UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED ~~September~~June 30, ~~2020~~2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _____________ TO _____________

Commission File Number: 001-37523

PURPLE INNOVATION, INC.

(Exact name of registrant as specified in its charter)

Delaware		47-4078206
(State or other jurisdiction of incorporation or organization)		(~~IRS~~I.R.S. Employer Identification No.)

4100 NORTH CHAPEL RIDGE ROAD, SUITE 200

LEHI, UTAH 84043

(Address of principal executive offices, including zip code)

(801) 756-2600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, par value $0.0001 per share	PRPL	The NASDAQ Stock Market LLC
~~Warrants to purchase one-half of one share of Class A Common Stock~~	~~PRPLW~~	~~The NASDAQ Stock Market LLC~~

Indicate by check mark whether the ~~registrant:~~registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.

Large accelerated filer ☐	☐	Accelerated filer ☐	☑
Non-accelerated filerþ	☐	Smaller reporting companyþ	☐
		Emerging growth companyþ	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ☑

As of ~~November 9, 2020, 60,934,097~~August 6, 2021, 66,371,411 shares of the registrant’s Class A common stock, $0.0001 par value per share, and ~~577,792~~448,279 shares of the registrant’s Class B common stock, $0.0001 par value per share, were outstanding.

PURPLE INNOVATION, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

In this Quarterly Report on Form 10-Q, references to “dollars” and “$” are to United States (“U.S.”) dollars.

We have ~~a number of~~several trademarks registered with the U.S. Patent and Trademark Office, including ~~EquaPressure~~^®EquaPressure®, ~~WonderGel~~^®WonderGel® and ~~EquaGel~~^®~~(for~~EquaGel® (for cushions), and ~~Purple~~^® ~~(the logo~~Purple®, No Pressure®, Hyper-Elastic Polymer®, Somnigel®, and ~~standard character mark),~~ Gel Matrix®~~, Somnigel®~~ (for ~~mattresses and pillows as well as plasticized elastomeric gel), Intellipillow® (for pillows) No Pressure~~^® ~~and Hyper-Elastic Polymer~~^®~~(for~~ plasticized elastomeric gel and certain types of products including ~~mattresses); the color “purple” (for mattresses); the~~mattresses, seat cushions, bed linen, mattress foundation and others). Additional registered trademarks include Purple ~~Powerbase® (for foundations);~~Grid®, The Purple Mattress®, Purple Hybrid®, and Purple ~~Pay®;~~ Hybrid Premier®. Applications are pending for registration of additional trademarks and some of these listed trademarks for additional classes of goods both in the U.S. and internationally. Our Purple, No Pressure and Hyper-Elastic Polymer trademarks are also registered and have applications pending for various classes of goods in numerous foreign jurisdictions, some of which include Australia, Canada, China, Europe, United Kingdom, Japan and Korea. Certain international trademark applications previously resided with EdiZONE, LLC, which is an entity owned by our founders, and were licensed to Purple LLC and we have taken the necessary steps to have those trademarks assigned to Purple LLC upon registration.

We also have a number of common law trademarks, including Harmony™, Purple Harmony Pillow™, Harmony Pillow™, Purple +™, Purple Plus™, ~~Furple™~~Find Comfort™, Dreams On Dreams™, Reinventing Comfort™, Gelflex™, Ascent™, Purple ~~Premier™~~Ascent™, ~~Softstrech™~~Comfort Reinvented™, ~~Purple Duvet™, Purple Sheets™, Purple Plush™, Dreams on Dreams™, PRPL™, True Comfort™, Take Comfort™, Find Comfort™~~Softstretch™, Purple Powerbase™, Purple Powerbase Premier™, Purple Powerbase Plus™, Purple Glove™, Eidertech™~~, Purple Grid™~~, Mattress Max™, WonderGel Original™, WonderGel Extreme™, DoubleGel™, DoubleGel Plus™, DoubleGel Ultra™, Roll n’ Go™, Fold N’ Go™, Purple Bed™, Purple Top™, Purple Pillow™, Portable Purple™, Everywhere Purple™, Simply Purple™, Lite Purple™, Royal Purple™, Double Purple™, Deep Purple™, Ultimate Purple™, Purple Back™, EquaGel Straight Comfort™, EquaGel General™, EquaGel Protector™, and EquaGel Adjustable™. ~~Many of the common law marks have registrations pending with the USPTO and other international jurisdictions.~~

Solely for convenience, we refer to our trademarks in this Quarterly Report without the ^™ or ^® symbol, but such references are not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights to our trademarks.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PURPLE INNOVATION, INC.

Condensed Consolidated Balance Sheets

(Inunaudited – in thousands, except for par value)

~~(Unaudited)~~

June 30,
2021 December 31,
2020
Assets
Current assets:
Cash and cash equivalents $ 110,081 $ 122,955
Accounts receivable, net 25,104 29,111
Inventories, net 64,795 65,726
Prepaid inventory 1,799 826
Other current assets 14,972 10,453
Total current assets 216,751 229,071
Property and equipment, net 87,496 61,486
Operating lease right-of-use assets 54,334 41,408
Intangible assets, net 10,376 9,945
Deferred income taxes 209,048 211,244
Other long-term assets 1,458 1,578
Total assets $ 579,463 $ 554,732

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 58,419 $ 69,594
Accrued sales returns 6,962 8,428
Accrued compensation 9,207 14,209
Customer prepayments 17,334 6,253
Accrued sales tax 3,596 6,015
Accrued rebates and allowances 6,870 10,891
Operating lease obligations – current portion 4,255 3,235
Other current liabilities 13,733 13,583
Total current liabilities 120,376 132,208
Debt, net of current portion 40,403 41,410
Operating lease obligations, net of current portion 67,924 48,936
Warrant liabilities 14,529 92,708
Tax receivable agreement liability, net of current portion 166,413 165,426
Other long-term liabilities, net of current portion 8,294 6,503
Total liabilities 417,939 487,191

Commitments and contingencies (Note 11)

Stockholders’ equity:
Class A common stock; $0.0001 par value, 210,000 shares authorized; 66,371 issued and outstanding at June 30, 2021 and 63,914 issued and outstanding at December 31, 2020 7 6
Class B common stock; $0.0001 par value, 90,000 shares authorized; 448 issued and outstanding at June 30, 2021 and 536 issued and outstanding at December 31, 2020 — —
Additional paid-in capital 403,071 333,047
Accumulated deficit (242,454 ) (265,856 )
Total stockholders’ equity 160,624 67,197
Noncontrolling interest 900 344
Total stockholders’ equity 161,524 67,541
Total liabilities and stockholders’ equity $ 579,463 $ 554,732

September 30, December 31,
2020 2019

Assets
Current assets:
Cash and cash equivalents $ 97,955 $ 33,478
Accounts receivable, net 21,894 28,692
Inventories, net 50,775 47,628
Prepaid inventory 1,888 879
Other current assets 8,443 3,442
Total current assets 180,955 114,119
Property and equipment, net 44,983 31,979
Intangible assets, net 9,620 1,101
Deferred income taxes 205,486 —
Other long-term assets 1,586 525
Total assets $ 442,630 $ 147,724

Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable $ 61,961 $ 50,240
Accrued sales returns 10,285 7,271
Accrued compensation 12,515 7,954
Customer prepayments 6,207 6,258
Accrued sales tax 7,327 5,602
Accrued rebates and allowances 7,232 5,311
Other current liabilities 7,995 4,229
Total current liabilities 113,522 86,865
Long-term debt, related-party — 35,399
Long-term debt, net of current portion 41,911 —
Warrant liabilities 64,930 21,622
Tax receivable agreement liability, net of current portion 168,328 —
Other long-term liabilities, net of current portion 12,375 8,570
Total liabilities 401,066 152,456
Commitments and contingencies (Note 11)
Stockholders’ equity (deficit):
Class A common stock; $0.0001 par value, 210,000 shares authorized; 53,787 issued and outstanding at September 30, 2020 and 22,494 issued and outstanding at December 31, 2019 5 2
Class B common stock; $0.0001 par value, 90,000 shares authorized; 605 issued and outstanding at September 30, 2020 and 31,394 issued and outstanding at December 31, 2019 — 3
Additional paid-in capital 44,032 5,990
Accumulated deficit (2,517 ) (8,349 )
Total stockholders’ equity (deficit) 41,520 (2,354 )
Noncontrolling interest 44 (2,378 )
Total equity (deficit) 41,564 (4,732 )
Total liabilities and stockholders’ equity (deficit) $ 442,630 $ 147,724
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.
Condensed Consolidated Statements of Operations
(Inunaudited – in thousands, except per share amounts)
~~(Unaudited)~~
Three Months Ended
June 30, Six Months Ended
June 30,
2021 2020 2021 2020
Revenues, net $ 182,586 $ 165,096 $ 369,015 $ 287,471
Cost of revenues 100,899 83,465 199,804 152,658
Gross profit 81,687 81,631 169,211 134,813
Operating expenses:
Marketing and sales 59,844 39,423 114,212 76,107
General and administrative 22,461 8,677 36,987 16,225
Research and development 1,923 1,580 3,646 3,025
Total operating expenses 84,228 49,680 154,845 95,357
Operating income (loss) (2,541 ) 31,951 14,366 39,456
Other income (expense):
Interest expense (569 ) (1,424 ) (1,139 ) (2,813 )
Other income (expense), net 26 16 (42 ) 106
Change in fair value – warrant liabilities 4,860 (130,264 ) 14,007 (108,631 )
Tax receivable agreement expense (381 ) (32,823 ) (207 ) (32,945 )
Total other income (expense), net 3,936 (164,495 ) 12,619 (144,283 )
Net income (loss) before income taxes 1,395 (132,544 ) 26,985 (104,827 )
Income tax benefit (expense) 1,167 35,428 (3,484 ) 35,712
Net income (loss) 2,562 (97,116 ) 23,501 (69,115 )
Net income (loss) attributable to noncontrolling interest (16 ) (3,841 ) 99 7,325
Net income (loss) attributable to Purple Innovation, Inc. $ 2,578 $ (93,275 ) $ 23,402 $ (76,440 )

Net income (loss) per share:
Basic $ 0.04 $ (3.19 ) $ 0.36 $ (2.94 )
Diluted $ (0.03 ) $ (3.19 ) $ 0.14 $ (2.94 )

Weighted average common shares outstanding:
Basic 66,277 29,277 65,439 25,976
Diluted 66,864 29,277 68,341 25,976

Three Months Ended
September 30, Nine Months Ended
September 30,
2020 2019 2020 2019

Revenues, net $ 187,111 $ 117,406 $ 474,582 $ 304,058
Cost of revenues 98,857 64,523 251,515 174,323
Gross profit 88,254 52,883 223,067 129,735
Operating expenses:
Marketing and sales 51,206 34,055 127,313 94,039
General and administrative 11,087 6,745 27,312 19,243
Research and development 1,687 1,070 4,712 3,004
Total operating expenses 63,980 41,870 159,337 116,286
Operating income 24,274 11,013 63,730 13,449
Other income (expense):
Interest expense (1,232 ) (1,356 ) (4,045 ) (3,801 )
Other income, net 3 138 109 373
Loss on extinguishment of debt (5,782 ) — (5,782 ) (6,299 )
Change in fair value – warrant liabilities (17,971 ) (1,384 ) (43,308 ) (3,372 )
Tax receivable agreement expense (567 ) — (33,512 ) —
Total other expense, net (25,549 ) (2,602 ) (86,538 ) (13,099 )
Net income (loss) before income taxes (1,275 ) 8,411 (22,808 ) 350
Benefit from income taxes 106 — 35,818 —
Net income (loss) (1,169 ) 8,411 13,010 350
Net income (loss) attributable to noncontrolling interest (147 ) 6,817 7,178 224
Net income (loss) attributable to Purple Innovation, Inc. $ (1,022 ) $ 1,594 $ 5,832 $ 126
Net income (loss) per share:
Basic $ (0.02 ) $ 0.18 $ 0.18 $ 0.01
Diluted $ (0.02 ) $ 0.16 $ 0.16 $ 0.01
Weighted average common shares outstanding:
Basic 44,266 8,828 32,117 8,576
Diluted 44,266 52,793 36,628 52,454
The accompanying notes are an integral part of these consolidated financial statements.

PURPLE INNOVATION, INC.
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(unaudited – in thousands)
Class A Class B Additional Accumulated Total
Common Stock Common Stock Paid-in Equity Stockholders’ Noncontrolling Total
Shares Par Value Shares Par Value Capital (Deficit) Equity Interest Equity
Balance - December 31, 2020 63,914 $ 6 536 $ — $ 333,047 $ (265,856 ) $ 67,197 $ 344 $ 67,541
Net income — — — — — 20,824 20,824 115 20,939
Stock-based compensation — — — — 479 — 479    — 479
Exchange of stock 88 — (88 ) — — — — — —
Exercise of warrants 2,291 1 — — 64,261 — 64,262 — 64,262
Exercise of stock options 10 — — — 83 — 83 — 83
Tax Receivable Agreement liability — — — — (777 ) — (777 ) — (777 )
Deferred income taxes — — — — 971 — 971 — 971
Accrued distributions — — — — (99 ) — (99 ) — (99 )
InnoHold indemnification payment — — — — 4,142 — 4,142 — 4,142
Impact of transactions affecting NCI — — — — (265 ) — (265 ) 265 —
Balance – March 31, 2021 66,303 $ 7 448 $ — $ 401,842 $ (245,032 ) $ 156,817 $ 724 $ 157,541
Net income (loss) — — — — — 2,578 2,578 (16 ) 2,562
Stock-based compensation — — — — 1,113 — 1,113 — 1,113
Exercise of warrants 1 — — — 26 — 26 — 26
Exercise of stock options 45 — — — 369 — 369 — 369
Tax Receivable Agreement liability — — — — (3 ) — (3 ) — (3 )
Deferred income taxes — — — — 3 — 3 — 3
Accrued distributions — — — — (87 ) — (87 ) — (87 )
Issuance of common stock 22 — — — — — — — —
Impact of transactions affecting NCI — — — — (192 ) — (192 ) 192 —
Balance – June 30, 2021 66,371 $ 7 448 $ — $ 403,071 $ (242,454 ) $ 160,624 $ 900 $ 161,524
Class A Class B Additional Accumulated Total
Stockholders’ Total
Common Stock Common Stock Paid-in Equity Equity Noncontrolling Equity
Shares Par Value Shares Par Value Capital (Deficit) (Deficit) Interest (Deficit)
Balance – December 31, 2019 22,494 $ 2 31,394 $ 3 $ 2,822 $ (28,989 ) $ (26,162 ) $ (2,378 ) $ (28,540 )
Net income — — — — — 16,835 16,835 11,166 28,001
Stock-based compensation — — — — 250 — 250 — 250
Exchange of stock 1,124 — (1,124 ) — — — — — —
Exercise of warrants 1 — — — 17 — 17 — 17
Tax Receivable Agreement liability — — — — (221 ) — (221 ) — (221 )
Accrued distributions — — — — (196 ) — (196 ) — (196 )
Issuance of common stock 3 — — — — — — — —
Impact of transactions affecting NCI — — — — 120 — 120 (120 ) —
Balance – March 31, 2020 23,622 $ 2 30,270 $ 3 $ 2,792 $ (12,154 ) $ (9,357 ) $ 8,668 $ (689 )
Net loss — — — — — (93,275 ) (93,275 ) (3,841 ) (97,116 )
Stock-based compensation — — — — 962 — 962 — 962
Exchange of stock 12,760 1 (12,760 ) (1 ) — — — — —
Exercise of warrants 1 — — — 19 — 19 — 19
Exercise of stock options 5 — — — (61 ) — (61 ) — (61 )
Tax Receivable Agreement liability — — — — 56,857 — 56,857 — 56,857
Deferred income taxes — — — — (45,266 ) — (45,266 ) — (45,266 )
Accrued distributions — — — — (4,327 ) — (4,327 ) — (4,327 )
Issuance of common stock 80 1 — — — — 1 — 1
Impact of transactions affecting NCI — — — — 6,453 — 6,453 (6,453 ) —
Balance – June 30, 2020 36,468 $ 4 17,510 $ 2 $ 17,429 $ (105,429 ) $ (87,994 ) $ (1,626 ) $ (89,620 )
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.
Condensed Consolidated Statements of ~~Stockholders’ Equity (Deficit)~~Cash Flows
(Inunaudited – in thousands)
~~(Unaudited)~~
Class A Class B Additional Accumulated Total
Stockholders’ Total
Common Stock Common Stock Paid-in Equity Equity Noncontrolling Equity
Shares Par Value Shares Par Value Capital (Deficit) (Deficit) Interest (Deficit)

Balance – December 31, 2019 22,494 $ 2 31,394 $ 3 $ 5,990 $ (8,349 ) $ (2,354 ) $ (2,378 ) $ (4,732 )
Net income — — — — — 8,835 8,835 11,166 20,001
Stock-based compensation — — — — 250 — 250 — 250
Exchange of stock 1,124 — (1,124 ) — — — — — —
Exercise of warrants 1 — — — 12 — 12 — 12
Tax Receivable Agreement liability — — — — (221 ) — (221 ) — (221 )
Accrued distributions — — — — (196 ) — (196 ) — (196 )
Issuance of common stock 3 — — — — — — — —
Impact of transactions affecting NCI — — — — 120 — 120 (120 ) —
Balance – March 31, 2020 23,622 $ 2 30,270 $ 3 $ 5,955 $ 486 $ 6,446 $ 8,668 $ 15,114
Net income (loss) — — — — — (1,981 ) (1,981 ) (3,841 ) (5,822 )
Stock-based compensation — — — — 962 — 962 — 962
Exchange of stock 12,760 1 (12,760 ) (1 ) — — — — —
Exercise of warrants 1 — — — 11 — 11 — 11
Exercise of stock options 5 — — — (61 ) — (61 ) — (61 )
Tax Receivable Agreement liability — — — — (45,045 ) — (45,045 ) — (45,045 )
Deferred income taxes — — — — 56,636 — 56,636 — 56,636
Accrued distributions — — — — (4,327 ) — (4,327 ) — (4,327 )
Issuance of common stock 80 1 — — — — 1 — 1
Impact of transactions affecting NCI — — — — 6,453 — 6,453 (6,453 ) —
Balance – June 30, 2020 36,468 $ 4 17,510 $ 2 $ 20,584 $ (1,495 ) $ 19,095 $ (1,626 ) $ 17,469
Net income (loss) — — — — — (1,022 ) (1,022 ) (147 ) (1,169 )
Stock-based compensation — — — — 347 — 347 — 347
Exchange of stock 16,905 2 (16,905 ) (2 ) — — — — —
Exercise of warrants 266 — — — 706 — 706 — 706
Exercise of stock options 184 — — — 1,394 — 1,394 — 1,394
Tax Receivable Agreement liability — — — — (89,677 ) — (89,677 ) — (89,677 )
Deferred income taxes — — — — 112,670 — 112,670 — 112,670
Accrued distributions — — — — (176 ) — (176 ) — (176 )
Forfeiture of unvested common stock (36 ) (1 ) — — 1 — — — —
Impact of transactions affecting NCI — — — — (1,817 ) — (1,817 ) 1,817 —
Balance – September 30, 2020 53,787 $ 5 605 $ — $ 44,032 $ (2,517 ) $ 41,520 $ 44 $ 41,564
Six Months Ended
June 30,
2021 2020
Cash flows from operating activities:
Net income (loss) $ 23,501 $ (69,115 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 3,544 3,816
Non-cash interest 257 2,791
Change in fair value – warrant liabilities (14,007 ) 108,631
Tax receivable agreement expense 207 32,945
Stock-based compensation 1,592 1,212
Non-cash lease expense 2,058 1,400
Deferred income taxes 3,170 (44,007 )
Changes in operating assets and liabilities:
Accounts receivable 4,007 9,663
Inventories 931 7,807
Prepaid inventory and other assets (2,263 ) (3,049 )
Accounts payable (11,783 ) 903
Accrued sales returns (1,466 ) 4,678
Accrued compensation (5,002 ) 2,374
Customer prepayments 11,081 2,080
Accrued rebates and allowances (4,021 ) (891 )
Operating lease obligations (1,273 ) (849 )
Other accrued liabilities 936 11,957
Net cash provided by operating activities 11,469 72,346

Cash flows from investing activities:
Purchase of property and equipment (26,162 ) (8,010 )
Investment in intangible assets (285 ) (2,435 )
Net cash used in investing activities (26,447 ) (10,445 )

Cash flows from financing activities:
Payments on term loan (1,125 ) —
Proceeds from InnoHold indemnification payment 4,142 —
Tax receivable agreement payments (628 ) —
Distributions to members (853 ) —
Proceeds from exercise of warrants 116 23
Proceeds from exercise of stock options 452 —
Net cash provided by financing activities 2,104 23

Net (decrease) increase in cash (12,874 ) 61,924
Cash and cash equivalents, beginning of the year 122,955 33,478
Cash and cash equivalents, end of the period $ 110,081 $ 95,402

Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 858 $ 22
Cash paid during the year for income taxes $ 4,434 $ 72

Supplemental schedule of non-cash investing and financing activities:
Property and equipment included in accounts payable $ 3,367 $ 1,025
Non-cash leasehold improvements $ 3,239 $ 615
Accrued distributions $ — $ 4,523
Tax receivable agreement liability $ 780 $ 45,266
Deferred income taxes $ 974 $ 56,636
Exercise of liability warrants $ 64,172 $ 23
Class A Class B Additional Total
Common Stock Common Stock Paid-in Accumulated Stockholders’ Noncontrolling Total
Shares Par Value Shares Par Value Capital Deficit Deficit Interest Deficit

Balance – December 31, 2018 9,731 $ 1 44,071 $ 4 $ 3,655 $ (4,322 ) $ (662 ) $ (1,349 ) $ (2,011 )
Net loss — — — — — (130 ) (130 ) (590 ) (720 )
Stock-based compensation — — — — 73 — 73 — 73
Balance – March 31, 2019 9,731 $ 1 44,071 $ 4 $ 3,728 $ (4,452 ) $ (719 ) $ (1,939 ) $ (2,658 )
Net loss — — — — — (1,338 ) (1,338 ) (6,003 ) (7,341 )
Stock-based compensation — — — — 6,733 — 6,733 — 6,733
Repurchase of stock options — — — — (97 ) — (97 ) — (97 )
Issuance of common stock 96 — — — — — — — —
Balance – June 30, 2019 9,827 $ 1 44,071 $ 4 $ 10,364 $ (5,790 ) $ 4,579 $ (7,942 ) $ (3,363 )
Net income — — — — — 1,594 1,594 6,817 8,411
Stock-based compensation — — — — 2,935 — 2,935 — 2,935
Conversion of stock 677 — (677 ) — — — — — —
Forfeiture of unvested common stock (3 ) — (7 ) — — — — — —
Impact of transactions affecting NCI — — — — (7,551 ) — (7,551 ) 7,551 —
Balance – September 30, 2019 10,501 $ 1 43,387 $ 4 $ 5,748 $ (4,196 ) $ 1,557 $ 6,426 $ 7,983
The accompanying notes are an integral part of these ~~unaudited condensed~~ consolidated financial ~~statements.~~statement.

PURPLE INNOVATION, INC.
~~Condensed Consolidated Statements of Cash Flows~~
~~(In thousands)~~
~~(Unaudited)~~
Nine Months Ended
September 30,
2020 2019

Cash flows from operating activities:
Net income $ 13,010 $ 350
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 6,366 2,492
Non-cash interest 2,973 2,439
Paid-in-kind interest (6,616 ) —
Loss on extinguishment of debt 5,782 6,299
Loss on change in fair value - warrant liabilities 43,308 3,372
Tax receivable agreement expense 33,512 —
Stock-based compensation 1,559 9,740
Deferred income taxes (35,818 ) —
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 6,798 (16,446 )
Increase in inventories (3,147 ) (11,878 )
Increase in prepaid inventory and other assets (5,740 ) (2,935 )
Increase in accounts payable 9,678 11,102
Increase (decrease) in accrued sales returns 3,014 (163 )
Increase in accrued compensation 4,561 2,830
Increase (decrease) in customer prepayments (51 ) 170
Decrease in income tax payable (567 ) —
Increase in other accrued liabilities 8,840 8,472
Net cash provided by operating activities 87,462 15,844

Cash flows from investing activities:
Purchase of property and equipment (14,194 ) (5,657 )
Investment in intangible assets (10,890 ) (246 )
Net cash used in investing activities (25,084 ) (5,903 )

Cash flows from financing activities:
Proceeds from related-party debt — 10,000
Proceeds from long-term debt 45,000 —
Proceeds from exercise of option and warrants 2,124 —
Repurchase of stock options — (97 )
Payment on related-party debt (37,497 ) —
Payments for debt issuance costs (2,460 ) (758 )
Distributions to members (5,006 ) —
Principal payments on capital lease obligations (62 ) (25 )
Net cash provided by financing activities 2,099 9,120

Net increase in cash 64,477 19,061
Cash, beginning of the period 33,478 12,232
Cash, end of the period $ 97,955 $ 31,293

Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 954 $ 1,364
Cash paid during the period for income taxes $ 2,422 $ —

Supplemental schedule of non-cash investing and financing activities:
Property and equipment included in accounts payable $ 2,786 $ 155
Equipment acquired through capital lease $ 147 $ 386
Non-cash leasehold improvements $ 615 $ —
Tax Receivable Agreement liability $ 134,943 $ —
Deferred income taxes $ 169,306 $ —
~~The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.~~

~~PURPLE INNOVATION, INC.~~

Notes to Condensed Consolidated Financial Statements
(unaudited)
~~(Unaudited)~~

1. Organization

The Company’s mission is to help people feel and live better through innovative comfort solutions.
Purple Innovation, Inc. collectively with its subsidiary (the “Company” or “Purple Inc.”) is a digitally-native vertical brand founded on comfort product innovation with premium offerings. The Company designs and manufactures a variety of innovative, branded and premium comfort products, including mattresses, pillows, cushions, bases, sheets, and other products. The Company markets and sells its products through its direct-to-consumer (“DTC”) online channels, retail brick-and-mortar wholesale partners, Company showrooms, and third-party online ~~retailers and its Company factory outlet and showrooms.~~retailers.
The Company was incorporated in Delaware on May 19, 2015 as a special purpose acquisition company under the name of Global Partnership Acquisition Corp (“GPAC”) ~~for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination involving the Company and one or more businesses.~~. On February 2, 2018, the Company consummated a transaction structured similar to a reverse recapitalization (the “Business Combination”) pursuant to which the Company acquired a portion of the equity of Purple Innovation, LLC (“Purple LLC”). At the closing of the Business Combination (the “Closing”), the Company became the sole managing member of Purple LLC, and GPAC was renamed Purple Innovation, Inc.
As the sole managing member of Purple LLC, Purple Inc. through its officers and directors is responsible for all operational and administrative decision making and control of the day-to-day business affairs of Purple LLC without the approval of any other member.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The Company consists of Purple Inc. and its consolidated subsidiary, Purple LLC. ~~Pursuant to the Business Combination described in Note 3—~~~~Business Combination~~~~, Purple Inc. acquired approximately 18% of the common units of Purple LLC, while InnoHold, LLC (“InnoHold”) retained approximately 82% of the common units in Purple LLC.~~ As of ~~September~~June 30, ~~2020,~~2021, Purple Inc. held approximately 99% of the common units of Purple LLC and ~~other~~ Purple LLC Class B Unit holders held approximately 1% of the common units in Purple LLC.
The Business Combination was structured similar to a reverse recapitalization. The historical operations of Purple LLC are deemed to be those of the Company. Thus, the financial statements included in this report reflect (i) the historical operating results of Purple LLC prior to the Business Combination; (ii) the combined results of the Company following the Business Combination; (iii) the assets and liabilities of Purple LLC at their historical cost; and (iv) the Company’s equity and earnings per share for all periods presented.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting and reflect the financial position, results of operations and cash flows of the Company. Certain information and note disclosures normally included in ~~the~~ financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, these unaudited condensed consolidated financial statements should be read in conjunction with the ~~2019~~2020 audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form ~~10-K~~10-K/A filed ~~March 9, 2020.~~May 10, 2021. The unaudited condensed consolidated financial statements were prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which were considered of normal recurring nature) considered necessary to present fairly the Company’s financial results. The results of the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, ~~2020~~2021 or for any other interim period or other future year.
~~COVID-19 Pandemic Developments~~
~~The COVID-19 pandemic has impacted many aspects of our operations, directly and indirectly, including disruption of our employees, consumer behavior, distribution and logistics, our suppliers, and~~On December 31, 2020, the market overall. The scope and nature of these impacts continue to evolve. In light of the COVID-19 pandemic, we have taken a number of precautionary measures to manage our resources and mitigate the adverse impact of the pandemic, which is intended to help minimize the risk to our Company employees, customers, and the communities in which we operate. Employees at the Company’s headquarters and certain other employees have been asked to work from home where possible, with only limited access given to employees to work in the office when necessary. For roles that require employeesceased to be ~~on-site, such as our manufacturing facility~~an emerging growth company (“EGC”) and distribution center, we mandate protective equipment be worn, perform temperature testing at the start of each shift and again during the shift, contact trace when risk of exposure is known, stagger shifts to reduce concentration of employees, follow social distancing guidelines and sanitize daily including complete weekly anti-viral fumigation. The State of Utah, where all of our manufacturing operations currently take place, has experienced a significant resurgence of COVID-19 cases. If the State of Utah, as part of efforts to control the resurgence of COVID-19, requires us to close our facilities temporarily or to reduce the number of employees working in our manufacturing at a given time, our business and operations could be significantly adversely affected.

~~PURPLE INNOVATION, INC.~~
~~Notes to Condensed Consolidated Financial Statements~~
~~(Unaudited)~~
Despite the ongoing challenges from COVID-19, the Company has been able to capitalize on the opportunities created by this situation. We continue to serve our customers through our Direct to Consumer (“DTC”) channel, which has remained strong throughout the year as consumer demand for our premium, differentiated product offerings shifted to our DTC channel. We continue to focus our efforts in our DTC core competencies resulting in a continued strength in DTC channel sales across all of our product categories throughout the quarter. This increase in demand was ~~a contributing factor to DTC net revenue growth of approximately 97% over the prior year third quarter. There can be~~ no assurance that this trend of strong demand through our DTC channel will continue. We initially experienced a sharp decline in the wholesale side of our business as temporary shutdowns of non-essential businesses and shelter-at-home directives occurred in most U.S. states. As the shutdowns were lifted and stores began to open again, demand through the wholesale channel increased such that our net revenue from wholesale customers this quarter is up approximately 7% over the prior year third quarter. As of November 9, 2020 we have our factory outlet and all of our showrooms open and servicing our customers. We recently opened two new showrooms and have two more planned to open by the end of the year. However, due to recent resurgence of COVID-19, we may be required to close our factory outlet and showrooms in the future. We have signed a new lease for a manufacturing facility in Georgia and are proceeding with the buildout and purchasing of equipment to begin production.
This increase in demand allowed us to work through a portion of our on-hand inventory and required us to ramp up production. We continue to take advantage of our vertically integrated business model to adjust production schedules to leverage inventory on hand and manage labor costs. We also continue to dynamically adjust our significant discretionary online advertising spend in response to any changes in DTC trends as they develop.
Our supply chain has not been significantly affected by COVID-19. Suppliers in China were temporarily closed as a result of the pandemic, but we had sufficient inventory on hand. These suppliers have resumed production and are able to supply materials as needed. Most of our domestic suppliers are able to continue operations and provide necessary materials when needed. We have experienced some constraintslonger exempt from certain ~~suppliers due~~reporting requirements that apply to ~~our increased production~~public companies. As an EGC prior to ~~meet demand. We have also experienced some shipping delays in the delivery of our product~~this date, Purple Inc. had elected to ~~our customers. This is due to the increased nationwide demand placed on delivery companies.~~
Although the Company has taken measures to protect the business, we cannot predict the specific duration for which these precautionary measures will stay in effect, and we may elect or need to take additional measures as the informationuse extended transition periods available to ~~us continues to develop, including~~private companies for complying with respect to our employees, manufacturing facilities and distribution center, and relationships with our suppliers and customers. Subject to certain assumptions regarding the duration and severity of the COVID-19 pandemic, and government, consumer, and our responses thereto, based on our current projections we believe our cash on hand, ongoing cash generated from e-commerce, liquidity available under our new line of credit, and continuing resumption and ramp up of store operations and our wholesale business, will be sufficient to cover our working capital requirements and anticipated capital expenditures for the next 12 months. However, the extent to which the COVID-19 pandemic and our precautionary measures in response thereto may impact our business will depend on future developments, which are highly uncertain and cannot be precisely predicted at this time.or revised accounting standards.
Variable Interest Entities
Purple LLC is a variable interest entity (“VIE”). The Company determined that it is the primary beneficiary of Purple LLC as it is the sole managing member and has the power to direct the activities most significant to Purple LLC’s economic performance as well as the obligation to absorb losses and receive benefits that are potentially significant. At ~~September~~June 30, ~~2020,~~2021, Purple Inc. had approximately a 99% economic interest in Purple LLC and consolidated 100% of Purple LLC’s assets, liabilities and results of operations in the Company’s unaudited condensed consolidated financial statements contained herein. ~~At September 30, 2020, other parties owned~~The holders of Purple LLC Class B Units (the “Class B Units”) held approximately 1% of the economic interest in ~~Purple LLC; however, the other parties have disproportionally fewer voting rights, and are shown as the noncontrolling interest (“NCI”) holder of~~ Purple LLC. For further discussion see Note 13 — Stockholders’ Equity.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Reclassification
Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on ~~the~~net income (loss), cash flows or stockholders’ equity previously ~~reported net loss.~~reported.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires ~~management~~the Company to establish accounting policies and to make estimates and ~~assumptions~~judgments that affect the reported amounts ~~reported in~~of assets and liabilities and disclose contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and ~~accompanying notes. The Company regularly makes significant estimates and assumptions including, but not limited to, estimates that affect~~ the ~~Company’s revenue recognition, accounts receivable and allowance for doubtful accounts, valuation of inventories, cost~~reported amounts of revenues ~~sales returns, warranty returns,~~and expenses during the recognition and measurement of loss contingencies, warrant liabilities, estimates of current and deferred income taxes, deferred income tax valuation allowances and amounts associated with the Company’s Tax Receivable Agreement with InnoHold (the “Tax Receivable Agreement” or “TRA”). Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment.reporting period. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The Company regularly makes significant estimates and assumptions including, but not limited to, estimates that affect revenue recognition, accounts receivable and allowance for doubtful accounts, valuation of inventories, cost of revenues, sales returns, warranty returns, warrant liability, stock based compensation, the recognition and measurement of loss contingencies, estimates of current and deferred income taxes, deferred income tax valuation allowances and amounts associated with the Company’s tax receivable agreement with InnoHold, LLC (“InnoHold”). Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results could differ materially from those estimates.

