This prospectus relates
to the resale of 2,613,240 warrants (the “Warrants”) to purchase shares of our Class A Common Stock, par value $0.0001
per share (the “Class A Common Stock”) by the selling warrantholders (the “Selling Warrantholders”) named
in this prospectus or their permitted transferees. The Warrants were issued in connection with the closing (the “Closing”)
of the Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) dated February 26, 2019
by and among Purple Innovation, LLC, our operating subsidiary, Coliseum Capital Partners, L.P. (“CCP”), Blackwell Partners
LLC – Series A (“Blackwell”), Coliseum Co-Invest Debt Fund, L.P. (“CDF” and together with CCP and
Blackwell, the “Lenders”) and Delaware Trust Company. As a condition to the Closing, the Company agreed to issue the
Warrants to CCP and Blackwell. Each Warrant entitles the holder to purchase one share of our Class A Common Stock at an exercise
price of $5.74 per share, subject to adjustment as discussed below. We will receive the proceeds from the exercise of the Warrants,
but not from the sale of the underlying Class A Common Stock.
This prospectus also
relates to the resale of 2,613,240 shares of Class A Common Stock issuable upon the exercise of the Warrants by the selling stockholders
(the “Selling Stockholders” and, together with the Selling Warrantholders, the “Selling Securityholders”)
named in this prospectus.
This prospectus also
relates to the issuance by us of 2,613,240 shares of our Class A Common Stock upon the exercise by third parties of Warrants that
have been resold by the Selling Warrantholders to third parties under this prospectus (the “Resold Warrants”). Each
Warrant entitles the holder to purchase one share of our Class A Common Stock at an exercise price of $5.74 per share, subject
to adjustment as discussed below.
We will not receive
any proceeds from the sale of shares of Class A Common Stock by the Selling Stockholders or from the sale of Warrants by the Selling
Warrantholders pursuant to this prospectus, except with respect to amounts received by us upon the exercise of the Warrants. However,
we will pay the expenses associated with the sale of shares and warrants pursuant to this prospectus.
Our registration of
the securities covered by this prospectus does not mean that the Selling Stockholders will offer or sell any of the shares of Class
A Common Stock or that the Selling Warrantholders will offer or sell any of the Warrants. The Selling Stockholders and the Selling
Warrantholders may sell the shares of Class A Common Stock and the Warrants, respectively, covered by this prospectus in a number
of different ways and at varying prices. We provide more information about how the Selling Stockholders and the Selling Warrantholders
may sell the shares of Class A Common Stock and the Warrants in the sections entitled “Determination of Offering Price”
and “Plan of Distribution.”
Our Class A Common
Stock is traded on the NASDAQ Capital Market (“NASDAQ”) under the symbol “PRPL”. On May 2, 2019, the last
reported sales price of the Class A Common Stock was $5.72 per share.
We are an “emerging
growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”) and
are subject to reduced public company reporting requirements. See “Risk Factors – 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.”
RISK FACTORS
An investment in
our securities involves risks and uncertainties. You should consider carefully the risks described below, those beginning on page
9 of our Annual Report on Form 10-K for the year ended December 31, 2018, and any updates to those risk factors or new risk factors
contained in our subsequent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with
the SEC, all of which we incorporate by reference herein, as well as the other information included in this prospectus, and any
applicable prospectus supplement, before making an investment decision. Any of the risk factors could significantly and negatively
affect our business, financial condition, results of operations, cash flows, and prospects and the trading price of our securities.
Risks Related to the Offering
Future sales of our Common Stock
may depress our share price.
As of April 30, 2019,
we had 9,730,636 shares of our Class A Common Stock and 44,071,318 shares of our Class B Common Stock outstanding. Sales of a number
of shares of Common Stock in the public market or issuances of additional shares pursuant to the exercise of our outstanding warrants,
or the expectation of such sales or exercises, could cause the market price of our Common Stock to decline. We may also sell additional
shares of Common Stock or securities convertible into or exercisable or exchangeable for Common Stock in subsequent public or private
offerings or other transactions, which may adversely affect the market price of our Common Stock.
Our stockholders may experience substantial
dilution in the value of their investment if we issue additional shares of our capital stock.
Our charter allows
us to issue up to 300 million shares of our Common Stock, including 210 million shares of Class A Common Stock and 90 million shares
of Class B Common Stock, and up to five million shares of undesignated preferred stock, par value $0.0001 per share. To raise additional
capital, we may in the future sell additional shares of our Common Stock or other securities convertible into or exchangeable for
our Common Stock at prices that are lower than the prices paid by existing stockholders, and investors purchasing shares or other
securities in the future could have rights superior to existing stockholders, which could result in substantial dilution to the
interests of existing stockholders.
We may issue debt and equity securities
or securities convertible into equity securities, any of which may be senior to our Common Stock as to distributions and in liquidation,
which could negatively affect the value of our 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 Common Stock, and holders of preferred securities would receive distributions of our available assets before distributions
to the holders of our Common 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.
Our management will have broad discretion
over the use of the proceeds received from the exercise of the Warrants, you may not agree with how we use the proceeds and the
proceeds may not be invested successfully.
Other than amounts
required to be paid to certain lenders, our management will have broad discretion as to the use of the proceeds from the exercise
of the Warrants, if any, and could use them for purposes other than those contemplated at the time of commencement of this offering.
Accordingly, you will be relying on the judgment of our management with regard to the use of these net proceeds, and you will not
have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. It is possible
that, pending their use, we may invest the proceeds in a way that does not yield a favorable, or any, return for us. The failure
of our management to use such funds effectively could have a material adverse effect on our business, financial condition, operating
results and cash flows.
Your interest in our Company may
be diluted as a result of this offering.
The shares issuable
upon the exercise of the Warrants will dilute the ownership interest of other stockholders and holders of Warrants who have not
exercised their Warrants.
This offering may cause the trading
price of our Common Stock to decrease.
The number of shares
of Class A Common Stock underlying the Warrants may result in an immediate decrease in the market price of our Common Stock. This
decrease may continue after the completion of this offering. We cannot predict the effect, if any, that the availability of shares
for future sale represented by the Warrants will have on the market price of our Common Stock from time to time.
Holders of the Warrants will have
no rights as a common stockholder until such holders exercise their Warrants and acquire our Class A Common Stock.
Until holders of Warrants
acquire shares of our Class A Common Stock upon exercise of the Warrants, holders of Warrants will have no rights with respect
to the shares of our Class A Common Stock underlying such Warrants. Upon exercise of the Warrants, the holders thereof will be
entitled to exercise the rights of a common stockholder only as to matters for which the record date occurs after the exercise
date.
There is no public market for the
Warrants
.
There is no established
public trading market for the Warrants, and we do not expect a market to develop. In addition, we do not intend to apply for listing
of the Warrants on any securities exchange or recognized trading system.
The market price of our Common Stock
may never exceed the exercise price of the Warrants issued in connection with this offering.
The Warrants being
issued in connection with this offering became exercisable upon issuance and will expire five years from the date of issuance.
The market price of our Common Stock may never exceed the exercise price of the Warrants prior to their date of expiration. Any
Warrants not exercised by their date of expiration will expire worthless and we will be under no further obligation to the Warrant
holder.
Since the Warrants are executory
contracts, they may have no value in a bankruptcy or reorganization proceeding.
In the event a bankruptcy
or reorganization proceeding is commenced by or against us, a bankruptcy court may hold that any unexercised Warrants are executory
contracts that are subject to rejection by us with the approval of the bankruptcy court. As a result, holders of the Warrants may,
even if we have sufficient funds, not be entitled to receive any consideration for their Warrants or may receive an amount less
than they would be entitled to if they had exercised their Warrants prior to the commencement of any such bankruptcy or reorganization
proceeding.
The exclusive jurisdiction and choice
of law clauses set forth in the Warrants may have the effect of limiting a warrantholder’s rights to bring legal action against
us and could limit a warrantholder’s ability to obtain a favorable judicial forum for disputes with us.
The Warrants provide
exclusive jurisdiction to courts of the State of New York or the United States District Court for the Southern District of New
York. Disputes arising under the Warrants are governed by New York law. These provisions may have the effect of limiting the ability
of warrantholders to bring a legal claim against us due to geographic limitations and may limit a warrantholder’s ability
to bring a claim in a judicial forum that it finds favorable for disputes with us.
This exclusive
forum provision would not apply to suits brought to enforce any liability or duty created by the Securities Act or the Exchange
Act or any other claim for which the federal courts have exclusive jurisdiction. To the extent that any such claims may be based
upon federal law claims, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce
any duty or liability created by the Exchange Act or the rules and regulations thereunder. Furthermore, Section 22 of the Securities
Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created
by the Securities Act or the rules and regulations thereunder.
If a court were to find this exclusive forum provision inapplicable
to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs
associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.
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 economic and business conditions worldwide. 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 inform our business strategies, and our past estimates and forecasts
have not been accurate. The rapidly evolving nature of the direct-to-consumer mattress industry and our business make 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:
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our ability to attract
new customers and the cost of acquiring new customers;
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our ability and the time required to develop new Mattress Max machines, develop new production lines, scale production capacity and appropriately train staff;
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the success of our wholesale expansion efforts;
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our ability to have enough production capacity to meet customer demand;
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our ability to effectively manage increasing sales and marketing expenses;
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our access to sufficient capital resources and liquidity to fund the growth of our business;
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competition from the sublicensees of intellectual property licensed back to EdiZONE, LLC;
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our ability to offer products on favorable terms, manage inventory, fulfill orders and manage product returns;
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the introduction of competitive products, services, price decreases, or improvements;
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timing, effectiveness, and costs of expansion and upgrades of our systems and infrastructure;
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the success of our geographic and product line expansions, including but not limited to power requirements, labor needs, and ease of product distribution;
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the success of hiring and expeditiously training engaged labor locally and worldwide;
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our ability to secure and retain superior global partners for specialized delivery services;
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the extent to which we use debt or equity financing, and the terms of any such financing for, our current operations and future growth;
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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;
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the enforceability and validity of our intellectual property rights;
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our ability to accommodate variations in the mix of products we sell;
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variations in our level of product returns, as well as our methods of collecting product returns or exchanges;
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the extent to which we offer free shipping;
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the extent to which we invest in technology and content, manufacturing, fulfillment, and other expense categories;
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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;
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our ability to anticipate and prepare for disruptions to manufacturing;
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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;
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our ability to collect amounts owed to us when they become due;
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the extent to which our internal network or website is affected by denial of service attacks, malicious unauthorized access, outages, and similar events; and
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the extent to which our internal network is affected by spyware, viruses, phishing and other spam emails, intrusions, data theft, downtime, and similar events.
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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, 2018 and 2017, we incurred losses of $19.6 million and $8.8 million and had negative working capital of $0.9 million
and $18.3 million, respectively. We experienced negative operating cash flow of $21.7 million for the year ended December 31, 2018
and as of December 31, 2018 our accumulated deficit was $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 and prospects 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 increasing our product offerings and scaling our infrastructure to support expansion
of our manufacturing capacity and our wholesale channel expansion. Our planned growth includes increasing our manufacturing capacity,
developing and introducing new products and developing new and broader distribution channels, including wholesale, and extending
our global reach to other countries in the long-term. 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
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.
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.
When recently rolling
out our new mattress lines through our direct-to-consumer sales channel, 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 been experiencing
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 are
seeking to implement improved controls and procedures in an environment of continuous change and our use of resources may not be
as effective as intended or we may need to apply additional resources than expected to make these 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,
resulting in reduction of operation expenses and improvement of our products and services, our business could continue to 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,
(ii) increasing our direct-to-consumer sales; (iii) expanding our wholesale distribution channel, particularly for our mattress
products; (iv) expanding our global sales; and (v) engaging global partners to improve distribution efficiencies and cost savings.
We believe that our
cash flow from operations, together with other available sources of liquidity, including the additional cash we received on February
26, 2019 and additional cash we may have access to under the Amended and Restated Credit Agreement (the “Amended and Restated
Credit Agreement”), by and among Purple LLC, Coliseum Capital Partners, L.P. (“CCP”), Blackwell Partners LLC-Series A
(“Blackwell”), Coliseum Co-Invest Debt Fund, L.P. (“CDF” and, together with CCP and Blackwell, the
“Lenders”), 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. 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.
Our ability to obtain
additional capital on acceptable terms or at all is subject to a variety of uncertainties, including approval from the Lenders.
Adequate financing may not be available or, if available, may only be available on unfavorable terms. The restrictive covenants
in the Amended and Restated Credit Agreement may make it difficult to obtain additional capital on terms that are favorable to
us, and the Lenders may not agree to lend us additional funds. 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, including under the Amended and Restated Credit Agreement, 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, as described above, 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 revenue recognition, estimating valuation allowances and accrued liabilities (including
allowances for returns, credit card chargebacks, doubtful accounts), valuation of inventory, internal-use software and website
development (acquired and developed internally), accounting for income taxes, valuation of intangible assets, equity-based compensation
and loss contingencies. 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.
The Company’s
2017 financial statements were audited in connection with the Business Combination. As a result of this audit and in anticipation
of becoming a public company, the Company implemented many accounting policies. The Company may determine in the future that these
policies are not effective or appropriate for the Company. Moreover, the Company may determine that the assumptions it has relied
on in preparing its financial statements are not appropriate. These determinations could lead to significant changes in the accounting
policies of and assumptions used by the Company in the future, which could negatively impact your investment.
