RISK FACTORS
An investment in our Class A Common
Stock involves risks and uncertainties. You should consider carefully the risks described below, 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 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 depends 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. 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
TM
machines, new production lines and appropriately trained staff;
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the success of our retail 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 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 worldwide;
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our ability to match or exceed the pace of production with
sales, both current and forecasted;
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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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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 or continue
to reduce prices worldwide;
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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;
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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. 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 retail channel expansion. Our planned growth includes increasing our manufacturing capacity, developing and introducing
new products and developing new and broader distribution channels, including retail, expanding our Canadian sales operations in
the near-term, and extending our global reach to other countries in the longer-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 could 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.
We will 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 distribution channels to include the retail 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, will be sufficient to fund anticipated operating expenses and our other anticipated
liquidity needs for the next twelve months, based on our current operating conditions. However, our current capital resources and
sources of liquidity are not sufficient to meet the requirements of our current 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. Adequate financing may not be available or, if available,
may only be available on unfavorable terms. 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 current operations or growth strategies. In addition, future financings through
equity investments are likely to be dilutive to our existing shareholders. Newly issued securities may include preferences or superior
voting rights or 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 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 and obsolete and damaged inventory), internal-use software and website development (acquired
and developed internally), accounting for income taxes, valuation of intangible assets and goodwill, 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 financial statements
were audited for the first time in connection with the Business Combination. As a result of this audit and in anticipation of becoming
a public company, the Company made many changes to its accounting policies. The Company may determine in the future that these
new 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.
Our future growth and profitability
depends 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 currently plan to expand our business into
the retail distribution channel through a relationship with Mattress Firm, Inc., but there can be no assurance that we will be
successful in forming such relationship or entering into commercial agreements with Mattress Firm, Inc. or any other retailers.
Even if such arrangements are entered into, we may be unsuccessful in generating sales through retail channels. We have limited
or no experience in the retail channel, and our retail customers may not purchase our products in the volume we expect.
Profitability, if any, from sales to retail
customers and new product offerings, especially new mattress models, may be lower than from our current 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.
In addition, offerings of new products
through our current direct-to-consumer platform and expansion of business into the retail distribution channel 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 into retail channels may require the development of additional, differentiated products to avoid
price and distribution conflicts between retail channels. Retail expansion increases our risk as our retail 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
depends 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 (such as TV and print),
as consumer preferences and competition change, and in achieving efficiency in our advertising expenditures.
We depend primarily on internet-based advertising
to market our products, including through YouTube, Facebook and other internet-based media and e-commerce platforms. If we are
unable to continue utilizing such platforms 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.
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.
We have recently 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.
We have engaged in significant related
party transactions with affiliates and owners that may give rise to conflicts of interest, result in significant 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. For example, we lease our facilities in Alpine, Utah from TNT Holdings, LLC, which is beneficially owned by Tony Pearce
and Terry Pearce. We have also entered into an intellectual property license agreement and shared services agreement with other
entities controlled by Tony Pearce and Terry Pearce, including EdiZONE, LLC. Because Tony Pearce and Terry Pearce were the only
directors of Purple LLC prior to the Business Combination, such transactions have not been approved by disinterested directors
of the Company. This lack of disinterested director approval may impair investor confidence, which could adversely affect the value
of our business.
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 may consolidate
production of certain products at one site over the other. Therefore, the disruption of operations of either of our two main manufacturing
facilities for a significant period of time, or even permanently through the loss of the lease of our Grantsville facility, may
increase our costs of doing business and lead to delays in shipping our beds 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 are in the process of expanding electricity
capacity at our Grantsville facility, including construction of infrastructure by Rocky Mountain Power. If we are unable to provide
sufficient power to this facility, we will be unable to meet the demands of our customers and our business would be adversely affected.
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.
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.
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.
Significant product returns could
harm our business.