~~PURPLE INNOVATION, INC.~~Leases
~~Notes to Condensed Consolidated Financial Statements~~
~~(Unaudited)~~
~~Revenue Recognition~~
In ~~May 2014, in addition to several amendments issued during~~February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~No. 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 outlines a single comprehensive model~~2016-02, Leases (“ASC 842”), which required an entity to recognize lease liabilities and assets on the balance sheet and to disclose key information about an entity’s leasing arrangements. Because the Company ceased to be an EGC on December 31, 2020, the standard became effective for ~~entities to use in accounting~~the Company for ~~revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The Company adopted this ASU effective~~its annual reporting period beginning January 1, ~~2019 on a~~2020, and interim reporting periods within the annual period beginning January 1, 2020. The adoption of ASC 842 and all related amendments using the modified retrospective ~~basis. Adoption of this standard did not result in significant changes to~~transition approach effective for the Company’s ~~accounting policies, business processes, systems or controls, or~~annual reporting period beginning January 1, 2020 resulted in the initial recognition of operating lease right-of-use (“ROU”) assets of $27.9 million and operating lease liabilities of $33.0 million in the Company’s consolidated balance sheet. Pre-existing liabilities for deferred rent and various lease incentives totaling $5.1 million were reclassified to operating lease ROU assets in connection with the adoption. The adoption of ASC 842 did not have a material impact on the Company’s ~~financial position,~~consolidated results of operations or cash ~~flows. As such,~~flows and had no impact on retained earnings. At January 1, 2020, the effective date of adoption, the Company’s finance ROU assets and lease liabilities were not material.
The Company determines if an agreement contains a lease at the inception of a contract. For leases with an initial term greater than 12 months, a related lease liability is recorded on the balance sheet at the present value of future payments discounted at the estimated fully collateralized incremental borrowing rate (discount rate) corresponding with the lease term. In addition, a ROU asset is recorded as the initial amount of the lease liability, plus any lease payments made to the lessor before or at the lease commencement date and any initial direct costs incurred, less any tenant improvement allowance incentives received.
The Company calculates the present value of future payments using its incremental borrowing rate when the discount rate implicit in the lease is not known. The incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. The Company determines the applicable incremental borrowing rate at the lease commencement date based on the rates of its secured borrowings, which is then adjusted for the appropriate lease term and risk premium. In determining the Company’s ROU assets and operating lease liabilities, the Company ~~did not record a cumulative adjustment~~applies these incremental borrowing rates to the ~~opening equity balance~~minimum lease payments within each lease agreement.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Operating lease expense is recognized on a straight-line basis over the lease term. Tenant incentive allowances received from the lessor are amortized through the ROU asset as a reduction of ~~accumulated deficit~~rent expense over the lease term. Any variable lease costs are expensed as incurred. Leases with an initial term of ~~January 1, 2019. However, additional disclosures have been added~~12 months or less (short-term leases) are not recorded as ROU assets and corresponding lease liabilities. Short-term lease expense is recognized on a straight-line basis over the lease term. ROU assets are assessed for impairment as part of the impairment of long-lived assets, which is performed whenever events or changes in ~~accordance with~~circumstances indicate that the ~~requirements~~carrying amount of ~~Topic 606 and are reflected in Note 4 –~~ an asset or asset group may not be recoverable.
Revenue ~~from Contracts with Customers.~~Recognition
The Company markets and sells its products through direct-to-consumer online channels, traditional wholesale partners, third-party online retailers, ~~the Company factory outlet~~ and Company showrooms. Revenue is recognized when the Company satisfies its performance obligations under the contract which is transferring the promised products to the customer. This principle is achieved in the following steps:
Identify the contract with the customer. A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods to be transferred and identifies the payment terms related to these goods, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for the goods that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company does not have significant costs to obtain contracts with customers.
Identify the performance obligations in the contract. The Company’s contracts with customers do not include multiple performance obligations to be completed over a period of time. The performance obligations generally relate to delivering products to a customer, subject to the shipping terms of the contract. The Company has made an accounting policy election to account for shipping and handling activities performed after a customer obtains control of the goods, including “white glove” delivery services, as activities to fulfill the promise to transfer the goods. The Company does not offer extended warranty or service plans. The Company does not provide an option to its customers to purchase future products at a discount and therefore there are no material option rights.
Determine the transaction price. Payment for sale of products through the direct-to-consumer online channels and third-party online retailers is collected at point of sale in advance of shipping the products. Amounts received for unshipped products are recorded as customer prepayments. Payment by traditional wholesale customers is due under customary fixed payment terms. None of the Company’s contracts contain a significant financing component. Revenue is recorded at the net sales price, which includes estimates of variable consideration such as product returns, volume rebates, and other adjustments. The estimates of variable consideration are based on historical return experience, historical and projected sales data, and current contract terms. Variable consideration is included in revenue only to the extent that it is probable that a significant reversal of the revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues.
Allocate the transaction price to performance obligations in the contract. The Company’s contracts with customers do not include multiple performance obligations. Therefore, the Company recognizes revenue upon transfer of the product to the customer’s control at contractually stated pricing.
Recognize revenue when or as we satisfy a performance obligation. The Company satisfies performance obligations at a point in time upon either shipment or delivery of goods, in accordance with the terms of each contract with the customer. With the exception of third-party “white glove” delivery and certain wholesale partners, revenue generated from product sales is recognized at shipping point, the point in time the customer obtains control of the products. Revenue generated from sales through third-party “white glove” delivery is recognized at the point in time when the product is delivered to the customer. Revenue generated from certain wholesale partners is recognized at a point in time when the product is delivered to the wholesale partner’s warehouse. The Company does not have service revenue.
7

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements
(unaudited)
~~(Unaudited)~~

Debt Issuance Costs and Discounts
Debt issuance costs and discounts that relate to borrowings are presented in the condensed consolidated balance sheet as a direct ~~deduction~~reduction from the carrying amount of the related debt liability and are amortized into interest expense using an effective interest rate over the duration of the debt. Debt issuance costs ~~for the~~that relate to revolving ~~line~~lines of credit ~~facility available from the 2020 Credit Agreement~~ are carried as an asset in the condensed consolidated balance sheet and amortized to interest expense on a straight-line basis over the term of the related line of credit facility. Refer to Note 8 – Debt.
Warrant Liabilities
The Company ~~accounts~~accounted for ~~warrant liabilities~~its incremental loan warrants as liability warrants under the provisions of ASC 480 - Distinguishing Liabilities from Equity. ASC 480 requires the recording of certain liabilities at their fair value. Changes in the fair value of these liabilities are recognized in earnings. ~~The Incremental Loan Warrants issued in conjunction with the Amended and Restated Credit Agreement contain~~These warrants contained a ~~warrant~~ repurchase provision which, upon an occurrence of a fundamental transaction as defined in the warrant agreement, could ~~give~~have given rise to an obligation of the Company to pay cash to the warrant holders. In addition, other provisions may ~~require~~have led to a reduction in the exercise price of the ~~warrants to be reduced.~~warrants. The Company ~~has~~ determined ~~that~~ the fundamental transaction provisions ~~require~~required the warrants to be accounted for as a liability at fair value on the date of the transaction, with changes in fair value recognized in ~~earnings.~~earnings in the period of change. The Company ~~uses~~used the Monte Carlo Simulation of a Geometric Brownian Motion stock path model to determine the fair value of the liability. The model uses key assumptions and inputs such as exercise price, fair market value of common stock, risk free interest rate, warrant life, expected volatility and the probability of ~~the~~a warrant re-price. ~~Refer~~All of the Incremental Loan warrants were exercised during fiscal 2020.
The Company accounted for its public warrants in accordance with ASC 815 – Derivatives and Hedging—Contracts in Entity’s Own Equity, under which these warrants did not meet the criteria for equity classification and were recorded as liabilities. Since the public warrants met the definition of a derivative as contemplated in ASC 815, these warrants were measured at fair value at inception and at each reporting date in accordance with ASC 820, Fair Value Measurement, with changes in fair value recognized in earnings in the period of change. The Company determined the fair value of the public warrants based on their public trading price. All of the public warrants were exercised during fiscal 2020.
The Company accounts for its sponsor warrants in accordance with ASC 815, under which these warrants do not meet the criteria for equity classification and must be recorded as liabilities. Since the sponsor warrants meet the definition of a derivative as contemplated in ASC 815, these warrants are measured at fair value at inception and at each reporting date in accordance with ASC 820 with changes in fair value recognized in earnings in the period of change. The Company uses the Black Scholes model to ~~Note 9 –~~ ~~Warrant Liabilities~~.determine the fair value of the liability associated with the sponsor warrants. The model uses key assumptions and inputs such as exercise price, fair market value of common stock, risk free interest rate, warrant life and expected volatility. At June 30, 2021, there were 1.9 million sponsor warrants outstanding.
Fair Value Measurements
The Company uses the fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:
Level 1—Quoted market prices in active markets for identical assets or liabilities;
Level 2—Significant other observable inputs (e.g. quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable, such as interest rate and yield curves, and market-corroborated inputs); and
Level 3—Unobservable inputs in which there is little or no market data, which require the reporting unit to develop its own assumptions.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements
(unaudited)
~~(Unaudited)~~

The classification of fair value measurements within the established three-level hierarchy is based upon the lowest level of input that is significant to the measurements. Financial instruments, although not recorded at fair value on a recurring basis include cash and cash equivalents, receivables, accounts payable, accrued expenses and the Company’s debt obligations. The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair value because of the short-term nature of these accounts. The fair value of the Company’s debt ~~instrument~~instruments is estimated to be ~~its~~ face value based on the contractual terms of the debt ~~instrument~~arrangements and market-based expectations.
The public warrant ~~liability is a~~liabilities are Level 1 instruments as they have quoted market prices in an active market. The sponsor and incremental loan warrant liabilities are Level 3 ~~instrument~~instruments and ~~uses an~~use internal ~~model~~models to estimate fair value using certain significant unobservable inputs which requires determination of relevant inputs and assumptions. Accordingly, changes in these unobservable inputs may have a significant impact on fair value. Such inputs include risk free interest rate, expected average life, expected dividend yield, and expected volatility. These Level 3 liabilities ~~would~~generally decrease (increase) in value based upon an increase (decrease) in risk free interest rate and expected dividend yield. Conversely, the fair value of these Level 3 liabilities ~~would~~ generally increase (decrease) in value if the expected average life or expected volatility were to increase (decrease).
The following table presents information about the Company’s liabilities that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
(In thousands) Level June 30,
2021 December 31,
2020
Sponsor warrants 3 $ 14,529 $ 92,708

All of the public warrants (a Level 1 fair value liability) and all of the incremental loan warrants (a Level 3 fair value liability) were exercised during 2020.
The following table summarizes the Company’s total Level 3 liability activity for the six months ended June 30, 2021 and 2020:
(In thousands) Sponsor
Warrants Incremental
Loan
Warrants Total Level 3
Liabilities
Fair value as of December 31, 2020 $ 92,708 $ — $ 92,708
Fair value transfer to Level 1 measurement (64,172 ) — (64,172 )
Change in valuation inputs⁽¹⁾ (14,007 ) — (14,007 )
Fair value as of June 30, 2021 $ 14,529 $ — $ 14,529

Fair value as of December 31, 2019 $ 7,689 $ 21,622 $ 29,311
Fair value of warrants exercised (763 ) — (763 )
Change in valuation inputs⁽¹⁾ 30,806 25,336 56,142
Fair value as of June 30, 2020 $ 37,732 $ 46,958 $ 84,690
(1) Changes in valuation inputs are recognized in the change in fair value – warrant liabilities in the Consolidated Statements of Income.
Income Taxes
In calculating the provision for interim income taxes, in accordance with ASC Topic 740, an estimated annual effective tax rate is applied to year-to-date ordinary income. At the end of each interim period, the Company estimates the effective tax rate expected to be applicable for the full fiscal year. This differs from the method utilized at the end of an annual period.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
For annual periods, the Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that the deferred tax assets will be realized. Deferred tax assets and liabilities are calculated by applying existing tax laws and the rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change. Our effective tax rate is primarily impacted by the allocation of income taxes to the noncontrolling interest and ~~changes~~the non-taxable nature of the change in ~~our valuation allowance.~~fair value of the warrant liability.
The Company accounts for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return, which are subject to examination by federal and state taxing authorities. The tax benefit from an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination by taxing authorities based on technical merits of the position. The amount of the tax benefit recognized is the largest amount of the benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The effective tax rate and the tax basis of assets and liabilities reflect management’s estimates of the ultimate outcome of various tax uncertainties. The Company recognizes penalties and interest related to uncertain tax positions within the ~~provision (benefit) for~~ income ~~taxes~~tax benefit (expense) line in the accompanying condensed consolidated statements of ~~operations. As of the third quarter of 2020, no uncertain tax positions have been recorded. The Company will continue to monitor this position each interim period.~~income.
The Company files U.S. federal and certain state income tax returns. The income tax returns of the Company are subject to examination by U.S. federal and state taxing authorities for various time periods, depending on those jurisdictions’ rules, generally after the income tax returns are filed.
Net Income (Loss) Per Share
The two-class method of computing net income (loss) per share is required for entities that have participating securities. The two-class method is an earnings allocation formula that determines net income (loss) per share for participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. The Company’s Class B Stock has no economic interest in the earnings of the Company, resulting in the two-class method not being applicable as of September 30, 2020 or in prior periods. Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to common shareholders by the weighted average number of shares of Class A Common Stock, par value $0.0001 per share (the “Class A Stock”), outstanding each period. Diluted net income (loss) per share adds to those shares the incremental shares that would have been outstanding and potentially dilutive assuming exchanges of the Company’s outstanding warrants, stock options and shares of Class B Common Stock, par value $0.0001 per share (the “Class B Stock”), for Class A Stock, and the vesting of unvested and restricted Class A Stock. An anti-dilutive impact isrepresents an increase in net income per share or a reduction in net loss per share resulting from the conversion, exercise or contingent issuance of certain securities.

~~PURPLE INNOVATION, INC.~~
~~Notes to Condensed Consolidated Financial Statements~~
~~(Unaudited)~~
The Company uses the “if-converted” method to determine the potential dilutive effect of conversions of its outstanding Class B Stock, and the treasury stock method to determine the potential dilutive effect of its outstanding warrants and stock options exercisable for shares of Class A Stock and the vesting of unvested ~~and restricted~~ Class A Stock.
Recent Accounting Pronouncements
Reference Rate Reform
~~New Lease Guidance~~
In ~~February 2016,~~March 2020, the FASB issued ASU ~~No. 2016-02, “Leases,” and in March 2019,~~2020-04, Reference Rate Reform (Topic 848): Facilitation of the ~~FASB issued~~ Effects of Reference Rate Reform on Financial Reporting (“ASU ~~No. 2019-01, “Leases: Codification Improvements”~~2020-04”), which ~~updated~~provides guidance to alleviate the burden in accounting ~~guidance related~~for reference rate reform by allowing certain expedients and exceptions in applying generally accepted accounting principles to ~~leases~~contracts, hedging relationships, and other transactions impacted by reference rate reform. The provisions of ASU 2020-04 apply only to ~~increase transparency~~those transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. This standard is currently effective and ~~comparability among organizations by recognizing lease assets and lease liabilities~~upon adoption may be applied prospectively to contract modifications made on or before December 31, 2022, when the reference rate replacement activity is expected to be completed. The interest rate on the balance sheet and disclosing key information about leasing arrangements. They also clarify implementation issues. These updates are effective for public companies for annual periods beginning after December 15, 2018, including interim periods therein.Company’s term loan is based on LIBOR. The Company ~~is allowed~~plans to ~~use~~apply the ~~private company adoption timelines, and therefore the standard is effective~~amendments in this update to account for the Company for its annual period beginning January 1, 2020, and interim periods within annual periods beginning January 1, 2021. The standard is to be applied utilizing a modified retrospective approach, with early adoption permitted. We areany contract modifications that result from changes in the ~~process of implementing a new lease accounting system in connection with the adoption. While we~~reference rate used. The Company does not expect these amendments to have a material impact ~~to our consolidated balance sheet as a result of the adoption of this new guidance, we continue to evaluate the effect of the new standard~~ on ~~our~~its condensed consolidated financial statements and related disclosures. ~~We also expect that adoption of the new guidance will require changes to our internal controls over financial reporting.~~

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes ~~(ASU No. 2019-12)~~(“ASU 2019-12”). The new guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ~~The new guidance~~ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance is effective for fiscal years beginning after December 15, 2020 and for interim periods within those fiscal years. ~~Early~~The adoption ~~is permitted. The~~of this standard by the Company ~~is currently evaluating~~on January 1, 2021 did not have a material impact on the ~~impact~~Company’s financial position, results of ~~adopting ASU 2019-12.~~operations, or cash flows.
~~New~~ Internal-Use Software ~~Guidance~~
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350) (“ASU 2018-15”). The objective of ASU 2018-15 is to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with those incurred to develop or obtain internal-use software. The guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The amendments can be applied either retrospectively or prospectively. ~~We do not expect~~Because the ~~adoption~~Company lost its EGC status on December 31, 2020, the standard became effective for the Company for its annual period beginning January 1, 2020, and interim periods within the annual period beginning January 1, 2021. The Company elected to apply the amendments on a prospective basis. Adoption of this standard todid not have a material impact on ~~our consolidated~~the Company’s financial ~~statements.~~position, results of operations, or cash flows.
Measurement of Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, ~~“Financial~~Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial ~~Instruments”~~Instruments (“ASU 2016-13”), which was further updated and clarified by the FASB through issuance of additional related ASUs. This guidance replaces the existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost based on expected credit losses. The estimate of expected credit losses requires the incorporation of historical information, current conditions, and reasonable and supportable forecasts. These updates are effective for public companies, excluding Smaller Reporting Companies (“SRC”), for annual periods beginning after December 15, 2019, including interim periods therein. The standard is effective for all other entities for annual periods beginning after December 15, 2022, including interim periods therein. ~~The~~Since the Company was considered an SRC on the deferral date of this standard, the guidance is effective for ~~our~~the Company’s interim and annual financial periods beginning January 1, 2023. ~~This standard~~ASU 2016-13 is to be applied utilizing a modified retrospective approach. ~~We are~~The Company is currently evaluating the impact of this standard on ~~our~~its accounts receivable, cash and cash equivalents, and any other financial assets measured at amortized cost and do not expect that adoption will have a material impact on ~~our~~its consolidated financial statements or related disclosures.

~~PURPLE INNOVATION, INC.~~
~~Notes to Condensed Consolidated Financial Statements~~
~~(Unaudited)~~
3. ~~Business Combination~~
On February 2, 2018, upon consummation of the Business Combination, Purple LLC merged with and into a wholly owned subsidiary of GPAC (PRPL Acquisition, LLC), with Purple LLC being the survivor in that merger pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), by and among GPAC, PRPL Acquisition, LLC, a Delaware limited liability company and a wholly owned subsidiary of GPAC (“Merger Sub”), Purple LLC and InnoHold. In connection with the Closing, GPAC was renamed “Purple Innovation, Inc.” and its articles of incorporation were amended to rename its common stock to Class A common stock (“Class A Stock”) and created a new class of stock named Class B common stock (“Class B Stock”) of which 44.1 million shares of Class B Stock were issued to InnoHold (refer to Note 13 — ~~Stockholders’ Equity~~ ~~for a description of the Class A Stock and Class B Stock).~~
Additionally, at the Closing, 9.7 million Class A Units of Purple LLC were issued and are solely held by Purple Inc. They are voting common units entitled to share in the profits and losses of Purple LLC and receive distributions as declared by Purple LLC’s manager. Approximately 44.1 million Class B Units of Purple LLC were issued to InnoHold, who had limited voting rights in Purple LLC and was entitled to share in the profits and losses of Purple LLC and to receive distributions as declared by Purple LLC’s manager. InnoHold subsequently transferred a portion of its shares and units to permitted transfers and exchanged its remaining shares for Class A Stock that it sold. As of September 30, 2020, 0.6 million Class B Units of Purple LLC remain outstanding, all held by other parties. The amended operating agreement appoints Purple Inc. as the sole managing member of Purple LLC. As the sole managing member, Purple Inc. has the sole voting interest in and control of the management and operations of Purple LLC, including when it had only a minority economic interest in Purple LLC.
4. Revenue from Contracts with Customers
The Company markets and sells its products through direct-to-consumer online channels, traditional wholesale partners, third-party online retailers and Company ~~factory outlet and~~ showrooms. Revenue is recognized when the Company satisfies its performance obligations under the contract which is transferring the promised products to the customer as described in Note 2 – Summary of Significant Accounting Policies.

~~Contract Balances~~

Payment for sale of products through the direct-to-consumer online channels, third-party online retailers and Company factory outlet and showrooms is collected at point of sale in advance of shipping the products. Amounts received for unshipped products are recorded as customer prepayments. Customer prepayments were $6.2 million at September 30, 2020 and $6.3 million at December 31, 2019. During the nine months ended September 30, 2020, the Company recognized $6.3 million of revenue that was deferred in customer prepayments at December 31, 2019.PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Disaggregated Revenue
~~The following table presents the Company’s revenue disaggregated by sales channel and product (in thousands):~~
Three Months Ended
September 30, Nine Months Ended
September 30,
Channel 2020 2019 2020 2019

Direct-to-consumer $ 134,252 $ 67,950 $ 360,119 $ 185,109
Wholesale partner 52,859 49,456 114,463 118,949
Revenues, net $ 187,111 $ 117,406 $ 474,582 $ 304,058
Three Months Ended
September 30, Nine Months Ended
September 30,
Product 2020 2019 2020 2019

Bedding $ 172,806 $ 110,332 $ 437,809 $ 283,844
Other 14,305 7,074 36,773 20,214
Revenues, net $ 187,111 $ 117,406 $ 474,582 $ 304,058
The Company sells products through two channels: Direct-to-Consumer and Wholesale. The Direct-to-Consumer channel includes product sales through various direct-to-consumer channels including ~~the~~ Company ~~outlet~~showrooms and ~~showrooms.~~contact center. The Wholesale channel includes all product sales to traditional third-party retailers for ~~their~~both in store and online channels. The Company classifies products into two major categories: Bedding and Other. Bedding products include mattresses, platforms, adjustable bases, mattress protectors, pillows and sheets. Other products include cushions and various other products.
The following tables present the Company’s revenue disaggregated by sales channel and product category (in thousands):
Three Months Ended
June 30, Six Months Ended
June 30,
Channel 2021 2020 2021 2020
Direct-to-consumer $ 116,219 $ 145,180 $ 241,123 $ 225,867
Wholesale partner 66,367 19,916 127,892 61,604
Revenues, net $ 182,586 $ 165,096 $ 369,015 $ 287,471

Three Months Ended
June 30, Six Months Ended
June 30,
Product 2021 2020 2021 2020
Bedding $ 166,708 $ 150,503 $ 338,551 $ 265,004
Other 15,878 14,593 30,464 22,467
Revenues, net $ 182,586 $ 165,096 $ 369,015 $ 287,471
Contract Balances
Payment for sale of products through the direct-to-consumer online channels, third-party online retailers, Company showrooms and contact center is collected at point of sale in advance of shipping the products. Amounts received for unshipped products are recorded as customer prepayments. Customer prepayments totaled $17.3 million and $6.3 million at June 30, 2021 and December 31, 2020, respectively. During the three months ended June 30, 2021 and 2020, the Company recognized all revenue that was deferred in customer prepayments at March 31, 2021 and 2020, respectively.
4. Inventories
Inventories consisted of the following (in thousands):
June 30, December 31,
2021 2020
Raw materials $ 36,315 $ 26,372
Work-in-process 1,991 3,593
Finished goods 27,446 36,280
Inventory obsolescence reserve (957 ) (519 )
Inventories, net $ 64,795 $ 65,726

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements
(unaudited)
~~(Unaudited)~~

5. ~~Inventories~~Property and Equipment
~~Inventories consist~~Property and equipment consisted of the following (in thousands):
June 30, December 31,
2021 2020
Equipment $ 45,037 $ 30,508
Equipment in progress 20,175 18,648
Leasehold improvements 24,716 15,758
Furniture and fixtures 8,566 5,160
Office equipment 4,191 3,185
Total property and equipment 102,685 73,259
Accumulated depreciation (15,189 ) (11,773 )
Property and equipment, net $ 87,496 $ 61,486
Equipment in progress reflects equipment, primarily related to mattress manufacturing, which is being constructed and was not in service at June 30, 2021 or December 31, 2020. Depreciation expense was $1.9 million and $3.5 million during the three and six months ended June 30, 2021, respectively, and totaled $1.4 million and $2.6 million during the three and six months ended June 30, 2020, respectively.
6. Leases
The Company leases its manufacturing and distribution facilities, corporate offices, showrooms and certain equipment under non-cancelable operating leases with various expiration dates through 2036. The Company’s office and manufacturing leases provide for initial lease terms up to 16 years, while retail showrooms have initial lease terms of up to seven years. Certain leases may contain options to extend the term of the original lease. The exercise of lease renewal options is at the Company’s discretion. Any lease renewal options are included in the lease term if exercise is reasonably certain at lease commencement. The Company also leases vehicles and other equipment under both operating and finance leases with initial lease terms of three to five years. The ROU asset for finance leases was $0.8 million and $0.6 million as of June 30, 2021 and December 31, 2020, respectively.
The following table presents the Company’s lease costs (in thousands):
Three Months Ended
June 30, Six Months Ended
June 30,
2021 2020 2021 2020
Operating lease costs $ 2,064 $ 1,267 $ 3,871 $ 2,475
Variable lease costs 482 18 577 26
Short-term lease costs 68 61 124 119
Total lease costs $ 2,614 $ 1,346 $ 4,572 $ 2,620

September 30, December 31,
2020 2019

Raw materials $ 21,116 $ 16,220
Work-in-process 3,292 2,713
Finished goods 26,924 29,485
Inventory obsolescence reserve (557 ) (790 )
Inventories, net $ 50,775 $ 47,628

~~6. Property~~
PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The table below reconciles the undiscounted cash flows for each of the first five years and ~~Equipment~~total remaining years to the operating lease liabilities recorded on the condensed consolidated balance sheet at June 30, 2021 (in thousands):
2021 (excluding the six months ended June 30, 2021) ⁽¹⁾ $ 2,028
2022 8,941
2023 8,412
2024 8,457
2025 8,499
Thereafter 63,966
Total operating lease payments 100,303
Less – lease payments representing interest (28,124 )
Present value of operating lease payments $ 72,179

~~Property~~
(1) – Amount consists of $3.5 million of undiscounted cash flows offset by $1.5 million of tenant improvement allowances which are expected to be fully utilized in fiscal 2021.
As of June 30, 2021 and ~~equipment consist~~December 31, 2020, the weighted-average remaining term of operating leases was 11.9 years and 11.8 years, respectively, and the weighted-average discount rate of operating leases was 5.54% and 6.18%, respectively.
The following table provides supplemental information related to the Company’s condensed consolidated statement of cash flows for the three and six months ended June 30, 2021 and 2020:
Three Months Ended
June 30, Six Months Ended
June 30,
2021 2020 2021 2020
Cash paid for amounts included in present value of operating lease liabilities $ 465 $ 426 $ 1,273 $ 849
Right-of-use assets obtained in exchange for operating lease liabilities 2,467 34 14,984 2,415
7. Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
June 30, December 31,
2021 2020
Warranty accrual – current portion $ 3,925 $ 2,806
Long-term debt – current portion 2,009 $ 2,004
Tax receivable agreement liability – current portion 5,916 6,545
Insurance financing 696 910
Other 1,187 1,318
Total other current liabilities $ 13,733 $ 13,583

September 30, December 31,
2020 2019
Equipment $ 27,139 $ 19,761
Equipment in progress 11,518 5,278
Leasehold improvements 8,353 7,040
Furniture and fixtures 5,141 4,252
Office equipment 2,555 1,523
Equipment under capital lease 809 662
Total property and equipment 55,515 38,516
Accumulated depreciation and amortization (10,532 ) (6,537 )
Property and equipment, net $ 44,983 $ 31,979

~~The Company recorded depreciation and amortization related~~PURPLE INNOVATION, INC.
Notes to property and equipment of $1.4 million and $0.9 million during the three months ended September 30, 2020 and 2019, respectively. Depreciation and amortization related to property and equipment of $4.0 million and $2.4 million were recorded during the nine months ended September 30, 2020 and 2019, respectively.Condensed Consolidated Financial Statements
(unaudited)

~~7. Other Current Liabilities~~8. Debt
~~Other current liabilities consist~~Debt consisted of the following (in thousands):
September 30, December 31,
2020 2019
Warranty accrual – current portion $ 2,015 $ 1,567
Long-term debt – current portion 2,001 $ —
Insurance financing 1,414 350
Website commissions 991 897
Tax Receivable Agreement liability – current portion 629 501
Accrued rent – current portion 298 —
All other current liabilities 647 914
Total other current liabilities $ 7,995 $ 4,229
~~8. Debt~~
~~Long-Term Debt, Related-Party~~
~~Long-term debt, related-party consists of the following (in thousands):~~
September 30, December 31,
2020 2019
Long-term debt, related-party $      — $ 39,202
Less: unamortized debt issuance costs and discounts — (3,803 )
Total long-term debt, related-party $ — $ 35,399
June 30, December 31,
2021 2020
Term loan $ 43,313 $ 44,438
Less: unamortized debt issuance costs (901 ) (1,024 )
Total debt 42,412 43,414
Less: current portion of debt (2,009 ) (2,004 )
Long-term debt, net $ 40,403 $ 41,410

~~PURPLE INNOVATION, INC.~~Term Loan and Revolving Line of Credit
~~Notes to Condensed Consolidated Financial Statements~~
~~(Unaudited)~~
~~Credit Agreement~~
On ~~February 2, 2018,~~September 3, 2020, Purple LLC entered into a ~~Credit Agreement (the “Credit Agreement”)~~financing arrangement with Coliseum Capital Partners, L.P. (“CCP”), Blackwell Partners LLC – Series A (“Blackwell”) and Coliseum Co-invest Debt Fund, L.P. (“CDF” and together with CCP and Blackwell, the “Lenders”), pursuant to which the Lenders agreed to make a loan in an aggregate principal amount of $25.0 million. The Credit Agreement was closed and funded in connection with the Closing on February 2, 2018. In conjunction with the Credit Agreement, Global Partner Sponsor I LLC (the “Sponsor”) agreed to assign to the Lenders an aggregate of 2.5 million warrants to purchase 1.3 million shares of its Class A Stock. The Credit Agreement was amended and restated on January 28, 2019 as discussed below.
~~Amended and Restated Credit Agreement~~
On January 28, 2019, Purple LLC entered into a First Amendment to the Credit Agreement (the “First Amendment”) with the Lenders. In the First Amendment, Purple LLC agreed to enter into the Amended and Restated Credit Agreement, under which two of the Lenders (“Incremental Lenders”) agreed to provide an incremental loan of $10.0 million such that the total amount of principal indebtedness provided to Purple LLC is increased to $35.0 million. A stockholder meeting was held on February 25, 2019 at which time a majority of non-interested stockholders voted in favor of this transaction. The Amended and Restated Credit Agreement, and each of the related documents, was accordingly closed, and the incremental $10.0 million loan was funded on February 26, 2019, and the Company issued to the Incremental Lenders 2.6 million warrants to purchase 2.6 million shares of the Company’s Class A Stock at a price of $5.74 per share, subject to certain adjustments. Among other things, the terms of the Amended and Restated Credit Agreement extends the maturity date for all loans under the Credit Agreement to five years from closing of the incremental loan, lowers the amount allowed for an asset-based loan to $10.0 million, revises certain restrictive covenants to make them more applicable to the Company’s current business, provides the ability for the Company to request additional loans from the Lenders not to exceed $10 million and other closing conditions, representations, warranties and covenants customary for a transaction of this type. All indebtedness under the Amended and Restated Credit Agreement bears interest at 12.0% per annum and is payable on the last business day of each fiscal quarter, provided that Purple LLC will be required to pay up to an additional 4.0% of interest per annum if it fails to meet certain EBITDA thresholds and an additional 2.0% of interest per annum if the Company is not in material compliance with the Sarbanes-Oxley Act of 2002. In addition, Purple LLC may elect for interest in excess of 5.0% per annum to be capitalized and added to the principal amount. Any principal pre-payments in the first year are subject to a make-whole payment, while principal pre-payments in years two through four are subject to certain pre-payment penalties. The Amended and Restated Credit Agreement provided for certain remedies to the Lenders in the event of customary events of default and provides for standard indemnification of the Lenders.
In conjunction with the incremental loan under the Amended and Restated Credit Agreement, the Company paid fees and debt issuance costs in the amount of $0.5 million and $0.3 million, respectively. Additionally, the $4.9 million fair value of the 2.6 million warrants at the time of issuance was included as a component of the loss on extinguishment of debt.
On March 27, 2020, the Company entered into the First Amendment to the Amended and Restated Credit Agreement with the Lenders. The purpose of this Amendment is to allow the Company to defer the remaining 5% of interest for the quarterly payments due March 31 and June 30, 2020 in an effort to reduce its cash disbursements during the COVID-19 impact. Pursuant to the Amendment, the Company was allowed to defer and capitalize the full amount of the interest payments due on March 31, 2020 and June 30, 2020. The Company accounted for the amendment as a modification of existing debt in accordance with ASC 470 - ~~Debt~~.
Interest expense related to the Amended and Restated Credit Agreement was $1.0 million and $1.4 million for the three months ended September 30, 2020 and 2019, respectively, and $3.8 million and $3.8 million for the nine months ended September 30, 2020 and 2019, respectively.
~~Retirement of Amended and Restated Credit Agreement~~
On September 3, 2020, the Company retired all indebtedness related to Purple LLC’s original Credit Agreement dated as of February 2, 2018, as amended and restated in the Amended and Restated Credit Agreement dated February 26, 2019, and as further amended by the First Amendment to Amended and Restated Credit Agreement dated as of March 27, 2020, the Second Amendment to Amended and Restated Credit Agreement dated as of May 15, 2020, and the Waiver and Consent to Amended and Restated Credit Agreement dated as of August 20, 2020. The total amount paid for the retirement of the debt was $45.0 million comprised of $35.0 million original principal, $6.6 million of paid-in-kind interest, $2.5 million in a prepayment fee and $0.9 million in accrued interest.

~~PURPLE INNOVATION, INC.~~
~~Notes to Condensed Consolidated Financial Statements~~
~~(Unaudited)~~
~~Loss on Extinguishment of Debt~~
~~In February 2019, the Company accounted for the debt restructuring under the Amended and Restated Credit Agreement in accordance with ASC 470 -~~ ~~Debt~~. The Company determined that there are separate lenders for purposes of determining if there was an extinguishment or modification. The amended debt terms with CDF were not determined to be substantial and therefore the existing debt attributable to CDF was accounted for as a modification of debt. The amended debt terms with the Incremental Lenders were determined to be substantially different terms from their existing debt and therefore required to be accounted for as an extinguishment of their existing debt. Accordingly, the Company recognized a loss on the extinguishment of their existing debt of approximately $6.3 million for the three and nine months ended March 31, 2019. This is a non-cash expense primarily associated with the recognition of related unamortized debt discount and debt issuance costs and the fair value of the incremental warrants issued.
~~In September 2020, the Company accounted for the debt retirement of the Amended and Restated Credit Agreement in accordance with ASC 470 -~~ ~~Debt~~. The Company determined that there are separate lenders and substantially different terms for the debt and therefore required to be accounted for as an extinguishment of debt. Accordingly, the Company recognized a loss on the extinguishment of their existing debt of approximately $5.8 million for the three and nine months ended September 20, 2020 primarily associated with the $2.5 million in prepayment fee and $3.3 million in the recognition of related unamortized debt discount and debt issuance costs.
~~Long-Term Debt~~
~~Long-term debt consists of the following (in thousands):~~
September 30, December 31,
2020 2019
2020 Credit Agreement Term Loan $ 45,000 $       —
Less: unamortized debt issuance costs (1,088 ) —
Less: current portion of long-term debt (2,001 ) —
Total long-term debt $ 41,911 $ —
~~2020 Credit Agreement~~
~~On September 3, 2020, the Company entered into a Credit Agreement (the “2020 Credit Agreement”) by and between Purple LLC and~~ KeyBank National Association and a group of financial ~~institutions.~~institutions (the “2020 Credit Agreement”). The 2020 Credit Agreement provides for a $45.0 million term loan and a $55.0 million revolving line of credit.
The borrowing rates for the term loan ~~will be~~are based on Purple LLC’s leverage ratio, as defined in the 2020 Credit Agreement, and can range from LIBOR plus ~~3.00 percent~~a 3.00% to ~~3.75 percent~~3.75% margin with a LIBOR minimum of ~~0.50 percent.~~0.50%. The initial borrowing rate of 3.50% is based on LIBOR plus ~~3.00 percent, which is 3.50 percent.~~3.00%. The term loan will be repaid ~~according to~~in accordance with a five-year amortization schedule and may be prepaid in whole or in part at any time without premium or penalty, subject to reimbursement of certain costs. There may be mandatory prepayment obligations based on excess cash flow.
Pursuant to a Pledge and Security Agreement between Purple LLC, KeyBank and the Company ~~Purple LLC’s obligations under~~(the “Security Agreement”), the 2020 Credit Agreement ~~are~~is secured by a perfected first-priority security interest in the assets of Purple LLC and the ~~Company.~~Company, including a security interest in all intellectual property. Also, the Company agreed to an unconditional guaranty of the payment of all obligations and liabilities of Purple LLC under the 2020 Credit Agreement. The ~~Pledge and~~ Security Agreement contains a pledge, as security for ~~its~~the Company’s guaranty, of all of its ownership ~~interests~~interest in Purple LLC. The 2020 Credit Agreement also provides for standard events of default, such as for non-payment and failure to perform or observe ~~covenants. The Credit Agreement~~covenants, and contains standard indemnifications benefitting the ~~Lenders.~~lenders.
The 2020 Credit Agreement ~~also contains~~includes representations, warranties and certain covenants of Purple LLC and the Company. While any amounts are outstanding under the 2020 Credit Agreement, Purple LLC is subject to ~~a number of~~several affirmative and negative covenants, including covenants regarding dispositions of property, investments, forming or acquiring subsidiaries, business combinations or acquisitions, incurrence of additional indebtedness, and transactions with affiliates, among other customary covenants, subject to certain exceptions. In particular, Purple LLC is (i) subject to annual capital expenditure limits that can be adjusted based on the Company achieving certain ~~Net Leverage Ratio~~net leverage ratio thresholds as provided in the 2020 Credit Agreement, (ii) restricted from incurring additional debt up to certain amounts, subject to limited exceptions, as set forth in the 2020 Credit Agreement, and (iii) maintain minimum ~~Consolidated Net Leverage Ratio~~consolidated net leverage and ~~Fixed Charge Coverage Ratio (as those terms are defined in the Credit Agreement)~~fixed charge coverage ratio thresholds at certain measurement ~~dates.~~dates (as defined in the 2020 Credit Agreement). Purple LLC is also restricted from paying dividends or making other distributions or payments on its capital stock, subject to limited exceptions. If the Company or Purple LLC fail to perform their obligations under these and other covenants, or should any event of default occur, the revolving loan commitments under the 2020 Credit Agreement may be terminated and any outstanding borrowings, together with accrued interest, ~~under the 2020 Credit Agreement~~ could be declared immediately due and payable. As of June 30, 2021, the Company was in compliance with all of the covenants related to the 2020 Credit Agreement.

~~PURPLE INNOVATION, INC.~~
~~Notes to Condensed Consolidated Financial Statements~~
~~(Unaudited)~~
The ~~Company has a~~ $55.0 million revolving credit facility ~~initially~~ established under the 2020 Credit ~~Agreement. The revolving line of credit~~Agreement has a term of five years and carries the same interest provisions as the term debt. ~~There is a~~A commitment fee ~~to be paid~~is due quarterly ~~calculated~~ based on the applicable margin applied to the unused total revolving commitment. The agreement for this revolving credit facility contains customary covenants ~~specified in the contractual agreement. The agreement also contains customary~~and events of default. As of ~~September~~June 30, ~~2020,~~2021, there was no balance outstanding on the revolving credit facility. ~~The foregoing summary of the 2020 Credit Agreement does not purport~~

PURPLE INNOVATION, INC.
Notes to ~~be compete and is subject to, and qualified in its entirety by, the full text of the 2020 Credit Agreement, which is attached as Exhibit 10.5 to this report and is incorporated by reference herein.~~Condensed Consolidated Financial Statements
(unaudited)

The Company incurred $2.5 million in debt issuance costs for the 2020 Credit Agreement. These costs ~~related~~relate to the entire credit arrangement and therefore ~~must be~~were allocated between the term loan and the revolving line of credit. ~~Accordingly,~~The Company determined $1.1 million of the debt issuance costs ~~relate~~related to the term debt and are presented in the condensed consolidated balance sheet as a direct ~~deduction~~reduction from the carrying amount of the debt liability. ~~The~~This amount is being amortized into interest expense using an effective interest rate over the duration of the debt. The remaining $1.4 million of ~~the~~ debt issuance costs ~~relate~~were allocated to the revolving line of credit ~~facility carried~~facility. This amount is classified as ~~an asset~~other assets and is being amortized to interest expense on a straight-line basis over the term of the revolving credit facility.
~~Guaranty~~
In connection with the Company’s entry into the 2020 Credit Agreement and the revolving credit facility, the Company entered into the 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 and the other Loan Documents. The foregoing summary of the Guaranty does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Guaranty, which is attached as Exhibit 10.7 to this report and is incorporated by reference herein.
~~Intellectual Property Security Agreements~~
In connection with the Company’s entry in the 2020 Credit Agreement and revolving credit facility, the Company and Purple LLC entered into a Collateral Assignment of Patents, Collateral Assignment of Trademarks, and Collateral Assignment of Copyrights, pursuant to which they granted to the Agent, on behalf of the Secured Creditors (as defined therein), a security interest in all of the intellectual property of the Company and Purple LLC that constitutes collateralInterest expense under the 2020 Credit Agreement totaled $0.6 million and ~~revolving credit facility. The foregoing summary~~$1.1 million for the three and six months ended June 30, 2021, respectively.
Related Party Loan
On March 27, 2020, the Company entered into an amendment to Purple LLC’s Credit Agreement dated February 3, 2018 and all subsequent amendments and agreements (collectively referred to as the “Related Party Loan”) that provided for the deferral of the ~~Collateral Assignment~~full amount of ~~Patents, Collateral Assignment~~the interest payment due on March 31, 2020 and June 30, 2020 to reduce cash disbursements during the COVID-19 pandemic. The Company accounted for this amendment as a modification of ~~Trademarks,~~existing debt in accordance with ASC 470 - Debt. Interest expense on the Related Party Loan was $1.2 million and ~~Collateral Assignment~~$2.4 million for the three and six months ended June 30, 2020, respectively, all of ~~Copyrights does not purport~~which was paid-in-kind through additions to ~~be complete~~the principal amount.
On September 3, 2020, the Company paid $45.0 million to retire, in full, all indebtedness related to the Related Party Loan. The payment included $25.0 million for the original loan under the agreement, $10.0 million for a subsequent incremental loan, $6.6 million for paid-in-kind interest, $2.5 million for a prepayment fee and ~~is subject to, and qualified in its entirety by,~~$0.9 million for accrued interest. As a result of paying off the ~~full text~~Related Party Loan during the third quarter of ~~such agreements, which are attached as Exhibits 10.8, 10.9, and 10.10, respectively, to this report and are incorporated by reference herein.~~fiscal 2020, the Company recognized a $5.8 million loss on extinguishment of debt.
9. Warrant Liabilities
~~The~~ On February 26, 2019, two of the lenders who originally financed the Related Party loan (the “Incremental Lenders”) funded a $10.0 million increase in the loan and received 2.6 million warrants (“Incremental Loan Warrants issued in conjunction with the Amended and Restated Credit Agreement contain a warrant repurchase provision which, upon an occurrence of a fundamental transaction, as defined in the warrant agreement, could give riseWarrants”) to ~~an obligation~~purchase 2.6 million shares of the ~~Company to pay cash to the warrant holders. In addition, upon the occurrence of any of the following events: (1)~~Company’s Class A Stock at a fundamental transaction; (2) acquisition of 25% or more of the total voting power of all the securities of the entity by any one person or group of affiliated persons or entities; (3) Tony Pearce or Terry Pearce individually or together ceasing to beneficially own at least 50% of the voting securities of the Company; or (4) the Board of Directors ceasing to be comprised of a majority of independent directors as defined under NASDAQ rules, the exercise price of the warrant will be reduced by a value based upon a formula model established in the agreement. The formula model is a Black Scholes valuation model which would use the following inputs: (1) share price would be the greater of the volume weighted average price (“VWAP”) of the common stock for the prior 30 days before the applicable event date or the VWAP of the trading day immediately preceding the event date; (2) exercise price of $5.74 unless previously adjusted under other terms of the warrant; (3) volatility would be the greater of 100% and the historical volatility of the Company’s common stock for the ninety days preceding the date of the triggering event; and (4) the assumed risk-free interest rate shall correspondper share, subject to ~~the US Treasury rate for a period equal to the remaining term of this warrant.~~certain adjustments. In May 2020, Tony Pearce or Terry Pearce individually or together ceased to beneficially own at least 50% of the voting securities of the Company. As a result, the exercise price of the warrants ~~were~~was reduced to ~~$0,~~zero based on the formula established in the agreement.
The Company ~~has determined that the fundamental transaction provisions require the warrants to be~~ accounted for the Incremental Loan Warrants as ~~a liability~~liabilities in accordance with ASC 480 - Distinguishing Liabilities from Equity and recorded them at fair value on the date of the transaction ~~under guidance prescribed in ASC 480~~ ~~- Distinguishing Liabilities from Equity~~~~. The liability for the warrants is~~and subsequently re-measured to fair value at each reporting date with changes in the fair value included in earnings. On November 9, 2020, the Company issued 2.6 million shares of Class A Stock pursuant to the exercise of all of the warrants held by the Incremental Lenders.

