Item 7. Management’s Discussion and Analysis
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking
Statements
This
Annual Report on Form 10-K, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains
forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities
Act and the Exchange Act. All statements other than statements of historical facts are statements that could be deemed forward-looking
statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we
operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,”
“goals,” “projects,” “intends,” “plans,” “believes,” “momentum,”
“seeks,” “estimates,” “continues,” “endeavors,” “strives,” “may,”
variations of such words, and similar expressions are intended to identify such forward-looking statements. 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. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties,
and assumptions that are difficult to predict, including those under “Part I, Item 1A. Risk Factors,” and elsewhere
herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake
no obligation to revise or update any forward-looking statements for any reason.
The
following discussion is intended to provide a more comprehensive review of our results of operations and financial condition than can
be obtained from reading our consolidated financial statements alone. This discussion should be read in conjunction with our consolidated
financial statements and the notes thereto included in “Part II Item 8. Financial Statements.”
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 market and sell our products via our DTC channel, which includes
Purple.com (our direct-to-consumer e-commerce), Purple showrooms, our customer contact center and online marketplaces, and our wholesale
channel through retail brick-and-mortar and online wholesale partners.
Organization
Our
business consists of Purple Inc. and its consolidated subsidiary, Purple LLC. Purple Inc. was incorporated in Delaware on May 19, 2015
as a special purpose acquisition company under the name of GPAC. On February 2, 2018, we consummated a transaction structured similar
to a reverse recapitalization (the “Business Combination”) pursuant to which Purple Inc. acquired an equity interest in Purple
LLC as holder of all Class A units and became its sole managing member. 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 December 31, 2024, Purple Inc. had a 99.8% economic interest in Purple
LLC while other Class B unit holders had the remaining 0.2%.
On
August 31, 2022, we acquired all the issued and outstanding stock of Intellibed to consolidate ownership of our licensed intellectual
property while enhancing our innovation and manufacturing capabilities and financial profile. For further discussion see Note 4 —
Acquisition.
30
Recent
Developments in Our Business
Operational
Developments
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. We are concentrating efforts on driving gross margin improvement through various methods such as selective pricing actions,
continued mix shift towards our Restore and Rejuvenate collections, and by driving cost savings through supply chain initiatives and manufacturing
efficiency. We have also delivered direct material cost savings from our supplier diversification efforts, improved scrap and yield results
from continuous improvements, and our outbound freight costs reflect cost improvements along with improved delivery reliability. Moreover,
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. The fourth quarter 2024 was significant
for us as we achieved profitability and positive cash flow. This was the direct result of our disciplined execution, operational improvements
and cost saving initiatives throughout the year. Other key highlights during the fourth quarter of 2024 included significant improvements
in Purple showroom profitability and the successful launch of our product in Costco retail locations.
In 2025, we announced the
re-launching of our Rejuvenate line in the second quarter 2025 through our DTC channels, followed by a full wholesale channel roll-out
expected to be complete by the third quarter 2025. The new Rejuvenate 2.0 will have a newly innovated grid technology that when stacked
with our original Gelflex grid, creates a unique combination that continues to differentiate us in the market while driving superior comfort
and support for an even more premium sleep experience.
Restructuring Activities
In August 2024, we initiated the Restructuring Plan to strategically
realign our operational focus to achieve efficiencies in our operations that are expected to improve profitability and provide for reinvesting
in technology and marketing initiatives. The Restructuring Plan includes 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 in the second quarter of 2025 while consolidation
into the Georgia facility was finalized in December 2024. The reduction in workforce at our Utah headquarters was completed in August
2024. During 2024, we recognized $36.4 million in costs relating to the Restructuring Plan., which included $4.3 million of employee-related
costs, $11.3 million of accelerated depreciation, $9.3 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, $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, and $0.5 million of other related costs.
We expect to record additional restructuring and other related charges in the amount of $4.6 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.
In addition, we plan to implement
additional cost savings measures in 2025 beyond those implemented pursuant to our 2024 Restructuring Plan.
