ITEM 1A. RISK
FACTORS
Except as described
below, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 9, 2020.
Risks
Related to Our Business
We
may experience significant fluctuations in our operating results and growth rate, which could adversely affect our performance
and financial results.
Our
revenue growth may not be sustainable, and our percentage growth rates may decrease. Our revenue and operating profit growth depend
on the continued growth of demand for our products, and our business is affected by general political, economic and business conditions
worldwide. Our business, our employees and our partners may also be negatively affected by political or social unrest including
potential reputational damage, disruption of our physical facilities or those of our wholesale partners, and boycotts by employees
or boycotts against us, our suppliers, our wholesale partners and our advertising partners. A softening of demand, whether caused
by changes in customer confidence or preferences or a weakening of the U.S. or global economies, may result in decreased revenue
or growth.
In
addition, we rely on estimates and forecasts of our expenses and revenues to provide guidance and inform our business strategies,
and some of our past estimates and forecasts have not been accurate. The rapidly evolving nature of our business makes forecasting
operating results difficult. If we fail to accurately forecast our expenses and revenues, our business, prospects, financial condition
and results of operations may suffer, and the value of our business may decline. If our estimates and forecasts prove incorrect,
we may not be able to adjust our operations quickly enough to respond to lower than expected sales or higher than expected expenses.
Our
sales and operating results will also fluctuate for many other reasons, including due to risks described elsewhere in this section
and the following:
|
●
|
our
ability to attract new customers and the cost of acquiring new customers;
|
|
●
|
our
ability and the time required to develop new Mattress Max machines, develop new production lines, scale production capacity and
appropriately train staff;
|
|
●
|
the
success of our wholesale business and our Company showroom expansion efforts;
|
|
●
|
our
ability to have enough production capacity to meet customer demand;
|
|
●
|
our
ability to effectively manage increasing sales and marketing expenses;
|
|
●
|
our
access to sufficient capital resources and liquidity to fund the growth of our business;
|
|
●
|
competition
from the sublicensees of intellectual property licensed back to EdiZONE even if we subsequently acquired from EdiZONE its rights
under such licenses;
|
|
●
|
our
ability to offer products on favorable terms, manage inventory, fulfill orders and manage product returns;
|
|
●
|
the
introduction of competitive products, services, price decreases, discounts, or improvements;
|
|
●
|
timing,
effectiveness, and costs of expansion and upgrades of our systems and infrastructure;
|
|
●
|
the
success of our geographic and product line expansions, including but not limited to power requirements, labor needs, and ease
of product distribution;
|
|
●
|
the
success of hiring, expeditiously training, and retaining engaged labor locally and worldwide;
|
|
●
|
our
ability to secure and retain superior global partners for specialized delivery services;
|
|
●
|
the
extent to which we use debt or equity financing, and the terms of any such financing for, our current operations and future growth;
|
|
●
|
the
outcomes of legal proceedings, claims, or governmental investigations or rulings, which may include significant monetary damages
or injunctive relief and could have a material adverse impact on our operating results;
|
|
●
|
the
ability to obtain patent and other intellectual property rights of exclusive use, and the enforceability and validity of our intellectual
property rights;
|
|
●
|
our
ability to accommodate variations in the mix of products we sell;
|
|
●
|
variations
in our level of product returns, as well as our methods of collecting product returns or exchanges;
|
|
●
|
the
extent to which we offer free shipping;
|
|
●
|
the
extent to which we invest in technology and content, manufacturing, fulfillment, and other expense categories;
|
|
●
|
increases
in the prices of materials used in the manufacturing of our products or the costs to produce our products, including but not limited
to new or unanticipated tariffs;
|
|
●
|
our
ability to anticipate and prepare for disruptions to manufacturing;
|
|
●
|
the
extent to which operators of the networks between our customers and our websites successfully charge fees to grant our customers
unimpaired and unconstrained access to our online services;
|
|
●
|
our
ability to collect amounts owed to us when they become due;
|
|
●
|
the
extent to which our internal network or website is affected by denial of service attacks, malicious unauthorized access, outages,
and similar events;
|
|
●
|
the
extent to which our internal network is affected by spyware, viruses, phishing and other spam emails, intrusions, data theft,
downtime, and similar events;
|
|
●
|
our
ability to manage the expenses associated with multiple facilities;
|
|
●
|
our
ability to secure attractive real estate locations for expansion with sustainable cost structures; and
|
|
●
|
our
ability to protect inventory assets from internal and external theft or damage.
|
We
have a short operating history in an evolving industry and, as a result, our past results may not be indicative of future operating
performance.
We
are a rapidly growing business with a short operating history. Our relatively short operating history makes it difficult to assess
our future performance. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing
companies in rapidly developing and changing industries, including challenges in forecasting accuracy, determining appropriate
investments of our limited resources, market acceptance of our products and services and future products and services, competition
from new and established companies, including those with greater financial and technical resources, enhancing our products and
services and developing new products and services.
For
the years ended December 31, 2019 and 2018, we incurred net losses of ($12.4) million and ($19.6) million, respectively.
In 2019, we generated $22.9 million of operating cash flow and ended the year with working capital of $27.3 million
and an accumulated deficit of $8.3 million. In 2018, we experienced negative operating cash flow of $21.7 million and
ended the year with negative working capital of $0.9 million, and an accumulated deficit of $4.3 million. We need positive
cash flow from operations and additional capital to execute our business plan and growth initiatives. If we are unable to satisfy
our liquidity and capital resource requirements our business could become adversely affected.
You
should consider our business in light of the risks and difficulties we may encounter, as described above and elsewhere in this
“Risk Factors” section. If we fail to address the risks and difficulties that we face, our business and operating
results will be adversely affected.
The
growth of our business places significant strain on our resources and if we are unable to manage our growth, we may not have profitable
operations or sufficient capital resources.
We
are rapidly and significantly expanding our operations, including expanding our workforce, increasing our product offerings and
scaling our infrastructure to support expansion of our manufacturing capacity, our wholesale channel expansion and the opening
of our Company showrooms. Our planned growth includes increasing our manufacturing capacity, developing and introducing new products
and developing new and broader distribution channels, including wholesale and Company showrooms, and extending our global reach
to other countries. This expansion increases the complexity of our business and places significant strain on our management, personnel,
operations, systems, technical performance, financial resources, and internal financial control and reporting functions.
Our
continued success depends, in part, upon our ability to manage and expand our operations and facilities and production capacity
in the face of continued growth. The growth in our operations has placed, and may continue to place, significant demands on our
management and operational and financial infrastructure. If we do not manage our growth effectively, the quality of our products
and fulfillment capabilities may suffer which could adversely affect our operating results. Our revenue growth may not be sustainable,
and our percentage growth rates may decrease. If we are unable to satisfy our liquidity and capital resource requirements, we
may have to scale back, postpone or discontinue our growth strategies, which could result in slower growth or no growth, and we
may run the risk of losing key suppliers, we may not be able to timely satisfy customer orders, and we may not be able to retain
all of our employees. In addition, we may be forced to restructure our obligations to creditors or pursue work-out options.
Our
growth depends in part on our ability to manage the opening and operating of new production facilities and our Company showrooms
which will require our entering into leases and other obligations while the success of expanding operations geographically and
opening additional Company showrooms remains unproven. To be successful, we will need to obtain or develop retail expertise and
we will need to hire new employees in states that may have employment laws that could increase our expenses. In general, operating
new production facilities and opening our Company showrooms in new locations exposes us to laws in other states, including California,
that may not be as employer-friendly as those in which we currently operate, and may expose us to new liabilities. If we are not
able to successfully manage the process of expanding operations geographically, opening our Company showrooms and maintaining
operations in an expanding number of facilities and Company showrooms, we may have to close Company showrooms and incur sunk costs
and continuing obligations that could put a strain upon our resources, damage our brand and reputation and limit our growth.
To
manage our growth effectively, we will need to continue to implement operational, financial and management controls and reporting
systems and procedures and improve the systems and procedures that are currently in place. There is no assurance that we will
be able to fulfill our staffing requirements for our business, successfully train and assimilate new employees, or expand our
management base and enhance our operating and financial systems. Failure to achieve any of these goals will prevent us from managing
our growth in an effective manner and could have a material adverse effect on our business, financial condition or results of
operations. In addition, our revenue and operating profit growth depends on the continued growth of demand for the products offered
by us, and our business is affected by general economic and business conditions worldwide. A softening of demand, whether caused
by changes in customer preferences or a weakening of the U.S. or global economies, may result in decreased revenue or growth.
Further, we may not be able to accurately forecast our growth rate. We base our expense levels and investment plans on sales estimates.
A significant portion of our expenses and investments is fixed, and we may not be able to adjust our spending quickly enough if
our sales are less than expected.
We
identified a need for internal controls to avoid delays in the timely delivery of our new mattress products and to improve the
customer’s experience. Also, we have experienced rapid growth in our employee base, and the need to implement controls and
procedures for improving employee training and retention. Competition for employees where our production facilities are located
also has increased the costs for employee retention. We have implemented improved controls and procedures in an environment of
continuous change but our use of resources may not be as effective as intended or we may need to apply more resources than expected
to continue to make changes to improve our employee retention and effectiveness and the quality of our products and services over
time. If we are unable to make continuous improvement, achieve greater efficiencies in our operating expenses and improve our
products and services, our business could be adversely affected.
We
may need additional capital to execute our business plan and fund operations and may not be able to obtain such capital on acceptable
terms or at all.
In
connection with the development and expansion of our business, we expect to incur significant capital and operational expenses.
We believe that we can increase our sales and net income by implementing a growth strategy that focuses on (i) increasing
our manufacturing capacity, including by establishing additional manufacturing locations; (ii) increasing our direct-to-consumer sales;
(iii) expanding our wholesale distribution channel; (iv) opening our Company showrooms; (v) expanding our global
sales; (vi) engaging global partners to improve distribution efficiencies and cost savings; and (vii) product assortment
and category expansion.
We
believe that our cash flow from operations, together with other available sources of liquidity, including the exercises of
warrants for cash and additional cash we received and may have further access to under that certain Credit Agreement dated
September 3, 2020(the “2020 Credit Agreement”) by and between Purple LLC and KeyBank National Association leading
a group of financial institutions(the “Institutional Lenders”), including the available revolving credit facility
under the 2020 Credit Agreement, will be sufficient to fund anticipated operating expenses, growth initiatives and our other
anticipated liquidity needs for the next twelve months, based on our current operating conditions. However, our ability to
obtain other capital resources and sources of liquidity may not be sufficient to support future growth strategies. If we are
unable to satisfy our liquidity and capital resource requirements, we may have to scale back, postpone or discontinue our
growth strategies, which could result in slower growth or no growth, and we may run the risk of losing key suppliers, we may
not be able to timely satisfy customer orders, and we may not be able to retain all of our employees. In addition, we may be
forced to restructure our obligations to creditors, pursue work-out options or other protective
measures.