We allow our customers to return products,
subject to our returns policies. If product returns are higher than we anticipate, our business, prospects, financial condition
and results of operations could be harmed. Further, we modify our policies and procedures relating to returns from time to time,
and policies and methods of collecting returned products intended to reduce the number of product returns may result in customer
dissatisfaction. The occurrence of any of the foregoing could have a material adverse effect on our business.
Adverse litigation judgments or settlements
resulting from legal proceedings in which we may be involved in the normal course of business could affect our operations and financial
condition.
In the normal course of business, we may
from time to time become involved in various legal proceedings. The outcome of these legal proceedings cannot be predicted. It
is possible that an unfavorable outcome of some or all of such matters could cause us to incur substantial liabilities that may
have a material adverse effect upon our financial condition and results of operations. Any significant adverse litigation, judgments
or settlements could have a negative effect on our business, financial condition and results of operations. Even if we are successful
in defending against 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 retail 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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We have entered into a memorandum of understanding
with Mattress Firm, Inc. concerning a potential joint venture agreement, pursuant to which Mattress Firm, Inc. is permitted to
sell certain of our products in its retail stores. We are currently conducting a trial phase with Mattress Firm, Inc. to assess
the viability of a joint venture arrangement. There can be no guarantee that we will enter into a joint venture agreement with
Mattress Firm, Inc. Even if we do enter into such agreement, the relationship may not be profitable to us or may impose additional
costs that we would not otherwise incur under our current operations. Further, establishing and maintaining this relationship will
require the commitment of significant amounts of time, financial resources and management attention, and it 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, 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. 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 and government 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.
In addition, the barriers to entry into
the retail bedding industry are relatively low. New or existing bedding retailers could enter our markets and increase the competition
we face. Competition in existing and new markets may also prevent or delay our ability to gain relative market share. Any of the
developments described above could have a material adverse effect on our planned growth and future results of operations.
We will face different market dynamics
and competition as we develop new products to expand our presence in our target markets. In some markets, our future competitors
may have greater brand recognition and broader distribution than we currently enjoy. We may not be as successful as our competitors
in generating revenues in those markets due to the lack of recognition of our brands, lack of customer acceptance, lack of product
quality history and other factors. As a result, any new expansion efforts could be costlier and less profitable than our efforts
in our existing markets. If we are not as successful as our competitors are in our target markets, our sales could decline, our
margins could be impacted negatively and we could lose market share, any of which could materially harm our business.
If we are unable to effectively compete
with other manufacturers and retailers of mattresses, pillows 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.
We recently acquired the purple.com domain
name from its owner, but before the transfer to the Company the prior owner allowed that name to be used by a competitor for purposes
of advertising its competing mattress products. Although that use of the domain name has stopped, it may have caused harm to the
Company’s sales and confusion as to the source of the Company’s goods that may harm the reputation of the Company and
its goodwill. Such confusion could have a continuing negative impact on our brand and sales.
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 significant 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 Terry and Tony Pearce. Terry and Tony Pearce, and EdiZONE have licensed certain cushioning
technology to competitors of Purple and have granted rights in the European Union to a competitor.
Purple LLC has licensed to EdiZONE certain
intellectual property rights for use by EdiZONE outside of the consumer comfort market. These licenses could lead to conflicts
of interest. If these conflicts of interest arise and are not properly addressed, we could have disputes with our founders and
our business could be harmed.
EdiZONE, LLC, which is an entity owned
by our founders, previously entered into licenses for comfort-related intellectual property with three different unrelated third-parties.
These licenses may prohibit us from selling our existing mattresses in certain geographic areas, including the European Union.
While we intend, if necessary, to modify our mattresses in a way that we can sell in these geographic territories in the future
without violating these licenses, there can be no assurance that these modified mattresses will be successful. 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 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. 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.
If we are unable to compete successfully
against current and future online competitors, our operations and profitability may be adversely affected.
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
a third-party consumer finance company, Affirm, Inc. As of September 30, 2017, approximately 25% 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.