Debt
Financing s
On January 23, 2024, Purple
LLC, Purple Inc. and Intellibed (collectively, the “Loan Parties”) entered into the Amended and Restated Credit Agreement,
which amended and restated the then existing term loan agreement (“Term Loan Agreement”), with CCP and other lenders (collectively,
the “Lenders”) and Delaware Trust Company, as administrative agent. 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 (the “Related Party Loan”) that was used to repay the $25.0 million of term loans outstanding,
the $5.0 million of revolving debt 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 of the loan. 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 previously outstanding term loans and revolving credit facility
were paid in full and the respective related agreements (collectively, the “2023 Credit Agreement”) were terminated.
31
On March 12, 2025, we entered into the 2025 Amendment, pursuant to
which the 2025 Term Loan Lenders (as defined in the 2025 Amendment) agreed to provide us with an incremental term loan of $19.0 million.
The 2025 Amendment also amended the Amended and Restated Credit Agreement to (i) provide for an additional term loan from the 2025 Term
Loan Lenders in an aggregate amount not to exceed $20.0 million, subject to the approval of the Required Lenders in their discretion,
(ii) provide for the payment of substantial make-whole payments in the event we prepay the loans prior to their maturity, and (iii) provide
that the incremental term loan will be senior in right of repayment to the initial term loan.
Warrants
In connection with the Amended and Restated Credit Agreement, we issued
to the Lenders the 2024 Warrants to purchase 20.0 million shares of our Class A Stock. Each 2024 Warrant entitles the registered holder
to purchase one share of our Class A Stock at a price of $1.50 per share, subject to adjustment. The 2024 Warrants will expire on the
10-year anniversary of issuance, or earlier upon redemption. A holder of the 2024 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 Stock outstanding immediately after giving effect to such exercise. The 2024 Warrants contain certain provisions
that do not meet the criteria for equity classification and therefore were recorded as liabilities. The liability for the 2024 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 subsequently re-measured to fair value at each reporting date or exercise date with changes in the fair value included in earnings.
During 2024, we recognized a gain of $3.5 million in our consolidated statement of operations for a decrease in the fair value of the
2024 Warrants outstanding at December 31, 2024.
In connection with the 2025
Amendment, we issued to the Lenders the 2025 Warrants to purchase 6.2 million shares of our Class A Stock . The 2025 Warrants have the
same terms as the 2024 Warrants, except that they expire on March 12, 2035 and certain adjustments to the exercise price are subject to
a floor of $0.6979.
Registration
Rights Agreements
In connection with the issuance
of the Warrants, we entered into the Registration Rights Agreement with holders of the Warrants (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.
NOL
Rights Plan
On June 27, 2024, our Board
of Directors (“Board”) adopted and we entered into a limited-duration stockholder rights agreement (the “NOL Rights
Plan”) with a stated expiration date of June 30, 2025. Our Board approved the NOL Rights Plan to protect stockholder value by attempting
to safeguard our ability to use our June 30, 2024 estimated $238 million of net operating losses (the “Current NOLs”) 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, our 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 at a special meeting of our stockholders
on October 15, 2024 (the “Special Meeting”). The NOL Rights Plan will automatically expire by its terms on June 30, 2025.
NOL
Protective Charter Amendment
In connection with the NOL
Rights Plan, our Board adopted a 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 our stockholders
at the Special Meeting. The NOL Protective Charter Amendment will automatically expire by its terms on June 30, 2025.
Review of Strategic Alternatives
We regularly engage in dialogue
with market participants regarding potential business combinations, partnerships and other strategic alternatives. Based on certain recent
preliminary inquiries, the Board has formed a special committee of independent directors and we have engaged a financial advisor to support
them in evaluating any indications of interest and exploring other potential strategic alternatives. If we are unsuccessful in engaging
in a favorable strategic alternative, then our ability to grow our business and compete with larger, including combined, competitors may
be adversely affected.