~~PURPLE INNOVATION, INC.~~
~~Notes~~For the three and six months ended June 30, 2020, the Company recognized losses of $39.0 million and $25.3 million, respectively, in its condensed consolidated statements of operations related to ~~Condensed Consolidated Financial Statements~~
~~(Unaudited)~~
~~The Company determined~~increases in the fair value of the Incremental Loan Warrants. The fair value of the Incremental Loan Warrants ~~to be $64.9 million and $21.6 million on September 30, 2020 and December 31, 2019, respectively~~was calculated using a Monte Carlo Simulation of a Geometric Brownian Motion stock path model. The following are the assumptions used in calculating fair value on June 30, 2020:
Trading price of common stock on measurement date $ 18.00
Exercise price $ —
Risk free interest rate 0.24 %
Warrant life in years 3.7
Expected volatility 50.57 %
Expected dividend yield —
Probability of warrant re-price 100.00 %

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The public and sponsor warrants that were issued in connection with the Company’s IPO and simultaneous private placement contain certain provisions that do not meet the criteria for equity classification and therefore must be recorded as liabilities. The liability for these warrants was recorded at fair value on the date of the Business Combination and subsequently re-measured to fair value at each reporting date or exercise date with changes in the fair value included in earnings.
During the six months ended June 30, 2021, 6.6 million sponsor warrants were exercised resulting in the issuance of 2.3 million shares of Class A common stock. The 1.9 million sponsor warrants outstanding at June 30, 2021 had a fair value of $14.5 million. All of the public warrants were exercised during fiscal 2020.
The Company used public trading prices of the public warrants to determine their fair value. The Company determined the fair value of the sponsor warrants using the Black Scholes model with the following assumptions:
June 30,
2021 2020
Trading price of common stock on measurement date $ 26.41 $ 18.00
Exercise price $ 5.75 $ 5.75
Risk free interest rate 0.25 % 0.18 %
Warrant life in years 1.6 2.6
Expected volatility 52.14 % 43.65 %
Expected dividend yield — —

September 30, December 31,
2020 2019
Trading price of common stock on measurement date $ 24.86 $ 8.71
Exercise price $ — $ 5.74
Risk free interest rate 0.16 % 1.69 %
Warrant life in years 3.4 4.2
Expected volatility 51.30 % 36.82 %
Expected dividend yield — —
Probability of an event causing a warrant re-price 100.00 % 95.00 %
~~The~~During the three and six months ended June 30, 2021, the Company ~~recorded a $18.0~~recognized gains of $4.9 million and ~~$1.4~~$14.0 million, ~~loss on~~respectively, in its condensed consolidated statements of operations related to decreases in the ~~increase in~~ fair value of the ~~Incremental Loan Warrants for~~sponsor warrants exercised during the respective periods or that were outstanding at the end of the respective period. For the three and six months ended ~~September~~June 30, 2020, ~~and 2019, respectively. The~~the Company ~~recorded a $43.3~~recognized losses of $91.3 million and ~~$3.4~~$83.3 million, ~~loss on~~respectively, in its condensed consolidated statements of operations related to increases in the ~~increase in~~ fair value of the ~~Incremental Loan Warrants for~~public and sponsor warrants exercised during the ~~nine months ended September 30, 2020 and 2019, respectively.~~respective periods or that were outstanding at the end of the respective period.
10. Other Long-Term Liabilities
Other long-term liabilities consist of the following (in thousands):
June 30, December 31,
2021 2020
Warranty accrual $ 11,278 $ 8,397
Other 941 912
Total 12,219 9,309
Less: current portion of warranty accrual (3,925 ) (2,806 )
Other long-term liabilities, net of current portion $ 8,294 $ 6,503

September 30, December 31,
2020 2019
Warranty accrual $ 7,499 $ 4,621
Deferred rent expense 6,680 5,115
Capital leases 577 488
Other long-term liabilities 55 —
Total other long-term liabilities 14,811 10,224
Less: current portion of long-term liabilities (2,436 ) (1,654 )
Other long-term liabilities, net of current portion $ 12,375 $ 8,570

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
11. Commitments and Contingencies
Required Member Distributions
Prior to the Business Combination and pursuant to the then applicable First Amended and Restated Limited Liability Company Agreement (the “First Purple LLC Agreement”), Purple LLC was required to distribute to its members an amount equal to 45 percent of Purple LLC’s net taxable income following the end of each fiscal year. The First Purple LLC Agreement was amended and replaced by the Second Amended and Restated Limited Liability Company Agreement (the “Second Purple LLC Agreement”) on February 2, 2018 as part of the Business Combination. The Second Purple LLC Agreement was amended and replaced by the Third Amended and Restated Limited Liability Company Agreement (the “Third Purple LLC Agreement”) on September 3, ~~2020 prior to retiring the debt owed under the Amended and Restated Credit Agreement and entering into the 2020 Credit Agreement and revolving credit facility.~~2020. The Second Purple LLC Agreement and the Third Purple LLC Agreement do not include any mandatory distributions, other than tax distributions. ~~No distributions were made under the Second Purple LLC Agreement in 2019.~~ During the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, the Company ~~has~~ paid ~~out $5.0~~$0.9 million in tax distributions under the ~~Second~~Third Purple LLC Agreement. At June 30, 2021, the Company’s condensed consolidated balance sheet had a minimal amount of accrued tax distributions included in other current liabilities.
Service Agreement
In October 2017, the Company entered into an electric service agreement with the local power ~~company.~~company in Grantsville, Utah. The agreement provided for the construction and installation of certain utility improvements to provide increased power capacity to the manufacturing and warehouse facility in Grantsville, Utah. The Company prepaid $0.5 million related to the improvements and agreed to a minimum contract billing amount over a 15-year period based on regulated rate schedules and changes in actual demand during the billing period. The agreement includes an early termination clause that requires the Company to pay a pro-rata termination charge if the Company terminates within the first 10 years of the service start date. The original early termination charge was $1.3 million and is reduced annually on a straight-line basis over the 10-year period. During 2018, the utility improvements construction was completed and were made available to the Company. As of ~~September~~June 30, ~~2020,~~2021, the early termination penalty was ~~$0.9~~$0.8 million and the Company expects to fulfill its commitments under the agreement in the normal course of business, and as such, no liability has been recorded.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements
(unaudited)
~~(Unaudited)~~

~~Operating Leases~~
~~The Company leases various office and warehouse facilities under non-cancellable operating leases.~~
Office and manufacturing space for its facility in Alpine, Utah is leased from TNT Holdings an entity under common control with InnoHold, which was historically the majority and controlling owner of Purple LLC. The lease was originally entered into in 2010, but in October 2017 was amended with a lease term of 10 years that expires in September 2027 with an early-out clause without penalties after 5 years and includes an option for a 5-year extension.
The Company leases a facility located in Grantsville, Utah for use primarily as manufacturing and warehouse space. The lease was entered into in August 2016 with a lease term of 66 months and expires in January 2022 with two 5-year extension options. The Company also leases another facility in Grantsville, Utah for use as temporary warehouse space. The lease was entered into in May 2019 with a lease term of 4 months which expired in August 2019 with a holdover option on a month to month basis.
In June 2019, the Company entered into a lease for Corporate office and showroom space in Lehi, Utah with a lease term of 10 years, an option to early terminate after the eighty-fourth calendar month, and an option for two 5-year extensions. The Lehi lease commenced in November 2019 and the Company moved its headquarters into the building in February 2020. In addition, in November 2019, the Company entered into an amendment to the Lehi lease for additional office space.
During 2019 and 2020, the Company entered into numerous leases for a Factory Outlet and Company showrooms, which have various commencement dates, with lease terms of 3 to 36 months with various renewal options.
In July 2020, the Company entered into a lease for a new facility in McDonough, Georgia. The Company immediately commenced preparing the building for use as a manufacturing, distribution and office facility and expects it to be fully operational in 2021. The term of the Lease is 128 months including an eight-month free rent period, which will commence upon completion of the landlord’s work on the Company’s space in the building. The Company anticipates the landlord’s work to be completed by the middle of first quarter 2021. The lease also provides the Company with an option to extend the Lease term for two additional five-year periods. The lease also provides the Company with signage rights and a right of first refusal on other contiguous space.
The Company recognizes rent expense on lease payments, including those with rent escalations and rent-free periods, on a straight-line basis over the expected lease term. During the three months ended September 30, 2020 and 2019, the Company recognized rent expense in the amount of $1.6 million and $0.8 million, respectively. During the nine months ended September 30, 2020 and 2019, the Company recognized rent expense in the amount of $4.2 million and $2.6 million, respectively. At September 30, 2020, the Company had deferred rent of $6.7 million, of which $0.3 million is short-term and included in other current liabilities and $6.4 million is long-term and included in other long-term liabilities on the accompanying balance sheets. At December 31, 2019, the Company had deferred rent of $5.1 million all of which is long-term and included in other long-term liabilities on the accompanying balance sheets.
~~Purchase Agreement~~
In February 2018, the Company entered into a purchase contract with a supplier of mineral oil that includes a minimum purchase commitment over a two-year period. In April 2019, the contract was amended to provide for a minimum purchase commitment over a four-year period ending in April 2023. In exchange, the Company is offered a further discount per gallon. As of September 30, 2020, approximately $6.2 million remains on the purchase contract. Based on current usage rates, the Company expects to fulfill its commitments under the agreement in the normal course of business, and as such, no liability has been recorded.
Indemnification Obligations
From time to time, the Company enters into contracts that contingently require it to indemnify parties against claims. These contracts primarily relate to provisions in the Company’s services agreements with related parties that may require the Company to indemnify the related parties against services rendered; and certain agreements with the Company’s officers and directors under which the Company may be required to indemnify such persons for liabilities. In connection with the closing of the Business Combination, to secure the payment of a certain portion of specified post-closing indemnification rights of the Company under the Merger Agreement, 0.5 million shares of Class B Stock and 0.5 million Class B Units otherwise issuable to InnoHold as equity consideration were deposited in an escrow account for up to three years from the Closing pursuant to a contingency escrow agreement. In September 2020, an amendment to the escrow agreement was signed whereby the 0.5 million shares of Class B Stock and 0.5 million Class B Units held in escrow were exchanged for $5.0 million to be held in escrow. As of September 30, 2020, the Company has estimated amounts totalling $4.2 million would qualify for indemnification if actually incurred. No claims have yet been submitted by the Company and $5.0 million remains deposited in an escrow account.

~~PURPLE INNOVATION, INC.~~
~~Notes to Condensed Consolidated Financial Statements~~
~~(Unaudited)~~
Subscription Agreement and Preemptive Rights
In February 2018, in connection with the Business Combination, the Company entered into a subscription agreement with ~~CCP~~Coliseum Capital Partners (“CCP”) and Blackwell Partners LLC – Series A (“Blackwell”), pursuant to which CCP and Blackwell agreed to purchase from the Company an aggregate of 4.0 million shares of Class A Stock at a purchase price of $10.00 per share (the “Coliseum Private Placement”). In connection with the Coliseum Private Placement, the Sponsor assigned (i) an aggregate of 1.3 million additional shares of Class A Stock to CCP and Blackwell and (ii) an aggregate of 3.3 million warrants to purchase 1.6 million shares of Class A Stock to CCP, Blackwell, and ~~CDF.~~Coliseum Co-Invest Debt Fund, L.P. (“CDF”). The subscription agreement provides CCP and Blackwell with preemptive rights with respect to future sales of the Company’s securities. It also provides them with a right of first refusal with respect to certain debt and preferred equity financings by the Company. The Company also entered into a registration rights agreement with CCP, Blackwell, and CDF, providing for the registration of the shares of Class A Stock issued and assigned to CCP and Blackwell in the Coliseum Private Placement, as well as the shares of Class A Stock underlying the warrants received by CCP, Blackwell and CDF. The Company has filed a registration statement with respect to such securities.
Rights of Securities Holders
The holders of certain Warrants exercisable into Class A Stock, including CCP, Blackwell and ~~certain other unregistered Class A Stock~~CDF, were entitled to registration rights pursuant to certain registration rights agreements of the Company as of the Business Combination date. In March 2018, the Company filed a registration statement registering the Warrants (and any shares of Class A Stock issuable upon the exercise of the Warrants), and certain unregistered shares of Class A Stock. The registration statement was declared effective on April 3, 2018. Under the Registration Rights Agreement dated February 2, 2018 between the Company and CCP, Blackwell, and CDF (the “Coliseum Investors”), the Coliseum Investors have the right to make written demands for up to three registrations of certain Warrants and shares of Class A Stock held by them, including in underwritten offerings. In an underwritten offering of such Warrants and shares of Class A Stock by the Coliseum Investors, the Company will pay underwriting discounts and commissions and certain expenses incurred by the Coliseum Investors.
On May 21, 2021, 7.3 million shares of Class A common stock were sold in a secondary offering by the Coliseum Investors at a price of $30.00 per share. The Company did not receive any of the proceeds from the secondary offering. The underwriting discount, commission and other related costs incurred by the Company for the secondary offering totaled $7.9 million and was recorded in May 2021 as general and administrative expense.
The holders of the Incremental Loan Warrants exercisable into Class A Stock were entitled to registration rights pursuant to the registration rights agreement of the Company in connection with the Amended and Restated Credit Agreement. In March 2019, the Company filed a registration statement registering the Warrants (and any shares of Class A Stock issuable upon the exercise of the Warrants). The registration statement was declared effective on May 17, ~~2019.~~2019 On November 9, 2020, the Company issued 2.6 million shares of Class A common stock in exchange for the exercised Incremental Loan Warrants.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
On February 2, 2018, in connection with the closing of the Business Combination, 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 Stock issued in exchange for the equity consideration received in the Business Combination) (the “Registrable Securities”). 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). Pursuant to the InnoHold Registration Rights Agreement, the Company filed a registration statement on Form S-3 that was declared effective on November 8, 2019, pursuant to which InnoHold, Tony Pearce and Terry Pearce sold 11.5 million shares of Class A Stock. The Company filed a second registration statement on Form S-3 that was declared effective on May 14, 2020, pursuant to which InnoHold sold 12.4 million shares of Class A Stock. The Company filed a third and final registration statement on Form S-3 that was declared effective on September 9, 2020, pursuant to which InnoHold sold 16.8 million shares of Class A Stock.
Purple LLC Class B Unit Exchange Right
On February 2, 2018, in connection with the closing of the Business Combination, the Company entered into an exchange agreement with Purple LLC and InnoHold and Class B Unit holders who become a party thereto (the “Exchange Agreement”), which provides for the exchange of Purple LLC Class B Units (the “Class B Units”) and shares of Class B Stock (together with an equal number of Class B Units, the “Paired Securities”) for, at the Company’s option, either (A) shares of Class A Stock at an initial exchange ratio equal to one Paired Security for one share of Class A Stock or (B) a cash payment equal to the product of the average of the volume-weighted closing price of one share of Class A Stock for the ten trading days immediately prior to the date InnoHold or other Class B Unit holders deliver a notice of exchange multiplied by the number of Paired Securities being exchanged. In December 2018, InnoHold distributed Paired Securities to Terry Pearce and Tony Pearce who also agreed to become parties to the Exchange Agreement. In June 2019, InnoHold distributed Paired Securities to certain current and former employees who also agreed to become parties to the exchange agreement. Holders of Class B Units may elect to exchange all or any portion of their Paired Securities as described above by delivering a notice to Purple LLC. ~~See Note 16 —~~ ~~Equity Compensation Plans.~~
In certain cases, adjustments to the exchange ratio will occur in case of a split, reclassification, recapitalization, subdivision or similar transaction of or relating to the Class B Units or the shares of Class A Stock and Class B Stock or a transaction in which the Class A Stock is exchanged or converted into other securities or property. The exchange ratio will also adjust in certain circumstances when the Company acquires Class B Units other than through an exchange for its shares of Class A Stock.
The right of a holder of Paired Securities to exchange may be limited by the Company if it reasonably determines in good faith that such restrictions are required by applicable law (including securities laws), such exchange would not be permitted under other agreements of such holder with the Company or its subsidiaries, including the ~~Operating~~Third Purple LLC Agreement, or if such exchange would cause Purple LLC to be treated as a “publicly traded partnership” under applicable tax laws.

~~PURPLE INNOVATION, INC.~~
~~Notes to Condensed Consolidated Financial Statements~~
~~(Unaudited)~~
The Company and each holder of Paired Securities shall bear its own expense regarding the exchange except that the Company shall be responsible for transfer taxes, stamp taxes and similar duties.
During the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020, ~~30.8~~0.1 million and 13.9 million, respectively, of Paired Securities were exchanged for shares of Class A Stock.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Maintenance of One-to-One Ratios
The Third Purple LLC Agreement includes provisions intended to ensure that the Company at all times maintains a one-to-one ratio between (a) (i) the number of outstanding shares of Class A Stock and (ii) the number of Class A Units owned by the Company (subject to certain exceptions for certain rights to purchase equity securities of the Company under a “poison pill” or similar stockholder rights plan, if any, certain convertible or exchangeable securities issued under the Company’s equity compensation plan and certain equity securities issued pursuant to the Company’s equity compensation plan (other than a stock option plan) that are restricted or have not vested thereunder) and (b) (i) the number of other outstanding equity securities of the Company (including the warrants exercisable for shares of Class A Stock) and (ii) the number of corresponding outstanding equity securities of Purple LLC. These provisions are intended to result in non-controlling interest holders having a voting interest in the Company that is identical to their economic interest in Purple LLC.
Non-Income Related Taxes
The U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc., No.17-494, reversed a longstanding precedent that remote sellers are not required to collect state and local sales taxes. WeThe Company cannot predict the effect of these and other attempts to impose sales, income or other taxes on e-commerce. The Company currently collects and reports on sales tax in all states in which it does business. However, the application of existing, new or revised taxes on ~~our~~the Company’s business, in particular, sales taxes, VAT and similar taxes would likely increase the cost of doing business online and decrease the attractiveness of selling products over the internet. The application of these taxes on ~~our~~the Company’s business could also create significant increases in internal costs necessary to capture data and collect and remit taxes. There have been, and will continue to be, substantial ongoing costs associated with complying with the various indirect tax requirements in the numerous markets in which ~~we conduct~~the Company conducts or will conduct business.
Legal Proceedings
On September 9, 2019, Purple LLC filed a Statement of Claim against PerfectSense Home Inc. and PerfectSense Trading Co. Ltd. (collectively, “PerfectSense”) in the Federal Court of Canada. PerfectSense is a manufacturer and supplier of mattresses and related products. PerfectSense owns the domain name www.purplesleep.ca, which used to, but no longer, redirects to its website at www.perfectsense.ca. In addition to this, Purple LLC has alleged that PerfectSense has: designed their mattresses with the same look as the Purple mattresses (white mattress top, purple stripe, and grey bottom); used many of the marketing elements on Purple’s website (including a similar “exploded view” image of their mattress); and adopted the color purple as their dominant marketing color. Purple LLC is suing for a declaration that PerfectSense has infringed Purple LLC’s copyright and trademark rights and committed the tort of passing off. Purple LLC is asking for injunctive relief, damages, an accounting of profits, interest, costs, and delivery up or destruction of the infringing products (including delivery up of the www.purplesleep.ca domain). After filing the statement of claim, Purple LLC posted $15,000 CAD as security for PerfectSense’s costs. PerfectSense ~~recently~~ brought a motion to strike that was resolved on consent. Pleadings are now closed, and the action is proceeding under case management. Counsel for the defendant was removed from the record at their own request by Court Order. The Court further ordered the defendant to either appoint counsel or file a motion to permit an officer or director to represent the defendant in legal proceedings. On November 6, 2020, the defendant informally requested that the Court permit Mr. Henderson, the CEO and shareholder of the defendant, to represent the defendant in the action until such time as a lawyer could be appointed. Purple ~~will oppose~~opposed this informal ~~request.~~ request, and it was denied by the Court. After granting PerfectSense a final extension of time to either appoint counsel or file a motion to permit Mr. Henderson to represent the defendant, PerfectSense appointed new counsel. The parties are engaged in litigation discovery and recently exchanged affidavits of documents. In June of 2021 the parties were scheduled to attend examinations for discovery. These discoveries were adjourned to allow the parties to negotiate formal terms of settlement.
On September 20, 2020, wePurple LLC filed a complaint atin the U.S. Court of International Trade seeking to recover approximately $7.0 million of Section 301 duties paid at the time of importation on certain Chinese-origin goods. More than 4,000 other complaints have been filed by other companies seeking similar refunds. ~~The~~On March 12, 2021 the United States ~~has not yet~~ filed ana master answer that applies to ~~our complaint.~~all the Section 301 cases, including Purple LLC’s. On July 6, 2021, the court granted a preliminary injunction against liquidation of any unliquidated entries. If successful, this litigation could result in a refund of some or all of the Section 301 duties.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements
(unaudited)
On October 13, 2020, Purple LLC filed a lawsuit against Responsive Surface Technology, LLC and its parent company, PatienTech, LLC (collectively referred to as “ReST”) in the United States District Court for the District of Utah. The lawsuit arises from ReST’s multiple breaches of its obligations to Purple LLC, including infringing upon Purple LLC’s trademarks, patents, and trade dress, among other claims. Purple seeks monetary damages, injunctive relief, and declaratory judgment based on certain conduct by ReST (“Case I”). On October 21, 2020, shortly after the complaint was filed in Case I, ReST filed a retaliatory lawsuit against Purple LLC, Gary DiCamillo, Adam Gray, Joseph Megibow, Terry Pearce, and Tony Pearce, also in the United States District Court for the District of Utah (“Case II”). Subsequently, the two cases were consolidated into one. Case II (now combined with Case I) involves many of the same facts and transactions as Case I. On January 19, 2021, ReST filed a motion to compel arbitration of the claims in Case I. Purple LLC opposed the motion to compel arbitration, arguing that ReST waived any rights they may have had to arbitration and that all the claims in both cases should stay in the courts. Briefing is complete on ReST’s motion to compel arbitration, and the Court held a hearing on May 25, 2021 to hear arguments from the lawyers. The court has not yet rendered a decision on this issue. On March 5, 2021, Purple LLC, Gary DiCamillo, Adam Gray, Joseph Megibow, Terry Pearce, and Tony Pearce, filed a motion to dismiss the claims set forth in Case II, and briefing on the motion to dismiss is complete, but the motion will not likely be heard until after the Court rules on ReST’s motion to compel arbitration, which is still pending. Purple LLC seeks over $4 million in damages from ReST, whereas ReST claims that Purple is liable to it for tens of millions of dollars. The outcome of this litigation cannot be predicted at this early stage. However, Purple intends to vigorously pursue its claims and defend against the claims made by ReST.
~~(Unaudited)~~
On November 19, 2020, Purple LLC sued Advanced Comfort Technologies, Inc., dba Intellibed (“Intellibed”) in the U.S. District Court for the District of Utah for patent infringement, trademark infringement, trade secret misappropriation, and a number of related state law based claims. The principal allegations are that Intellibed has manufactured and sold unauthorized, infringing products under the Sleepy’s brand name owned by third-party Mattress Firm. Purple LLC also requested declaratory relief related to certain assignment terms of a license agreement in which Purple LLC is the licensor and Intellibed is the licensee. On December 14, 2020, Intellibed filed a motion to dismiss Counts I through XI of Purple LLC’s Complaint on the ground that these Counts fail to state a claim upon which relief can be granted. On December 15, 2020, Intellibed filed an Answer to Purple LLC’s complaint and also asserted against Purple LLC a total of eight counterclaims, including a number of declaratory judgment claims, breach of contract, and tortious interference claims. Intellibed’s main allegations are that its use of Purple LLC’s patents, trademark, and trade secrets in connection with Mattress Firm’s Sleepy’s products is authorized under the license agreement. On January 19, 2021, Purple LLC filed a motion to dismiss Intellibed’s fifth, sixth, seventh, and eighth counterclaims on the ground that these counterclaims fail to state a claim upon which relief can be granted. Briefing on Purple LLC’s partial motion to dismiss was completed on March 2, 2021. On January 19, 2021, Purple LLC also filed an Answer to Intellibed’s counterclaims, which were not subject to Purple LLC’s motion to dismiss. On January 27, 2021, Purple LLC filed a First Amended Complaint in response to Intellibed’s initial motion to dismiss. On February 10, 2021, Intellibed filed a motion to dismiss Counts I through XI of Purple LLC’s First Amended Complaint. Briefing on Intellibed’s partial motion to dismiss was completed on March 24, 2021. Both motions to dismiss are still pending before the Court. The case is in the early stages. No substantial discovery has taken place. The Court has not yet entered a Scheduling Order governing the case, and no trial date has been set.
On June 8, 2021, Serta Simmons Bedding, LLC (“SSB”) filed a Complaint against the Company in the Superior Court of Gwinnett County, Georgia, Case No. 21-A-04413-1 (the “Georgia Litigation”). SSB’s Complaint alleges that the Company intentionally interfered with SSB’s business and contractual relations and violated the Georgia Trade Secrets Act by hiring one of SSB’s former employees in the face of a purportedly valid 2015 noncompete agreement. SSB seeks compensatory damages, punitive damages, equitable relief, and attorneys’ fees as a result of the conduct alleged in the Complaint. SSB also initiated arbitration against its former employee who Purple LLC has agreed to indemnify, subject to certain conditions. On July 9, 2021, the Company filed its own Complaint in the Fourth Judicial District Court of Salt Lake County, Utah, Case No. 21040011 (the “Utah Litigation”), seeking: (1) a declaratory judgment that the arbitration clause in the former employee’s 2015 noncompete agreement is unenforceable, (2) a declaratory judgment that the restrictive covenants in the former employee’s 2015 noncompete agreement are unenforceable, and (3) an order enjoining arbitration proceedings initiated by SSB and currently pending against the former employee. On July 12, 2021, the Company filed an Answer to SSB’s Complaint in the Georgia Litigation, denying all allegations of unlawful conduct, and further moved to dismiss the Georgia Litigation on the grounds that Georgia is an inconvenient forum and the parties’ dispute should instead be litigated in Utah. SSB’s response is due on August 16, 2021. The court is expected to render a decision on the Company’s motion to dismiss the Georgia Litigation in September 2021. The Company continues to deny that any illegal or wrongful conduct occurred and intends to continue to defend against SSB’s claims vigorously. At this time, the Company is unable to determine whether an unfavorable outcome is probable and declines to express an opinion as to an amount or range of potential loss that may result from the litigation.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company is from time to time involved in various other claims, legal proceedings and complaints arising in the ordinary course of business. The Company does not believe that adverse decisions in any such pending or threatened proceedings, or any amount that the Company might be required to pay by reason thereof, would have a material adverse effect on the financial condition or future results of the Company.
12. Related Party Transactions
The Company had various transactions with entities or individuals which are considered related parties.
Coliseum Capital Management, LLC
Immediately following the Business Combination, Adam Gray was appointed to the Company’s ~~board~~Board of ~~directors.~~Directors (the “Board”). Mr. Gray is a manager of Coliseum Capital, LLC, which is the general partner of CCP and CDF, and he is also a managing partner of Coliseum Capital Management, LLC (“CCM”), which is the investment manager of Blackwell. Mr. Gray has voting and dispositive control over securities held by CCP, CDF and Blackwell which ~~are~~were also Lenders under the Amended and Restated Credit Agreement. In 2018, the Lenders agreed to make ~~a loan~~the Related Party Loan in an aggregate principal amount of $25.0 million pursuant to ~~the Credit Agreement~~an agreement entered into as part of the Business Combination. In conjunction with ~~the Credit Agreement,~~this agreement, the Sponsor agreed to assign to the Lenders an aggregate of 2.5 million warrants to purchase 1.3 million shares of its Class A Stock. In 2019, ~~two of the Lenders,~~ the Incremental Lenders ~~agreed to provide an incremental loan of~~funded a $10.0 million ~~(see Note 10 –~~ ~~Debt~~~~). The Lenders~~increase in ~~aggregate had $41.6 million in principal borrowings outstanding, comprised of $35.0 million in original loan amount~~the Related Party Loan and $6.6 million in capitalized interest and accrued interest of $0.9 million as of September 3, 2020. Pursuant to the First Amendment to the Amended and Restated Credit Agreement, the Company did not make any cash interest payments to the Lenders during the three or nine months ended September 30, 2020. The Company made a cash interest payment of $0.5 million and $1.3 million during the three and nine months ended September 30, 2019, respectively. Pursuant to the Second Amendment to the Amended and Restated Credit Agreement, a negative covenant was removed so that there would not be an event of default if Lenders acquired 25% or more ownership of the Company. As part of the Amended and Restated Credit Agreement, CCP and Blackwell were granted 2.6 million warrants to purchase 2.6 million shares of the Company’s Class A Stock at a price of $5.74 per share, subject to certain adjustments. In ~~May 2020, pursuant~~accordance with an amendment to the ~~terms of the warrant agreement upon the condition that Tony Pearce or Terry Pearce individually or together ceased to beneficially own at least 50% of the voting securities of~~Related Party Loan dated March 27, 2020, the Company did not make any cash interest payments to the ~~exercise price~~Lenders during the first and second quarters of 2020. On September 3, 2020, the ~~warrants were adjusted~~Company paid $45.0 million to ~~$0 per share.~~
retire, in full, the Related Party Loan. The payment included the $25.0 million original loan under the agreement, $10.0 million for the subsequent incremental loan, $6.6 million of paid-in-kind interest, $2.5 million in a prepayment fee and $0.9 million in accrued interest. In ~~February 2018, in~~ connection with the Business Combination, the Company entered into a subscription agreement with CCP and Blackwell, pursuant to which CCP and Blackwell agreed to purchase from the Company an aggregate of 4.0 million shares of Class A Stock at a purchase price of $10.00 per share (the “Coliseum Private Placement”). In connection with the Coliseum Private Placement, the Sponsor assigned (i) an aggregate of 1.3 million additional shares of Class A Stock to CCP and Blackwell and (ii) an aggregate of 3.3 million warrants to purchase 1.6 million shares of Class A Stock to CCP, Blackwell, and CDF. The subscription agreement provides CCP and Blackwell with preemptive rights with respect to future sales of the Company’s securities. It also provides them with a right of first refusal with respect to certain debt and preferred equity financings by the Company. The Company also entered into a registration rights agreement with CCP, Blackwell, and CDF, providing for the registration of the shares of Class A Stock issued and assigned to CCP and Blackwell in the Coliseum Private Placement, as well as the shares of Class A Stock underlying the warrants received by CCP, Blackwell and CDF. The Company has filed a registration statement with respect to such securities.
~~Retirement~~In May 2020, pursuant to the terms of ~~Amended and Restated Credit Agreement~~
the warrant agreement upon the condition that Tony Pearce or Terry Pearce individually or together ceased to beneficially own at least 50% of the voting securities of the Company, the exercise price of the Incremental Loan Warrants was adjusted to zero. On ~~September 3,~~November 9, 2020, the Company ~~retired all indebtedness related to Purple LLC’s original Credit Agreement dated as~~issued 2.6 million shares of ~~February 2, 2018, as amended and restated~~Class A common stock in exchange for the ~~Amended and Restated Credit Agreement dated February 26, 2019, and as further amended~~Incremental Loan Warrants held by the First Amendment to Amended and Restated Credit Agreement dated as of March 27, 2020, the Second Amendment to Amended and Restated Credit Agreement dated as of May 15, 2020, and the Waiver and Consent to Amended and Restated Credit Agreement dated as of August 20, 2020. The total amount paid for the retirement of the debt was $45.0 million, comprised of $35.0 million in original principal, $6.6 million of paid-in-kind interest, $2.5 million in a prepayment fee and $0.9 million in accrued interest.Incremental Lenders.
Purple Founder Entities
TNT Holdings, LLC (herein “TNT Holdings”), EdiZONE, ~~LLC (herein “EdiZONE”)~~(wholly owned by TNT Holdings) and InnoHold ~~LLC (herein “InnoHold”)~~ (the “Purple Founder Entities”) were entities under common control with Purple LLC prior to the Business ~~Combination as~~Combination. TNT Holdings and InnoHold are majority owned and controlled by Terry Pearce and Tony Pearce ~~(with EdiZONE being wholly owned by TNT Holdings)~~(the “Purple Founders”), who ~~also were the founders of Purple LLC and immediately following the Business Combination~~ were appointed to the Company’s Board ~~(the “Purple Founders”).~~following the Business Combination. InnoHold was a majority shareholder of the Company until it sold a portion of its interests in a secondary public offering in May 2020 and the remainder of its interests ~~were sold~~ in a secondary public offering in September 2020. The Purple Founders also resigned as employees of the Company and retired from the ~~Company’s~~ Board in August 2020.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements
(unaudited)
~~(Unaudited)~~

TNT Holdings ~~owns~~owned the Alpine facility Purple LLC has been leasing since ~~2010.~~2010, and the Purple Founders informed the Company that TNT Holdings recently transferred ownership to 123E LLC, an entity controlled by the Purple Founders. Effective as of October 31, 2017, Purple LLC entered into an Amended and Restated Lease Agreement with TNT Holdings. The Company determined that neither TNT Holdings ~~is not~~nor 123E LLC are a VIE as neither the Company nor Purple LLC hold any explicit or implicit variable interest in TNT Holdings or 123E LLC and do not have a controlling financial interest in TNT ~~Holdings.~~Holdings or 123E LLC. The Company incurred $0.2 million and $0.2 million in rent expense to TNT Holdings for the building lease of the Alpine facility for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively and ~~$0.7~~$0.4 million and ~~$0.8~~$0.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. The Company continues to lease the Alpine facility that was formerly the Company headquarters, for use in production, research and development and video production.
During the ~~nine~~six months ended ~~September~~June 30, ~~2020, 30.1 million~~2021, certain current and former employees of the Company who received distributions of Paired Securities ~~have been~~from InnoHold exchanged 0.1 million of Paired Securities for Class A ~~Stock by InnoHold.~~Stock.
On November 9, 2018, Purple LLC and EdiZONE executed the Second Amended and Restated Confidential Assignment and License Back Agreement (the “Revised License Agreement”), pursuant to which EdiZONE assigned all of its comfort and cushioning intellectual property to Purple LLC and further limited the subset of such intellectual property licensed back to EdiZONE to only those uses that enabled EdiZONE to comply with its obligations under previously existing contracts, agreements and licenses. On August 14, 2020, Purple LLC entered into a ~~License Transfer and IP Assignment~~separate agreement whereby EdiZONE, for consideration of $8.5 million, assigned a license agreement with ~~EdiZONE for the transfer~~Advanced Comfort Technologies, Inc., dba Intellibed (“Intellibed”), and ~~assignment~~related royalties payable thereunder, to Purple LLC, ~~all~~along with the trademarks GEL MATRIX and INTELLIPILLOW. In connection with such assignment, the Company agreed to indemnify EdiZONE against claims by Intellibed relating to EdiZONE’s breach under the agreement.
In connection with the Business Combination, to secure payment of ~~EdiZONE’s rights, interests, and obligations under~~ a certain ~~license agreement, and certain intellectual property~~portion of specified post-closing indemnification rights of ~~EdiZONE,~~the Company under the Merger Agreement, 0.5 million shares of Class B Stock and ~~indemnify and hold EdiZONE harmless~~0.5 million Class B Units otherwise issuable to InnoHold as equity consideration were deposited in an escrow account for up to three years from ~~liability related~~the date of the Business Combination pursuant to a contingency escrow agreement. In September 2020, an amendment to the ~~certain license agreement.~~escrow agreement was signed whereby the 0.5 million shares of Class B Stock and 0.5 million Class B Units held in escrow were exchanged for $5.0 million. On February 3, 2021, the Company received $4.1 million from InnoHold as reimbursement for amounts that qualified for indemnification from the $5.0 million being held in escrow. The remaining $0.9 million in escrow was returned to InnoHold. The amount received from InnoHold was recorded as additional paid-in capital in the condensed consolidated balance sheet.
During the six months ended June 30, 2021, Purple LLC paid EdiZONE $8.5 million as consideration for the agreement. The rights, interests, and obligations under the assigned license agreement now owned by Purple LLC, including the right to receive royalty payments from the licensee, pertain to certain intellectual property owned by Purple LLC that was licensed back to EdiZONE for purposes of allowing EdiZONE to maintain its license with the third party licensee that existed prior to both the Business Combination and EdiZONE’s related assignment of all its material intellectual property to Purple LLC pursuant to the Second Amended and Restated Assignment and License Back between EdiZONE and Purple LLC dated November 9, 2018, resulting in Purple LLC now being the direct licensor to that third party licensee of the intellectual property owned by Purple LLC. The additional intellectual property assigned to Purple LLC, and now also owned by Purple LLC, includes the INTELLIPILLOW and GEL MATRIX trademarks. For the avoidance of doubt, and stated simply, Purple LLC acquired the rights of EdiZONE to be the direct licensor with the third party licensee of the intellectual property, namely patents and trade secrets, that were and are owned by Purple LLC. The foregoing description of the License Transfer and IP Assignment Agreement does not purport to be complete and is qualified in its entirety by reference to the complete terms of the agreement, a copy of which is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q and incorporated herein by reference.
~~In July 2020 and September 2020, Purple LLC paid~~ InnoHold ~~either directly or~~ through withholding payments directly to various states, an aggregate of ~~$4.7~~$0.4 million in required tax distributions pursuant to the ~~Second~~Third Purple LLC Agreement.
13. Stockholders’ Equity
Prior to the Business Combination, GPAC was a shell company with no operations, formed as a vehicle to effect a business combination with one or more operating businesses. After the Closing, the Company became a holding company whose sole material asset consists of its interest in Purple LLC.
Class A Common Stock
The Company has 210.0 million shares of Class A Stock authorized at a par value of $0.0001 per share. Holders of the Company’s Class A Stock are entitled to one vote for each share held on all matters to be voted on by the stockholders and participate in dividends, if declared by the Board, or 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. Holders of the Class A Stock and holders of the Class B Stock voting together as a single class, have the exclusive right to vote for the election of directors and on all other matters properly submitted to a vote of the stockholders. Holders of Class A Stock and Class B Stock are entitled to one vote per share on matters to be voted on by stockholders. At ~~September~~June 30, ~~2020, 53.8~~2021, 66.4 million shares of Class A Stock were outstanding.
In accordance with the terms of the Business Combination, approximately 1.3 million shares of Class A Stock were subject to vesting and forfeiture. The shares of Class A Stock subject to vesting will be forfeited eight years from the Closing, unless any of the following events (each a “Triggering Event”) occurs prior to that time:(i) the closing price of the Class A Stock on the principal exchange on which it is listed is at or above $12.50 for 20 trading days over a thirty trading day period (subject to certain adjustments), (ii) a change of control of the Company, (iii) a “going private” transaction by the Company pursuant to Rule 13e-3 under the Exchange Act or such other time as the Company ceases to be subject to the reporting obligations under Section 13 or 15(d) of the Exchange Act, or (iv) the time that the Company’s Class A Stock ceases to be listed on a national securities exchange. During ~~the nine months ended September 30,~~fiscal 2020, a Triggering Event occurred as the closing price of the Class A Stock on the principal exchange on which it is listed was at or above $12.50 for 20 trading days over a ~~thirty trading~~thirty-trading day period. Accordingly, ~~the~~these shares of Class A Stock are no longer subject to vesting or forfeiture.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Class B Common Stock
The Company has 90.0 million shares of Class B Stock authorized at a par value of $0.0001 per share. Holders of the Company’s Class B Stock will vote together as a single class with holders of the Company’s Class A Stock on all matters properly submitted to a vote of the stockholders. Shares of Class B Stock may be issued only to InnoHold, their respective successors and assigns, as well as any permitted transferees of InnoHold. A holder of Class B Stock may transfer shares of Class B Stock to any transferee (other than the Company) only if such holder also simultaneously transfers an equal number of such holder’s Purple LLC Class B Units to such transferee in compliance with the ~~Second~~Third Purple LLC Agreement. The Class B 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.

