Purple Innovation, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual filing, not a standalone fourth-quarter report. Purple designs and sells premium mattresses and related comfort products through e-commerce, 60 company showrooms, online marketplaces and wholesale partners. Its products are built around proprietary Hyper-Elastic Polymer technology.
Financial performance and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net revenue | $510.5 million | $573.2 million |
| Gross profit / margin | $171.8 million / 33.7% | $208.1 million / 36.3% |
| Operating loss | $113.7 million | $42.8 million |
| Net loss attributable to Purple Innovation, Inc. | $120.8 million ($1.17 per share) | $92.5 million ($1.13 per share) |
| Cash used in operating activities | $54.7 million | $28.8 million |
| Capital expenditures | $15.2 million | $38.2 million |
| Cash and cash equivalents at year-end | $26.9 million | $41.8 million |
| Working capital at year-end | $30.8 million | $61.6 million |
Revenue declined 10.9% year over year. DTC revenue fell 10.2% and wholesale revenue fell 11.9%; within DTC, e-commerce declined 16.4%, while showroom revenue rose 15.8%. Sleep products made up 97.2% of FY2023 revenue. The company reported total debt of $30.0 million at year-end, before unamortized issuance costs, including $25.0 million of term loans and $5.0 million drawn on its revolving facility. Operating lease liabilities totaled $123.9 million.
Material changes versus FY2022
- Gross margin contracted 2.6 percentage points, which management attributed to the transition to the new product lineup: wholesale floor-model discounts, higher labor and freight costs, lower manufacturing efficiency, legacy inventory reserves and increased discounting.
- Operating expenses increased 13.8% to $285.5 million. Marketing and sales expense rose to $182.3 million, including higher advertising and showroom costs; G&A included elevated legal and professional fees. Purple also recorded a $6.9 million goodwill impairment, writing off the full balance.
- Operating loss widened by $71.0 million. The comparison of net losses is affected by FY2022’s $162.0 million of Tax Receivable Agreement income and $213.2 million income tax expense; FY2023 had no comparable TRA income and only de minimis income tax expense.
- Operating cash outflow increased by $25.9 million. Cash declined by $14.9 million during FY2023, while financing activities included $57.0 million net proceeds from a February stock offering.
- Showrooms increased from 55 at year-end 2022 to 60 at year-end 2023. DTC represented 58.1% of revenue and wholesale 41.9%, broadly similar to the prior-year mix.
Outlook, financing and key risks
- Purple launched its Premium and Luxe mattress collections in May 2023 and transitioned wholesale partners to the new lineup during the second half. Management said the lineup was fully available across channels in Q4, which produced the highest quarterly revenue since Q4 2021. The filing does not provide a clear numerical revenue, earnings or margin forecast for 2024.
- Management’s priorities include improving gross margin and operating efficiency, growing Premium and Luxe sales, improving showroom and wholesale productivity, optimizing e-commerce conversion, and developing new products. Management said it was slowing showroom openings in the short term, while anticipating continued expansion over time.
- On January 23, 2024, after year-end, Purple refinanced its 2023 facilities with a $61.0 million term loan from lenders including Coliseum-affiliated entities. The transaction repaid $30.0 million of year-end debt and provided approximately $27.0 million of net proceeds; Purple reported post-transaction unrestricted cash of approximately $48.0 million. The loan matures December 31, 2026 and bears interest at SOFR plus 0.10% (subject to a 3.5% floor) plus 8.25%, or 10.25% if interest is paid in kind. The loan is secured by substantially all assets and includes restrictive covenants. Management believed available cash, facility capacity and expected operating cash could cover requirements for the next 12 months, but warned that weaker cash generation could require cuts, restructuring or additional financing.
- The refinancing included warrants for 20.0 million shares at $1.50 per share, approximately 19% of then-outstanding common stock, subject to adjustment and a 49.9% beneficial-ownership cap. Exercise could materially dilute shareholders. Coliseum is a controlling stockholder and lender, and the filing describes its significant influence over the company.
- Operating cash flow has been negative for two consecutive years. Additional risks include soft consumer demand for premium home products, competition, input and delivery costs, production disruptions, lender covenants, and the possibility of needing further capital. The company reported FY2023 covenant defaults that were waived in November 2023; it said it was compliant with amended covenants at year-end.
- Management and the auditor identified a material weakness in financial reporting controls concerning review of wholesale customer contracts and estimation of wholesale warranty liabilities. Controls were not effective at December 31, 2023, and the auditor issued an adverse opinion on internal control. The financial-statement audit opinion was unqualified. The company revised warranty accounting for prior periods, describing the errors as not material to any prior annual or interim period.
- Warranty liabilities were $35.6 million at year-end, up from $24.5 million. The auditor identified accrued warranties as a critical audit matter because estimates depend on future claims and repair costs. The company also reported a full valuation allowance against $303.8 million of gross deferred tax assets and estimated a $119.8 million discounted payment under the Tax Receivable Agreement upon specified termination or change-of-control events.
Most important facts for investors to verify
- Whether new Premium and Luxe products can restore revenue growth and gross margin after the transition-related costs and discounts.
- Whether operating cash burn improves, and whether liquidity and covenant compliance remain adequate under the high-interest, secured 2024 loan.
- Progress and independent validation of remediation of the wholesale warranty control weakness, including the adequacy of the $35.6 million warranty reserve.
- The potential dilution and control implications of the 20 million lender warrants, including registration and any exercise or resale activity.
- The assumptions and contingent cash impact of the Tax Receivable Agreement, and developments in the company’s material litigation and other disclosed contingencies.