32
Executive
Summary – Results of Operations
Net revenues decreased $22.7 million, or 4.4%, to $487.9 million in
2024 compared to $510.5 million in 2023. This decrease was primarily driven by industry-wide demand softness for home-related products
coupled with a reduction in advertising spend to focus on more profitable marketing. From a sales channel perspective in 2024, e-commerce
net revenues decreased $17.3 million, or 7.7%, Purple showroom net revenues increased $4.3 million, or 5.8% and wholesale net revenues
decreased $9.6 million, or 4.5%, as compared to 2023. The growth in Purple showroom net revenues was primarily due to an increase in average
selling prices related to both strategic price adjustments and a sizeable shift in product mix to our higher priced Rejuvenate Products.
Net revenues also benefited in 2024 from a full year’s impact of five new Purple showrooms that opened in 2023. In addition to demand
softness, our wholesale channel net revenues were negatively impacted in 2024 by intentionally exiting our relationship with certain customers.
Gross profit increased $9.3
million, or 5.4%, to $181.1 million in 2024 compared to $171.8 million in 2023 and our gross profit percentage improved to 37.1% in 2024
from 33.7% in 2023. These increases reflected improved production effectiveness in 2024 coupled with the negative impact in 2023 of non-recurring
costs associated with the transition to our new product lineup. The improved production effectiveness in 2024 was largely attributable
to supply chain initiatives and operational efficiency improvements implemented over the last 12 months. Gross profit and the related
percentage were both negatively impacted by $15.4 million of charges recorded pursuant to the Restructuring Plan. Although $1.6 million
of additional restructuring related charges are projected to be recorded in cost of revenues through the second quarter of 2025, we expect
the Restructuring Plan will further streamline our manufacturing operations and provide increased gross profits going forward.
Operating expenses decreased
$12.2 million, or 4.3% to $273.3 million in 2024 compared to $285.5 million in 2023. This decrease was driven by an $11.1 million decrease
in marketing and sales costs due primarily to a decline in advertising spend, a $15.3 million decrease in general and administrative expense
due largely to non-recurring legal and professional costs incurred by the Board’s special committee in 2023 and a $6.9 loss on impairment
of goodwill recorded in 2023. This decrease was offset in part by $20.0 million in charges related to the Restructuring Plan.
Other expense, net was $5.9
million in 2024 compared to $7.5 million in 2023. Other expense, net in 2024 included interest expense of $17.5 million associated primarily
with the Related Party Loan, offset in part by other income of $11.5 million related to two payments received in full settlement of a
previously filed business interruption claim.
Net loss attributable to Purple
Inc. was $97.9 million in 2024 compared to a net loss of $120.8 million in 2023. The $22.9 million decrease in net loss was primarily
due to a $9.3 million increase in gross profit and a $12.2 million decrease in operating expenses. Excluding the impact of the $35.4 million
in restructuring, impairment and other related charges recorded in 2024, gross profit would have increased $24.7 million and operating
expenses would have decreased $32.2 million.
Outlook
for Growth
We believe, given the Restructuring
Plan and our new grid innovation, that we are well positioned to grow our business in this challenging market. We are focused on the following
three key initiatives to drive sustainable and profitable market share:
●
Focus on pioneering new technologies to maintain our competitive advantage. Our strategy focuses on offering a differentiated product that provides unique benefits and higher customer satisfaction, all fueled by our proprietary flexible gel technology. Advancements and innovation in our grid technology has led to a new grid technology marking a significant advancement in our product lineup. Our new DreamLayer grid, stacked with our original grid, creates a unique combination that continues to differentiate us in the market while driving superior comfort and support for an even more premium sleep experience. This upgrade will result in a refresh of our current Rejuvenate line. The new Rejuvenate 2.0 collection launches in the second quarter 2025 through our direct-to-consumer channels, followed by a full wholesale roll-out expected to be complete by the third quarter 2025. In addition, we significantly expanded our distribution of pillows by launching our renowned DreamLayer and Freeform pillows into our wholesale channel.
33
●
Drive sales by promoting our product differentiation. We started as a brand built on differentiation. In recent years, the category has relied extensively on discount messaging to attract customers, with less focus on product benefits. Our goal is to refocus our messaging to lead with our product differentiation. We intend to effectively articulate the unique qualities of sleeping on our gel grid layer to be more effective and reach more consumers. In our selling channels, we expect refocusing our messaging on promoting our differentiation will drive more and better quality traffic while improving conversion both online and in stores, and increase our share of retailer sales in our wholesale channel.