While
we have access to a $55 million revolving credit facility under the 2020 Credit Agreement, our ability to access such funds
is subject to certain conditions, which we may not be able to satisfy at such time that we seek to draw on the revolving
credit facility. Further, our ability to obtain additional or alternative capital on acceptable terms or at all is subject to
a variety of uncertainties, including approval from the Institutional Lenders under the 2020 Credit Agreement. Adequate
financing may not be available or, if available, may only be available on unfavorable terms. The restrictive covenants in the
2020 Credit Agreement may make it difficult to obtain additional capital on terms that are favorable to us, and the we may
not be able to satisfy the conditions necessary to obtain additional funds pursuant to the revolving credit facility under
the 2020 Credit Agreement. There is no assurance we will obtain the capital we require. As a result, there can be no
assurance that we will be able to fund our future operations or growth strategies. In addition, future equity or debt
financings may require us to also issue warrants or other equity securities that are likely to be dilutive to our existing
stockholders. Newly issued securities may include preferences or superior voting rights or may be combined with the issuance
of warrants or other derivative securities, which each may have additional dilutive effects. Furthermore, we may incur
substantial costs in pursuing future capital and financing, including investment banking fees, legal fees, accounting fees,
printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in
connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our
financial condition. If we cannot raise additional funds on favorable terms or at all, we may not be able to carry out all or
parts of our long-term growth strategy, maintain our growth and competitiveness or continue in business.
Changes
in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters
could significantly affect our financial results.
Generally
accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard
to a wide range of matters that are relevant to our business are complex and involve many subjective assumptions, estimates and
judgments by our management, including but not limited to estimates that affect our revenue recognition, accounts receivable and
allowance for doubtful accounts, valuation of inventories, cost of revenues, sales returns, warranty liabilities, the recognition
and measurement of loss contingencies, warrant liabilities, estimates of current and deferred income taxes, deferred income tax
valuation allowances and amounts associated with our Tax Receivable Agreement with InnoHold (the “Tax Receivable Agreement”).
Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management
could significantly change our reported or expected financial performance, and could have a material adverse effect on our business.
Our
expansion into new products, market segments and geographic regions subjects us to additional business, legal, financial, and
competitive risks.
The
majority of our sales are made directly to consumers through our website or certain other e-commerce platforms. We have
been expanding our business into the wholesale distribution channel through relationships with our wholesale partners but there
can be no assurance that we will continue to experience success with our wholesale partners or that anticipated new locations
will be successful.
We
may be unsuccessful in generating additional sales through wholesale channels. We may extend credit terms in connection with such
relationships and such relationships may expose us to the risk of unpaid or late paid invoices. In addition, we may provide fixtures
to such partners that may be difficult to recover or re-use. Our wholesale customers may not purchase our products in the volume
we expect.
Profitability,
if any, from sales to wholesale customers and new product offerings may be lower than from our direct-to-consumer model
and current products, and we may not be successful enough in these newer activities to recoup our investments in them. If any
of these issues were to arise, they could damage our reputation, limit our growth, and negatively affect our operating results.
We
may be unsuccessful in opening any of our Company showrooms beyond the store we currently have at our headquarters in Lehi, Utah,
the Company factory outlet in Salt Lake City, Utah and the newly opened Company showrooms in San Diego, California, Santa Clara,
California, Santa Monica, California, Austin, Texas and Tysons Corner, Virginia. We have limited experience in opening and operating
our Company showrooms. Operating our Company showrooms includes additional risks. For example, we will incur expenses and accept
obligations related to additional leases, insurance, distribution and delivery challenges, increased employee management, and
new marketing challenges. If we are not successful in our efforts to profitably operate these new stores, our reputation and brand
could be damaged, growth could be limited, and our business may be harmed.
In
addition, offerings of new products through our direct-to-consumer platform, wholesale distribution channel and our
Company showrooms may present new and difficult challenges, and we may be subject to claims if customers of these offerings experience
service disruptions or failures or other quality issues. Expansion of sales channels may require the development of additional,
differentiated products to avoid price and distribution conflicts between and within sales channels. Wholesale expansion increases
our risk as our wholesale partners will require delaying payments to us on net terms ranging from a few days to 60 or more days,
or may delay paying us beyond the agreed-upon net terms or fail to pay. Our Company showroom expansion increases our risk for
inventory shrinkage from destruction, theft, obsolescence and factors that render such inventory unusable or unsellable.
New
products may come with the same warranty and return risks as mentioned above. New product offerings or expansion into new market
channels or geographic regions may subject us to new or additional regulation, which would impose potentially significant compliance
and distribution costs.
The
ongoing COVID-19 pandemic and responses thereto have adversely affected and may continue to adversely affect aspects of our business,
including, among other things, our supply chain, workforce, and operations.
The
COVID-19 pandemic has resulted in far-reaching economic and financial disruptions that have adversely affected, and are likely
to continue to adversely affect, the Company’s business, financial condition, capital, liquidity and results of operations.
Almost all U.S. states and many local jurisdictions have issued at various times, and others in the future may issue, “shelter-in-place”
orders, quarantines, executive orders and similar government orders, restrictions, and recommendations for their residents to
control the spread of COVID-19. Such orders, restrictions and recommendations, and the perception that additional orders, restrictions
or recommendations could occur, have resulted in widespread closures of businesses not deemed “essential,” work stoppages,
slowdowns and delays, work-from-home policies, travel restrictions and cancellation of events, as well as increased volatility
in stock prices, among other effects. While certain jurisdictions have begun easing restrictions, we cannot be certain that other
jurisdictions will do so. Furthermore, many jurisdictions have experienced a resurgence in COVID-19 cases, which has prompted
governments to reinstate previously scaled back restrictions. If other jurisdictions experience a resurgence in COVID-19 cases,
they may also prolong restrictions or adopt additional restrictions that could negatively affect our business, including, but
not limited to, requiring us to close our manufacturing facilities. In addition, policies in the United States regarding the government
response to the COVID-19 pandemic may further change as a result of recent elections.
We
continue to monitor our operations and government mandates and may elect or be required to temporarily close our offices, manufacturing
plants or Company showrooms to protect our employees, and limit our access to customers and limit customer use of our products
as they are required to prioritize resources to address the public healthcare needs arising from the COVID-19 pandemic. The disruptions
to our activities and operations may negatively impact our business, operating results and financial condition. There is a risk
that government actions, or lack thereof, will not be effective at containing COVID-19, and that government actions or inactions,
including the orders and restrictions described above and premature lessening of those restrictions, that are intended to contain
the spread of COVID-19 while also minimizing harm to the economy, will have a devastating negative impact on the world economy
at large, in which case the risks to our sales, operating results and financial condition described herein would be elevated significantly.
The
duration of the COVID-19 pandemic’s impact on our business may be difficult to assess or predict. The widespread pandemic
has resulted, and may continue to result for an extended period, in significant disruption of global financial markets, and may
restrict our ability to access capital, which would negatively affect our liquidity. While we have been able to reverse some previous
actions undertaken, such as, among others, temporarily deferring capital expenditures, furloughing certain employees, and temporarily
deferring compensation for our senior executives, we may be required to take such actions again, or take additional actions, if
there is a resurgence of COVID-19 cases or reinstatement of government restrictions. As a result of such actions or restrictions,
we may be unable to complete capital expenditure projects or investments in the future, which would limit our ability to grow
our business, and our results of operations and financial condition will be adversely affected.
Further,
quarantines or government reaction or shutdowns for COVID-19 could disrupt our supply chain. Travel and import restrictions may
also disrupt our ability to manufacture or distribute our products. Any import or export or other cargo restrictions related to
our products or the raw materials used to manufacture our products would restrict our ability to manufacture and ship products
and harm our business, financial condition and results of operations. Our key personnel and other employees could also be affected
by COVID-19, potentially reducing their availability. In addition, the government responses to COVID-19 or the procedures we take
to mitigate its effect on our workforce could reduce the efficiency of our operations or prove insufficient to mitigate the adverse
impact of COVID-19 on our business. We may delay or reduce certain capital spending and related projects until the travel and
logistical impacts of COVID-19 are lifted, which could delay the completion of such projects.
Even
after initial quarantines and other government restrictions are scaled back, there is risk that we will be unable to continue
normal production and operations, due to, among other things, disruptions and delays in our supply chain, reduced demand in our
wholesale channel and Company showrooms, government relief programs that enable production workers to remain out of the workforce,
and difficulties in ramping up our own operations. We may also experience disputes with our suppliers and/or customers as a result
of such difficulties. Further, there may be subsequent outbreaks of COVID-19, particularly as we enter the winter season, that
could disrupt our operations. In addition, as employees return to work, we may face claims by such employees or regulatory authorities
that we have not provided adequate protection to our employees with respect to the spread of COVID-19 at our facilities.
The
global outbreak of COVID-19 continues to rapidly evolve. The ultimate impact of the COVID-19 outbreak is highly uncertain and
subject to change. We do not yet know the full extent of potential delays or impacts on our business or the global economy as
a whole. However, these effects have harmed our business, financial condition and results of operations in the near term and could
have a continuing material impact on our operations, sales and ability to continue as a going concern. To the extent the COVID-19
pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks
described in this “Risk Factors” section, such as those relating to our high level of indebtedness,
our need to generate sufficient cash flows to service our indebtedness and our ability to comply with the covenants contained
in the agreements that govern our indebtedness.
Customer
demand for and our ability to sell and market our products, particularly within our wholesale and Company showroom businesses,
has been and may in the future be adversely affected by the COVID-19 pandemic and responses thereto.
The
COVID-19 pandemic has created significant uncertainty in our business, slowed our anticipated wholesale partner and showroom plans
and resulted in a temporary contraction of our wholesale and Company showroom businesses due to temporary shutdowns of non-essential
businesses, reduced demand for physical retail locations, and shelter-at-home and social distancing directives in most U.S. states.
The future impact to our wholesale partners and consumer demand from the COVID-19 pandemic or a future health epidemic or other
outbreak occurring in other locations, particularly in North America, is unknown. If we fail to anticipate changes in demand or
consumer behavior resulting from the COVID-19 pandemic or other outbreaks it could adversely affect our business or operating
results.
If
sales in our channels decline, including as a result of stay-at-home orders, social distancing mandates, temporary closures of
or decreased shopping in our wholesale partners’ stores or our Company showrooms, or deteriorating general economic conditions,
our business may be adversely affected. Moreover, we may be impacted by difficulties experienced by our wholesale partners as
a result of the COVID-19 pandemic, including disruptions in their supply chains, their liquidity challenges and their ability
to keep open or reopen retail locations. In addition, while in the quarter ended September 30, 2020 we experienced an increase
in demand for our products through our DTC channel, there can be no guarantee that sales through our DTC channel will continue
to increase or will not decline.
