Business Context and Reporting Period
Purple Innovation, Inc. (PRPL) filed this Form 8-K on February 8, 2023, to disclose preliminary financial estimates as of December 31, 2022, and updates regarding its credit facilities and corporate governance. The company is a digitally native vertical brand designing and manufacturing comfort products, including mattresses and pillows, sold through direct-to-consumer channels and wholesale partners.
Key Financial Metrics
- Cash on Hand: Approximately $41.8 million as of December 31, 2022 (preliminary estimate).
- Debt: Approximately $24.7 million outstanding under the term loan portion of the 2020 Credit Agreement as of February 8, 2023. No amounts were outstanding under the revolving line of credit.
- Revenue and Profit: The filing does not provide specific revenue, profit, or margin figures for the period.
- Liquidity: The company is negotiating an amendment to its credit agreement that includes a minimum liquidity covenant of $25.0 million, increasing to $30.0 million if the leverage ratio exceeds 3.00x.
Material Changes and Credit Agreement Amendment
The company is working with lenders to amend its 2020 Credit Agreement. The proposed amendment is contingent upon paying off the $24.7 million term loan balance and raising at least $40.0 million in an equity offering. Key proposed changes include:
- Covenant Waivers: Leverage and fixed charge coverage ratio covenants would be waived for Q1 and Q2 2023.
- Revised Covenants: Leverage ratio revised to 4.50x for Q3 2023 and 3.00x thereafter. Fixed charge coverage revised to 1.50x for Q3/Q4 2023 and 2.00x for Q1 2024.
- EBITDA Covenant: A new minimum consolidated EBITDA covenant for Q1 and Q2 2023 would be tied to total unrestricted cash and unused revolver availability (ranging from a loss of $4.0 million to $10.0 million depending on cash levels).
- Lease Incurrence: New showroom leases would be permitted based on the gross proceeds of the equity offering (e.g., 6 new leases if proceeds are $40M-$45M).
- Maturity Date: The maturity date would spring forward to June 30, 2024, if consolidated EBITDA for 2023 is not greater than $15.0 million.
Outlook, Risks, and Corporate Events
Management Outlook: The company plans to focus on expanding its wholesale business, prioritizing showroom profitability (targeting over $2 million sales per store), and reducing dependency on price promotions. It aims to manage input costs and operating efficiencies to offset gross profit erosion.
Corporate Governance: Director Dawn Zier notified the company on February 9, 2023, that she will not stand for reelection at the 2023 annual meeting to prioritize other commitments. She will remain on the board until her term ends.
Risks and Contingencies:
- Cybersecurity: The company experienced a spear-phishing attack in 2022 resulting in unauthorized changes to a vendor's bank account. Estimated costs are up to $250,000. The company notes ongoing risks of data breaches and evolving privacy regulations.
- Financing Uncertainty: There is no guarantee the credit amendment will be finalized or that the required equity offering will succeed.
- Internal Controls: The filing references potential material weaknesses in internal controls over financial reporting related to IT general controls.
Investor Verification Checklist
- Verify the final audited cash balance and debt figures once the year-end financial statements for 2022 are formally issued.
- Confirm the execution of the proposed Credit Agreement Amendment and the successful completion of the required equity offering.
- Monitor the status of the cybersecurity incident remediation and any additional costs or liabilities arising from the 2022 spear-phishing attack.
- Review the upcoming 2023 Annual Meeting proxy statement regarding the board composition following Dawn Zier's departure.
- Assess the company's ability to meet the new EBITDA and liquidity covenants under the proposed amendment terms.