●
Prioritize gross margin improvements. We expect continued gross margin gains to come from driving cost savings through plant consolidation efficiency gains, supplier diversification efforts and , improved scrap and yield results from continuous improvements efforts. We are also ramping up in-house pillow production, changing vendors for key mattress components like coils and mattress covers and improving our delivery program to drive cost improvements and better deliveries. These savings will enable us to reinvest in innovation and marketing to drive growth.
There
is no guarantee that we will be able to effectively execute on these initiatives, which are subject to risks, uncertainties, and assumptions
that are difficult to predict, including the risks described under “Part I, Item 1A. 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.
Critical Accounting Policies and Estimates
In connection with the preparation
of our consolidated financial statements in conformity with United States generally accepted accounting principles (“GAAP”),
we are required to make estimates and assumptions about future events and apply judgments that affect the reported amounts of assets,
liabilities, sales, expenses and the related disclosures. Predicting future events is inherently an imprecise activity and as such requires
the use of judgment. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that
management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews
the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly
and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could
differ from our assumptions and estimates, and such differences could be material.
Management believes the accounting
estimates discussed below are the most critical because they require management’s most difficult, subjective or complex judgments,
resulting from the need to make estimates about the effect of matters that are inherently uncertain.
34
Revenue Recognition
Our revenue recognition accounting methodology contains uncertainties
because it requires management to make assumptions and to apply judgment to estimate the amount and timing of future sales returns, uncollectible
accounts and variable consideration. Our estimates of the amount and timing of sales returns, uncollectible accounts and variable consideration
are based primarily on historical trends, product return rates and current contract terms. Accrued sales returns increased from $5.4 million
at December 31, 2023 to $6.5 million as of December 31, 2024. Our allowance for credit losses increased from a de minimis amount at December
31, 2023 to $1.1 million as of December 31, 2024. We do not believe there is a reasonable likelihood that there will be any material changes
in our accounting methodology, future estimates or assumptions used to measure our estimated liability for sales returns and exchanges,
our allowance for credit losses or variable consideration. However, if actual results are not consistent with our estimates or assumptions,
we may be exposed to losses or gains that could be material.
Impairment
We review our long-lived assets
and definite-lived intangible assets for impairment as of December 31 and whenever events or changes in circumstances indicate
the carrying amount may not be recoverable. If there are any indications of impairment, we perform a recoverability test by comparing
the carrying value of the assets to the estimated future cash flows (undiscounted and without interest charges - plus proceeds expected
from disposition, if any). If the estimated undiscounted cash flows are less than the carrying value of the assets, the Company calculates
an impairment loss. The impairment loss calculation compares the carrying value of its assets to the assets’ estimated fair value.
When the Company recognizes an impairment loss, the carrying amount of the impaired assets are reduced to estimated fair value based on
discounted cash flows, quoted market prices or other valuation techniques. Assets to be disposed of are reported at the lower of the carrying
amount of the asset or fair value less costs to sell. Cash flow models are reliant on various assumptions, including projected business
results and long-term growth factors. The Company determined there were indicators of impairment that existed at December 31, 2024 and
a recoverability test was required. Based on the results of this recoverability test, the Company concluded its long-lived and definite-lived
assets were not impaired as of December 31, 2024 and no resultant impairment charges were recorded.
In conjunction with the Restructuring
Plan initiated by us in August 2024, we recorded impairment charges of $2.5 million on various long-lived assets associated with entering
into a sublease on one of the Utah manufacturing facilities that is expected to close during the first quarter of 2025.
The Restructuring Plan initiated
by us in August 2024 was determined to be a triggering event for potential impairment of intellectual property that was being accounted
for as an indefinite-lived intangible asset. The resultant impairment assessment performed by us determined this asset no longer had any
supportable value and an $8.5 million impairment charge to write off the entire balance of the asset was recorded in 2024.
Accrued Warranty Liabilities
We provide a limited warranty
on most of the products we sell. Our warranty liability assessment methodology includes estimates in both our DTC and wholesale channels.