~~PURPLE INNOVATION, INC.~~
~~Notes to Condensed Consolidated Financial Statements~~
~~(Unaudited)~~
In connection with the Business Combination, approximately 44.1 million shares of Class B Stock were issued to InnoHold as part of the equity consideration. InnoHold subsequently transferred a portion of its shares to permitted transfers and exchanged its remaining shares for Class A Stock that it sold. ~~At September 30, 2020, 0.6~~All of the 0.4 million shares of Class B Stock ~~were~~ outstanding ~~all~~at June 30, 2021 were held by other parties.
Preferred Stock
The Company has 5.0 million shares of preferred stock authorized at a par value of $0.0001 per share. The preferred stock may be issued from time to time in one or more series. The directors are expressly authorized to provide for the issuance of shares of the preferred stock in one or more series and to establish from time to time the number of shares to be included in each such series and to fix the voting rights, designations and other special rights or restrictions. At ~~September~~June 30, ~~2020,~~2021, there were no shares of preferred stock outstanding.
Public and Sponsor Warrants
There were 15.5 million public warrants ~~(the “Public Warrants”)~~ issued in connection with GPAC’s formation and IPO and 12.8 million sponsor warrants ~~(the “Sponsor Warrants”),~~ issued pursuant to a private placement simultaneously with the IPO. Each of the Company’s warrants entitles the registered holder to purchase one-half of one share of the Company’s Class A Stock at a price of $5.75 per half share ($11.50 per full share), subject to adjustment pursuant to the terms of the warrant agreement. Pursuant to the warrant agreement, a warrant holder may exercise its warrants only for a whole number of shares of the Class A Stock. For example, if a warrant holder holds one warrant to purchase one-half of one share of Class A Stock, such warrant will not be exercisable. If a warrant holder holds two warrants, such warrants will be exercisable for one share of the Class A Stock. In no event will the Company be required to net cash settle any warrant. The warrants have a five-year term which commenced on March 2, 2018, 30 days after the completion of the Business Combination, and will expire on February 2, 2023, or earlier upon redemption or liquidation.
The Company may call the warrants for redemption if the reported last sale price of the Class A Stock equals or exceeds $24.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date the Company sends the notice of redemption to the warrant holders; provided, however, that the ~~Sponsor Warrants~~sponsor warrants are not redeemable by the Company so long as they are held by the Sponsor or its permitted transferees. In addition, with respect to the ~~Sponsor Warrants,~~sponsor warrants, so long as such ~~Sponsor Warrants~~sponsor warrants are held by the Sponsor or its permitted transferee, the holder may elect to exercise the ~~Sponsor Warrants~~sponsor warrants on a cashless basis, by surrendering their ~~Sponsor Warrants~~sponsor warrants for that number of shares of Class A Stock equal to the quotient obtained by dividing (x) the product of the number of shares of Class A Stock underlying the ~~Sponsor Warrants,~~sponsor warrants, multiplied by the difference between the exercise price of the Sponsor 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 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. All other terms, rights and obligations of the ~~Sponsor Warrants~~sponsor warrants remain the same as the ~~Public Warrants. Both~~public warrants.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
On October 27, 2020, the Company provided notice to the holders of the public warrants that the Company was exercising its right under the terms of the Public ~~and Sponsor~~ Warrants ~~are classified as equity instruments~~to redeem such warrants by paying to the warrant holders the redemption price of $0.01 per warrant on November 30, 2020. Any exercise of the warrants prior to that date was to be done on a cashless basis, in accordance with the terms of the warrants. All of the public warrants were exercised or redeemed by November 30, 2020.
During the six months ended June 30, 2021, 6.6 million sponsor warrants were exercised resulting in the ~~accompanying condensed consolidated balance sheet.~~
~~From the time~~issuance of ~~GPAC’s IPO up to the Business Combination with Purple LLC,~~2.3 million shares of Class A common stock. At June 30, 2021, there were ~~28.3~~1.9 million warrants ~~outstanding. During the nine months ended September 30, 2020, 0.9 million warrants have been exercised. At September 30, 2020, approximately 27.4 million warrants remain outstanding.~~outstanding all of which were sponsor warrants.
Incremental Loan Warrants
In connection with the Amended and Restated Credit Agreement, the Company issued to ~~CCP and Blackwell, as~~ the Incremental Lenders ~~funding the Incremental Loan,~~ 2.6 million Incremental Loan Warrants to purchase 2.6 million shares of the Company’s Class A Stock. Each Incremental Loan Warrant ~~entitles~~entitled the registered holder to purchase one share of the Company’s Class A Stock at a price of $5.74 per share, subject to adjustment pursuant to the terms of the warrant agreement. ~~The Incremental Loan Warrants have a five-year term and will expire on February 26, 2024, or earlier upon redemption or liquidation.~~

~~PURPLE INNOVATION, INC.~~
~~Notes to Condensed Consolidated Financial Statements~~
~~(Unaudited)~~
The Company may call the warrants for redemption at a price of $0.01 per Share of Class A Stock if the reported last sale price of the Class A Stock equals or exceeds $24.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date the Company sends the notice of redemption to the warrant holders. If the Company calls the Incremental Loan Warrants for redemption, it will have the option to require the holder to exercise the Incremental Loan Warrants on a cashless basis, by surrendering their Incremental Loan Warrants for that number of shares of Class A Stock equal to the quotient obtained by dividing (x) the product of the number of shares of Class A Stock underlying the Incremental Loan Warrants, multiplied by the difference between the exercise price of the Sponsor 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 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 Incremental Loan Warrants.
In the event of a “fundamental transaction” as defined in the warrant agreement, the holder will have the right to purchase and receive the same kind and amount of consideration receivable by the stockholders of the Company upon the occurrence of such fundamental transaction. The warrant agreement requires the Company to cause the surviving company in a fundamental transaction, to assume the obligations of the Company under the Incremental Loan Warrants. In addition, a clause in the Incremental Loan Warrant Agreement states, upon the occurrence of a fundamental transaction, that the holders of the Incremental Loan Warrants may elect to either (i) have the exercise price of the warrant reduced by the Black-Scholes value of the Incremental Loan Warrants (as set forth in the Incremental Loan Warrants Agreement) or (ii) cause the Company or its successor to repurchase all or a portion of the Incremental Loan Warrants at the Black-Scholes value (as set forth in the Incremental Loan Warrants). In addition, upon the occurrence of any of the additional following events: (1) acquisition of 25% or more of the total voting power of all the securities of the entity by any one person or group of affiliated persons or entities; (2) Tony Pearce or Terry Pearce individually or together ceasing to beneficially own at least 50% of the voting securities of the Company; or (3) the Board of Directors ceasing to be comprised of a majority of independent directors as defined under NASDAQ rules, the exercise price of the warrant will be reduced by a value based upon a formula model established in the agreement. As a result of these clauses, the Incremental Loan Warrants embody an obligation to repurchase the Company’s equity shares, or is indexed to such an obligation, and may require the Company to settle the obligation by transferring assets. As such, the Incremental Loan Warrants are classified as liabilities under ASC 480 - ~~Distinguishing Liabilities from Equity~~.
~~During the nine months ended September 30,~~May 2020, Tony Pearce orand Terry Pearce individually or together ceased to beneficially own at least 50% of the voting securities of the Company. As a result, the exercise price of the warrants ~~were~~was reduced to ~~$0,~~zero based on the formula established in the agreement.
On October 27, 2020, the Company provided notice to the holders of the Incremental Loan Warrants that the Company was exercising its right to redeem such warrants by paying to the warrant holders the redemption price of $0.01 per warrant on November 30, 2020. Any exercise of the warrants prior to that date was to be done on a cashless basis, in accordance with the terms of the warrants. On November 9, 2020, upon the exercise of all the Incremental Loan Warrants, the Company issued 2.6 million shares of Class A common stock in exchange for the Incremental Loan Warrants held by the Incremental Lenders.
Noncontrolling Interest
Noncontrolling interest (“NCI”) is the membership interest in Purple LLC held by holders other than the Company. ~~On February 2, 2018, upon~~Upon the close of the Business Combination, and at December 31, 2018, InnoHold’s and other ~~Purple LLC~~ Class B Unit holders’ combined NCI percentage in Purple LLC was approximately 82%. At ~~September~~June 30, ~~2020,~~2021, the combined NCI percentage in Purple LLC was approximately 1%. The Company has consolidated the financial position and results of operations of Purple LLC and reflected the proportionate interest held by all such Purple LLC Class B Unit holders as NCI.
14. Income Taxes
The Company’s sole material asset is Purple LLC, which is treated as a partnership for U.S. federal income tax purposes and for purposes of certain state and local income taxes. Purple LLC’s net taxable income and any related tax credits are passed through to its members and are included in the members’ tax returns, even though such net taxable income or tax credits may not have actually been distributed. While the Company consolidates Purple LLC for financial reporting purposes, the Company will be taxed on its share of earnings of Purple LLC not attributed to the noncontrolling interest holders, which will continue to bear their share of income tax on its allocable earnings of Purple LLC. The income tax burden on the earnings taxed to the noncontrolling interest holders is not reported by the Company in its consolidated financial statements under GAAP. As a result, the Company’s effective tax rate differs ~~materially~~ from the statutory rate. The primary factors impacting the expected tax are the allocation of tax benefit to noncontrolling interest and the ~~impact~~non-taxable nature of the ~~valuation allowance.~~change in fair value of the warrant liability.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements
(unaudited)
~~(Unaudited)~~

~~In prior periods~~Prior to the second quarter of 2020, the Company ~~had~~ maintained a full valuation allowance on its net deferred tax assets which are comprised primarily of basis differences in Purple LLC. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income sufficient to utilize the deferred tax assets on income tax returns. In periods prior ~~periods,~~to the second quarter of 2020, management ~~had determined~~made the determination that its net deferred tax assets were not more likely than not going to be realized ~~due to existence of critical negative evidence that~~because the Company was in a three-year cumulative loss ~~position.~~position and the generation of future taxable income was uncertain. Considering this and other factors, the Company maintained a full valuation allowance of $44.3 million ~~was maintained~~ through the period ending March 31, 2020.
~~For~~During fiscal 2020, the ~~period ended June 30, 2020,~~Company achieved three-year cumulative income for the first time and ~~in assessing the realizability~~determined that it would likely generate sufficient taxable income to utilize some of its deferred tax ~~assets, management determined that~~assets. Based on this and other positive evidence, the Company concluded it was more likely than not that some of its ~~net~~ deferred tax assets would be realized and that a full valuation allowance for its deferred tax assets was no longer appropriate. As ~~of the period ended June 30, 2020, the Company was no longer in a three-year cumulative loss position. As~~ a result, of the removal of this negative evidence and other items of positive evidence, the Company determined that the deferred tax assets were more likely than not to be realized. Accordingly, through the period ended September 30, 2020, $35.4$35.5 million of the valuation allowance associated with the Company’s federal and state deferred tax assets was released during 2020 and recorded as an income tax benefit. An additional $0.7 million of remaining valuation allowance will be released in the fourth quarter of 2020 as taxes are recorded. In addition, and in conjunction with the removal of the valuation allowance, the Company recorded an additional $172.8 million in deferred tax assets primarily related to tax basis increases resulting from exchanges of Class B Paired Securities during the nine months ended September 30, 2020. The deferred tax assets at ~~September~~June 30, ~~2020 are $205.5~~2021 totaled $209.0 million, which is net of ~~$0.7~~a $70.4 million ~~of valuation allowance recorded against the deferred tax assets, which will be released in subsequent quarters and $11.0 million of~~ valuation allowance that has been recorded against the residual outside partnership basis for the amount the Company believes is not more likely than not realizable. As a result, there was an overall increase of $18.4 million in the valuation allowance from December 31, 2020 to June 30, 2021, primarily as a result of an increase in the residual outside partnership basis.
The Company currently estimates its annual effective income tax rate to be ~~3.14%~~27.30%. The annualized effective tax rate for the Company differs from the federal rate of 21% primarily due to ~~(1)~~ the ~~release of a portion~~non-taxable nature of the ~~valuation allowance through~~change in fair value of the ~~current year’s annual effective tax rate calculation,~~warrant liability and ~~(2) NCI in Purple LLC that is allocated to InnoHold~~state and ~~others.~~local income taxes.

For the six months ended June 30, 2021, the Company has recorded income tax expense of $3.5 million. The effective tax rate ~~as of September~~for the six months ended June 30, ~~2020,~~2021 was 12.91%, which is ~~162% primarily due~~less than the federal statutory rate because the gain related to the ~~tax benefit from the release~~change in fair value of the ~~valuation allowance. For the three months and nine months ended September 30, 2020, the Company has recorded an~~warrant liability is excluded from taxable income for income tax ~~benefit of $0.1 million and $35.8 million, respectively.~~purposes.
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (2017 Tax Act). Corporate taxpayers may carryback net operating losses (NOLs) originating during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act.
~~In addition,~~On March 11, 2021, Congress passed, and the ~~CARES~~President signed into law, the American Rescue Plan Act, ~~raises~~2021 (the “ARP”), which includes certain business tax provisions. At this point the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The enactment of the CARES Act resulted in two adjustments to ourCompany does not believe that these changes will have a material impact on its income tax provision for 2021. The Company will continue to evaluate the ~~six months ended June 30, 2020, relating to increased 2019 NOL utilization~~impact of new legislation on its financial position, results of operations, and ~~tax benefits from NOL carrybacks. We have recorded a discrete benefit of $0.5 million in our income tax provision for the nine months ended September 30, 2020 related to the CARES Act.~~cash flows.
In connection with the Business Combination, the Company entered into ~~the TRA~~a tax receivable agreement with InnoHold, which provides for the payment by the Company to InnoHold of 80% of the net cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes (or is deemed to realize in certain circumstances) in periods after the Closing as a result of (i) any tax basis increases in the assets of Purple LLC resulting from the distribution to InnoHold of the cash consideration, (ii) the tax basis increases in the assets of Purple LLC resulting from the redemption by Purple LLC or the exchange by the Company, as applicable, of Class B Paired Securities or cash, as applicable, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, payments it makes under the ~~TRA.~~tax receivable agreement.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements
(unaudited)
~~(Unaudited)~~

As noncontrolling interest holders exercise their right to exchange or cause Purple LLC to redeem all or a portion of their Class B Units, a ~~TRA Liability is~~tax receivable agreement liability may be recorded based on 80% of the estimated future cash tax savings that the Company may realize as a result of increases in the basis of the assets of Purple LLC attributed to the Company as a result of such exchange or redemption. The amount of the increase in asset basis, the related estimated cash tax savings and the attendant ~~TRA Liability~~tax receivable agreement liability to be recorded will depend on the price of the Company’s Class A Stock at the time of the relevant redemption or exchange.
The estimation of liability under the ~~TRA~~tax receivable agreement is by its nature imprecise and subject to significant assumptions regarding the amount and timing of future taxable income. As a result of the initial merger transaction and the subsequent exchanges of ~~43.5 million~~ Class B Units for Class A Stock, ~~as of September 30, 2020,~~ the potential future ~~TRA~~tax receivable agreement liability is $169.6 million, of which $169.0 million has been recorded through the third quarter of 2020. Due to the release of the Company’s valuation allowance on the deferred tax assets to which the Tax Receivable Agreement liability relates, only $169.0 of the $169.6 million has been recorded to date ($0.5 million in 2019 and an incremental $168.5 million through September 30, 2020).$172.3 million. Of the ~~total~~tax receivable agreement liability recorded during ~~2020, $134.9~~the six months ended June 30, 2021, $0.8 million relates to current year exchanges and was recorded as an adjustment to stockholders’ equity and ~~$33.5~~$0.2 million was recorded toas expense in ~~order~~the condensed consolidated statement of operations to ~~re-establish~~reflect the ~~TRA related to prior year exchanges. The additional $0.6 million is expected to be recorded in the fourth quarter~~impact of the ~~year ending December 31,~~change in rate associated with state income taxes.
The Company has no federal net operating loss (“NOL”) carryforwards after utilization of the remaining carryforwards in 2020.
The effects of uncertain tax positions are recognized in the consolidated financial statements if these positions meet a “more-likely-than-not” threshold. For those uncertain tax positions that are recognized in the consolidated financial statements, liabilities are established to reflect the portion of those positions it cannot conclude “more-likely-than-not” to be realized upon ultimate settlement. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of ~~operations.~~income. Accrued interest and penalties would be included on the related tax liability line in the consolidated balance sheet. As of ~~September~~June 30, ~~2020,~~2021, no uncertain tax positions were recognized as liabilities in the condensed consolidated financial statements.
15. Net Income (Loss) Per Common Share
The following table sets forth the calculation of basic and diluted weighted average shares outstanding and earnings (loss) per share for the periods presented (in thousands, except per share amounts):

Three Months Ended
September 30, Nine Months Ended
September 30,
2020 2019 2020 2019
Net income (loss) (numerator):
Net income (loss) attributable to Purple Innovation, Inc.-basic $ (1,022 ) $ 1,594 $ 5,832 $ 126
Add: Net income (loss) attributed to the noncontrolling interest — 6,817 — 224
Net income (loss) attributable to Purple Innovation, Inc.-diluted $ (1,022 ) $ 8,411 $ 5,832 $ 350
Weighted average shares (denominator):
Weighted average shares—basic 44,266 8,828 32,117 8,576
Add: Dilutive effects of equity awards — 262 4,511 91
Add: Dilutive effects of Class B common stock — 43,703 — 43,787
Weighted average shares—diluted 44,266 52,793 36,628 52,454
Net income (loss) per common share:
Basic $ (0.02 ) $ 0.18 $ 0.18 $ 0.01
Diluted $ (0.02 ) $ 0.16 $ 0.16 $ 0.01
Three Months Ended
June 30, Six Months Ended
June 30,
2021 2020 2021 2020
Numerator:
Net income (loss) attributable to Purple Innovation, Inc.-basic $ 2,578 $ (93,275 ) $ 23,402 $ (76,440 )
Less: Dilutive effect of change in fair value – warrant liabilities (4,860 ) — (14,007 ) —
Net income (loss) attributable to Purple Innovation, Inc.-diluted $ (2,282 ) $ (93,275 ) $ 9,395 $ (76,440 )
Denominator
Weighted average shares—basic 66,277 29,277 65,439 25,976
Add: Dilutive effect of equity awards 587 — 2,902 —
Weighted average shares—diluted 66,864 29,277 68,341 25,976
Net income (loss) per common share:
Basic $ 0.04 $ (3.19 ) $ 0.36 $ (2.94 )
Diluted $ (0.03 ) $ (3.19 ) $ 0.14 $ (2.94 )

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements
(unaudited)
~~(Unaudited)~~

For the three and six months ended ~~September~~June 30, ~~2020,~~2021, the Company excluded ~~9.9~~0.4 million and 0.5 million, respectively, of Paired Securities ~~exchangeable~~convertible into shares of Class A Stock and 10.4 million shares of Class A Stock issuable upon exercise of certain Company warrants and stock options as the effect was anti-dilutive. For the nine months ended September 30, 2020, the Company excluded 21.6 million Paired Securities exchangeable into shares of Class A Stock and 2.6 million shares of Class A Stock issuable upon exercise of certain Company warrants as the effect was anti-dilutive. For the three ~~and nine~~ months ended ~~September~~June 30, ~~2019,~~2020, the Company excluded ~~17.0~~24.7 million of Paired Securities convertible into shares of Class A Stock and 4.6 million shares of Class A Stock issuable upon conversion of ~~the Company’s~~certain Company warrants, ~~and~~ stock options and ~~1.3 million shares of issued~~ Class A ~~Stock~~shares subject to vesting as the effect was anti-dilutive. For the six months ended June 30, 2020, the Company excluded 27.5 million of Paired Securities convertible into shares of Class A Stock and 4.1 million shares of Class A Stock issuable upon conversion of certain Company warrants, stock options and Class A shares subject to vesting as the effect was anti-dilutive.
16. Equity Compensation Plans
2017 Equity Incentive Plan
The Purple Innovation, Inc. 2017 Equity Incentive Plan (the “2017 Incentive Plan”) provides for grants of stock options, stock appreciation rights, restricted stock and other stock-based awards. Directors, officers and other employees and subsidiaries and affiliates, as well as others performing consulting or advisory services for the Company and its subsidiaries, will be eligible for grants under the 2017 Incentive Plan. ~~The~~As of June 30, 2021, an aggregate ~~number~~ of 1.8 million shares ~~of Class A Stock which may be issued~~remain available for issuance or ~~used for reference purposes~~use under the 2017 Incentive ~~Plan or with respect to which awards may be granted may not exceed 4.1 million shares. As of September 30, 2020, approximately 2.1 million shares remain available under the 2017 Incentive~~ Plan.
Class A ~~Common~~ Stock Awards
In ~~March 2020,~~May 2021, the Company granted a restricted stock award under the Company’s 2017 Equity Incentive Plan to the Company’s independent Board advisor and GPAC observer. The stock award vests in March 2021. As this award includes a service condition, the estimated fair value of the restricted stock is measured on the grant date and is recognized over the service period. The Company determined that the fair value of the restricted stock on the grant date was immaterial.
~~In May and June 2020, the Company granted restricted~~ stock awards under the Company’s 2017 Equity Incentive Plan to ~~certain employees of~~independent directors on the ~~Company.~~Board. The stock awards ~~vest over 3 to 4 years. The estimated fair value of~~vested immediately and the ~~restricted stock is measured on~~Company recognized $0.6 million in expense during the ~~grant date and is recognized over the vesting period. The Company determined that~~three months ended June 30, 2021 which represented the fair value of the ~~restricted~~ stock award on the grant ~~dates was $0.7 million.~~date.

~~PURPLE INNOVATION, INC.~~
~~Notes to Condensed Consolidated Financial Statements~~
~~(Unaudited)~~
Employee Stock Options
~~During the nine months ended September 30, 2020,~~In March 2021, the Company granted 0.1 million stock options under the Company’s 2017 Equity Incentive Plan to certain management of the Company. The stock options have an exercise price ~~ranging from~~ of ~~$12.76 to $15.12~~$32.28 per option. The stock options expire in five years and vest over a four-year period. The estimated fair value of the stock options, less expected forfeitures, is amortized over the options vesting period on a straight-line basis. The Company determined the fair value of ~~the~~these options ~~granted during the nine months ended September 30, 2020~~ using the Black Scholes method with the following assumptions:
Fair market value $ 11.71
Exercise price $ 32.28
Risk free interest rate 0.45 %
Expected term in years 3.46
Expected volatility 52.46 %
Expected dividend yield —

~~Fair market value~~ $ ~~8.02 – 15.12~~
~~Exercise price~~ $ ~~12.76 – 15.12~~
~~Risk free interest rate~~ ~~0.21 - 0.61~~ %
~~Expected term in years~~ ~~2.50 - 3.56~~
~~Expected volatility~~ ~~38.28 – 54.45~~ %
~~Expected dividend yield~~ —
The following table summarizes the Company’s total stock option activity for the ~~nine~~six months ended ~~September~~June 30, ~~2020:~~2021:

Options
(in thousands)

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term in
Years

Intrinsic
Value
(in thousands)

Options outstanding as of January 1, 2021 2,234 $ 8.71 3.5 $ 54,133
Granted 55 32.28 — —
Exercised (56 ) 8.11 — —
Forfeited/cancelled (13 ) 8.26 — —
Options outstanding as of June 30, 2021 2,220 $ 9.31 3.0 $ 38,278

Options
(in thousands)

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term in
Years

Intrinsic
Value $

As of September 30, 2020:
Options outstanding as of January 1, 2020 2,136 $ 6.95 4.3 $ 3,752
Granted 309 13.11 — —
Exercised (208 ) 7.42 — —
Forfeited/cancelled (109 ) 10.80 — —
Options outstanding as of September 30, 2020 2,128 $ 7.61 3.6 $ 36,721

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Outstanding and exercisable stock options as of ~~September~~June 30, ~~2020~~2021 are as follows:
Options Outstanding Options Exercisable
Exercise Prices Number of Options Outstanding
(in thousands) Weighted
Average
Remaining Life (Years) Number of Options Exercisable
(in thousands) Weighted
Average
Remaining Life
(Years) Intrinsic
Value
(in thousands)
$ 5.75 210 2.64 106 2.64 $ 2,186
5.95 538 2.25 359 2.25 7,339
6.51 241 2.89 111 2.89 2,216
6.65 173 2.86 77 2.86 1,525
7.99 19 3.42 6 3.42 118
8.17 225 3.26 83 3.26 1,510
8.32 187 3.00 56 3.00 1,016
8.55 179 �� 3.26 75 3.26 1,335
12.76 25 3.70 8 3.70 107
13.12 186 3.88 57 3.88 757
15.12 3 3.88 1 3.88 12
21.70 179 4.25 — — —
32.28 55 4.71 — — —

Options Outstanding Options Exercisable
Exercise Prices
Number of
Options
Outstanding
(in thousands)

Weighted
Average
Remaining Life
(Years)

Number of
Options
Exercisable
(in thousands)
Weighted
Average
Remaining Life (Years) Intrinsic
Value
$ 5.75 225 3.39 74 $ 3.39 $ 1,413
5.95 538 3.00 258 3.00 4,875
6.51 277 3.64 82 3.64 1,511
6.65 183 3.61 50 3.61 904
7.99 28 4.17 10 4.17 175
8.07 5 3.90 — — —
8.17 225 4.00 22 4.00 365
8.32 230 3.75 53 3.75 865
8.55 179 4.00 — — —
12.76 25 4.45 — — —
13.12 210 4.22 19 0.13 226
15.12 3 4.63 — — —
The following table summarizes the Company’s unvested stock option activity for the six months ended June 30, 2021:
Options
(in thousands) Weighted Average
Grant
Date
Fair Value
Nonvested options as of January 1, 2021 1,568 $ 3.20
Granted 55 11.71
Vested (329 ) 2.27
Forfeited (13 ) 2.59
Nonvested options as of June 30, 2021 1,281 $ 3.81

The estimated fair value of ~~the~~ Company stock options, less expected forfeitures, is amortized over the options vesting period on ~~the~~a straight-line basis. For the three and six months ended June 30, 2021, the Company recognized stock option expense of $0.5 million and $0.9 million, respectively. The Company ~~recognized $0.3~~recorded stock option expense of $0.4 million and ~~$0.2~~$0.6 million ~~in stock-based compensation expenses related to stock options~~ during the three and six months ended ~~September~~June 30, 2020, ~~and 2019,~~ respectively. ~~The Company recognized $0.9 million and $0.4 million in stock-based compensation expenses related to~~
As of June 30, 2021, outstanding stock options ~~during the nine months ended September 30, 2020 and 2019, respectively.~~
~~As of September 30, 2020, there was $3.0~~had $4.3 million of ~~total~~ unrecognized stock compensation cost with a remaining recognition period of ~~2.60~~2.1 years.
Employee Restricted Stock Units
In May 2021, the Company granted restricted stock units under the Company’s 2017 Equity Incentive Plan to certain management of the Company. The restricted stock units have a grant date fair value of $28.52 per share and vest over a four-year period. The estimated fair value of the restricted stock units is measured on the grant date and is recognized over the vesting period on a straight-line basis. The Company recognized a minimal restricted stock unit expense for both the three and six months ended June 30, 2021,
27

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table summarizes the Company’s restricted stock unit activity for the six months ended June 30, 2021:
~~(Unaudited)~~
Number
Outstanding (in thousands) Weighted Average
Grant
Date
Fair Value
Nonvested restricted stock units as of January 1, 2021 — $ —
Granted 15 28.52
Vested — —
Forfeited — —
Nonvested restricted stock units as of June 30, 2021 15 $ 28.52
InnoHold Incentive Units
In January 2017, pursuant to the 2016 Equity Incentive Plan approved by InnoHold and Purple LLC that authorized the issuance of 12.0 million incentive units, Purple LLC granted 11.3 million incentive units to Purple Team LLC, an entity for the benefit of certain employees who were participants in that plan. In conjunction with the Business Combination, Purple Team LLC was merged into InnoHold with InnoHold being the surviving entity and the Purple Team LLC incentive units were cancelled and new incentive units were issued by InnoHold under its own limited liability company agreement (the “InnoHold Agreement”). On February 8, 2019, InnoHold initiated a tender offer to each of these incentive unit holders, some of which are current employees of Purple LLC, to distribute to each a pro rata number of 2.5 million Paired Securities held by InnoHold in exchange for the cancellation of their ownership interests in InnoHold. All InnoHold incentive unit holders accepted the offer, and the terms and distribution of each transaction were finalized and closed on June 25, 2019. At the closing of the tender offer, those incentive unit holders received, based on their pro rata holdings of InnoHold Class B Units, a portion of 2.5 million Paired Securities held by InnoHold. The distribution by InnoHold to current employees of Purple LLC as of the distribution date resulted in the recognition of non-cash stock compensation expense for Purple LLC in the amount of $9.0 million which represented the fair value of the Paired Securities as of the distribution date in 2019. As of ~~September~~June 30, ~~2020, 0.6~~2021, 0.4 million of the Paired Securities remain to be exchanged for Class A Stock by the incentive unit holders. ~~A small number of Paired Securities remain subject to vesting contingent upon such current employees’ continued employment with the Company.~~
Aggregate Non-Cash Stock-Based Compensation
The Company has accounted for all stock-based compensation under the provisions of ASC 718 Compensation—Stock Compensation. This standard requires the Company to record a non-cash expense associated with the fair value of stock-based compensation over the requisite service period. The table below summarizes the aggregate non-cash stock-based compensation recognized in the statement of operations for stock awards, employee stock options and ~~the distribution by InnoHold of Paired Securities.~~employee restricted stock units.
(in thousands) Three Months Ended
June 30, Six Months Ended
June 30,
Non-Cash Stock-Based Compensation 2021 2020 2021 2020
Cost of revenues $ 44 $ 45 $ 89 $ 80
Marketing and sales 114 88 218 148
General and administrative 951 507 1,275 659
Research and development 4 322 10 325
Total non-cash stock-based compensation $ 1,113 $ 962 $ 1,592 $ 1,212

(in thousands) Three Months Ended
September 30, Nine Months Ended
September 30,
Non-Cash Stock-Based Compensation 2020 2019 2020 2019

Cost of revenues $ 44 $ 164 $ 124 $ 629
Marketing and sales 76 1,332 224 4,215
General and administrative 181 1,199 840 4,140
Research and development 46 240 371 756
Total non-cash stock-based compensation $ 347 $ 2,935 $ 1,559 $ 9,740
17. Employee Retirement Plan
In July 2018 the Company established a 401(k) plan that qualifies as a deferred compensation arrangement under Section 401 of the IRS Code. All eligible employees over the age of 18 and with 4 months’ service are eligible to participate in the plan. The plan provides for Company matching of employee contributions up to 5% of eligible earnings. Company contributions immediately vest. The ~~Company~~Company’s matching contribution expense was ~~$0.5~~$0.8 million and ~~$0.4~~$0.6 million for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$1.7~~$1.6 million and $1.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020 and 2019, respectively.~~

~~PURPLE INNOVATION, INC.~~
~~Notes to Condensed Consolidated Financial Statements~~
~~(Unaudited)~~
~~18. Subsequent Events~~
On October 1, 2020, pursuant to his employment agreement, the Company granted Joseph B. Megibow, Chief Executive Officer, nonqualified stock options to purchase 0.2 million shares of the Company’s Class A Stock. The options have an exercise price of $21.70 per share, vest over a four-year period and expire five years from the date of issuance. In addition, the Company determined to increase Mr. Megibow’s salary by $50,000 to $500,000 annually, continue to provide Mr. Megibow with such airfare reimbursement and housing stipend for six additional months, expiring March 31, 2021 and ~~extend Mr. Megibow’s relocation reimbursements until September 30, 2021.~~2020, respectively.

In October we received a claim that one of our products does not have the proper warning label required by California’s Proposition 65, which requires businesses to provide warnings to Californians about significant exposures to chemicals that are known to California to cause cancer, birth defects or other reproductive harm. While we are investigating this claim and generally make efforts to comply with Proposition 65, we may be subject to such claims and, as a result, we may be required to expend resources in defense of these claims and incur costs to comply with the regulations that could increase our cost of doing business
On October 13, 2020, Purple LLC filed a lawsuit against Responsive Surface Technology, LLC (“ReST”) and its parent company, PatienTech, LLC (“PatienTech”) in the United States District Court for the District of Utah. Purple, LLC seeks monetary damages, injunctive relief, and declaratory judgment based on certain conduct by ReST and PatienTech (“Case I”). Due to confidentiality obligations between the parties, the publicly-filed complaint was filed in a redacted form, and the substance of the dispute cannot be revealed at this time. The defendants’ responses to the complaint have not yet come due, and no motions have been filed. Case I remains in its infancy. On October 21, 2020, shortly after the complaint was filed in Case I, ReST filed a retaliatory lawsuit against Purple LLC, Gary DiCamillo, Adam Gray, Joseph Megibow, Terry Pearce, and Tony Pearce, also in the United States District Court for the District of Utah (“Case II”). Although ReST seeks to cast the situation in a light unfavorable to Purple LLC, Case II involves the same facts and transactions as Case I. As a result, Case II is subject to the same confidentiality restrictions, and its substance cannot be revealed at this time. Purple LLC, has not yet filed its response to ReST’s complaint. Purple LLC, intends to file a motion to consolidate Case II into Case I in the near future. Purple LLC seeks over $4 million in damages from ReST and PatienTech in Case I, while ReST claims in Case II that Purple LLC is liable to it for tens of millions of dollars. The outcomes of the cases cannot be predicted at this early stage. However, we intend to vigorously pursue our claims under Case I and defend against the claims made by ReST in Case II.
~~During October 2020, approximately 8.0 million Public Warrants were exercised for $45.6 million in cash and approximately 4.0 million shares of Class A Stock were issued.~~
On October 27, 2020, the Company provided notice to the holders of the Public Warrants and the Incremental Loan Warrants that the Company is exercising their right under the terms of the Public Warrants and Incremental Loan Warrants to redeem such warrants by paying to such warrant holders the redemption price of $0.01 per warrant on November 30, 2020. Any exercise of the warrants prior to that date must be done on a cashless basis, in accordance with the terms of the warrants. As of November 9, 2020, 1.7 million Public Warrants and 2.6 million Incremental Loan Warrants have been exercised resulting in the issuance of 3.1 million shares of Class A stock.
On November 4, 2020, the Company’s Board approved a Short-Term Cash Incentive Plan (the “STIP”) for the 2020 plan year. Participation in the STIP is limited to key employees who are employed to serve as Senior Vice Presidents, Vice Presidents, or Senior Directors. Not all eligible employees are guaranteed to participate in the plan, as participation will be subject to Board discretion and approval. The STIP will be administered by the HR & Compensation Committee as authorized by the Board. For the STIP to activate, the company must achieve certain net revenue and adjusted EBITDA targets. If the Company does not reach the minimum targets, no cash awards will be paid to any of the participants under the Plan. The amount of the total payment to each participant is adjustable to account for personal performance criteria, as follows: 70% of the amount is based on the Company’s achievement of at least the minimum Company-level performance targets and the remaining 30% is based on the participant’s achievement of personal performance criteria selected or approved by the Board. Subject to the other provisions of the STIP, payment to a participant will be made in cash in an amount up to the product determined by multiplying a certain percentage from 50% to 150% by the participant’s targeted bonus amount. That percentage will be determined based on whether and the extent to which the net revenue target and adjusted EBITDA target both exceed certain minimum target threshold amounts. The bonus target applicable to each participant is determined by multiplying (x) the participant’s annual base salary by (y) the participant’s share of the total bonus fund amount, as determined in accordance with the STIP. A participant will have no right to receive a payment under the STIP unless the participant remains in good standing with the Company during the plan year and remains in the employ of the Company through and including the payment date in 2021. This summary of the STIP does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the STIP, which is attached as Exhibit 10.11 to this 10-Q and is incorporated by reference herein.
On November 9, 2020, the Company mailed to Paul Zepf a notice terminating Mr. Zepf’s Observer and Indemnification Agreement dated February 2, 2018 (the “Observer Agreement”). Since Mr. Zepf was appointed to the Board of Directors on August 18, 2020, his service as an observer was no longer necessary. The Observer Agreement provided for one-year automatic renewals until the Company provided written notice of termination not less than thirty days prior to the renewal period.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to provide a more comprehensive review of the operating results and financial condition of Purple Innovation, Inc. than can be obtained from reading the Unaudited Condensed Consolidated Financial Statements alone. The discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and the notes thereto included in “Part I. Item 1. Financial Statements.”
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that represent our current expectations and beliefs. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws. In some cases, you can identify these statements by forward-looking words such as “believe,” “expect,” “project,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “will,” “would,” “could,” “may,” “might,” the negative of these words and other similar words.
All forward-looking statements included in this Quarterly Report are made only as of the date thereof. It is routine for our internal projections and expectations to change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end of the next quarter or year. Investors are cautioned not to place undue reliance on any such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.
We caution and advise readers that these statements are based on assumptions that may not be realized and involve risks and uncertainties that could cause actual results to differ materially from the expectations and beliefs contained herein. These risks include, among others, the evolving impact and duration of the COVID-19 pandemic. For a summary of these risks, see the risk factors included in the “Risk Factors” section in this Quarterly Report and in our Annual Report on Form ~~10-K~~10-K/A filed with the Securities and Exchange Commission on ~~March 9, 2020.~~
~~Introductory Note~~
On February 2, 2018, our predecessor, GPAC, consummated the Business Combination pursuant to the Merger Agreement, by and among GPAC, Merger Sub, Purple LLC, InnoHold and the Sponsor, which provided for the Company’s acquisition of Purple LLC’s business through the merger of Merger Sub with and into Purple LLC, with Purple LLC being the survivor in the Business Combination.
In connection with the closing of the Business Combination, the Company changed its name from “Global Partner Acquisition Corp.” to “Purple Innovation, Inc.” The Business Combination was accounted for as a reverse recapitalization because the former owners of Purple LLC had control over the combined company through their 82% ownership of the common stock of the Company. Although the Company was the legal acquirer, the historical operations of Purple LLC are deemed to be those of the Company. Thus, the financial statements included in this Quarterly Report on Form 10-Q reflect (i) the historical operating results of Purple LLC prior to the Business Combination; (ii) the combined results of the Company following the Business Combination; (iii) the assets and liabilities of Purple LLC at their historical cost; and (iv) the Company’s equity and earnings per share for all periods (both pre- and post-Business Combination) presented.
May 10, 2021.
30
Overview of Our Business
Our mission is to help people feel and live better through innovative comfort solutions.
We are a digitally-native vertical brand founded on comfort product innovation with premium offerings. We design and manufacture a variety of innovative, branded and premium comfort products, including mattresses, pillows, cushions, frames, sheets, and other products. Our products are the result of over 30 years of innovation and investment in proprietary and patented comfort technologies and the development of our own manufacturing processes. Our proprietary gel technology, Hyper-Elastic Polymer, underpins many of our comfort products and provides a range of benefits that differentiate our offerings from other competitors’ products. We market and sell our products through our ~~direct-to-consumer (“DTC”)~~DTC online channels, retail brick-and-mortar wholesale partners, third-party online retailers and ~~our~~ Company showrooms.
Organization
Our business consists of Purple Inc. and its consolidated subsidiary, Purple LLC. Purple Inc. was incorporated in Delaware on May 19, 2015 as a special purpose acquisition company under the name of GPAC. On February 2, 2018, Purple Inc. consummated a transaction structured similar to a reverse recapitalization (the “Business Combination”) pursuant to which Purple Inc. acquired an equity interest in Purple LLC and became its sole managing member. As the sole managing member of Purple LLC, Purple Inc., through its officers and directors, is responsible for all operational and administrative decision making and control of the day-to-day business affairs of Purple LLC without the approval of any other member. In connection with the Business Combination, InnoHold retained an 82% economic interest in Purple LLC. InnoHold subsequently transferred a portion of its Class B Units to permitted transferees and exchanged its remaining shares for shares of Class A Stock that it sold. At June 30, 2021, Purple Inc. had a 99% economic interest in Purple LLC while other Class B Unit holders had the remaining 1%.

COVID-19 Pandemic Developments
The COVID-19 pandemic has impacted many aspects of our operations, directly and indirectly, including disruption of our employees, consumer behavior, distribution and logistics, our suppliers, and the market overall. The scope and nature of these impacts continue to evolve. ~~In light~~Because of the COVID-19 pandemic, we have taken ~~a number of~~ precautionary measures recommended by the appropriate national and state health agencies to manage our resources and mitigate the adverse impact of the pandemic, which is intended to help minimize the risk to our Company, employees, customers, and the communities in which we operate. Employees at the Company’s headquarters and certain other employees have been asked to work from home where possible, with only limited access given to employees to work in the office when necessary. For roles that require employees to be on-site, such as our manufacturing facility and distribution center, we mandate protective equipment be worn, perform temperature testing at the start of each shift and again during the shift, contact trace when risk of exposure is known, stagger shifts to reduce concentration of employees, follow social distancing guidelines and sanitize daily including complete weekly anti-viral fumigation. The State of Utah, where all of our manufacturing operations currently take place, has experienced a significant resurgence of COVID-19 cases. If the State of Utah, as part of efforts to control the resurgence of COVID-19, requires us to close our facilities temporarily or to reduce the number of employees working in our manufacturing at a given time, our business and operations could be adversely affected.
Despite the ongoing challenges from COVID-19, ~~the Company has~~we have been able to capitalize on the opportunities created by this situation. We were able to continue ~~to serve~~serving our customers through our ~~Direct to Consumer (“DTC”)~~DTC channel, ~~which has remained~~as strong ~~throughout the year as~~ consumer demand for our premium, differentiated product offerings shifted to our DTC ~~channel.~~channel throughout 2020. We continue to focus our efforts in our DTC core competencies resulting in a continued strength in DTC channel sales across all of our product categories throughout the quarter. This increase in demand was a contributing factor to DTC net revenue growth of approximately 97% over the prior year third quarter. There can be no assurance that this trend of strong demand through our DTC channel will continue. We initially experienced a sharp decline in the wholesale side of our business during the second quarter of 2020 as temporary shutdowns of non-essential businesses and shelter-at-home directives occurred in most U.S. states. As the shutdowns were lifted and stores began to open again, demand through the wholesale channel has increased ~~such that our net revenue from~~and customer demand in 2021 has shifted to wholesale ~~customers this quarter is up 7% over~~and DTC levels we were experiencing prior to the ~~prior year third quarter. We have our factory outlet and all~~COVID-19 pandemic. All of our showrooms are currently open and ~~servicing~~we have continued with our ~~customers. We recently opened two~~expansion plans by opening four new showrooms ~~and have two more planned to open by~~since the ~~end~~beginning of the year. However, due to recent resurgence of COVID-19, we may be required to close our factory outlet and showrooms in the future. We have signed a new lease for a manufacturing facility in Georgia and are proceeding with the buildout and purchasing of equipment to begin production.2021.

