Purple Innovation, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results are compared with the corresponding 2021 periods. Purple designs, manufactures, and sells premium mattresses and other comfort products through direct-to-consumer (DTC), wholesale, and retail showroom channels. It acquired Intellibed on August 31, 2022.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenue | $143.3 million | $170.8 million | $430.6 million | $539.8 million |
| Gross profit | $59.4 million | $61.1 million | $159.9 million | $230.3 million |
| Gross margin | 41.5% | 35.8% | 37.1% | 42.7% |
| Operating income (loss) | $1.3 million | $(6.6) million | $(29.1) million | $7.8 million |
| Net income (loss) attributable to Purple | $2.3 million | $2.2 million | $(19.6) million | $25.6 million |
| Basic EPS | $0.03 | $0.03 | $(0.25) | $0.39 |
Revenue and margins: Q3 revenue fell 16.1%; nine-month revenue fell 20.2%. Management cited softer demand for home-related products, inflation’s effect on discretionary spending, and a shift away from pandemic-era e-commerce purchasing. Q3 DTC revenue declined 25.0%, including a 36.6% e-commerce decline, while showroom revenue grew 110.4% and wholesale revenue rose 1.3%. For the nine months, DTC revenue declined 28.9% and wholesale revenue declined 3.8%. Q3 gross margin improved year over year, helped by cost and efficiency initiatives and prior-year production inefficiencies; nine-month margin contracted amid elevated materials, labor, and freight costs, lower demand, and channel mix.
Expenses and earnings: Operating expenses declined 14.1% in Q3 and 15.1% for the nine months, principally due to lower advertising, workforce reductions, and other cost actions. Q3 operating income improved despite lower sales. Nine-month operating results turned to a loss, reflecting lower revenue and margin. Q3 included a $1.4 million gain from settlement of a pre-existing Intellibed legal matter and $2.8 million of Intellibed transaction costs. The nine-month results also included a $4.2 million noncash gain from the change in warrant fair value and a $6.6 million income tax benefit.
Cash flow and liquidity: Cash, cash equivalents, and restricted cash were $59.1 million at September 30, 2022, including $57.4 million of unrestricted cash; unrestricted cash was $91.6 million at year-end 2021. Working capital was $86.2 million, versus $87.5 million. Nine-month operating cash flow was negative $30.5 million, compared with positive $0.1 million in 2021. Investing cash flow was negative $30.4 million; financing cash flow was positive $28.4 million. Cash declined $32.5 million. The company reported $31.4 million of property and equipment purchases and $2.6 million of intangible-asset investment.
Debt: Total debt, net of issuance costs, was $38.6 million, including a $39.7 million term loan before issuance costs; the $55 million revolving-line balance was repaid in March and no revolver borrowings were outstanding at quarter-end. The term-loan rate was 6.07%. The credit agreement was amended after 2021 covenant results failed to meet requirements; covenant tests were waived for specified quarters through June 2022, and the amendment added liquidity, reporting, capital expenditure, lease, and other restrictions. Purple reported compliance with financial covenants at September 30. Its revolver access remains subject to the agreement’s conditions.
Material changes and significant developments
- Intellibed acquisition: Consideration was $28.3 million, primarily stock. Intellibed contributed $2.7 million of revenue and $1.3 million of pretax income from acquisition through September 30. Purchase price allocation was preliminary; goodwill was $6.4 million. Management expects expanded premium offerings, intellectual-property consolidation, innovation, and potential synergies.
- Equity financing: The March public offering issued 16.1 million Class A shares and generated $92.9 million net proceeds. Proceeds helped repay the revolver. The acquisition also issued 8.1 million shares at closing, with 0.5 million additional shares held in escrow and up to 1.5 million contingent shares.
- Shareholder proposal and rights plan: CCM, which beneficially owned approximately 45% of the company, submitted a non-binding proposal on September 17 to buy the remaining shares for $4.35 per share in cash. A special committee was formed to evaluate it. A rights agreement adopted September 25 runs through September 25, 2023 and generally triggers at 20% ownership, subject to its terms.
- Capital allocation and operations: Purple ended Q3 with 51 showrooms after opening 11 during the quarter and planned three additional openings in 2022. Products were sold through approximately 3,300 wholesale doors, about 800 net additions in the first nine months. Marketing spend was intentionally reduced; workforce and operating capacity were also resized.
Outlook, risks, and contingencies
- No formal revenue or earnings guidance is provided. Management said current projections indicate cash on hand, conditional revolver availability, and expected channel cash generation should cover working capital, covenant compliance, and anticipated capital expenditures for the next 12 months and beyond. This is subject to demand, cash flow, and credit-agreement conditions.
- Management’s priorities include improving wholesale-door productivity, strengthening the premium brand, refining marketing, developing products, improving capacity utilization, and managing input costs and pricing. It cautioned that execution and market outcomes are uncertain.
- Key operating risks include persistent inflation and consumer weakness, high materials/labor/freight costs, supply-chain disruptions, lower-margin wholesale mix, execution of showroom expansion, and integration of Intellibed. Management said costs could remain elevated or increase and demand could remain weak.
- The credit agreement is restrictive and includes minimum-liquidity requirements and mandatory revolver prepayments when cash exceeds $25 million. If cash flow or financing is inadequate, management may cut spending, scale back operations, defer growth plans, or seek additional financing. A 100-basis-point rate increase was estimated to add about $0.4 million of interest over 12 months.
- The tax receivable agreement liability was $162.2 million. A change of control or other specified events may accelerate payments; the company estimated a potential lump-sum termination payment of approximately $118.7 million.
- Litigation includes a Section 301 tariff-refund claim seeking approximately $7 million; an arbitration with ReST involving Purple’s claim for over $4 million and ReST’s claim for tens of millions; and other intellectual-property and contract actions. The filing states outcomes are uncertain. The PerfectSense matter was discontinued following a settlement order, with compliance being monitored.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at September 30 because of an unresolved material weakness in IT access and segregation-of-duties controls. No misstatement was identified, but remediation was ongoing and its completion timing was unclear.
Most important facts for investors to verify
- Whether demand stabilizes and Q3 margin improvement continues, especially given lower nine-month margins and negative operating cash flow.
- Cash burn, unrestricted liquidity, actual availability of the revolver, and continued covenant compliance under the amended credit agreement.
- Intellibed integration, realized synergies, and final purchase-price allocation, including potential contingent share issuance.
- Progress and outcome of CCM’s proposal and any effects of the rights agreement on a potential transaction.
- Remediation of the material weakness in internal controls and the potential cash effects of the tax receivable agreement and pending contingencies.