The estimated warranty costs associated with products sold through DTC channels are expensed at the time of sale and included in cost
of revenues. The estimated warranty costs associated with products sold through the wholesale channel are recorded at the time of sale
and included as an offset to net revenues. Estimates for warranty costs are based primarily on historical trends and warranty claim rates
incurred. We regularly assess and adjust the estimate of accrued warranty claims by updating claims rates for any current or expected
trends and changes in projected claim costs. We expect the estimated warranty liability to continue to increase as we have not yet reached
the full 10 years of history on our 10-year mattress warranty. We classify as non-current those estimated warranty costs expected to be
paid out in greater than one year. As of December 31, 2024, the current and non-current portions of our warranty liabilities
were $6.1 million and $26.1 million, respectively, compared to $9.8 million and $25.8 million, respectively, at December 31, 2023.
We do not believe there is a reasonable likelihood that a material change in the estimates or assumptions we use to calculate our warranty
liability will occur. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or
gains that could be material.
35
Results of Operations
A discussion regarding our
financial condition and results of operations for the year ended December 31, 2024 compared to the year ended December 31, 2023 is presented
below. A separate discussion regarding our financial condition and results of operations for the year ended December 31, 2023 compared
to the year ended December 31, 2022 can be found under Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended December
31, 2023, filed with the SEC on March 12, 2024.
Results of Operations for the Year Ended December
31, 2024 compared to the year ended December 31, 2023
The following table sets forth
for the periods indicated, our results of operations and the percentage of total net revenues represented by each line item in our consolidated
statements of operations:
Years Ended December 31,
2024
% of
Net
Revenues
2023
% of
Net
Revenues
Revenues, net
$ 487,877
100.0 %
$ 510,541
100.0 %
Cost of revenues:
Cost of revenues
291,303
59.7
338,716
66.3
Cost of revenues - restructuring related charges
15,442
3.2
—
—
Total cost of revenues
306,745
62.9
338,716
66.3
Gross profit
181,132
37.1
171,825
33.7
Operating expenses:
Marketing and sales
171,263
35.1
182,313
35.7
General and administrative
69,117
14.2
84,446
16.5
Research and development
12,962
2.7
11,898
2.3
Restructuring, impairment and other related charges
19,973
4.1
—
—
Loss on impairment of goodwill
—
—
6,879
1.3
Total operating expenses
273,315
56.0
285,536
55.9
Operating loss
(92,183 )
(18.9 )
(113,711 )
(22.3 )
Other income (expense):
Interest expense
(17,510 )
(3.6 )
(1,967 )
(0.4 )
Other income (expense), net
11,548
2.4
(1,198 )
(0.2 )
Loss on extinguishment of debt
(3,394 )
(0.7 )
(4,331 )
(0.8 )
Change in fair value – warrant liabilities
3,504
0.7
—
—
Total other expense, net
(5,852 )
(1.2 )
(7,496 )
(1.5 )
Net loss before income taxes
(98,035 )
(20.1 )
(121,207 )
(23.7 )
Income tax expense
(63 )
—
(8 )
—
Net loss
(98,098 )
(20.1 )
(121,215 )
(23.7 )
Net loss attributable to noncontrolling interest
(201 )
—
(458 )
(0.1 )
Net loss attributable to Purple Innovation, Inc.
$ (97,897 )
(20.1 )
$ (120,757 )
(23.7 )
36
Revenues, Net
Net revenues decreased $22.7
million, or 4.4%, to $487.9 million in 2024 compared to $510.5 million in 2023. This decrease was primarily driven by macroeconomic pressures
impacting U.S. consumer behavior that fueled the ongoing impact of industry-wide demand softness for home-related products, a reduction
in advertising spend to focus on more profitable marketing, and the lapping effect on 2024 net revenues associated with the successful
launch of our new premium mattress products in 2023. Also, our wholesale channel net revenues were negatively impacted by intentionally
exiting our relationship with certain customers. From a sales channel perspective in 2024, DTC net revenues decreased $13.0 million, or
4.4%, and wholesale net revenues decreased $9.6 million, or 4.5%, as compared to 2023. Within DTC in 2024, e-commerce net revenues decreased
$17.3 million, or 7.7%, while Purple showroom net revenues increased $4.3 million, or 5.8%, as compared to 2023. The growth in Purple
showroom net revenues was driven by an increase in average selling prices related to both strategic price adjustments and a sizeable shift
in product mix to our higher priced Rejuvenate Products. Net revenues also benefited in 2024 from a full year’s impact of five new
Purple showrooms that opened in 2023.
