Purple Innovation, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This filing reports full-year results; it does not provide a clear standalone fourth-quarter income statement. The February 2018 business combination was accounted for as a reverse recapitalization, so the historical results principally reflect Purple Innovation, LLC.
Business context
Purple designs and manufactures mattresses, pillows, cushions and related products using its proprietary Hyper-Elastic Polymer technology. For 2018, direct-to-consumer sales generated 85% of revenue and wholesale 15%; mattresses represented 83%. The company reported an approximately $7.5 million order backlog at year-end.
Financial results and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net revenue | $285.8 million | $196.9 million |
| Gross profit / margin | $112.6 million / 39.4% | $85.0 million / 43.2% |
| Operating loss | $16.9 million | $8.7 million |
| Consolidated net loss | $19.6 million | $8.8 million |
| Net loss attributable to Purple Innovation, Inc. | $4.3 million; $0.51 per share | $8.8 million; $1.05 per share |
| Operating cash flow | $(21.7) million | $5.0 million |
| Capital expenditures | $11.3 million | $7.6 million |
| Cash at year-end | $12.2 million | $3.6 million |
Revenue grew 45%, primarily from mattress sales and channel expansion. Cost of revenue rose 55%, and gross margin fell 3.8 percentage points, reflecting higher product and freight costs, manufacturing and quality-control inefficiencies, warehouse-system transition issues, and a larger wholesale sales mix. Marketing and sales expense was $103.8 million (36.3% of revenue), versus $79.1 million (40.2%) in 2017. General and administrative expense rose to $23.6 million, partly due to business-combination and public-company costs.
Year-end working capital was negative $0.9 million, improved from negative $18.3 million in 2017. The balance sheet reported $26.6 million of debt principal under the related-party Coliseum credit agreement; after $5.2 million of unamortized debt discounts and issuance costs, its carrying value was $21.4 million. The agreement carried a 12% rate, with $1.6 million of 2018 interest capitalized and $1.2 million paid in cash. Capital leases were also outstanding.
Changes, outlook and material matters
- Cash generation deteriorated sharply: operating cash flow moved from positive $5.0 million to negative $21.7 million, amid higher operating costs, inventory investment and accounts-payable payments.
- Management expected 2019 revenue to increase, primarily through further wholesale growth, and forecast $8–$12 million of 2019 capital expenditures. These are expectations, not formal earnings guidance. It also expected R&D spending to rise as product and technology development accelerated.
- On February 26, 2019, the company closed an additional $10 million loan, bringing stated principal indebtedness under the amended agreement to $35 million. The filing also cites approximately $36.7 million outstanding as of March 14, 2019. The loan bears 12% interest, subject to additional rates for specified EBITDA or Sarbanes-Oxley shortfalls, and the lenders received warrants for 2.6 million Class A shares at $5.74 per share.
- Management identified continuing delivery delays, increased product returns, manufacturing inefficiencies and hiring/retention pressures. Product returns reduced revenue by $33.5 million in 2018, compared with $19.8 million in 2017; the year-end accrued return liability was $5.5 million.
- Management concluded that disclosure controls and internal control over financial reporting were ineffective at year-end because of material weaknesses. Prior-period inventory and prepaid-inventory errors reduced 2017 assets by $3.4 million and increased 2017 cost of revenue by the same amount; the company said the errors were immaterial and did not affect operating cash flow. Remediation was ongoing.
- The filing identifies an estimated $2.6 million sales-tax liability for certain earlier periods, subject to state-by-state assessment and possible amnesty or settlements. A former consultant’s lawsuit seeks $44 million and an asserted 4% equity interest; the company denies the allegations and says it is contesting the case. The filing reports that Mattress Firm paid its $3.5 million unsecured claim in its bankruptcy.
- Other key risks include reliance on digital advertising and third-party delivery, supplier and production capacity constraints, competition, related-party arrangements and debt covenants. The lender is affiliated with a company director, and founders control the majority of voting power. The company also has a tax receivable agreement requiring payment of 80% of specified realized tax benefits to InnoHold.
Important facts for investors to verify
- Whether operating cash flow, gross margin, returns and delivery performance improved after year-end, and whether growth generated sustainable profitability.
- The exact debt balance and terms after the February 2019 amendment, including interest accruals, covenant headroom, warrants and any further borrowing availability.
- Progress and independent validation of remediation of the material weaknesses, and whether subsequent filings required further corrections or restatements.
- The ultimate sales-tax exposure and outcome of the $44 million lawsuit, including any potential liability beyond defense costs.
- Wholesale customer concentration and credit exposure, supplier alternatives, and the financial impact of related-party agreements and the tax receivable agreement.