Purple Innovation, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited, consolidated results. Unless otherwise noted, amounts are in U.S. dollars.
Business context and period highlights
Purple designs and manufactures mattresses and other comfort products, selling through e-commerce, showrooms, wholesale partners and third-party online retailers. Management described demand normalizing after pandemic-driven growth, with consumers shifting toward brick-and-mortar shopping. Lower demand and elevated labor and overhead costs prompted workforce restructuring and a focus on profitability and operating efficiency.
In March, the company issued 16.1 million Class A shares and received $92.9 million in net proceeds. It used $55.0 million of those proceeds to repay the revolving credit balance. The share issuance increased Class A shares outstanding from 66.5 million at year-end 2021 to 82.6 million at March 31, 2022.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Net revenue | $143.2 million | $186.4 million | Down 23.2% |
| Gross profit / margin | $51.6 million / 36.1% | $87.5 million / 46.9% | Margin down 10.8 percentage points |
| Operating income (loss) | $(18.4) million | $16.9 million | Shifted to operating loss |
| Net income (loss) attributable to Purple | $(13.5) million | $20.8 million | Basic and diluted loss per share: $0.20 |
| Net cash used in operating activities | $(44.3) million | $(9.4) million | Higher operating cash use |
| Net cash used in investing activities | $(13.1) million | $(12.4) million | Primarily capital expenditures |
| Net cash provided by financing activities | $28.4 million | $2.6 million | Included offering proceeds and revolver repayment |
- Revenue mix: Direct-to-consumer revenue fell 31.5% to $85.5 million, including a 38.6% decline in e-commerce; showroom revenue grew 138.2% to $12.0 million. Wholesale revenue decreased 6.3% to $57.6 million and represented 40.3% of sales, versus 33.0% a year earlier.
- Margins and costs: Gross margin contracted as labor and overhead costs rose and the sales mix shifted away from higher-margin e-commerce. Marketing and sales expense declined to $50.0 million, but rose to 34.9% of revenue from 29.2%, reflecting lower sales. G&A increased 23.1% to $17.9 million.
- Cash and working capital: Cash was $62.7 million at quarter-end, down from $91.6 million at December 31, 2021. Working capital was $98.9 million, up from $87.5 million. Operating cash use reflected the weaker results and working-capital movements, including lower accounts payable and customer prepayments.
- Debt: Quarter-end debt carrying value was $37.7 million, including a $39.7 million term loan before unamortized issuance costs; the $55.0 million revolver was fully repaid. Debt is variable-rate. A 100-basis-point rate increase was estimated to add approximately $0.4 million to interest expense over the next 12 months.
- Other balance-sheet items: Total assets were $640.9 million and total liabilities $414.7 million. The tax receivable agreement liability was $162.0 million, net of current portion, with a separate current portion; the filing reports a $162.2 million total potential liability and a $5.8 million payment in Q1. Operating lease liabilities totaled $97.8 million.
Management outlook, risks and unusual items
- Management said it expects gross margins to improve near term from price increases, workforce reductions and manufacturing and supply-chain efficiencies. Its stated goal was to exit 2022 with gross margins close to 40%; the filing provides no revenue or earnings guidance.
- Management believes cash on hand, revolver availability and expected cash generation will cover working-capital needs and anticipated capital expenditures for the next 12 months. However, the amended credit agreement imposes minimum-liquidity requirements, mandatory revolver prepayments if cash exceeds $25 million, restricted access to additional revolver borrowings, capital expenditure limits and other covenants. Covenant testing for specified quarters was waived after the company failed to meet 2021 financial and performance covenants.
- Credit terms changed to SOFR-based pricing, initially 5.25% if the applicable liquidity threshold is met and 9.00% if it is not. The agreement also includes enhanced reporting, showroom lease tests and additional restrictions extending into 2023, subject to conditions.
- Q1 included $1.2 million of severance costs. A further $0.8 million of severance costs was incurred in April 2022. Management cited inflation, supplier constraints, freight costs, labor availability and wages as pressures that could continue to weigh on costs and margins.
- The $3.9 million warrant fair-value gain benefited Q1 earnings but was noncash; the comparable gain was $9.1 million in Q1 2021. Q1 capital expenditures were $13.1 million, mainly for showroom improvements and fixtures.
- Material litigation includes a dispute with ReST, in which Purple seeks more than $4 million and ReST claims tens of millions; outcomes are uncertain. Purple is also pursuing approximately $7 million in Section 301 duty refunds, with the case remanded to USTR. A lawsuit against Photon was filed May 3, 2022, after quarter-end. The filing does not provide a clear quantified estimate of potential losses for these matters.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at March 31, 2022 due to a previously reported material weakness in IT access and segregation-of-duties controls. No misstatements were identified; remediation was ongoing, with no completion timetable stated.
Most important facts for investors to verify
- Whether revenue and e-commerce trends stabilize, and whether showroom and wholesale growth can offset continued direct-channel weakness.
- Whether pricing, restructuring and efficiency measures lift gross margin toward management’s near-40% year-end objective.
- Cash burn, capital spending and actual access to revolver liquidity under the amended $25 million cash restrictions and other lender covenants.
- Future covenant compliance, SOFR borrowing costs and ability to meet debt and lease obligations.
- Potential dilution from the 16.1 million-share issuance and the terms and timing of any further equity awards or financing.
- Progress in remediating the IT control weakness and developments in material litigation, including the Section 301 refund case.