Purple Innovation Inc

Previous wording

Beginning in 2022 and continuing into 2023, we expanded our focus on product development and increased our innovation capabilities. As a result, in May 2023, we launched our new Premium and Luxe product lineups. This launch was supported by enhancements to our in-store presence and refinements to our marketing programs and brand messaging. 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 March 31, 2024. In addition, we have focused on growing our placements with wholesale partners and improving wholesale door productivity. By the end of 2023, we had transitioned all of our wholesale partners to the new line of mattress products. Improving the sales productivity of both our wholesale partners and existing showrooms remains a primary focus and critical component of our strategy to respond to shifting demand patterns. We are also diligently working to improve e-commerce conversion by determining ways to best optimize traffic on our website. We experienced several years of growth during the pandemic and increased investments to support current and future expansion. After right-sizing our operations, improving our execution, and refining our strategies to drive share gains in the premium mattress category, we are now building the framework for improved operational maturity and accountability to position us for accelerated growth. With the introduction of our new product lineups, we initiated a new marketing campaign which included enhanced brand positioning and increased media investment at the top of the acquisition funnel. In 2024, we believe we can achieve 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 believe we have set the right course for the next stage of growth for the Company.

Current wording

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.

Previous wording

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 three months ended March 31, 2024, we recognized a loss of $23.6 million in our condensed consolidated statement of operations related to an increase in the fair value of the Warrants outstanding at March 31, 2024.

Current wording

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.

Previous wording

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. On March 21, 2024, we filed a registration statement registering the Registrable Securities.

Current wording

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.

Previous wording

Operating expenses decreased 0.5% to $64.9 million for the three months ended March 31, 2024 compared to $65.2 million for the three months ended March 31, 2023. This decrease primarily reflected a $3.9 million reduction in general and administrative expense, offset in part by a $3.3 million increase in marketing and sales costs. 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. The increase in marketing and sales expense was driven by higher advertising spend to further support our new product lineup coupled with an increase in wholesale marketing and sales costs.

Current wording

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.

Previous wording

Other expense totaled $27.1 million for the three months ended March 31, 2024 compared to other expense of $1.3 million for the three months ended March 31, 2023. Other expense in 2024 included a $23.6 million loss related to an increase in the fair value of the Warrants outstanding at March 31, 2024, a $3.4 million loss on extinguishment of the Company’s 2023 Credit Agreements during the quarter, and $4.5 million of interest expense related primarily to our new loan under the Amended and Restated Credit Agreement. These expenses were offset in part by $4.3 million of other income associated with proceeds received in January 2024 as partial settlement for a previously filed business interruption insurance claim.

Current wording

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.

Previous wording

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 profitable market share gains:

Current wording

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:

Previous wording

There is no guarantee that we will be able to effectively execute these initiatives, which are subject to risks, uncertainties, and assumptions that are difficult to predict, including the risks described under “Risk Factors” and elsewhere herein. Therefore, actual results may differ materially and adversely from those described above. In addition, we may, in the future, adapt these focuses in response to changes in the market or our business.

Current wording

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.

Previous wording

General and administrative expense decreased $3.9 million, or 16.6%, to $19.7 million for the three months ended March 31, 2024 compared to $23.7 million for the three months ended March 31, 2023. This decrease was primarily due to a $5.0 million decline in legal and professional fees as the prior year’s comparative quarter included costs associated with the Board’s special committee.

Current wording

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.

Previous wording

Operating loss decreased $1.5 million to $23.1 million for the three months ended March 31, 2024 compared to $24.6 million for the three months ended March 31, 2023. The smaller operating loss primarily resulted from an increase in gross profit that was driven by higher sales coupled with a minimal decrease in operating expenses.

Current wording

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.

Previous wording

We had income tax expense of $0.1 million for the three months ended March 31, 2024 compared to an income tax expense of $0.1 million for the three months ended March 31, 2023. The income tax expense amount in the first quarter of 2024 related to various state taxes.

Current wording

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.