Cost of Revenues
Total cost of revenues decreased
$32.0 million, or 9.4%, to $306.7 million in 2024 compared to $338.7 million in 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 $15.4 million of charges associated with the Restructuring Plan. Our gross
profit percentage, which increased to 37.1% of net revenues in 2024 from 33.7% in 2023, reflected improved production effectiveness in
2024 coupled with the negative impact in 2023 of non-recurring costs associated with the transition to our new product lineup. These savings
were offset in part by the restructuring-related charges mentioned above. Although $1.6 million of additional restructuring related charges
are projected to be recorded in cost of revenues through the second quarter of 2025, we expect the Restructuring Plan will further streamline
our manufacturing operations and provide increased gross profits going forward. These future charges incorporate certain estimates that
are provisional and include management judgments and assumptions that could change materially as we complete the execution of our plan.
Actual results may differ from these estimates and the completion of our plan could result in additional restructuring, impairment or
other related charges not currently anticipated.
Marketing and Sales
Marketing and sales expense
decreased $11.1 million, or 6.1%, to $171.3 million in 2024 compared to $182.3 million in 2023. This decrease was primarily due to a $7.2
million decrease in advertising spend and a $2.9 million decrease in wholesale marketing and sales costs compared to the corresponding
amounts in the prior year when we invested heavily to support the launch of our new product lineups. As a percentage of net revenues,
advertising spend was 13.4% in 2024 compared to 14.2% in 2023. The lower percentage of revenues reflected the impact of using more efficient
advertising techniques in 2024 as compared to the use of expanded marketing efforts in 2023.
General and Administrative
General and administrative
expense decreased $15.3 million, or 18.2%, to $69.1 million in 2024 compared to $84.4 million in 2023. This decrease was primarily due
to $11.3 million of non-recurring legal and professional costs incurred by the Board’s special committee in 2023 coupled with a
$4.9 million reduction in other professional fees in 2024. These reductions were partially offset by a $2.0 million increase in compensation
and benefits expense related to the special recognition bonus and 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 $1.1 million, or 8.9%, to $13.0 million in 2024 compared to $11.9 million in 2023. This increase was primarily due to a loss
incurred on the write off of a software development project coupled with increased investment in new research and development initiatives.
37
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.
Of the $36.4 million total costs in 2024 relating to the Restructuring Plan, $20.0 million were recorded as restructuring, impairment
and other related charges which included $3.1 million of employee-related costs, $0.1 million of accelerated depreciation, $5.2 million
related to write-downs of long-lived assets to be disposed of or equipment in progress that will not be put in service, $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, and $0.6 million for other related charges. We
expect to record additional restructuring and other related charges of $3.0 million through the second quarter of 2025. These charges
incorporate certain estimates that are provisional and include management judgments and assumptions that could change materially as we
complete the execution of our plan. Actual results may differ from these estimates and the completion of our plan could result in additional
restructuring, impairment or other related charges not currently anticipated.
Loss on Impairment of Goodwill
We recorded a $6.9 million
loss on impairment of goodwill in the third quarter of 2023 because 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 $21.5
million, or 18.9%, to $92.2 million in 2024 compared to $113.7 million in 2023. The smaller operating loss primarily resulted from an
increase in gross profit, a decrease in advertising spend, a decrease in general and administrative expense and a loss on impairment of
goodwill in 2023. These decreases in operating loss were partially offset by restructuring and impairment charges recorded in 2024 related
to the Restructuring Plan. We expect to record additional $4.6 million of costs relating to the Restructuring Plan through the second
quarter of 2025. These charges include certain estimates that are provisional and incorporate management judgments and assumptions that
could change materially as we complete the execution of our plan. Actual results may differ from these estimates, and the completion of
our plan could result in additional restructuring, impairment or other related charges not currently expected.