This increase in demand allowed us to work through a portion of our on-hand inventory and required us to ramp up production. We continue to take advantage of our vertically integrated business model to adjust production schedules to leverage inventory on hand and manage labor costs. We also continue to dynamically adjust our significant discretionary online advertising spend in response to any changes in DTC trends as they develop.
Our supply chain has not been significantly affected by COVID-19. Suppliers in China were temporarily closed ~~as a result~~because of the pandemic, but we had sufficient inventory on ~~hand.~~hand to meet our production needs. These suppliers have resumed production and are able to supply materials as needed. Most of our domestic suppliers ~~are~~have been able to continue operations and provide necessary materials when needed. We have experienced some constraints from certain suppliers due to our increased production to meet demand. We have also experienced some shipping delays in the delivery of our product to our customers. This is due to the increased nationwide demand placed on delivery companies.
Although ~~the Company has~~we have taken measures to protect ~~the~~our business, we cannot predict the specific duration for which ~~these~~ precautionary measures relating to COVID-19 will stay in effect, and we may elect or ~~need~~be required to take additional measures as the information available to us continues to develop, including with respect to our employees, manufacturing facilities and distribution center, and relationships with our suppliers and customers. Subject to certain assumptions regarding the duration and severity of the COVID-19 pandemic, and government, consumer, and our responses thereto, based on our current projections we believe our cash on hand, ongoing cash generated from e-commerce, liquidity available under our ~~new~~ line of credit, and continuing resumption and ramp up of store operations and our wholesale business, will be sufficient to cover our working capital requirements and anticipated capital expenditures for the next 12 months. ~~However,~~
While most state and local governments have eased restrictions on commercial retail activity, it is possible that a resurgence in cases of COVID-19 or one of its variants could prompt a return to tighter restrictions in certain areas of the ~~extent to which~~country. Furthermore, while the bedding industry has fared much better during the pandemic than certain other sectors of the economy, continued economic weakness mayeventually have an adverse impact upon the industry and our business. Therefore, significant uncertainty remains regarding the ongoing impact of the COVID-19 ~~pandemic~~outbreak upon our financial condition and ~~our precautionary measures~~future results of operations, as well as upon the significant estimates and assumptions we utilize in ~~response thereto may~~reporting certain assets and liabilities.
Isolated Production Challenges
During the second quarter of 2021, following an accident resulting in the death of an employee and subsequent safety improvements involving the Mattress Max machines, the Company encountered isolated production challenges caused by unanticipated mechanical and maintenance issues when bringing the machines back online. As a result, the Company has experienced significantly reduced production levels causing shipment backlogs that unfavorably affected second quarter net revenues and will also adversely impact ~~our business~~third quarter net revenues. The Company exited the month of July with production back at planned levels and expects to be out of the current backlog position by the end of August. The Company also expects there to be no impact on completing the scheduled addition of new Mattress Max machines as previously announced. The Company is confident that these issues are an isolated event and will ~~depend~~have no impact on ~~future developments, which are highly uncertain and cannot be precisely predicted at this time.~~its ability to scale beyond 2021.

Operating Results for the Three Months Ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020
The following table sets forth for the periods indicated, our results of operations and the percentage of total revenue represented in our condensed consolidated statements of ~~operations:~~income:

Three Months Ended September 30,
2020 % of
Net
Revenues 2019 % of
Net
Revenues
Revenues, net $ 187,111 100.0 % $ 117,406 100.0 %
Cost of revenues 98,857 52.8 64,523 55.0
Gross profit 88,254 47.2 52,883 45.0
Operating expenses:
Marketing and sales 51,206 27.4 34,055 29.0
General and administrative 11,087 5.9 6,745 5.7
Research and development 1,687 0.9 1,070 0.9
Total operating expenses 63,980 34.2 41,870 35.7
Operating income 24,274 13.0 11,013 9.4
Other income (expense):
Interest expense (1,232 ) (0.7 ) (1,356 ) (1.2 )
Other income, net 3 0.0 138 0.1
Loss on extinguishment of debt (5,782 ) (3.1 ) — 0.0
Change in fair value – warrant liabilities (17,971 ) (9.6 ) (1,384 ) (1.2 )
    Tax receivable agreement expense (567 ) (0.3 ) — 0.0
Total other income (expense), net (25,549 ) (13.7 ) (2,602 ) (2.2 )
Net income (loss) before income taxes (1,275 ) (0.7 ) 8,411 7.2
Benefit from income taxes 106 0.1 — 0.0
Net income (loss) (1,169 ) (0.6 ) 8,411 7.2
Net income attributable to noncontrolling interest (147 ) (0.1 ) 6,817 5.8
Net income (loss) attributable to Purple Innovation, Inc. $ (1,022 ) (0.5 ) $ 1,594 1.4
Three Months Ended June 30,
2021 % of
Net Revenues 2020 % of
Net Revenues
Revenues, net $ 182,586 100.0 % $ 165,096 100.0 %
Cost of revenues 100,899 55.3 83,465 50.6
Gross profit 81,687 44.7 81,631 49.4
Operating expenses:
Marketing and sales 59,844 32.8 39,423 23.9
General and administrative 22,461 12.3 8,677 5.3
Research and development 1,923 1.1 1,580 1.0
Total operating expenses 84,228 46.1 49,680 30.1
Operating income (loss) (2,541 ) (1.4 ) 31,951 19.4
Other income (expense):
Interest expense (569 ) (0.3 ) (1,424 ) (0.9 )
Other income), net 26 — 16 —
Change in fair value – warrant liabilities 4,860 2.7 (130,264 ) (78.9 )
Tax receivable agreement expense (381 ) (0.2 ) (32,823 ) (19.9 )
Total other income (expense), net 3,936 2.2 (164,495 ) (99.6 )
Net income (loss) before income taxes 1,395 0.8 (132,544 ) (80.3 )
Income tax benefit 1,167 0.6 35,428 21.5
Net income (loss) 2,562 1.4 (97,116 ) (58.8 )
Net loss attributable to noncontrolling interest (16 ) — (3,841 ) (2.3 )
Net income (loss) attributable to Purple Innovation, Inc. $ 2,578 1.4 $ (93,275 ) (56.5 )

Revenue
~~Total net revenue~~Net revenues increased ~~$69.7~~$17.5 million, or ~~59.4%~~10.6%, to ~~$187.1~~$182.6 million for the three months ended ~~September~~June 30, ~~2020 from $117.4~~2021 compared to $165.1 million for the three months ended ~~September~~June 30, ~~2019 due~~2020. Our wholesale business generated net revenue growth of $46.5 million, or 233.2% during the second quarter of 2021 while DTC net revenues decreased by $29.0 million, or 19.9%. Net revenue changes associated with our DTC channel relative to our wholesale business reflected a ~~$49.4~~shift in customer demand to levels we were experiencing prior to the COVID-19 pandemic. Our wholesale business was also favorably impacted by wholesale expansion and the prior year second quarter being negatively impacted by the temporary shutdown of wholesale partner operations caused by the pandemic. Net revenues were unfavorably impacted by isolated production issues that occurred in the second quarter of 2021 (see Isolated Production Challenges above). The increase in net revenues from a product perspective reflected a $12.2 million increase in mattress sales, a ~~$13.4~~$4.0 million increase in ~~top of mattress~~other bedding product sales and a ~~$6.9~~$1.3 million ~~net~~ increase in other ~~products. These increases in revenue were~~product sales. This growth was primarily ~~attributable to~~driven by an increase in ~~demand across all product lines due to recent increases in online shopping in home furnishings.~~customer demand.

Cost of Revenues
The cost of revenues increased ~~$34.4~~$17.4 million, or ~~53.2%~~20.9%, to ~~$98.8~~$100.9 million for the three months ended ~~September~~June 30, ~~2020~~2021 from ~~$64.5~~$83.5 million for the three months ended ~~September~~June 30, ~~2019. The~~2020. This increase, ~~was primarily due to~~which reflected a ~~$15.9~~$7.9 million increase in direct material costs, a ~~$7.6~~$9.2 million increase in labor and overhead ~~a $5.3 million increase in freight charges, a $3.5 million increase in merchant processing fees~~costs, and a ~~$2.1~~$0.3 million increase in all other costs, ~~all~~was primarily due to ~~the increase in revenue. The~~increased product sales and higher production and material costs. Our gross profit percentage ~~increased~~decreased to ~~47.2%~~44.7% of net revenues for the three months ended ~~September~~June 30, ~~2020 from 45.0%~~2021 compared to 49.4% for the same period in ~~2019.~~2020. The ~~improvement~~decrease in our gross profit percentage was primarily driven by a higher ~~margins due to~~proportion of wholesale channel ~~shift toward higher~~revenue, which carries a lower gross margin than revenue from the DTC ~~sales.~~channel, combined with the impact of isolated production issues that occurred in the second quarter of 2021 (see Isolated Production Challenges above).
Marketing and Sales
Marketing and sales expenses increased ~~$17.2~~$20.4 million, or ~~50.4%~~51.8%, to ~~$51.2~~$59.8 million for the three months ended ~~September~~June 30, ~~2020 from $34.1~~2021 compared to $39.4 million for the three months ended ~~September~~June 30, ~~2019.~~2020. The increase was due to an ~~$11.9~~$11.8 million increase in advertising costs due to higher advertising rates in 2021 and advertising costs in 2020 being uncharacteristically low due to the pandemic, a ~~$3.2~~$3.5 million increase in ~~marketing salaries~~personnel costs related to anplanned growth of our workforce and a $5.1 million increase ~~in personnel and an increase of $2.1 million~~ in other marketing and sales expenses. ~~The marketing~~Marketing and sales expense as a percentage of net ~~revenue~~revenues was ~~27.4%~~32.8% for the three months ended ~~September~~June 30, ~~2020. This is a decrease from 29.0%~~2021 compared to 23.9% for the ~~three months ended September 30, 2019~~comparative prior period. The higher percentage of net revenues in the current quarter was due in part to ~~efficiencies~~product sales being unfavorably impacted by isolated production issues that occurred in ~~our~~the second quarter of 2021 (see Isolated Production Challenges above) coupled with higher advertising ~~spending created from enhanced marketing strategies~~rates in 2021 and ~~lower~~ advertising ~~costs.~~costs in the prior year second quarter being uncharacteristically low because of the pandemic.
General and Administrative
General and administrative expenses increased ~~$4.4~~$13.8 million, or ~~64.4%~~158.9%, to ~~$11.1~~$22.5 million for the three months ended ~~September~~June 30, ~~2020~~2021 from ~~$6.7~~$8.7 million for the three months ended ~~September~~June 30, ~~2019.~~2020. The increase was primarily due to ~~a $2.3~~an $11.2 million increase ~~in salaries related to an increase in personnel, $0.7 million additional expense for previous years sales tax liability, $0.9 million~~ in legal and professional fees related to offering costs, consultants, professional staffing and ~~$0.5~~executive placement costs, a $1.4 million increase in personnel costs related to planned growth of our workforce, and a $1.2 million increase in all other expenses.
32
Research and Development
Research and development costs increased ~~$0.6~~$0.3 million, or ~~57.7%~~21.7%, to ~~$1.7~~$1.9 million for the three months ended ~~September~~June 30, ~~2020~~2021 from ~~$1.1~~$1.6 million for the three months ended ~~September~~June 30, ~~2019.~~2020. The increase was primarily due to ~~a $0.8 million amortization of a one-year license agreement for innovative technology, a $0.1 million~~an increase in ~~other R&D expenses, partially offset by a decrease of $0.3 million in salaries as Tony and Terry Pearce resigned their positions as Co-Directors of Research and Development in August 2020.~~ professional services costs related to product development activities.

Operating Income

Operating income ~~increased $13.3~~decreased $34.5 million to ~~$24.3~~an operating loss of $2.5 million for the three months ended ~~September~~June 30, ~~2020,~~2021, from operating income of ~~$11.0~~$32.0 million for the three months ended ~~September~~June 30, ~~2019. The increase~~2020. This decrease was ~~primarily~~ due in part to ~~increased DTC sales~~net revenues being unfavorably impacted by isolated production issues that occurred in the second quarter of 2021 (see Isolated Production Challenges above) coupled with higher ~~margins and lower~~ marketing and sales ~~costs as a percentage~~expenses, increased legal and professional fees and increased expenses associated with planned growth of ~~revenue.~~our workforce.
Interest Expense
~~We incurred $1.2~~Interest expense totaled $0.6 million ~~in interest expense~~ for the three months ended ~~September~~June 30, ~~2020 including $0.9 million related~~2021, as compared to the Amended and Restated Credit Agreement and $0.2 million related to the 2020 Credit Agreement. In addition, for the three months ended September 30, 2020 we incurred discounts and debt issuance costs related to the Amended and Restated Credit Agreement in the amount of $0.1 million which was amortized to interest expense as non-cash interest. The Amended and Restated Credit Agreement was retired during the quarter and the 2020 Credit Agreement had an outstanding principal balance of $45.0 million at September 30, 2020. Under the 2020 Credit Agreement, interest for the Term Debt accrues at LIBOR (with a floor) plus 3%. Interest expense was $1.4 million for the three months ended ~~September~~June 30, ~~2019.~~2020. The ~~portion relating~~$0.8 million decrease was primarily due to the ~~Amended and Restated~~$35.0 million Related Party Loan, which carried an interest rate of 12.00%, being refinanced in the third quarter of 2020 with a $45.0 million term loan at an initial interest rate of 3.50%. Interest expense in 2021 also includes amortization of deferred loan costs associated with the 2020 Credit Agreement ~~was $1.2 million of which $0.7 million was paid-in-kind through additions to the principal amount~~ and ~~$0.5 million was paid in cash. In addition, for the three months ended September 30, 2019 we incurred discounts and debt issuance costs~~fees related to the ~~Amended and Restated Credit Agreement in the amount~~revolving line of ~~$0.2 million which was amortized to interest expense as non-cash interest.~~credit.

~~Loss on Extinguishment of Debt~~

In September 2020, the retirement of the Amended and Restated Credit Agreement was accounted for as an extinguishment of debt. Accordingly, the Company recognized a loss on the extinguishment of debt of approximately $5.8 million, made up primarily of $3.3 million in the write-off of the unamortized portion of the debt discount related to the Amended and Restated Credit Agreement and $2.5 million in a pre-payment penalty.
Change in Fair Value – Warrant Liabilities
~~The~~On February 26, 2019, the Incremental Lenders funded a $10.0 million increase in the Related Party Loan and received 2.6 million warrants to purchase 2.6 million shares of our Class A Stock at a price of $5.74 per share, subject to certain adjustments. We accounted for the Incremental Loan Warrants ~~issued in conjunction with the Amended and Restated Credit Agreement are classified~~ as liabilities and recorded them at fair value on the date of the transaction and subsequently re-measured to fair value at each reporting date with changes in the fair value included in earnings. ~~An increase in fair value for the three months ended September 30, 2020 resulted in a non-cash loss in the amount of $18.0 million recorded in earnings for the period. The increase in~~We determined the fair value of the Incremental Loan Warrants ~~as of September~~to be $47.0 million at June 30, 2020. During the three months ended June 30, 2020, ~~was due primarily~~we recognized a loss of $39.0 million in our condensed consolidated statement of operations related to the ~~increase~~change in ~~our stock price. On October 27, 2020, we notified the holders~~fair value of these warrants. There was no gain or loss on the Incremental Loan Warrants ~~that we would redeem any unexercised Incremental Loan Warrants on November~~for the three months ended June 30, ~~2020. The Incremental Loan Warrants have been~~2021 as they were exercised ~~prior to this redemption date.~~in 2020.

There were 15.5 million public warrants issued in connection with GPAC’s formation and IPO and 12.8 million sponsor warrants issued pursuant to a simultaneous private placement with the IPO. We have accounted for these warrants as liabilities and recorded them at fair value on the date of the transaction and subsequently re-measured to fair value at each reporting date with changes in fair value included in earnings. The 1.9 million sponsor warrants outstanding at June 30, 2021 had a fair value of $14.5 million. The fair value of the public and sponsor warrants outstanding at June 30, 2020 was $107.1 million. During the three months ended June 30, 2021, we recognized a gain of $4.9 million in our condensed consolidated statement of operations related to a decrease in the fair value of the sponsor warrants exercised during the quarter or that were outstanding at the end of the quarter. During the three months ended June 30, 2020, we recognized a loss of $91.3 million in our condensed consolidated statement of operations related to an increase in the fair value of the public and sponsor warrants exercised during the prior year quarter or that were outstanding at the end of the prior year quarter.
Tax Receivable Agreement Expense
~~In connection with~~We are party to a tax receivable agreement which generally provides for the ~~Business Combination, the Company entered into the TRA with InnoHold. As noncontrolling interest holders exercise their right~~payment by us to ~~exchange or cause Purple LLC to redeem all or a portion~~InnoHold of ~~their Class B Units, a TRA Liability is recorded based on~~ 80% of ~~the estimated future cash~~certain tax ~~savings~~benefits, if any, that ~~the Company may~~we realize as a result of increases in its allocable share of the tax basis of the tangible and intangible assets of Purple ~~LLC attributed to~~LLC. Because of the ~~Company as a result of such exchange or redemption. There were 16.9 million~~Business Combination, subsequent exchanges of 43.5 million Class B ~~Stock~~Units for Class A Stock ~~that occurred~~and changes in estimates relating to the expected tax benefits associated with the tax receivable agreement, the tax receivable agreement liability totaled $172.3 million and $172.0 million at June 30, 2021 and December 31, 2020, respectively. During the second quarter of 2021, we incurred $0.4 million of tax receivable agreement expense due to state tax rate changes. Of the $78.1 million liability recorded during the three months ended ~~September~~June 30, ~~2020. As a result, an additional $90.3~~2020, $45.3 million ~~was recorded~~related to ~~the TRA liability of which $89.7 million~~current period exchanges and was recorded as an adjustment to stockholders’ equity and ~~$0.6 million~~$32.8 was recorded to expense ~~during~~as it related to reestablishing the ~~three months ended September 30, 2020. There was no TRA expense incurred for the three months ended September 30, 2019 as the Company had a full valuation allowance on the deferred~~ tax ~~assets and no TRA~~receivable agreement liability ~~was recorded.~~related to prior year exchanges.

~~Benefit from~~ Income ~~Taxes~~Tax Benefit

Our income tax benefit was ~~$0.1~~$1.2 million for the three months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~no income tax benefit~~$35.4 million for the three months ended ~~September~~June 30, ~~2019. Our~~2020. This decrease was primarily due to $32.8 million of the valuation allowance associated with the Company’s federal and state deferred tax assets being released and recorded as an income tax benefit ~~for the three months ended September 30, 2020 is primarily due to the change in the effective tax rate during the period. No income tax benefit was recorded~~ during the three months ended ~~September~~June 30, ~~2019 as the Company had a full valuation allowance on the deferred tax assets.~~2020.
Noncontrolling Interest
~~As a result of the Business Combination in 2018, we~~We attribute net income or loss to the Class B ~~units~~Units in Purple LLC ~~owned by InnoHold and other parties,~~ as a noncontrolling interest at their aggregate ownership percentage. ~~At September~~We calculate net income or loss attributable to noncontrolling interests on a quarterly basis using their weighted average ownership percentage. Net loss attributed to noncontrolling interests was negligible for the three months ended June 30, 2021 compared to a net loss of $3.8 million for the three months ended June 30, 2020. The decrease in the net income level attributed to noncontrolling interests resulted from the noncontrolling ownership interest declining from approximately 32% at June 30, 2020 ~~this ownership percentage was~~to approximately 1%~~, a decrease from approximately 81%~~ at ~~September~~June 30, 2019. This decrease was the result of the exchange of 43.5 million Paired Securities for Class A Stock, mostly attributed to InnoHold’s three secondary public offerings concluded in November 2019, May 2020 and September 2020.2021.

Operating Results for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020
The following table sets forth for the periods indicated, our results of operations and the percentage of total revenue represented in our statements of operations:

Nine Months Ended September 30,
2020 % of
Net
Revenues 2019 % of
Net
Revenues
Revenues, net $ 474,582 100.0 % $ 304,058 100.0 %
Cost of revenues 251,515 53.0 174,323 57.3
Gross profit 223,067 47.0 129,735 42.7
Operating expenses:
Marketing and sales 127,313 26.8 94,039 30.9
General and administrative 27,312 5.8 19,243 6.3
Research and development 4,712 1.0 3,004 1.0
Total operating expenses 159,337 33.6 116,286 38.2
Operating income 63,730 13.4 13,449 4.4
Other income (expense):
Interest expense (4,045 ) (0.9 ) (3,801 ) (1.3 )
Other income, net 109 0.0 373 0.1
Loss on extinguishment of debt (5,782 ) (1.2 ) (6,299 ) (2.1 )
Change in fair value – warrant liabilities (43,308 ) (9.1 ) (3,372 ) (1.1 )
Tax receivable agreement expense (33,512 ) (7.1 ) — 0.0
Total other income (expense), net (86,538 ) (18.2 ) (13,099 ) (4.3 )
Net income (loss) before income taxes (22,808 ) (4.8 ) 350 0.1
Benefit from income taxes 35,818 7.5 — 0.0
Net income 13,010 2.7 350 0.1
Net income attributable to noncontrolling interest 7,178 1.5 224 0.1
Net income attributable to Purple Innovation, Inc. $ 5,832 1.2 $ 126 0.0
Six Months Ended June 30,
2021 % of
Net Revenues 2020 % of
Net Revenues
Revenues, net $ 369,015 100.0 % $ 287,471 100.0 %
Cost of revenues 199,804 54.1 152,658 53.1
Gross profit 169,211 45.9 134,813 46.9
Operating expenses:
Marketing and sales 114,212 31.0 76,107 26.5
General and administrative 36,987 10.0 16,225 5.6
Research and development 3,646 1.0 3,025 1.1
Total operating expenses 154,845 42.0 95,357 33.2
Operating income 14,366 3.9 39,456 13.7
Other income (expense):
Interest expense (1,139 ) (0.3 ) (2,813 ) (1.0 )
Other income (expense), net (42 ) — 106 —
Change in fair value – warrant liabilities 14,007 3.8 (108,631 ) (37.8 )
Tax receivable agreement expense (207 ) (0.1 ) (32,945 (11.5 )
Total other income (expense), net 12,619 3.4 (144,283 ) (50.2 )
Net income (loss) before income taxes 26,985 7.3 (104,827 ) (36.5 )
Income tax benefit (expense) (3,484 ) (0.9 ) 35,712 12.4
Net income (loss) 23,501 6.4 (69,115 ) (24.0 )
Net income attributable to noncontrolling interest 99 — 7,325 2.5
Net income (loss) attributable to Purple Innovation, Inc. $ 23,402 6.3 $ (76,440 ) (26.6 )

Revenue
~~Total net revenue~~Net revenues increased ~~$170.5~~$81.5 million, or ~~56.1%~~28.4%, to ~~$474.6~~$369.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020 from $304.1~~2021 compared to $287.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019 due mainly~~2020. During the first six months of 2021, DTC net revenues increased $15.3 million, or 6.8%, while our wholesale business generated net revenue growth of $66.3 million, or 107.6%. Net revenue changes associated with our DTC channel relative to our wholesale business reflected a ~~$116.1~~shift in customer demand to levels we were experiencing prior to the COVID-19 pandemic. Our wholesale business was also favorably impacted by wholesale expansion and the prior year second quarter being negatively impacted by the temporary shutdown of wholesale partner operations caused by the pandemic. Net revenues were unfavorably impacted by the isolated production issues that occurred in the second quarter of 2021 (see Isolated Production Challenges above). The increase in net revenues from a product perspective reflected a $58.3 million increase in mattress sales, a ~~$37.9~~$15.3 million increase in ~~top of mattress~~other bedding product sales and a ~~$16.5~~$7.9 million ~~net~~ increase in other ~~products. These increases in revenue were~~product sales. This growth was primarily ~~attributable to~~driven by an increase in ~~demand across all product lines due to recent increases in online shopping in home furnishings.~~customer demand.
Cost of Revenues
The cost of revenues increased ~~$77.2~~$47.1 million, or ~~44.3%~~30.9%, to ~~$251.5~~$199.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020 from $174.3~~2021 compared to $152.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The increase, which was primarily due to a ~~$35.0~~$26.5 million increase in direct material costs, a ~~$18.0~~$15.4 million increase in labor and overhead ~~$11.9 million increase in freight charges, $8.6 million increase in merchant processing fees,~~costs, and a ~~$3.7~~$5.2 million increase in other costs, ~~all~~was primarily associated with increased ~~sales.~~product sales and higher production and material costs. The gross profit percentage ~~increased~~decreased to ~~47.0%~~45.9% of net revenues for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 from ~~42.7%~~46.9% for the ~~same period~~comparative prior year period. The decrease in ~~2019. The improvement in~~our gross profit percentage was primarily driven by a higher ~~margins due to~~proportion of wholesale channel ~~shift toward higher~~revenue, which carries a lower gross margin than revenue from the DTC ~~sales.~~channel, combined with the impact of isolated production issues that occurred in the second quarter of 2021 (see Isolated Production Challenges above).
34

Marketing and Sales
Marketing and sales expenses increased ~~$33.3~~$38.1 million, or ~~35.4%~~50.1%, to ~~$127.3~~$114.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020 from $94.0~~2021 compared to $76.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019. The~~2020. This increase ~~was due to~~reflected a ~~$22.4~~$22.9 million increase in advertising costs due to higher advertising rates in 2021 and advertising costs in 2020 being uncharacteristically low due to the pandemic, a ~~$8.3~~$7.7 million increase in ~~marketing salaries~~personnel costs related to ~~an increase in personnel~~planned growth of our workforce and a ~~$2.6~~$7.5 million increase in other marketing and sales expenses. ~~The marketing~~Marketing and sales expense as a percentage of net ~~revenue~~revenues was ~~26.8%~~31.0% for the ~~nine~~six months ended ~~September~~June 30, 2021 compared to 26.5% for the six months ended June 30, 2020. ~~This is a decrease from 30.9% for~~The higher percentage of net revenues in the ~~nine~~first six months ~~ended September 30, 2019~~of 2021 was due in part to efficiencies in our advertising spending created from enhanced marketing strategies, lower advertising costs and a temporary reduction in advertising spending as part of our cash preservation initiativesproduct sales being unfavorably impacted by isolated production issues that occurred in the second quarter of ~~this year.~~2021 (see Isolated Production Challenges above) coupled with higher advertising rates in 2021 and advertising costs in the prior year second quarter being uncharacteristically low because of the pandemic.
General and Administrative
General and administrative expenses increased ~~$8.1~~$20.8 million, or ~~41.9%~~128.0%, to ~~$27.3~~$37.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020 from $19.2~~2021 compared to $16.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019. The~~2020. This increase was primarily due to a ~~$2.4~~$14.3 million increase in ~~salaries related to an increase in personnel, a $3.5 million increase in software subscriptions,~~ legal and professional fees related to ~~InnoHold’s two secondary public offerings concluded~~offering costs, consultants, professional staffing and executive placement costs, a $3.3 million increase related to planned increases in ~~May 2020 and September 2020~~our workforce, and a ~~new corporate building lease, $0.7 million in additional expense for previous years sales tax liability and $1.5~~$3.2 million increase in all other expenses.
Research and Development
Research and development costs increased ~~$1.7~~$0.6 million, or ~~56.9%~~20.5%, to ~~$4.7~~$3.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 from $3.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019. The~~2020. This increase was primarily due to ~~$1.6 million in amortization of a one-year license agreement for innovative technology and a $0.1 million~~an increase in ~~other R&D expenses as we added resources for new~~professional services costs related to product ~~innovation.~~development activities.

Operating Income

Operating income ~~increased $50.3~~decreased $25.1 million, or ~~373.9%~~63.6%, to ~~$63.7~~$14.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, from operating income of ~~$13.4~~$39.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. This decrease was due in part to net revenues being unfavorably impacted by isolated production issues that occurred in the second quarter of 2021 (see Isolated Production Challenges above) coupled with higher marketing and sales expenses, increased legal and professional fees and increased expenses associated with planned growth of our workforce.
Interest Expense
Interest expense totaled $1.1 million for the six months ended June 30, 2021 as compared to $2.8 million for the six months ended June 30, 2020. The ~~increase~~$1.7 million decrease was primarily due to ~~increased DTC sales with higher margins and lower marketing and sales costs as a percentage~~the $35.0 million Related Party Loan, which carried an interest rate of ~~revenue.~~
~~Interest Expense~~
We incurred $4.0 million in interest expense for the nine months ended September 30, 2020 including $3.3 million related to the Amended and Restated Credit Agreement and $0.2 million related to the 2020 Credit Agreement. In addition, for the nine months ended September 30, 2020 we incurred discounts and debt issuance costs related to the Amended and Restated Credit Agreement12.00%, being refinanced in the ~~amount~~third quarter of ~~$0.5~~2020 with a $45.0 million ~~which was amortized to~~term loan at an initial interest ~~expense as non-cash interest. The Amended and Restated Credit Agreement was retired in September 2020. Under the Amended and Restated Credit Agreement, interest accrued at a fixed~~ rate of ~~12%~~3.50%. ~~Under~~Interest expense in 2021 also includes amortization of deferred loan costs associated with the 2020 Credit Agreement ~~interest for the Term Debt accrues at LIBOR (with a floor) plus 3%. Interest expense was $3.8 million for the nine months ended September 30, 2019. The portion relating to the Amended~~ and Restated Credit Agreement was $3.2 million of which $1.9 million was paid-in-kind through additions to the principal amount and $1.3 million was paid in cash. In addition, for the nine months ended September 30, 2019 we incurred discounts and debt issuance costsfees related to the ~~Amended and Restated Credit Agreement in the amount~~revolving line of ~~$0.6 million which was amortized to interest expense as non-cash interest.~~credit.

~~Loss on Extinguishment of Debt~~
In September 2020, the retirement of the Amended and Restated Credit Agreement was accounted for as an extinguishment of debt. Accordingly, the Company recognized a loss on the extinguishment of debt of approximately $5.8 million, consisting primarily of $3.3 million in the write-off of the unamortized portion of the debt discount related to the Amended and Restated Credit Agreement and $2.5 million in a pre-payment penalty.
In February 2019, in conjunction with the Incremental Loan under the Amended and Restated Credit Agreement, we determined that the amended debt terms resulted in substantially different terms for a portion of the existing debt and therefore was required to be accounted for as an extinguishment of a portion of the existing debt. Accordingly, we recognized a non-cash loss on the extinguishment of a portion of the existing debt of approximately $6.3 million. This was a non-cash expense primarily associated with the recognition of related unamortized debt discount and debt issuance costs and the fair value of the Incremental Loan Warrants issued.
Change in Fair Value – Warrant Liabilities
~~The~~On February 26, 2019, the Incremental Lenders funded a $10.0 million increase in the Related Party Loan and received 2.6 million warrants to purchase 2.6 million shares of our Class A Stock at a price of $5.74 per share, subject to certain adjustments. We accounted for the Incremental Loan Warrants ~~issued in conjunction with the Amended and Restated Credit Agreement are classified~~ as liabilities and recorded them at fair value on the date of the transaction and subsequently re-measured to fair value at each reporting date with changes in the fair value included in earnings. ~~An increase in fair value for the nine months ended September 30, 2020 resulted in a non-cash loss in the amount of $43.3 million recorded in earnings for the period. The increase in~~We determined the fair value of the Incremental Loan Warrants ~~as of September~~to be $47.0 million at June 30, 2020. During the six months ended June 30, 2020, ~~was due primarily~~we recognized a loss of $25.3 million in our condensed consolidated statement of operations related to the ~~increase in our stock price and the decrease of the Pearce’s ownership interest below 50%, which triggered a~~ change in ~~the exercise price~~fair value of ~~the outstanding Incremental Loan Warrants to $0. On October 27, 2020, we notified the holders of~~these warrants. There was no gain or loss on the Incremental Loan Warrants for the six months ended June 30, 2021 as they were exercised in 2020.

There were 15.5 million public warrants issued in connection with GPAC’s formation and IPO and 12.8 million sponsor warrants issued pursuant to a simultaneous private placement with the IPO. We have accounted for these warrants as liabilities and recorded them at fair value on the date of the transaction and subsequently re-measured to fair value at each reporting date with changes in fair value included in earnings. The 1.9 million sponsor warrants outstanding at June 30, 2021 had a fair value of $14.5 million. The fair value of the public and sponsor warrants outstanding at June 30, 2020 was $107.1 million. During the six months ended June 30, 2021, we recognized a gain of $14.0 million in our condensed consolidated statement of operations related to a decrease in the fair value of the sponsor warrants exercised during the six-month period or that were outstanding at June 30, 2021. During the six months ended June 30, 2020, we ~~would redeem any unexercised Incremental Loan Warrants on November~~recognized a loss of $83.3 million in our condensed consolidated statement of operations related to an increase in the fair value of the public and sponsor warrants exercised during the prior year six-month period or that were outstanding at the end of June 30, 2020. ~~The Incremental Loan Warrants have been exercised prior to this redemption date.~~

Tax Receivable Agreement Expense

~~In connection with~~The tax receivable agreement liability totaled $172.3 million and $172.0 million at June 30, 2021 and December 31, 2020, respectively. During the ~~Business Combination, the Company entered into the TRA with InnoHold. As noncontrolling interest holders exercise their right~~first six months of 2021, we incurred $0.2 million of tax receivable agreement expense due to ~~exchange or cause Purple LLC to redeem all or a portion of their Class B Units, a TRA Liability is recorded based on 80% of the estimated future cash~~state tax savings that the Company may realize as a result of increases in the basis of the assets of Purple LLC attributed to the Company as a result of such exchange or redemption. As a result of the initial merger transaction and 43.5 million subsequent exchanges of Class B Stock for Class A Stock and the release of the Company’s valuation allowance on the deferred tax assets to which the TRA liability relates, $169.0 million has been recorded as of September 30, 2020, of which $168.5 million was recorded during the nine months ended September 30, 2020.rate changes. Of the total $78.2 million liability recorded during the ~~nine~~six months ended ~~September~~June 30, 2020, ~~$134.9~~$45.3 million relates to current year exchanges and was recorded as an adjustment to stockholders’ equity and ~~$33.5 million~~$32.9 was recorded to expense as it related to reestablishing the ~~TRA~~tax receivable agreement liability related to prior year exchanges. ~~There~~
Income Tax Benefit (Expense)
Income tax expense was ~~no TRA expense incurred~~$3.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019 as~~2021, compared to an income tax benefit of $35.7 million for the ~~Company had~~six months ended June 30, 2020. Income tax expense for the six months ended June 30, 2021 was primarily the result of no longer having a full valuation allowance onand the decrease in noncontrolling interest. The income tax benefit in the comparative prior six-month period was primarily due to $32.8 million of the valuation allowance associated with the Company’s federal and state deferred tax assets being released and ~~no TRA liability was recorded.~~
~~Benefit from Income Taxes~~
~~Our~~recorded as an income tax benefit ~~was $35.8 million for~~during the ~~nine~~six months ended ~~September~~June 30, 2020, compared to no income tax benefit for the nine months ended September 30, 2019. Our income tax benefit is primarily due to the release of the federal and state valuation allowance and the recognition of deferred tax assets as of September 30, 2020. ~~No income tax benefit was recorded during the nine months ended September 30, 2019 as the Company had a full valuation allowance on the deferred tax assets.~~

Noncontrolling Interest

~~As a result of the Business Combination in 2018, we~~We attribute net income or loss to the Class B ~~units~~Units in Purple LLC, owned by InnoHold and other parties, as a noncontrolling interest at their aggregate ownership percentage. ~~At September~~We calculate net income or loss attributable to noncontrolling interests on a quarterly basis using their weighted average ownership percentage. Net income attributed to noncontrolling interests was $0.1 million for the six months ended June 30, 2021 compared to $7.3 million for the six months ended June 30, 2020. The decrease in the net income level attributed to noncontrolling interests resulted from the noncontrolling ownership interest declining from approximately 32% at June 30, 2020 ~~this ownership percentage was~~to approximately 1%~~, a decrease from approximately 81%~~ at ~~September~~June 30, 2019. This decrease was the result of the exchange of 43.5 million Paired Securities for Class A Stock, mostly attributed to InnoHold’s three secondary public offerings concluded in November 2019, May 2020 and September 2020.2021.

Liquidity and Capital Resources

Our primary cash needs have historically consisted of working capital, capital expenditures and debt service. Our working capital needs depend upon the timing of cash receipts from sales, payments to vendors and others, changes in inventories, and ~~capital and~~ operating lease payment obligations. Our cash and working capital positions ~~are strong. We had cash in the amount of $98.0~~were $110.1 million and $96.4 million, respectively, as of ~~September~~June 30, ~~2020~~2021 compared to $123.0 million and ~~$33.5~~$96.9 million, respectively, as of December 31, 2019. We had working capital of $67.4 million as of September 30, 2020, and working capital of $27.3 million as of December 31, 2019. During the nine months ended September 30, 2020, our accounts receivable decreased by $6.8 million. Our capital expenditures primarily relate to acquiring and maintaining manufacturing equipment and expanding capacity and cash2020. Cash used for ~~capital expenditures was $14.2~~purchases of property and equipment increased from $8.0 million ~~for~~during the ~~nine~~first six months ~~ended September 30, 2020. We financed these capital expenditures through cash provided by operating activities.~~of 2020 to $26.2 million during the first six months of 2021. This increase primarily resulted from continuing to build out our new manufacturing facility in Georgia that began operations in March 2021, enhancing our manufacturing capabilities in Utah, scaling our infrastructure to support the growth of our workforce, and opening several new Company showrooms.

In response to the COVID-19 pandemic, we took a number of precautionary measures to manage our resources and mitigate ~~the~~its adverse ~~impact of the pandemic.~~impact. Given the initial ~~difficultly~~difficulty in predicting how long ~~this~~the pandemic would persist and its full impact, we managed our business and opportunities to preserve liquidity. We temporarily reduced our capital spend by delaying all non-maintenance related projects and investments in non-essential initiatives and headcount additions. Other proactive steps were taken to carefully manage cash and quickly and prudently respond to the rapidly changing circumstances including temporarily furloughing a portion of our permanent workforce, temporarily deferring a portion of the cash compensation of Senior Executives and all the cash compensation of members of our Board of Directors, and limiting other discretionary expenses. We also entered into an amendment to our Amended and Restated Credit Agreement to allow the Company to defer 5% of the interest for quarterly payments due during the first two quarters of 2020. In September 2020, this debt was subsequently retired and replaced with a $45 million term loan and a $55 million line of credit. In addition, our receivables from our wholesale partners remain healthy. Most of our wholesale partners continue to make payments in accordance with their original contract terms and remain current on their outstanding balances.
~~As a result of our precautionary measures, continued payments from wholesale customers, and our strong DTC sales, our cash balance increased by $64.5 million during the nine months~~ ended ~~September 30, 2020. We have now ended many~~most of the cash preservation programs and ~~have~~ returned to full production to meet increased ~~demand.~~demand during the second half of 2020. Subject to certain assumptions regarding the duration and severity of the COVID-19 pandemic, and our responses thereto, based on our current projections we believe our cash on hand, ~~along with~~ ongoing cash generated from our DTC business, amounts available under our line of credit, ~~strong~~increasing demand of our ~~product~~products in the ~~Wholesale~~wholesale channel and ~~eventual resumption and~~continuing ramp up of store operations, will be sufficient to cover our working capital requirements and anticipated capital expenditures for the next 12 months.