For example, during
2018, the Company identified immaterial errors that caused an overstatement in 2017 of previously reported net inventory and prepaid
inventory. The error in net inventory related primarily to a process deficiency in the physical inventory count and reconciliation
process that resulted in an overstatement of certain inventory items. The error in prepaid inventory related to the process deficiency
in the tracking and reconciling of deposits made to overseas suppliers for inventory orders. The correction of these errors reduced
net inventory and prepaid inventory by $2.5 million and $0.9 million, respectively, as of December 31, 2017 and increased cost
of revenues in an amount of $3.4 million for the year ended December 31, 2017. The errors had no impact on net cash provided by
operating activities. It is possible that additional errors could be identified as we continue to improve our controls and processes.
Our future growth and profitability
depend in part on our ability to continue to improve and expand our product line and to successfully execute new product introductions.
As described in greater
detail below, the mattress, pillow and cushion industries are highly competitive, and our ability to compete effectively and to
profitably grow our market share depends in part on our ability to continue to improve and expand our product line and related
accessory products.
We incur significant
research and development and other expenditures in the pursuit of improvements and additions to our product line. If these efforts
do not result in meaningful product improvements or new product introductions, or if we are not able to gain widespread consumer
acceptance of product improvements or new product introductions, our sales, profitability, cash flows and financial condition may
be adversely affected. In addition, if any significant product improvements or new product introductions are not successful, our
reputation and brand image may be adversely affected, and our business may be harmed.
A significant portion
of our gross profit comes from our mattress products. If we are unable to develop new models of our mattress products or successfully
market and sell new mattress models, our profitability may be adversely affected, and our business may be harmed.
Our expansion into new products,
market segments and geographic regions subjects us to additional business, legal, financial, and competitive risks.
The vast 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 a relationship 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 retail locations will be successful.
We may be unsuccessful
in generating sales through wholesale channels. We may extend credit terms in connection with such retail relationships and such
retail relationships may expose us to the risk of unpaid or late paid invoices. In addition, we may provide fixtures to retail
partners that may be difficult to recover. We have limited experience in the wholesale channel, and 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 own Company retail stores beyond the current store we currently have in Alpine, Utah. We have limited experience
in opening stores and operating our own brick-and-mortar retail business. Operating our own physical stores includes additional
risks. For example, we will incur expenses and accept obligations related to additional leases, 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 possible future Company-owned stores
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.
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.
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 significantly. 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.
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 periods, 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, 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, or if our existing Mattress Max machines are unable
to function at the desired capacity, our production capacity may be constrained and 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 controlling persons and officers of the Company, as well as with other entities affiliated
with controlling 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, LLC, which is owned by Tony Pearce and Terry Pearce. As
the Company grows, and its needs change, the Company may need to negotiate a termination or modification of this lease. Tony and
Terry Pearce, either personally or through one or more of their other entities, also have tangible property located in this facility
that has not been clearly identified and separated from the Company’s property, although we expect this tangible property
to be either removed or identified and separated in 2019. Tony and Terry Pearce pay no rent or other compensation to the Company
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 for reasons not currently
foreseeable.
Prior to the Business
Combination, we also entered into an Amended and Restated Confidential Assignment and License Back Agreement with EdiZONE, LLC,
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 the Company and the Company 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. These third parties include direct competitors to the Company
that at the time of the Business Combination were not selling products through retail channels in which the Company was selling
its products. One of these third parties is now a domestic competitor of the Company, as it now sells mattresses through some of
the same retailers through which the Company also sells its products. This competitor’s sales revenues are increasing, resulting
in increasing royalties paid to EdiZONE from this licensee. Another third-party licensee may make it difficult for the Company
to expand into certain geographic regions, such as the European Union. Casey McGarvey, our Chief Legal Officer, is also entitled
to receive a small percent of such royalties from EdiZONE related to these third-party licenses, in accordance with a small investment
made in EdiZONE years before the Business Combination. While the current license back to EdiZONE, as recently 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 our competitors, may lead to conflicts of interest between the Company and the Company’s
insiders receiving royalties. At the time this agreement with 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 the Company’s
rights and narrow EdiZONE’s rights with the approval of the Company’s independent directors.
Prior to the Business
Combination, the Company also entered into a Shared Services Agreement with other entities controlled by Tony Pearce and Terry
Pearce, including EdiZONE, which covers the provision of services to these entities by employees of the Company. We believe the
terms of this agreement are based on reasonable arms’ length terms. However, because Tony Pearce and Terry Pearce were the
only directors of Purple LLC prior to the Business Combination, such transactions were not required to be approved by disinterested
directors of the Company prior to the Business Combination. Also, the exercise of rights under this agreement for services to be
performed by the Company may create conflicts of interest between the Company and the Pearce’s. Only immaterial amounts of
legal and accounting services were provided by Purple LLC in 2018.
Prior to the Business
Combination, InnoHold, LLC (“InnoHold”), an entity owned by Terry and Tony Pearce and the controlling stockholder of
the Company, also granted equity incentive awards in Purple LLC to certain key employees. 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
participant’s ownership interests have 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 employee’s employment is terminated. Before and since the Business Combination, all forfeitures occurring
from departing employees have inured to the benefit of only the owners of InnoHold, and not all the Company’s stockholders.
This means that the forfeited equity does not increase the Company’s currently approved equity incentive pool. This pertains
to but is not limited to the forfeitures resulting from the departures occurring after the Business Combination in 2018, including
that of the former Chief Executive Officer, Sam Bernards, and more recently the departures of the Chief Marketing Officer and Chief
Brand Officer. Because the forfeited equity resulting from these departures prior to this distribution is held at InnoHold, that
forfeited equity does not replenish the Company’s equity incentive pool and cannot be used for current and future equity
grants to those who have replaced and will replace these employees or for other purposes essential to the business. To avoid future
forfeitures from inuring only to the benefit of InnoHold’s owners, InnoHold has agreed to distribute to the incentive participants
their pro rata share of InnoHold’s ownership of Class B Common Stock in Purple Inc. and Class B Units in Purple LLC, after
which any forfeitures will inure to the benefit of all stockholders of the Company. The Company’s 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 of such key employees who had existing equity grants through InnoHold, and there is a risk that the Company 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 replacements
for the prior CEO, CMO and CBO and others. If the equity pool is not refreshed, there is a risk that the Company may not be able
to hire and retain these and other key employees. If the equity pool is refreshed with authorized shares of the Company that are
issued in accordance with the Company’s 2017 Equity Incentive Plan, the Company’s stockholders will be diluted.
In connection with
the Business Combination, Purple LLC also entered into a Credit Agreement (“Credit Agreement”) with the Lenders which
was guaranteed by Purple Inc. The Lenders also are stockholders and warrant holders of the Company and appointed one director to
serve on the Company’s board, Adam Gray. 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 Lenders,
was closed and an incremental loan was funded. The exercise of rights under this Amended and Restated Credit Agreement by the Lenders
may create conflicts of interest between the Company and Mr. Gray.
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, 2018 for a further discussion of all related-party transactions between the Company and insiders.
Disruption of operations in either
of our two main manufacturing facilities, including as a result of natural disasters, could increase our costs of doing business
or lead to delays in shipping our beds.
We have two main manufacturing
plants, which are located in Alpine, Utah and Grantsville, Utah. A significant percentage of our products are assembled to fulfill
orders rather than stocking finished goods inventory in our plants. Although we could produce our products at both sites, we are
consolidating production of certain products at one site. Therefore, the disruption of operations of our manufacturing facilities,
particularly the facility where manufacturing will be consolidated, for a significant period of time, or even permanently, such
as through 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 and financial condition. Because
both of our manufacturing plants are located within the same geographic region, regional economic downturns, natural disasters
or other issues could potentially disrupt all of our manufacturing and other operating activities, which could adversely affect
our business.
We may not be able to successfully
anticipate consumer trends and demand and our failure to do so may lead to loss of consumer acceptance of the products we sell,
resulting in reduced net sales.
Our success depends
in part on our ability to anticipate and respond to changing trends and consumer demands in a timely manner. Changes in consumers’
tastes and trends and the resultant change in our product mix, as well as failure to offer our consumers multiple avenues for purchasing
our products, could adversely affect our business and operating results. If we fail to identify and respond to emerging trends,
consumer acceptance of the products we manufacture and sell and our image with current or potential customers may be harmed, which
could reduce our net sales. If we misjudge market trends, we may significantly overstock inventory and be forced to take significant
inventory markdowns, which would have a negative impact on our gross profit and cash flow. Conversely, shortages of inventory or
time to fulfillment of our products that prove popular could also reduce our sales.
We have in some instances kept excessive
amounts of raw material inventory and some finished goods inventory, which could be susceptible to shrinkage that may harm our
ability to use or sell such inventory and may adversely impact our profitability.
Although we attempt
to maintain only the necessary amounts of raw material inventory on hand, in some instances we have accumulated excessive amounts
of raw materials inventory. We also have accumulated excessive amounts of some finished goods inventory. All such excessive inventory
is subject to shrinkage from destruction, theft, obsolescence and factors that render such inventory unusable or unsellable, and
we have lost inventory for such reasons. While we take efforts to right-size all raw materials and finished goods inventory, if
our efforts are not successful, we could continue to experience excessive amounts of some items of raw materials and finished goods
and related shrinkage that could adversely impact our cash flow, margins and profitability.
Failure to achieve and maintain a
high level of product quality could negatively impact our sales, profitability, cash flows and financial condition.
Our products are highly
differentiated from traditional mattresses, sheets, pillows and cushions. As a result, our products may be susceptible to failures
that do not exist with traditional products. Failure to achieve and maintain acceptable quality standards could impact consumer
acceptance of our products or could result in negative media and Internet reports or owner dissatisfaction that could negatively
impact our brand image and sales levels.
In addition, a decline
in product quality could result in an increase in return rates and a corresponding decrease in sales, or an increase in product
warranty claims in excess of our warranty reserves. An unexpected increase in return rates or warranty claims could harm our sales,
profitability, cash flows and financial condition.
We currently maintain
FDA registrations on a select group of our cushions that are sold through third parties. These FDA registrations allow for FDA
inspections and there is a risk that an FDA inspection could lead to product recall of the FDA registered cushions. The number
of products is small; however, a recall can result, among other things, in lost sales, diverted resources and potential harm to
our reputation and increased customer service costs, which may have a material adverse effect on our financial condition.
As a consumer innovation
company with differentiated products, we face an inherent risk of exposure to product liability claims if the use of our products
is alleged to have resulted in personal injury or property damage. If any of our products proves to be defective, we may be required
to recall or redesign such products. Such recalls 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 maintain insurance
against some forms of 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 that results in significant adverse publicity
against us, may have a material adverse effect on our sales, profitability, cash flows and financial condition.
We are subject to warranty claims
for our products, which could result in unexpected expense.
Our products carry
warranties for defects in quality and workmanship. Historically, the amount for return of products, discounts provided to affected
customers and cost for returns or warrant claims has been immaterial. However, we may experience significant expense as the result
of future product quality issues, product recalls or product liability claims which may have a material adverse effect on our business.
The actual costs of servicing future warranty claims may exceed our expectations and have a material adverse effect on our results
of operations, financial condition and cash flows. Further, we may modify our warranties from time to time, and limitations to
warranties intended to reduce the number of claims may result in customer dissatisfaction. The occurrence of any of the foregoing
could have a material adverse effect on 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.
We have experienced
an increase in returns above previously anticipated levels. This increase has negatively impacted our business and profitability.
If we are unable to identify correctly the causes of these increased returns or to counteract those causes, we may not be able
to lower returns or prevent the rate of returns from increasing, which would continue to negatively impact our business and profitability.
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 such litigation, the costs of making such a defense, which may or may not be covered by our
insurance, could be significant and have a material adverse effect on our business.
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. 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:
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disruption of our ongoing business, including loss of management focus on existing businesses;
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impairment of other relationships;
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variability in revenue and income from entering into, amending, or terminating such agreements or relationships; and
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difficulty integrating under the commercial agreements.
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During 2018 we
entered into arrangements with several new 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 the Company. 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.
Current and future economic conditions
could materially adversely affect our sales, profitability, cash flows and financial condition.
Our business has been
affected by general business and economic conditions, and these conditions could have an impact on future demand for our products.
The global economy remains unstable, and we expect the economic environment to continue to be challenging.
Our sales depend, in
part, on discretionary spending by our customers. Pressure on discretionary income brought on by general economic downturns and
slow recoveries may cause consumers to reduce the amount they spend on discretionary items. If recovery from any economic downturn
is slow or prolonged, our growth, prospects, results of operations, cash flows and financial condition could be adversely impacted.
General economic conditions
and discretionary spending are beyond our control and are affected by, among other things, reduced consumer demand for products;
insolvency of potential customers; insolvency of our key suppliers resulting in product delays; inability of consumers to obtain
credit to finance purchases of our products; decreased consumer confidence; and inability for us, our customers and our suppliers
to accurately forecast future product demand trends. If such conditions are experienced in future periods, our industry, business
and results of operations could be adversely impacted.
We operate in the highly competitive
mattress, pillow and cushion industries, and if we are unable to compete successfully, we may lose customers and our sales may
decline.
