Purple Innovation, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019, compared with FY2018. The filing provides annual results, not a separate Q4 income statement. Purple designs and manufactures premium comfort products and sells through direct-to-consumer (DTC) and wholesale channels. Purple Inc. consolidates Purple LLC despite holding approximately 42% of its economic interest at year-end; the remaining approximately 58% is reported as noncontrolling interest.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net revenue | $428.4 million | $285.8 million |
| Gross profit / margin | $189.0 million / 44.1% | $112.6 million / 39.4% |
| Operating income (loss) / margin | $16.2 million / 3.8% | ($16.9 million) / (5.9%) |
| Consolidated net loss / margin | ($12.4 million) / (2.9%) | ($19.6 million) / (6.9%) |
| Net loss attributable to Purple Inc.; diluted EPS | ($4.0 million); ($0.40) | ($4.3 million); ($0.51) |
| Cash from (used in) operating activities | $22.9 million | ($21.7 million) |
| Cash at year-end | $33.5 million | $12.2 million |
| Working capital | $27.3 million | ($0.9 million) |
- Revenue increased 49.9%, primarily from mattress sales and expanded wholesale distribution. The company reported more than 800 additional third-party retail stores versus 2018. DTC generated 62% of FY2019 revenue and wholesale 38%; bedding represented 94%.
- Gross margin improved 4.7 percentage points, attributed to production and logistics efficiencies and product mix, partly offset by wholesale-channel mix. Marketing and sales expense rose 36.8% to $142.0 million, but declined to 33.1% of revenue from 36.3%.
- Investing cash outflow was $10.8 million, including $10.5 million of property and equipment purchases. Financing cash inflow was $9.1 million, including the $10.0 million incremental loan.
- Year-end gross debt was $39.2 million under the related-party credit agreement, plus $0.5 million of capital leases. The balance sheet reports $35.4 million of long-term debt net of unamortized discounts and issuance costs. The loan bears 12% interest; $2.5 million of 2019 interest was capitalized and $1.9 million paid in cash.
Material changes and unusual items
- Operating results improved substantially, with operating income replacing the prior-year operating loss. The consolidated net loss narrowed, but remained negative due largely to financing and noncash items.
- FY2019 included a $16.8 million noncash loss from remeasurement of liability-classified lender warrants and a $6.3 million noncash loss on debt extinguishment. Stock-based compensation was $10.1 million, including approximately $9 million related to distributions of paired securities to employee incentive holders.
- Inventories increased $24.7 million to $47.6 million, and accounts receivable increased $18.5 million to $28.7 million. Mattress Firm represented approximately 26% of revenue and 67% of year-end accounts receivable.
- The company adopted ASC 606 revenue recognition in 2019; it reported no material impact. Management said a previously reported material weakness in internal controls was remediated by year-end; management assessed financial reporting controls as effective. The auditor did not provide an opinion on internal control effectiveness.
Outlook, risks, and contingencies
- Management expected cash from operations and available liquidity to cover operating expenses, growth initiatives, and anticipated needs for the next 12 months, based on then-current conditions. This is not a specific revenue or earnings forecast.
- Planned 2020 capital expenditures were approximately $40 million, above the credit agreement’s $20 million annual cap absent a waiver or debt restructuring. Plans included a new East Coast manufacturing/distribution facility, continued showroom expansion, and entry into Canada through wholesale channels.
- Management identified COVID-19 as a potential FY2020 risk to suppliers, operations, inventory availability, deliveries, and demand; the duration and financial impact could not then be estimated. Other key risks include intense competition and rising digital advertising costs, manufacturing capacity and delivery execution, product returns and quality, dependence on key suppliers, and customer concentration.
- The company reported higher-than-anticipated historical returns; accrued sales returns were $7.3 million at year-end, with $34.4 million of additions reducing FY2019 net sales. Warranty accruals totaled $4.6 million.
- Contingencies include a former consultant’s claim seeking $10.75 million or a 4% equity interest, which Purple disputes, and a CPSC investigation of a third-party accessory product following reported failures and a handful of minor injuries. A broad recall’s potential cost was not determinable.
- The Tax Receivable Agreement generally requires payment to InnoHold of 80% of certain realized tax savings. The estimated liability for prior transactions was approximately $34.8 million; only $0.5 million was recorded at year-end because of the full valuation allowance. Potential future payments and acceleration provisions could affect liquidity.
- Other exposures include an estimated approximately $2.5 million sales-tax liability for earlier periods, related-party arrangements, and covenant, refinancing, and dilution risks. The company reported compliance with debt covenants at December 31, 2019.
Investor verification checklist
- Check whether operating cash generation persists as receivables and inventory grow, and assess the collectability of Mattress Firm receivables.
- Confirm lender approval or restructuring for planned 2020 capital spending above the covenant limit, and review interest, maturity, and warrant-adjustment terms.
- Track gross-margin sustainability, advertising efficiency, product-return trends, warranty costs, and capacity and delivery performance.
- Monitor COVID-19 effects on suppliers, manufacturing, distribution, and demand, alongside the status and cost of the CPSC matter and other litigation.
- Assess the eventual cash impact of the Tax Receivable Agreement, sales-tax exposure, related-party transactions, and potential equity dilution from warrants and exchanges.