4.4 million for the three months ended September 30, 2024 compared to $0.6 million for the three months ended September 30, 2023. This increase was primarily due to interest incurred on the Related Party 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 third quarter of 2023 reflected interest incurred on the 2023 Credit Agreements. 30 Other Income, Net Other income increased to $7.2 million for the three months ended September 30, 2024 compared to $0.2 million for the three months ended September 30, 2023. This increase was due to $7.3 million of proceeds received in July 2024 for the remaining settlement amount due pursuant to a previously filed business interruption insurance claim. 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 September 30, 2024, the outstanding Warrants had a fair value of $19.7 million. During the three months ended September 30, 2024, we recognized a gain of $4.8 million for the decrease in fair value of the Warrants outstanding at September 30, 2024 as compared to the fair value of the Warrants outstanding at the end of the second quarter of 2024. Loss on Extinguishment of Debt We recorded a $3.1 million loss on extinguishment of debt in the third quarter of 2023. In connection with the execution of the 2023 Credit Agreements, the Company terminated its 2020 Credit Agreement. While the Company had no outstanding borrowings under the 2020 Credit Agreement at that time, the termination was accounted for as an extinguishment of debt during the third quarter of 2023 and $3.1 million of unamortized debt issuance costs were recorded as loss on extinguishment of debt. Income Tax (Expense) Benefit We had income tax expense of $0.1 million for the three months ended September 30, 2024 compared to negligible income tax expense for the three months ended September 30, 2023. The income tax expense amounts in both the third 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 $0.1 million for both the three months ended September 30, 2024 and the three months ended September 30, 2023. 31 Operating Results for the Nine Months Ended September 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: Nine Months Ended September 30, 2024 % of Net Revenues 2023 % of Net Revenues Revenues, net $ 358,902 100.0 % $ 364,605 100.0 % Cost of revenues: Cost of revenues 220,190 61.4 241,244 66.2 Cost of revenues - restructuring related charges 12,859 3.6 — — Total cost of revenues 233,049 64.9 241,244 66.2 Gross profit 125,853 35.1 123,361 33.8 Operating expenses: Marketing and sales 125,778 35.0 137,368 37.7 General and administrative 55,111 15.4 67,628 18.5 Research and development 10,572 2.9 9,001 2.5 Restructuring, impairment and other related charges 18,881 5.3 — — Loss on impairment of goodwill — — 6,879 1.9 Total operating expenses 210,342 58.6 220,876 60.6 Operating loss (84,489 ) (23.5 ) (97,515 ) (26.7 ) Other income (expense): Interest expense (13,029 ) (3.6 ) (1,148 ) (0.3 ) Other income, net 11,612 3.2 315 0.1 Change in fair value – warrant liabilities (111 ) — — — Loss on extinguishment of debt (3,394 ) (0.9 ) (4,331 ) (1.2 ) Total other expense, net (4,922 ) (1.4 ) (5,164 ) (1.4 ) Net loss before income taxes (89,411 ) (24.9 ) (102,679 ) (28.2 ) Income tax expense (176 ) — (162 ) — Net loss (89,587 ) (25.0 ) (102,841 ) (28.2 ) Net loss attributable to noncontrolling interest (169 ) — (417 ) (0.1 ) Net loss attributable to Purple Innovation, Inc. $ (89,418 ) (24.9 ) $ (102,424 ) (28.1 ) Revenues, Net Net revenues decreased $5.7 million, or 1.6%, to $358.9 million for the nine months ended September 30, 2024 compared to $364.6 million for the nine months ended September 30, 2023. From a sales channel perspective, DTC net revenues decreased $10.7 million, or 5.0%, and wholesale net revenues increased $5.0 million, or 3.3%. Within DTC, e-commerce net revenues decreased $14.1 million, or 8.7%, while Purple showroom net revenues increased $3.4 million, or 6.5%. The decrease in e-commerce net revenues reflected the ongoing impact of deteriorating industry trends that have led to demand softness for most big-ticket home-related discretionary items. 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 third quarter to 59 at the end of the third quarter of 2024. The increase in wholesale channel net revenues was largely driven by the continued positive response of our existing wholesale partners during the first two quarters of 2024 after transitioning to the new product lineups in 2023. Total Cost of Revenues Total cost of revenues decreased $8.2 million, or 3.4%, to $233.0 million for the nine months ended September 30, 2024 compared to $241.2 million for the nine months ended September 30, 2023. This decrease was due to lower sales volume coupled with lower production costs that were largely attributable to supply chain initiatives and operational efficiency improvements implemented over the last 12 months. This decrease was offset in part by $12.9 million of restructuring related charges associated with the Restructuring Plan. We also experienced non-recurring costs in 2023 associated with the transition to our new product lineup. Our gross profit percentage, which increased to 35.1% of net revenues in the first nine months of 2024 from 33.8% in the first nine months of 2023, reflected improved production effectiveness in 2024 due primarily to supply chain initiatives and manufacturing efficiencies. These savings were offset in part by the $12.9 million of restructuring related charges coupled with a shift in revenue to our wholesale channel, which carries a lower average selling price than sales from our DTC channels. We believe the Restructuring Plan will achieve further operational efficiencies and provide increased gross profits. We expect to record additional cost of revenues restructuring related charges in the amount of $5.2 million through the second quarter of 2025. These charges include certain estimates that are provisional and include management judgments and assumptions that could change materially as we complete the execution of our plans. Actual results may differ from these estimates, and the completion of our plan could result in additional restructuring related charges not reflected. 