Affirm, Inc., with Cross River Bank, a
New Jersey state-charted bank originates financing resources for Affirm, Inc., offers consumer financing options to our customers
through an agreement that may be terminated by us or Affirm, Inc. upon thirty days’ prior written notice. Affirm, Inc., with
Cross River Bank, has 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 credit standards under our private label credit card program or changes in regulatory
requirements, or the termination of our agreement with Affirm, Inc., could harm our sales, profitability, cash flows and financial
condition.
We typically keep only two to four
weeks 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 typically only keep two to four weeks
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. 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.
Our business could also be adversely affected
if there are delays in product shipments to us due to freight difficulties, 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.
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.
During fiscal 2017, we were subject to
a single attempted malware installation, and we will likely continue to 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, physical bank check, and payment upon delivery.
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 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 these 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 may 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 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, operations and engineering personnel. We have an
employment agreement with each of our executive officers. 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.
Further, the involvement of Tony and Terry
Pearce has been and continues to be 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 we will enter 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. The continued growth of our business depends upon their continued involvement.
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, 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. 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 claims by other parties and could
require us to alter or end these practices or adopt new practices that are not as effective or are more expensive.
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.
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.
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. 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.
We may not have sufficient lead time to build systems and processes to collect these taxes. 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 do not, could result in substantial tax liabilities, including for past sales, as well as penalties and interest. In addition,
if the tax authorities in jurisdictions where we are already subject to sales tax or other indirect tax obligations were successfully
to challenge our positions, our tax liability could increase substantially. In the U.S., Supreme Court decisions restrict states’
rights to require remote sellers to collect state and local sales taxes (although some states are seeking to have the Supreme Court
revisit these decisions).
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.
Several proposals have been made at the
U.S. state and local levels that would impose additional taxes on the sale of goods and services over the Internet. These proposals,
if adopted, could substantially impair the growth of e-commerce and our brands, and could diminish our opportunity to derive financial
benefit from our activities. While the U.S. federal government’s moratorium on state and local taxation of Internet access
or multiple or discriminatory taxes on e-commerce has been temporarily extended, this moratorium does not prohibit federal, state
or local authorities from collecting taxes on our income or from collecting certain taxes that were in effect prior to the enactment
of the moratorium and one of its extensions.
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 various jurisdictions may be subject to significant change,
with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and
estimating our provision and accruals for these taxes. In addition, some states and cities requires 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 DGCL 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 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 proposed 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 shareholders will be time-consuming and costly.
It will also be 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 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, approximately
$0.1 million and $4.3 million of post-closing net adjustments were made to our 2016 balance sheet and statement of operations,
respectively, as a result of the material weaknesses. We are developing 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 shareholder 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.
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 stockholder to be diluted.
Fluctuations in operating results,
quarter to quarter earnings and other factors, including incidents involving Purple’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.
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 with a written charter addressing the committee’s purpose and responsibilities;
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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 Compensation Committee and a Nominating and Corporate
Governance Committee. As a result, we do not have a Compensation Committee or a Nominating and Corporate Governance Committee.
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 acquisition and development
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. 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. 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 securities are currently listed
on NASDAQ. However, we cannot assure you that our securities will continue to be listed on NASDAQ in the future. In order to continue
listing our securities 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 securities. Additionally, in connection with
the Business Combination, we are required to demonstrate compliance with NASDAQ’s initial listing requirements, which are
more rigorous than NASDAQ’s continued listing requirements, in order to continue to maintain the listing of our securities
on NASDAQ. We cannot assure you that we will be able to meet those initial listing requirements or obtain all the necessary approvals.
On August 28, 2017, we received a written
notice from the Listing Qualifications Department of NASDAQ, indicating that, based upon our non-compliance with NASDAQ Listing
Rule 5550(a)(3), which requires an issuer to report a minimum of 300 public holders of its common stock (the “Minimum Holders
Rule”), we would be required to submit a plan to regain compliance with the Minimum Holders Rule for the NASDAQ staff’s
consideration.