The mattress, pillow
and cushion markets are highly competitive and fragmented. We face competition from many manufacturers (including competitors that
primarily manufacture and import from China), traditional brick-and-mortar retailers and online retailers, including direct-to-consumer
competitors. Participants in the mattress, pillow and cushion industries 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 mattress, pillow and cushion industries 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.
Mattress, pillow and cushion 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. 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 mattress, pillow and cushion industries. 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, which
has been a licensee of EdiZONE for over fifteen years, uses substantially similar technology to the Company’s Hyper-Elastic
Polymer
®
material in its own mattress, topper and pillow products sold through branded retail stores domestically
and in Canada. This competitor recently has been seen to be growing its sales and now distributes its products through wholesale
partners with retail locations where the Company’s mattresses are sold. This competitor may continue to increase its sales
and expand into additional distribution channels which could erode the Company’s sales in those retail locations and channels.
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.
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.
Moreover, the U.S.
Department of Commerce has opened an antidumping investigation into whether mattresses imported from China are being sold into
the United States at below fair market value. The investigation results from a petition filed by U.S. mattress manufacturers claiming
that in recent years Chinese exporters have unfairly made large gains in market share by undercutting prices. The United States
International Trade Commission has found that there is a reasonable indication that the U.S. mattress industry is being materially
injured by reason of mattresses being imported from China and sold for less than fair value. The U.S. Department of Commerce will
continue with its antidumping duty investigation concerning imports of this product from China. If the antidumping investigation
does not result in the prevention of dumping of underpriced Chinese mattresses into the U.S. market, we could continue to experience
a negative impact on our planned growth and the 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 and cushions, our sales, profitability, cash
flows and financial condition may be adversely impacted.
We may not be able to protect our
product designs and other proprietary rights adequately, which could adversely affect our competitive position and reduce the value
of our products and brands, and litigation to protect our intellectual property rights may be costly.
We attempt to strengthen
and differentiate our product portfolio by developing new and innovative brands, product designs and functionality and materials
for use in our products. We regard our trademarks, service marks, copyrights, patents, trade dress, trade secrets, proprietary
technology, and similar intellectual property as critical to our success, and we rely on trademark, copyright, and patent law,
trade secret protection, and confidentiality agreements and license agreements with our employees, customers, and others to protect
our proprietary rights.
We own various U.S.
and foreign patents and patent applications related to certain elements of the design and function of our mattresses, pillows,
cushions and related products, as well as related to proprietary formulas and related technology for certain materials used in
the manufacturing of our products. We own numerous registered and unregistered trademarks and trademark applications, as well as
other intellectual property rights, including trade secrets, trade dress and copyrights, which we believe have significant value
and are important to the marketing of our products. Our success will depend in part on our ability to obtain and protect our products,
methods, processes and other technologies, to preserve our trade secrets, and to operate without infringing on the proprietary
rights of third parties.
Despite our efforts,
we may not be able to adequately protect or enforce our intellectual property and other proprietary rights. Effective protection
or enforcement of intellectual property rights may be unavailable or limited in the jurisdictions in which we do business. We also
may be unable to acquire or maintain appropriate domain names in all jurisdictions in which we do business. Furthermore, regulations
governing domain names may not protect our trademarks and similar proprietary rights. We may be unable to prevent third parties
from acquiring domain names that are similar to, infringe upon, or diminish the value of our trademarks and other proprietary rights.
The protection of our
intellectual property may require the expenditure of significant financial and managerial resources. We may not be able to discover
or determine the extent of any unauthorized use of our proprietary rights. Policing the unauthorized use of our proprietary technology
can be difficult and expensive. Litigation might be necessary to protect our intellectual property rights, which may be costly
and may divert our management’s attention away from our core business. Furthermore, there is no guarantee that litigation
would result in an outcome favorable to us. Third parties that license our proprietary rights also may take actions that diminish
the value of our proprietary rights or reputation. We also cannot be certain that others will not independently develop or otherwise
acquire equivalent or superior technology or other intellectual property rights. If we are unable to protect our proprietary rights
adequately, it would have a negative impact on our operations.
We, or the owners of any intellectual
property rights licensed to us, may be subject to claims that we or such licensors have infringed the proprietary rights of others,
which could require us and our licensors to obtain a license or change designs.
We have been subject
to, and expect to continue to be subject to, claims and legal proceedings regarding alleged infringement by us of the intellectual
property rights of third parties. Although we do not believe any of our products infringe upon the proprietary rights of others,
there is no assurance that infringement or invalidity claims (or claims for indemnification resulting from infringement claims)
will not be asserted or prosecuted against us or those from whom we have licenses or that any such assertions or prosecutions will
not have a material adverse effect on our business. Regardless of whether any such claims are valid or can be asserted successfully,
defending against such claims could cause us to incur costs and could divert resources away from our other activities. In addition,
assertion of infringement claims could result in injunctions that prevent us from distributing our products. If any claims or actions
are asserted against us or those from whom we have licenses, we may seek to obtain a license to the intellectual property rights
that are in dispute. Such a license may not be available on reasonable terms, or at all, which could force us to change our designs.
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 priority, 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.
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,
contingent on Purple LLC’s agreement to indemnify EdiZONE and fund the expense of such enforcement. In the event such enforcement
is deemed necessary by Purple LLC, Purple LLC may not be able to enforce its rights and may not be successful in any such efforts
to enforce its intellectual property rights and this may harm our business.
Substantial and increasingly intense
competition worldwide in e-commerce may harm our business.
Consumers who might
purchase our products from us online have a wide variety of alternatives for purchasing competing mattresses, pillows and cushions,
including traditional brick and mortar retailers (as well as the online and mobile operations of these traditional retailers),
other online direct-to-consumer retailers and their related mobile offerings, online and offline classified services, online retailer
platforms, such as Amazon.com, and other shopping channels, such as offline and online home shopping networks.
The Internet and mobile
networks provide new, rapidly evolving and intensely competitive channels for the sale of all types of goods and services, including
products that compete directly with our products. Consumers who purchase mattresses, pillows and cushions through us have more
and more alternatives, and merchants have more online channels to reach consumers. We expect competition to continue to intensify.
Online and offline businesses increasingly are competing with each other and our competitors include a number of online and offline
retailers with significant resources, large user communities and well-established brands. Moreover, the barriers to entry into
these channels can be low, and businesses easily can launch online sites or mobile platforms and applications at nominal cost by
using commercially available software or partnering with any of a number of successful e-commerce companies. As we respond to changes
in the competitive environment, we may, from time to time, make pricing, service or marketing decisions or acquisitions that may
be controversial with and lead to dissatisfaction among our customers, which could reduce activity on our platform and harm our
profitability.
In addition, sellers
in our industry are increasingly utilizing multiple sales channels, including the acquisition of new customers by paying for search-related
advertisements on horizontal search engine sites, such as Google, Yahoo!, Naver and Baidu. We use product search engines and paid
search advertising to help users find our sites, but these services also have the potential to divert users to other online shopping
destinations. Consumers may choose to search for products with a horizontal search engine or shopping comparison website, and such
sites may also send users to other shopping destinations. Consumers may not be familiar with or confused by our current web address:
purple.com.
We also face increased
competitive pressure as the competitive norm for, and the expected level of service from, e-commerce has significantly increased,
due to, among other factors, improved user experience, greater ease of buying goods, lower (or no) shipping costs, faster delivery
times and more favorable return policies. Also, certain platform businesses, many of whom are larger than us or have greater capitalization,
have a dominant and secure position in other industries or certain significant markets, and offer a broader variety of mattress,
pillow and cushion products to consumers and retailers that we do not offer. If we are unable to change our product offerings in
ways that reflect the changing demands of e-commerce and mobile commerce marketplaces, particularly the higher growth of sales
of fixed-price items and higher expected service levels, or compete effectively with and adapt to changes in larger platform businesses,
our business will suffer.
Some of our e-commerce
competitors offer a significantly broader range of products and services than we do. Competitors with other revenue sources may
be able to devote more resources to marketing and promotional campaigns, adopt more aggressive pricing policies and devote more
resources to website, mobile platforms and applications and systems development than we can. Other direct-to-consumer retailers
and e-commerce competitors may offer or continue to offer faster shipping, free shipping, delivery on Sunday, same-day delivery,
favorable return policies or other transaction-related services which improve the user experience on their sites and which could
be impractical or inefficient for us to match. Competitors may be able to innovate faster and more efficiently, and new technologies
may increase the competitive pressures by enabling competitors to offer more efficient or lower-cost services.
We have experienced
substantial difficulties with timely and accurate delivery of products which has taken more time than anticipated to correct. We
believe this is a result of internal deficiencies as well as deficiencies of our third-party white glove delivery service providers,
and our efforts to correct these deficiencies is ongoing. If we are unable to correct our internal deficiencies and obtain an increased
level of service from our third-party delivery vendors, we may suffer lost sales, damage to our reputation and liabilities to customers
that could have a material adverse impact on our business.
If we cannot keep pace with rapid
technological developments to provide new and innovative programs, products and services, the use of our products and our revenues
could decline.
Rapid, significant
technological changes continue to confront the industries in which we operate. We cannot predict the effect of technological changes
on our business. We expect that new services and technologies applicable to the industries in which we operate will continue to
emerge. These new services and technologies may be superior to, or render obsolete, the technologies we currently use in our products
and services. Incorporating new technologies into our products and services may require substantial expenditures and take considerable
time, and ultimately may not be successful. In addition, our ability to adopt new services and develop new technologies may be
inhibited by industry-wide standards, new laws and regulations, resistance to change from clients or merchants, or third parties’
intellectual property rights. Our success will depend on our ability to develop new technologies and adapt to technological changes
and evolving industry standards.
A reduction in the availability of
credit to consumers generally or under our existing consumer credit programs could harm our sales, profitability, cash flows and
financial condition.
We offer financing
to consumers through third-party consumer finance companies. As of December 31, 2018, approximately 28% of our sales were financed
through third-party consumer finance companies. The amount of credit available to consumers may be adversely impacted by macroeconomic
factors that affect the financial position of consumers as suppliers of credit adjust their lending criteria. In addition, changes
in federal regulations effective in 2010 placed additional restrictions on all consumer credit programs, including limiting the
types of promotional credit offerings that may be offered to consumers.
These third-party consumer
finance companies offer consumer financing options to our customers through agreements that may be terminated by us or the companies
upon thirty days’ prior written notice. These consumer finance companies have discretion to control the content of financing
offers to our customers and to set minimum credit standards under which credit is extended to customers.
Reduction of credit
availability due to changing economic conditions, changes in regulatory requirements, or the termination of our agreements with
third-party consumer finance companies could harm our sales, profitability, cash flows and financial condition.
We attempt to maintain only the necessary
amounts of raw material inventory, which could leave us vulnerable to shortages in supply of components that may harm our ability
to satisfy consumer demand and may adversely impact our sales and profitability.
We attempt to maintain
only the necessary amounts of raw material inventory on hand, which could leave us vulnerable to shortages in supply of components
that may harm our ability to satisfy consumer demand and may adversely impact our sales and profitability. Lead times for ordered
components may vary significantly, especially as we source some of our materials from China. In addition, some components used
to manufacture our products are provided on a sole source basis. Any unexpected shortage of materials caused by any disruption
of supply or an unexpected increase in the demand for our products, could lead to delays in shipping our beds to customers. Any
such delays could adversely affect our sales, customer satisfaction, profitability, cash flows and financial condition.
We rely upon several
key suppliers that are, in some instances, the only source of supply currently used by us for particular materials, components
or services. A disruption in the supply or substantial increase in cost of any of these products or services could harm our sales,
profitability, cash flows and financial condition.
We currently obtain
all of the raw materials and components used to produce our mattresses, pillows and cushions from outside sources. In some cases,
we have chosen to obtain these materials and components from suppliers who serve as the only source of supply, or who supply the
vast majority of our needs of the particular material or component. While we believe that these materials and components, or suitable
replacements, could be obtained from other sources, in the event of a disruption or loss of supply of relevant materials or components
for any reason, we may not be able to find alternative sources of supply, or if found, may not be found on comparable terms. In
addition, a change in the financial condition of some of our suppliers could impede their ability to provide products to us in
a timely manner. Further, we maintain relatively small supplies of our raw materials and outsourced goods at our manufacturing
facilities, and any disruption in the on-going shipment of supplies to us could interrupt production of our products, which could
result in a decrease of our sales or could cause an increase in our cost of sales, either of which could decrease our liquidity
and profitability.
If our relationship
with the primary supplier of our mineral oil is terminated, we could have short-term difficulty in replacing these sources since
there are relatively few other suppliers presently capable of supplying the local volume that we would need in a short period of
time.
Fluctuations in the price, availability
and quality of raw materials could cause 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.
Our success is highly dependent on
our ability to provide timely delivery to our customers, and any disruption in our delivery capabilities or our related planning
and control processes may adversely affect our operating results.
An important part of
our success is due to our ability to deliver our products to our customers in a timely manner. This in turn is due to our successful
planning and distribution infrastructure, including ordering, transportation and receipt processing, the ability of our suppliers
to meet our distribution requirements and the ability of our contractors to meet our delivery requirements. Our ability to maintain
this success depends on the continued identification and implementation of improvements to our planning processes, distribution
infrastructure and supply chain. We also need to ensure that our distribution infrastructure and supply chain keep pace with our
anticipated growth and increased product output. The cost of these enhanced processes could be significant and any failure to maintain,
grow or improve them could adversely affect our operating results.
