Purple Innovation, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. This is an annual report; the filing does not provide a clear standalone fourth-quarter income statement. Amounts below are in U.S. dollars.
Business context
Purple designs and sells mattresses and other comfort products using its proprietary Hyper-Elastic Polymer technology. Sales are made through e-commerce and company-owned showrooms (DTC), online marketplaces, and wholesale partners. In 2022, DTC generated 57.4% of revenue and wholesale 42.6%; sleep products accounted for 91.2%.
The company acquired premium mattress maker Intellibed on August 31, 2022, for $28.3 million of purchase consideration, primarily stock. Intellibed contributed $9.7 million of revenue from acquisition through year-end. Purple ended 2022 with 55 showrooms, after adding 27, and products in approximately 3,400 wholesale doors.
Key financial metrics
| Metric | 2022 | 2021 |
|---|---|---|
| Net revenue | $575.7 million | $726.2 million |
| Gross profit / gross margin | $210.6 million / 36.6% | $295.0 million / 40.6% |
| Operating expenses | $250.8 million | $318.3 million |
| Operating loss | $40.3 million | $23.4 million |
| Net income (loss) attributable to Purple | $(89.7) million | $4.0 million |
| Operating cash flow | $(28.8) million | $(30.9) million |
| Capital expenditures | $38.2 million | $57.1 million |
| Cash, cash equivalents and restricted cash at year-end | $41.8 million | $91.6 million |
Net loss per share was $1.10. Cash used in investing activities was $34.5 million and cash provided by financing activities was $13.4 million. Unrestricted cash was $40.0 million and working capital was $62.0 million at December 31, 2022.
Year-end debt was $24.7 million under the term loan, net of issuance costs; the revolving facility had no balance drawn. On February 17, 2023, Purple repaid the term loan using proceeds that included its February stock offering and amended the facility to a $50 million revolver, available subject to covenant compliance.
Material changes versus 2021
- Revenue fell 20.7%. DTC revenue declined 30.3%, including a 39.5% decrease in e-commerce; showroom revenue increased 94.7% as the showroom count grew. Wholesale revenue decreased 2.7%.
- Gross margin declined four percentage points, reflecting higher materials, labor and freight costs, lower demand, and a greater share of sales through lower-margin wholesale. Cost-saving initiatives partly offset these pressures.
- Operating expenses fell 21.2%, mainly due to reduced advertising, workforce reductions and other cost controls. Marketing and sales expense decreased 30.9%; general and administrative expense rose 6.4% and R&D expense rose 26.2%.
- The reported net loss included a $213.5 million deferred-tax expense from a full valuation allowance on deferred tax assets, and $162.0 million of tax receivable agreement income from reversing the recorded liability. These material tax-related items make reported net income a poor standalone indicator of operating performance.
- Operating cash use remained substantial, while year-end cash fell by $49.9 million. Inventory decreased by $25.5 million, and accounts payable decreased by $33.3 million.
Outlook, risks and unusual items
- Management did not provide specific revenue or earnings guidance. It said current projections indicated cash on hand, expected operating cash and the revolver would be sufficient for working capital, covenants and anticipated capital expenditures for the next 12 months and beyond. Planned 2023 capital expenditures were approximately $35 million.
- Management’s strategy emphasizes launching Essentials, Premium and Luxe mattress collections; elevating the brand; increasing wholesale placements and door productivity; and opening 11 additional showrooms in 2023. It planned to increase effective marketing by 11% versus 2022, with an anticipated 40% increase after the new product launches.
- Credit conditions are a key risk. The amended facility imposes EBITDA, leverage, fixed-charge coverage, liquidity, capital expenditure and showroom-lease restrictions. If 2023 consolidated EBITDA is not greater than $15 million, the facility maturity springs forward to June 30, 2024. The company had previously needed covenant amendments and did not meet 2021 covenant requirements.
- Coliseum, which beneficially owned approximately 44.7% of voting power, made an unsolicited $4.35-per-share acquisition proposal that the special committee rejected. A proxy contest and litigation challenging the company’s PRPLS voting-security issuance remained unresolved at the filing date.
- After SVB’s March 2023 closure, Purple reported approximately $4.2 million of cash there and said it had regained access to its accounts and credit-card processing. SVB also represented $7.25 million of the $50 million revolver commitment.
- The company reported a 2022 spear-phishing incident that diverted payments to a vendor’s altered bank account; it estimated costs of up to $250,000. Other litigation includes the ReST arbitration, for which Purple seeks more than $4 million and the counterparty claims tens of millions; outcomes were uncertain.
- The company reported that a previously identified material weakness in IT general controls had been remediated by year-end. Management and the auditor concluded internal control over financial reporting was effective as of December 31, 2022; the audit firm issued an unqualified opinion on the financial statements and controls.
Important facts for investors to verify
- Whether sales, gross margin and operating cash flow stabilize, and whether the company can realize the expected benefits of cost reductions and showroom and wholesale expansion.
- How covenant compliance, liquidity and EBITDA develop under the amended credit agreement, and whether the full $50 million revolver remains accessible when needed.
- The economic and cash implications of the Tax Receivable Agreement: the filing reversed its recorded liability to zero, but separately estimated a potential liability of approximately $168.8 million and a potential early-termination payment of approximately $108.5 million.
- Whether the Premium and Luxe launches, planned marketing increases and wholesale placement commitments deliver the sales and margin benefits management expects.
- The outcome and financial impact of the Coliseum proxy contest and PRPLS litigation, and any resulting governance changes or dilution.
- Final purchase-accounting adjustments for Intellibed, and the development of warranty liabilities, which rose to $20.7 million and were identified as a critical audit matter.