On October 18, 2017, the NASDAQ staff advised
us that they accepted our plan and granted us an extension until February 26, 2018 to evidence compliance with the Minimum Holders
Rule. If we do not evidence compliance by such date, the NASDAQ staff will notify us that it will delist our securities. We would
be entitled to request a hearing, at which hearing we would present our plan to a NASDAQ Hearings Panel and request the continued
listing of our securities on NASDAQ pursuant to and pending the completion of such plan. During the pendency of the hearing process,
our securities would continue to be listed on NASDAQ.
The compliance plan sets forth the actions
we plan to take to enable us to have at least 300 public holders. However, there can be no assurance that we will be able to meet
the listing standards of NASDAQ, or if we do, that we will continue to meet the listing requirements.
On January 4, 2018, we received written
notice from the NASDAQ staff indicating that, based upon our non-compliance with Nasdaq Listing Rule 5620(a), which requires an
issuer to hold an annual meeting of shareholders no later than one year after the end of its fiscal year-end (the “Annual
Meeting Rule”), we would be required to submit a plan to regain compliance with the Annual Meeting Rule for the NASDAQ staff’s
consideration by no later than February 20, 2018. We intend to present NASDAQ with a plan to regain compliance with such rule by
holding a combined annual meeting for both 2016 and 2017 in 2018.
If NASDAQ delists our securities 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 and Public Warrants continue to be listed on NASDAQ,
our Class A Common Stock and Public Warrants will be covered securities. Although the states are preempted from regulating the
sale of our securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and,
if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular
case.
Purple’s level of indebtedness
could adversely affect Purple’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 September 30, 2017, Purple LLC had
total debt of $37,165 outstanding. On October 9, 2017, Purple LLC entered into a credit agreement with Wells Fargo Bank, National
Association, for a $10 million secured revolving loan facility. In connection with the Closing, the Wells Fargo facility was repaid
in full and Purple LLC entered into Credit Agreement (the “
Credit Agreement
”) with Coliseum Capital Partners,
L.P. (“
CCP
”), Blackwell Partners LLC – Series A (“
Blackwell
” and, together with CCP,
the “
Coliseum Investors
”) and Coliseum Co-Invest Debt Fund, L.P. (together with CCP and Blackwell, the “
Lenders
”),
pursuant to which the Lenders agreed to make a loan to Purple LLC in an aggregate principal amount of $25 million (the “
Loan
”).
In connection with the Credit Agreement, on February 2, 2018 the Company entered into a Parent Guaranty (the “
Parent Guaranty
”)
pursuant to which the Company agreed to an unconditional guaranty of the payment of all obligations and liabilities of Purple LLC
under the 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 Credit Agreement, and we may be unable to comply with all covenants
in the future.
The 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 $20 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’s assets, other than with respect to the Business Combination.
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In addition, the 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 post-Business Combination company will have the ability to authorize the issuance
of up to five million shares of preferred stock as 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 the Structure
after the Business Combination
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 may, subject to certain conditions
and transfer restrictions, exchange its 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.
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 Purple’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 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 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 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 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. The amount of any such tax savings attributable to
the payment of cash to InnoHold in the Business Combination and the exchanges contemplated by the Exchange Agreement will be paid
80% to InnoHold 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 the Closing Date, there were 53,755,173 shares of common stock outstanding, including 9,682,855 shares of Class A Common
Stock and 44,071,318 shares of Class B Common Stock, held of record by approximately four holders of Class A Common Stock and one
holder of Class B Common Stock, no shares of preferred stock outstanding and 28,340,000 warrants outstanding held of record by
approximately 12 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. 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. There are no sinking fund provisions
applicable to the common stock, except that we will provide our stockholders with the opportunity to redeem their public shares
for cash equal to their pro rata share of the aggregate amount then on deposit in the trust account, including interest (which
interest shall be net of taxes payable) upon the completion of our initial business combination, subject to the limitations described
herein.
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. 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 the shares of Class A Common
Stock registered in this prospectus 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.