On ~~January 28, 2019,~~September 3, 2020, we paid $45.0 million to retire, in full, all indebtedness related to Purple ~~LLC entered into~~LLC’s Related Party Loan. The payment included $25.0 million for the ~~First Amendment, which amended~~original loan under the ~~Credit Agreement. In the First Amendment, Purple LLC agreed to enter into the Amended and Restated Credit Agreement under which the Incremental Lenders agreed to provide an~~agreement, $10.0 million for a subsequent incremental loan, ~~of $10.0~~$6.6 million ~~such that the total amount of principal indebtedness provided to Purple LLC was increased to $35.0 million. A stockholder meeting was held~~for paid-in-kind interest, $2.5 million for a prepayment fee and $0.9 million for accrued interest.
Also on February 25, 2019 at which time a majority of non-interested stockholders voted in favor of this transaction. Accordingly, the Amended and Restated Credit Agreement, and each related document, was closed and an incremental loan of $10.0 million was funded. In addition, we issued to the Incremental Lenders warrants to purchase 2.6 million shares of the Company’s Class A Stock at a price of $5.74 per share, subject to certain adjustments. On February 26, 2019, we received approximately $9.2 million in proceeds after debt issuance costs and fees. For additional information regarding our credit agreement with Coliseum, refer to Note 8 — ~~Long-Term Debt, Related Party~~ ~~of our condensed consolidated financial statements.~~
On September 3, 2020, Purple LLC entered into athe 2020 Credit Agreement ~~with KeyBank National Association and other lenders. The 2020 Credit Agreement~~that provided for a $45.0 million term loan (the “Term Loan”) and a $55.0 million revolving line of credit. The agreement has a five-year term and borrowing rates for both the Term Loan and revolving line of credit are based on Purple LLC’s leverage ratio and can range from LIBOR plus a 3.00% to 3.75% margin with a LIBOR minimum of 0.50%. As of June 30, 2021, there was no balance outstanding on the revolving credit facility. Proceeds from the ~~term loan, which were fully drawn at closing,~~Term Loan were used to retire all indebtedness ~~related to Purple LLC’s existing Amended~~associated with the Related Party Loan.
During the six months ended June 30, 2021, 6.6 million sponsor warrants were exercised on a cash and ~~Restated Credit Agreement.~~cashless basis resulting in the issuance of 2.3 million shares of Class A Stock. The ~~retirement of the loan under the Amended and Restated Credit Agreement included a prepayment fee of approximately $2.5 million.~~
~~Debt service~~proceeds received for the ~~nine months ended September~~cash exercise was $0.1 million. At June 30, ~~2020 totaled $3.5~~2021, there were 1.9 million ~~and consisted of interest paid on the Amended and Restated Credit Agreement, the 2020 Credit Agreement, as well as principal and interest payments on certain capital leases.~~sponsor warrants outstanding.
In the event our cash flow from operations or other sources of financing are less than anticipated, we believe we will be able to fund operating expenses based on our ability to scale back operations, reduce marketing spend and postpone or discontinue our growth strategies. In such event, this 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 current creditors or pursue work-out options.
If cash flow from operations or available financing under the 2020 Credit Agreement are not sufficient to fund our operating expenses or our growth strategies, we may need to raise additional capital. Our ability to obtain additional or alternative capital on acceptable terms or at all is subject to a variety of uncertainties, including instability in the credit and financial markets resulting from the COVID-19 pandemic, ~~and~~political or social unrest, other ~~things such as civil unrest and~~ macroeconomic factors and approval from the lenders under the 2020 Credit Agreement. Adequate financing may not be available or, if ~~available,~~offered, may only be available on unfavorable terms. In response to the economic fallout of the COVID-19 pandemic, the U.S. government established a Main Street Lending Program to support lending to small and medium-sized businesses. However, there is no guarantee that we will be eligible to participate in such program or that, if we are eligible to participate, that we will receive any benefits under this program. Further, the Main Street Lending Program imposes restrictions on how funds received are used that would limit our ability to operate our business. The restrictive covenants in the 2020 Credit Agreement may make it difficult to obtain additional capital on terms that are favorable to us, and we may not be able to satisfy the conditions necessary to obtain additional funds pursuant to the revolving credit facility under the 2020 Credit Agreement. There is no assurance we will obtain the capital we require. As a result, there can be no assurance that we will be able to fund our future operations or growth strategies. In addition, future equity or debt financings may require us to also issue warrants or other equity securities that are likely to be dilutive to our existing stockholders. Newly issued securities may include preferences or superior voting rights or, as described above, may be combined with the issuance of warrants or other derivative securities, which each may have additional dilutive effects. Furthermore, we may incur substantial costs in pursuing future capital and financing, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition. If we cannot raise additional funds on favorable terms or at all, we may not be able to carry out all or parts of our long-term growth strategy, maintain our growth and competitiveness or continue in business.
We are required to make certain payments to InnoHold under the ~~TRA,~~tax receivable agreement, which ~~payments~~ may have a material adverse effect on our liquidity and capital resources. We are currently unable to determine the total future amount of these payments due to the unpredictable nature of several factors, including the timing of future exchanges, the market price of shares of Class A Stock at the time of the exchanges, the extent to which such exchanges are taxable and the amount and timing of future taxable income sufficient to utilize tax attributes that give rise to the payments under ~~TRA.~~the tax receivable agreement. As of ~~September~~June 30, ~~2020,~~2021, the ~~estimated future payments under~~tax receivable agreement liability reflected in our condensed consolidated balance sheet is $172.3 million of which $5.9 million is classified as other current liabilities in the ~~TRA are $169.0 million with approximately $0.7 million due to be paid within the next 12 months.~~condensed consolidated balance sheet.

Cash Flows for the ~~Nine Months~~Six months Ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020
The following summarizes our cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 as reported in our condensed consolidated statements of cash flows (in thousands):
Nine Months Ended
September 30,
2020 2019
Net cash provided by operating activities $ 87,462 $ 15,844
Net cash used in investing activities (25,084 ) (5,903 )
Net cash provided by financing activities 2,099 9,120
Net increase in cash 64,477 19,061
Cash, beginning of the period 33,478 12,232
Cash, end of the period $ 97,955 $ 31,293
Six Months Ended
June 30,
2021 2020
Net cash provided by operating activities $ 11,469 $ 72,346
Net cash used in investing activities (26,447 ) (10,445 )
Net cash provided by financing activities 2,104 23
Net (decrease) increase in cash (12,874 ) 61,924
Cash, beginning of the period 122,955 33,478
Cash, end of the period $ 110,081 $ 95,402

~~Nine~~Six months ended ~~September~~June 30, ~~2020~~2021 Compared to the ~~Nine~~Six months ended ~~September~~June 30, ~~2019~~2020
Cash provided by operating activities was ~~$87.5~~$11.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020, an increase of $71.6~~2021 compared to $72.3 million ~~from cash provided by operating activities of $15.8 million during~~for the ~~nine~~six months ended ~~September~~June 30, ~~2019. This is due to a $39.4 million increase~~2020. The decrease in cash provided by operations asprimarily resulted from a ~~result of increased~~$43.5 million decrease in operating ~~income over last year driven mainly by an acceleration of DTC sales and a $32.2 million increase from all other~~cash flows related to net changes in operating assets and liabilities ~~due mainly~~for the six months ended June 30, 2021 compared to ~~$23.2 million~~the corresponding six-month period in ~~additional~~the prior year. This decrease consisted of decreased cash from ~~a year-over-year increase~~changes in ~~the change~~period-over-period fluctuations in accounts receivable, inventories and ~~$8.7 million~~liabilities, offset in ~~additional cash from a year-over-year~~part by an increase in ~~the~~cash related to a change in the year-over-year fluctuation in prepaid inventory and ~~$0.3~~other assets. The decrease in cash provided by operations was further impacted by a $17.4 million decrease in ~~additional~~ cash ~~from year-over-year increase~~provided by operating income which was mainly driven by net revenues being unfavorably impacted by isolated production issues that occurred in the ~~change~~second quarter of 2021 (see Isolated Production Challenges above) coupled with higher marketing and sales expenses, increased legal and professional fees and planned increases in ~~all other operating assets and liabilities.~~our workforce.
Cash used in investing activities was ~~$25.1~~$26.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020, an increase of $19.2~~2021 compared to $10.4 million ~~from cash used in investing activities of $5.9 million during~~for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. This increase ~~is due mainly~~primarily resulted from enhancing our manufacturing capabilities in Utah, scaling our infrastructure to ~~increases~~support the growth of our workforce, opening several new Company showrooms, and continuing to expand our manufacturing capacity in ~~purchases of property and equipment and investment~~our new manufacturing facility in ~~intangible assets of $8.5 million and $10.6 million, respectively, over the same period~~Georgia that began operations in ~~the prior year.~~March 2021.
Cash provided by financing activities during the six months ended June 30, 2021 was $2.1 million ~~in the nine months ended September 30, 2020,~~compared to a ~~decrease~~minimal amount of ~~$7.0 million from~~ cash provided by financing ~~of $9.1 million~~activities during the ~~nine~~six months ended ~~September~~June 30, ~~2019. The cash provided~~2020. Financing activities in ~~2020 represented $45.0~~the first six months of 2021 included $4.1 million in proceeds from ~~the 2020 Credit Agreement, $2.1~~an InnoHold indemnification payment and $0.6 million of proceeds from warrant and stock option exercises, offset in part by $1.1 million in principal payments on the Term Loan, member tax distributions of $0.9 million and a ~~$37.5~~$0.6 million payment ~~to retire~~for the Amended and Restated Credit Agreement, $5.0 million in distributions to members and $2.5 million in debt issuance costs. The cash provided in 2019 represented the $10.0 million in funds received from the Amended and Restated Credit Agreement, partially offset by $0.8 million in debt issuance costs and $0.1 million in other financing payments.tax receivable agreement.
Critical Accounting Policies
~~For a description of~~We discuss our critical accounting policies ~~refer to Note 2 —~~and estimates in ~~Summary~~Management’s Discussion and Analysis of ~~Significant Accounting Policies~~Financial Condition and Results of Operations in our 2020 Annual Report on Form 10-K/A filed May 10, 2021. There were no significant changes in our critical accounting policies since the end of ~~our condensed consolidated financial statements.~~fiscal 2020.

Off-Balance-Sheet Arrangements and Contractual Obligations

~~On July 21, 2020,~~As of June 30, 2021, we were not involved in any unconsolidated special purpose entity transactions and did not have any off-balance-sheet financing. Also, there was no balance outstanding on our $55.0 million revolving credit facility as of June 30, 2021.
There have been no material changes to our contractual obligations during the Company signed a Lease (the “Lease”) with PNK S2, LLC for approximately 520,000 square feet located at 1325 Hwy 42 S., Building B, McDonough, Georgia (the “Building”). A copy of the Lease is attached as Exhibit 10.1 to this report and incorporated by reference. The Company anticipates immediately preparing the Building for use as a manufacturing, distribution and office facility and expects it to be fully operationalthree months ended June 30, 2021 from those previously disclosed in ~~2021.~~
The term of the Lease is 128 months including an eight-month free rent period, which will commence upon completion of the landlord’s work on the Company’s space in the Building. The Company anticipates the landlord’s work is expected to be completed by the middle of first quarter 2021. Prior to the commencement of the term, the Company has an immediate right to make use of the Building. Under the Lease, the Company will pay $3.41 per square foot annually or $147,675 per monthour Form 10-Q for the initial lease year. Thereafter the basic monthly rent increases 2% per year. The Lease also provides the Company with an option to extend the Lease term for two additional five-year periods at rates for the first renewal term of $4.24 per square foot with 2% annual increases and for the second renewal term of $4.75 per square foot with annual increases of 3.5%. The Company is also responsible for its proportionate share of the operating expenses incurred by the landlord for the Building. The Lease provides for a tenant improvement allowance of $12.50 per usable square foot. The Lease also provides the Company with signage rights and a right of first refusal on other contiguous space.quarterly period ended March 31, 2021.
Seasonality and Cyclicality
We believe that sales of our products are typically subject to seasonality corresponding to different periods of the consumer spending cycle, holidays and other seasonal factors. Our sales may also vary with the performance of the broader economy consistent with the market.
Available Information
Our website address is www.purple.com. We make available free of charge on the Investor Relations portion of our website, investors.purple.com, our annual ~~reports~~report on Form ~~10-K,~~10-K/A, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the ~~Securities and Exchange Commission.~~SEC.

We also use the Investor Relations portion of our website, investors.purple.com, as a channel of distribution of additional Company information that may be deemed material. Accordingly, investors should monitor this channel, in addition to following our press releases, ~~Securities and Exchange Commission~~SEC filings and public conference calls and webcasts. The contents of our website shall not be deemed to be incorporated herein by reference.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.

~~Not Applicable.~~
ITEM 4. CONTROLS AND PROCEDURES
~~As an emerging growth company, we are exempt from the auditor attestation requirements with respect to internal control over financial reporting under Section 404(b) of the Sarbanes Oxley Act of 2002.~~
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO” and together with the CEO, the “Certifying Officers”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Certifying Officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Based upon this evaluation, and the above criteria, our CEO and CFO concluded that due to the material weakness described below and as previously disclosed in our Form ~~10-Q~~10-K/A filed ~~August 14, 2020,~~May 10, 2021, the Company’s disclosure controls and procedures were not effective as of ~~September~~June 30, ~~2020.~~2021.
~~Previously Reported~~ Material Weakness in Internal Control over Financial Reporting
~~In connection with the preparation and interim review~~A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our ~~quarterly~~annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
As previously disclosed in our Annual Report on Form 10-K/A for the ~~quarter~~year ended December 31, 2020, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2020 due to the material weakness described below.
Our internal control over financial reporting did not identify an error in the classification of the public and sponsor warrants issued in connection with our IPO and through a simultaneous private placement, which we determined to be a material weakness. This error in classification was brought to our attention when the SEC issued a public statement (the “SEC Statement”) informing market participants that warrants issued by special purpose acquisition companies (“SPACs”) may require classification as a liability of the entity measured at fair value, with changes in fair value each period reported in earnings. The SEC Statement addresses certain accounting and reporting considerations related to warrants of a kind similar to those public and sponsor warrants we issued. We previously classified our public warrants and sponsor warrants as equity. As a result of such misclassification, we restated our previously issued audited consolidated financial statements as of and for the years ended December 31, 2020 and 2019 and previously issued unaudited condensed consolidated financial statements as of and for the quarterly periods ended September 30, 2020 and 2019, June 30, 2020 we and 2019 and March 31, 2020 and 2019. Such restated financial statements were included in our ~~independently registered public accounting firm identified a~~Annual Report on Form 10-K/A for the year ended December 31, 2020 filed on May 10, 2021.
In response to this material weakness in internal ~~controls~~control over ~~the tax provision process, specifically~~financial reporting related to the ~~release~~assessment of complex accounting issues reached in prior periods that continue to impact the ~~valuation allowance~~Company, we will implement a new control to assess complex accounting issues reached in the past that continue to impact the Company to ensure those conclusions reached are still appropriate. Our plans include increased communication among our personnel and third-party professionals with whom we consult regarding the ~~unique recording~~application of complex accounting transactions. Our remediation plan can only be accomplished over time and will be continually reviewed to determine that it is achieving its objectives. We can offer no assurance that these initiatives will ultimately have the ~~Tax Receivable Agreement liability as described in Note 14 –~~ ~~Income Taxes~~.intended effects.
We have begun remediating the underlying cause of this material weakness including the implementation of additional steps in our process of reviewing unique and complicated tax transactions. We believe these additional steps will enable us to identify and remediate quickly any potential errors in our processes and broaden the scope and quality of our controls over our tax processes.
(b) Changes in Internal Controls Over Financial Reporting.
Other than the changes described above, during the three months ended June 30, 2021, there have been no changes in our internal control over financial reporting ~~that occurred during the nine months ended September 30, 2020~~ that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is from time to time involved in various claims, legal proceedings and complaints arising in the ordinary course of business. Please refer to Note 11 — Commitments and Contingencies ~~and Note 18~~ ~~– Subsequent Events~~to the condensed consolidated financial statements contained in this report ~~and to Part I, Item 3 of our Annual Report on Form 10-K filed on March 11, 2020~~ for certain information regarding our legal proceedings.
ITEM 1A. RISK FACTORS

Except as described below, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K filed with the ~~Securities and Exchange Commission~~SEC on March ~~9, 2020.~~
~~Risks Related to Our Business~~
~~We may experience significant fluctuations in our operating results and growth rate, which could adversely affect our performance and financial results.~~
~~Our revenue growth may~~11, 2021 as amended by Form 10-K/A filed on May 10, 2021.The disclosure of risks identified below does not ~~be sustainable, and our percentage growth rates may decrease. Our revenue and operating profit growth depend on~~imply that the continued growth of demand for our products, and our business is affected by general political, economic and business conditions worldwide. Our business, our employees and our partners may also be negatively affected by political or social unrest including potential reputational damage, disruption of our physical facilities or those of our wholesale partners, and boycotts by employees or boycotts against us, our suppliers, our wholesale partners and our advertising partners. A softening of demand, whether caused by changes in customer confidence or preferences or a weakening of the U.S. or global economies, may result in decreased revenue or growth.
~~In addition, we rely on estimates and forecasts of our expenses and revenues to provide guidance and inform our business strategies, and some of our past estimates and forecasts have~~risk has not been accurate. The rapidly evolving nature of our business makes forecasting operating results difficult. If we fail to accurately forecast our expenses and revenues, our business, prospects, financial condition and results of operations may suffer, and the value of our business may decline. If our estimates and forecasts prove incorrect, we may not be able to adjust our operations quickly enough to respond to lower than expected sales or higher than expected expenses.already materialized.
~~Our sales and operating results will also fluctuate for many other reasons, including due to risks described elsewhere in this section and the following:~~
● ~~our ability to attract new customers and the cost of acquiring new customers;~~
● ~~our ability and the time required to develop new Mattress Max machines, develop new production lines, scale production capacity and appropriately train staff;~~
● ~~the success of our wholesale business and our Company showroom expansion efforts;~~
● ~~our ability to have enough production capacity to meet customer demand;~~
● ~~our ability to effectively manage increasing sales and marketing expenses;~~
● ~~our access to sufficient capital resources and liquidity to fund the growth of our business;~~
● ~~competition from the sublicensees of intellectual property licensed back to EdiZONE even if we subsequently acquired from EdiZONE its rights under such licenses;~~

● ~~our ability to offer products on favorable terms, manage inventory, fulfill orders and manage product returns;~~
● ~~the introduction of competitive products, services, price decreases, discounts, or improvements;~~
● ~~timing, effectiveness, and costs of expansion and upgrades of our systems and infrastructure;~~
● ~~the success of our geographic and product line expansions, including but not limited to power requirements, labor needs, and ease of product distribution;~~
● ~~the success of hiring, expeditiously training, and retaining engaged labor locally and worldwide;~~
● ~~our ability to secure and retain superior global partners for specialized delivery services;~~
● ~~the extent to which we use debt or equity financing, and the terms of any such financing for, our current operations and future growth;~~
● the outcomes of legal proceedings, claims, or governmental investigations or rulings, which may include significant monetary damages or injunctive relief and could have a material adverse impact on our operating results;
● ~~the ability to obtain patent and other intellectual property rights of exclusive use, and the enforceability and validity of our intellectual property rights;~~
● ~~our ability to accommodate variations in the mix of products we sell;~~
● ~~variations in our level of product returns, as well as our methods of collecting product returns or exchanges;~~
● ~~the extent to which we offer free shipping;~~
● ~~the extent to which we invest in technology and content, manufacturing, fulfillment, and other expense categories;~~
● ~~increases in the prices of materials used in the manufacturing of our products or the costs to produce our products, including but not limited to new or unanticipated tariffs;~~
● ~~our ability to anticipate and prepare for disruptions to manufacturing;~~
● ~~the extent to which operators of the networks between our customers and our websites successfully charge fees to grant our customers unimpaired and unconstrained access to our online services;~~
● ~~our ability to collect amounts owed to us when they become due;~~
● ~~the extent to which our internal network or website is affected by denial of service attacks, malicious unauthorized access, outages, and similar events;~~
● ~~the extent to which our internal network is affected by spyware, viruses, phishing and other spam emails, intrusions, data theft, downtime, and similar events;~~
● ~~our ability to manage the expenses associated with multiple facilities;~~
● ~~our ability to secure attractive real estate locations for expansion with sustainable cost structures; and~~
● ~~our ability to protect inventory assets from internal and external theft or damage.~~
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~~We have a short operating history in an evolving industry and, as a result, our past results may not be indicative of future operating performance.~~
We are a rapidly growing business with a short operating history. Our relatively short operating history makes it difficult to assess our future performance. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly developing and changing industries, including challenges in forecasting accuracy, determining appropriate investments of our limited resources, market acceptance of our products and services and future products and services, competition from new and established companies, including those with greater financial and technical resources, enhancing our products and services and developing new products and services.
For the years ended December 31, 2019 and 2018, we incurred net losses of ($12.4) million and ($19.6) million, respectively. In 2019, we generated $22.9 million of operating cash flow and ended the year with working capital of $27.3 million and an accumulated deficit of $8.3 million. In 2018, we experienced negative operating cash flow of $21.7 million and ended the year with negative working capital of $0.9 million, and an accumulated deficit of $4.3 million. We need positive cash flow from operations and additional capital to execute our business plan and growth initiatives. If we are unable to satisfy our liquidity and capital resource requirements our business could become adversely affected.
You should consider our business in light of the risks and difficulties we may encounter, as described above and elsewhere in this “Risk Factors” section. If we fail to address the risks and difficulties that we face, our business and operating results will be adversely affected.
~~The growth of our business places significant strain on our resources and if we are unable to manage our growth, we may not have profitable operations or sufficient capital resources.~~
We are rapidly and significantly expanding our operations, including expanding our workforce, increasing our product offerings and scaling our infrastructure to support expansion of our manufacturing capacity, our wholesale channel expansion and the opening of our Company showrooms. Our planned growth includes increasing our manufacturing capacity, developing and introducing new products and developing new and broader distribution channels, including wholesale and Company showrooms, and extending our global reach to other countries. This expansion increases the complexity of our business and places significant strain on our management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions.
Our continued success depends, in part, upon our ability to manage and expand our operations and facilities and production capacity in the face of continued growth. The growth in our operations has placed, and may continue to place, significant demands on our management and operational and financial infrastructure. If we do not manage our growth effectively, the quality of our products and fulfillment capabilities may suffer which could adversely affect our operating results. Our revenue growth may not be sustainable, and our percentage growth rates may decrease. If we are unable to satisfy our liquidity and capital resource requirements, we may have to scale back, postpone or discontinue our growth strategies, which could result in slower growth or no growth, and we may run the risk of losing key suppliers, we may not be able to timely satisfy customer orders, and we may not be able to retain all of our employees. In addition, we may be forced to restructure our obligations to creditors or pursue work-out options.
Our growth depends in part on our ability to manage the opening and operating of new production facilities and our Company showrooms which will require our entering into leases and other obligations while the success of expanding operations geographically and opening additional Company showrooms remains unproven. To be successful, we will need to obtain or develop retail expertise and we will need to hire new employees in states that may have employment laws that could increase our expenses. In general, operating new production facilities and opening our Company showrooms in new locations exposes us to laws in other states, including California, that may not be as employer-friendly as those in which we currently operate, and may expose us to new liabilities. If we are not able to successfully manage the process of expanding operations geographically, opening our Company showrooms and maintaining operations in an expanding number of facilities and Company showrooms, we may have to close Company showrooms and incur sunk costs and continuing obligations that could put a strain upon our resources, damage our brand and reputation and limit our growth.

To manage our growth effectively, we will need to continue to implement operational, financial and management controls and reporting systems and procedures and improve the systems and procedures that are currently in place. There is no assurance that we will be able to fulfill our staffing requirements for our business, successfully train and assimilate new employees, or expand our management base and enhance our operating and financial systems. Failure to achieve any of these goals will prevent us from managing our growth in an effective manner and could have a material adverse effect on our business, financial condition or results of operations. In addition, our revenue and operating profit growth depends on the continued growth of demand for the products offered by us, and our business is affected by general economic and business conditions worldwide. A softening of demand, whether caused by changes in customer preferences or a weakening of the U.S. or global economies, may result in decreased revenue or growth. Further, we may not be able to accurately forecast our growth rate. We base our expense levels and investment plans on sales estimates. A significant portion of our expenses and investments is fixed, and we may not be able to adjust our spending quickly enough if our sales are less than expected.
We identified a need for internal controls to avoid delays in the timely delivery of our new mattress products and to improve the customer’s experience. Also, we have experienced rapid growth in our employee base, and the need to implement controls and procedures for improving employee training and retention. Competition for employees where our production facilities are located also has increased the costs for employee retention. We have implemented improved controls and procedures in an environment of continuous change but our use of resources may not be as effective as intended or we may need to apply more resources than expected to continue to make changes to improve our employee retention and effectiveness and the quality of our products and services over time. If we are unable to make continuous improvement, achieve greater efficiencies in our operating expenses and improve our products and services, our business could be adversely affected.
~~We may need additional capital to execute our business plan and fund operations and may not be able to obtain such capital on acceptable terms or at all.~~
In connection with the development and expansion of our business, we expect to incur significant capital and operational expenses. We believe that we can increase our sales and net income by implementing a growth strategy that focuses on (i) increasing our manufacturing capacity, including by establishing additional manufacturing locations; (ii) increasing our direct-to-consumer sales; (iii) expanding our wholesale distribution channel; (iv) opening our Company showrooms; (v) expanding our global sales; (vi) engaging global partners to improve distribution efficiencies and cost savings; and (vii) product assortment and category expansion.
We believe that our cash flow from operations, together with other available sources of liquidity, including the exercises of warrants for cash and additional cash we received and may have further access to under that certain Credit Agreement dated September 3, 2020(the “2020 Credit Agreement”) by and between Purple LLC and KeyBank National Association leading a group of financial institutions(the “Institutional Lenders”), including the available revolving credit facility under the 2020 Credit Agreement, will be sufficient to fund anticipated operating expenses, growth initiatives and our other anticipated liquidity needs for the next twelve months, based on our current operating conditions. However, our ability to obtain other capital resources and sources of liquidity may not be sufficient to support future growth strategies. If we are unable to satisfy our liquidity and capital resource requirements, we may have to scale back, postpone or discontinue our growth strategies, which could result in slower growth or no growth, and we may run the risk of losing key suppliers, we may not be able to timely satisfy customer orders, and we may not be able to retain all of our employees. In addition, we may be forced to restructure our obligations to creditors, pursue work-out options or other protective measures.
While we have access to a $55 million revolving credit facility under the 2020 Credit Agreement, our ability to access such funds is subject to certain conditions, which we may not be able to satisfy at such time that we seek to draw on the revolving credit facility. Further, our ability to obtain additional or alternative capital on acceptable terms or at all is subject to a variety of uncertainties, including approval from the Institutional Lenders under the 2020 Credit Agreement. Adequate financing may not be available or, if available, may only be available on unfavorable terms. The restrictive covenants in the 2020 Credit Agreement may make it difficult to obtain additional capital on terms that are favorable to us, and the we may not be able to satisfy the conditions necessary to obtain additional funds pursuant to the revolving credit facility under the 2020 Credit Agreement. There is no assurance we will obtain the capital we require. As a result, there can be no assurance that we will be able to fund our future operations or growth strategies. In addition, future equity or debt financings may require us to also issue warrants or other equity securities that are likely to be dilutive to our existing stockholders. Newly issued securities may include preferences or superior voting rights or may be combined with the issuance of warrants or other derivative securities, which each may have additional dilutive effects. Furthermore, we may incur substantial costs in pursuing future capital and financing, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition. If we cannot raise additional funds on favorable terms or at all, we may not be able to carry out all or parts of our long-term growth strategy, maintain our growth and competitiveness or continue in business.
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~~Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results.~~
Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business are complex and involve many subjective assumptions, estimates and judgments by our management, including but not limited to estimates that affect our revenue recognition, accounts receivable and allowance for doubtful accounts, valuation of inventories, cost of revenues, sales returns, warranty liabilities, the recognition and measurement of loss contingencies, warrant liabilities, estimates of current and deferred income taxes, deferred income tax valuation allowances and amounts associated with our Tax Receivable Agreement with InnoHold (the “Tax Receivable Agreement”). Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance, and could have a material adverse effect on our business.
~~Our expansion into new products, market segments and geographic regions subjects us to additional business, legal, financial, and competitive risks.~~
The majority of our sales are made directly to consumers through our website or certain other e-commerce platforms. We have been expanding our business into the wholesale distribution channel through relationships with our wholesale partners but there can be no assurance that we will continue to experience success with our wholesale partners or that anticipated new locations will be successful.
We may be unsuccessful in generating additional sales through wholesale channels. We may extend credit terms in connection with such relationships and such relationships may expose us to the risk of unpaid or late paid invoices. In addition, we may provide fixtures to such partners that may be difficult to recover or re-use. Our wholesale customers may not purchase our products in the volume we expect.
Profitability, if any, from sales to wholesale customers and new product offerings may be lower than from our direct-to-consumer model and current products, and we may not be successful enough in these newer activities to recoup our investments in them. If any of these issues were to arise, they could damage our reputation, limit our growth, and negatively affect our operating results.
We may be unsuccessful in opening any of our Company showrooms beyond the store we currently have at our headquarters in Lehi, Utah, the Company factory outlet in Salt Lake City, Utah and the newly opened Company showrooms in San Diego, California, Santa Clara, California, Santa Monica, California, Austin, Texas and Tysons Corner, Virginia. We have limited experience in opening and operating our Company showrooms. Operating our Company showrooms includes additional risks. For example, we will incur expenses and accept obligations related to additional leases, insurance, distribution and delivery challenges, increased employee management, and new marketing challenges. If we are not successful in our efforts to profitably operate these new stores, our reputation and brand could be damaged, growth could be limited, and our business may be harmed.
In addition, offerings of new products through our direct-to-consumer platform, wholesale distribution channel and our Company showrooms may present new and difficult challenges, and we may be subject to claims if customers of these offerings experience service disruptions or failures or other quality issues. Expansion of sales channels may require the development of additional, differentiated products to avoid price and distribution conflicts between and within sales channels. Wholesale expansion increases our risk as our wholesale partners will require delaying payments to us on net terms ranging from a few days to 60 or more days, or may delay paying us beyond the agreed-upon net terms or fail to pay. Our Company showroom expansion increases our risk for inventory shrinkage from destruction, theft, obsolescence and factors that render such inventory unusable or unsellable.
New products may come with the same warranty and return risks as mentioned above. New product offerings or expansion into new market channels or geographic regions may subject us to new or additional regulation, which would impose potentially significant compliance and distribution costs.
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The ongoing COVID-19 pandemic and responses thereto have adversely affected and may continue to adversely affect aspects of our business, including, among other things, our supply chain, workforce, and operations.
The COVID-19 pandemic has resulted in far-reaching economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, the Company’s business, financial condition, capital, liquidity and results of operations. Almost all U.S. states and many local jurisdictions have issued at various times, and others in the future may issue, “shelter-in-place” orders, quarantines, executive orders and similar government orders, restrictions, and recommendations for their residents to control the spread of COVID-19. Such orders, restrictions and recommendations, and the perception that additional orders, restrictions or recommendations could occur, have resulted in widespread closures of businesses not deemed “essential,” work stoppages, slowdowns and delays, work-from-home policies, travel restrictions and cancellation of events, as well as increased volatility in stock prices, among other effects. While certain jurisdictions have begun easing restrictions, we cannot be certain that other jurisdictions will do so. Furthermore, many jurisdictions have experienced a resurgence in COVID-19 cases, which has prompted governments to reinstate previously scaled back restrictions. If other jurisdictions experience a resurgence in COVID-19 cases, they may also prolong restrictions or adopt additional restrictions that could negatively affect our business, including, but not limited to, requiring us to close our manufacturing facilities. In addition, policies in the United States regarding the government response to the COVID-19 pandemic may further change as a result of recent elections.
We continue to monitor our operations and government mandates and may elect or be required to temporarily close our offices, manufacturing plants or Company showrooms to protect our employees, and limit our access to customers and limit customer use of our products as they are required to prioritize resources to address the public healthcare needs arising from the COVID-19 pandemic. The disruptions to our activities and operations may negatively impact our business, operating results and financial condition. There is a risk that government actions, or lack thereof, will not be effective at containing COVID-19, and that government actions or inactions, including the orders and restrictions described above and premature lessening of those restrictions, that are intended to contain the spread of COVID-19 while also minimizing harm to the economy, will have a devastating negative impact on the world economy at large, in which case the risks to our sales, operating results and financial condition described herein would be elevated significantly.
The duration of the COVID-19 pandemic’s impact on our business may be difficult to assess or predict. The widespread pandemic has resulted, and may continue to result for an extended period, in significant disruption of global financial markets, and may restrict our ability to access capital, which would negatively affect our liquidity. While we have been able to reverse some previous actions undertaken, such as, among others, temporarily deferring capital expenditures, furloughing certain employees, and temporarily deferring compensation for our senior executives, we may be required to take such actions again, or take additional actions, if there is a resurgence of COVID-19 cases or reinstatement of government restrictions. As a result of such actions or restrictions, we may be unable to complete capital expenditure projects or investments in the future, which would limit our ability to grow our business, and our results of operations and financial condition will be adversely affected.
Further, quarantines or government reaction or shutdowns for COVID-19 could disrupt our supply chain. Travel and import restrictions may also disrupt our ability to manufacture or distribute our products. Any import or export or other cargo restrictions related to our products or the raw materials used to manufacture our products would restrict our ability to manufacture and ship products and harm our business, financial condition and results of operations. Our key personnel and other employees could also be affected by COVID-19, potentially reducing their availability. In addition, the government responses to COVID-19 or the procedures we take to mitigate its effect on our workforce could reduce the efficiency of our operations or prove insufficient to mitigate the adverse impact of COVID-19 on our business. We may delay or reduce certain capital spending and related projects until the travel and logistical impacts of COVID-19 are lifted, which could delay the completion of such projects.
Even after initial quarantines and other government restrictions are scaled back, there is risk that we will be unable to continue normal production and operations, due to, among other things, disruptions and delays in our supply chain, reduced demand in our wholesale channel and Company showrooms, government relief programs that enable production workers to remain out of the workforce, and difficulties in ramping up our own operations. We may also experience disputes with our suppliers and/or customers as a result of such difficulties. Further, there may be subsequent outbreaks of COVID-19, particularly as we enter the winter season, that could disrupt our operations. In addition, as employees return to work, we may face claims by such employees or regulatory authorities that we have not provided adequate protection to our employees with respect to the spread of COVID-19 at our facilities.

The global outbreak of COVID-19 continues to rapidly evolve. The ultimate impact of the COVID-19 outbreak is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business or the global economy as a whole. However, these effects have harmed our business, financial condition and results of operations in the near term and could have a continuing material impact on our operations, sales and ability to continue as a going concern. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our high level of indebtedness, our need to generate sufficient cash flows to service our indebtedness and our ability to comply with the covenants contained in the agreements that govern our indebtedness.
Customer demand for and our ability to sell and market our products, particularly within our wholesale and Company showroom businesses, has been and may in the future be adversely affected by the COVID-19 pandemic and responses thereto.
The COVID-19 pandemic has created significant uncertainty in our business, slowed our anticipated wholesale partner and showroom plans and resulted in a temporary contraction of our wholesale and Company showroom businesses due to temporary shutdowns of non-essential businesses, reduced demand for physical retail locations, and shelter-at-home and social distancing directives in most U.S. states. The future impact to our wholesale partners and consumer demand from the COVID-19 pandemic or a future health epidemic or other outbreak occurring in other locations, particularly in North America, is unknown. If we fail to anticipate changes in demand or consumer behavior resulting from the COVID-19 pandemic or other outbreaks it could adversely affect our business or operating results.
If sales in our channels decline, including as a result of stay-at-home orders, social distancing mandates, temporary closures of or decreased shopping in our wholesale partners’ stores or our Company showrooms, or deteriorating general economic conditions, our business may be adversely affected. Moreover, we may be impacted by difficulties experienced by our wholesale partners as a result of the COVID-19 pandemic, including disruptions in their supply chains, their liquidity challenges and their ability to keep open or reopen retail locations. In addition, while in the quarter ended September 30, 2020 we experienced an increase in demand for our products through our DTC channel, there can be no guarantee that sales through our DTC channel will continue to increase or will not decline.
We may not be eligible to participate in some of the relief programs provided under the recently adopted Coronavirus Aid Relief, and Economic Security (CARES) Act or other government programs and even if we are eligible we may not realize any material benefits from participating in such programs.
On March 27, 2020, the President of the United States signed the Coronavirus Aid Relief, and Economic Security (CARES) Act into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. We continue to evaluate the applicability of the CARES Act to the Company, and the potential impacts on our business and are actively taking advantage of applicable programs.
While we may determine to apply for programs available under the CARES Act, there is no guarantee that we will meet any eligibility requirements to participate in such programs or, even if we are able to participate, that such programs will provide meaningful benefit to our business. In addition to the CARES Act in connection with the COVID-19 pandemic, the U.S. government and state/local governments may offer additional programs intended to assist employers. We may fail to qualify for or take advantage of such COVID-19 relief programs, which may have a negative impact on our business. In the event we obtain financing through a government COVID-19 stimulus program, such financing may impose additional restrictions on our business and how those funds are used, such as bringing employees back from furlough even if production levels remain reduced, restrictions on the payment of distributions or dividends and limits on executive pay that could adversely affect our ability to recruit and retain qualified key employees. In addition, previously adopted government programs designed to provide assistance to businesses and consumers may not be sufficient and further assistance may not be provided.
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~~Our future growth and profitability depend upon the strength of our Purple brand and the effectiveness and efficiency of our marketing programs and our ability to attract and retain customers.~~
We are highly dependent on the effectiveness of our marketing messages and the efficiency of our advertising expenditures in generating consumer awareness and sales of our products. We continue to evolve our marketing strategies, adjusting our messages, the amount we spend on advertising and where we spend it. We may not always be successful in developing effective messages and new marketing channels, as consumer preferences and competition change, and in achieving efficiency in our advertising expenditures.
We depend heavily on internet-based advertising to market our products through internet-based media and e-commerce platforms. If we are unable to continue utilizing such platforms, if those media and platforms diminish in importance or size, or if we are unable to direct our advertising to our target consumer groups, our advertising efforts may be ineffective, and our business could be adversely affected. The costs of advertising through these platforms have increased significantly, which has resulted in decreased efficiency in the use of our advertising expenditures, and we expect these costs may continue to increase in the future.
We have relationships with online services, search engines, affiliate marketing websites, directories and other website and e-commerce businesses to provide content, advertising and other links that direct customers to our website. We rely on these relationships as significant sources of traffic to our website and to generate new customers. If we are unable to develop or maintain these relationships or develop and maintain new relationships for newly developed and necessary marketing services on acceptable terms, our ability to attract new customers and our financial condition would suffer. In addition, current or future relationships or agreements may fail to produce the sales that we anticipate. The cost of advertising for web-based platforms, such as Facebook, are increasing. Increasing advertising costs erode the efficiency of our advertising efforts. If we are unable to effectively manage our advertising costs or if our advertising efforts fail to produce the sales that we anticipate, our business could be adversely affected.
On October 20, 2020, the United States Department of Justice brought an antitrust lawsuit against Google claiming that Google improperly uses its monopoly over Internet search to impede competition and harm consumers. Our cost of advertising on Google may remain high if Google’s monopoly over Internet searches is not prevented and competitive search engines are not allowed to compete. Alternatively, if Google is required because of this lawsuit to split up the company or sell assets, there is no assurance this will decrease advertising costs and it may lead to increased costs due to an increased number of service providers who obtain oligopoly power to control advertising costs. Although this lawsuit may lower our advertising costs, there is risk that it may not and would lead to increased costs which would reduce our profitability and harm our business.
Consumers are increasingly using digital tools as a part of their shopping experience. As a result, our future growth and profitability will depend in part on (i) the effectiveness and efficiency of our online experience for disparate worldwide audiences, including advertising and search optimization programs in generating consumer awareness and sales of our products, (ii) our ability to prevent confusion among consumers that can result from search engines that allow competitors to use or bid on our trademarks to direct consumers to competitors’ websites, (iii) our ability to prevent Internet publication or television broadcast of false or misleading information regarding our products or our competitors’ products, (iv) the nature and tone of consumer sentiment published on various social media sites, and (v) the stability of our website. In recent years, a number of direct-to-consumer, Internet-based retailers, like us, have emerged and have driven up the cost of basic search terms, which has and may continue to increase the cost of our Internet-based marketing programs. More recently, the large traditional mattress manufacturers have been increasing their efforts to increase their direct-to-consumer sales which also is increasing the cost of our Internet-based marketing programs and cost of customer conversion.
In the past, we have been the target of publications by purported consumer reviewers who claim to have identified health and safety concerns with our products. While we believe such claims to be baseless, refuting such claims requires us to expend significant resources to educate current and potential customers on the safety of our products. Even if we are able to broadly disseminate factual information to refute such claims and reinforce the safety of our products, such claims and attendant adverse publicity could persist and damage our reputation and brand value and result in lower sales.
The number of third-party review websites is increasing, and such reviews are becoming increasingly influential with consumers. Negative reviews from such sources may receive widespread attention from consumers, which could damage our reputation and brand value and result in lower sales. If we are unable to effectively manage relationships with such reviewers to promote accurate reviews of our products, reviewers may decline to review our products or may post reviews with misleading information, which could damage our reputation and make it more difficult for us to improve our brand value.