We
may not be eligible to participate in some of the relief programs provided under the recently adopted Coronavirus Aid Relief,
and Economic Security (CARES) Act or other government programs and even if we are eligible we may not realize any material benefits
from participating in such programs.
On
March 27, 2020, the President of the United States signed the Coronavirus Aid Relief, and Economic Security (CARES) Act into
law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer
side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to
the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.
We continue to evaluate the applicability of the CARES Act to the Company, and the potential impacts on our business and are actively
taking advantage of applicable programs.
While
we may determine to apply for programs available under the CARES Act, there is no guarantee that we will meet any eligibility
requirements to participate in such programs or, even if we are able to participate, that such programs will provide meaningful
benefit to our business. In addition to the CARES Act in connection with the COVID-19 pandemic, the U.S. government and state/local
governments may offer additional programs intended to assist employers. We may fail to qualify for or take advantage of such COVID-19
relief programs, which may have a negative impact on our business. In the event we obtain financing through a government COVID-19
stimulus program, such financing may impose additional restrictions on our business and how those funds are used, such as bringing
employees back from furlough even if production levels remain reduced, restrictions on the payment of distributions or dividends
and limits on executive pay that could adversely affect our ability to recruit and retain qualified key employees. In addition,
previously adopted government programs designed to provide assistance to businesses and consumers may not be sufficient and further
assistance may not be provided.
Our
future growth and profitability depend upon the strength of our Purple brand and the effectiveness and efficiency of our marketing
programs and our ability to attract and retain customers.
We
are highly dependent on the effectiveness of our marketing messages and the efficiency of our advertising expenditures in generating
consumer awareness and sales of our products. We continue to evolve our marketing strategies, adjusting our messages, the amount
we spend on advertising and where we spend it. We may not always be successful in developing effective messages and new marketing
channels, as consumer preferences and competition change, and in achieving efficiency in our advertising expenditures.
We
depend heavily on internet-based advertising to market our products through internet-based media and e-commerce platforms. If
we are unable to continue utilizing such platforms, if those media and platforms diminish in importance or size, or if we are
unable to direct our advertising to our target consumer groups, our advertising efforts may be ineffective, and our business could
be adversely affected. The costs of advertising through these platforms have increased significantly, which has resulted in decreased
efficiency in the use of our advertising expenditures, and we expect these costs may continue to increase in the future.
We
have relationships with online services, search engines, affiliate marketing websites, directories and other website and e-commerce businesses
to provide content, advertising and other links that direct customers to our website. We rely on these relationships as significant
sources of traffic to our website and to generate new customers. If we are unable to develop or maintain these relationships or
develop and maintain new relationships for newly developed and necessary marketing services on acceptable terms, our ability to
attract new customers and our financial condition would suffer. In addition, current or future relationships or agreements may
fail to produce the sales that we anticipate. The cost of advertising for web-based platforms, such as Facebook, are
increasing. Increasing advertising costs erode the efficiency of our advertising efforts. If we are unable to effectively manage
our advertising costs or if our advertising efforts fail to produce the sales that we anticipate, our business could be adversely
affected.
On
October 20, 2020, the United States Department of Justice brought an antitrust lawsuit against Google claiming that Google improperly
uses its monopoly over Internet search to impede competition and harm consumers. Our cost of advertising on Google may remain
high if Google’s monopoly over Internet searches is not prevented and competitive search engines are not allowed to compete.
Alternatively, if Google is required because of this lawsuit to split up the company or sell assets, there is no assurance this
will decrease advertising costs and it may lead to increased costs due to an increased number of service providers who obtain
oligopoly power to control advertising costs. Although this lawsuit may lower our advertising costs, there is risk that it may
not and would lead to increased costs which would reduce our profitability and harm our business.
Consumers
are increasingly using digital tools as a part of their shopping experience. As a result, our future growth and profitability
will depend in part on (i) the effectiveness and efficiency of our online experience for disparate worldwide audiences, including
advertising and search optimization programs in generating consumer awareness and sales of our products, (ii) our ability
to prevent confusion among consumers that can result from search engines that allow competitors to use or bid on our trademarks
to direct consumers to competitors’ websites, (iii) our ability to prevent Internet publication or television broadcast
of false or misleading information regarding our products or our competitors’ products, (iv) the nature and tone of
consumer sentiment published on various social media sites, and (v) the stability of our website. In recent years, a number
of direct-to-consumer, Internet-based retailers, like us, have emerged and have driven up the cost of basic search terms,
which has and may continue to increase the cost of our Internet-based marketing programs. More recently, the large traditional
mattress manufacturers have been increasing their efforts to increase their direct-to-consumer sales which also is increasing
the cost of our Internet-based marketing programs and cost of customer conversion.
In
the past, we have been the target of publications by purported consumer reviewers who claim to have identified health and safety
concerns with our products. While we believe such claims to be baseless, refuting such claims requires us to expend significant
resources to educate current and potential customers on the safety of our products. Even if we are able to broadly disseminate
factual information to refute such claims and reinforce the safety of our products, such claims and attendant adverse publicity
could persist and damage our reputation and brand value and result in lower sales.
The
number of third-party review websites is increasing, and such reviews are becoming increasingly influential with consumers. Negative
reviews from such sources may receive widespread attention from consumers, which could damage our reputation and brand value and
result in lower sales. If we are unable to effectively manage relationships with such reviewers to promote accurate reviews of
our products, reviewers may decline to review our products or may post reviews with misleading information, which could damage
our reputation and make it more difficult for us to improve our brand value.
If
our marketing messages are ineffective or our advertising expenditures, geographic price-points, and other marketing programs,
including digital programs, are inefficient in creating awareness and consideration of our products and brand name and in driving
consumer traffic to our website, our sales, profitability, cash flows and financial condition may be adversely impacted. In addition,
if we are not effective in preventing the publication of confusing, false or misleading information regarding our brand or our
products, or if there arises significant negative consumer sentiment on social media regarding our brand or our products, our
sales, profitability, cash flows and financial condition may be adversely impacted.
Our
future growth and profitability depend, in part, upon our ability to achieve and maintain sufficient production capacity to meet
customer demands.
We
manufacture our mattresses using our proprietary and patented Mattress Max™ machinery to make our Hyper-Elastic Polymer® cushioning
material. Because of the unique features of our Mattress Max machines, new machines are not readily available and must be constructed.
We also have experienced inefficiencies in sourcing of materials and production of finished products. We have taken steps to improve
our processes and capabilities, but if we are unable to maintain our improvements and continue our improvement initiatives to
increase efficiencies or if we are unable to promptly and efficiently open our new Georgia manufacturing facility, we may not
be able to keep up with demand which would harm our business. If we are unable to construct new Mattress Max machines and implement
them into our production process in a timely manner, if our existing Mattress Max machines are unable to function at the desired
capacity, or if we are unable to develop replacements for the existing Mattress Max machines if such replacements should become
necessary, our production capacity may be constrained and our ability to respond to customer demand may be adversely impacted.
We manufacture mattresses and other products using components provided by third-party suppliers. If those third-party suppliers
are unable to provide us with such components or if our assembly capacity is insufficient our ability to respond to customer demand
may be adversely impacted. This would negatively impact our ability to grow our business and achieve profitability.
We
have engaged in significant related-party transactions with affiliates and owners that may give rise to conflicts of interest,
result in losses to the Company or otherwise adversely affect our operations and the value of our business.
We
have engaged in numerous related-party transactions involving significant shareholders, directors, and officers of the Company,
as well as with other entities affiliated with such persons. Several of these transactions were entered into prior to the Business
Combination. For example, since 2010, we have leased our facilities in Alpine, Utah from TNT Holdings, which is owned by Tony
Pearce and Terry Pearce. As we grow, and our needs change, we may need to negotiate a termination or modification of this lease,
and we have recently amended this lease to shift responsibility from TNT Holdings to the Company for arranging certain types of
insurance. We have leased a new facility in Lehi, Utah and moved our headquarters into that building during the first quarter
2020. The Company continues to lease the Alpine facility that was formerly the Company headquarters, for use in production, research
and development and video production. We also may at some time purchase this Alpine facility from TNT Holdings. Tony and Terry
Pearce, either personally or through one or more of their other entities, also have tangible property located in this Alpine facility
that has not been clearly identified and separated from our property. Although we expected this tangible property to be either
removed or identified and separated in 2019, this has not yet occurred. Tony and Terry Pearce pay no rent or other compensation
to us to store such property in our leased facility. While there is currently no dispute over the lease, and we do not anticipate
a dispute, there could arise in the future a dispute between the Company and Tony and Terry Pearce over this lease, or ownership
of the property located at this facility. Tony Pearce and Terry Pearce served on our board of directors until August 17,
2020 and, through InnoHold, owned a majority of the outstanding shares of our common stock until all their interests were sold
in secondary public offerings ending in September 2020.
Prior
to the Business Combination, we also entered into an Amended and Restated Confidential Assignment and License Back Agreement
with EdiZONE, an entity beneficially owned and controlled by Tony Pearce and Terry Pearce through their ownership of TNT
Holdings, pursuant to which EdiZONE transferred tangible and intellectual property to us and we licensed back to EdiZONE
certain intellectual property previously licensed by EdiZONE to third parties prior to the Business Combination in order to
enable EdiZONE to continue to meet certain pre-existing license obligations to those third parties. EdiZONE and the
Pearces have agreed to not modify or extend these third-party licenses and to not enter new third-party licenses. As these
third-party license obligations end all rights under the license revert to the Company. These third parties include direct
competitors to us that at the time of the Business Combination were not selling products through retail channels in which we
were selling our products. One of these third parties is Advanced Comfort Technologies, Inc. dba Intellibed
(“ACTI”), a domestic competitor of ours, who sells mattresses through some of the same retailers through which we
also sell our products. On August 14, 2020, Purple LLC entered into a License Transfer and IP Assignment Agreement with
EdiZONE, pursuant to which EdiZONE assigned the ACTI License Agreement, and related royalties payable thereunder, to Purple
LLC, along with the trademarks GEL MATRIX and INTELLIPILLOW. In connection with such assignment, we agreed to indemnify
EdiZONE against claims by ACTI against EdiZONE relating to EdiZONE’s breach under the License Agreement, claims arising
out of the execution of the EdiZONE Agreement, or Purple LLC’s ownership, enforcement or breach of the License
Agreement. The intellectual property so assigned remains subject to other licenses granted by EdiZONE to third parties, which
licenses are retained by EdiZONE. ACTI’s sales revenues have been increasing, resulting in increasing royalties paid by
ACTI to the Company pursuant to a the ACTI License Agreement. Another third-party licensee may make it difficult for us to
expand into certain geographic regions, such as the European Union. While the current license back to EdiZONE, as amended
following the Business Combination, is much narrower than the license that existed at the time of the Business Combination,
these third-party licenses, including licenses by EdiZONE to a potential foreign competitor and obligations owed to the
Company related to the ACTI License Agreement, may lead to conflicts of interest between us and EdiZONE. At the time this
initial assignment from and license back to EdiZONE was first entered into, Purple LLC had only Tony and Terry Pearce as
directors. Subsequent to the Business Combination, the license to EdiZONE was amended to broaden our rights and narrow
EdiZONE’s rights with the approval of our independent directors, and the recent acquisition of the ACTI License
Agreement also was approved by our independent directors.