Interest Expense
Interest expense totaled $17.5
million in 2024 compared to $2.0 million in 2023. This increase was primarily due to $16.8 million of 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. We elected for interest to be capitalized to the outstanding loan balance in accordance with the terms of the Amended and
Restated Credit Agreement which resulted in $9.7 million of interest expense being added to the Related Party Loan during 2024. In addition,
interest expense in 2024 included $7.2 million of debt issuance cost amortization associated with the Related Party Loan. Interest expense
in 2023 was primarily comprised of $2.1 million related to the 2023 Credit Agreements entered into in August 2023 and $1.3 million related
to the 2020 Credit Agreement that was terminated upon entering into the 2023 Credit Agreements. Interest expense in 2023 was reduced by
capitalized interest of $1.5 million.
Other Income (Expense), Net
Other income was $11.5 million
in 2024 compared to other expense of $1.2 million in 2023. Other income in 2024 was primarily comprised of two payments totaling $11.6
million received in full settlement of a previously filed business interruption claim. Other expense in 2023 consisted of a $1.7 million
loss on the disposal of property and equipment, partially offset by other income of $0.5 million.
Loss on Extinguishment of Debt
Loss on extinguishment of
debt totaled $3.4 million in 2024 compared to $4.3 million in 2023. In January 2024, we entered into the Amended and Restated Credit Agreement
that terminated and paid off the outstanding borrowings under our 2023 Credit Agreement. 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 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 and $3.1 million of unamortized debt issuance costs were recorded as loss on
extinguishment of debt in 2023.
Change in Fair Value – Warrant Liabilities
In January 2024, in connection
with the Amended and Restated Credit Agreement, we issued to the Lenders Warrants to purchase 20.0 million shares of our Class A Stock.
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 December 31, 2024, the Warrants had a fair value of $16.1 million. We recognized a gain of $3.5 million
related to a decrease in the fair value of the Warrants outstanding at the end of the period compared to the fair value of the Warrants
on the date of issuance.
38
Income Tax Expense
We had income tax expense
of $0.1 million in 2024 compared to a de minimis amount of income tax expense in 2023. Income tax expense in 2024 was 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 $0.5 million for 2024 and 2023, respectively.
Liquidity and Capital Resources
Our principal sources of funds
are cash inflows generated from operations and cash and cash equivalents on hand, supplemented with borrowings made pursuant to our credit
agreements 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 terms of the Amended and Restated Credit Agreement
and to manage our cash obligations, we have elected to pay interest in kind and have it added to the principal amount of the loan. 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 $29.0 million and $25.4 million,
respectively, as of December 31, 2024 compared to $26.9 million and $30.8 million, respectively, as of December 31, 2023. Cash used for
capital expenditures decreased from $15.2 million in 2023 to $7.4 million in 2024. Our capital expenditures in 2024 have primarily consisted
of additional investments made in our manufacturing operations and showroom facilities. Additional details regarding our current debt
are described above under “ Recent Developments in our Business – Debt Financing ”
Our financial statements have
been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities
and commitments in the normal course of business. In connection with our preparation of our consolidated financial statements for the
year ended December 31, 2024, we conducted an evaluation as to whether there were conditions and events, considered in the aggregate,
which raised substantial doubt as to our ability to continue as a going concern within one year after the date of the issuance of such
financial statements. We had cash and cash equivalents of approximately $29.0 million and
an accumulated deficit of $573.9 million at December 31, 2024, and a net loss of $97.9 million and net cash used
in operating and investing activities of $25.4 million for the year ended December 31, 2024. We entered into the 2025
Amendment, pursuant to which we received $19.0 million on March 12, 2025, in additional term loan proceeds from the 2025 Term Loan Lenders.
We have also taken a number of
other actions to increase cash flow. In August 2024, we implemented the Restructuring Plan to consolidate manufacturing operations to
create efficiencies and cost savings. We have realized and plan to continue to realize direct material cost savings through supply chain
initiatives and supplier diversification efforts. We have taken additional cost-saving initiatives in 2025 to maintain liquidity to support
our operations and strategies.