If our marketing messages are ineffective or our advertising expenditures, geographic price-points, and other marketing programs, including digital programs, are inefficient in creating awareness and consideration of our products and brand name and in driving consumer traffic to our website, our sales, profitability, cash flows and financial condition may be adversely impacted. In addition, if we are not effective in preventing the publication of confusing, false or misleading information regarding our brand or our products, or if there arises significant negative consumer sentiment on social media regarding our brand or our products, our sales, profitability, cash flows and financial condition may be adversely impacted.
~~Our future growth and profitability depend, in part, upon our ability to achieve and maintain sufficient production capacity to meet customer demands.~~
We manufacture our mattresses using our proprietary and patented Mattress Max™ machinery to make our Hyper-Elastic Polymer® cushioning material. Because of the unique features of our Mattress Max machines, new machines are not readily available and must be constructed. We also have experienced inefficiencies in sourcing of materials and production of finished products. We have taken steps to improve our processes and capabilities, but if we are unable to maintain our improvements and continue our improvement initiatives to increase efficiencies or if we are unable to promptly and efficiently open our new Georgia manufacturing facility, we may not be able to keep up with demand which would harm our business. If we are unable to construct new Mattress Max machines and implement them into our production process in a timely manner, if our existing Mattress Max machines are unable to function at the desired capacity, or if we are unable to develop replacements for the existing Mattress Max machines if such replacements should become necessary, our production capacity may be constrained and our ability to respond to customer demand may be adversely impacted. We manufacture mattresses and other products using components provided by third-party suppliers. If those third-party suppliers are unable to provide us with such components or if our assembly capacity is insufficient our ability to respond to customer demand may be adversely impacted. This would negatively impact our ability to grow our business and achieve profitability.
We have engaged in significant related-party transactions with affiliates and owners that may give rise to conflicts of interest, result in losses to the Company or otherwise adversely affect our operations and the value of our business.
We have engaged in numerous related-party transactions involving significant shareholders, directors, and officers of the Company, as well as with other entities affiliated with such persons. Several of these transactions were entered into prior to the Business Combination. For example, since 2010, we have leased our facilities in Alpine, Utah from TNT Holdings, which is owned by Tony Pearce and Terry Pearce. As we grow, and our needs change, we may need to negotiate a termination or modification of this lease, and we have recently amended this lease to shift responsibility from TNT Holdings to the Company for arranging certain types of insurance. We have leased a new facility in Lehi, Utah and moved our headquarters into that building during the first quarter 2020. The Company continues to lease the Alpine facility that was formerly the Company headquarters, for use in production, research and development and video production. We also may at some time purchase this Alpine facility from TNT Holdings. Tony and Terry Pearce, either personally or through one or more of their other entities, also have tangible property located in this Alpine facility that has not been clearly identified and separated from our property. Although we expected this tangible property to be either removed or identified and separated in 2019, this has not yet occurred. Tony and Terry Pearce pay no rent or other compensation to us to store such property in our leased facility. While there is currently no dispute over the lease, and we do not anticipate a dispute, there could arise in the future a dispute between the Company and Tony and Terry Pearce over this lease, or ownership of the property located at this facility. Tony Pearce and Terry Pearce served on our board of directors until August 17, 2020 and, through InnoHold, owned a majority of the outstanding shares of our common stock until all their interests were sold in secondary public offerings ending in September 2020.

Prior to the Business Combination, we also entered into an Amended and Restated Confidential Assignment and License Back Agreement with EdiZONE, an entity beneficially owned and controlled by Tony Pearce and Terry Pearce through their ownership of TNT Holdings, pursuant to which EdiZONE transferred tangible and intellectual property to us and we licensed back to EdiZONE certain intellectual property previously licensed by EdiZONE to third parties prior to the Business Combination in order to enable EdiZONE to continue to meet certain pre-existing license obligations to those third parties. EdiZONE and the Pearces have agreed to not modify or extend these third-party licenses and to not enter new third-party licenses. As these third-party license obligations end all rights under the license revert to the Company. These third parties include direct competitors to us that at the time of the Business Combination were not selling products through retail channels in which we were selling our products. One of these third parties is Advanced Comfort Technologies, Inc. dba Intellibed (“ACTI”), a domestic competitor of ours, who sells mattresses through some of the same retailers through which we also sell our products. On August 14, 2020, Purple LLC entered into a License Transfer and IP Assignment Agreement with EdiZONE, pursuant to which EdiZONE assigned the ACTI License Agreement, and related royalties payable thereunder, to Purple LLC, along with the trademarks GEL MATRIX and INTELLIPILLOW. In connection with such assignment, we agreed to indemnify EdiZONE against claims by ACTI against EdiZONE relating to EdiZONE’s breach under the License Agreement, claims arising out of the execution of the EdiZONE Agreement, or Purple LLC’s ownership, enforcement or breach of the License Agreement. The intellectual property so assigned remains subject to other licenses granted by EdiZONE to third parties, which licenses are retained by EdiZONE. ACTI’s sales revenues have been increasing, resulting in increasing royalties paid by ACTI to the Company pursuant to a the ACTI License Agreement. Another third-party licensee may make it difficult for us to expand into certain geographic regions, such as the European Union. While the current license back to EdiZONE, as amended following the Business Combination, is much narrower than the license that existed at the time of the Business Combination, these third-party licenses, including licenses by EdiZONE to a potential foreign competitor and obligations owed to the Company related to the ACTI License Agreement, may lead to conflicts of interest between us and EdiZONE. At the time this initial assignment from and license back to EdiZONE was first entered into, Purple LLC had only Tony and Terry Pearce as directors. Subsequent to the Business Combination, the license to EdiZONE was amended to broaden our rights and narrow EdiZONE’s rights with the approval of our independent directors, and the recent acquisition of the ACTI License Agreement also was approved by our independent directors.
Prior to the Business Combination, we also entered into a Shared Services Agreement with other entities controlled by Tony Pearce and Terry Pearce, including EdiZONE, which covered the provision of services to these entities by our employees. The Shared Services Agreement was terminated by us effective July 24, 2019. No legal or accounting services were provided by Purple LLC during 2019 prior to this termination.
Prior to the Business Combination, InnoHold, an entity owned by Terry and Tony Pearce and previously a significant stockholder of the Company, also granted equity incentive awards in Purple LLC to certain key employees at that time. As a result of the structure of those awards being granted through a separate entity, the equity incentives were required, because of the structure of the Business Combination, to be exchanged for ownership units in InnoHold, to avoid those equity interests becoming of no value to the participants. Those participants’ ownership interests had certain restrictions, including vesting requirements. These equity incentives granted to key employees prior to the Business Combination are forfeited to the extent the grant to an employee is not yet fully vested at the time that such employee’s employment is terminated. Before and for a period of time since the Business Combination, all forfeitures occurring from departing employees have inured to the benefit of only the owners of InnoHold, and not all of our stockholders. This means that the forfeited equity did not increase our currently approved equity incentive pool. Because the forfeited equity resulting from these departures prior to this distribution was held at InnoHold, that forfeited equity did not replenish our equity incentive pool and could not be used for equity grants to those who have replaced and will replace these employees or for other purposes essential to the business. During 2019, to avoid future forfeitures from inuring only to the benefit of InnoHold’s owners, InnoHold distributed to the incentive participants their pro rata share of InnoHold’s ownership of Class B Stock in Purple Inc. and Class B Units in Purple LLC, after which any forfeitures would inure to the benefit of all of our stockholders. InnoHold distributed additional paired shares of Class B Stock in Purple Inc. and Class B Units in Purple LLC which also will be subject to the same vesting requirements and result in forfeitures inuring to the benefit of all shareholders. Our current equity incentive pool, as approved by the stockholders prior to the Business Combination in the 2017 Equity Incentive Plan, did not account for the departure, before this distribution by InnoHold, of such key employees who had existing equity grants through InnoHold, and there is a risk that we will have to seek approval from the Board and stockholders to refresh the equity incentive pool earlier than anticipated at the time of the Business Combination because of the unanticipated need to use shares from the existing pool to hire and retain other key employees needed to achieve the Company’s growth objectives. If the equity pool is not refreshed, there is a risk that we may not be able to hire and retain such key employees. If the equity pool is refreshed with authorized shares of the Company that are issued in accordance with our 2017 Equity Incentive Plan, our stockholders will be diluted. Also, this distribution by InnoHold to the equity incentive participants has caused us to incur administrative expenses related to the distributions, the management of the differing vesting schedules and compliance with their rights under the distribution agreements. In addition, the calculations of the distributive share and related income tax withholdings with respect to holders of InnoHold’s Class B Units, as well as the processes by which such distributions and withholdings are made, are highly complex. As a result, there is a risk that the recipients of such distributions or other third parties may claim that we have miscalculated the distribution or income tax withholding amounts or failed to timely pay the taxes. The cost of responding to such claims, including but not limited to the diversion of management’s attention from our operations and defense or settlement costs, could negatively impact our operations and financial results.

In connection with the Business Combination, Purple LLC also entered into that certain Credit Agreement dated February 2, with the Lenders, which was guaranteed by Purple Inc. The Lenders also were stockholders and warrant holders of the Company and appointed one director to serve on our Board, Adam Gray, who continues to serve on our Board and is affiliated with the Lenders. Further, on February 26, 2019, the Amended and Restated Credit Agreement between Purple LLC and the Lenders thereto, and each of the related documents, including the issuance of additional warrants to the Incremental Lenders, was closed and an incremental loan was funded. In connection with the funding of the incremental loan, we issued to the Incremental Lenders warrants to purchase shares of our Class A Stock.
On March 27, 2020, the Amended and Restated Credit Agreement was amended to allow Purple LLC at its election a 5% paid-in-kind interest deferral for the first two quarters of 2020. On May 15, 2020, the Amended and Restated Credit Agreement was further amended to remove a negative covenant so that there would not be an event of default if the Lenders acquired 25% or more ownership of the Company. On August 20, 2020, the Company and Purple LLC entered into a Waiver and Consent to Amended and Restated Credit Agreement with the Lenders, that, among other things, waives an event of default as a result of InnoHold ceasing to own 25% or more of the aggregate equity interests in the Company, subject to certain conditions as more fully provided in such waiver
On September 3, 2020, we paid off the full amount owed and a prepayment premium to the Lenders in the aggregate amount of $45.0 million and terminated the Amended and Restated Credit Agreement, subject to those provisions that survive termination.
See “Item 13. Certain Relationships and Related Transactions, and Director Independence” in our Annual Report on Form 10-K for the year ended December 31, 2019 for a further discussion of all related-party transactions between the Company and insiders.
Disruption of operations in our manufacturing facilities, including as a result of, among other things, workplace injuries, pandemics or natural disasters, has and could increase our costs of doing business or lead to delays in shipping our ~~products.~~products and could materially adversely affect our operating results and our ability to grow our business.

We have ~~two~~three manufacturing plants, which are located in Alpine, Utah, Grantsville, Utah, and ~~Grantsville, Utah.~~McDonough, Georgia. We ~~have signed a lease for and have begun work~~began operations on ~~building out a third manufacturing plant~~March 3, 2021 in McDonough, ~~Georgia that is not yet~~Georgia. In the future we may also enter into leases for additional manufacturing ~~products.~~plants.

~~Although we can produce some of our products at both Utah sites, we have consolidated production of certain products at each site. Therefore, the~~The disruption of operations of our manufacturing facilities ~~particularly where manufacturing has been consolidated,~~ for a significant period of time, or even permanently, or disruptions to the scheduled build-out of the Georgia facility such as through a closure related to the COVID-19 pandemic or the loss of ~~the~~a lease, may increase our costs of doing business and lead to delays in shipping our products to customers and could materially adversely affect our operating results and our ability to grow our business. In addition, the occurrence of workplace injuries or other industrial accidents at one or more of our manufacturing plants has required, and may require in the future, that we suspend production or modify our operations, which could lead to delays in manufacturing and shipping our products to customers. Likewise, acts of workplace violence may require us to temporarily suspend production or modify our operations. Such delays could adversely affect our sales, customer satisfaction, profitability, cash flows, liquidity and financial condition. Because ~~both~~two of our currently operating manufacturing plants are located within the same geographic region, regional economic downturns, natural disasters, closures due to COVID-19, the unavailability of utilities as a result of climate events or otherwise, or other issues could potentially disrupt ~~all~~a significant portion of our manufacturing and other operating activities, which could adversely affect our business. On March 18, 2020, Magna, Utah was the epicenter of a 5.7 magnitude earthquake that was felt approximately 20 miles away at our Grantsville, Utah manufacturing plant but not felt at our Alpine, Utah manufacturing plant. Since that date, there have been approximately one-thousand aftershocks. Though no damage occurred at either manufacturing plant from the 5.7 earthquake or its aftershocks, continued or increased earthquake activity in the area could disrupt manufacturing and other operating activities, which could adversely affect our business.
~~Significant product returns could harm our business.~~

~~We allow~~Our manufacturing processes involve the use of heavy machinery and equipment, which exposes us to potentially significant financial losses and reputational harm due to workplace injuries or industrial accidents that may occur at our ~~customers to return products,~~facilities.
Our manufacturing processes involve the use of heavy machinery and equipment and are subject to risks involving workplace injuries, mechanical failures, and industrial accidents, including, among other things, personal injury or death resulting from such incidents at our ~~returns policies. If product returns are higher than~~manufacturing plants. A workplace accident, mechanical failure, industrial accident or any similar problem involving any one or more of our facilities has required, and may require in the future, that we ~~anticipate,~~suspend production at one or more of our manufacturing plants, which could lead to delays in manufacturing and shipping our products and adversely affect 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.
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~~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~~The occurrence of such incidents, or ~~settlements~~any perceived insufficiency in our response to any such deficiency or problem, could ~~have~~also materially adversely affect our reputation. If we are unable to meet workplace safety standards or, if our employees or customers perceive us having a ~~negative effect on~~poor safety record, it could materially impact our ability to attract and retain new employees and our reputation with our customers could suffer, which could adversely affect our business ~~financial condition~~ and results of operations. ~~Even if we are successful in defending against or prosecuting such litigation, the costs of such litigation, which may or may not be covered by~~

We recently experienced an incident involving our ~~insurance, could be significant and have a material adverse effect on our business. The quantity and scope of legal proceedings could cause an increase~~manufacturing equipment that resulted in the ~~amount~~death of one of our employees. As a result, we ~~pay for insurance coverage~~ceased using such equipment while we evaluated the safety of our manufacturing equipment and identified and implemented safety improvements. In addition, once safety improvements were implemented and manufacturing resumed, we experienced unanticipated mechanical and maintenance issues while ramping up to normal production. These delays in production limited our ability to fill customer orders, which ~~could negatively affect~~has adversely affected our financial ~~condition.~~
~~Our business~~results. Other incidents could ~~suffer if we are unsuccessful~~result in ~~making, integrating, and maintaining commercial agreements, strategic alliances, and other business relationships.~~
To successfully operate our business, we rely on commercial agreements and strategic relationships with suppliers, service providers and certain wholesale partners and customers. These arrangements can be complex and require substantial infrastructure capacity, personnel, and other resource commitments. Further, our business partners may have disruptions in their businesses or choose to no longer do business with us and the impact of such disruption or choices could be magnified to the extent such business partners represent a significant part of our business. We may not be able to implement, maintain, or develop the components of these commercial relationships. Moreover, we may not be able to enter into additional commercial relationships and strategic alliances on favorable terms or at all.
As our agreements terminate or relationships unwind, we may be unable to renew or replace these agreements on comparable terms, or at all. We may in the future enter into amendments on less favorable terms or encounter parties that have difficulty meeting their contractual obligations to us,further production delays, which could adversely affect our operating ~~results.~~
~~Our present~~performance and ~~future services agreements, other commercial agreements, and strategic relationships create additional risks such as:~~
● ~~disruption of our ongoing business, including loss of management focus on existing businesses;~~
● ~~impairment of other relationships;~~
● ~~variability in revenue and income from entering into, amending, or terminating such agreements or relationships; and~~
● ~~difficulty integrating under the commercial agreements.~~
~~We have entered into arrangements~~reputation with ~~several wholesale partners through which we sell certain of~~ our ~~products in their retail stores. We anticipate increasing the number of these partnerships. Also,~~customers. While we have ~~agreed to exclusivity~~lowered our risk of certain products with some of our wholesale partners. Our relationships with our wholesale partners may not be profitable to us or may impose additional costs that we would not otherwise incur under our prior DTC-only operations. Our wholesale partners may experience their own business disruptions, including for example bankruptcy, that could affect their ability to continue to do business with us. Our wholesale partners may engage in conduct that could breach the exclusivity rights of other wholesale partners. Further, maintaining these relationships may require the commitment offuture safety incidents by committing significant ~~amounts of time,~~ financial resources and ~~management attention,~~time to implement safety improvements, these safety improvements may cause our production output to decrease and ~~may result in prohibitions on certain sales channels through exclusivity requirements, which may adversely affect other aspects of our business.~~
We have opened a Company factory outlet and six Company showrooms. Our business is expanding into additional Company showrooms which, like our online e-commerce retail store, will compete with our wholesale partners for customers. Our relationships with our wholesale partners may be adversely affected by this competition. In our effort to make our products available to consumers in multiple retail channels, there is the risk that sales may diminish in other channels, costs may be incurred without an increase in overall sales and our wholesale partners may no longer carry our products. Managing an omni-channel distribution strategy, including the relationships with business partners in each channel, may require significant amounts of time, resources and attention which may adversely affect other aspects of our business.
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~~We operate in a highly competitive Comfort Industry, and if we are unable to compete successfully, we may lose customers and our sales may decline.~~
The Comfort Industry market is highly competitive and fragmented. We face competition from many manufacturers (including competitors that primarily manufacture and import from China and other low-cost countries), traditional brick-and-mortar retailers and online retailers, including direct-to-consumer competitors. Participants in the Comfort Industry compete primarily on price, quality, brand name recognition, product availability and product performance and compete across a range of distribution channels. The highly competitive nature of the Comfort Industry means we are continually subject to the risk of loss of market share, loss of significant customers, reductions in margins, and the inability to acquire new customers.
~~A number of our significant competitors offer products that compete directly with our products. Any such competition by established manufacturers and retailers or new entrants into the market~~ could have a material adverse effect on our business, financial condition and operating results. Comfort Industry manufacturers and retailers are seeking to increase their channels of distribution and are looking for new ways to reach the consumer. Like us, many newer competitors in the mattress industry have begun to offer “bed-in-a-box” or similar products directly to consumers through the Internet and other distribution channels. Some of our established competitors have begun to offer “bed-in-a-box” products as well. Many of our competitors source their products from countries such as China and Vietnam, where the costs may be lower than our costs. Companies providing for the distribution of mattresses online or through retail stores, such as Amazon and Walmart, also have begun to offer competing products in their respective channels. In addition, retailers outside the U.S. have integrated vertically in the furniture and bedding industries, and it is possible that retailers may acquire other retailers or may seek to vertically integrate in the U.S. by acquiring a mattress manufacturer.
Many of our current and potential competitors may have substantially greater financial support, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition, mature distribution methods, and more established relationships in the industry than we do and sell products through broader and more established distribution channels. These competitors, or new entrants into the market, may compete aggressively and gain market share with existing or new products, and may pursue or expand their presence in the Comfort Industry. We cannot be sure we will have the resources or expertise to compete successfully in the future. We have limited ability to anticipate the timing and scale of new product introductions, advertising campaigns or new pricing strategies by our competitors, which could inhibit our ability to retain or increase market share, or to maintain our product margins. Our current and potential competitors may secure better terms from vendors, adopt more aggressive pricing, and devote more resources to technology, infrastructure, fulfillment, and marketing. Also, due to the large number of competitors and their wide range of product offerings, we may not be able to continue to differentiate our products through value, styling or functionality from those of our competitors. Our products are also typically heavier than others and some markets we wish to expand into will not support delivery of our heavy products through parcel services or other affordable home delivery services, limiting our ability to serve the market.
One competitor, ACTI, which has been a licensee of EdiZONE for over fifteen years until the Company’s recent acquisition of the ACTI License Agreement from EdiZONE, uses similar technology to our Hyper-Elastic Polymer material and Purple Grid in its own mattress, topper and pillow products sold through branded retail stores domestically and in Canada. This competitor has been growing its sales and now distributes its products through wholesale partners with retail locations where our mattresses are sold. This competitor may continue to increase its sales and expand into additional distribution channels which could erode our sales in those retail locations and channels. Even with the Company’s receipt of royalties from ACTI pursuant to the ACTI License Agreement, the continuing growth of this single competitor couldmaterially adversely affect our ~~business.~~
A consolidation of the domestic market for foam may increase the prices for foam in the geographical market in which we purchase foam, which could adversely affect our business. We source a specialized type of foam from a supplier who has been in bankruptcy, and the ability of that supplier to remain in business in the short- or long-term may affect our ability to continue to obtain that specialized foam and require us to modify our product offerings, lose sales or incur increased expenses that could adversely affect our cash flows, margins and profitability.

In addition, the barriers to entry into the retail bedding industry are relatively low. New or existing bedding retailers could enter our markets and increase the competition we face. Competition in existing and new markets may also prevent or delay our ability to gain relative market share. Any of the developments described above could have a material adverse effect on our planned growth and futureoperating results ~~of operations.~~
We will face different market dynamics and competition as we develop new products to expand our presence in our target markets. In some markets, our future competitors may have greater brand recognition and broader distribution than we currently enjoy. We may not be as successful as our competitors in generating revenues in those markets due to the lack of recognition of our brands, lack of customer acceptance, lack of product quality history and other factors. As a result, any new expansion efforts could be costlier and less profitable than our efforts in our existing markets. If we are not as successful as our competitors are in our target markets, our sales could decline, our margins could be impacted negatively and we could lose market share, any of which could materially harm our business.
If we are unable to effectively compete with other manufacturers and retailers of mattresses, pillows, cushions, and our other products our sales, profitability, cash flows and financial condition may be adversely impacted.
~~The results of the U.S. Department of Commerce’s antidumping investigation could have a negative impact on our planned growth and future results of operations.~~
On December 16, 2019, the U.S. Department of Commerce (“Department”) issued an antidumping duty order directing the U.S. Customs and Border Protection (“CBP”) to assess, upon further instruction by the Department, antidumping duties equal to the amount by which the normal value of the merchandise exceeds the export price, or constructed export price, of the subject merchandise for all relevant entries of mattresses from China. However, if the antidumping duties do not result in the prevention of dumping of underpriced Chinese mattresses into the U.S. market, or if the import duties enacted by the Department pursuant to its antidumping order are removed, rescinded, or modified, we could experience or continue to experience a negative impact on our planned growth and the future results of operations.
In addition, in March 2020 several U.S. mattress manufacturers and two labor unions announced that they filed seven antidumping duty petitions and one countervailing duty petition with the Department charging that unfairly traded imports of finished mattresses from eight countries are causing material injury to the U.S. mattress industry. In April 2020 the Department opened an investigation into the petitions. In May 2020, the Department rolled out preliminary countervailing duties on Chinese-origin mattresses. These duties are in addition to the antidumping duties on mattresses from China. If the Department fails to impose antidumping duties on the seven named exporting countries and/or countervailing duties on China, we could experience continued negative impact on our planned growth and future results of operations.
Purple LLC has licensed certain intellectual property to EdiZONE, LLC, which is owned by Tony and Terry Pearce via TNT Holdings, LLC, for the purpose of enabling EdiZONE to meet its contractual obligations to licensees of EdiZONE under contracts entered into years before the Business Combination, and some of those licensees are competitors of Purple LLC and have exclusivity rights that Purple LLC is required to observe.
Purple LLC has licensed to EdiZONE, LLC, which is an entity owned by Tony and Terry Pearce through TNT Holdings, LLC, certain intellectual property rights for use by EdiZONE outside of the consumer comfort market. Prior to the Business Combination, EdiZONE’s business model was the creation and licensing of intellectual property, and it had granted many licenses over time, most of which were terminated prior to the Business Combination. When EdiZONE assigned its intellectual property to Purple LLC it received in return a license back of the intellectual property it needed to maintain its contractual obligations under the licenses that still were in place at that time. After the Business Combination, this license back to EdiZONE has been amended with the cooperation of Purple LLC, EdiZONE and the Pearces to further narrow EdiZONE’s rights, in order to minimize the conflicts of interest that may exist. Although there are no conflicts of interest foreseen at this time, if conflicts of interest do arise and are not properly addressed, disputes may occur which may be detrimental to the Company.

On August 14, 2020, Purple LLC entered into a License Transfer and IP Assignment Agreement with EdiZONE, pursuant to which EdiZONE assigned to Purple LLC all its interest in the ACTI License Agreement and the trademarks GEL MATRIX and INTELLIPILLOW. In connection with such assignment, we agreed to indemnify EdiZONE against claims by ACTI against EdiZONE relating to EdiZONE’s breach under the License Agreement, claims arising out of the execution of the EdiZONE Agreement, or Purple LLC’s ownership, enforcement or breach of the License Agreement.
EdiZONE previously entered into licenses, as described above, for comfort-related intellectual property. These licenses include exclusivity rights that may prohibit us from selling our existing mattresses or potentially new products in certain geographic areas, including domestically and in the European Union. That risk may be addressed by redesign of the configuration of the Hyper-Elastic Polymer in that geographic region by either using existing technologies already assigned by EdiZONE to Purple LLC or developing new technologies. Alternatively, that risk may not exist at all to the extent Purple LLC’s current mattress products are the subject of expired patent rights licensed by that licensee or because Purple LLC is not the licensor. However, there can be no assurance that our future sales in these geographic territories, if any, will not be challenged by the licensee as a violation of the license agreements, or that any redesigned mattresses created by us will be successful. If Purple LLC’s activities are challenged by a licensee, Purple LLC has an indemnification obligation to EdiZONE and the Pearces, which may be an expense to the Company.
In addition, if these third parties violate their licenses or infringe on intellectual property owned by Purple LLC and Purple LLC is unable to take effective action against such violating or infringing parties, we may be unable to protect against this infringement or the effects of such violations and our business could be harmed.
Purple LLC has obtained, with the cooperation of EdiZONE and the Pearces, the right to enforce its intellectual property rights at Purple LLC’s option, provided that Purple LLC will indemnify EdiZONE and fund the expense of such enforcement. In addition, as the licensor under the ACTI License Agreement, the Company now has the ability as the direct licensor to enforce its intellectual property rights against ACTI. In the event such enforcement is deemed necessary by Purple LLC, Purple LLC may not be successful in any such efforts to enforce its intellectual property and other rights under the ACTI License Agreement and this may harm our business.
Fluctuations in the price, availability and quality of raw materials could cause and has caused delays that could result in our inability to provide goods to our customers or could increase our costs, either of which could decrease our earnings.
In manufacturing products, we use various commodity components, such as polyurethane foam, oil, our spring units, ingredients for our Hyper-Elastic Polymer® material, our water-based adhesive and other raw materials. Because we are dependent on outside suppliers for our raw materials, fluctuations in their price, availability, and quality could have a negative effect on our cost of sales and our ability to ~~meet~~grow our ~~customers’ demands. Competitive~~business.
The occurrence of this and ~~marketing pressures may prevent us~~other such incidents could also result in investigations by or the imposition of fines from ~~passing along price increases to our customers, and the inability to meet our customers’ demands could cause~~regulatory authorities or require us to ~~lose sales.~~implement corrective actions to address the causes of such incidents, which could require the expenditure of significant resources and may adversely affect our financial condition and operations. Further, the occurrence of such incidents may result in litigation, including personal injury or workers’ compensation claims, which could also adversely affect our financial condition and reputation. While we maintain insurance coverage for certain types of losses, such insurance coverage may be insufficient to cover all losses that may arise.
We depend on ~~a few key~~executive employees, and if we lose the services of ~~certain~~members of ~~our principal~~the executive ~~officers,~~team, we may not be able to run our business effectively.

Our future success depends in part on our ability to attract and retain key executive, merchandising, marketing, sales, finance, operations and engineering personnel. If any of our ~~executive officers~~executives cease to be employed by us, or if our growth or other changes in circumstances require executives with additional skill sets, we would have to hire replacement or additional qualified personnel. Our ability to successfully attract and hire other experienced and qualified ~~executive officers~~executives cannot be assured and may be difficult because we face competition for these professionals from our competitors, our suppliers and other companies operating in our industry and in our geographic locations.   Since the Business Combination, we have hired a new Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and a Chief Retail Officer. We have also experienced the departure of the prior Chief Marketing Officer and the prior Chief Branding Officer. These departuresDepartures and any delay in replacing ~~these~~ executives could significantly disrupt our ability to grow and pursue our strategic plans. ~~We are currently in the process of searching for a qualified replacement for our Chief Marketing Officer.~~ While we believe our ~~new executive officers~~current executives have benefitted and will continue to benefit us, finding qualified replacements is time-consuming, takes Company resources, and can disrupt our growth and achievement of strategic plans. We do not maintain key-person insurance for members of our executive management team.

~~Further, the involvement of Tony and Terry Pearce has been crucial~~Regulatory requirements relating to the ~~success~~manufacture and disposal of mattresses may increase our ~~company because~~product costs and increase the risk of their extensive experience with and technical knowledge of our products. On August 17, 2020, Terry Pearce and Tony Pearce retired from our Board of Directors, and from their positions as Co-Directors of Research & Development. If we are unsuccessful in our efforts to build out our research and development capabilities around the many technologies conceived by Tony and Terry Pearce, our ability to develop new technologies and innovative products may be adversely affected.
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~~Our business exposes us to personal injury, property damage and product liability claims, which could result in adverse publicity and harm~~disruption to our ~~brands and our results of operations.~~business.

We may be subject to personal injury, property damage and product liability claims for the products that we sell or related to the Company showrooms we will operate. Any personal injury, property damage or product liability claim made against us, whether or not it has merit, could be time consuming and costly to defend, resulting in adverse publicity, or damage to our reputation, and have an adverse effect on our results of operations. In addition, any negative publicity involving our vendors, employees, labor contractors, delivery contractors and other parties who are not within our control could negatively impact us.
~~Further, the products we sell are subject to regulation by the~~The U.S. Consumer Product Safety Commission (“CPSC”) and similar state and international regulatory authorities. Such products could be subject to recalls and other actions by these authorities. Product safety concerns may require us to voluntarily remove selected products from our stores. Such recalls and voluntary removal of products can result in, among other things, lost sales, diverted resources, potential harm to our reputation and increased customer service costs, which could have a material adverse effect on our financial condition.
We previously voluntarily reported to the CPSC concerning a potential defect in an accessory product supplied to us by third parties. After its review, CPSC staff closed the case with no action by the Commission. We are providing repair parts to customers with affected products as a warranty matter and are continuing to monitor the issue. We anticipate at this time approximately 30% of our customers who purchased this product will desire to receive our improvement which we will ship to them at no cost. Since we will incur the cost of this improvement, if our estimate is too low, we may incur additional expenses. Contacting customers with this improvement also may result in an increase in warranty claims or claims of injury or damage prior to receiving the improvement that has not yet been communicated to us. If a customer is harmed by a product failure there also could be litigation and expenses related to a claim of personal injury, which could harm our brand and reputation and negatively affect our operating results.
We maintain insurance against some forms of personal injury, property damage and product liability claims, but such coverage may not be adequate for liabilities actually incurred. A successful claim brought against us in excess of available insurance coverage, or any claim or product recall that results in significant adverse publicity against us, may have a material adverse effect on our sales, profitability, cash flows and financial condition.
~~Regulatory requirements, including, but not limited to, trade, customs, environmental, health and safety requirements, may require costly expenditures and expose us to liability.~~
Our products and our marketing and advertising programs are subject to regulation in the U.S. by various federal, state and local regulatory authorities, including the Federal Trade Commission and U.S. Customs and Border Protection. In addition, our operations are subject to federal, state and local consumer protection regulations and other laws relating specifically to the bedding industry. These rules and regulations may conflict and may change from time to time, as a result of changes in the political environment or otherwise. There may be continuing costs of regulatory compliance including continuous testing, additional quality control processes and appropriate auditing of design and process compliance. For example, the CPSC and other jurisdictions have adopted rules relating to fire retardancy standards for the mattress industry. Some states and the U.S. Congress continue to consider fire retardancy regulations that may be different from or more stringent than the current standard. 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.
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.
Also, California recently enacted laws effective in 2021 requiring mattress retailers delivering mattresses via common carrier in California to offer to pick up their customers’ old ~~mattresses.~~mattresses at no cost to the customer. 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~~
New legislation aimed at improving the fire retardancy of mattresses, regulating the handling of mattresses in connection with preventing or controlling the spread of bed bugs could be passed, or requiring the collection or recycling of discarded mattresses, could result in product recalls or in a significant increase in the cost of operating our business. In addition, failure to comply with these various regulations may result in penalties, the inability to conduct business as previously conducted or at all, or adverse publicity, among other things. Adoption of multi-layered regulatory regimes, particularly if they conflict with each other, could increase our costs, alter our manufacturing processes and impair the performance of our products which may have an adverse effect on our business. We are also subject to various health and environmental provisions such as ~~California Proposition 65 (the Safe Drinking Water and Toxic Enforcement Act of 1986) and~~ 16 CFR Part 1633 (Standard for the Flammability (Open Flame) of Mattress Sets).

Our marketing and advertising practices could also become the subject of proceedings before regulatory authorities or the subject of civil claims by competitors and other parties, which could result in civil litigation or regulatory penalties and require us to alter or end these practices or adopt new practices that are not as effective or are more expensive. Despite our efforts to comply with all marketing laws and regulations, we may not be in complete compliance at all times. Some competitors engage in the practice of regularly sending notices alleging non-compliance with certain of these regulations, and demanding proof of compliance, and while we may believe we comply with applicable regulations, this practice consumes our resources, could lead to litigation and may have a negative impact on our financial condition.
In addition, we are subject to federal, state and local laws and regulations relating to pollution, environmental protection and occupational health and safety. We may not be in complete compliance with all such requirements at all times, and we have been required in the past to make changes to our facilities in order to comply with these requirements. We have made and will continue to make capital and other expenditures to comply with environmental and health and safety requirements. If a release of harmful or hazardous substances occurs on or from our properties or any associated offsite disposal location, or if contamination from prior activities is discovered at any of our properties, we may be held liable and the amount of such liability could be material. As a manufacturer of mattresses, pillows, cushions and related products, we use and dispose of a number of substances, such as glue, oil, solvents and other petroleum products, as well as certain foam ingredients, that may subject us to regulation under numerous foreign, federal and state laws and regulations governing the environment. Among other laws and regulations, we are subject in the U.S. to the Federal Water Pollution Control Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Resource Conservation and Recovery Act, the Clean Air Act and related state and local statutes and regulations.
We are also subject to federal laws and regulations relating to international shipments, customs, and import controls. We may not be in complete compliance with all such requirements at all times, and if we are not in compliance with such requirements, we may be subject to penalties or fines, which could have an adverse impact on our financial condition and results of operations.
Our operations could also be impacted by a number of pending legislative and regulatory proposals to address greenhouse gas emissions in the U.S. and other countries. Certain countries have adopted the Kyoto Protocol. New greenhouse gas reduction targets have been established under the Kyoto Protocol, as amended. This and other initiatives under consideration could affect our operations. These actions could increase costs associated with our manufacturing operations, including costs for raw materials, pollution control equipment and transportation. Because it is uncertain what laws will be enacted, we cannot predict the potential impact of such laws on our future consolidated financial condition, results of operations, or cash flows.
We are also subject to regulations and laws specifically governing the Internet, e-commerce, electronic devices, and other services. These regulations and laws may cover taxation, privacy, data protection, pricing, content, copyrights, distribution, mobile communications, electronic device certification, electronic waste, energy consumption, electronic contracts and other communications, competition, consumer protection, trade and protectionist measures, web services, the provision of online payment services, information reporting requirements, unencumbered Internet access to our services or access to our facilities, the design and operation of websites and the characteristics and quality of products and services. It is not clear how existing laws governing issues such as property ownership, libel, and personal privacy apply to the Internet, e-commerce, digital content, and web services. Unfavorable regulations and laws could diminish the demand for, or availability of, our products and services and increase our cost of doing business.
Claims have been made against us for alleged violations of the Americans with Disability Act (“ADA”) related to accessibility to our website by the blind. The law is unsettled as to whether the ADA covers websites and what standards are applicable, but courts in certain jurisdictions have recognized these types of ADA claims. While we comply with industry standards for making our website accessible to the blind, and regularly test our site for this purpose, we may be subject to such claims and, as a result, we may be required to expend resources in defense of these claims that could increase our cost of doing business.
ITEM 5. OTHER INFORMATION