Prior
to the Business Combination, we also entered into a Shared Services Agreement with other entities controlled by Tony Pearce and
Terry Pearce, including EdiZONE, which covered the provision of services to these entities by our employees. The Shared Services
Agreement was terminated by us effective July 24, 2019. No legal or accounting services were provided by Purple LLC during
2019 prior to this termination.
Prior
to the Business Combination, InnoHold, an entity owned by Terry and Tony Pearce and previously a significant stockholder of the
Company, also granted equity incentive awards in Purple LLC to certain key employees at that time. As a result of the structure
of those awards being granted through a separate entity, the equity incentives were required, because of the structure of the
Business Combination, to be exchanged for ownership units in InnoHold, to avoid those equity interests becoming of no value to
the participants. Those participants’ ownership interests had certain restrictions, including vesting requirements. These
equity incentives granted to key employees prior to the Business Combination are forfeited to the extent the grant to an employee
is not yet fully vested at the time that such employee’s employment is terminated. Before and for a period of time since
the Business Combination, all forfeitures occurring from departing employees have inured to the benefit of only the owners of
InnoHold, and not all of our stockholders. This means that the forfeited equity did not increase our currently approved equity
incentive pool. Because the forfeited equity resulting from these departures prior to this distribution was held at InnoHold,
that forfeited equity did not replenish our equity incentive pool and could not be used for equity grants to those who have replaced
and will replace these employees or for other purposes essential to the business. During 2019, to avoid future forfeitures from
inuring only to the benefit of InnoHold’s owners, InnoHold distributed to the incentive participants their pro rata share
of InnoHold’s ownership of Class B Stock in Purple Inc. and Class B Units in Purple LLC, after which any
forfeitures would inure to the benefit of all of our stockholders. InnoHold distributed additional paired shares of Class B Stock in Purple Inc. and Class B Units in Purple LLC which also will be subject to the same vesting requirements and
result in forfeitures inuring to the benefit of all shareholders. Our current equity incentive pool, as approved by the stockholders
prior to the Business Combination in the 2017 Equity Incentive Plan, did not account for the departure, before this distribution
by InnoHold, of such key employees who had existing equity grants through InnoHold, and there is a risk that we will have to seek
approval from the Board and stockholders to refresh the equity incentive pool earlier than anticipated at the time of the Business
Combination because of the unanticipated need to use shares from the existing pool to hire and retain other key employees needed
to achieve the Company’s growth objectives. If the equity pool is not refreshed, there is a risk that we may not be able
to hire and retain such key employees. If the equity pool is refreshed with authorized shares of the Company that are issued in
accordance with our 2017 Equity Incentive Plan, our stockholders will be diluted. Also, this distribution by InnoHold to the equity
incentive participants has caused us to incur administrative expenses related to the distributions, the management of the differing
vesting schedules and compliance with their rights under the distribution agreements. In addition, the calculations of the distributive
share and related income tax withholdings with respect to holders of InnoHold’s Class B Units, as well as the processes
by which such distributions and withholdings are made, are highly complex. As a result, there is a risk that the recipients of
such distributions or other third parties may claim that we have miscalculated the distribution or income tax withholding amounts
or failed to timely pay the taxes. The cost of responding to such claims, including but not limited to the diversion of management’s
attention from our operations and defense or settlement costs, could negatively impact our operations and financial results.
In connection
with the Business Combination, Purple LLC also entered into that certain Credit Agreement dated February 2, with the Lenders,
which was guaranteed by Purple Inc. The Lenders also were stockholders and warrant holders of the Company and appointed one
director to serve on our Board, Adam Gray, who continues to serve on our Board and is affiliated with the Lenders. Further,
on February 26, 2019, the Amended and Restated Credit Agreement between Purple LLC and the Lenders thereto, and each of
the related documents, including the issuance of additional warrants to the Incremental Lenders, was closed and an
incremental loan was funded. In connection with the funding of the incremental loan, we issued to the Incremental Lenders
warrants to purchase shares of our Class A Stock.
On March 27, 2020,
the Amended and Restated Credit Agreement was amended to allow Purple LLC at its election a 5% paid-in-kind interest deferral for
the first two quarters of 2020. On May 15, 2020, the Amended and Restated Credit Agreement was further amended to remove a
negative covenant so that there would not be an event of default if the Lenders acquired 25% or more ownership of the Company.
On August 20, 2020, the Company and Purple LLC entered into a Waiver and Consent to Amended and Restated Credit Agreement
with the Lenders, that, among other things, waives an event of default as a result of InnoHold ceasing to own 25% or more of the
aggregate equity interests in the Company, subject to certain conditions as more fully provided in such waiver
On September 3, 2020,
we paid off the full amount owed and a prepayment premium to the Lenders in the aggregate amount of $45.0 million and terminated
the Amended and Restated Credit Agreement, subject to those provisions that survive termination.
See
“Item 13. Certain Relationships and Related Transactions, and Director Independence” in our Annual Report on Form
10-K for the year ended December 31, 2019 for a further discussion of all related-party transactions between the Company
and insiders.
Disruption
of operations in our manufacturing facilities, including as a result of pandemics or natural disasters, could increase our costs
of doing business or lead to delays in shipping our products.
We
have two manufacturing plants, which are located in Alpine, Utah and Grantsville, Utah. We have signed a lease for and have begun
work on building out a third manufacturing plant in McDonough, Georgia that is not yet manufacturing products.
Although
we can produce some of our products at both Utah sites, we have consolidated production of certain products at each site. Therefore,
the disruption of operations of our manufacturing facilities, particularly where manufacturing has been consolidated, for a significant
period of time, or even permanently, or disruptions to the scheduled build-out of the Georgia facility such as through a closure
related to the COVID-19 pandemic or the loss of the lease, may increase our costs of doing business and lead to delays in shipping
our products to customers. Such delays could adversely affect our sales, customer satisfaction, profitability, cash flows, liquidity
and financial condition. Because both of our currently operating manufacturing plants are located within the same geographic region,
regional economic downturns, natural disasters, closures due to COVID-19 or other issues could potentially disrupt all of our
manufacturing and other operating activities, which could adversely affect our business. On March 18, 2020, Magna, Utah was
the epicenter of a 5.7 magnitude earthquake that was felt approximately 20 miles away at our Grantsville, Utah manufacturing plant
but not felt at our Alpine, Utah manufacturing plant. Since that date, there have been approximately one-thousand aftershocks.
Though no damage occurred at either manufacturing plant from the 5.7 earthquake or its aftershocks, continued or increased earthquake
activity in the area could disrupt manufacturing and other operating activities, which could adversely affect our business.
Significant
product returns could harm our business.
We
allow our customers to return products, subject to our returns policies. If product returns are higher than we anticipate, our
business, prospects, financial condition and results of operations could be harmed. Further, we modify our policies and procedures
relating to returns from time to time, and policies and methods of collecting returned products intended to reduce the number
of product returns may result in customer dissatisfaction. The occurrence of any of the foregoing could have a material adverse
effect on our business.
Adverse
litigation judgments or settlements resulting from legal proceedings in which we may be involved in the normal course of business
could affect our operations and financial condition.
In
the normal course of business, we may from time to time become involved in various legal proceedings. The outcome of these legal
proceedings cannot be predicted. It is possible that an unfavorable outcome of some or all of such matters could cause us to incur
substantial liabilities that may have a material adverse effect upon our financial condition and results of operations. Any significant
adverse litigation, judgments or settlements could have a negative effect on our business, financial condition and results of
operations. Even if we are successful in defending against or prosecuting such litigation, the costs of such litigation, which
may or may not be covered by our insurance, could be significant and have a material adverse effect on our business. The quantity
and scope of legal proceedings could cause an increase in the amount we pay for insurance coverage which could negatively affect
our financial condition.
Our
business could suffer if we are unsuccessful in making, integrating, and maintaining commercial agreements, strategic alliances,
and other business relationships.
To
successfully operate our business, we rely on commercial agreements and strategic relationships with suppliers, service providers
and certain wholesale partners and customers. These arrangements can be complex and require substantial infrastructure capacity,
personnel, and other resource commitments. Further, our business partners may have disruptions in their businesses or choose to
no longer do business with us and the impact of such disruption or choices could be magnified to the extent such business partners
represent a significant part of our business. We may not be able to implement, maintain, or develop the components of these commercial
relationships. Moreover, we may not be able to enter into additional commercial relationships and strategic alliances on favorable
terms or at all.
As
our agreements terminate or relationships unwind, we may be unable to renew or replace these agreements on comparable terms, or
at all. We may in the future enter into amendments on less favorable terms or encounter parties that have difficulty meeting their
contractual obligations to us, which could adversely affect our operating results.
Our
present and future services agreements, other commercial agreements, and strategic relationships create additional risks such
as:
|
●
|
disruption
of our ongoing business, including loss of management focus on existing businesses;
|
|
●
|
impairment
of other relationships;
|
|
●
|
variability
in revenue and income from entering into, amending, or terminating such agreements or relationships; and
|
|
●
|
difficulty
integrating under the commercial agreements.
|
We
have entered into arrangements with several wholesale partners through which we sell certain of our products in their retail stores.
We anticipate increasing the number of these partnerships. Also, we have agreed to exclusivity of certain products with some of
our wholesale partners. Our relationships with our wholesale partners may not be profitable to us or may impose additional costs
that we would not otherwise incur under our prior DTC-only operations. Our wholesale partners may experience their own
business disruptions, including for example bankruptcy, that could affect their ability to continue to do business with us. Our
wholesale partners may engage in conduct that could breach the exclusivity rights of other wholesale partners. Further, maintaining
these relationships may require the commitment of significant amounts of time, financial resources and management attention, and
may result in prohibitions on certain sales channels through exclusivity requirements, which may adversely affect other aspects
of our business.
We
have opened a Company factory outlet and six Company showrooms. Our business is expanding into additional Company showrooms which,
like our online e-commerce retail store, will compete with our wholesale partners for customers. Our relationships with
our wholesale partners may be adversely affected by this competition. In our effort to make our products available to consumers
in multiple retail channels, there is the risk that sales may diminish in other channels, costs may be incurred without an increase
in overall sales and our wholesale partners may no longer carry our products. Managing an omni-channel distribution strategy,
including the relationships with business partners in each channel, may require significant amounts of time, resources and attention
which may adversely affect other aspects of our business.