Previous wording

Gross profit increased 2.8% to $41.7 million for the three months ended March 31, 2024 compared to $40.6 million for the three months ended March 31, 2023 due primarily to an increase in sales volume. The gross profit percentage in 2024 was 34.8% as compared to 38.0% in 2023. The lower gross profit percentage in the first quarter of 2024 was primarily due to a shift in revenue to our wholesale channel, which carries a lower average selling price than sales from our DTC channels.

Current wording

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.

Previous wording

Interest expense totaled $4.5 million for the three months ended March 31, 2024 compared to $0.2 million for the three months ended March 31, 2023. This increase was primarily due to interest incurred on the $61.0 million new 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 quarter of 2023 was lower because the term loan associated with 2020 Credit Agreement was repaid in full in February 2023.

Current wording

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.

Previous wording

Other income increased to $4.4 million for the three months ended March 31, 2024 compared to $0.1 million for the three months ended March 31, 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.

Current wording

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.

Previous wording

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 the first quarter of 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 the first quarter of 2023.

Current wording

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.

Previous wording

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. During the three months ended March 31, 2024, we recognized a loss of $23.6 million in our condensed consolidated statement of operations related to an increase in the fair value of the Warrants outstanding at March 31, 2024.

Current wording

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.

Previous wording

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 March 31, 2024 and 2023.

Current wording

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.

Previous wording

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 Agreementand 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, the Company has elected to pay interest in kind on its 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 $34.5 million and $47.9 million, respectively, as of March 31, 2024 compared to $26.9 million and $30.8 million, respectively, as of December 31, 2023. Cash used for capital expenditures totaled $3.1 million for both the first quarter of 2024 and the first quarter of 2023. Our capital expenditures in 2024 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.”

Current wording

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.”

Previous wording

Based on our current projections, we believe our cash on hand, amounts available under our Amended and Restated Credit Agreement, and expected cash to be generated from our operations will be sufficient to meet our working capital requirements and cover anticipated capital expenditures for the next 12 months. In the event our cash flow from operations or other sources of financing are less than anticipated, we believe we will be able to fund operating expenses based on our ability to scale back operations, reduce marketing spend, and postpone or discontinue our growth strategies. Such actions could result in slower growth or no growth, and we may lose key suppliers, be unable to timely satisfy customer orders, and be unable to retain all of our employees. In addition, we may be forced to restructure our obligations to creditors, pursue work-out options or other protective measures. We may also need to seek additional funding sources including new debt from subordinated lenders or equity capital. However, such additional debt or equity capital may not be available on terms favorable to us or at all. Our ability to raise additional debt financing would require the consent of the Lenders.

Current wording

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.

Previous wording

Other material contractual obligations primarily include operating lease payment obligations. See Note 8 of the condensed consolidated financial statements for additional information on leases.

Current wording

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.

Previous wording

Cash Flows for the Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023

Current wording

Cash Flows for the Six Months Ended June 30, 2024 Compared to the Three Months Ended June 30, 2023

Previous wording

The following summarizes our cash flows for the three months ended March 31, 2024 and 2023 as reported in our condensed consolidated statements of cash flows (in thousands):

Current wording

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):

Previous wording

Cash used in operating activities was $16.8 million and $13.5 million for the three months ended March 31, 2024 and 2023, respectively. Cash used in operating activities during the first quarter of 2024 was more than 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 $24.2 million increase in net loss, offset in part by a $23.6 million increase in the fair value of Warrants issued in January 2024.

Current wording

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.

Previous wording

Cash used in investing activities reflected capital expenditures of $3.1 million for boththe three months ended March 31, 2024 and 2023. Capital expenditures in the first quarter of 2024 primarily consisted of additional investments made in our manufacturing operations and showroom facilities.

Current wording

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.

Previous wording

Cash provided by financing activities was $27.5 million during the three months ended March 31, 2024 compared to $29.4 million during the three months ended March 31, 2023. Financing activities in the first quarter of 2024 included $61.0 million of proceeds received from the new 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.

Current wording

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.