We rely on FedEx and
other carriers to deliver our products to customers on a timely, convenient, and cost-effective basis. We also rely on the systems
of such carriers to provide us with accurate information about the status and delivery of our products. Any significant delay in
deliveries to our customers could lead to increased returns and cause us to lose sales. Any increase in freight charges could increase
our costs of doing business and harm our sales, profitability, cash flows and financial condition. Lack of accurate information
from such carriers could damage our brand and our relationship with our customers.
Our business could
also be adversely affected if there are delays in product shipments to us due to freight difficulties, delays in product shipments
clearing U.S. Customs for reasons of non-compliance or otherwise, challenges with our suppliers or contractors involving strikes
or other difficulties at their principal transport providers or otherwise. Such delays could adversely affect our profitability
and reputation.
We have experienced
delays in the timely delivery of our mattress products. These delays have caused customer dissatisfaction with their experience
with the Company and, in some cases, customers have cancelled their orders or returned their mattresses. We are working to rectify
these delays with both internal operating and customer service controls and assistance offered to our third-party delivery providers.
We have contracted with new delivery providers and are also seeking to qualify other delivery providers who can meet our standards.
If we are unable to improve the timely delivery of our new mattress models, our business could continue to be adversely affected.
Our business operations could be
disrupted if our information technology systems fail to perform adequately or are disrupted by natural disasters or other catastrophes
or if we are unable to protect the integrity and security of our information systems.
We depend largely upon
our information technology systems in the conduct of all aspects of our operations. If our information technology systems fail
to perform as anticipated, we could experience difficulties in virtually any area of our operations, including but not limited
to receiving orders from customers, replenishing inventories or delivering our products. We may be required to incur significant
capital expenditures in the pursuit of improvements or upgrades to our management information systems. These efforts may take longer
and may require greater financial and other resources than anticipated, may cause distraction of key personnel, and may cause short-term
disruptions to our existing systems and our business. If we experience difficulties in implementing new or upgraded information
systems or experience significant system failures, or if we are unable to successfully modify our information systems to respond
to changes in our business needs, our ability to run our business could be adversely affected. It is also possible that our competitors
could develop better e-commerce platforms than ours, which could negatively impact our sales.
In addition, our systems
may experience service interruptions or degradation due to hardware and software defects or malfunctions, computer denial-of-service
and other cyberattacks, human error, earthquakes, hurricanes, floods, fires, natural disasters, power losses, disruptions in telecommunications
services, fraud, military or political conflicts, terrorist attacks, computer viruses, or other events. Our systems are also subject
to break-ins, sabotage, information hijacking or ransom, and intentional acts of vandalism. Some of our systems are not fully redundant
and our disaster recovery planning is not sufficient for all eventualities. Any of these or other systems related problems could,
in turn, adversely affect our sales and profitability.
Our business and our reputation could
be adversely affected by the failure to protect sensitive employee, customer and consumer data, or to comply with evolving regulations
relating to our obligation to protect such data.
In the ordinary course
of our business, we collect and store certain personal information from individuals, such as our customers and suppliers, and we
process customer payment card and check information for purchases via our website. Cyber-attacks designed to gain access to sensitive
information by breaching security systems of large organizations leading to unauthorized release of confidential information have
occurred recently at a number of major U.S. companies despite widespread recognition of the cyber-attack threat and improved data
protection methods. Computer hackers may attempt to penetrate our computer system and, if successful, misappropriate personal information,
payment card or check information or confidential Company business information. In addition, a Company employee, contractor or
other third party with whom we do business may attempt to circumvent our security measures in order to obtain such information
and may purposefully or inadvertently cause a breach involving such information.
We will likely be subject
to attempts to breach the security of our networks and IT infrastructure through cyber-attack, malware, computer viruses, and other
means of unauthorized access. To the best of our knowledge, attempts to breach our systems have not been successful to date. A
breach of our systems that resulted in the unauthorized release of sensitive data could adversely affect our reputation and lead
to financial losses from remedial actions or potential liability, possibly including punitive damages. An electronic security breach
resulting in the unauthorized release of sensitive data from our information systems could also materially increase the costs we
already incur to protect against these risks. We continue to balance the additional risk with the cost to protect us against a
breach. Additionally, losses arising from a breach could be covered in part by insurance that we carry.
We are subject to payments-related
risks.
We accept payments
using a variety of methods, including credit card, debit card, credit accounts (including promotional financing), gift cards, direct
debit from a customer’s bank account, electronic payments (e.g., PayPal and Venmo), consumer invoicing and physical bank
check. For existing and future payment options we offer to our customers, we may become subject to additional regulations and compliance
requirements (including obligations to implement enhanced authentication processes that could result in significant costs and reduce
the ease of use of our payments products). For certain payment methods, including credit and debit cards, we pay interchange and
other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide
certain payment methods and payment processing services, including the processing of credit cards, debit cards, electronic checks,
electronic fund transfers, and promotional financing. In each case, it could disrupt our business if these companies become unwilling
or unable to provide these services to us. In addition, our business and profitability could be adversely affected if customers
who finance purchases fail to make financing payments in a timely manner.
Our customers primarily
use credit cards to buy from us. We are subject to the policies, procedures and rules of credit card issuers and payment card processors.
We are completely dependent upon our payment card processors to process the sales transactions and remit the proceeds to us. The
payment card processors have the right to withhold funds otherwise payable to us to establish or increase reserves based on their
assessment of the inherent risks of payment card processing and their assessment of the risks of processing our customers’
payment cards at any time, and have done so from time to time in the past. We are also subject to payment card association operating
rules, including data security rules, certification requirements, and rules governing electronic funds transfers, which could change
or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with any of these policies, procedures,
rules or requirements, or if our data security systems are breached or compromised, we may be liable for card issuing banks’
costs, subject to fines and higher transaction fees, and lose our ability to accept credit and debit card payments from our customers,
process electronic funds transfers, or facilitate other types of online payments, and our business and operating results could
be adversely affected. In addition, events affecting our payment card processors, including cyber-attacks, Internet or other infrastructure
or communications impairment or other events that could interrupt the normal operation of the payment card processors, could have
a material adverse effect on our business.
Credit card fraud and our response
to it could adversely affect our business.
We have received and
anticipate we will continue to receive orders placed with fraudulent credit card data. If we fail to adequately control fraudulent
credit card transactions it could reduce our net revenues and our gross profit or cause credit card or payment system companies
to disallow their cards’ use for customer payments on our website. We may suffer losses as a result of orders placed with
fraudulent credit card data even if the associated financial institution approved payment of the orders. Under current credit card
practices, we may be liable for fraudulent credit card transactions because we do not obtain a cardholder’s signature. If
we are unable to detect or control credit card fraud, claims against us for these transactions could harm our business, prospects,
financial condition and results of operation.
Further, to the extent
that our efforts to prevent fraudulent orders result in our inadvertent refusal to fill legitimate orders, we would lose the benefit
of legitimate potential sales and risk the alienation of legitimate customers. The occurrence of any of the foregoing could have
a material adverse effect on our business.
We are at risk of fraudulent returns.
We believe some customers
have processed a return of their purchased mattress products, and received a refund of the purchase price, fraudulently. If we
fail to detect and prevent these fraudulent activities, we will suffer losses that would adversely affect our profitability. Also,
our efforts to monitor and prevent fraud committed by customers could alienate legitimate customers which also could have a material
adverse effect on our business.
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.
Since the Business Combination, we have hired a new Chief Executive Officer, Chief Operating Officer and interim Chief Financial
Officer. The Company has also experienced the departure of the Chief Marketing Officer and Chief Branding Officer as well as announced
the departure of the Chief Financial Officer. These departures and any delay in replacing these executives could significantly
disrupt the Company’s ability to grow and pursue its strategic plans. The Company is currently in the process of searching
for qualified replacements. While we believe our new executive officers have benefitted and will continue to benefit the Company,
finding qualified replacements is time-consuming, takes Company resources, and can disrupt the Company’s 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. Pursuant to the employment agreements that have been entered into with them in connection with the consummation
of the Business Combination, they are not required to work a particular number of hours for us or to be based at any particular
location. The loss or reduction of their services could adversely affect our operations and our ability to achieve our business
objectives.
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. 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 have received notice
from the CPSC of several purported consumer complaints regarding some of our products. While we believe such complaints to be baseless,
in terms of the alleged harms and, in some cases, the individual’s actual use of our product, we are required to devote significant
amounts of time, attention and other resources, including financial resources, to investigating and responding to such complaints.
Further, because the complaints are available to the public, such complaints could result in adverse publicity or damage to our
reputation and brand value and result in lower sales.
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 change from time to time or may conflict. 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. 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 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 of non-compliance with certain of these regulations, and demand proof of compliance, and while we may believe we
comply 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 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.
Regulatory requirements related to
flammability standards for mattresses may increase our product costs and increase the risk of disruption to our business.
The CPSC adopted new
flammability standards and related regulations which became effective nationwide in July 2007 for mattresses and mattress and foundation
sets. Compliance with these requirements has resulted in higher materials and manufacturing costs for our products and has required
modifications to our information systems and business operations, further increasing our costs and negatively impacting our capacity.
Some states and the U.S. Congress continue to consider fire retardancy regulations that may be different from or more stringent
than the CPSC standard. 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.
In addition, these
regulations require manufacturers to implement quality assurance programs and encourage manufacturers to conduct random testing
of products. These regulations also require maintenance and retention of compliance documentation. These quality assurance and
documentation requirements are costly to implement and maintain. If any product testing, other evidence, or regulatory inspections
yield results indicating that any of our products may not meet the flammability standards, we may be required to temporarily cease
production and distribution or to recall products from the field, and we may be subject to fines or penalties, any of which outcomes
could harm our business, reputation, sales, profitability, cash flows and financial condition.
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 $2.6 million. We are in the process of assessing
our filing status and exposure with each state to determine if we can take advantage of an amnesty program or negotiated settlements.
In conjunction with
our expanded mattress product offering in 2018 delivered via third-party “white glove” service, we determined that
we are subject to sales tax as imposed by the jurisdictions in the contiguous 48 U.S. states and have been collecting and remitting
such sales tax for all of 2018. If the tax authorities in jurisdictions where we are already subject to sales tax or other indirect
tax obligations were to successfully challenge our positions or request an audit, our tax liability could increase substantially.
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.
We could be subject to additional
income tax liabilities.
We are subject to federal
and state income taxes in the U.S. Tax laws, regulations, and administrative practices in the U.S. and in various state and local
jurisdictions are subject to significant change, and significant judgment is required in evaluating and estimating our provision
and accruals for taxes. In addition, some states and cities require additional taxes or fees for the right to sell mattresses in
their jurisdiction. While we have established reserves based on assumptions and estimates that we believe are reasonable to cover
such taxes and fees, these reserves may prove to be insufficient.
Our determination of
our tax liability is always subject to audit and review by applicable tax authorities. Any adverse outcome of any such audit or
review could harm our business, and the ultimate tax outcome may differ from the amounts recorded in our financial statements and
may materially affect our financial results in the period or periods for which such determination is made. Regardless of the outcome,
responding to any such audit or review could cause us to incur significant costs and could divert resources away from our operations.
There are many transactions
that occur during the ordinary course of business for which the ultimate tax determination is uncertain. Our effective tax rates
could be affected by earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than
anticipated in jurisdictions where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to
realize the related tax benefit, changes in foreign currency exchange rates, entry into new businesses and geographies and changes
to our existing businesses, acquisitions (including integrations) and investments, changes in the price of our securities, changes
in our deferred tax assets and liabilities and their valuation, and changes in the relevant tax, accounting, and other laws, regulations,
administrative practices, principles, and interpretations.
A number of U.S. states
have attempted to increase corporate tax revenues by taking an expansive view of corporate presence to attempt to impose corporate
income taxes and other direct business taxes on companies that have no physical presence in their state, and taxing authorities
in other jurisdictions may take similar actions. Many U.S. states are also altering their apportionment formulas to increase the
amount of taxable income or loss attributable to their state from certain out-of-state businesses. Further, we may be required
in the future to pay sales and other taxes and fees to states where our products were warehoused before shipping. If more taxing
authorities are successful in applying direct taxes to Internet companies that do not have a physical presence in their respective
jurisdictions, this could increase our effective tax rate.
We may be subject to sales reporting
and record-keeping obligations.
One or more states,
the U.S. federal government or other jurisdictions may seek to impose reporting or record-keeping obligations on companies that
engage in or facilitate e-commerce. Such an obligation could be imposed by legislation intended to improve tax compliance (and
legislation to such effect has been contemplated by several states and a number of foreign jurisdictions). Complying with such
requirements would require us to devote significant amounts of time, attention and other resources, including financial resources,
which may adversely affect our operations and profitability.
Delaware law and our Second Amended
and Restated Certificate of Incorporation contain anti-takeover provisions, any of which could delay or discourage a merger, tender
offer, or assumption of control of the Company not approved by our Board of Directors and founders that some stockholders may consider
favorable.
