Purple Innovation, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. Purple designs and sells mattresses, bedding, cushions and related products through direct-to-consumer (DTC) and wholesale channels.
Financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $117.4 | $70.8 | $304.1 | $207.3 |
| Gross profit / margin | $52.9 / 45.0% | $28.1 / 39.7% | $129.7 / 42.7% | $85.8 / 41.4% |
| Operating income (loss) / margin | $11.0 / 9.4% | $(3.4) / (4.9)% | $13.4 / 4.4% | $(11.7) / (5.6)% |
| Net income (loss), consolidated | $8.4 | $(4.4) | $0.4 | $(14.2) |
| Net income (loss) attributable to Purple Innovation, Inc. | $1.6 | $(0.8) | $0.1 | $(3.3) |
Q3 diluted earnings per share were $0.16; nine-month diluted earnings per share were $0.01. Consolidated earnings include the results attributable to noncontrolling interest holders, who held about 81% of Purple LLC at quarter-end.
- Revenue and margins: Q3 revenue grew 65.8% year over year; nine-month revenue grew 46.7%. Management attributed growth mainly to bedding sales, including wholesale expansion to more than 1,200 additional stores. Q3 channel revenue was $68.0 million DTC and $49.5 million wholesale. Gross margin improved on operating and logistics efficiencies and product mix, partly offset by wholesale pricing.
- Operating costs: Q3 marketing and sales expense rose 35.2% to $34.1 million, but declined to 29.0% of revenue from 35.6%. Nine-month marketing and sales expense rose 20.6% to $94.0 million, while its revenue share fell to 30.9% from 37.6%. Higher noncash stock compensation contributed to expense growth.
- Cash flow: For the first nine months, operating activities provided $15.8 million, versus $27.4 million used in the comparable 2018 period. Investing used $5.9 million; financing provided $9.1 million. Cash increased by $19.1 million to $31.3 million.
- Liquidity: Working capital was $30.1 million at September 30, versus negative $0.9 million at December 31, 2018. Receivables rose $16.4 million year to date, mainly reflecting wholesale growth and promotion timing; inventories rose $11.9 million.
- Debt: Related-party credit-agreement principal was $38.5 million, including $3.5 million of capitalized interest; balance-sheet carrying value, net of discounts and issuance costs, was $34.5 million. The agreement bears 12% interest, potentially increasing by up to 4% for EBITDA thresholds and 2% for specified compliance failures. The company also reported $0.5 million of capital lease obligations in its risk disclosures.
Changes, outlook and notable items
- Operating income shifted to profit in both the quarter and nine-month period, as higher sales and improved margins more than offset increased operating expenses. Nine-month results nevertheless included a $6.3 million noncash debt-extinguishment loss and $3.4 million noncash loss from revaluing incremental loan warrants.
- Management expected 2019 capital expenditures of approximately $10–$12 million and stated that operating cash flow and available credit were expected to fund anticipated needs for the next 12 months under current conditions. The filing provides no quantified revenue or earnings guidance.
- The February 2019 related-party loan added $10 million of principal and included warrants to purchase 2.6 million Class A shares at $5.74 per share. Additional borrowing may be available under the agreement, subject to its terms. Capital spending and capital leases are subject to restrictions.
- Management reported that disclosure controls were ineffective at September 30, 2019 because of continuing material weaknesses in internal controls, including controls over complex transactions and accounting review. Remediation was underway but incomplete; the filing warns that further errors or restatements could result.
- Management cited rapid expansion, production capacity, delivery performance, competition, supplier concentration, liquidity and financing access as business risks. The company disclosed past delivery delays and a product accessory under CPSC investigation; it had stopped selling that product and could not estimate potential remediation costs.
- Contingencies include a former consultant’s lawsuit seeking $12–$25 million or a claimed 4% equity interest; Purple disputes the allegations. The company also brought a Canadian intellectual-property action. A preliminary estimate of potential Tax Receivable Agreement obligations was $11.4 million, but no liability was recorded because payment was not considered likely.
- After quarter-end, the company reported a final U.S. Commerce Department antidumping determination on Chinese mattresses; the ITC injury determination was still pending as of the filing. The company also signed a 10-year Lehi headquarters lease, expected to move its headquarters by the end of Q1 2020, and filed a resale registration statement covering up to 20 million shares issuable upon exchange of paired securities; it was not yet effective.
Key facts for investors to verify
- Whether revenue growth, wholesale expansion and gross-margin improvement continue, and whether receivables and inventory convert to cash as expected.
- Cash generation, capital spending, debt service and compliance with the related-party credit agreement’s covenants and restrictions.
- Progress in remediating material weaknesses and whether subsequent filings report effective controls or accounting adjustments.
- Potential costs or outcomes of the CPSC product matter, the consultant lawsuit, the Tax Receivable Agreement and other contingencies.
- Potential dilution or selling pressure from paired-security exchanges, the up-to-20-million-share resale registration, warrants and equity awards.