Purple Innovation, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Unaudited results; comparisons are with Q1 2023 unless stated otherwise. Financial amounts are USD millions except per-share data.
Business context
Purple designs and sells premium comfort products, including mattresses, through direct-to-consumer (DTC) e-commerce and showrooms, wholesale partners, and third-party online retailers. It reported 60 showrooms at quarter-end and said its Premium and Luxe product lines were available to all wholesale partners by Q4 2023.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Net revenue | $120.0 | $106.7; up 12.5% |
| Gross profit / margin | $41.7 / 34.8% | $40.6 / 38.0% |
| Operating expenses | $64.9 | $65.2 |
| Operating loss | $(23.1) | $(24.6) |
| Net loss attributable to Purple | $(50.2) | $(25.9) |
| Basic and diluted loss per share | $(0.47) | $(0.26) |
| Cash used in operating activities | $(16.8) | $(13.5) |
| Capital expenditures | $3.1 | $3.1 |
| Cash at period-end | $34.5 | $26.9 at Dec. 31, 2023; $54.5 at Mar. 31, 2023 |
- Wholesale revenue rose $13.4 million, or 33.1%, to $53.8 million. DTC revenue was $66.2 million, approximately flat year over year: e-commerce declined 3.5%, while showroom revenue rose 11.3%.
- Gross margin fell 3.2 percentage points, primarily because revenue shifted toward wholesale, which has a lower average selling price than DTC. Marketing and sales expense increased $3.3 million; G&A declined $3.9 million, partly because Q1 2023 included special-committee legal and professional costs.
- Net loss included a $23.6 million noncash loss from remeasuring lender warrants, a $3.4 million debt-extinguishment loss, and $4.5 million of interest expense. These were partly offset by $4.3 million of insurance-settlement income. The warrant remeasurement was the main reason net loss widened despite a smaller operating loss.
- At March 31, cash was $34.5 million and working capital was $47.9 million, versus $30.8 million at year-end. Operating cash outflow increased year over year. Financing provided $27.5 million net, principally reflecting the new loan proceeds and repayment of prior borrowings.
- The January 2024 related-party refinancing provided a $61.0 million loan, with approximately $27.0 million net proceeds after repayment of prior debt and transaction costs. Principal outstanding was $62.85 million at quarter-end, including paid-in-kind interest; the balance sheet reports debt net of issuance costs at $41.9 million. The loan matures December 31, 2026, bears variable-rate interest, and allows interest to be paid in kind at a higher rate. The company reported covenant compliance at March 31.
Changes, outlook, and key risks
- Operating priorities: Management emphasized improving wholesale and showroom productivity, e-commerce conversion, gross margin, product innovation, and marketing efficiency. It prioritized showroom profitability over expansion and planned one additional showroom in 2024. No specific revenue, earnings, or margin guidance was provided.
- Liquidity outlook: Management said cash on hand, credit-agreement availability, and expected operating cash generation should cover working capital and anticipated capital expenditures for the next 12 months. It cautioned that weaker-than-expected cash generation could require spending reductions, slower growth, creditor restructuring, or additional financing, which may not be available on favorable terms; additional debt requires lender consent.
- Debt and dilution: The refinancing lender group received 20 million warrants exercisable at $1.50 per share, subject to adjustments. They were liability-classified and generated significant earnings volatility. The company also warned that registered securities and potential warrant exercises could pressure the share price and dilute existing holders.
- Controls: Disclosure controls were not effective at quarter-end due to a previously reported material weakness in review of wholesale customer contracts, variable consideration, and wholesale warranty liabilities. Remediation efforts were underway but not yet complete.
- Contingencies: Pending matters include founders’ appeals/litigation, including a Delaware claim seeking approximately $3.0 million in tax distributions, and a California customer class action alleging marketing and pricing violations. A post-quarter lawsuit by the founders over the former Alpine facility lease seeks approximately $2.5 million in damages and $0.8 million in holdover rent, plus other amounts. The company disputes the claims and intends to defend them.
- Other unusual compensation: The CEO’s amended employment terms include an incremental $0.9 million bonus and eligibility for a future payment of up to $5.0 million tied to the stock price and continued employment. Certain senior leaders were also made eligible for special recognition bonuses. The company recorded $0.4 million of expense for the CEO’s future bonus in Q1.
- Market risk: The $62.8 million variable-rate principal exposes the company to interest-rate changes; management estimated a 100-basis-point increase would add approximately $0.6 million of interest expense over the next 12 months.
Important facts for investors to verify
- Whether wholesale growth and showroom performance persist, and whether e-commerce demand and conversion improve.
- Whether gross margin can recover despite channel mix and promotional/pricing choices.
- Cash burn, borrowing availability, interest paid or capitalized, and compliance with credit covenants under the high-cost related-party loan.
- The potential dilution, fair-value volatility, registration and resale activity associated with the 20 million warrants and other registered securities.
- Progress and testing of controls remediation, and developments in the pending legal claims and post-quarter lease dispute.
- Costs and vesting conditions for executive and senior-leadership bonuses, and whether management’s 12-month liquidity expectations are met.