Provisions of Delaware
law and our Second Amended and Restated Certificate of Incorporation could hamper a third party’s acquisition of us, or discourage
a third party from attempting to acquire control of us. You may not have the opportunity to participate in these transactions.
These provisions could also limit the price that investors might be willing to pay in the future for equity interests in the Company.
These provisions include:
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no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
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the right of our Board to elect a director to fill a vacancy created by the expansion of our Board or the resignation, death or removal of a director in certain circumstances, which prevents stockholders from being able to fill vacancies on our Board;
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a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;
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a prohibition on stockholders calling a special meeting and the requirement that a meeting of stockholders may only be called by members of our Board, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;
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the requirement that changes or amendments to certain provisions of our certificate of incorporation or bylaws must be approved by holders of at least two-thirds of our common stock; and
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advance notice procedures that stockholders must comply with in order to nominate candidates to our Board or to propose matters to be acted upon at a meeting of stockholders, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.
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Provisions in our Second Amended
and Restated Certificate of Incorporation could make it very difficult for an investor to bring any legal actions against us and
our directors or officers and could require us to pay any amounts incurred by our directors or officers in any such actions.
Our Second Amended
and Restated Certificate of Incorporation provides that, to the fullest extent permitted by law, our directors shall not be personally
liable for monetary damages for breach of fiduciary duties. Our Second Amended and Restated Certificate of Incorporation also allows
us to indemnify our directors and officers from and against any and all costs, charges and expenses resulting from their acting
in such capacities with us. This means that if you were able to enforce an action against our directors or officers, in all likelihood,
we would be required to pay any expenses they incurred in defending the lawsuit and any judgment or settlement they otherwise would
be required to pay. Accordingly, our indemnification obligations could divert needed financial resources and may adversely affect
our business, financial condition, results of operations and cash flows, and adversely affect the value of our business.
Provisions in our Second Amended
and Restated Certificate of Incorporation may limit our stockholders’ ability to obtain a favorable judicial forum.
Our Second Amended
and Restated Certificate of Incorporation provides that the Court of Chancery of the State of Delaware shall be the sole and exclusive
forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain
a favorable judicial forum for disputes with us or our directors, officers, employees or agents. It also provides that, unless
we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive
forum for any derivative action or proceeding brought on our behalf; any action asserting a claim for or based on a breach of duty
or obligation owed by any current or former director, officer or employee of ours to us or to our stockholders, including any claim
alleging the aiding and abetting of such a breach; any action asserting a claim against us or any current or former director, officer
or employee of ours arising pursuant to any provision of the Delaware General Corporation Law or our certificate of incorporation
or bylaws; or any action asserting a claim related to or involving us that is governed by the internal affairs doctrine.
This
exclusive forum provision would not apply to suits brought to enforce any liability or duty created by the Securities Act or the
Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. To the extent that any such claims may
be based upon federal law claims, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought
to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. Furthermore, Section 22 of
the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability
created by the Securities Act or the rules and regulations thereunder.
This choice of forum provision may limit a stockholder’s
ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or employees,
which may discourage such lawsuits against us and our directors, officers or employees. Alternatively, if a court were to find
the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we
may incur additional costs associated with resolving such action in other jurisdictions, which could have a material adverse effect
on our business, financial condition, results of operations and prospects.
We will incur significant costs as
a result of our operating as a public company and our management will be required to devote substantial time to compliance with
the regulatory requirements placed on a public company.
As a public company
with substantial operations, we incur significant legal, accounting and other expenses. The costs of preparing and filing annual,
quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”)
and furnishing audited reports to stockholders will be time-consuming and costly.
It is also time-consuming,
difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley
Act of 2002, or the Sarbanes-Oxley Act. Certain members of our management have limited or no experience operating a company whose
securities are listed on a national securities exchange or with the rules and reporting practices required by the federal securities
laws as applied to a publicly traded company. We may need to recruit, hire, train and retain additional financial reporting, internal
control and other personnel in order to develop and implement appropriate internal controls and reporting procedures. If we are
unable to comply with the internal controls requirements of the Sarbanes-Oxley Act, we may not be able to obtain the independent
accountant certifications required by the Sarbanes-Oxley Act.
If we fail to establish and maintain
an effective system of internal controls, we may not be able to report our financial results accurately. Any inability to report
and file our financial results accurately and timely could harm our business and adversely affect the value of our business.
As a public company,
we are required to establish and maintain internal controls over financial reporting and disclosure controls and procedures and
to comply with other requirements of the Sarbanes-Oxley Act and the rules promulgated by the SEC. Even when such controls are implemented,
management, including our Chief Executive Officer and Interim Chief Financial Officer, cannot guarantee that our internal controls
and disclosure controls and procedures will prevent all possible errors. Because of the inherent limitations in all control systems,
no system of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company
have been detected. These inherent limitations include the possibility that judgments in decision-making can be faulty and subject
to simple error or mistake. Furthermore, controls can be circumvented by individual acts of some persons, by collusion of two or
more persons, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, measures of control may become inadequate because of changes in conditions or
the degree of compliance with policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and may not be detected.
We have identified material weaknesses
in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial
statements.
Our management has
identified material weaknesses 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. Specifically,
in connection with the preparation of our quarterly report for the quarter ended September 30, 2018 we discovered immaterial errors
in the amount of $1.7 million that resulted in revisions to prepaid inventory and cost of revenues over periods from January 1,
2017 through June 30, 2018, errors in the amount of $1.3 million that resulted in revisions to the three months ended June 30,
2018 inventory balance and cost of revenues and errors in the amount of $0.2 million that resulted in revisions to the six months
ended June 30, 2018 customer prepayments, accrued sales tax and revenues. In connection with our quarterly report for the quarter
ended March 31, 2018, we revised our 2017 year-end inventory balance and cost of revenues in the amount of $2.5 million. We continue
to evaluate, design and work through the process of implementing controls and procedures under a remediation plan designed to address
these material weaknesses. If our remedial measures are insufficient to address the material weaknesses, 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.
We may need to implement additional
finance and accounting systems, procedures and controls as we grow our business and organization and to satisfy new reporting requirements.
We are required to
comply with a variety of reporting, accounting and other rules and regulations. Compliance with existing requirements is expensive.
As a public company, we are required to comply with additional regulations and other requirements. These and future requirements
may increase our costs and require additional management time and resources. We may need to implement additional finance and accounting
systems, procedures and controls to satisfy our reporting requirements. If our internal control over financial reporting is determined
to be ineffective, such failure could cause investors to lose confidence in our reported financial information, negatively affect
the value of our business, subject us to regulatory investigations and penalties, and could have a material adverse effect on our
business.
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 could
be an emerging growth company for up to five years following the completion of our initial public offering in August 2015, although
we could lose that status sooner if our revenues exceed $1.07 billion, if we issue more than $1.0 billion in non-convertible debt
in a three year period or if the market value of our Common Stock held by non-affiliates meets or exceeds $700.0 million as of
the last day of its second fiscal quarter before that time, in which case we would no longer be an emerging growth company as of
the following fiscal year-end. 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 Common 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.
In connection with
the Closing of the Business Combination, the founders, Terry and Tony Pearce, through InnoHold, LLC control all of the shares of
Class B Common Stock of the Company which constitutes over 80% of all ownership interests in the Company. The lock-up period
following the Business Combination has expired, and the founders are now able to exchange their Class B shares for Class A shares
and sell them. Also, at this time, CCP, Blackwell and CDF own a majority of the shares of Class A Common Stock of the Company.
Any of these shareholders may choose to sell shares of Common Stock, and the founders particularly may decide to liquidate a substantial
portion of their interest in view of their age and for other personal reasons. The amount of shares they are able to sell,
if sold in large blocks or relatively close to each other in time, could result in downward pressure on the price of our Class
A Common Stock.
In connection with
the Closing of the Business Combination, some of our employees were granted incentive units as members of InnoHold, which together
with Terry and Tony Pearce holds all of the outstanding shares of Class B Common Stock of the Company. On February 8, 2019, at
the request of the Company’s HR & Compensation Committee of the Board of Directors, InnoHold initiated a tender offer
to each of its Class B unit holders to distribute to each a pro rata number of the paired Class B Units of Purple LLC and Class
B Stock of Purple Inc. held by InnoHold in exchange for the cancellation of their ownership interests in InnoHold. All InnoHold
Class B unit holders accepted the offer, and each transaction is expected to close sometime in the second quarter of 2019. The
closing of the transaction will be a taxable event for the recipients of paired Class B Units of Purple LLC and Class B Stock of
Purple Inc., and such recipients, or the Company on their behalf, may need to exchange, subject to the exchange agreement among
the Company, Purple LLC and InnoHold (the “Exchange Agreement”) and certain other conditions and restrictions, all
or some of their securities into shares of Class A Common Stock and then liquidate those shares of Class A Common Stock in order
to pay taxes assessed. Some of the participants receiving these equity incentives, including those who no longer work for the Company,
may want to liquidate some or all of the equity distributed to them by InnoHold. Sales of such shares of Class A Common Stock may
occur relatively close to each other in time, including during short windows of time when such employees are able to trade in the
Company’s securities without violating the Company’s insider trading policy, and such consolidated trading in such
short windows of time could result in downward pressure on the price of our Class A Common Stock.
This risk of downward
pressure on the price of our Class A Common Stock is particularly acute at this time inasmuch as the average trading volume of
our Class A Common Stock is very low, making it more difficult to sell a substantial number of shares at any point in time.
This risk related to the lack of an active trading market also may make it more difficult for any shareholder to sell their shares,
and until an active trading market develops and becomes sustainable, it is likely to make our stock less desirable to investors.
InnoHold, CCP, Blackwell and CDF, who hold most of the Company’s Common Stock, may not sell shares, or sell enough shares,
to increase the float to a point where a sustainable market develops.
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 Common Stock and, as a result, there may be significant volatility in the market price of our Class A Common 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 Common 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 Common 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, 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 Common 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 Common 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.
We are a “controlled company”
within the meaning of NASDAQ rules and, as a result, are exempt from certain corporate governance requirements.
InnoHold holds capital
stock representing a majority of our outstanding voting power. So long as InnoHold maintains holdings of more than 50% of the voting
power of our capital stock, we will be a “controlled company” within the meaning of NASDAQ corporate governance standards.
Under these standards, a company need not comply with certain corporate governance requirements, including:
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the requirement that a majority of our board of directors consist of “independent directors” as defined under NASDAQ rules;
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the requirement that we have a compensation committee that is composed entirely of independent directors;
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the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities, or otherwise have director nominees selected by vote of a majority of the independent directors; and
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the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.
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We intend to rely on
certain of these exemptions, including exemptions from the rules that would otherwise require us to have a Nominating and Corporate
Governance Committee and a Compensation Committee that is comprised entirely of independent directors. As a result, we do not have
a Nominating and Corporate Governance Committee and our Compensation Committee is not comprised entirely of independent directors.
While a controlled company is not required to have a majority of independent directors on its board of directors, our bylaws provide
that our board of directors shall consist of a majority of independent directors unless otherwise determined by a unanimous vote
of our board of directors. If we are no longer eligible to rely on the controlled company exception, we will comply with all applicable
NASDAQ corporate governance requirements, but we will be able to rely on phase-in periods for certain of these requirements in
accordance with NASDAQ rules. Accordingly, our stockholders may not have the same protections afforded to stockholders of companies
that are subject to all NASDAQ corporate governance requirements.
We may need additional financing
to execute our business plan and fund operations, which additional financing may not be available on reasonable terms or at all.
To fund our operations
and growth strategies, we may need to raise additional funds through various financing sources, including the sale of our equity
securities and the procurement of commercial debt financing. We may be required to refinance our debt. In addition, we may also
need additional funds to respond to business opportunities and challenges, including our ongoing operating expenses, developing
new and existing lines of business and enhancing our operating infrastructure. While we may need to seek additional funding for
such purposes, there can be no assurance that such funds will be available on commercially reasonable terms, if at all. If such
financing is not available on satisfactory terms, we may be unable to expand or continue our business as desired or refinance existing
debt, and operating results may be adversely affected. Under the terms of the Amended and Restated Credit Agreement, we are restricted
in the amount and type of additional indebtedness we are entitled to incur, which may delay or prohibit the Company from obtaining
additional indebtedness. Even if we procure new debt financing, such debt financing will increase expenses and must be repaid regardless
of operating results and may involve restrictive covenants limiting our operating flexibility. If we issue equity securities to
raise additional funds, the percentage ownership of our existing stockholders will be reduced, and our stockholders may experience
additional dilution in net book value per share.
If the amount of capital
we are able to raise from financing activities, together with revenues from operations, is not sufficient to satisfy our capital
needs, we may be required to reduce or even cease operations.
A market for our securities may not
develop, 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 develop or, if developed, it may not be sustained for many reasons, including that InnoHold,
CCP, Blackwell and CDF, who hold most of the Company’s 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 a market can be established
and sustained.
NASDAQ may delist our securities
from trading on its exchange, which could limit investors’ ability to make transactions in our securities and subject us
to additional trading restrictions.
Our shares of Class
A Common Stock are currently listed on NASDAQ. However, we cannot assure you that our Class A Common Stock will continue to be
listed on NASDAQ in the future. In order to continue listing our Class A Common Stock on NASDAQ, we must maintain certain financial,
distribution and stock price levels. Generally, we must maintain a minimum amount in stockholders’ equity and a minimum number
of holders of our Class A Common Stock.
