Business Context and Reporting Period
This Form 8-K, filed on February 21, 2019, by Purple Innovation, Inc. (Purple), reports the consummation of an Amended and Restated Credit Agreement by its operating subsidiary, Purple Innovation, LLC. The transaction was approved by stockholders on February 25, 2019, and closed on February 26, 2019. The filing details a material definitive agreement involving new debt financing, equity warrants, and related security agreements.
Key Financial Metrics and Capital Structure
- Incremental Loan: $10.0 million provided by Lenders (Coliseum Capital Partners, Blackwell Partners, and Coliseum Co-Invest Debt Fund).
- Total Principal Indebtedness: Increased to $35.0 million following the incremental loan.
- Interest Rate: Base rate of 12.0% per annum. Additional interest of up to 4.0% applies if EBITDA thresholds are not met, and an additional 2.0% applies if the Company is not in material compliance with the Sarbanes-Oxley Act.
- Maturity Date: Extended to the five-year anniversary of the satisfaction of closing conditions.
- Prepayment Penalties: Make-whole payment in Year 1; 6.0% in Year 2; 4.0% in Year 3; 2.0% in Year 4.
- Warrants Issued: 2,613,240 warrants to purchase Class A Common Stock at an exercise price of $5.74 per share, expiring February 26, 2024.
- Additional Loan Capacity: Up to $10.0 million available in future drawings, subject to specific approval conditions and warrant issuance.
Material Changes and Covenants
The Amended and Restated Credit Agreement significantly alters the Company's debt structure and imposes strict operational covenants. Key changes include:
- Security Interests: Lenders hold a security interest in substantially all assets of Purple LLC and the Company, including intellectual property.
- Capital Expenditure Limit: Restricted to $20 million annually.
- Debt Restrictions: Capital lease obligations limited to $10 million; asset-based loans limited to $10 million.
- Dividend Restrictions: Purple LLC is restricted from paying dividends or making distributions on its capital stock, subject to limited exceptions.
- EBITDA Thresholds: The Company must maintain EBITDA above certain thresholds at specific measurement dates to avoid higher interest rates.
Outlook, Risks, and Unusual Items
Management Commentary and Future Obligations: The Company has entered into a Registration Rights Agreement requiring the filing of a registration statement by March 29, 2019, for the resale of the warrants and underlying shares. The agreement includes provisions for "Additional Loan Warrants" if future loans are drawn, which could result in the issuance of up to 15,000,000 additional shares if the full $10 million additional loan is utilized at the minimum exercise price of $1.00.
Risks and Contingencies:
- Dilution Risk: Lenders currently beneficially own 5,958,772 shares and warrants for 6,926,630 shares. Full exercise of potential additional warrants could increase Lender ownership to approximately 21.9 million shares.
- Compliance Risk: Failure to meet EBITDA targets or Sarbanes-Oxley compliance triggers higher interest rates.
- Redemption Risk: Warrants are redeemable by the Company if the stock price exceeds $24.00 per share for 20 trading days within a 30-day period.
Unusual Items: The filing includes an option grant to John A. Legg for 250,000 shares at $5.75 per share, vesting over a three-year period.
Investor Verification Checklist
- Verify the current EBITDA status to determine if the 12.0% base interest rate or the higher penalty rates (up to 18.0%) are currently applicable.
- Confirm the status of the Sarbanes-Oxley compliance to assess the potential for the additional 2.0% interest penalty.
- Review the Company's cash flow projections to ensure compliance with the $20 million annual capital expenditure cap and the ability to service the $35 million debt load.
- Monitor the stock price relative to the $24.00 threshold to assess the risk of warrant redemption.
- Check the filing of the registration statement for the warrants, which was required by March 29, 2019.