We
operate in a highly competitive Comfort Industry, and if we are unable to compete successfully, we may lose customers and our
sales may decline.
The
Comfort Industry market is highly competitive and fragmented. We face competition from many manufacturers (including competitors
that primarily manufacture and import from China and other low-cost countries), traditional brick-and-mortar retailers
and online retailers, including direct-to-consumer competitors. Participants in the Comfort Industry compete primarily
on price, quality, brand name recognition, product availability and product performance and compete across a range of distribution
channels. The highly competitive nature of the Comfort Industry means we are continually subject to the risk of loss of market
share, loss of significant customers, reductions in margins, and the inability to acquire new customers.
A
number of our significant competitors offer products that compete directly with our products. Any such competition by established
manufacturers and retailers or new entrants into the market could have a material adverse effect on our business, financial condition
and operating results. Comfort Industry manufacturers and retailers are seeking to increase their channels of distribution and
are looking for new ways to reach the consumer. Like us, many newer competitors in the mattress industry have begun to offer “bed-in-a-box” or
similar products directly to consumers through the Internet and other distribution channels. Some of our established competitors
have begun to offer “bed-in-a-box” products as well. Many of our competitors source their products from
countries such as China and Vietnam, where the costs may be lower than our costs. Companies providing for the distribution of
mattresses online or through retail stores, such as Amazon and Walmart, also have begun to offer competing products in their respective
channels. In addition, retailers outside the U.S. have integrated vertically in the furniture and bedding industries, and it is
possible that retailers may acquire other retailers or may seek to vertically integrate in the U.S. by acquiring a mattress manufacturer.
Many
of our current and potential competitors may have substantially greater financial support, technical and marketing resources,
larger customer bases, longer operating histories, greater name recognition, mature distribution methods, and more established
relationships in the industry than we do and sell products through broader and more established distribution channels. These competitors,
or new entrants into the market, may compete aggressively and gain market share with existing or new products, and may pursue
or expand their presence in the Comfort Industry. We cannot be sure we will have the resources or expertise to compete successfully
in the future. We have limited ability to anticipate the timing and scale of new product introductions, advertising campaigns
or new pricing strategies by our competitors, which could inhibit our ability to retain or increase market share, or to maintain
our product margins. Our current and potential competitors may secure better terms from vendors, adopt more aggressive pricing,
and devote more resources to technology, infrastructure, fulfillment, and marketing. Also, due to the large number of competitors
and their wide range of product offerings, we may not be able to continue to differentiate our products through value, styling
or functionality from those of our competitors. Our products are also typically heavier than others and some markets we wish to
expand into will not support delivery of our heavy products through parcel services or other affordable home delivery services,
limiting our ability to serve the market.
One
competitor, ACTI, which has been a licensee of EdiZONE for over fifteen years until the Company’s recent acquisition of
the ACTI License Agreement from EdiZONE, uses similar technology to our Hyper-Elastic Polymer material and Purple Grid in its
own mattress, topper and pillow products sold through branded retail stores domestically and in Canada. This competitor has been
growing its sales and now distributes its products through wholesale partners with retail locations where our mattresses are sold.
This competitor may continue to increase its sales and expand into additional distribution channels which could erode our sales
in those retail locations and channels. Even with the Company’s receipt of royalties from ACTI pursuant to the ACTI License
Agreement, the continuing growth of this single competitor could adversely affect our business.
A
consolidation of the domestic market for foam may increase the prices for foam in the geographical market in which we purchase
foam, which could adversely affect our business. We source a specialized type of foam from a supplier who has been in bankruptcy,
and the ability of that supplier to remain in business in the short- or long-term may affect our ability to continue to obtain
that specialized foam and require us to modify our product offerings, lose sales or incur increased expenses that could adversely
affect our cash flows, margins and profitability.
In
addition, the barriers to entry into the retail bedding industry are relatively low. New or existing bedding retailers could enter
our markets and increase the competition we face. Competition in existing and new markets may also prevent or delay our ability
to gain relative market share. Any of the developments described above could have a material adverse effect on our planned growth
and future results of operations.
We
will face different market dynamics and competition as we develop new products to expand our presence in our target markets. In
some markets, our future competitors may have greater brand recognition and broader distribution than we currently enjoy. We may
not be as successful as our competitors in generating revenues in those markets due to the lack of recognition of our brands,
lack of customer acceptance, lack of product quality history and other factors. As a result, any new expansion efforts could be
costlier and less profitable than our efforts in our existing markets. If we are not as successful as our competitors are in our
target markets, our sales could decline, our margins could be impacted negatively and we could lose market share, any of which
could materially harm our business.
If
we are unable to effectively compete with other manufacturers and retailers of mattresses, pillows, cushions, and our other products
our sales, profitability, cash flows and financial condition may be adversely impacted.
The
results of the U.S. Department of Commerce’s antidumping investigation could have a negative impact on our planned growth
and future results of operations.
On
December 16, 2019, the U.S. Department of Commerce (“Department”) issued an antidumping duty order directing
the U.S. Customs and Border Protection (“CBP”) to assess, upon further instruction by the Department, antidumping
duties equal to the amount by which the normal value of the merchandise exceeds the export price, or constructed export price,
of the subject merchandise for all relevant entries of mattresses from China. However, if the antidumping duties do not
result in the prevention of dumping of underpriced Chinese mattresses into the U.S. market, or if the import duties enacted by
the Department pursuant to its antidumping order are removed, rescinded, or modified, we could experience or continue to experience
a negative impact on our planned growth and the future results of operations.
In
addition, in March 2020 several U.S. mattress manufacturers and two labor unions announced that they filed seven antidumping duty
petitions and one countervailing duty petition with the Department charging that unfairly traded imports of finished mattresses
from eight countries are causing material injury to the U.S. mattress industry. In April 2020 the Department opened an investigation
into the petitions. In May 2020, the Department rolled out preliminary countervailing duties on Chinese-origin mattresses.
These duties are in addition to the antidumping duties on mattresses from China. If the Department fails to impose antidumping
duties on the seven named exporting countries and/or countervailing duties on China, we could experience continued negative impact
on our planned growth and future results of operations.
Purple
LLC has licensed certain intellectual property to EdiZONE, LLC, which is owned by Tony and Terry Pearce via TNT Holdings, LLC,
for the purpose of enabling EdiZONE to meet its contractual obligations to licensees of EdiZONE under contracts entered into years
before the Business Combination, and some of those licensees are competitors of Purple LLC and have exclusivity rights that Purple
LLC is required to observe.
Purple
LLC has licensed to EdiZONE, LLC, which is an entity owned by Tony and Terry Pearce through TNT Holdings, LLC, certain intellectual
property rights for use by EdiZONE outside of the consumer comfort market. Prior to the Business Combination, EdiZONE’s
business model was the creation and licensing of intellectual property, and it had granted many licenses over time, most of which
were terminated prior to the Business Combination. When EdiZONE assigned its intellectual property to Purple LLC it received in
return a license back of the intellectual property it needed to maintain its contractual obligations under the licenses that still
were in place at that time. After the Business Combination, this license back to EdiZONE has been amended with the cooperation
of Purple LLC, EdiZONE and the Pearces to further narrow EdiZONE’s rights, in order to minimize the conflicts of interest
that may exist. Although there are no conflicts of interest foreseen at this time, if conflicts of interest do arise and are not
properly addressed, disputes may occur which may be detrimental to the Company.
On
August 14, 2020, Purple LLC entered into a License Transfer and IP Assignment Agreement with EdiZONE, pursuant to which EdiZONE
assigned to Purple LLC all its interest in the ACTI License Agreement and the trademarks GEL MATRIX and INTELLIPILLOW. In connection
with such assignment, we agreed to indemnify EdiZONE against claims by ACTI against EdiZONE relating to EdiZONE’s breach
under the License Agreement, claims arising out of the execution of the EdiZONE Agreement, or Purple LLC’s ownership, enforcement
or breach of the License Agreement.
EdiZONE
previously entered into licenses, as described above, for comfort-related intellectual property. These licenses include exclusivity
rights that may prohibit us from selling our existing mattresses or potentially new products in certain geographic areas, including
domestically and in the European Union. That risk may be addressed by redesign of the configuration of the Hyper-Elastic Polymer
in that geographic region by either using existing technologies already assigned by EdiZONE to Purple LLC or developing new technologies.
Alternatively, that risk may not exist at all to the extent Purple LLC’s current mattress products are the subject of expired
patent rights licensed by that licensee or because Purple LLC is not the licensor. However, there can be no assurance that our
future sales in these geographic territories, if any, will not be challenged by the licensee as a violation of the license agreements,
or that any redesigned mattresses created by us will be successful. If Purple LLC’s activities are challenged by a licensee,
Purple LLC has an indemnification obligation to EdiZONE and the Pearces, which may be an expense to the Company.
In
addition, if these third parties violate their licenses or infringe on intellectual property owned by Purple LLC and Purple LLC
is unable to take effective action against such violating or infringing parties, we may be unable to protect against this infringement
or the effects of such violations and our business could be harmed.
Purple
LLC has obtained, with the cooperation of EdiZONE and the Pearces, the right to enforce its intellectual property rights at Purple
LLC’s option, provided that Purple LLC will indemnify EdiZONE and fund the expense of such enforcement. In addition, as
the licensor under the ACTI License Agreement, the Company now has the ability as the direct licensor to enforce its intellectual
property rights against ACTI. In the event such enforcement is deemed necessary by Purple LLC, Purple LLC may not be successful
in any such efforts to enforce its intellectual property and other rights under the ACTI License Agreement and this may harm our
business.
Fluctuations
in the price, availability and quality of raw materials could cause and has caused delays that could result in our inability to
provide goods to our customers or could increase our costs, either of which could decrease our earnings.
In
manufacturing products, we use various commodity components, such as polyurethane foam, oil, our spring units, ingredients for
our Hyper-Elastic Polymer® material, our water-based adhesive and other raw materials. Because we are dependent on outside
suppliers for our raw materials, fluctuations in their price, availability, and quality could have a negative effect on our cost
of sales and our ability to meet our customers’ demands. Competitive and marketing pressures may prevent us from passing
along price increases to our customers, and the inability to meet our customers’ demands could cause us to lose sales.
We
depend on a few key employees, and if we lose the services of certain of our principal executive officers, we may not be able
to run our business effectively.
