Purple Innovation, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; filed August 13, 2019. Purple designs and sells mattresses, pillows, cushions, and related products using its Hyper-Elastic Polymer technology through direct-to-consumer and wholesale channels. Purple Innovation consolidates Purple LLC, although it held approximately 18% of its economic interest; the remaining approximately 82% is reported as noncontrolling interest.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net revenue | $103.0 million | $75.8 million | $186.7 million | $136.5 million |
| Gross profit / margin | $42.8 million / 41.5% | $31.8 million / 42.0% | $76.9 million / 41.2% | $57.6 million / 42.2% |
| Operating income (loss) | $(2.4) million | $(4.7) million | $2.4 million | $(8.3) million |
| Net income (loss) | $(7.3) million | $(5.6) million | $(8.1) million | $(9.8) million |
| Net loss attributable to Purple Innovation | $(1.3) million; $(0.16) per share | $(1.0) million; $(0.12) per share | $(1.5) million; $(0.17) per share | $(2.6) million; $(0.30) per share |
Q2 revenue rose 36.0%, primarily on bedding sales and wholesale expansion, including more than 1,000 additional stores year over year. Six-month revenue increased 36.7%, with management citing more than 1,500 additional stores. Wholesale mix pressured gross margin, partly offset by operating and logistics efficiencies. Marketing and sales expense rose in dollars but declined as a share of revenue, to 34.9% for Q2 and 32.1% for the first half.
Q2 results included a $3.7 million noncash loss from remeasuring warrant liabilities. First-half results included a $6.3 million noncash debt-extinguishment loss and a $2.0 million noncash warrant fair-value loss. Noncash stock compensation was $6.7 million in Q2 and $6.8 million for the first half; it included $6.3 million related to InnoHold’s distribution of paired securities to employees. These items affect comparability of reported earnings.
Cash flow, debt, and liquidity
- For the six months, operating cash flow was positive $2.1 million, versus use of $27.6 million a year earlier. Investing cash flow was $(3.3) million, including $3.1 million of property and equipment purchases; financing cash flow was $9.1 million.
- Cash was $20.3 million at June 30, 2019, up from $12.2 million at year-end 2018. Working capital was $17.7 million, compared with negative $0.9 million at year-end.
- Accounts receivable increased $14.6 million during the first half, mainly from wholesale growth and promotion timing. Management also cited lower inventory cash use than in 2018 and reduced customer prepayments as production helped clear the shipment backlog.
- Related-party debt had $37.8 million principal outstanding at June 30, including $2.8 million of capitalized interest; the balance-sheet carrying amount, net of debt discounts and issuance costs, was $33.7 million. Including capital leases, the filing reports total debt of approximately $38.2 million.
- The amended credit agreement bears 12% annual interest, with potential additional interest tied to EBITDA thresholds and Sarbanes-Oxley compliance. It limits annual capital expenditures to $20 million, subject to exceptions, and allows the company to request up to $10 million of additional loans. The lender group is related to a company director.
Outlook, risks, and notable matters
- No formal revenue or earnings guidance is provided. Management expected approximately $12 million of 2019 capital expenditures and believed operating cash flow and available credit would cover anticipated needs for the next 12 months under current conditions. It cautioned that lower-than-expected cash flow or unavailable financing could force spending cuts, delay growth plans, or require additional capital.
- Management attributed growth to wholesale expansion and stated that wholesale pricing mix weighed on margins. Risks include demand and forecast volatility, competition, production capacity and delivery execution, supplier concentration, and the cost of scaling channels and facilities. A fifth Mattress Max machine completed construction and testing in August 2019.
- Disclosure controls were deemed ineffective at June 30 because of continuing material weaknesses in internal financial controls, including controls over complex transactions, accounting analyses, reconciliations, and management review. Remediation was underway but incomplete; management warned of possible misstatements or restatement if remediation proves insufficient.
- A former consultant claims an oral agreement entitled him to a 4% equity interest and seeks $12–$25 million in damages or declaratory relief. Purple LLC denies the claims and is contesting the case; expert discovery was expected to conclude in September 2019.
- The company reported a CPSC matter involving a third-party accessory product that it stopped selling while investigating reported failures and working with the CPSC. A recall or other corrective action may be required, but the filing says the likely cost could not yet be determined. The filing also describes other consumer complaints and product-quality, warranty, and recall risks.
- Other commitments include a four-year mineral-oil purchase contract with approximately $21.2 million remaining, and a new Lehi headquarters lease with a planned move before the end of Q1 2020. A potential Tax Receivable Agreement obligation could require payment to InnoHold of 80% of certain realized tax savings; no liability was recorded because realization was not considered probable.
Most important facts for investors to verify
- Whether wholesale-driven revenue growth translates into improved margins and cash collection, given the sharp increase in receivables.
- Progress in remediating material weaknesses and whether subsequent filings report effective controls or further accounting adjustments.
- Cash availability and compliance with the related-party credit agreement, including interest terms, covenants, and any additional borrowing.
- The outcome and potential cost of the consultant litigation and the CPSC accessory-product investigation.
- Whether the $12 million capital-spending expectation, 12-month liquidity outlook, and new facility commitments remain achievable.
- Potential share supply and dilution from exchanges of Class B paired securities, warrants, and equity awards, as well as any future Tax Receivable Agreement payments.