Purple Innovation, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. The filing is an annual report, not a standalone Q4 report; Q4-specific figures are limited in the supplied text. Purple designs and manufactures premium comfort products, primarily mattresses and related sleep products, selling through e-commerce, company showrooms and wholesale partners.
Financial results and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net revenue | $726.2 million | $648.5 million |
| Gross profit / gross margin | $295.0 million / 40.6% | $305.1 million / 47.0% |
| Operating income (loss) | $(23.4) million | $71.2 million |
| Net income (loss) | $3.9 million | $(229.8) million |
| Operating cash flow | $(30.9) million | $81.3 million |
| Capital expenditures | $57.1 million | $39.1 million |
| Cash and working capital at year-end | $91.6 million / $87.5 million | $123.0 million / $96.9 million |
| Debt at year-end | $97.2 million | $44.4 million |
Revenue rose 12.0%. Wholesale revenue increased 54.5% and showroom revenue 207.9%, while e-commerce revenue declined 6.9%. DTC contributed 65.3% of FY2021 revenue and wholesale 34.7%; sleep products represented 91.5%.
Profitability deteriorated despite revenue growth: cost of revenue rose 25.6%, faster than sales, and gross margin fell 6.4 percentage points. Marketing and sales expense increased 27.3% to $239.3 million; general and administrative expense rose 80.6% to $72.1 million. The company reported $4.0 million of net income attributable to Purple Innovation, Inc.; reported basic EPS was $0.06 and diluted EPS was $(0.30), with warrant accounting affecting diluted results.
Year-end debt consisted of a $42.2 million term loan and the fully drawn $55.0 million revolving facility. The company used $30.9 million of operating cash and $57.1 million for investing, partly funded by $55.0 million of revolver borrowings. Inventory increased to $98.7 million from $65.7 million.
Material changes and unusual items
- FY2021 operating income swung from $71.2 million profit to a $23.4 million loss. Production disruptions, softer-than-expected demand, higher material, labor and freight costs, and increased operating expenses were cited as key drivers.
- A 2021 manufacturing-equipment accident resulted in an employee fatality. Safety improvements and subsequent mechanical and maintenance problems reduced production and caused backlogs in Q2 and Q3. Management said production returned to planned levels in Q3; Q4 revenue grew 7.2% year over year, but the quarter still had an operating loss. Q4 loss amount is not clearly provided in the filing text.
- Warrant fair-value changes were substantial and non-cash: FY2021 recorded a $24.1 million gain, versus a $300.1 million loss in FY2020. These changes materially affect reported earnings and comparability.
- On November 8, 2021, Purple replaced its Mattress Firm agreement, ending prior exclusivity and allowing the company to pursue additional specialty retail partners.
Outlook, risks and contingencies
Management focused on right-sizing labor, improving capacity utilization, expanding wholesale, and building premium mattress share toward a stated 20% target from approximately 11%. It also targeted gross margins returning to approximately 2020 levels by the end of 2022. These are management objectives, not guaranteed results. Management expected elevated input costs and lower-than-expected demand to weigh on results into Q1 2022. Pricing actions and cost-efficiency initiatives were underway.
In February 2022, the company reduced headcount by approximately 15% and incurred a $1.1 million restructuring charge. It also amended its credit agreement after FY2021 covenant results failed to meet requirements. The amendment waived certain leverage and coverage tests through Q2 2022, added minimum-liquidity and reporting requirements, restricted capital spending and new leases, and increased borrowing costs. The initial rate was 5.25% if the liquidity threshold is met and 9.00% if it is not; the company also paid $0.9 million in fees and prepaid $2.5 million of 2022 principal.
- Liquidity and debt: The revolver was fully drawn, and covenant compliance, cash generation and access to additional financing remain important risks. Management said cash and expected operating cash generation should cover working capital and planned capital expenditures for the next 12 months, subject to assumptions.
- Controls: Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end due to an IT general-controls material weakness involving user access and segregation of duties. The auditor issued an adverse opinion on internal control, but an unqualified opinion on the financial statements.
- Tax receivable agreement: The recorded liability was $168.1 million, including $5.8 million current, and the company generally owes InnoHold 80% of specified realized tax benefits. Payment timing and total amounts are uncertain.
- Operations and demand: Risks include supply-chain and freight constraints, inflation, labor availability, production capacity and equipment maintenance, changing demand across online and physical retail, inventory levels, and dependence on wholesale partners and suppliers.
- Legal matters: Disputes with Responsive Surface Technology and Intellibed remained unresolved; Purple sought $5.5 million from ReST, which claimed damages in the tens of millions. A Section 301 duty-refund case sought approximately $7.0 million. The Serta Simmons dispute was settled without monetary payment by Purple.
- Other: The company cited competition, marketing costs, consumer financing availability, intellectual-property and related-party matters, and ongoing COVID-19 and macroeconomic uncertainty. No cash dividends were anticipated in the foreseeable future.
Important facts for investors to verify
- Whether sales demand and wholesale orders recovered after 2021’s production interruptions, and how channel mix affects margins.
- Progress toward the 2022 gross-margin objective, including the effects of pricing, freight, materials and labor costs.
- Cash flow, inventory conversion and liquidity under the amended credit agreement; covenant compliance, minimum-liquidity tests and borrowing costs.
- Remediation of the IT-controls material weakness and whether any further financial reporting issues arise.
- Potential cash requirements under the $168.1 million tax receivable agreement liability, as well as the outcomes and exposure in pending legal matters.