32 Marketing and Sales Marketing and sales expense decreased $11.6 million, or 8.4%, to $125.8 million for the nine months ended September 30, 2024 compared to $137.4 million for the nine months ended September 30, 2023. This decrease primarily reflected a $12.2 million decrease in advertising spending over last year when we invested heavily to support our new product launch. As a percentage of net revenues, advertising spend was 12.5% in 2024 compared to 15.7% in 2023. The lower percentage of revenues reflected the impact of using more efficient advertising techniques in 2024 as compared to management’s use of expanded marketing efforts in 2023 to support the launch of our new product lineups. General and Administrative General and administrative expense decreased $12.5 million, or 18.5%, to $55.1 million for the nine months ended September 30, 2024 compared to $67.6 million for the nine months ended September 30, 2023. This decrease was primarily due to 2023 including $14.2 million of non-recurring legal and professional costs incurred by the Board’s special committee and a $2.3 million reduction in other professional fees. These reductions were partially offset by a $4.3 million increase in compensation expense, which included severance costs associated with the Restructuring Plan. There will be no additional severance cost associated with the Restructuring Plan recorded in general and administrative expense. Research and Development Research and development costs increased $1.6 million, or 17.5%, to $10.6 million for the nine months ended September 30, 2024 compared to $9.0 million for the nine months ended September 30, 2023. This increase was primarily due to a loss incurred on the write off of a project coupled with increased investment in new research and development initiatives. Restructuring, Impairment and Other Related Charges In August 2024, we initiated a Restructuring Plan to permanently close our two Utah manufacturing facilities and consolidate mattress production in our Georgia plant. The Restructuring Plan also provided for a headcount reduction at our Utah headquarters to drive additional operating efficiencies. The $18.9 million of restructuring and impairment charges recorded during the third quarter of 2024 included $2.4 million of employee-related costs, $0.4 million of accelerated depreciation, $5.1 million related to write-downs of long-lived assets to be disposed of or equipment in progress that will not be put in service, and $11.0 million of impairment charges which included $2.5 million associated with entering into a sublease for one of the Utah manufacturing facilities to be closed and $8.5 million for the write-off of and indefinite-lived intangible asset. We expect to record additional restructuring and other related charges in the amount of $4.7 million through the second quarter of 2025. These charges include certain estimates that are provisional and include management judgments and assumptions that could change materially as we complete the execution of our plans. Actual results may differ from these estimates, and the completion of our plan could result in additional restructuring, impairment or other related charges not reflected. Loss on Impairment of Goodwill We recorded a $6.9 million loss on impairment of goodwill in the third quarter of 2023 as a result of an impairment assessment performed that determined goodwill was impaired. An ongoing decline in our market capitalization, along with other qualitative considerations was determined to be a triggering event for potential goodwill impairment. The Company, considered as a single reporting unit, estimated the implied fair value of its goodwill using a variety of valuation methods, including both the income and market approaches. Operating Loss Operating loss decreased $13.0 million, or 13.4%, to $84.5 million for the nine months ended September 30, 2024 compared to $97.5 million for the nine months ended September 30, 2023. The smaller operating loss primarily resulted from an increase in gross profit, a decrease in ad spend, a decrease in general and administrative expense, and 2023 including a loss on impairment of goodwill. These increases to operating income were partially offset by restructuring and impairment charges recorded in 2024 related to the Restructuring Plan. We expect to record additional restructuring and other related charges of $9.9 million through the second quarter of 2025. These charges include certain estimates that are provisional and include management judgments and assumptions that could change materially as we complete the execution of our plans. Actual results may differ from these estimates, and the completion of our plan could result in additional restructuring, impairment or other related charges not reflected. Interest Expense