Accordingly, we
concluded that we will have sufficient liquidity to fund our operations for at least one year from the date of this Annual Report on
Form 10-K.
Although we currently expect
our sources of capital to be sufficient to meet our near-term liquidity needs, there can be no assurance that such sources will be sufficient
to satisfy our liquidity requirements in the future. If we cannot generate or obtain needed funds, we might be forced to make substantial
reductions in our operating and capital expenses or pursue restructuring plans, which could adversely affect our business operations and
ability to execute our current business strategy.
39
Other Contractual Obligations
Other material contractual
obligations primarily include operating lease payment obligations. Refer to Note 9 of our consolidated financial statements for additional
information on leases.
Cash Flows for the year ended December 31, 2024 compared to the
year ended December 31, 2023
The following summarizes our
cash flows for the years ended December 31, 2024 and 2023 as reported in our consolidated statements of cash flows (in thousands):
Years Ended December 31,
2024
2023
Net cash used in operating activities
$
(17,850
)
$
(54,662
)
Net cash used in investing activities
(7,530
)
(16,061
)
Net cash provided by financing activities
27,534
55,826
Net decrease in cash
2,154
(14,897
)
Cash, beginning of the period
26,857
41,754
Cash, end of the period
$
29,011
$
26,857
Net cash used in operating activities was $17.9 million in 2024 compared
to $54.7 million in 2023. Operating activities in 2024 reflected a net loss of $98.1 million offset in part by non-cash adjustments of
$75.9 million and working capital changes of $4.3 million. The non-cash adjustments primarily consisted of depreciation and amortization
totaling $35.3 million, non-cash restructuring, impairment and other related charges of $20.2 million, paid-in-kind interest on the Related
Party Loan of $9.7 million, non-cash interest from amortization of debt issuance costs of $7.2 million, and losses on the extinguishment
of debt of $3.4 million. The working capital changes were primarily comprised of a $4.7 million decrease in accounts receivable and a
$6.0 million decrease in inventories, offset in part by a $6.4 million decrease in accounts payable. Operating activities in 2023 reflected
a net loss of $121.2 million offset in part by non-cash adjustments of $44.1 million and working capital changes of $22.4 million. The
non-cash adjustments primarily consisted of depreciation and amortization totaling $25.1 million, an impairment charge to write off $6.9
million of goodwill, stock-based compensation of $4.9 million, and losses on the extinguishment of debt of $4.3 million. The working capital
changes were primarily comprised of an $11.1 million increase in accrued warranties, a $4.4 million increase in accounts payable accounts
and a $5.9 million decrease in inventories.
Net cash used in investing activities was $7.5 million in 2024 compared
to $16.1 million in 2023. Capital expenditures of $7.5 million and $15.2 million in 2024 and 2023, respectively, consisted primarily of
additional investments made to our manufacturing operations and showroom facilities.
Net cash provided by financing
activities totaled $27.5 million in 2024 compared to $55.8 million in 2023. Financing activities in 2024 included $61.0 million of proceeds
received from the Related Party Loan, offset in part by a $25.0 million payment to pay off the term loan from the 2023 Credit Agreement,
$5.0 million in repayments against the revolving debt outstanding from the 2023 Credit Agreement, and $3.5 million in payments on debt
issuance costs associated with entering into the Amended and Restated Credit Agreement. Financing activities during 2023 included $57.0
million of net proceeds received from a stock offering, $25.0 million from the Term Loan Agreement entered into in August 2023, and $17.0
million in draws on the revolving debt pursuant to the 2023 Credit Agreement. These cash proceeds were partially offset by a $24.7 million
payment to pay off the term loan from the 2020 Credit Agreement, $12.0 million in repayments against the revolving debt outstanding from
the 2023 Credit Agreement, $6.1 million in payments on debt issuance costs, and $0.4 million of other payments.
Recent Accounting Pronouncements
For a description of accounting
standards recently issued or adopted, including the respective dates of adoption and expected effects on our results of operations and
financial condition, refer to Note 2 of our consolidated financial statements included in this Annual Report on Form 10-K.
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