Purple Innovation, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited results compare with Q1 2019; balance-sheet amounts compare with December 31, 2019. Purple designs and sells mattresses and other comfort products through direct-to-consumer (DTC) and wholesale channels.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $122.4 million | $83.6 million |
| Gross profit / margin | $53.2 million / 43.5% | $34.1 million / 40.7% |
| Operating expenses | $45.7 million | $29.3 million |
| Operating income | $7.5 million | $4.8 million |
| Net income (loss) | $20.0 million | ($0.7 million) |
| Net income (loss) attributable to Purple | $8.8 million | ($0.1 million) |
| Basic / diluted EPS | $0.39 / $0.11 | ($0.02) / ($0.02) |
| Operating cash flow | ($0.3 million) | ($8.3 million) |
| Investing cash flow | ($6.8 million) | ($1.0 million) |
- Revenue increased 46.3%. DTC revenue rose to $80.7 million from $53.8 million; wholesale revenue rose to $41.7 million from $29.9 million. Bedding revenue was $114.5 million versus $81.3 million.
- Gross margin improved 2.8 percentage points, which management attributed mainly to operating and logistics efficiencies and product and channel mix. Marketing and sales expense increased to $36.7 million from $24.0 million, including higher advertising spend.
- Reported net income included a $13.6 million non-cash gain from the decrease in fair value of warrant liabilities. The gain materially affected reported earnings; Purple-attributable net income was $8.8 million. The filing reports diluted EPS of $0.11.
- Operating cash use narrowed year over year, but cash declined $7.1 million during the quarter, to $26.4 million. Investing outflows included $4.5 million of property and equipment purchases and $2.3 million for intangible assets.
Financial position and liquidity
- At March 31, cash was $26.4 million, current assets $98.5 million, current liabilities $68.2 million, and working capital $30.3 million. Total assets were $137.9 million.
- Related-party debt had $40.4 million of principal outstanding, including capitalized interest; its net carrying value was $36.8 million after unamortized costs and discounts. Including $0.5 million of capital lease obligations, total debt was approximately $40.9 million. The credit agreement carries 12% annual interest. Purple reported covenant compliance at quarter-end.
- A March amendment permitted capitalization of all interest due for the March 31 and June 30, 2020 quarterly payments, rather than paying the remaining 5% in cash. This reduces near-term cash outflow but increases debt.
- Management reported cash of $62.5 million at April 30 and said, subject to assumptions about the pandemic and business recovery, available cash and expected DTC cash generation would cover working capital and anticipated capital expenditures for the next 12 months.
Changes, outlook, and risks
- COVID-19 and channels: Management reported a sharp wholesale downturn and temporary closure of three California showrooms, while DTC demand accelerated in late March. It said online sales grew 50% year over year in Q1, partly offsetting wholesale weakness. In April, DTC orders increased more than 170% to approximately $54 million versus April 2019, while wholesale orders were down approximately 45%. These are management-reported trends, not a formal forecast; the filing cautions that DTC growth may not continue.
- Operating response: Purple adjusted production, temporarily furloughed roughly 35% of its permanent workforce, deferred 25% of senior executives’ cash compensation and all directors’ cash compensation, reduced discretionary spending, and delayed non-maintenance capital projects. By the filing date, it said it had ended the temporary furlough for almost all manufacturing personnel and was operating near full capacity. The company also temporarily closed California showrooms.
- Supply and uncertainty: Management said supply had not yet been significantly affected and suppliers in China had largely resumed production. It emphasized that the pandemic’s duration and effects on demand, wholesale partners, employees, logistics, and funding remain uncertain and may materially harm results and liquidity.
- Debt, warrants, and ownership: A non-cash warrant remeasurement gain drove a substantial portion of net income. The company also has substantial potential dilution from warrants and exchangeable Class B paired securities. The noncontrolling interest in Purple LLC was approximately 56% at quarter-end.
- Tax Receivable Agreement: Estimated future payments were $37.5 million, of which only $0.8 million was recorded, reflecting the full valuation allowance on deferred tax assets. The filing gives an illustrative additional liability of approximately $138.4 million if all remaining paired securities were exchanged under stated assumptions. Management said a significant valuation-allowance release may be possible within 12 months, but timing and amount depend on profitability.
- Other matters: Contingencies include a former consultant’s lawsuit seeking $10.75 million or an equity interest, a Canadian trademark/copyright dispute, and an April 2020 putative TCPA class action disclosed as a subsequent event. The company also described a product accessory improvement following reported failures and CPSC involvement; it estimated 50% of purchasers may request the no-cost improvement, and higher participation could increase costs.
- No formal full-year revenue or earnings guidance is provided. Management’s liquidity outlook is conditional on the pandemic’s duration, DTC cash generation, and resumption of showroom and wholesale activity.
Most important facts for investors to verify
- Whether April’s reported DTC acceleration persisted and whether wholesale orders and showroom activity recovered.
- Cash conversion and liquidity after quarter-end, including the effect of operating cash use, capital spending, and capitalized interest.
- The debt agreement’s 12% cost, covenant compliance, related-party terms, and ability to refinance or obtain additional financing.
- How much reported earnings depended on warrant fair-value changes, and the potential dilution from warrants and paired-security exchanges.
- The potential timing and cash impact of Tax Receivable Agreement payments, valuation-allowance changes, and pending legal or product matters.