Item 1A. Risk Factors
ITEM 1A. RISK FACTORS
Except
as described below, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K filed
with the SEC on March 22, 2023.The disclosure of risks identified below does not imply that the risk has not already materialized.
We may need additional
capital to execute our business plan and fund operations and may not be able to obtain such capital on acceptable terms or at all.
In
connection with the development and expansion of our business, we expect to incur significant capital and operational expenses. We believe
that we can increase our sales and net income by implementing a growth strategy that focuses on (i) increasing our manufacturing
efficiency; (ii) increasing our marketing; (iii) expanding our distribution channels; (iv) elevating the premium customer
experience of our products; (v) opening additional Purple owned retail showrooms; (vi) expanding our global sales; (vii) engaging
global partners to improve distribution efficiencies and cost savings; and (viii) product assortment and category expansion.
Our
ability to obtain other capital resources and sources of liquidity may not be sufficient to support future growth strategies. If we are
unable to satisfy our liquidity and capital resource requirements, we may have to scale back, postpone or discontinue our growth strategies,
which could result in slower growth or no growth, and we may run the risk of losing key suppliers, we may not be able to timely satisfy
customer orders, and we may not be able to retain our employees. In addition, we may be forced to restructure our obligations to creditors,
pursue work-out options or other protective measures.
While
we have access to a revolving asset-based credit facility of up to $50 million under the ABL Credit Agreement and have borrowed $25 million
of term loans under the Term Loan Credit Agreement our ability to access funds under the ABL Credit Agreement (each a “Revolving
Loan” and collectively, the “Revolving Loans”) is subject to certain conditions and restrictive covenants, and there
is no guarantee that we will be able to satisfy such conditions and restrictive covenants. For example, we did not satisfy certain financial
and performance covenants under our prior credit agreement and were required to amend such credit agreement to avoid non-compliance. To
the extent that waivers and amendments are necessary under either of the Credit Agreements, there can be no guarantee that we will be
able to obtain waivers or amendments from the applicable Agent and Lenders if, in the future, we are unable to comply with the covenants
and other terms of the Credit Agreements. Our failure to satisfy the required conditions under the Credit Agreements or maintain compliance
with the financial and performance covenants under the Credit Agreements could result in a default, which would adversely affect our financial
condition and results of operations, including, potentially, as a result of acceleration of our outstanding debt. In addition, any default
under the Credit Agreements would adversely affect our ability to obtain alternative financing.
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Further, our ability to obtain
additional capital on acceptable terms or at all is subject to a variety of uncertainties. Adequate alternative financing may not be available
or, if available, may only be available on unfavorable terms or subject to covenants that we may not be able to satisfy.
There is no assurance we will
obtain the capital we require. As a result, there can be no assurance that we will be able to fund our future operations or growth strategies.
Future
equity or debt financings may require us to also issue warrants or other equity securities that are likely to be dilutive to our existing
stockholders. For example, on February 13, 2023, we completed an offering of our Class A Shares that increased the number of outstanding
Class A Shares from 91,380,323 to 104,780,323. Newly issued securities may include preferences or superior voting rights or may be combined
with the issuance of warrants or other derivative securities, which each may have additional dilutive effects. Furthermore, we may incur
substantial costs in pursuing future capital and financing, including investment banking fees, legal fees, accounting fees, printing and
distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities
we may issue, such as convertible notes and warrants, which will adversely impact our financial condition. If we cannot raise additional
funds on favorable terms or at all, we may not be able to carry out all or parts of our long-term growth strategy, maintain our growth
and competitiveness or continue in business.
Anti-takeover provisions in our Second Amended
and Restated Certificate of Incorporation, our Third Amended and Restated Bylaws as well as provisions of Delaware law, 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 that some stockholders may consider favorable.
Provisions of Delaware law,
our Second Amended and Restated Certificate of Incorporation, and our Third Amended and Restated Bylaws 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:
●
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;
●
a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;
●
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;
●
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
●
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.
In December 2022, we amended
our bylaws to add requirements relating to stockholder nominations of directors, including a requirement that stockholder nominees complete
a written questionnaire and that stockholder nominees make themselves available for interviews by our Board upon request.
In
addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain transactions
with stockholders owning 15% or more of our outstanding voting stock or require us to obtain stockholder approval prior to engaging in
such transactions. Coliseum collectively holds approximately 44.7% of our outstanding voting stock. Any delay or prevention of a change
in control transaction or changes in our Board could adversely affect our ability to execute transactions that are needed to carry out
our operations and growth strategies and cause the market price of our common stock to decline.
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We may not be able
to identify, complete or successfully integrate acquisitions, and any such acquisitions may not achieve the anticipated financial benefits,
all of which could have a negative impact on our growth, financial condition, and results of operations.
We may seek to acquire businesses
in the future as we encounter acquisition prospects that would complement our current product offerings, increase the size and geographic
scope of our operations, or otherwise offer strategic, growth and operating efficiency opportunities. We cannot assure investors that
we will be able to identify and acquire acceptable acquisition candidates on terms favorable to us in the future, or that any acquisitions
will achieve the anticipated strategic or financial benefits. Even if we do identify opportunities to acquire businesses, we may not be
able to consummate such acquisitions due to a number of factors, including lacking access to sufficient capital to fund such acquisitions.
In
addition, acquisitions involve numerous risks and uncertainties and may be of businesses in which we lack operational or market experience.