Interest expense totaled $13.0 million for the nine months ended September 30, 2024 compared to $1.1 million for the nine months ended September 30, 2023. This increase was primarily due to interest incurred on the Related Party 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 nine months of 2023 was lower in part because the term loan associated with the 2020 Credit Agreement was repaid in full in February 2023 and the 2023 Credit Agreements did not go into effect until August 2023. Other Income, Net Other income increased to $11.6 million for the nine months ended September 30, 2024 compared to $0.3 million for the nine months ended September 30, 2023. This increase was due to $4.3 million of proceeds received in January 2024 as partial settlement for a previously filed business interruption insurance claim and $7.3 million of additional proceeds received in July 2024 for the remaining settlement payment due pursuant to the same previously filed business interruption claim. 33 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 September 30, 2024, the Warrants had a fair value of $19.7 million. During the nine months ended September 30, 2024, we recognized a loss of $0.1 million for the increase in fair value of the Warrants outstanding at September 30, 2024 as compared to the fair value of the Warrants on the date of issuance. Loss on Extinguishment of Debt Loss on extinguishment of debt totaled $3.4 million for the nine months ended September 30, 2024 compared to $4.3 million for the nine months ended September 30, 2023. 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 accounted for an amendment to the 2020 Credit Agreement as an extinguishment of debt and $1.2 million of unamortized debt issuance costs were recorded as loss on extinguishment of debt in 2023. In connection with the execution of the 2023 Credit Agreements in August 2023, the Company terminated its 2020 Credit Agreement. While the Company had no outstanding borrowings under the 2020 Credit Agreement at that time, the termination was accounted for as an extinguishment of debt during the third quarter of 2023 and $3.1 million of unamortized debt issuance costs were recorded as loss on extinguishment of debt. Income Tax (Expense) Benefit We had income tax expense of $0.2 million for the nine months ended September 30, 2024 compared to income tax expense of $0.2 million for the nine months ended September 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 $0.2 million and $0.4 million for the nine months ended September 30, 2024 and 2023, 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 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 $28.7 million, respectively, as of September 30, 2024 compared to $26.9 million and $30.8 million, respectively, as of December 31, 2023. Cash used for capital expenditures totaled $6.4 million and $9.4 million for the nine months ended September 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, 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 on terms requested by us to the extent agreed to by the Lenders at their discretion, will be sufficient to meet our working capital requirements and cover anticipated capital expenditures for the next 12 months. Also, in August 2024, we announced our Restructuring Plan. We believe consolidation of our manufacturing footprint is an important step to advance our grid innovation and build momentum to achieve positive operating cash flow and market share growth over the long term. 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. 34 Other Contractual Obligations Other material contractual obligations primarily include operating lease payment obligations. See Note 9 - Leases of the condensed consolidated financial statements for additional information on leases. Cash Flows for the Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 30, 2023 The following summarizes our cash flows for the nine months ended September 30, 2024 and 2023 as reported in our condensed consolidated statements of cash flows (in thousands): Nine Months Ended September 30, 2024 2023 Net cash used in operating activities $ (24,611 ) $ (55,808 ) Net cash used in investing activities (6,381 ) (10,183 ) Net cash provided by financing activities 27,534 50,843 Net decrease in cash (3,458 ) (15,148 ) Cash, beginning of the period 26,857 41,754 Cash, end of the period $ 23,399 $ 26,606 Cash used in operating activities was $24.6 million and $55.8 million for the nine months ended September 30, 2024 and 2023, respectively. Significant components of the year-over-year change in cash used in operating activities included a $13.3 million decrease in net loss, $29.1 million of noncash restructuring, impairment and other related charges, and $7.0 million of paid-in-kind interest, offset in part by a $17.1 million fluctuation in accounts payable due to timing of vendor payments. Cash used in investing activities reflected capital expenditures of $6.4 million and $9.4 million for the nine months ended September 30, 2024 and 2023, respectively. Capital expenditures in the first nine 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 nine months ended September 30, 2024 compared to $50.8 million during the nine months ended September 30, 2023. Financing activities during the first nine 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 Estimates 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. 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, 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. 35