Purple Innovation, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise. Purple designs and sells mattresses and other comfort products through direct-to-consumer (DTC), wholesale, showrooms and online retail partners. The 2022 comparison includes Intellibed only after its acquisition in August 2022.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Net revenue | $109.4 | $143.2; down 23.6% |
| Gross profit / margin | $43.2 / 39.5% | $51.6 / 36.1% |
| Operating loss | $(22.0) | $(18.4) |
| Net loss attributable to Purple | $(23.3); $(0.24) per share | $(13.5); $(0.20) per share |
| Operating cash flow | $(13.5) | $(44.3) |
| Capital expenditures | $3.1 | $13.1 |
- DTC revenue was $66.3 million, down 22.5%; wholesale revenue was $43.1 million, down 25.3%. Within DTC, e-commerce fell 30.1%, while showroom revenue grew 24.4%.
- Marketing and sales expense declined to $38.2 million, primarily reflecting a $12.0 million reduction in advertising. G&A rose to $23.7 million, including $5.9 million of Special Committee legal and professional costs. R&D increased to $3.4 million.
- At March 31, cash, cash equivalents and restricted cash were $54.5 million, including $52.8 million unrestricted cash. Working capital was $77.5 million. Inventories were $87.7 million, up from $73.2 million at year-end.
- The $24.7 million term loan was repaid in February. No debt was outstanding at quarter-end; the full $50 million revolving facility was available, subject to covenant compliance. Operating lease liabilities totaled $129.4 million.
- Financing cash flow was $29.4 million, including $57.2 million net proceeds from a February stock offering of 13.4 million shares at $4.50 per share. Class A shares outstanding increased from 91.4 million at December 31, 2022 to 105.0 million at March 31, 2023.
Material changes versus the prior-year quarter
- Revenue declined amid softer home-product demand, inflationary pressure on discretionary spending and reduced advertising. Wholesale partners also reduced purchases ahead of the planned new product launch; Intellibed contributed $5.3 million of wholesale revenue.
- Gross margin improved 3.4 percentage points, which management attributed to efficiency and cost-reduction initiatives and lower pressure from materials, labor and freight costs.
- Despite lower operating expenses overall, operating loss widened by $3.6 million as lower gross profit outweighed expense reductions. Net loss attributable to Purple increased by $9.8 million; the comparison also reflects a $3.9 million warrant fair-value gain in Q1 2022 that did not recur.
- Operating cash use improved year over year, supported in part by a $20.1 million reduction in accounts receivable; inventory increased by $14.5 million during the quarter.
Outlook, risks and unusual items
- Management said current projections indicate cash on hand, revolver availability and expected operating cash generation should cover working capital, covenant compliance and anticipated capital expenditures for at least 12 months. This is a conditional management assessment, not a quantified revenue or earnings forecast.
- The company planned to launch its Premium and Luxe product lineup in Q2 2023, with about $3.0 million of launch-related expenses shifted into that quarter. Management cited wholesale expansion, showroom productivity, brand elevation, innovation and operational efficiency as priorities. It expected to resume adding showrooms during 2023; the filing reports 55 showrooms and approximately 3,400 wholesale doors at quarter-end.
- The February credit amendment waived leverage and fixed-charge coverage testing for Q1 and Q2 2023, with tests resuming under revised thresholds. It also limits growth capital spending and makes the credit agreement’s maturity spring forward to June 30, 2024 if 2023 consolidated EBITDA is not greater than $15 million. Minimum liquidity may rise to $30 million if specified leverage conditions are met. The company reported compliance at March 31, 2023; a May amendment clarified the Q1 and Q2 minimum EBITDA tests.
- The April 2023 Coliseum Cooperation Agreement resolved its governance litigation and provided for board changes, redemption of all outstanding PRPLS, termination of the shareholder rights agreement, and reimbursement of Coliseum’s case-related costs up to $4.0 million. These are subsequent events, not Q1 operating results.
- Contingencies include an InnoHold-related claim seeking approximately $3.0 million in tax distributions; ReST litigation with Purple seeking more than $4 million and ReST claiming tens of millions; and other intellectual-property and commercial disputes. The court rejected the company’s bid for approximately $7 million of Section 301 duty refunds, subject to possible appeal.
- Management identified ongoing demand and execution uncertainty, potential difficulty obtaining additional capital on favorable terms, and risks from debt covenants. The filing also describes cybersecurity exposure, including a 2022 payment-diversion incident expected to cost up to $250,000 and a more recent vendor-system intrusion involving email addresses.
Important facts for investors to verify
- Whether the new product lineup and planned wholesale, showroom and marketing initiatives translate into improved sales and margins, and how Q2 launch spending affects results.
- Quarterly cash burn, inventory levels, unrestricted liquidity and revolver availability, alongside compliance with revised credit covenants and the $15 million 2023 EBITDA condition.
- The impact of the February equity issuance and any further financing on share count and dilution.
- Costs and outcomes of the Coliseum agreement, InnoHold tax-distribution claim and other material litigation.
- Potential tax receivable agreement exposure: no liability was recorded at March 31, 2023, but the filing estimates approximately $168.5 million if remaining Class B units were exchanged and an approximately $110.6 million discounted early-termination payment in a change of control.