If NASDAQ delists our
Class A Common Stock 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:
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a limited availability of market quotations for our securities;
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reduced liquidity for our securities;
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a determination that our Common Stock is a “penny stock” which will require brokers trading in our Common Stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities;
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a limited amount of news and analyst coverage; and
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a decreased ability to issue additional securities or obtain additional financing in the future.
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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.” If our Class A Common Stock continues to be listed on NASDAQ,
our Class A Common Stock will be a covered security. 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.
Purple LLC’s level of indebtedness
could adversely affect Purple LLC’s and the Company’s 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 December
31, 2018, Purple LLC had total debt of $26.7 million outstanding, comprised of $26.6 million outstanding under the Credit
Agreement and $0.1 million in capital lease obligations. On February 26, 2019, an additional $10.0 million in debt was
incurred upon the closing of the Amended and Restated Credit Agreement. As of March 14, 2019, approximately $36.7 million
was outstanding under the Amended and Restated Credit Agreement. Our level of indebtedness could have important consequences
to stockholders. For example, it could:
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make it more difficult to satisfy our obligations with respect to our indebtedness, resulting in possible defaults on, and acceleration of, such indebtedness;
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increase our vulnerability to general adverse economic and industry conditions;
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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 its business;
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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 its business;
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limit our ability to make material acquisitions or take advantage of business opportunities that may arise; and
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place us at a potential competitive disadvantage compared to its competitors that have less debt.
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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 Amended and Restated Credit Agreement, and we may be unable to comply
with all covenants in the future.
The Amended and Restated
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 will limit our ability to, among other
things:
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make capital expenditures in excess of $20 million;
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incur capital lease obligations in excess of $10 million;
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enter into future asset-based loans in excess of $10 million;
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guarantee additional debt;
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pay dividends on capital stock or redeem, repurchase, retire or otherwise acquire any capital stock;
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make certain payments, dividends, distributions or investments; and
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merge or consolidate with other companies or transfer all or substantially all of Purple LLC’s assets, other than with respect to the Business Combination.
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In addition, the Amended
and Restated Credit Agreement contains certain negative covenants that restrict the incurrence of indebtedness unless certain incurrence-based
financial covenant requirements are met. 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. 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.
We could issue additional preferred
stock without stockholder approval with the effect of diluting then current stockholder interests, impairing their voting rights
and potentially discouraging a takeover that stockholders may consider favorable.
Pursuant to our Amended
and Restated Certificate of Incorporation, the board of directors of the Company has the ability to authorize the issuance of up
to five million shares of preferred stock at any time and from time to time, with such terms and preferences as the board determines
and without any stockholder approval other than as may be required by NASDAQ rules. The issuance of such shares of preferred stock
could dilute the interest of, or impair the voting power of, our common stockholders. The issuance of such preferred stock could
also be used as a method of discouraging, delaying or preventing a change of control.
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 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.
InnoHold and other
owners may, subject to certain conditions and transfer restrictions, exchange their Class B Units and shares of Class B Common
Stock for shares of Class A Common 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 December 31, 2018, there have
been no exchanges of Class B Units and shares of Class B Common Stock for shares of Class A Common Stock.
In connection with
the Business Combination, we entered into the Tax Receivable Agreement, which generally provides for the payment by us to exchanging
holders of Class B Units and shares of Class B Common Stock 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. Because none
of the foregoing factors are known at this time, we cannot determine the amounts (if any) that would be payable under the Tax Receivable
Agreement. However, we expect that as a result of the possible 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 that we expect to make 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 and other
owners of the securities 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, which could materially impair our financial condition.
In certain cases, payments under
the Tax Receivable Agreement may be accelerated or significantly exceed the actual benefits we realize in respect of the tax attributes
subject to the Tax Receivable Agreement.
The Tax Receivable
Agreement provides that, in the event that we exercise our right to early termination of the Tax Receivable Agreement, or in the
event of a change of control of the Company or we are more than 90 days late in making of a payment due under the Tax Receivable
Agreement, the Tax Receivable Agreement will terminate, and we will be required to make a lump-sum payment to InnoHold and other
owners of similar securities equal to the present value of all forecasted future payments that would have otherwise been made under
the Tax Receivable Agreement, which lump-sum payment would be based on certain assumptions, including those relating to our future
taxable income. The change of control payment to InnoHold and the other owners could be substantial and could exceed the actual
tax benefits that we receive as a result of acquiring units from other owners of Purple LLC because the amounts of such payments
would be calculated assuming that we would have been able to use the potential tax benefits each year for the remainder of the
amortization periods applicable to the basis increases, and that tax rates applicable to us would be the same as they were in the
year of the termination.
Decisions made in the
course of running our business, such as with respect to mergers, asset sales, other forms of business combinations or other changes
in control, may influence the timing and amount of payments that are received by the other holders of Class B Units and shares
of Class B Common Stock under the Tax Receivable Agreement. For example, the earlier disposition of assets following an exchange
or acquisition transaction will generally accelerate payments under the Tax Receivable Agreement and increase the present value
of such payments, and the disposition of assets before an exchange or acquisition transaction will increase an existing owner’s
tax liability without giving rise to any rights of holders of Class B Units and shares of Class B Common Stock to receive payments
under the Tax Receivable Agreement.
There may be a material
negative effect on our liquidity if the payments under the Tax Receivable Agreement exceed the actual income or franchise tax savings
that we realize in respect of the tax attributes subject to the Tax Receivable Agreement or if distributions to us by Purple LLC
are not sufficient to permit us to make payments under the Tax Receivable Agreement after we have paid taxes and other expenses.
Furthermore, our obligations to make payments under the Tax Receivable Agreement could make us a less attractive target for an
acquisition, particularly in the case of an acquirer that cannot use some or all of the tax benefits that are deemed realized under
the Tax Receivable Agreement. We may need to incur additional indebtedness to finance payments under the Tax Receivable Agreement
to the extent our cash resources are insufficient to meet our obligations under the Tax Receivable Agreement as a result of timing
discrepancies or otherwise which may have a material adverse effect on our financial condition.
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 Common Stock, in each case that were received in connection with the Business Combination, for shares of Class
A Common 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. Any such amounts payable will only be due once the relevant tax savings have been
realized 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.
Unanticipated changes in effective
tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our financial
condition and results of operations.
Our future effective
tax rates could be subject to volatility or adversely affected by a number of factors, including:
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changes in the valuation of our deferred tax assets and liabilities;
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expected timing and amount of the release of any tax valuation allowances;
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tax effects of stock-based compensation;
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costs related to intercompany restructurings; and
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changes in tax laws, regulations or interpretations thereof.
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In addition, we may
be subject to audits of our income, sales and other transaction taxes by U.S. federal and state authorities. Outcomes from these
audits could have an adverse effect on our financial condition and results of operations.
DESCRIPTION
OF CAPITAL STOCK
The following summary
of the material terms of our securities is not intended to be a complete summary of the rights and preferences of such securities.
We urge you to read our certificate of incorporation in its entirety for a complete description of the rights and preferences of
our securities.
Authorized and Outstanding Stock
Our authorized capital
stock consists of 300 million shares of common stock, including 210 million shares of Class A Common Stock, par value of $0.0001
per share and 90 million shares of Class B Common Stock, par value of $0.0001 per share, and five million shares of undesignated
preferred stock, $0.0001 par value per share. The outstanding shares of our common stock are duly authorized, validly issued, fully
paid and non-assessable. As of April 30, 2019, there were 53,801,954 shares of common stock outstanding, including 9,730,636 shares
of Class A Common Stock, held of record by approximately twenty-one stockholders of record, and 44,071,318 shares of Class B Common
Stock, held by approximately three stockholders of record, no shares of preferred stock outstanding and 30,953,240 warrants, including
the Warrants, outstanding held of record by approximately 21 holders of warrants. Such numbers do not include Depository Trust
Company participants or beneficial owners holding shares through nominee names.
The following is a
summary of the rights of our common and preferred stock and some of the provisions of our Second Amended and Restated Certificate
of Incorporation and Amended and Restated Bylaws, our outstanding warrants, our registration rights agreements and the Delaware
General Corporation Law. Because it is only a summary, it does not contain all the information that may be important to you. For
a complete description you should refer to our Second Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws,
the warrant and registration rights agreements, as well as the relevant provisions of the Delaware General Corporation Law.
Common Stock
Class A Common Stock
Holders of Class A
Common Stock are entitled to one vote for each share held on all matters to be voted on by stockholders. Unless specified in our
Second Amended and Restated Certificate of Incorporation or Amended and Restated Bylaws, or as required by applicable provisions
of the DGCL or applicable stock exchange rules, the affirmative vote of a majority of our common shares that are voted is required
to approve any such matter voted on by our stockholders. Directors are elected by a plurality of the votes cast at an annual meeting
of stockholders by holders of our common stock. There is no cumulative voting with respect to the election of directors, with the
result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors. Holders
of Class A Common Stock are entitled to receive ratable dividends when, as and if declared by the board of directors out of funds
legally available therefor.
In the event of a liquidation,
dissolution or winding up of the company after a business combination, our stockholders are entitled to share ratably in all assets
remaining available for distribution to them after payment of liabilities and after provision is made for each class of stock,
if any, having preference over the common stock. Our stockholders have no preemptive or other subscription rights, other than as
described below in the section entitled “Preemptive or Other Rights.” There are no sinking fund provisions applicable
to the common stock.
Class B Common Stock
Holders of Class B
Common Stock are entitled to one vote for each share held on all matters to be voted on by stockholders. Unless specified in our
Second Amended and Restated Certificate of Incorporation or Amended and Restated Bylaws, or as required by applicable provisions
of the DGCL or applicable stock exchange rules, the affirmative vote of a majority of our common shares that are voted is required
to approve any such matter voted on by our stockholders. Directors are elected by a plurality of the votes cast at an annual meeting
of stockholders by holders of our common stock. There is no cumulative voting with respect to the election of directors, with the
result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors.
The Class B Common
Stock is not entitled to receive dividends, if declared by the Board, or to receive any portion of any such assets in respect of
their shares upon liquidation, dissolution, distribution of assets or winding-up of the Company in excess of the par value of such
stock. In addition, the Class B Common Stock may only be issued to and held by InnoHold and its permitted transferees (collectively,
the “Permitted Holders”).
At any time Purple
LLC issues a Class B Unit to a Permitted Holder, the Company will issue a share of Class B Common Stock to such Permitted Holder.
Upon the exchange of a Class B Unit pursuant to the Exchange Agreement for a share of Class A Common Stock, the corresponding share
of Class B Common Stock will be automatically cancelled for no consideration. Shares of Class B Common Stock may only be transferred
to a person other than the Company or Purple LLC if the transferee is a Permitted Holder and an equal number of Class B Units are
simultaneously transferred to such transferee.
Founder Shares
2,587,500 of our outstanding
shares of Class A Common Stock were sold to Global Partner Sponsor I LLC (the “Sponsor”) in our initial public offering.
These “Founder Shares” are identical to the shares of Class A Common Stock sold in our initial public offering, and
holders of these shares have the same stockholder rights as public stockholders, except that the Founder Shares are subject to
certain transfer restrictions described below.
In connection with
the closing of the Business Combination, the Company, Continental Stock Transfer and the Coliseum Investors entered into an Agreement
to Assign Founder Shares (the “Founder Share Assignment Agreement”), pursuant to which the Sponsor assigned to the
Coliseum Investors an aggregate of 1,293,750 of its Founder Shares (the “Coliseum Founder Shares”).
The Sponsor agreed
to subject 646,876 shares of Class A Common Stock owned by it to vesting and forfeiture based on the Class A Common Stock price
performance of the post-Business Combination company over eight years following consummation of the Business Combination (the “Vesting
Period”). These shares will vest and no longer be subject to forfeiture on the first day the closing price of the Class A
Common Stock is at or above $12.50 (subject to adjustments for stock splits, stock dividends, reorganizations, recapitalizations
and the like) for 20 trading days over a 30 trading day period immediately preceding such day during the Vesting Period. In addition,
these shares will immediately vest upon a change of control or liquidation of the Company or certain other events. Any shares that
do not vest during the Vesting Period will be forfeited by the Sponsor at the expiration of the Vesting Period. The Sponsor will
continue to be entitled to voting rights and dividends on these shares until vesting. The Coliseum investors also agreed to subject
646,876 of their Coliseum Founder Shares to the same vesting and forfeiture conditions described above.
Voting Power
Except as otherwise
required by law or as otherwise provided in any certificate of designation for any series of preferred stock, the holders of Class
A Common Stock and Class B Common Stock have exclusive voting power for the election of directors and all other matters requiring
stockholder action. Holders of Class A Common Stock and Class B Common Stock are entitled to one vote per share on matters to be
voted on by stockholders.
Warrants
Warrants Registered
in this Offering
In connection with
the Closing and Purple LLC’s entry into the Amended and Restated Credit Agreement, the Company issued to CCP and Blackwell,
as the Lenders that provided an additional $10.0 million in loans upon the closing of the Amended and Restated Credit Agreement,
the Warrants on the terms described below.