Our
future success depends in part on our ability to attract and retain key executive, merchandising, marketing, sales, finance, operations
and engineering personnel. If any of our executive officers cease to be employed by us, we would have to hire additional qualified
personnel. Our ability to successfully attract and hire other experienced and qualified executive officers cannot be assured and
may be difficult because we face competition for these professionals from our competitors, our suppliers and other companies operating
in our industry and in our geographic locations. Since the Business Combination, we have hired a new Chief Executive Officer,
Chief Operating Officer, Chief Financial Officer, and a Chief Retail Officer. We have also experienced the departure of the prior
Chief Marketing Officer and the prior Chief Branding Officer. These departures and any delay in replacing these executives could
significantly disrupt our ability to grow and pursue our strategic plans. We are currently in the process of searching for a qualified
replacement for our Chief Marketing Officer. While we believe our new executive officers have benefitted and will continue to
benefit us, finding qualified replacements is time-consuming, takes Company resources, and can disrupt our growth and achievement
of strategic plans.
Further,
the involvement of Tony and Terry Pearce has been crucial to the success of our company because of their extensive experience
with and technical knowledge of our products. On August 17, 2020, Terry Pearce and Tony Pearce retired from our Board of
Directors, and from their positions as Co-Directors of Research & Development. If we are unsuccessful in our efforts
to build out our research and development capabilities around the many technologies conceived by Tony and Terry Pearce, our ability
to develop new technologies and innovative products may be adversely affected.
Our
business exposes us to personal injury, property damage and product liability claims, which could result in adverse publicity
and harm to our brands and our results of operations.
We
may be subject to personal injury, property damage and product liability claims for the products that we sell or related to the
Company showrooms we will operate. Any personal injury, property damage or product liability claim made against us, whether or
not it has merit, could be time consuming and costly to defend, resulting in adverse publicity, or damage to our reputation, and
have an adverse effect on our results of operations. In addition, any negative publicity involving our vendors, employees, labor
contractors, delivery contractors and other parties who are not within our control could negatively impact us.
Further,
the products we sell are subject to regulation by the U.S. Consumer Product Safety Commission (“CPSC”) and similar
state and international regulatory authorities. Such products could be subject to recalls and other actions by these authorities.
Product safety concerns may require us to voluntarily remove selected products from our stores. Such recalls and voluntary removal
of products can result in, among other things, lost sales, diverted resources, potential harm to our reputation and increased
customer service costs, which could have a material adverse effect on our financial condition.
We
previously voluntarily reported to the CPSC concerning a potential defect in an accessory product supplied to us by third parties.
After its review, CPSC staff closed the case with no action by the Commission. We are providing repair parts to customers with
affected products as a warranty matter and are continuing to monitor the issue. We anticipate at this time approximately 30% of
our customers who purchased this product will desire to receive our improvement which we will ship to them at no cost. Since we
will incur the cost of this improvement, if our estimate is too low, we may incur additional expenses. Contacting customers with
this improvement also may result in an increase in warranty claims or claims of injury or damage prior to receiving the improvement
that has not yet been communicated to us. If a customer is harmed by a product failure there also could be litigation and expenses
related to a claim of personal injury, which could harm our brand and reputation and negatively affect our operating results.
We
maintain insurance against some forms of personal injury, property damage and product liability claims, but such coverage may
not be adequate for liabilities actually incurred. A successful claim brought against us in excess of available insurance coverage,
or any claim or product recall that results in significant adverse publicity against us, may have a material adverse effect on
our sales, profitability, cash flows and financial condition.
Regulatory
requirements, including, but not limited to, trade, customs, environmental, health and safety requirements, may require costly
expenditures and expose us to liability.
Our products and our
marketing and advertising programs are subject to regulation in the U.S. by various federal, state and local regulatory authorities,
including the Federal Trade Commission and U.S. Customs and Border Protection. In addition, our operations are subject to federal,
state and local consumer protection regulations and other laws relating specifically to the bedding industry. These rules and regulations
may conflict and may change from time to time, as a result of changes in the political environment or otherwise. There may be continuing
costs of regulatory compliance including continuous testing, additional quality control processes and appropriate auditing of design
and process compliance. For example, the CPSC and other jurisdictions have adopted rules relating to fire retardancy standards
for the mattress industry. Some states and the U.S. Congress continue to consider fire retardancy regulations that may be different
from or more stringent than the current standard. California recently enacted laws effective in 2021 requiring mattress retailers
delivering mattresses via common carrier in California to offer to pick up their customers’ old mattresses. Additionally,
California, Rhode Island and Connecticut have all enacted laws requiring the recycling of mattresses discarded in their states.
State and local bedding industry regulations vary among the states in which we operate but generally impose requirements as to
the proper labeling of bedding merchandise, restrictions regarding the identification of merchandise as “new” or otherwise,
controls as to hygiene and other aspects of product handling, disposal, sales, resales and penalties for violations. We or our
suppliers may be required to incur significant expense to the extent that these regulations change and require new and different
compliance measures. For example, new legislation aimed at improving the fire retardancy of mattresses, regulating the handling
of mattresses in connection with preventing or controlling the spread of bed bugs could be passed, or requiring the collection
or recycling of discarded mattresses, could result in product recalls or in a significant increase in the cost of operating our
business. In addition, failure to comply with these various regulations may result in penalties, the inability to conduct business
as previously conducted or at all, or adverse publicity, among other things. Adoption of multi-layered regulatory regimes, particularly
if they conflict with each other, could increase our costs, alter our manufacturing processes and impair the performance of our
products which may have an adverse effect on our business. We are also subject to various health and environmental provisions,
such as California Proposition 65 (the Safe Drinking Water and Toxic Enforcement Act of 1986) and 16 CFR Part 1633 (Standard for
the Flammability (Open Flame) of Mattress Sets).
Our
marketing and advertising practices could also become the subject of proceedings before regulatory authorities or the subject
of civil claims by competitors and other parties, which could result in civil litigation or regulatory penalties and require us
to alter or end these practices or adopt new practices that are not as effective or are more expensive. Despite our efforts to
comply with all marketing laws and regulations, we may not be in complete compliance at all times. Some competitors engage in
the practice of regularly sending notices alleging non-compliance with certain of these regulations, and demanding proof
of compliance, and while we may believe we comply with applicable regulations, this practice consumes our resources, could lead
to litigation and may have a negative impact on our financial condition.
In
addition, we are subject to federal, state and local laws and regulations relating to pollution, environmental protection and
occupational health and safety. We may not be in complete compliance with all such requirements at all times, and we have been
required in the past to make changes to our facilities in order to comply with these requirements. We have made and will continue
to make capital and other expenditures to comply with environmental and health and safety requirements. If a release of harmful
or hazardous substances occurs on or from our properties or any associated offsite disposal location, or if contamination from
prior activities is discovered at any of our properties, we may be held liable and the amount of such liability could be material.
As a manufacturer of mattresses, pillows, cushions and related products, we use and dispose of a number of substances, such as
glue, oil, solvents and other petroleum products, as well as certain foam ingredients, that may subject us to regulation under
numerous foreign, federal and state laws and regulations governing the environment. Among other laws and regulations, we are subject
in the U.S. to the Federal Water Pollution Control Act, the Comprehensive Environmental Response, Compensation and Liability Act,
the Resource Conservation and Recovery Act, the Clean Air Act and related state and local statutes and regulations.
We
are also subject to federal laws and regulations relating to international shipments, customs, and import controls. We may not
be in complete compliance with all such requirements at all times, and if we are not in compliance with such requirements, we
may be subject to penalties or fines, which could have an adverse impact on our financial condition and results of operations.
Our
operations could also be impacted by a number of pending legislative and regulatory proposals to address greenhouse gas emissions
in the U.S. and other countries. Certain countries have adopted the Kyoto Protocol. New greenhouse gas reduction targets have
been established under the Kyoto Protocol, as amended. This and other initiatives under consideration could affect our operations.
These actions could increase costs associated with our manufacturing operations, including costs for raw materials, pollution
control equipment and transportation. Because it is uncertain what laws will be enacted, we cannot predict the potential impact
of such laws on our future consolidated financial condition, results of operations, or cash flows.
We
are also subject to regulations and laws specifically governing the Internet, e-commerce, electronic devices, and other
services. These regulations and laws may cover taxation, privacy, data protection, pricing, content, copyrights, distribution,
mobile communications, electronic device certification, electronic waste, energy consumption, electronic contracts and other communications,
competition, consumer protection, trade and protectionist measures, web services, the provision of online payment services, information
reporting requirements, unencumbered Internet access to our services or access to our facilities, the design and operation of
websites and the characteristics and quality of products and services. It is not clear how existing laws governing issues such
as property ownership, libel, and personal privacy apply to the Internet, e-commerce, digital content, and web services.
Unfavorable regulations and laws could diminish the demand for, or availability of, our products and services and increase our
cost of doing business.
Claims
have been made against us for alleged violations of the Americans with Disability Act (“ADA”) related to accessibility
to our website by the blind. The law is unsettled as to whether the ADA covers websites and what standards are applicable,
but courts in certain jurisdictions have recognized these types of ADA claims. While we comply with industry standards for making
our website accessible to the blind, and regularly test our site for this purpose, we may be subject to such claims and, as a
result, we may be required to expend resources in defense of these claims that could increase our cost of doing business.
We
have received a claim that one of our products does not have the proper warning label required by California Proposition 65, which
requires businesses to provide warnings to Californians about significant exposures to chemicals that are known to the State of
California to cause cancer, birth defects or other reproductive harm. While we are investigating this claim and generally make
efforts to comply with Proposition 65, we may be subject to such claims and, as a result, we may be required to expend resources
in defense of these claims that could increase our cost of doing business. In addition, to the extent we may have violated Proposition
65 we may incur expense associated with complying including but not limited to providing warnings or product recalls.
We
could be subject to additional sales tax or other indirect tax liabilities.
The
application of indirect taxes (such as sales and use tax, value-added tax (VAT), goods and services tax, business tax and gross
receipt tax) to e-commerce businesses and to our users is a complex and evolving issue and we may be unable to timely
or accurately determine our obligations with respect to such indirect taxes, if any, in various jurisdictions. Many of the fundamental
statutes and regulations that impose these taxes were established before the adoption and growth of the Internet and e-commerce. In
many cases, it is not clear how existing statutes apply to the Internet or e-commerce.
An
increasing number of states and foreign jurisdictions have considered or adopted laws or administrative practices, with or without
notice, that impose additional obligations on remote sellers and online marketplaces to collect transaction taxes such as sales,
consumption, value added, or similar taxes. In 2016 and early 2017, we did not have systems and processes to collect these taxes
in all jurisdictions where we were conducting business. Failure to comply with such laws or administrative practices, or a successful
assertion by such states or foreign jurisdictions requiring us to collect taxes where we did not, could result in substantial
tax liabilities for past sales, as well as penalties and interest. For the amounts incurred in 2016 and early 2017 that remain
unpaid, we have estimated the sales tax liability, including penalties and interest to be approximately $4.2 million. We
are in the process of working with each state to make the necessary filings and take advantage of any amnesty programs or negotiated
settlements. InnoHold has agreed to indemnify us for any such tax liability incurred in 2016 and early 2017, and InnoHold has
placed in escrow $5 million to cover such liability. However, disputes may arise between InnoHold and us, related to such indemnification,
that may increase our costs or delay our reimbursement for such tax liabilities.
