Purple Innovation, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. The unaudited statements are consolidated and should be read with the company’s 2020 Form 10-K/A. The comparable 2020 quarter reflects the company’s warrant-accounting restatement.
Business context and financial results
Purple designs and sells mattresses, pillows, cushions, bases, sheets, and other comfort products through direct-to-consumer (DTC) channels, wholesale partners, third-party online retailers, and company showrooms.
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net revenue | $186.4 million | $122.4 million |
| Gross profit / margin | $87.5 million / 46.9% | $53.2 million / 43.5% |
| Operating income / margin | $16.9 million / 9.1% | $7.5 million / 6.1% |
| Net income | $20.9 million | $28.0 million |
| Net income attributable to Purple Innovation, Inc. | $20.8 million | $16.8 million |
| Diluted earnings per share | $0.17 | $0.43 |
| Cash from operating activities | $(9.4) million | $(0.3) million |
| Cash used in investing activities | $(12.4) million | $(6.8) million |
| Cash from financing activities | $2.6 million | $0.01 million |
At March 31, 2021, cash and cash equivalents were $103.8 million, total current assets were $217.8 million, and current liabilities were $114.7 million; reported working capital was $103.2 million. Debt was $42.9 million, net of issuance costs, including $2.0 million current and $40.9 million long-term. The company had no borrowings on its $55 million revolving facility. Total operating lease liabilities were approximately $64.6 million. The tax receivable agreement liability was $171.9 million, including $5.9 million current.
Changes versus the prior comparable period
- Revenue rose 52.3%. DTC revenue increased 54.8% to $124.9 million; wholesale revenue increased 47.6% to $61.5 million. Growth reflected increased demand across product categories.
- Gross margin improved 3.4 percentage points, which management primarily attributed to a higher DTC sales mix. Operating income more than doubled as higher-margin sales grew and marketing costs declined as a share of revenue.
- Marketing and sales expense increased 48.2% to $54.4 million, including higher advertising and personnel costs, but fell to 29.2% of revenue from 30.0%. General and administrative expense increased 92.4% to $14.5 million, primarily due to legal and professional fees, salaries, and a new corporate lease.
- Net income decreased despite higher operating income, partly because the prior-year quarter included a larger $21.6 million warrant fair-value gain versus $9.1 million in Q1 2021. The warrant gains are noncash and materially affect reported earnings. Basic weighted-average shares increased to 64.6 million from 22.7 million; diluted EPS was also affected by dilution and warrant accounting.
- Operating cash use increased to $9.4 million, with working-capital movements including higher receivables and payments of liabilities contributing to the outflow. Capital spending increased to $12.3 million, primarily for manufacturing capacity, infrastructure, showrooms, and the Georgia facility.
Outlook, commentary, risks, and unusual items
- Management gave no quantified revenue or earnings guidance. Subject to assumptions about COVID-19 and its effects, it believed available cash, DTC cash generation, the revolving facility, wholesale demand, and store operations would cover working capital and anticipated capital expenditures for the next 12 months.
- Management reported that the Georgia manufacturing facility began operations on March 3, 2021 and three new showrooms had opened since the beginning of the year. Increased demand created constraints with some suppliers and shipping delays; management said the supply chain had not been significantly affected overall.
- COVID-19 duration, consumer demand, renewed restrictions, economic weakness, supplier capacity, and delivery delays remain uncertainties. The company also cited possible funding needs if cash flows or available financing fall short; credit agreement covenants could constrain additional financing. It reported compliance with credit agreement covenants at March 31, 2021.
- The company reported $19.4 million of sponsor warrant liabilities and a $9.1 million Q1 fair-value gain. Warrant fair values depend partly on model inputs and can create earnings volatility without corresponding operating cash flows.
- In April 2021, the Audit Committee concluded that prior financial statements for specified periods, including Q1 2020, should not be relied upon because of warrant classification errors. The company restated affected periods in its May 10, 2021 Form 10-K/A. A material weakness in internal control remained, and management concluded disclosure controls were ineffective as of March 31, 2021; remediation was ongoing.
- Legal matters include a dispute with Responsive Surface Technology, which alleges claims against Purple while Purple seeks more than $4 million in damages; outcomes are uncertain. Purple also has an early-stage dispute with Intellibed and litigation seeking approximately $7 million of Section 301 duty refunds. No refund is assured. The filing also describes a Canadian trademark dispute.
- The company’s tax receivable agreement generally requires payments to InnoHold equal to 80% of certain realized tax savings. Future payment timing and amount depend on exchanges, share prices, and taxable income. The company also disclosed regulatory, product-safety, manufacturing-disruption, and workplace-safety risks.
Important facts for investors to verify
- Review the warrant-accounting restatement and material weakness disclosures, and monitor progress and effectiveness of remediation.
- Separate operating performance from noncash warrant gains when assessing net income and EPS; verify the effect of share issuance and remaining warrants on dilution.
- Track operating cash flow, receivables and other working-capital movements, capital spending, and progress at the Georgia facility.
- Assess whether demand, DTC mix, supplier capacity, and delivery performance remain consistent with management’s 12-month liquidity expectations.
- Monitor the $171.9 million tax receivable agreement liability, credit facility availability and covenants, and developments in the disclosed litigation.