Pursuant to a letter agreement, subject
to certain exceptions, the Sponsor has agreed not to transfer, assign or sell any of its Founder Shares until the earlier of (A)
one year after the completion of the Business Combination, or earlier if, subsequent to the Business Combination, the last sale
price of our Class A Common Stock equals or exceeds $12.00 per share (subject to adjustments for stock splits, stock dividends,
reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150
days after the business combination or (B) the date on which we complete a liquidation, merger, stock exchange or other similar
transaction after the business combination that results in all of our stockholders having the right to exchange their shares of
common stock for cash, securities or other property. Notwithstanding the foregoing, the Founder Shares will be released from the
lock-up on the date on which we complete a liquidation, merger, stock exchange or other similar transaction after our the Business
Combination that results in all of our stockholders having the right to exchange their shares of common stock for cash, securities
or other property.
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 has 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. 646,876 of the Founder Shares held by the Coliseum Investors
are also subject to vesting and forfeiture based on the terms 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
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 have 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 will use our best
efforts to file with the SEC this registration statement for the registration, under the Securities Act, of the shares of Class
A Common Stock issuable upon exercise of the warrants. We will use our best efforts to cause the same to become effective and to
maintain the effectiveness of this 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, Global
Partners Sponsor I LLC (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 a letter agreement, the Sponsor
Warrants will not be released except to permitted transferees until March 4, 2018. During the lock-up period, the Sponsor Warrants
will not be transferable, other than (a) to our officers or directors, any affiliates or family members of any of our officers
or directors, any members of the Sponsor, or any affiliates of the Sponsor, (b) by gift to a member of one of the members of the
Sponsor’s immediate family or to a trust, the beneficiary of which is a member of one of the members of the Sponsor’s
immediate family, to an affiliate of the Sponsor or to a charitable organization; (c) by virtue of laws of descent and distribution
upon death of one of the members of the Sponsor; (d) pursuant to a qualified domestic relations order; (e) by virtue of the laws
of the state of Delaware or the Sponsor’s limited liability company agreement upon dissolution of the Sponsor; or (f) in
the event of our completion of a liquidation, merger, stock exchange or other similar transaction which results in all of our stockholders
having the right to exchange their shares of common stock for cash, securities or other property subsequent to our completion of
our initial business combination; provided, however, that these permitted transferees must enter into a written agreement agreeing
to be bound by these transfer restrictions. The Sponsor Warrants are not redeemable by us so long as they are held by the Sponsor
or its permitted transferees. Otherwise, the Sponsor Warrants have terms and provisions that are identical to those of the public
warrants, except that such warrants may be exercised by the holders on a cashless basis. If the Sponsor Warrants are held by holders
other than the Sponsor or its permitted transferees, the Sponsor Warrants will be redeemable by us and exercisable by the holders
on the same basis as the Public Warrants.
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. The reason that we have agreed that these warrants will be exercisable on a cashless basis
so long as they are held by the Sponsor or its affiliates and permitted transferees is because it is not known at this time whether
they will be affiliated with us following a business combination. If they remain affiliated with us, their ability to sell our
securities in the open market will be significantly limited. We expect to have policies in place that prohibit insiders from selling
our securities except during specific periods of time. Even during such periods of time when insiders will be permitted to sell
our securities, an insider cannot trade in our securities if he or she is in possession of material non-public information. Accordingly,
unlike public stockholders who could exercise their warrants and sell the shares of Class A Common Stock received upon such exercise
freely in the open market in order to recoup the cost of such exercise, the insiders could be significantly restricted from selling
such securities. As a result, we believe that allowing the holders to exercise such warrants on a cashless basis is appropriate.
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 “Baleen Investors” include Baleen Capital Investors
II LLC, Baleen Capital Fund LP, Greenhaven Road Capital Fund 1, L.P., Royce Value Trust, Inc., David Capital Partners Fund, LP,
Pleiades Investment Partners – DC, L.P. and Dane Capital Fund LP.
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, a copy which is attached hereto as Exhibit 4.4 and is incorporated herein by reference.