We
are subject to sales tax or other indirect tax obligations as imposed by the various states in the United States. If the tax authorities
in these jurisdictions were to challenge our filings or request an audit, our tax liability may increase.
We
may be subject to laws, regulations, and administrative practices that require us to collect information from our customers, vendors,
merchants, and other third parties for tax reporting purposes and report such information to various government agencies. The
scope of such requirements continues to expand, requiring us to develop and implement new compliance systems. Failure to comply
with such laws and regulations could result in significant penalties.
The
U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc., No.17-494, reversed a longstanding precedent that remote sellers
are not required to collect state and local sales taxes. We cannot predict the effect of these and other attempts to impose sales,
income or other taxes on e-commerce. The Company currently collects and reports on sales tax in all states in which it does business.
However, the application of existing, new or revised taxes on our business, in particular, sales taxes, VAT and similar taxes
would likely increase the cost of doing business online and decrease the attractiveness of selling products over the internet.
The application of these taxes on our business could also create significant increases in internal costs necessary to capture
data and collect and remit taxes. There have been, and will continue to be, substantial ongoing costs associated with complying
with the various indirect tax requirements in the numerous markets in which we conduct or will conduct business.
Our
ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
Under
Section 382 and related provisions of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation
undergoes an “ownership change” (generally defined as a greater than 50 percentage point change (by value) in its
equity ownership by certain stockholders over a three year period), the corporation’s ability to use its pre-change net
operating loss carryforwards (“NOLs”) and other pre-change tax attributes to offset its post-change income may be
limited. If finalized, Treasury Regulations currently proposed under Section 382 of the Code may further limit our ability to
utilize our pre-change NOLs or other tax attributes if we undergo a future ownership change. We may have experienced ownership
changes in the past, and we may experience ownership changes in the future and/or subsequent shifts in our stock ownership (some
of which may be outside our control). Thus, our ability to utilize carryforwards of our net operating losses and other tax attributes
to reduce future tax liabilities may be substantially restricted. At this time, we have not completed a study to assess the impact,
if any, of ownership changes on our NOLs under Section 382 of the Code.
We
have identified a material weakness in our internal control over our tax provision process which could, if not remediated, result
in material misstatements in our financial statements.
Our
management has identified a material weakness in our internal controls over financial reporting. A material weakness is defined
as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a
timely basis. In connection with the preparation of our quarterly report for the quarter ended June 30, 2020, we identified
a material weakness in internal controls over the tax provision process, specifically related to the release of the valuation
allowance and the unique recording of the Tax Receivable Agreement liability during the quarter.
We
continue to evaluate, design and work through the process of implementing controls and procedures under a remediation plan designed
to address this material weakness. If our remedial measures are insufficient to address the material weakness, or if additional
material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our financial statements
may contain material misstatements and we could be required to restate our financial results, which could lead to substantial
additional costs for accounting and legal fees and stockholder litigation.
Risks
Relating to Our Organizational Structure
Our
only significant asset is our ownership of Purple LLC and such ownership may not be sufficient to pay dividends or make distributions
or loans to enable us to pay any dividends on our Class A Common Stock or satisfy our other financial obligations, including
our obligations under the Tax Receivable Agreement.
We
are a holding company and do not directly own any operating assets other than our ownership of interests in Purple LLC. We depend
on Purple LLC for distributions, loans and other payments to generate the funds necessary to meet our financial obligations, including
our expenses as a publicly traded company, to pay any dividends, and to satisfy our obligations under the Tax Receivable Agreement.
The earnings from, or other available assets of, Purple LLC may not be sufficient to make distributions or pay dividends, pay
expenses or satisfy our other financial obligations, including our obligations under the Tax Receivable Agreement. Moreover, our
debt covenants may not allow us to pay dividends.
We
are an emerging growth company, and the reduced reporting requirements applicable to emerging growth companies may make our Class A
Common Stock less attractive to investors.
We
are an “emerging growth company” as defined under the Jumpstart Our Business Startups Act (the “JOBS Act”).
For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements
that are applicable to other public companies that are not emerging growth companies, including not being required to comply with
the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”),
reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements and exemptions from the
requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute
payments not previously approved. We have been an emerging growth company since our initial public offering in August 2015 and
will continue to be an emerging growth company until the end of 2020. If some investors find our common stock less attractive
because we may rely on these exemptions, there may be a less active trading market for our common stock, and our stock price may
be more volatile.
Under
the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards
apply to private companies. We have irrevocably elected not to opt out of this extended transition period for implementing new
or revised accounting standards, which means that when an accounting standard is issued or revised and it has different application
dates for public or private companies, we can adopt the new or revised accounting standard at the time private companies adopt
the new or revised standard.
Future
sales of our Class A Common Stock by our existing stockholders may cause our stock price to fall.
The
market price of our Class A Stock could decline as a result of sales by our existing stockholders in the market, or
the perception that these sales could occur. These sales might also make it more difficult for us to sell equity securities at
a time and price that we deem appropriate. In addition, subsequent public issuances of our stock would cause the interest of each
current Purple Inc. stockholder to be diluted. At this time, CCP and Blackwell own a substantial percentage of the shares of Class A Stock of the Company and warrants for additional Class A Stock, and may choose to sell shares of common stock.
Fluctuations
in operating results, quarter to quarter earnings and other factors, including incidents involving Purple LLC’s clients
and negative media coverage, may result in significant decreases in the price of our Class A Common Stock.
The stock markets experience
volatility that is often unrelated to operating performance. These broad market fluctuations may adversely affect the trading price
of our Class A Stock and, as a result, there may be significant volatility in the market price of our Class A Stock.
If we are unable to operate our business as profitably as in the past or as our investors expect us to in the future, the market
price of our Class A Stock will likely decline when it becomes apparent that the market expectations may not be realized.
In addition to our operating results, many economic and seasonal factors outside of our control could have an adverse effect on
the price of our Class A Stock and increase fluctuations in our quarterly earnings. These factors include certain of the risks
discussed herein, operating results of other companies in the sleep and comfort products industry, changes in our financial estimates
or recommendations of securities analysts, speculation in the press or investment community, negative media coverage or risk of
proceedings or government investigation, the possible effects of war, disease, terrorist and other hostilities, adverse weather
conditions, changes in general conditions in the economy or the financial markets or other developments affecting the sleep products
industry.
We
do not anticipate paying any cash dividends in the foreseeable future.
We
intend to retain future earnings, if any, for use in the business or for other corporate purposes and do not anticipate that cash
dividends with respect to our Class A Stock will be paid in the foreseeable future. Any decision as to the future
payment of dividends will depend on our results of operations, financial position and such other factors as our board of directors,
in its discretion, deems relevant. As a result, capital appreciation, if any, of our Class A Stock will be a stockholder’s
sole source of gain for the foreseeable future. Moreover, our debt covenants may not allow us to pay dividends.
A
market for our securities may not be maintained, which would adversely affect the liquidity and price of our securities.
The
price of our securities may vary significantly due to our operating performance and general market or economic conditions. Furthermore,
an active trading market for our securities may never become sustainable for many reasons, including that CCP and Blackwell, who
hold a significant portion of our outstanding common stock, may not sell shares, or sell enough shares, to increase the float
to a point where a sustainable market develops. You may be unable to sell your securities unless an established market can be
sustained.
Purple
LLC’s level of indebtedness could adversely affect Purple LLC’s and our ability to meet its obligations under its
indebtedness, react to changes in the economy or its industry and to raise additional capital to fund operations.
As
of September 30, 2020, Purple LLC had total debt of $45.6 million outstanding, comprised of $45.0 million outstanding
under the 2020 Credit Agreement and $0.6 million in capital lease obligations. While
any amounts are outstanding under the 2020 Credit Agreement, Purple LLC is subject to a number of affirmative and negative covenants,
including covenants regarding dispositions of property, investments, forming or acquiring subsidiaries, business combinations
or acquisitions, incurrence of additional indebtedness, and transactions with affiliates, among other customary covenants, subject
to certain exceptions. In particular, Purple LLC is (i) subject to annual capital expenditure limits that can be adjusted based
on the Company achieving certain Net Leverage Ratio thresholds as provided in the 2020 Credit Agreement, (ii) restricted from
incurring additional debt up to certain amounts, subject to limited exceptions, as set forth in the Credit Agreement, and (iii)
maintain minimum Consolidated Net Leverage Ratio and Fixed Charge Coverage Ratio (as those terms are defined in the Credit Agreement)
thresholds at certain measurement dates. Purple LLC is also restricted from paying dividends or making other distributions or
payments on its capital stock, subject to limited exceptions.
Our
level of indebtedness could have important consequences to stockholders. For example, it could:
|
●
|
make
it more difficult to satisfy our obligations with respect to our indebtedness, resulting in possible defaults on, and acceleration
of, such indebtedness;
|
|
●
|
increase
our vulnerability to general adverse economic and industry conditions;
|
|
●
|
require
us to dedicate a substantial portion of our cash flows from operations to payments on indebtedness, thereby reducing the availability
of such cash flows to fund working capital, capital expenditures and other general corporate requirements or to carry out other
aspects of our business;
|
|
●
|
limit
our ability to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements
or to carry out other aspects of our business;
|
|
●
|
limit
our ability to make material acquisitions or take advantage of business opportunities that may arise; and
|
|
●
|
place
us at a potential competitive disadvantage compared to our competitors that have less debt.
|
We
may also incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial
and operational flexibility.
Future
operating flexibility is limited in significant respects by the restrictive covenants in the 2020 Credit Agreement, and we may
be unable to comply with all covenants in the future.
The
2020 Credit Agreement imposes restrictions that could impede Purple LLC’s and the Company’s ability to enter into
certain corporate transactions, as well as increases our vulnerability to adverse economic and industry conditions, by limiting
our flexibility in planning for, and reacting to, changes in our business and industry. These restrictions include
covenants regarding dispositions of property, investments, forming or acquiring subsidiaries, business combinations or acquisitions,
incurrence of additional indebtedness, and transactions with affiliates. The restrictions may prevent Purple LLC and the
Company from taking actions that we believe would be in the best interests of the business and may make it difficult for us to
successfully execute our business strategy or effectively compete with companies that are not similarly restricted.
