Purple Innovation, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Financial statements are unaudited; amounts below are in millions of dollars unless otherwise stated. Purple designs, manufactures, and sells bedding and other comfort products through direct-to-consumer (DTC), wholesale, showrooms, and third-party online channels.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net revenue | $170.8 | $187.1 | $539.8 | $474.6 |
| Gross profit | $61.1 | $88.3 | $230.3 | $223.1 |
| Gross margin | 35.8% | 47.2% | 42.7% | 47.0% |
| Operating income (loss) | $(6.6) | $24.3 | $7.8 | $63.7 |
| Net income (loss) | $2.1 | $(87.2) | $25.6 | $(156.3) |
| Cash provided by operating activities | Not separately provided for the quarter | $0.1 | $87.4 |
- Q3 revenue fell 8.7% year over year. DTC revenue declined 15.9% to $112.9 million; wholesale revenue grew 9.6% to $57.9 million. For the first nine months, revenue rose 13.7%, led by wholesale growth of 62.3%, while DTC revenue declined 1.7%.
- Q3 gross margin fell 11.4 percentage points. Management attributed margin pressure to production inefficiencies, higher shipping, material and labor costs, and a greater share of lower-margin wholesale sales. Operating expenses were $67.7 million in Q3, including $48.8 million in marketing and sales and $17.0 million in general and administrative costs.
- Reported net income included noncash gains from changes in warrant fair value: $5.4 million in Q3 and $19.4 million for the nine-month period. These gains materially affect comparison with 2020, when warrant remeasurement produced large losses. Q3 diluted loss per share was $0.05 despite positive net income attributable to Purple of $2.2 million.
Liquidity, debt, and investment
- At September 30, cash and cash equivalents were $83.6 million, down from $123.0 million at December 31, 2020. Working capital was $74.9 million, compared with $96.9 million at year-end 2020.
- Nine-month operating cash flow was nearly breakeven at $0.1 million. Investing activities used $41.5 million, including $40.1 million for property and equipment. Cash declined $39.3 million during the period.
- Term-loan principal was $42.8 million; carrying debt, net of issuance costs, was $41.9 million, of which $2.0 million was current. The $55 million revolving facility was undrawn at September 30. The company reported covenant compliance at that date.
- On November 8, 2021, after quarter-end, Purple requested a draw of the full $55 million revolver at an initial 3.50% rate. The filing describes a request, not confirmation that funds were received.
- Operating lease obligations totaled $81.1 million on a present-value basis. The tax receivable agreement liability was $171.5 million, including $5.9 million classified as current.
Material changes, outlook, and risks
- Production disruptions followed a 2021 workplace accident that resulted in an employee death and safety upgrades to Mattress Max equipment. Mechanical and maintenance issues reduced output and created order backlogs, which management said were cleared by the end of August; production had returned to planned levels by July.
- Management said demand had not recovered to expected levels by quarter-end, citing customer cancellations, reduced marketing during production problems, and diminished confidence among customers and wholesale partners. It expected these effects to continue to adversely affect Q4 2021 results; the filing provides no numerical revenue or earnings guidance.
- Management expected elevated or rising shipping, raw-material, and labor costs to pressure margins. It also highlighted COVID-19, supplier constraints, logistics delays, inflation, manufacturing capacity, and the possibility that slower demand and higher costs could impair credit-covenant compliance. Management stated that available cash, operating cash generation, and credit availability were expected to cover working capital and planned capital expenditures for the next 12 months, subject to assumptions and risks.
- On November 8, Purple and Mattress Firm replaced their prior retail agreement with a standard-form agreement that removes prior exclusivity arrangements, potentially allowing Purple to pursue additional wholesale partners.
- Legal matters include Purple’s claims against ReST, which seeks tens of millions of dollars in counterclaims; a dispute with Serta Simmons Bedding over hiring a former employee; and a dispute with Intellibed proceeding through contractual dispute-resolution procedures. Purple also seeks recovery of approximately $7 million in Section 301 duties; any refund is uncertain.
- Management identified a material weakness in IT general controls relating to user access and segregation of duties, and concluded disclosure controls and internal control over financial reporting were ineffective at September 30. No resulting financial-statement misstatement was identified. Remediation had begun; management could not estimate when it would be complete. A previously reported weakness related to warrant accounting was reported remediated.
- A $0.6 million amount of capitalized interest relating to periods before Q3 was recorded as an out-of-period correction in Q3; management said it was not material to prior or current financial statements.
Important facts for investors to verify
- Whether the requested $55 million revolver draw was completed, and the resulting cash, debt, interest expense, and covenant headroom.
- Whether DTC and wholesale demand recovered after the production disruption, and whether elevated costs continued to reduce gross margin.
- Progress in remediating the IT-control material weakness and whether subsequent filings report any control failures or restatements.
- Updates on the ReST, Serta Simmons, and Intellibed disputes, including potential exposure, indemnification, or settlement costs.
- Use of the substantial cash balance alongside near-zero operating cash flow, continued capital spending, lease commitments, and the $171.5 million tax receivable agreement liability.