Purple Innovation, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Financial statements are unaudited; dollar figures below are in millions unless noted. Purple designs and sells mattresses and other comfort products through direct-to-consumer (DTC), wholesale, showrooms and third-party online retailers.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $182.6 | $165.1 | $369.0 | $287.5 |
| Gross profit / margin | $81.7 / 44.7% | $81.6 / 49.4% | $169.2 / 45.9% | $134.8 / 46.9% |
| Operating income (loss) | $(2.5) | $32.0 | $14.4 | $39.5 |
| Net income (loss) | $2.6 | $(97.1) | $23.5 | $(69.1) |
| Net income (loss) attributable to Purple | $2.6 | $(93.3) | $23.4 | $(76.4) |
| Operating cash flow | Not separately stated | Not separately stated | $11.5 | $72.3 |
- Q2 revenue rose 10.6% year over year; first-half revenue increased 28.4%. However, Q2 gross margin fell 4.7 percentage points and the company moved from operating profit to an operating loss.
- Q2 channel mix shifted: wholesale revenue grew to $66.4 from $19.9, while DTC revenue declined to $116.2 from $145.2. For the first half, wholesale revenue rose 107.6% to $127.9 and DTC revenue rose 6.8% to $241.1.
- Marketing and sales expense was $59.8 in Q2, up 51.8%; general and administrative expense was $22.5, up 158.9%. G&A included $7.9 of company-borne costs related to a secondary offering by Coliseum Investors; Purple received no proceeds from that offering.
- Q2 basic EPS was $0.04 and diluted EPS was $(0.03); first-half basic and diluted EPS were $0.36 and $0.14, respectively. The diluted figures reflect the filing’s treatment of warrant fair-value gains in its EPS calculation.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $110.1, down from $123.0 at December 31, 2020. Working capital was $96.4, versus $96.9 at year-end.
- First-half operating cash flow was $11.5, compared with $72.3 a year earlier. Investing cash outflow was $26.4, including $26.2 of property and equipment purchases; financing cash inflow was $2.1. Cash declined $12.9 over the half-year.
- Debt carrying value was $42.4, including $2.0 current and $40.4 long-term. The company had no borrowings on its $55.0 revolving credit facility and reported compliance with credit agreement covenants.
- Operating lease obligations totaled $72.2 on a present-value basis. The tax receivable agreement liability was $172.3, including $5.9 classified as current.
- Capital spending increased as Purple expanded manufacturing capacity in Utah and Georgia, supported workforce infrastructure and opened showrooms. The Georgia manufacturing facility began operations in March 2021.
Management commentary, outlook and risks
- Production disruption: Following an employee fatality and safety improvements involving Mattress Max machines, mechanical and maintenance issues reduced production and created shipment backlogs. Management said production was back at planned levels by the end of July, expected to clear the backlog by the end of August, and warned of an adverse effect on Q3 revenue. No specific revenue or earnings guidance was provided.
- Demand and supply chain: Management described demand as shifting toward pre-pandemic DTC and wholesale levels. It reported some supplier constraints and delivery delays amid higher production and nationwide delivery demand. All showrooms were open, with four new showrooms opened since the start of 2021.
- Liquidity outlook: Based on assumptions about COVID-19 and business conditions, management believed available cash, operating cash generation, revolver availability and channel recovery would cover working capital and anticipated capital expenditures for the next 12 months. The filing cautions that weaker cash generation or unavailable financing could require reduced marketing or growth spending, or additional capital.
- Non-cash items: The company recorded a $14.0 first-half gain from changes in warrant fair value, compared with a $108.6 loss in the prior-year period. These valuation changes materially affect reported earnings but are not operating revenue. Sponsor warrant liabilities were $14.5 at quarter-end, with 1.9 million sponsor warrants outstanding.
- Legal matters: Purple seeks approximately $7.0 in refunds of Section 301 duties; the court granted a preliminary injunction against liquidation of unliquidated entries, but the outcome is uncertain. Litigation with ReST includes Purple’s claim for over $4.0 in damages and ReST’s claim that Purple is liable for tens of millions; the company says the outcome cannot yet be predicted. Serta Simmons Bedding sued Purple over alleged interference and trade-secret violations; Purple denied wrongdoing and said it could not estimate the likelihood or amount of loss. Other disclosed disputes include litigation with PerfectSense and Intellibed.
- Controls and safety: Management concluded disclosure controls were ineffective at June 30 because of a previously identified material weakness in accounting for SPAC warrants. The company had restated prior financial statements and was implementing remediation, with no assurance the plan would be effective. The filing also highlights workplace safety, manufacturing interruptions, COVID-19, regulatory costs and potential tax receivable agreement payments as risks.
Most important facts for investors to verify
- Whether production and shipments recovered as expected, the backlog was cleared by the end of August, and the Q3 revenue impact matched management’s warning.
- Whether gross margins and operating profitability improve as channel mix, material and labor costs, and marketing spending change.
- Whether operating cash flow can support the expansion program and capital expenditures, and whether the company maintains access to its undrawn revolver while meeting covenants.
- The eventual financial outcomes of the SSB, ReST, Intellibed and Section 301 duty cases, including any material liability or recovery.
- Progress in remediating the warrant-accounting material weakness, and the future cash timing and amount of tax receivable agreement payments.