Purple Innovation, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited results; dollar amounts below are in millions unless stated otherwise. Purple designs, manufactures and sells mattresses and other comfort products through direct-to-consumer, wholesale and company-owned showroom channels.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $140.0 | $142.9 | $364.6 | $428.9 |
| Gross profit | $47.3 | $59.0 | $123.4 | $158.2 |
| Gross margin | 33.8% | 41.3% | 33.8% | 36.9% |
| Operating income (loss) | $(32.6) | $0.9 | $(97.5) | $(30.8) |
| Net income (loss) | $(36.1) | $2.0 | $(102.8) | $(21.0) |
| Net income (loss) attributable to Purple | $(36.0) | $2.0 | $(102.4) | $(20.8) |
| Basic loss per share | $(0.34) | $0.02 | $(0.99) | $(0.26) |
Q3 revenue declined 2.0% year over year; nine-month revenue declined 15.0%. Nine-month DTC revenue fell 14.7% and wholesale revenue fell 15.4%. In Q3, wholesale revenue rose 2.6%, while DTC declined 5.2%. Management attributed the broader declines to softer home-product demand following normalization from pandemic-era demand.
Q3 marketing and sales expense increased 42.7% to $52.8 million, including $25.4 million of advertising, as the company supported its Premium and Luxe product launch. Nine-month operating expenses were $220.9 million versus $189.0 million, including $6.9 million to impair all remaining goodwill. The Q3 debt extinguishment loss was $3.1 million; nine-month loss on extinguishment was $4.3 million.
Cash, liquidity and debt
- Cash, cash equivalents and restricted cash were $26.6 million at September 30, 2023, down from $41.8 million at December 31, 2022. Working capital was $40.2 million, versus $62.4 million at year-end 2022.
- For the first nine months, operating cash flow was $(55.8) million, investing cash flow $(10.2) million and financing cash flow $50.8 million. Capital expenditures were approximately $9.4 million, down from $34.1 million in the comparable 2022 period.
- At September 30, debt carrying value was $24.0 million, including a $25.0 million term loan before unamortized issuance costs. The new term loan bears interest at SOFR plus 8.5% and is secured by company assets. A $50.0 million asset-based revolving facility was undrawn at quarter-end.
- After quarter-end, Purple drew approximately $17.0 million on the ABL facility and gave notice to repay $2.0 million. As of November 13, cash was $31.0 million and reported remaining ABL borrowing availability was approximately $4.6 million, after a $5.0 million lender reserve and minimum-availability requirement.
- Management said projected cash, available ABL borrowings and expected operating cash generation should cover working capital and anticipated capital expenditures for at least 12 months. This outlook depends on cash generation and access to borrowing capacity.
Material developments, outlook and risks
- Product and channel strategy: Premium and Luxe product lines launched in May 2023. More than half of approximately 3,300 wholesale doors had transitioned by the end of Q3; management expected remaining conversions by year-end. The company had 57 showrooms at quarter-end and cited improving showroom and wholesale productivity, brand elevation, innovation and operational efficiency as priorities.
- Margin pressure: Management cited discounted wholesale floor models, transition-related labor and freight costs, lower manufacturing efficiencies versus the prior year, online discounting and a greater wholesale revenue mix as factors reducing gross margin.
- Credit agreement defaults and waivers: Purple was out of compliance with requirements under both 2023 credit agreements as of September 30, including late reporting and incomplete post-closing deliverables; it also drew on the ABL while those defaults existed. On November 6, lenders waived the specified defaults but imposed enhanced reporting, 13-week cash forecasts and budgets, a third-party consultant, and daily cash sweeps. Future noncompliance could restrict borrowing or trigger further default consequences.
- Warranty accounting and controls: In October, the company identified errors in estimating wholesale warranty-return liabilities and revised prior-period statements. It said the prior-period effects were immaterial, but the cumulative error would have been material if left uncorrected. The correction did not affect cash flows. Management concluded disclosure controls were ineffective at September 30 because of a material weakness; remediation is planned but not assured.
- Goodwill impairment: Declining market capitalization and other factors triggered an impairment review, resulting in a $6.9 million charge to write off Intellibed-related goodwill.
- Tax receivable agreement: No liability was recorded. The company estimated a potential liability of approximately $168.5 million if remaining Class B units were exchanged, and a discounted early-termination payment of approximately $110.6 million in a change-of-control scenario; estimates depend on assumptions and future tax outcomes.
- Contingencies: The ReST arbitration decision was pending, with Purple seeking more than $5 million and ReST claiming approximately $4 million. The InnoHold parties seek approximately $3.0 million in alleged unpaid tax distributions. Other disclosed matters include intellectual-property litigation and trademark proceedings. The Pearces’ salary claims were dismissed with prejudice in October, with final judgment pending.
- Other risks: Additional capital may be needed and may not be available on acceptable terms; restricted ABL availability, covenants, variable interest rates, customer demand, execution of product transitions and remediation of the control weakness are significant uncertainties. The filing provides no specific quantitative revenue or earnings guidance.
Key facts investors should verify
- Whether Purple meets the amended credit facilities’ reporting, liquidity and covenant requirements, and how ABL availability changes with borrowing-base calculations and lender reserves.
- Subsequent cash use, operating cash flow and the company’s ability to maintain liquidity against its stated 12-month outlook.
- Whether Premium and Luxe product transitions improve sales productivity and gross margin, particularly in wholesale and showrooms.
- Progress and testing of warranty-accounting control remediation, and any further revisions or restatements.
- Outcomes and potential financial effects of the disclosed legal matters and tax receivable agreement.