The financing for any of these acquisitions could dilute the interests of our stockholders, result in an increase in our indebtedness
or both. Future acquisitions could entail numerous risks, including:
●
difficulties in integrating acquired technologies, operations or products;
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the difficulties of imposing financial and operating controls on the acquired companies and their management and the potential costs of doing so;
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the potential loss of key employees, customers, suppliers or distributors from acquired businesses and disruption to our direct selling channel;
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diversion of management’s attention from our core business;
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the failure to achieve the strategic objectives of these acquisitions;
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increased fixed costs;
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the failure of the acquired businesses to achieve the results we have projected in either the near or long term;
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the assumption of unexpected liabilities, including compliance and litigation risks;
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adverse effects on existing business relationships with our suppliers, sales force or consumers;
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Failure to gain consumer or wholesale market acceptance of acquired brands and products; and
●
risks associated with entering markets or industries in which we have limited or no prior experience, including limited expertise in running the business, developing the technology, and selling and servicing the products.
Our
failure to successfully complete the integration of any acquired business, or a failure to effectively identify and pursue such acquisitions,
could have a material adverse effect on our business, financial condition and operating results.
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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. In addition, we may share with third-parties personal information
we have collected. 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 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 or the
systems of third-parties with which we have shared personal information 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. For example, though it did not involve access to or release of personal information, we recently
experienced an unauthorized intrusion into one of our vendor’s system using a former contractor’s credentials that resulted
in access to email addresses and an unauthorized email being sent under a valid Purple email address. Breaches involving any personal
information could be more likely to the extent we have any material weakness in internal control over financial reporting related to information
technology general controls in the areas of user access and segregation of duties related to certain IT systems that support the Company’s
financial reporting processes.
We and third parties with
which we have shared personal information have been subject to attempts to breach the security of networks, IT infrastructure, and controls
through cyber-attack, malware, computer viruses, social engineering attacks, ransomware attacks, and other means of unauthorized access.
For example, in 2022, we experienced a spear-phishing attack that resulted in the unauthorized change to a significant vendor’s
bank account to which we made payments that were lost in part until the scheme was discovered. We expect that this attack will result
in costs to us of up to $250,000. We anticipate that we may, in the future, continue to be subject to these and similar cyber threats.
A breach of systems resulting in the unauthorized release of sensitive data could also adversely affect our reputation and lead to financial
losses from remedial actions or potential liability, possibly including punitive damages, and could also materially increase the costs
we already incur to protect against these risks. In addition, cyber-attacks, such as ransomware attacks, if successful, could interfere
with our ability to access and use systems and records that are necessary to operate our business. Such attacks could materially adversely
affect our reputation, relationships with customers, and operations and could require us to expend significant resources to resolve such
issues. We continue to balance the additional risk with the cost to protect us against a breach. Additionally, while losses arising from
a breach may be covered in part by insurance that we carry, such coverage may not be adequate for liabilities or losses actually incurred.
We
may be subject to data privacy and data breach laws in the states in which we do business, and as we expand into other countries, we may
be subject to additional data privacy laws and regulations. In many states, state data privacy laws (such as the California Consumer Privacy
Act), including application and interpretation, are rapidly evolving. The rapidly evolving nature of state and federal privacy laws, including
potential inconsistencies between such laws and uncertainty as to their application, adds additional compliance costs and increases our
risk of non-compliance. While we attempt to comply with such laws, we may not be in compliance at all times in all respects. Failure to
comply with such laws may subject us to fines, administrative actions, and reputational harm.
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Our level of indebtedness
and related covenants could limit our operational and financial flexibility and adversely affect our business if we breach such covenants
and default on such indebtedness.
Under the Credit Agreements,
we are subject to a number of affirmative and negative covenants, including covenants regarding dispositions of property, investments,
forming or acquiring subsidiaries, business combinations or acquisitions, incurrence of additional indebtedness, and transactions with
affiliates, among other customary covenants, in each case, subject to certain exceptions. In particular, we are (i) restricted from
incurring additional debt up to certain amounts, subject to limited exceptions, as set forth in each Credit Agreement, and (ii) required
to maintain minimum revolving availability under the ABL Credit Agreement, and, if revolving availability falls beneath a specified amount,
a specified Consolidated Fixed Charge Coverage Ratio (as such term is defined in the ABL Credit Agreement). The Loan Parties are also
restricted from paying dividends or making other distributions or payments on their capital stock, subject to limited exceptions.
These restrictions may prevent
us from taking actions that we believe would be in the best interests of the business and may make it difficult for us to successfully
execute our business strategy or effectively compete with companies that are not similarly restricted. If we determine that we need to
take any action that is restricted under any Credit Agreement, we will need to first obtain a waiver from the applicable Agent and Lenders.
Obtaining such waivers, if needed, may impose additional costs on the Company or we may be unable to obtain such waivers. Our ability
to comply with these restrictive covenants in future periods will largely depend on our ability to successfully implement our overall
business strategy. The breach of any of these covenants or restrictions could result in a default, which could potentially result in the
acceleration of our outstanding debt. In the event of an acceleration of such debt, we could be forced to apply all available cash flows
to repay such debt, which could also force us into bankruptcy or liquidation.
In the past, we have been
required to negotiate with our lenders to obtain amendments to our prior credit agreement to avoid non-compliance with certain of our
covenants thereunder. If we are not able to maintain compliance with our covenants under the Credit Agreements, we may need to seek amendments
or waivers to the Term Loan Agreement and ABL Agreement in the future.
To
the extent that waivers and amendments under any Credit Agreement are necessary, there can be no guarantee that we will be able to obtain
waivers or amendments from the applicable Lenders if, in the future, we are unable to comply with the covenants and other terms of any
Credit Agreement. Our failure to satisfy the required conditions under the Credit Agreements, any amendments thereof, or maintain compliance
with the financial and performance covenants under the Credit Agreements could result in a default, which would adversely affect our financial
condition and results of operations, including, potentially, as a result of acceleration of our outstanding debt. In addition, any default
under would adversely affect our ability to obtain alternative financing, and significantly limit our ability to execute our business
strategies.