Purple Innovation, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts below are in millions of dollars unless stated otherwise. Purple designs and sells premium mattresses and other comfort products through e-commerce, company showrooms, wholesale partners and third-party online retailers. Intellibed, acquired in August 2022, is included in the results.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net revenue | $120.9 | $144.1 | $230.2 | $287.3 |
| Gross profit | $38.5 | $48.8 | $81.7 | $100.4 |
| Gross margin | 31.8% | 33.9% | 35.5% | 35.0% |
| Operating loss | $(37.3) | $(12.1) | $(59.3) | $(30.5) |
| Net loss attributable to Purple | $(37.5) | $(8.3) | $(60.8) | $(21.8) |
| Diluted loss per share | $(0.36) | $(0.10) | $(0.60) | $(0.29) |
- Q2 revenue fell 16.1%; DTC revenue was $68.1 million and wholesale revenue was $52.8 million. E-commerce weakened, while showroom revenue rose 13.5% year over year. For the first half, revenue declined 19.9%.
- Q2 gross margin contracted, primarily reflecting discounted new floor models sold to wholesale partners and markdowns on discontinued DTC products. First-half margin improved modestly year over year, aided by cost and efficiency initiatives.
- Q2 operating expenses increased to $75.7 million, including higher marketing and showroom costs and legal/professional expenses associated with the Special Committee and Coliseum agreement. The filing reports a $4.0 million settlement-related accrual.
- For the six months, operating cash flow was $(38.1) million, investing cash flow $(5.8) million and financing cash flow $29.1 million. Financing included approximately $57.0 million of net proceeds from the February stock offering, partly offset by repayment of the $24.7 million term loan.
Financial position and liquidity
- At June 30, cash, cash equivalents and restricted cash were $26.9 million; management reported unrestricted cash of $25.2 million and working capital of $43.9 million. Cash at year-end 2022 was $41.8 million.
- Inventories were $78.4 million, up from $73.2 million at year-end. Total liabilities were $223.1 million, including operating lease obligations of $127.9 million. The company had no debt outstanding at June 30 after repaying its term loan; it also had no borrowing on the revolving facility at that date.
- On August 7, 2023, after quarter-end, Purple entered into a new credit package: $25.0 million of fully drawn term loans and a $50.0 million asset-based revolving facility, undrawn at closing. The term loan bears interest at SOFR plus 8.5% and a 0.15% adjustment, with a 2.0% SOFR floor; the ABL rate is SOFR plus 2.75%–3.25% and a 0% floor. Both facilities mature in 2026, subject to their terms. The prior credit agreement was terminated.
- Management stated that cash on hand, ABL availability and expected operating cash generation should cover working capital and planned capital expenditures for at least 12 months. The filing also warns that weaker-than-expected cash generation or unavailable financing could require reduced spending or growth plans.
Changes, outlook and material matters
- Management attributed weaker sales to soft demand for home-related products, inflation pressure, consumer purchases brought forward in prior years, wholesale partners’ reduced purchases ahead of product launches, and discounting during the transition to new Premium and Luxe lines.
- The new Premium and Luxe products launched in May. Management said customer response was positive and June revenue run rate was up double digits compared with the first five months of 2023. The company planned to transition remaining wholesale doors to the new lineup by year-end and expected additional showroom openings. These are management observations and plans, not formal financial guidance.
- Showrooms increased to 56 from 40 a year earlier. Management identified wholesale productivity, showroom productivity, brand development, marketing efficiency and manufacturing efficiency as key priorities.
- The February 2023 public offering issued 13.4 million Class A shares at $4.50 per share and generated approximately $57.0 million net proceeds, increasing the share count and diluting existing holders.
- The Coliseum Cooperation Agreement resolved Coliseum’s lawsuit concerning preferred voting shares. It changed board composition and governance arrangements, required redemption of the preferred shares, and provides for reimbursement of Coliseum’s legal costs up to $4.0 million. The agreement is scheduled to end after the 2024 annual meeting.
- Contingencies include ongoing ReST arbitration, in which Purple seeks over $4 million and ReST claims approximately $8 million; an InnoHold-related claim for approximately $3.0 million in alleged tax distributions; and other intellectual-property and commercial disputes. In an ITC matter, an administrative law judge recommended exclusionary relief after finding violations, but the Commission’s final action was pending. Purple’s approximately $7.0 million claim for Section 301 duty refunds was on appeal.
- No tax receivable agreement liability was recorded. The company estimated a potential liability of approximately $168.5 million if all remaining Class B units were exchanged, and an approximately $110.7 million discounted early-termination payment upon a qualifying change of control; these are estimates, not recorded obligations.
- The company reported a full valuation allowance against deferred tax assets. Management concluded disclosure controls were effective; its internal-control assessment excluded Intellibed, whose integration was still in progress.
Important facts for investors to verify
- Reconcile the MD&A’s Q2 comparative net-loss statement, which cites a $29.2 million prior-year loss, with the financial statements, which report Q2 2022 consolidated net loss of $8.4 million and loss attributable to Purple of $8.3 million.
- Track cash burn, unrestricted cash, inventory levels and actual availability under the borrowing-base-dependent ABL facility, as well as compliance with the new credit agreements’ covenants.
- Assess whether the new product launch, showroom expansion and wholesale-door conversions improve sales, gross margin and operating losses; no quantified full-year revenue or profit guidance is provided.
- Monitor dilution and equity compensation, and determine whether financing needs could lead to further equity issuance.
- Follow outcomes and potential costs of the listed litigation, the Coliseum reimbursement, the tax receivable agreement and the pending ITC proceeding.