General
. Each
Warrant entitles the registered holder to purchase one share of the Company’s Class A Common Stock at a price of $5.74 per
share, subject to adjustment as discussed below. The Warrants expire on February 26, 2024, at 5:00 p.m., New York time, or earlier
upon redemption or liquidation.
Exercise
. The
Warrants may be exercised by providing an executed notice of exercise form accompanied by full payment of the exercise price or
on a cashless basis, if applicable. The holders do not have the rights or privileges of holders of Class A Common Stock or any
voting rights until they exercise their Warrants and receive shares of Class A Common Stock. After the issuance of shares of Class
A Common Stock upon exercise of the Warrants, each holder will be entitled to one vote for each share held of record on all matters
to be voted on by stockholders generally. Upon 20 days’ prior written notice, the Company may, in its sole discretion, decrease
the exercise price of the Warrants at any time prior to the expiration of the Warrants for a period of not less than 20 business
days. In no event shall the exercise price be lowered by the Company to be less than $1.00.
Redemption Right
.
Once the Warrants become exercisable, the Company may call the Warrants for redemption in whole and not in part at a price of $0.01
per share of Class A Common Stock issuable upon exercise of the Warrants upon not less than 30 days’ prior written notice
of redemption (the “30-day redemption period”) to each warrantholder, provided that this redemption right is only available
if the reported last sale price of the Class A Common Stock equals or exceeds $24.00 per share for any 20 trading days within a
30-trading day period ending three business days before the Company sends the notice of redemption to the warrantholders. If the
Company calls the Warrants for redemption, it will have the option to require any holder that wishes to exercise his, her or its
Warrant to do so on a “cashless basis” by which the holders of Warrants would pay the exercise price by surrendering
their Warrants for that number of shares of Class A Common Stock equal to the quotient obtained by dividing (x) the product of
the number of shares of Class A Common Stock underlying the Warrants, multiplied by the difference between the exercise price of
the Warrants and the “fair market value” (defined below), by (y) the fair market value. The “fair market value”
means the average reported last sale price of the Class A Common Stock for the 10 trading days ending on the third trading day
prior to the date on which the notice of redemption is sent to the holders of Warrants.
Beneficial Ownership
Limitation
. The warrantholders may elect to be subject to a requirement that such warrantholder will not have the right to
exercise its Warrants, to the extent that after giving effect to such exercise, such person (together with such person’s
affiliates) would beneficially own in excess of 9.8% (as specified by the holder) of the shares of Class A Common Stock outstanding
immediately after giving effect to such exercise.
Anti-Dilution Protection
.
If the number of outstanding shares of Class A Common Stock is increased by a stock dividend payable in shares of Class A Common
Stock, or by a split-up of shares of Class A Common Stock or other similar event, then, on the effective date of such stock dividend,
split-up or similar event, the number of shares of Class A Common Stock issuable on exercise of each Warrant will be increased
in proportion to such increase in the outstanding shares of Class A Common Stock. A rights offering to holders of Class A Common
Stock entitling holders to purchase shares of Class A Common Stock at a price less than the fair market value will be deemed a
stock dividend of a number of shares of Class A Common Stock equal to the product of (i) the number of shares of Class A Common
Stock actually sold in such rights offering (or issuable under any other equity securities sold in such rights offering that are
convertible into or exercisable for Class A Common Stock) multiplied by (ii) one (1) minus the quotient of (x) the price per share
of Class A Common Stock paid in such rights offering divided by (y) the fair market value. For these purposes (i) if the rights
offering is for securities convertible into or exercisable for Class A Common Stock, in determining the price payable for Class
A Common Stock, there will be taken into account any consideration received for such rights, as well as any additional amount payable
upon exercise or conversion and (ii) “fair market value” means the volume weighted average price of Class A Common
Stock as reported during the ten trading day period ending on the trading day prior to the first date on which the shares of Class
A Common Stock trade on the applicable exchange or in the applicable market, regular way, without the right to receive such rights.
In addition, if the
Company, at any time while the Warrants are outstanding and unexpired, pays a dividend or makes a distribution in cash, securities
or other assets to the holders of Class A Common Stock on account of such shares of Class A Common Stock (or other shares of our
capital stock into which the warrants are convertible), other than (a) as described in the paragraph above or (b) certain ordinary
cash dividends, then the Warrant exercise price will be decreased, effective immediately after the effective date of such event,
by the amount of cash and/or the fair market value of any securities or other assets paid on each share of Class A Common Stock
in respect of such event.
If the number of outstanding
shares of Class A Common Stock is decreased by a consolidation, combination, reverse stock split or reclassification of shares
of Class A Common Stock or other similar event, then, on the effective date of such consolidation, combination, reverse stock split,
reclassification or similar event, the number of shares of Class A Common Stock issuable on exercise of each warrant will be decreased
in proportion to such decrease in outstanding shares of Class A Common Stock.
Whenever the number
of shares of Class A Common Stock purchasable upon the exercise of the Warrants is adjusted, as described in the paragraphs above,
the Warrant exercise price will be adjusted by multiplying the Warrant exercise price immediately prior to such adjustment by a
fraction (x) the numerator of which will be the number of shares of Class A Common Stock purchasable upon the exercise of the Warrants
immediately prior to such adjustment, and (y) the denominator of which will be the number of shares of Class A Common Stock so
purchasable immediately thereafter.
Fundamental Transaction;
Exercise Price Adjustment
. In the event of a “fundamental transaction” the holder will have the right to purchase
and receive the same kind and amount of consideration receivable by the stockholders of the Company in such fundamental transaction.
The Company will cause the surviving company in a fundamental transaction to assume the obligations of the Company under the Warrants.
In addition, the holder may elect to either (i) have the exercise price of the warrant reduced by the Black-Scholes value of the
Warrants (as set forth in the Warrants) or (ii) cause the Company or its successor to repurchase all or a portion of the Warrants
at the Black-Scholes value (as set forth in the Warrants). For purposes of the Warrants, a “fundamental transaction”
includes, subject to certain exceptions, any reclassification or reorganization of the Company, any merger or consolidation of
the Company with or into another corporation, any merger or consolidation with (but not into) another corporation in which the
stockholders of the Company immediately prior to the merger or consolidation own less than a majority of the outstanding stock
of the surviving entity, any sale or conveyance of all or substantially all of the assets or other property of the Company, and
any group (within the meaning of Rule 13d-5(b)(1) under the Exchange Act) consummates a tender, exchange or redemption offer after
which such group beneficially owns more than 50% of the outstanding shares of Class A Common Stock of the Company.
Additionally, the exercise
price of the warrant will be reduced by the Black-Scholes value of the Warrants (as set forth in the Warrants) in the event (a)
any person (other than the holders of the Warrants and their affiliates), together with members of any group (within
the meaning of Rule 13d-5(b)(1) under the Exchange Act) of which such person is a part, and together with any affiliate or associate
of such person (within the meaning of Rule 12b-2 under the Exchange Act) and any members of any such group of which any such affiliate
or associate is a part, becomes the beneficial owner, directly or indirectly, through purchase, merger or other acquisition transaction
or series of transactions, securities of the Company entitling such person or group to exercise 25% or more of the total voting
power of all voting securities of the Company, (b) Tony Pearce or Terry Pearce individually or together cease beneficially to own
at least 50% of the voting securities of the Company, or (c) the Board ceases to be comprised of a majority of independent directors
(as defined under NASDAQ rules) for a period of longer than 60 consecutive days.
Amendments
.
The Warrants provide that the terms of the Warrants may be amended only in a writing signed by the Company and the holder.
The issuance of the
Warrants does not affect the rights of our existing security holders, other than with respect to potential dilution as a result
of an increase in the number of shares of Class A Common Stock outstanding if the Lenders exercise the Warrants.
Public Warrants
and Sponsor Warrants
There were 15,525,000
warrants (the “Public Warrants”) issued in the initial public offering of Global Partner Acquisition Corp. (the predecessor
to the Company) and 12,815,000 warrants (the “Sponsor Warrants”) issued in a private placement simultaneously with
such initial public offering. The Public Warrants and Sponsor Warrants have the same terms. In March 2018 the Public Warrants and
Sponsor Warrants began trading together as publicly traded warrants under the same trading symbol and CUSIP. The terms of the Public
Warrants and Sponsor warrants are described below.
Public Warrants
Each whole warrant
entitles the registered holder to purchase one-half of one share of our Class A Common Stock at a price of $5.75 per half share
($11.50 per full share), subject to adjustment as discussed below, at any time after March 4, 2018. Pursuant to the warrant agreement,
a warrantholder may exercise its warrants only for a whole number of shares of the Class A Common Stock. For example, if a warrantholder
holds one warrant to purchase one-half of a share of Class A Common Stock, such warrant will not be exercisable. If a warrantholder
holds two warrants, such warrants will be exercisable for one share of the Class A Common Stock. Warrants must be exercised for
a whole share. The warrants will expire February 2, 2023, at 5:00 p.m., New York time, or earlier upon redemption or liquidation.
We will not be obligated
to deliver any shares of Class A Common Stock pursuant to the exercise of a warrant and will have no obligation to settle such
warrant exercise unless a registration statement under the Securities Act with respect to the shares of Class A Common Stock underlying
the warrants is then effective and a prospectus relating thereto is current, subject to our satisfying our obligations described
below with respect to registration. No warrant will be exercisable and we will not be obligated to issue shares of Class A Common
Stock upon exercise of a warrant unless Class A Common Stock issuable upon such warrant exercise has been registered, qualified
or deemed to be exempt under the securities laws of the state of residence of the registered holder of the warrants. In the event
that the conditions in the two immediately preceding sentences are not satisfied with respect to a warrant, the holder of such
warrant will not be entitled to exercise such warrant and such warrant may have no value and expire worthless. In no event will
we be required to net cash settle any warrant. In the event that a registration statement is not effective for the exercised warrants,
the purchaser of a unit containing such warrant will have paid the full purchase price for the unit solely for the share of Class
A Common Stock underlying such unit.
We agreed that as soon
as practicable, but in no event later than fifteen (15) business days, after the closing of our initial business combination, we
would use our best efforts to file with the SEC the registration statement for the registration, under the Securities Act, of the
shares of Class A Common Stock issuable upon exercise of the warrants. That registration statement was filed within fifteen (15)
business days of the Business Combination. We will use our best efforts to cause the same to become effective and to maintain the
effectiveness of such registration statement, and a current prospectus relating thereto, until the expiration of the warrants in
accordance with the provisions of the warrant agreement. Notwithstanding the above, if our Class A Common Stock is at the time
of any exercise of a warrant not listed on a national securities exchange such that it satisfies the definition of a “covered
security” under Section 18(b)(1) of the Securities Act, we may, at our option, require holders of public warrants who exercise
their warrants to do so on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act and, in the
event we so elect, we will not be required to file or maintain in effect a registration statement or register or qualify the shares
under blue sky laws.
Once the warrants become
exercisable, we may call the warrants for redemption:
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in whole and not in part;
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at a price of $0.01 per warrant;
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upon not less than 30 days’ prior written notice of redemption (the “30-day redemption period”) to each warrantholder; and
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if, and only if, the reported last sale price of the Class A Common Stock equals or exceeds $24.00 per share for any 20 trading days within a 30-trading day period ending three business days before we send the notice of redemption to the warrant holders.
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If and when the warrants
become redeemable by us, we may exercise our redemption right even if we are unable to register or qualify the underlying securities
for sale under all applicable state securities laws.
We have established
the last of the redemption criterion discussed above to prevent a redemption call unless there is at the time of the call a significant
premium to the warrant exercise price. If the foregoing conditions are satisfied and we issue a notice of redemption of the warrants,
each warrant holder will be entitled to exercise his, her or its warrant prior to the scheduled redemption date. However, the price
of the Class A Common Stock may fall below the $24.00 redemption trigger price as well as the $5.75 (for each half share) warrant
exercise price after the redemption notice is issued.
If we call the warrants
for redemption as described above, our management will have the option to require any holder that wishes to exercise his, her or
its warrant to do so on a “cashless basis.” In determining whether to require all holders to exercise their warrants
on a “cashless basis,” our management will consider, among other factors, our cash position, the number of warrants
that are outstanding and the dilutive effect on our stockholders of issuing the maximum number of shares of Class A Common Stock
issuable upon the exercise of our warrants. If our management takes advantage of this option, all holders of warrants would pay
the exercise price by surrendering their warrants for that number of shares of Class A Common Stock equal to the quotient obtained
by dividing (x) the product of the number of shares of Class A Common Stock underlying the warrants, multiplied by the difference
between the exercise price of the warrants and the “fair market value” (defined below), by (y) the fair market value.
The “fair market value” shall mean the average reported last sale price of the Class A Common Stock for the 10 trading
days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of warrants. If
our management takes advantage of this option, the notice of redemption will contain the information necessary to calculate the
number of shares of Class A Common Stock to be received upon exercise of the warrants, including the “fair market value”
in such case. Requiring a cashless exercise in this manner will reduce the number of shares to be issued and thereby lessen the
dilutive effect of a warrant redemption. We believe this feature is an attractive option to us if we do not need the cash from
the exercise of the warrants after our initial business combination. If we call our warrants for redemption and our management
does not take advantage of this option, the Sponsor and its permitted transferees would still be entitled to exercise their Sponsor
Warrants for cash or on a cashless basis using the same formula described above that other warrant holders would have been required
to use had all warrant holders been required to exercise their warrants on a cashless basis, as described in more detail below.
