Purple Innovation, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparative period is Q1 2018. Purple designs and manufactures mattresses, pillows, cushions and other comfort products, selling through direct-to-consumer, wholesale and third-party online channels. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Net revenue | $83.6 million | $60.8 million |
| Gross profit / margin | $34.1 million / 40.7% | $25.8 million / 42.5% |
| Operating income (loss) | $4.8 million | $(3.6) million |
| Net loss | $(0.7) million consolidated; $(0.1) million attributable to Purple Innovation, Inc. | $(4.3) million consolidated; $(1.6) million attributable to Purple Innovation, Inc. |
| Net loss per share | $(0.02) | $(0.18) |
| Operating cash flow | $(8.3) million | $(15.6) million |
| Cash at period end | $12.2 million | $12.2 million at Dec. 31, 2018 |
| Working capital | $13.4 million | $(0.9) million at Dec. 31, 2018 |
| Related-party debt | $37.2 million principal; $32.8 million carrying value | $26.6 million principal; $21.4 million carrying value at Dec. 31, 2018 |
Revenue increased 37.7%, primarily from bedding sales and wholesale expansion, including more than 800 additional stores versus the prior-year quarter. Direct-to-consumer revenue was $53.8 million and wholesale revenue was $29.9 million; bedding generated $81.3 million of revenue. Cost of revenue rose faster than sales, and gross margin fell 1.8 percentage points, primarily due to a greater share of wholesale-priced sales and higher freight costs, including white-glove delivery. Marketing and sales expense rose to $24.0 million but declined as a share of revenue, from 36.3% to 28.7%; general and administrative expense fell to $4.6 million, mainly because Q1 2018 included Business Combination costs.
Cash used in operations improved year over year, but remained substantial. Higher operating income and lower inventory cash needs were partly offset by a $9.4 million increase in accounts receivable, mainly associated with wholesale growth. Investing cash outflow was $1.0 million, including $0.9 million in property and equipment purchases. Financing provided $9.2 million, primarily from the February 2019 incremental loan; cash declined $0.1 million during the quarter.
Debt, material changes and unusual items
- In February, the company closed a $10.0 million incremental related-party loan, bringing principal indebtedness under the credit agreement to $35.0 million before $2.2 million of capitalized interest. The lender group had $37.2 million principal outstanding at quarter-end. The loan bears 12% annual interest, with potential additional interest tied to EBITDA thresholds and Sarbanes-Oxley compliance; some interest may be capitalized. The agreement also includes restrictive covenants, prepayment provisions and potential additional borrowing subject to conditions.
- The restructuring produced a $6.3 million non-cash loss on extinguishment of debt, primarily from write-offs of debt discounts and issuance costs and recognition of warrant fair value. Incremental warrants were recorded as liabilities; their fair value decreased from $4.9 million at issuance to $3.2 million at quarter-end, generating a $1.7 million non-cash gain.
- Purple consolidated Purple LLC despite holding approximately 18% of its economic interest; other holders’ approximately 82% interest is presented as noncontrolling interest.
Outlook, risks and contingencies
- Management expects 2019 capital expenditures of $8 million to $12 million and believes operating cash flow and available liquidity, including access to the credit agreement, will fund anticipated needs for the next 12 months under current operating conditions. This is not a guarantee; actual needs and available financing may differ.
- Management says the company may need additional capital if cash generation or available financing is insufficient. Lender approval and restrictive covenants may limit financing options; future financing could carry unfavorable terms or dilute shareholders. If funding is constrained, the company may reduce marketing, delay growth plans or restructure obligations.
- Risks discussed include competitive and margin pressures, wholesale partner and supplier dependence, product warranty exposure, key-person departures, regulation and e-commerce taxes, low trading liquidity and possible selling by large holders after lock-up expiration. The filing says a Tax Receivable Agreement could require payments to InnoHold equal to 80% of certain realized tax savings; no liability was recorded at quarter-end.
- A former consultant seeks $44 million or a claimed 4% Purple LLC interest, alleging an oral agreement. The company denies the allegations and is contesting the case; fact discovery was scheduled to conclude in July 2019. The filing does not report a liability for this claim.
- Disclosure controls and procedures were deemed ineffective as of March 31, 2019 because of material weaknesses in internal control over financial reporting, including controls over complex transactions and account analyses and reconciliations. Remediation efforts were underway but not complete.
- Other commitments include approximately $5.2 million remaining under a supplier purchase commitment and a 15-year utility service agreement; management expects to meet these commitments in the ordinary course. In April 2019, the company entered a $0.4 million, 72-month equipment capital lease.
Important facts for investors to verify
- Whether wholesale growth and store expansion continue, and how channel mix affects gross margin and freight costs.
- Cash conversion, receivables collection, inventory requirements and funding for planned capital expenditures.
- Credit agreement terms, covenant compliance, interest capitalization, additional borrowing availability and any further financing or dilution.
- Progress and effectiveness of internal-control remediation, including accounting for complex transactions.
- Developments in the $44 million consultant claim and any resulting financial-statement or liquidity impact.
- Potential share supply and trading effects following the expiration of lock-ups and the planned distribution of paired securities to former and current employees.