Purple Innovation, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Purple designs and sells mattresses, pillows, cushions and related comfort products through direct-to-consumer, wholesale and third-party online channels. On February 2, 2018, the company completed a reverse recapitalization and became the managing member of Purple LLC. It consolidates all of Purple LLC despite holding about 18% of its economic interest; InnoHold holds about 82% and is reported as noncontrolling interest. Comparative operating results reflect Purple LLC’s historical results.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $75.4 million | $47.7 million | $136.4 million | $77.8 million |
| Gross profit / margin | $33.0 million / 43.8% | $21.2 million / 44.4% | $59.4 million / 43.6% | $35.5 million / 45.6% |
| Operating income (loss) | ($3.5) million | $3.6 million | ($6.4) million | $1.7 million |
| Net income (loss) | ($4.3) million | $3.6 million | ($7.9) million | $1.7 million |
| Net income (loss) attributable to Purple Inc. | ($0.8) million | $3.6 million | ($2.2) million | $1.7 million |
| EPS, basic and diluted | ($0.09) | $0.43 | ($0.26) | $0.20 |
Revenue increased 58% in Q2 and 75.3% in the first half, principally from mattress sales. Management attributed demand growth to higher marketing investment and, for the first half, new higher-priced mattress models. Wholesale revenue rose $7.5 million in Q2 and $10.3 million in the first half. Marketing and sales expense increased to $30.7 million in Q2 and $52.8 million in the first half, mainly due to advertising. Gross margin declined year over year, while operating results turned to losses; higher marketing, manufacturing inefficiencies, logistics costs and transaction/public-company expenses contributed.
Cash, liquidity and debt
- Cash was $10.4 million at June 30, 2018, versus $3.6 million at December 31, 2017. Working capital was positive $12.1 million, compared with negative $17.4 million at year-end.
- First-half operating cash flow was negative $27.6 million, compared with positive $4.9 million in 2017. Inventory growth used $19.9 million of cash; management cited expanded products, demand, stocking at third-party distribution centers and production based on forecasts later reduced.
- Investing cash outflow was $7.1 million, including $7.0 million of property and equipment purchases. Management estimated 2018 capital expenditures of $10–$15 million.
- Financing cash inflow was $41.5 million, including $25.9 million from the transaction and $24.0 million of net proceeds from the Coliseum credit agreement, partly offset by repayment of the Wells Fargo line of credit.
- Coliseum debt had $25.7 million principal outstanding and a $20.0 million net carrying value at June 30. It bears fixed interest of 12%, matures in February 2023, and includes restrictive covenants, prepayment penalties and a make-whole provision in the first year. $0.7 million of first-half interest was paid in kind. The Wells Fargo line was repaid and closed in February 2018.
Outlook, risks and notable matters
- Management expected revenue to continue increasing in absolute dollars through the remainder of 2018, citing increased marketing and wholesale expansion, including a Mattress Firm store trial. It cautioned that the anticipated Mattress Firm contribution might not develop as expected.
- Management anticipated gross margin improvement through manufacturing-process improvements, automation and cost containment; it also expected higher general and administrative costs as the company scaled as a public company, and slightly higher quarterly interest expense.
- Management believed cash flows and available liquidity would fund anticipated expenses and needs for the next 12 months under current conditions, but warned that financing may be unavailable or unfavorable and that inability to fund operations or growth could require scaling back plans.
- Delivery delays on new mattress models had caused customer dissatisfaction, cancellations and returns. The company was working with delivery providers and seeking alternatives; continued delays could harm results. Freight costs and supply-chain execution are key risks.
- Disclosure controls were deemed ineffective at June 30 due to previously reported material weaknesses in financial reporting. Remediation was ongoing. A prior inventory-count error reduced December 31, 2017 inventory and equity by $2.454 million; the company said it was immaterial and revised the comparative balance sheet.
- Pending matters include a former consultant’s claim alleging a promised 4% equity stake and seeking $44 million plus interest, which the company denies, and litigation concerning online claims about product safety. The filing also describes July 2018 ADA website-accessibility litigation and a trade-dress/patent suit against Layla Sleep.
- The company disclosed a mineral-oil purchase commitment of approximately $14.4 million over two years, expected to be met in the ordinary course. The utility service arrangement includes a 15-year minimum billing commitment and an early-termination charge; key terms were still being finalized.
- Nasdaq had conditioned continued listing of the company’s warrants on demonstrating at least 400 round-lot holders by September 15, 2018. Failure could result in warrant delisting; the Class A shares were not subject to that determination.
- The Tax Receivable Agreement requires payment to InnoHold of 80% of certain realized tax savings. No liability was recorded because realization was not considered probable; future payments could affect liquidity.
Most important facts for investors to verify
- Whether revenue growth and the Mattress Firm/wholesale expansion translated into sustained demand, and whether delivery delays and returns were resolved.
- Whether gross margin recovered as management anticipated, given first-half manufacturing inefficiencies and freight costs.
- Inventory levels, operating cash burn and liquidity needs, including the impact of the 12% Coliseum debt and its covenants.
- Progress in remediating material weaknesses and whether subsequent filings report further control or inventory-accounting issues.
- Outcomes of the legal proceedings, the warrant-holder listing requirement and any future Tax Receivable Agreement liability.