A holder of a warrant
may notify us in writing in the event it elects to be subject to a requirement that such holder will not have the right to exercise
such warrant, to the extent that after giving effect to such exercise, such person (together with such person’s affiliates),
to the warrant agent’s actual knowledge, would beneficially own in excess of 9.8% (as specified by the holder) of the shares
of Class A Common Stock outstanding immediately after giving effect to such exercise.
If the number of outstanding
shares of Class A Common Stock is increased by a stock dividend payable in shares of Class A Common Stock, or by a split-up of
shares of Class A Common Stock or other similar event, then, on the effective date of such stock dividend, split-up or similar
event, the number of shares of Class A Common Stock issuable on exercise of each warrant will be increased in proportion to such
increase in the outstanding shares of Class A Common Stock. A rights offering to holders of Class A Common Stock entitling holders
to purchase shares of Class A Common Stock at a price less than the fair market value will be deemed a stock dividend of a number
of shares of Class A Common Stock equal to the product of (i) the number of shares of Class A Common Stock actually sold in such
rights offering (or issuable under any other equity securities sold in such rights offering that are convertible into or exercisable
for Class A Common Stock) multiplied by (ii) one (1) minus the quotient of (x) the price per share of Class A Common Stock paid
in such rights offering divided by (y) the fair market value. For these purposes (i) if the rights offering is for securities convertible
into or exercisable for Class A Common Stock, in determining the price payable for Class A Common Stock, there will be taken into
account any consideration received for such rights, as well as any additional amount payable upon exercise or conversion and (ii)
fair market value means the volume weighted average price of Class A Common Stock as reported during the ten trading day period
ending on the trading day prior to the first date on which the shares of Class A Common Stock trade on the applicable exchange
or in the applicable market, regular way, without the right to receive such rights.
In addition, if we,
at any time while the warrants are outstanding and unexpired, pay a dividend or make a distribution in cash, securities or other
assets to the holders of Class A Common Stock on account of such shares of Class A Common Stock (or other shares of our capital
stock into which the warrants are convertible), other than (a) as described above or (b) certain ordinary cash dividends, then
the warrant exercise price will be decreased, effective immediately after the effective date of such event, by the amount of cash
and/or the fair market value of any securities or other assets paid on each share of Class A Common Stock in respect of such event.
If the number of outstanding
shares of our Class A Common Stock is decreased by a consolidation, combination, reverse stock split or reclassification of shares
of Class A Common Stock or other similar event, then, on the effective date of such consolidation, combination, reverse stock split,
reclassification or similar event, the number of shares of Class A Common Stock issuable on exercise of each warrant will be decreased
in proportion to such decrease in outstanding shares of Class A Common Stock.
Whenever the number
of shares of Class A Common Stock purchasable upon the exercise of the warrants is adjusted, as described above, the warrant exercise
price will be adjusted by multiplying the warrant exercise price immediately prior to such adjustment by a fraction (x) the numerator
of which will be the number of shares of Class A Common Stock purchasable upon the exercise of the warrants immediately prior to
such adjustment, and (y) the denominator of which will be the number of shares of Class A Common Stock so purchasable immediately
thereafter.
In case of any reclassification
or reorganization of the outstanding shares of Class A Common Stock (other than those described above or that solely affects the
par value of such shares of Class A Common Stock), or in the case of any merger or consolidation of us with or into another corporation
(other than a consolidation or merger in which we are the continuing corporation and that does not result in any reclassification
or reorganization of our outstanding shares of Class A Common Stock), or in the case of any sale or conveyance to another corporation
or entity of the assets or other property of us as an entirety or substantially as an entirety in connection with which we are
dissolved, the holders of the warrants will thereafter have the right to purchase and receive, upon the basis and upon the terms
and conditions specified in the warrants and in lieu of the shares of our Class A Common Stock immediately theretofore purchasable
and receivable upon the exercise of the rights represented thereby, the kind and amount of shares of stock or other securities
or property (including cash) receivable upon such reclassification, reorganization, merger or consolidation, or upon a dissolution
following any such sale or transfer, that the holder of the warrants would have received if such holder had exercised their warrants
immediately prior to such event. If less than 70% of the consideration receivable by the holders of Class A Common Stock in such
a transaction is payable in the form of common stock in the successor entity that is listed for trading on a national securities
exchange or is quoted in an established over-the-counter market, or is to be so listed for trading or quoted immediately following
such event, and if the registered holder of the warrant properly exercises the warrant within thirty days following public disclosure
of such transaction, the warrant exercise price will be reduced as specified in the warrant agreement based on the Black-Scholes
value (as defined in the warrant agreement) of the warrant.
The warrant agreement
provides that the terms of the warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective
provision, but requires the approval by the holders of at least 50% of the then outstanding public warrants to make any change
that adversely affects the interests of the registered holders of public warrants.
The warrants may be
exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with
the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment
of the exercise price (or on a cashless basis, if applicable), by certified or official bank check payable to us, for the number
of warrants being exercised. The warrant holders do not have the rights or privileges of holders of Class A Common Stock or any
voting rights until they exercise their warrants and receive shares of Class A Common Stock. After the issuance of shares of Class
A Common Stock upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters
to be voted on by stockholders.
No fractional shares
will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional
interest in a share, we will, upon exercise, round down to the nearest whole number the number of shares of our Class A Common
Stock to be issued to the warrant holder.
Sponsor Warrants
Pursuant to the Warrant
Agreement between the Company and Continental Stock Transfer & Trust Company, for so long as the Sponsor or a permitted transferee
of the Sponsor holds Sponsor Warrants, such holder may exercise the Sponsor Warrants on a cashless basis. If holders of the Sponsor
Warrants elect to exercise them on a cashless basis, they would pay the exercise price by surrendering their warrants for that
number of shares of Class A Common Stock equal to the quotient obtained by dividing (x) the product of the number of shares of
Class A Common Stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the “fair
market value” (defined below), by (y) the fair market value. The “fair market value” means the average reported
last sale price of the Class A Common Stock for the 10 trading days ending on the third trading day prior to the date on which
the notice of warrant exercise is sent to the warrant agent. In connection with the Baleen Investment and the Coliseum Private
Placement and Coliseum Credit Agreement, the Sponsor assigned to the Coliseum Investors, Coliseum Co-Invest Debt Fund, L.P., and
the Baleen Investors an aggregate of 9,532,500 Sponsor Warrants to purchase 4,766,250 shares of Class A Common Stock. After giving
effect to such assignment, the Sponsor holds 3,282,500 Sponsor Warrants to purchase 1,641,250 shares of Class A Common Stock.
The Public Warrants
and the Sponsor Warrants (including the Sponsor Warrants assigned to the Coliseum Investors, Coliseum Co-Invest Debt Fund, L.P.,
and the Baleen Investors) are subject to that certain Warrant Agreement, dated July 29, 2015, between Continental Stock Transfer
& Trust Company and the Company.
Registration Rights
Lender Registration Rights Agreement
In connection with
the Closing and Purple LLC’s entry into the Amended and Restated Credit Agreement, the Company entered into a Registration
Rights Agreement with CCP and Blackwell (the “Registration Rights Agreement”) providing for the registration under
the Securities Act of 1933, as amended (the “Securities Act”) of the Warrants and the shares of Class A Common Stock
underlying the Warrants, subject to customary terms and conditions. The Registration Rights Agreement entitles the warrantholders
to demand registration of these securities and also to piggyback on the registration of Company securities by the Company and other
existing Company securityholders.
The Registration Rights
Agreement provides that on or prior to March 29, 2019, the Company will be required to prepare and file with the Securities and
Exchange Commission pursuant to Rule 415 of the Securities Act a registration statement to register the resale of the Warrants
and the shares of Class A Common Stock underlying the Warrants. The filing of the registration statement of which this prospectus
forms a part is meant to satisfy this obligation.
InnoHold Registration Rights Agreement
On February 2, 2018,
in connection with the Closing, the Company entered into a Registration Rights Agreement with InnoHold and the Parent Representative
(the “InnoHold Registration Rights Agreement”). Under the InnoHold Registration Rights Agreement, InnoHold holds registration
rights that obligate the Company to register for resale under the Securities Act, all or any portion of the Equity Consideration
(including Class A Common Stock issued in exchange for the equity consideration received in the Business Combination) (the “Registrable
Securities”) so long as such shares are not then restricted under the Lock-Up Agreement. InnoHold is entitled to make a written
demand for registration under the Securities Act of all or part of its Registrable Securities (up to a maximum of three demands
in total), so long as such shares are not then restricted under the Lock-Up Agreement. Subject to certain exceptions, if any time
after the Closing, the Company proposes to file a registration statement under the Securities Act with respect to its securities,
under the Registration Rights Agreement, the Company shall give notice to InnoHold as to the proposed filing and offer InnoHold
an opportunity to register the sale of such number of Registrable Securities as requested by InnoHold in writing. In addition,
subject to certain exceptions, InnoHold is entitled under the Registration Rights Agreement to request in writing that the Company
register the resale of any or all of its Registrable Securities on Form S-3 and any similar short-form registration that may be
available at such time.
Under the Registration
Rights Agreement, the Company agreed to indemnify InnoHold and certain persons or entities related to InnoHold, such as its officers,
directors, employees, agents and representatives, against any losses or damages resulting from any untrue statement or omission
of a material fact in any registration statement or prospectus pursuant to which they sell Registrable Securities, unless such
liability arose from their misstatement or omission, and InnoHold agreed to indemnify the Company and certain persons or entities
related to the Company such as its officers and directors and underwriters against all losses caused by their misstatements or
omissions in those documents.
Dividends
Subject to the rights,
if any, of the holders of any outstanding series of preferred stock, the holders of the Class A Common Stock will be entitled to
receive such dividends and other distributions (payable in cash, property or capital stock of the Company) when, as and if declared
thereon by the board of directors from time to time out of any assets or funds of the Company legally available therefor, and will
share equally on a per share basis in such dividends and distributions. Holders of Class B Common Stock are not entitled to share
in any such dividends or other distributions.
Liquidation, Dissolution and Winding
Up
In the event of any
voluntary or involuntary liquidation, dissolution or winding-up, the holders of the Class A Common Stock will be entitled to receive
all remaining assets of the Company available for distribution to stockholders, after the rights of the holders of the preferred
stock have been satisfied. Holders of the Class B Common Stock will not be entitled to receive any portion of any such assets of
the Company in excess of the par value of such stock in respect of their shares of Class B Common Stock.
Preemptive or Other Rights
On February 1, 2018
the Company entered into a subscription agreement (the “Coliseum Subscription Agreement”) with CCP and Blackwell (together
the “Coliseum Investors”), pursuant to which CCP agreed to purchase from the Company 2,900,000 shares of Class A Common
Stock of the Company at a purchase price of $10.00 per share and Blackwell agreed to purchase from the Company 1,100,000 shares
of Class A Common Stock of the Company at a purchase price of $10.00 per share (the “Coliseum Private Placement”).
The shares of the Company’s common stock issued in the Coliseum Private Placement were not registered under the Securities
Act in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.
In connection with
the Coliseum Private Placement, we granted to the Coliseum Investors preemptive rights for the future sale of Company securities.
So long as the Coliseum Investors hold at least 50% of the shares of Class A Common Stock acquired in the Coliseum Private Placement,
the Coliseum Investors are entitled to purchase up to their pro rata share of all equity securities issued by the Company, subject
to certain exceptions.
In addition, the Coliseum
Subscription Agreement provides the Coliseum Investors (and any other funds or accounts managed by Coliseum Capital Management,
LLC) with a right of first refusal to provide all, but not less than all, of any of the following financings by the Company or
any of its subsidiaries: (i) preferred equity financing with a preference to or over any of the terms of the Company’s common
stock and (ii) any debt financing with a principal amount outstanding (together with all other debt provided by lender or group
of lenders) greater than or equal to $10 million, other than (x) the replacement or refinancing of existing indebtedness or (y)
an asset based loan on customary terms with an all in interest rate of not greater than 5% per year, by the Company or any of its
subsidiaries.
Other than the Coliseum
Investors, stockholders will have no preemptive or other subscription rights and there will be no sinking fund or redemption provisions
applicable to the Class A Common Stock and Class B Common Stock.
Certain Anti-Takeover Provisions of
Delaware Law
We are subject to the
provisions of Section 203 of the DGCL regulating corporate takeovers. This statute prevents certain Delaware corporations, under
certain circumstances, from engaging in a “merger” with:
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a stockholder who owns 15% or more of our outstanding voting stock (otherwise known as an “interested stockholder”);
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an affiliate of an interested stockholder; or
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an associate of an interested stockholder, for three years following the date that the stockholder became an interested stockholder.
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A “merger”
includes a merger or sale of more than 10% of our assets. However, the above provisions of Section 203 do not apply if:
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our board of directors approves the transaction that made the stockholder an “interested stockholder,” prior to the date of the transaction;
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after the completion of the transaction that resulted in the stockholder becoming an interested stockholder, that stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, other than statutorily excluded shares of common stock; or
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on or subsequent to the date of the transaction, the merger is approved by our board of directors and authorized at a meeting of its stockholders, and not by written consent, by an affirmative vote of at least two-thirds of the outstanding voting stock not owned by the interested stockholder.
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