Registration Rights
Baleen Registration Rights Agreement
On January 29, 2018, the Company and the
Sponsor entered into a subscription agreement (the “
Baleen Subscription Agreement
”) with the Baleen Investors,
who agreed to acquire an aggregate of $25 million in shares of Class A Common Stock through open market purchases, private purchases
and private placements. On January 31, 2018 the Baleen Investors completed the acquisition of $25 million of Class A Common Stock
all through open market purchases (the “
Baleen Investment
”). In connection with these investments, on February
2, 2018, the Company, the Sponsor, the Baleen Investors and Continental Stock Transfer and Trust Company entered into an Agreement
to Assign Sponsor Warrants (the “
Baleen Warrant Assignment Agreement
”), pursuant to which the Sponsor agreed
to assign to the Baleen Investors an aggregate of 3,750,000 outstanding sponsor warrants (the “
Baleen Warrants
”)
that were issued to the Sponsor in a private placement in August 2015. On February 2, 2018 the Sponsor assigned the Baleen Warrants
to the Baleen Investors in accordance with the terms of the Baleen Warrant Assignment Agreement. On February 2, 2018 the
Company entered into a Registration Rights Agreement (the “
Baleen Registration Rights Agreement
”) with the Baleen
Investors, providing for the registration under the Securities Act of the shares and warrants acquired by the Baleen Investors
pursuant to the Baleen Subscription Agreement.
The Baleen Investors will be entitled to
make up to three demands, excluding short form registration demands, that we register such securities for sale under the Securities
Act. In addition, these holders have “piggy-back” registration rights to include such securities in other registration
statements filed by us and rights to require us to register for resale such securities pursuant to Rule 415 under the Securities
Act. We will bear the costs and expenses of filing any such registration statements.
Coliseum Registration Rights Agreement
On February 1, 2018 the Company entered
into the Coliseum Subscription Agreement with 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
”). In connection with the Coliseum Private Placement and the Coliseum Credit Agreement, on February
2, 2018 the Sponsor, the Company, Continental Stock Transfer and Trust Company, Coliseum, Blackwell and Coliseum Co-Invest Debt
Fund, L.P. (“
CCDF
”) entered into an Agreement to Assign Sponsor Warrants (the “
Coliseum Warrant Assignment
Agreement
”), pursuant to which the Sponsor agreed to assign to the Coliseum Investors and CCDF an aggregate of 5,782,500
outstanding sponsor warrants (the “
Coliseum Warrants
”), including 3,282,500 warrants related to the Coliseum
Private Placement and 2,500,000 warrants related to the Credit Agreement. On February 2, 2018, the Company entered into a registration
rights agreement (the “
Coliseum Registration Rights Agreement
”) with the Coliseum Investors and CCDF, providing
for the registration under the Securities Act of (i) the shares issued in the Coliseum Private Placement, (ii) the Coliseum Warrants
and the shares issuable upon the exercise of the Coliseum Warrants and (iii) the Coliseum Founder Shares, subject to customary
terms and conditions.
The Coliseum Investors and CCDF will be
entitled to make up to three demands, excluding short form registration demands, that we register such securities for sale under
the Securities Act. In addition, these holders have “piggy-back” registration rights to include such securities in
other registration statements filed by us and rights to require us to register for resale such securities pursuant to Rule 415
under the Securities Act. We will bear the costs and expenses of filing any such registration statements.
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.
Sponsor Registration Rights
We have entered into a registration rights
agreement with respect to the Founder Shares, Sponsor Warrants, the shares of Common Stock issuable upon exercise of the Sponsor
Warrants and other securities that may be issued in repayment of any Sponsor loans. The holders of these securities will be entitled
to make up to three demands, excluding short form registration demands, that we register such securities for sale under the Securities
Act. In addition, these holders have “piggy-back” registration rights to include such securities in other registration
statements filed by us and rights to require us to register for resale such securities pursuant to Rule 415 under the Securities
Act. We will bear the costs and expenses of filing any such registration statements.
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
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.
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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