If
we determine that we need to take any action that is restricted under the 2020 Credit Agreement, we will need to first obtain
a waiver from the Institutional Lenders. Obtaining such waivers, if needed, may impose additional costs on the Company or we
may be unable to obtain such waivers. Purple LLC’s ability to comply with these restrictive covenants in future periods
will largely depend on its ability to successfully implement its overall business strategy. The breach of any of these
covenants or restrictions could result in a default, which could result in the acceleration of Purple LLC’s debt. In
the event of an acceleration of Purple LLC’s debt, Purple LLC could be forced to apply all available cash flows to
repay such debt, which would reduce or eliminate distributions to us, which could also force us into bankruptcy or
liquidation.
Certain
outstanding warrants could be exercised and result in dilution of all shareholders without any concurrent payment or other benefit
to the Company.
Certain
outstanding warrants held by former members of Global Partner Sponsor, LLC (the sponsor for Global Partner Acquisition Corp.,
our predecessor) and CCP and its affiliates may be exercised on a cashless basis, without any further consideration paid to us.
In addition, on October 22, 2020, the last sales price of our common stock reported was at least $24.00 per share on each of twenty
trading days within a thirty (30) trading-day period, and we elected to redeem our outstanding warrants (other than those
held by former members of Global Partner Sponsor, LLC and certain warrants held by CCP and its affiliates) by paying redemption
consideration of $0.01 per warrant. We sent a Notice of redemption on October 27, 2020 to affected warrant holders. We anticipate
that the redemption will take place on November 30, 2020. In connection with our election to redeem, any warrant exercises that
take place prior to the redemption must be done on a cashless basis. As a result, we will be required to issue shares of our Class A
Stock without any further consideration being paid to us, with respect to any warrants that are exercised prior to redemption
on November 30, 2020, which will also result in dilution to existing shareholders. For the period October 1 through October
26, 2020, approximately 8.0 million public warrants were exchanged for 4.0 million Class A shares resulting in cash proceeds to
the Company of approximately $45.6 million. On October 27, 2020, the Company announced the redemption of previously issued public
and incremental loan warrants, to take place on November 30, 2020. For the period October 27 through November 9, 2020, approximately
1.7 million public and all 2.6 million incremental loan warrants have been exercised and, as a result, there were 60.9 million
Class A shares outstanding on November 9, 2020. The approximately 9.3 million public warrants that remain may be cashless exercised
at any time prior to November 30, 2020. Any public warrants remaining outstanding at that date will be redeemed. As of November
9, 2020, approximately 8.5 million sponsor warrants remain outstanding. Sponsor warrants are not redeemable, and do not need to
be exercised on a cashless basis prior to November 30, 2020, if they are held by the sponsor or a permitted transferee.
We
may issue debt and equity securities or securities convertible into equity securities, any of which may be senior to our Class A
Common Stock as to distributions and in liquidation, which could negatively affect the value of our Class A Common Stock.
In the future, we may
attempt to increase our capital resources by entering into additional debt or debt-like financing that is unsecured or secured
by up to all of our assets, or by issuing additional debt or equity securities, which could include issuances of secured or unsecured
notes, preferred stock, hybrid securities or securities convertible into or exchangeable for equity securities. In the event of
our liquidation, our lenders and holders of our debt would receive distributions of our available assets before distributions to
holders of our Class A Stock, and holders of preferred securities would receive distributions of our available assets before
distributions to the holders of our Class A Stock. Because our decision to incur debt and issue securities in future offerings
may be influenced by market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or
nature of our future offerings or debt financings. Further, market conditions could require us to accept less favorable terms for
the issuance of our securities in the future.
Nasdaq may delist our warrants from
trading on its exchange, which could limit investors’ ability to make transactions in our warrants and subject us to additional
trading restrictions.
After the redemption,
there will be less than 20 holders of warrants remaining. While there is no Nasdaq rule requiring us to maintain a specified number
of holders of warrants, Nasdaq may use its discretionary authority to delist the warrants due to concerns such as, among other
things, a lack of liquidity for the warrants. If Nasdaq delists our warrants from trading on its exchange and we are not able to
list our securities on another national securities exchange, we expect our securities could be quoted on an over-the-counter market.
If this were to occur, we could face significant material adverse consequences, including a limited availability of market quotations
for our warrants and reduced liquidity for our warrants.
The National Securities
Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain
securities, which are referred to as “covered securities.” Because our warrants are currently listed on Nasdaq, our
warrants are covered securities. Although the states are preempted from regulating the sale of our securities, the federal statute
does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity,
then the states can regulate or bar the sale of covered securities in a particular case. Further, if our warrants are no longer
listed on Nasdaq, the warrants would not be covered securities and we would be subject to regulation in each state in which we
offer the warrants.
Tax
Risks Relating to Our Structure
Although
we may be entitled to tax benefits relating to additional tax depreciation or amortization deductions as a result of the tax basis step-up we
receive in connection with the exchanges of Class B Units and shares of Class B Common Stock into our Class A Common
Stock and related transactions, we will be required to pay InnoHold 80% of these tax benefits under the Tax Receivable Agreement.
Owners of Class B
Units and shares of Class B Stock may, subject to certain conditions and transfer restrictions, exchange their Class B
Units and shares of Class B Stock for shares of Class A Stock pursuant to the Exchange Agreement. The deemed exchanges
in the Business Combination and any exchanges pursuant to the Exchange Agreement are expected to result in increases in our allocable
share of the tax basis of the tangible and intangible assets of Purple LLC. These increases in tax basis may increase (for tax
purposes) depreciation and amortization deductions and therefore reduce the amount of income or franchise tax that we would otherwise
be required to pay in the future, although the Internal Revenue Service (“IRS”) or any applicable foreign, state or
local tax authority may challenge all or part of that tax basis increase, and a court could sustain such a challenge. As of September
30, 2020, there have been 43.5 million exchanges of Class B Units and shares of Class B Stock for shares of Class A
Stock, in addition to the deemed exchanges that occurred in connection with the Business Combination.
In connection with
the Business Combination, we entered into the Tax Receivable Agreement, which generally provides for the payment by us to InnoHold
of 80% of certain tax benefits, if any, that we realize as a result of these increases in tax basis and of certain other tax benefits
related to entering into the Tax Receivable Agreement, including income or franchise tax benefits attributable to payments under
the Tax Receivable Agreement. These payment obligations pursuant to the Tax Receivable Agreement are the obligation of the Company
and not of Purple LLC. The actual increase in our allocable share of the Company’s tax basis in its assets, as well as the
amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the
timing of exchanges, the market price of shares of our common stock at the time of the exchange, the extent to which such exchanges
are taxable and the amount and timing of our income. As of September 30, 2020, the Company’s preliminary estimate of
the liability under the Tax Receivable Agreement resulting from the deemed exchanges that occurred in connection with the Business
Combination and subsequent exchanges of 43.5 million Paired Securities as of September 30, 2020 was approximately $169.6 million.
Due to the release of the Company’s valuation allowance on the deferred tax assets to which the Tax Receivable Agreement
liability relates, $169.0 million of the $169.6 million estimated liability has been recorded as of September 30,
2020 ($0.5 million in 2019 and an incremental $168.5 million through September 30, 2020). The additional $0.6 million
is expected to be recorded in the fourth quarter of the year ending December 31, 2020. To the extent the Company realizes
tax benefits in future years, or in the event of a change in future tax rates, or if payments under the Tax Receivable Agreement
are required to be accelerated, this liability may exceed the estimated liability.
Because not all of
the relevant factors described above are known at this time with respect to the exchanges that have occurred, and none of the relevant
factors are known with respect to 0.6 million future exchanges (whether this year or in subsequent years), except as estimated
above, we cannot yet with certainty determine the final amounts that will be payable under the Tax Receivable Agreement. However,
as a result of the size and frequency of the exchanges and the resulting increases in the tax basis of the tangible and intangible
assets of Purple LLC, the payments under the Tax Receivable Agreement will be substantial and could have a material adverse effect
on our financial condition. The payments under the Tax Receivable Agreement are not conditioned upon continued ownership of the
Company by the holders of units.
InnoHold
will not be required to reimburse us for any excess payments that may previously have been made under the Tax Receivable Agreement,
for example, due to adjustments resulting from examinations by taxing authorities. Rather, excess payments made to such holders
will be netted against payments otherwise to be made, if any, after the determination of such excess. As a result, in certain
circumstances we could make payments under the Tax Receivable Agreement in excess of our actual income or franchise tax savings,
if any, and we may not be able to recoup such excess, which could materially impair our financial condition and adversely affect
our liquidity.
If all of the 0.6 million
Paired Securities outstanding as of September 30, 2020 were exchanged for shares of Class A Stock pursuant to the Exchange
Agreement, and the fair market value of the Class A Stock at the time of such exchange were equal to $31.00 per share (the
closing price of a share of our Class A Stock on November 5, 2020), our aggregate liability under the Tax Receivable Agreement
would be, including the estimated $169.6 million liability described above, approximately $174.3 million in total, payable
in estimated annual amounts ranging from $1.0 million to $12.0 million over a 15-year period. The foregoing estimate
of our aggregate liability is based on certain assumptions, including that there are no changes in relevant tax law, that we are
able to fully depreciate or amortize our assets, and that we recognize taxable income sufficient to realize the full benefit of
the increased depreciation and amortization of our assets in each of the next 15 tax years. These assumptions may not be accurate
with respect to all or any exchanges of Paired Securities for Class A Stock. As a result, the amount and timing of our actual
aggregate liability under the Tax Receivable Agreement may differ materially from our estimates depending on a number of factors,
including those described above and elsewhere in this prospectus.
We
may not be able to realize all or a portion of the tax benefits that are expected to result from the acquisition of Units from
Purple LLC Class B Unitholders.
Pursuant to the Tax
Receivable Agreement, the Company will share tax savings resulting from (A) the amortization of the anticipated step-up in
tax basis in Purple LLC’s assets as a result of (i) the Business Combination and (ii) the exchange of (a) the
Class B Units and (b) the Class B Stock, in each case that were received in connection with the Business Combination,
for shares of Class A Stock pursuant to the Exchange Agreement and (B) certain other related transactions with InnoHold
in connection with the Business Combination. The amount of any such tax savings attributable to the payment of cash to InnoHold
in connection with the Business Combination and the exchanges contemplated by the Exchange Agreement will be paid 80% to InnoHold
and other owners of such securities and retained 20% by the Company. Our ability to realize, and benefit from, these tax savings
depends on a number of assumptions, including that we will earn sufficient taxable income each year during the period over which
the deductions arising from any such basis increases and payments are available and that there are no adverse changes in applicable
law or regulations. If our actual taxable income were insufficient to fully utilize such tax benefits or there were adverse changes
in applicable law or regulations, we may be unable to realize all or a portion of these expected benefits and our cash flows and
stockholders’ equity could be negatively affected.