We have received a claim that one of our products does not have the proper warning label required by California Proposition 65, which requires businesses to provide warnings to Californians about significant exposures to chemicals that are known to the State of California to cause cancer, birth defects or other reproductive harm. While we are investigating this claim and generally make efforts to comply with Proposition 65, we may be subject to such claims and, as a result, we may be required to expend resources in defense of these claims that could increase our cost of doing business. In addition, to the extent we may have violated Proposition 65 we may incur expense associated with complying including but not limited to providing warnings or product recalls.
None.
~~We could be subject to additional sales tax or other indirect tax liabilities.~~
The application of indirect taxes (such as sales and use tax, value-added tax (VAT), goods and services tax, business tax and gross receipt tax) to e-commerce businesses and to our users is a complex and evolving issue and we may be unable to timely or accurately determine our obligations with respect to such indirect taxes, if any, in various jurisdictions. Many of the fundamental statutes and regulations that impose these taxes were established before the adoption and growth of the Internet and e-commerce. In many cases, it is not clear how existing statutes apply to the Internet or e-commerce.
An increasing number of states and foreign jurisdictions have considered or adopted laws or administrative practices, with or without notice, that impose additional obligations on remote sellers and online marketplaces to collect transaction taxes such as sales, consumption, value added, or similar taxes. In 2016 and early 2017, we did not have systems and processes to collect these taxes in all jurisdictions where we were conducting business. Failure to comply with such laws or administrative practices, or a successful assertion by such states or foreign jurisdictions requiring us to collect taxes where we did not, could result in substantial tax liabilities for past sales, as well as penalties and interest. For the amounts incurred in 2016 and early 2017 that remain unpaid, we have estimated the sales tax liability, including penalties and interest to be approximately $4.2 million. We are in the process of working with each state to make the necessary filings and take advantage of any amnesty programs or negotiated settlements. InnoHold has agreed to indemnify us for any such tax liability incurred in 2016 and early 2017, and InnoHold has placed in escrow $5 million to cover such liability. However, disputes may arise between InnoHold and us, related to such indemnification, that may increase our costs or delay our reimbursement for such tax liabilities.
We are subject to sales tax or other indirect tax obligations as imposed by the various states in the United States. If the tax authorities in these jurisdictions were to challenge our filings or request an audit, our tax liability may increase.
We may be subject to laws, regulations, and administrative practices that require us to collect information from our customers, vendors, merchants, and other third parties for tax reporting purposes and report such information to various government agencies. The scope of such requirements continues to expand, requiring us to develop and implement new compliance systems. Failure to comply with such laws and regulations could result in significant penalties.
~~The U.S. Supreme Court ruling in~~ ~~South Dakota v. Wayfair, Inc.~~, No.17-494, reversed a longstanding precedent that remote sellers are not required to collect state and local sales taxes. We cannot predict the effect of these and other attempts to impose sales, income or other taxes on e-commerce. The Company currently collects and reports on sales tax in all states in which it does business. However, the application of existing, new or revised taxes on our business, in particular, sales taxes, VAT and similar taxes would likely increase the cost of doing business online and decrease the attractiveness of selling products over the internet. The application of these taxes on our business could also create significant increases in internal costs necessary to capture data and collect and remit taxes. There have been, and will continue to be, substantial ongoing costs associated with complying with the various indirect tax requirements in the numerous markets in which we conduct or will conduct business.
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~~Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.~~
Under Section 382 and related provisions of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation undergoes an “ownership change” (generally defined as a greater than 50 percentage point change (by value) in its equity ownership by certain stockholders over a three year period), the corporation’s ability to use its pre-change net operating loss carryforwards (“NOLs”) and other pre-change tax attributes to offset its post-change income may be limited. If finalized, Treasury Regulations currently proposed under Section 382 of the Code may further limit our ability to utilize our pre-change NOLs or other tax attributes if we undergo a future ownership change. We may have experienced ownership changes in the past, and we may experience ownership changes in the future and/or subsequent shifts in our stock ownership (some of which may be outside our control). Thus, our ability to utilize carryforwards of our net operating losses and other tax attributes to reduce future tax liabilities may be substantially restricted. At this time, we have not completed a study to assess the impact, if any, of ownership changes on our NOLs under Section 382 of the Code.
~~We have identified a material weakness in our internal control over our tax provision process which could, if not remediated, result in material misstatements in our financial statements.~~
Our management has identified a material weakness in our internal controls over financial reporting. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the preparation of our quarterly report for the quarter ended June 30, 2020, we identified a material weakness in internal controls over the tax provision process, specifically related to the release of the valuation allowance and the unique recording of the Tax Receivable Agreement liability during the quarter.
We continue to evaluate, design and work through the process of implementing controls and procedures under a remediation plan designed to address this material weakness. If our remedial measures are insufficient to address the material weakness, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our financial statements may contain material misstatements and we could be required to restate our financial results, which could lead to substantial additional costs for accounting and legal fees and stockholder litigation.
~~Risks Relating to Our Organizational Structure~~
Our only significant asset is our ownership of Purple LLC and such ownership may not be sufficient to pay dividends or make distributions or loans to enable us to pay any dividends on our Class A Common Stock or satisfy our other financial obligations, including our obligations under the Tax Receivable Agreement.
We are a holding company and do not directly own any operating assets other than our ownership of interests in Purple LLC. We depend on Purple LLC for distributions, loans and other payments to generate the funds necessary to meet our financial obligations, including our expenses as a publicly traded company, to pay any dividends, and to satisfy our obligations under the Tax Receivable Agreement. The earnings from, or other available assets of, Purple LLC may not be sufficient to make distributions or pay dividends, pay expenses or satisfy our other financial obligations, including our obligations under the Tax Receivable Agreement. Moreover, our debt covenants may not allow us to pay dividends.
~~We are an emerging growth company, and the reduced reporting requirements applicable to emerging growth companies may make our Class A Common Stock less attractive to investors.~~
We are an “emerging growth company” as defined under the Jumpstart Our Business Startups Act (the “JOBS Act”). For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We have been an emerging growth company since our initial public offering in August 2015 and will continue to be an emerging growth company until the end of 2020. If some investors find our common stock less attractive because we may rely on these exemptions, there may be a less active trading market for our common stock, and our stock price may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to opt out of this extended transition period for implementing new or revised accounting standards, which means that when an accounting standard is issued or revised and it has different application dates for public or private companies, we can adopt the new or revised accounting standard at the time private companies adopt the new or revised standard.
~~Future sales of our Class A Common Stock by our existing stockholders may cause our stock price to fall.~~
The market price of our Class A Stock could decline as a result of sales by our existing stockholders in the market, or the perception that these sales could occur. These sales might also make it more difficult for us to sell equity securities at a time and price that we deem appropriate. In addition, subsequent public issuances of our stock would cause the interest of each current Purple Inc. stockholder to be diluted. At this time, CCP and Blackwell own a substantial percentage of the shares of Class A Stock of the Company and warrants for additional Class A Stock, and may choose to sell shares of common stock.
Fluctuations in operating results, quarter to quarter earnings and other factors, including incidents involving Purple LLC’s clients and negative media coverage, may result in significant decreases in the price of our Class A Common Stock.
The stock markets experience volatility that is often unrelated to operating performance. These broad market fluctuations may adversely affect the trading price of our Class A Stock and, as a result, there may be significant volatility in the market price of our Class A Stock. If we are unable to operate our business as profitably as in the past or as our investors expect us to in the future, the market price of our Class A Stock will likely decline when it becomes apparent that the market expectations may not be realized. In addition to our operating results, many economic and seasonal factors outside of our control could have an adverse effect on the price of our Class A Stock and increase fluctuations in our quarterly earnings. These factors include certain of the risks discussed herein, operating results of other companies in the sleep and comfort products industry, changes in our financial estimates or recommendations of securities analysts, speculation in the press or investment community, negative media coverage or risk of proceedings or government investigation, the possible effects of war, disease, terrorist and other hostilities, adverse weather conditions, changes in general conditions in the economy or the financial markets or other developments affecting the sleep products industry.
~~We do not anticipate paying any cash dividends in the foreseeable future.~~
We intend to retain future earnings, if any, for use in the business or for other corporate purposes and do not anticipate that cash dividends with respect to our Class A Stock will be paid in the foreseeable future. Any decision as to the future payment of dividends will depend on our results of operations, financial position and such other factors as our board of directors, in its discretion, deems relevant. As a result, capital appreciation, if any, of our Class A Stock will be a stockholder’s sole source of gain for the foreseeable future. Moreover, our debt covenants may not allow us to pay dividends.
~~A market for our securities may not be maintained, which would adversely affect the liquidity and price of our securities.~~
The price of our securities may vary significantly due to our operating performance and general market or economic conditions. Furthermore, an active trading market for our securities may never become sustainable for many reasons, including that CCP and Blackwell, who hold a significant portion of our outstanding common stock, may not sell shares, or sell enough shares, to increase the float to a point where a sustainable market develops. You may be unable to sell your securities unless an established market can be sustained.
Purple LLC’s level of indebtedness could adversely affect Purple LLC’s and our ability to meet its obligations under its indebtedness, react to changes in the economy or its industry and to raise additional capital to fund operations.
As of September 30, 2020, Purple LLC had total debt of $45.6 million outstanding, comprised of $45.0 million outstanding under the 2020 Credit Agreement and $0.6 million in capital lease obligations. While any amounts are outstanding under the 2020 Credit Agreement, Purple LLC is subject to a number of affirmative and negative covenants, including covenants regarding dispositions of property, investments, forming or acquiring subsidiaries, business combinations or acquisitions, incurrence of additional indebtedness, and transactions with affiliates, among other customary covenants, subject to certain exceptions. In particular, Purple LLC is (i) subject to annual capital expenditure limits that can be adjusted based on the Company achieving certain Net Leverage Ratio thresholds as provided in the 2020 Credit Agreement, (ii) restricted from incurring additional debt up to certain amounts, subject to limited exceptions, as set forth in the Credit Agreement, and (iii) maintain minimum Consolidated Net Leverage Ratio and Fixed Charge Coverage Ratio (as those terms are defined in the Credit Agreement) thresholds at certain measurement dates. Purple LLC is also restricted from paying dividends or making other distributions or payments on its capital stock, subject to limited exceptions.
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~~Our level of indebtedness could have important consequences to stockholders. For example, it could:~~
● ~~make it more difficult to satisfy our obligations with respect to our indebtedness, resulting in possible defaults on, and acceleration of, such indebtedness;~~
● ~~increase our vulnerability to general adverse economic and industry conditions;~~
● require us to dedicate a substantial portion of our cash flows from operations to payments on indebtedness, thereby reducing the availability of such cash flows to fund working capital, capital expenditures and other general corporate requirements or to carry out other aspects of our business;
● ~~limit our ability to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements or to carry out other aspects of our business;~~
● ~~limit our ability to make material acquisitions or take advantage of business opportunities that may arise; and~~
● ~~place us at a potential competitive disadvantage compared to our competitors that have less debt.~~
~~We may also incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility.~~
~~Future operating flexibility is limited in significant respects by the restrictive covenants in the 2020 Credit Agreement, and we may be unable to comply with all covenants in the future.~~
The 2020 Credit Agreement imposes restrictions that could impede Purple LLC’s and the Company’s ability to enter into certain corporate transactions, as well as increases our vulnerability to adverse economic and industry conditions, by limiting our flexibility in planning for, and reacting to, changes in our business and industry. These restrictions include covenants regarding dispositions of property, investments, forming or acquiring subsidiaries, business combinations or acquisitions, incurrence of additional indebtedness, and transactions with affiliates. The restrictions may prevent Purple LLC and the Company from taking actions that we believe would be in the best interests of the business and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted.
If we determine that we need to take any action that is restricted under the 2020 Credit Agreement, we will need to first obtain a waiver from the Institutional Lenders. Obtaining such waivers, if needed, may impose additional costs on the Company or we may be unable to obtain such waivers. Purple LLC’s ability to comply with these restrictive covenants in future periods will largely depend on its ability to successfully implement its overall business strategy. The breach of any of these covenants or restrictions could result in a default, which could result in the acceleration of Purple LLC’s debt. In the event of an acceleration of Purple LLC’s debt, Purple LLC could be forced to apply all available cash flows to repay such debt, which would reduce or eliminate distributions to us, which could also force us into bankruptcy or liquidation.
~~Certain outstanding warrants could be exercised and result in dilution of all shareholders without any concurrent payment or other benefit to the Company.~~
Certain outstanding warrants held by former members of Global Partner Sponsor, LLC (the sponsor for Global Partner Acquisition Corp., our predecessor) and CCP and its affiliates may be exercised on a cashless basis, without any further consideration paid to us. In addition, on October 22, 2020, the last sales price of our common stock reported was at least $24.00 per share on each of twenty trading days within a thirty (30) trading-day period, and we elected to redeem our outstanding warrants (other than those held by former members of Global Partner Sponsor, LLC and certain warrants held by CCP and its affiliates) by paying redemption consideration of $0.01 per warrant. We sent a Notice of redemption on October 27, 2020 to affected warrant holders. We anticipate that the redemption will take place on November 30, 2020. In connection with our election to redeem, any warrant exercises that take place prior to the redemption must be done on a cashless basis. As a result, we will be required to issue shares of our Class A Stock without any further consideration being paid to us, with respect to any warrants that are exercised prior to redemption on November 30, 2020, which will also result in dilution to existing shareholders. For the period October 1 through October 26, 2020, approximately 8.0 million public warrants were exchanged for 4.0 million Class A shares resulting in cash proceeds to the Company of approximately $45.6 million. On October 27, 2020, the Company announced the redemption of previously issued public and incremental loan warrants, to take place on November 30, 2020. For the period October 27 through November 9, 2020, approximately 1.7 million public and all 2.6 million incremental loan warrants have been exercised and, as a result, there were 60.9 million Class A shares outstanding on November 9, 2020. The approximately 9.3 million public warrants that remain may be cashless exercised at any time prior to November 30, 2020. Any public warrants remaining outstanding at that date will be redeemed. As of November 9, 2020, approximately 8.5 million sponsor warrants remain outstanding. Sponsor warrants are not redeemable, and do not need to be exercised on a cashless basis prior to November 30, 2020, if they are held by the sponsor or a permitted transferee.
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We may issue debt and equity securities or securities convertible into equity securities, any of which may be senior to our Class A Common Stock as to distributions and in liquidation, which could negatively affect the value of our Class A Common Stock.
In the future, we may attempt to increase our capital resources by entering into additional debt or debt-like financing that is unsecured or secured by up to all of our assets, or by issuing additional debt or equity securities, which could include issuances of secured or unsecured notes, preferred stock, hybrid securities or securities convertible into or exchangeable for equity securities. In the event of our liquidation, our lenders and holders of our debt would receive distributions of our available assets before distributions to holders of our Class A Stock, and holders of preferred securities would receive distributions of our available assets before distributions to the holders of our Class A Stock. Because our decision to incur debt and issue securities in future offerings may be influenced by market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings or debt financings. Further, market conditions could require us to accept less favorable terms for the issuance of our securities in the future.
~~Nasdaq may delist our warrants from trading on its exchange, which could limit investors’ ability to make transactions in our warrants and subject us to additional trading restrictions.~~
After the redemption, there will be less than 20 holders of warrants remaining. While there is no Nasdaq rule requiring us to maintain a specified number of holders of warrants, Nasdaq may use its discretionary authority to delist the warrants due to concerns such as, among other things, a lack of liquidity for the warrants. If Nasdaq delists our warrants from trading on its exchange and we are not able to list our securities on another national securities exchange, we expect our securities could be quoted on an over-the-counter market. If this were to occur, we could face significant material adverse consequences, including a limited availability of market quotations for our warrants and reduced liquidity for our warrants.
The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Because our warrants are currently listed on Nasdaq, our warrants are covered securities. Although the states are preempted from regulating the sale of our securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. Further, if our warrants are no longer listed on Nasdaq, the warrants would not be covered securities and we would be subject to regulation in each state in which we offer the warrants.
~~Tax Risks Relating to Our Structure~~
Although we may be entitled to tax benefits relating to additional tax depreciation or amortization deductions as a result of the tax basis step-up we receive in connection with the exchanges of Class B Units and shares of Class B Common Stock into our Class A Common Stock and related transactions, we will be required to pay InnoHold 80% of these tax benefits under the Tax Receivable Agreement.
Owners of Class B Units and shares of Class B Stock may, subject to certain conditions and transfer restrictions, exchange their Class B Units and shares of Class B Stock for shares of Class A Stock pursuant to the Exchange Agreement. The deemed exchanges in the Business Combination and any exchanges pursuant to the Exchange Agreement are expected to result in increases in our allocable share of the tax basis of the tangible and intangible assets of Purple LLC. These increases in tax basis may increase (for tax purposes) depreciation and amortization deductions and therefore reduce the amount of income or franchise tax that we would otherwise be required to pay in the future, although the Internal Revenue Service (“IRS”) or any applicable foreign, state or local tax authority may challenge all or part of that tax basis increase, and a court could sustain such a challenge. As of September 30, 2020, there have been 43.5 million exchanges of Class B Units and shares of Class B Stock for shares of Class A Stock, in addition to the deemed exchanges that occurred in connection with the Business Combination.
In connection with the Business Combination, we entered into the Tax Receivable Agreement, which generally provides for the payment by us to InnoHold of 80% of certain tax benefits, if any, that we realize as a result of these increases in tax basis and of certain other tax benefits related to entering into the Tax Receivable Agreement, including income or franchise tax benefits attributable to payments under the Tax Receivable Agreement. These payment obligations pursuant to the Tax Receivable Agreement are the obligation of the Company and not of Purple LLC. The actual increase in our allocable share of the Company’s tax basis in its assets, as well as the amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the timing of exchanges, the market price of shares of our common stock at the time of the exchange, the extent to which such exchanges are taxable and the amount and timing of our income. As of September 30, 2020, the Company’s preliminary estimate of the liability under the Tax Receivable Agreement resulting from the deemed exchanges that occurred in connection with the Business Combination and subsequent exchanges of 43.5 million Paired Securities as of September 30, 2020 was approximately $169.6 million. Due to the release of the Company’s valuation allowance on the deferred tax assets to which the Tax Receivable Agreement liability relates, $169.0 million of the $169.6 million estimated liability has been recorded as of September 30, 2020 ($0.5 million in 2019 and an incremental $168.5 million through September 30, 2020). The additional $0.6 million is expected to be recorded in the fourth quarter of the year ending December 31, 2020. To the extent the Company realizes tax benefits in future years, or in the event of a change in future tax rates, or if payments under the Tax Receivable Agreement are required to be accelerated, this liability may exceed the estimated liability.

Because not all of the relevant factors described above are known at this time with respect to the exchanges that have occurred, and none of the relevant factors are known with respect to 0.6 million future exchanges (whether this year or in subsequent years), except as estimated above, we cannot yet with certainty determine the final amounts that will be payable under the Tax Receivable Agreement. However, as a result of the size and frequency of the exchanges and the resulting increases in the tax basis of the tangible and intangible assets of Purple LLC, the payments under the Tax Receivable Agreement will be substantial and could have a material adverse effect on our financial condition. The payments under the Tax Receivable Agreement are not conditioned upon continued ownership of the Company by the holders of units.
InnoHold will not be required to reimburse us for any excess payments that may previously have been made under the Tax Receivable Agreement, for example, due to adjustments resulting from examinations by taxing authorities. Rather, excess payments made to such holders will be netted against payments otherwise to be made, if any, after the determination of such excess. As a result, in certain circumstances we could make payments under the Tax Receivable Agreement in excess of our actual income or franchise tax savings, if any, and we may not be able to recoup such excess, which could materially impair our financial condition and adversely affect our liquidity.
If all of the 0.6 million Paired Securities outstanding as of September 30, 2020 were exchanged for shares of Class A Stock pursuant to the Exchange Agreement, and the fair market value of the Class A Stock at the time of such exchange were equal to $31.00 per share (the closing price of a share of our Class A Stock on November 5, 2020), our aggregate liability under the Tax Receivable Agreement would be, including the estimated $169.6 million liability described above, approximately $174.3 million in total, payable in estimated annual amounts ranging from $1.0 million to $12.0 million over a 15-year period. The foregoing estimate of our aggregate liability is based on certain assumptions, including that there are no changes in relevant tax law, that we are able to fully depreciate or amortize our assets, and that we recognize taxable income sufficient to realize the full benefit of the increased depreciation and amortization of our assets in each of the next 15 tax years. These assumptions may not be accurate with respect to all or any exchanges of Paired Securities for Class A Stock. As a result, the amount and timing of our actual aggregate liability under the Tax Receivable Agreement may differ materially from our estimates depending on a number of factors, including those described above and elsewhere in this prospectus.
~~We may not be able to realize all or a portion of the tax benefits that are expected to result from the acquisition of Units from Purple LLC Class B Unitholders.~~
Pursuant to the Tax Receivable Agreement, the Company will share tax savings resulting from (A) the amortization of the anticipated step-up in tax basis in Purple LLC’s assets as a result of (i) the Business Combination and (ii) the exchange of (a) the Class B Units and (b) the Class B Stock, in each case that were received in connection with the Business Combination, for shares of Class A Stock pursuant to the Exchange Agreement and (B) certain other related transactions with InnoHold in connection with the Business Combination. The amount of any such tax savings attributable to the payment of cash to InnoHold in connection with the Business Combination and the exchanges contemplated by the Exchange Agreement will be paid 80% to InnoHold and other owners of such securities and retained 20% by the Company. Our ability to realize, and benefit from, these tax savings depends on a number of assumptions, including that we will earn sufficient taxable income each year during the period over which the deductions arising from any such basis increases and payments are available and that there are no adverse changes in applicable law or regulations. If our actual taxable income were insufficient to fully utilize such tax benefits or there were adverse changes in applicable law or regulations, we may be unable to realize all or a portion of these expected benefits and our cash flows and stockholders’ equity could be negatively affected.
~~ITEM 5.~~ ~~OTHER INFORMATION~~
On November 4, 2020, the Company’s Board approved a Short-Term Cash Incentive Plan (the “STIP”) for the 2020 plan year. Participation in the STIP is limited to key employees who are employed to serve as Senior Vice Presidents, Vice Presidents, or Senior Directors. Not all eligible employees are guaranteed to participate in the plan, as participation will be subject to Board discretion and approval. The STIP will be administered by the HR & Compensation Committee as authorized by the Board. For the STIP to activate, the company must achieve certain net revenue and adjusted EBITDA targets. If the Company does not reach the minimum targets, no cash awards will be paid to any of the participants under the Plan. The amount of the total payment to each participant is adjustable to account for personal performance criteria, as follows: 70% of the amount is based on the Company’s achievement of at least the minimum Company-level performance targets and the remaining 30% is based on the participant’s achievement of personal performance criteria selected or approved by the Board. Subject to the other provisions of the STIP, payment to a participant will be made in cash in an amount up to the product determined by multiplying a certain percentage from 50% to 150% by the participant’s targeted bonus amount. That percentage will be determined based on whether and the extent to which the net revenue target and adjusted EBITDA target both exceed certain minimum target threshold amounts. The bonus target applicable to each participant is determined by multiplying (x) the participant’s annual base salary by (y) the participant’s share of the total bonus fund amount, as determined in accordance with the STIP. A participant will have no right to receive a payment under the STIP unless the participant remains in good standing with the Company during the plan year and remains in the employ of the Company through and including the payment date in 2021. This summary of the STIP does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the STIP, which is attached as Exhibit 10.11 to this 10-Q and is incorporated by reference herein.
On November 9, 2020, we mailed to Paul Zepf a notice terminating Mr. Zepf’s Observer and Indemnification Agreement dated February 2, 2018 (the “Observer Agreement”). Since Mr. Zepf was appointed to the Board of Directors on August 18, 2020, his service as an observer was no longer necessary. The Observer Agreement provided for one-year automatic renewals until we provided written notice of termination not less than thirty days prior to the renewal period.

ITEM 6. EXHIBITS
Number Description
~~10.1~~10.1+⁽¹⁾ ~~Lease Agreement between Purple Innovation, LLC and PNK S2, LLC dated July 21, 2020.~~
10.2* ~~License Transfer and IP Assignment Agreement between Purple Innovation, LLC and EdiZONE, LLC dated August 14, 2020.~~
~~10.3*+~~ ~~Indemnification Agreement between~~Amendment to Purple Innovation, Inc. ~~and Paul Zepf~~2017 Equity Incentive Plan dated ~~August 18, 2020.~~July 12, 2021.
~~10.4~~10.2+⁽²⁾⁽¹⁾ ~~Waiver~~Restated and ~~Consent to~~ Amended ~~and Restated Credit Agreement dated August 20, 2020.~~
~~10.5~~⁽³⁾ ~~Credit Agreement dated September 3, 2020 between and among Purple Innovation, LLC,~~ Purple Innovation, Inc.~~, KeyBank National Association, and the other lenders party thereto.~~ 2019 Long-Term Equity Incentive Plan, dated as of July 12, 2021.
~~10.6~~10.3+⁽³⁾⁽¹⁾ ~~Pledge and Security Agreement dated September 3, 2020.~~Form of Restricted Share Unit Agreement.
~~10.7~~10.4+⁽³⁾⁽¹⁾ ~~Guaranty dated September 3, 2020.~~Form of Performance-Based Share Unit Agreement.
~~10.8~~10.5+⁽³⁾⁽¹⁾ ~~Collateral Assignment of Patents dated September 3, 2020.~~
~~10.9~~⁽³⁾ ~~Collateral Assignment of Trademarks dated September 3, 2020.~~
~~10.10~~⁽³⁾ ~~Collateral Assignment of Copyrights dated September 3, 2020.~~
~~10.11*+~~
Purple Innovation, Inc. ~~2020~~2021 Short-Term Cash Incentive ~~Plan.~~Plan, dated as of July 12, 2021.
31.1* Certification by Joseph B. Megibow, Chief Executive Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification by Craig L. Phillips, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification by Joseph B. Megibow, Chief Executive Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification by Craig L. Phillips, Chief Financial Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
* ~~Filed herewith.~~
+
104 Cover Page Interactive Data File––the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
* Filed herewith.
+ Indicates management contract or compensatory plan.
(1) ~~Previously filed as an Exhibit to the Quarterly Report on Form 10-Q filed August 14, 2020.~~
~~(2)~~ Previously filed as an Exhibit to the Current Report on Form 8-K filed ~~August 21, 2020~~.
~~(3)~~ ~~Previously filed as an Exhibit to the Current Report on Form 8-K filed September 3, 2020~~.July 13, 2021.

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PURPLE INNOVATION, INC.
Date: August 9, 2021 ~~November 10, 2020~~By: ~~By:~~ /s/ Joseph B. Megibow
Joseph B. Megibow
Chief Executive Officer
(Principal Executive Officer)
Date: August 9, 2021 ~~November 10, 2020~~By: ~~By:~~ /s/ Craig L. Phillips
Craig L. Phillips
Chief Financial Officer
(Principal Financial and Accounting Officer)

6447

0001643953 prpl:RelatedPartyLoanMember 2020-04-01 2020-06-30

					Page
Part I.	Financial Information			1
	Item 1.	Financial Statements (Unaudited):	1
		1
		Condensed Consolidated Balance Sheets	1
		1
		Condensed Consolidated Statements of ~~Operations~~Income	2
		2
		Condensed Consolidated Statements of Stockholders’ Equity (Deficit)	3
		3
		Condensed Consolidated Statements of Cash Flows	4
		4
		Notes to Condensed Consolidated Financial Statements		5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30	32
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39	42
	Item 4.	Controls and Procedures	39
		43

Part II.	Other Information		40	44
	Item 1.	Legal Proceedings	40	44
	Item 1A.	Risk Factors	40	44
	Item 6.	Exhibits	63	46
	Signatures		64	47

	June 30, 2021			December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	110,081		$	122,955
Accounts receivable, net		25,104			29,111
Inventories, net		64,795			65,726
Prepaid inventory		1,799			826
Other current assets		14,972			10,453
Total current assets		216,751			229,071
Property and equipment, net		87,496			61,486
Operating lease right-of-use assets		54,334			41,408
Intangible assets, net		10,376			9,945
Deferred income taxes		209,048			211,244
Other long-term assets		1,458			1,578
Total assets	$	579,463		$	554,732

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	58,419		$	69,594
Accrued sales returns		6,962			8,428
Accrued compensation		9,207			14,209
Customer prepayments		17,334			6,253
Accrued sales tax		3,596			6,015
Accrued rebates and allowances		6,870			10,891
Operating lease obligations – current portion		4,255			3,235
Other current liabilities		13,733			13,583
Total current liabilities		120,376			132,208
Debt, net of current portion		40,403			41,410
Operating lease obligations, net of current portion		67,924			48,936
Warrant liabilities		14,529			92,708
Tax receivable agreement liability, net of current portion		166,413			165,426
Other long-term liabilities, net of current portion		8,294			6,503
Total liabilities		417,939			487,191

Commitments and contingencies (Note 11)

Stockholders’ equity:
Class A common stock; $0.0001 par value, 210,000 shares authorized; 66,371 issued and outstanding at June 30, 2021 and 63,914 issued and outstanding at December 31, 2020		7			6
Class B common stock; $0.0001 par value, 90,000 shares authorized; 448 issued and outstanding at June 30, 2021 and 536 issued and outstanding at December 31, 2020		—			—
Additional paid-in capital		403,071			333,047
Accumulated deficit		(242,454	)		(265,856	)
Total stockholders’ equity		160,624			67,197
Noncontrolling interest		900			344
Total stockholders’ equity		161,524			67,541
Total liabilities and stockholders’ equity	$	579,463		$	554,732

	September 30,			December 31,
	2020			2019

Assets
Current assets:
Cash and cash equivalents	$	97,955		$	33,478
Accounts receivable, net		21,894			28,692
Inventories, net		50,775			47,628
Prepaid inventory		1,888			879
Other current assets		8,443			3,442
Total current assets		180,955			114,119
Property and equipment, net		44,983			31,979
Intangible assets, net		9,620			1,101
Deferred income taxes		205,486			—
Other long-term assets		1,586			525
Total assets	$	442,630		$	147,724

Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	61,961		$	50,240
Accrued sales returns		10,285			7,271
Accrued compensation		12,515			7,954
Customer prepayments		6,207			6,258
Accrued sales tax		7,327			5,602
Accrued rebates and allowances		7,232			5,311
Other current liabilities		7,995			4,229
Total current liabilities		113,522			86,865
Long-term debt, related-party		—			35,399
Long-term debt, net of current portion		41,911			—
Warrant liabilities		64,930			21,622
Tax receivable agreement liability, net of current portion		168,328			—
Other long-term liabilities, net of current portion		12,375			8,570
Total liabilities		401,066			152,456
Commitments and contingencies (Note 11)
Stockholders’ equity (deficit):
Class A common stock; $0.0001 par value, 210,000 shares authorized; 53,787 issued and outstanding at September 30, 2020 and 22,494 issued and outstanding at December 31, 2019		5			2
Class B common stock; $0.0001 par value, 90,000 shares authorized; 605 issued and outstanding at September 30, 2020 and 31,394 issued and outstanding at December 31, 2019		—			3
Additional paid-in capital		44,032			5,990
Accumulated deficit		(2,517	)		(8,349	)
Total stockholders’ equity (deficit)		41,520			(2,354	)
Noncontrolling interest		44			(2,378	)
Total equity (deficit)		41,564			(4,732	)
Total liabilities and stockholders’ equity (deficit)	$	442,630		$	147,724

	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
Revenues, net	$	182,586		$	165,096		$	369,015		$	287,471
Cost of revenues		100,899			83,465			199,804			152,658
Gross profit		81,687			81,631			169,211			134,813
Operating expenses:
Marketing and sales		59,844			39,423			114,212			76,107
General and administrative		22,461			8,677			36,987			16,225
Research and development		1,923			1,580			3,646			3,025
Total operating expenses		84,228			49,680			154,845			95,357
Operating income (loss)		(2,541	)		31,951			14,366			39,456
Other income (expense):
Interest expense		(569	)		(1,424	)		(1,139	)		(2,813	)
Other income (expense), net		26			16			(42	)		106
Change in fair value – warrant liabilities		4,860			(130,264	)		14,007			(108,631	)
Tax receivable agreement expense		(381	)		(32,823	)		(207	)		(32,945	)
Total other income (expense), net		3,936			(164,495	)		12,619			(144,283	)
Net income (loss) before income taxes		1,395			(132,544	)		26,985			(104,827	)
Income tax benefit (expense)		1,167			35,428			(3,484	)		35,712
Net income (loss)		2,562			(97,116	)		23,501			(69,115	)
Net income (loss) attributable to noncontrolling interest		(16	)		(3,841	)		99			7,325
Net income (loss) attributable to Purple Innovation, Inc.	$	2,578		$	(93,275	)	$	23,402		$	(76,440	)

Net income (loss) per share:
Basic	$	0.04		$	(3.19	)	$	0.36		$	(2.94	)
Diluted	$	(0.03	)	$	(3.19	)	$	0.14		$	(2.94	)

Weighted average common shares outstanding:
Basic		66,277			29,277			65,439			25,976
Diluted		66,864			29,277			68,341			25,976

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019

Revenues, net	$	187,111		$	117,406		$	474,582		$	304,058
Cost of revenues		98,857			64,523			251,515			174,323
Gross profit		88,254			52,883			223,067			129,735
Operating expenses:
Marketing and sales		51,206			34,055			127,313			94,039
General and administrative		11,087			6,745			27,312			19,243
Research and development		1,687			1,070			4,712			3,004
Total operating expenses		63,980			41,870			159,337			116,286
Operating income		24,274			11,013			63,730			13,449
Other income (expense):
Interest expense		(1,232	)		(1,356	)		(4,045	)		(3,801	)
Other income, net		3			138			109			373
Loss on extinguishment of debt		(5,782	)		—			(5,782	)		(6,299	)
Change in fair value – warrant liabilities		(17,971	)		(1,384	)		(43,308	)		(3,372	)
Tax receivable agreement expense		(567	)		—			(33,512	)		—
Total other expense, net		(25,549	)		(2,602	)		(86,538	)		(13,099	)
Net income (loss) before income taxes		(1,275	)		8,411			(22,808	)		350
Benefit from income taxes		106			—			35,818			—
Net income (loss)		(1,169	)		8,411			13,010			350
Net income (loss) attributable to noncontrolling interest		(147	)		6,817			7,178			224
Net income (loss) attributable to Purple Innovation, Inc.	$	(1,022	)	$	1,594		$	5,832		$	126
Net income (loss) per share:
Basic	$	(0.02	)	$	0.18		$	0.18		$	0.01
Diluted	$	(0.02	)	$	0.16		$	0.16		$	0.01
Weighted average common shares outstanding:
Basic		44,266			8,828			32,117			8,576
Diluted		44,266			52,793			36,628			52,454

	Class A				Class B					Additional			Accumulated			Total
	Common Stock				Common Stock					Paid-in			Equity			Stockholders’			Noncontrolling			Total
	Shares		Par Value		Shares			Par Value		Capital			(Deficit)			Equity			Interest			Equity
Balance - December 31, 2020		63,914	$	6		536		$	—	$	333,047		$	(265,856	)	$	67,197		$	344		$	67,541
Net income		—		—		—			—		—			20,824			20,824			115			20,939
Stock-based compensation		—		—		—			—		479			—			479			—			479
Exchange of stock		88		—		(88	)		—		—			—			—			—			—
Exercise of warrants		2,291		1		—			—		64,261			—			64,262			—			64,262
Exercise of stock options		10		—		—			—		83			—			83			—			83
Tax Receivable Agreement liability		—		—		—			—		(777	)		—			(777	)		—			(777	)
Deferred income taxes		—		—		—			—		971			—			971			—			971
Accrued distributions		—		—		—			—		(99	)		—			(99	)		—			(99	)
InnoHold indemnification payment		—		—		—			—		4,142			—			4,142			—			4,142
Impact of transactions affecting NCI		—		—		—			—		(265	)		—			(265	)		265			—
Balance – March 31, 2021		66,303	$	7		448		$	—	$	401,842		$	(245,032	)	$	156,817		$	724		$	157,541
Net income (loss)		—		—		—			—		—			2,578			2,578			(16	)		2,562
Stock-based compensation		—		—		—			—		1,113			—			1,113			—			1,113
Exercise of warrants		1		—		—			—		26			—			26			—			26
Exercise of stock options		45		—		—			—		369			—			369			—			369
Tax Receivable Agreement liability		—		—		—			—		(3	)		—			(3	)		—			(3	)
Deferred income taxes		—		—		—			—		3			—			3			—			3
Accrued distributions		—		—		—			—		(87	)		—			(87	)		—			(87	)
Issuance of common stock		22		—		—			—		—			—			—			—			—
Impact of transactions affecting NCI		—		—		—			—		(192	)		—			(192	)		192			—
Balance – June 30, 2021		66,371	$	7		448		$	—	$	403,071		$	(242,454	)	$	160,624		$	900		$	161,524

(In thousands)	Level		June 30, 2021		December 31, 2020
Sponsor warrants		3	$	14,529	$	92,708

(In thousands)	Sponsor Warrants			Incremental Loan Warrants		Total Level 3 Liabilities
Fair value as of December 31, 2020	$	92,708		$	—	$	92,708
Fair value transfer to Level 1 measurement		(64,172	)		—		(64,172	)
Change in valuation inputs⁽¹⁾		(14,007	)		—		(14,007	)
Fair value as of June 30, 2021	$	14,529		$	—	$	14,529

Fair value as of December 31, 2019	$	7,689		$	21,622	$	29,311
Fair value of warrants exercised		(763	)		—		(763	)
Change in valuation inputs⁽¹⁾		30,806			25,336		56,142
Fair value as of June 30, 2020	$	37,732		$	46,958	$	84,690

	Three Months Ended September 30,				Nine Months Ended September 30,
Channel	2020		2019		2020		2019

Direct-to-consumer	$	134,252	$	67,950	$	360,119	$	185,109
Wholesale partner		52,859		49,456		114,463		118,949
Revenues, net	$	187,111	$	117,406	$	474,582	$	304,058

	Three Months Ended September 30,				Nine Months Ended September 30,
Product	2020		2019		2020		2019

Bedding	$	172,806	$	110,332	$	437,809	$	283,844
Other		14,305		7,074		36,773		20,214
Revenues, net	$	187,111	$	117,406	$	474,582	$	304,058

	June 30,			December 31,
	2021			2020
Raw materials	$	36,315		$	26,372
Work-in-process		1,991			3,593
Finished goods		27,446			36,280
Inventory obsolescence reserve		(957	)		(519	)
Inventories, net	$	64,795		$	65,726

2021 (excluding the six months ended June 30, 2021) ⁽¹⁾	$	2,028
2022		8,941
2023		8,412
2024		8,457
2025		8,499
Thereafter		63,966
Total operating lease payments		100,303
Less – lease payments representing interest		(28,124	)
Present value of operating lease payments	$	72,179

Trading price of common stock on measurement date	$	18.00
Exercise price	$	—
Risk free interest rate		0.24	%
Warrant life in years		3.7
Expected volatility		50.57	%
Expected dividend yield		—
Probability of warrant re-price		100.00	%

Fair market value	$	11.71
Exercise price	$	32.28
Risk free interest rate		0.45	%
Expected term in years		3.46
Expected volatility		52.46	%
Expected dividend yield		—

~~Fair market value~~	$	~~8.02 – 15.12~~
~~Exercise price~~	$	~~12.76 – 15.12~~
~~Risk free interest rate~~		~~0.21 - 0.61~~	%
~~Expected term in years~~		~~2.50 - 3.56~~
~~Expected volatility~~		~~38.28 – 54.45~~	%
~~Expected dividend yield~~		—

	Options (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years		Intrinsic Value (in thousands)
Options outstanding as of January 1, 2021		2,234		$	8.71		3.5	$	54,133
Granted		55			32.28		—		—
Exercised		(56	)		8.11		—		—
Forfeited/cancelled		(13	)		8.26		—		—
Options outstanding as of June 30, 2021		2,220		$	9.31		3.0	$	38,278

	Options (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years		Intrinsic Value $
As of September 30, 2020:
Options outstanding as of January 1, 2020		2,136		$	6.95		4.3	$	3,752
Granted		309			13.11		—		—
Exercised		(208	)		7.42		—		—
Forfeited/cancelled		(109	)		10.80		—		—
Options outstanding as of September 30, 2020		2,128		$	7.61		3.6	$	36,721

		Options Outstanding					Options Exercisable
Exercise Prices		Number of Options Outstanding (in thousands)			Weighted Average Remaining Life (Years)		Number of Options Exercisable (in thousands)		Weighted Average Remaining Life (Years)		Intrinsic Value (in thousands)
$	5.75		210			2.64		106		2.64	$	2,186
	5.95		538			2.25		359		2.25		7,339
	6.51		241			2.89		111		2.89		2,216
	6.65		173			2.86		77		2.86		1,525
	7.99		19			3.42		6		3.42		118
	8.17		225			3.26		83		3.26		1,510
	8.32		187			3.00		56		3.00		1,016
	8.55		179	��		3.26		75		3.26		1,335
	12.76		25			3.70		8		3.70		107
	13.12		186			3.88		57		3.88		757
	15.12		3			3.88		1		3.88		12
	21.70		179			4.25		—		—		—
	32.28		55			4.71		—		—		—

	Options (in thousands)			Weighted Average Grant Date Fair Value
Nonvested options as of January 1, 2021		1,568		$	3.20
Granted		55			11.71
Vested		(329	)		2.27
Forfeited		(13	)		2.59
Nonvested options as of June 30, 2021		1,281		$	3.81

	Number Outstanding (in thousands)		Weighted Average Grant Date Fair Value
Nonvested restricted stock units as of January 1, 2021		—	$	—
Granted		15		28.52
Vested		—		—
Forfeited		—		—
Nonvested restricted stock units as of June 30, 2021		15	$	28.52

	Three Months Ended September 30,
	2020			% of Net Revenues			2019			% of Net Revenues
Revenues, net	$	187,111			100.0	%	$	117,406			100.0	%
Cost of revenues		98,857			52.8			64,523			55.0
Gross profit		88,254			47.2			52,883			45.0
Operating expenses:
Marketing and sales		51,206			27.4			34,055			29.0
General and administrative		11,087			5.9			6,745			5.7
Research and development		1,687			0.9			1,070			0.9
Total operating expenses		63,980			34.2			41,870			35.7
Operating income		24,274			13.0			11,013			9.4
Other income (expense):
Interest expense		(1,232	)		(0.7	)		(1,356	)		(1.2	)
Other income, net		3			0.0			138			0.1
Loss on extinguishment of debt		(5,782	)		(3.1	)		—			0.0
Change in fair value – warrant liabilities		(17,971	)		(9.6	)		(1,384	)		(1.2	)
Tax receivable agreement expense		(567	)		(0.3	)		—			0.0
Total other income (expense), net		(25,549	)		(13.7	)		(2,602	)		(2.2	)
Net income (loss) before income taxes		(1,275	)		(0.7	)		8,411			7.2
Benefit from income taxes		106			0.1			—			0.0
Net income (loss)		(1,169	)		(0.6	)		8,411			7.2
Net income attributable to noncontrolling interest		(147	)		(0.1	)		6,817			5.8
Net income (loss) attributable to Purple Innovation, Inc.	$	(1,022	)		(0.5	)	$	1,594			1.4

	Three Months Ended June 30,
	2021			% of Net Revenues			2020			% of Net Revenues
Revenues, net	$	182,586			100.0	%	$	165,096			100.0	%
Cost of revenues		100,899			55.3			83,465			50.6
Gross profit		81,687			44.7			81,631			49.4
Operating expenses:
Marketing and sales		59,844			32.8			39,423			23.9
General and administrative		22,461			12.3			8,677			5.3
Research and development		1,923			1.1			1,580			1.0
Total operating expenses		84,228			46.1			49,680			30.1
Operating income (loss)		(2,541	)		(1.4	)		31,951			19.4
Other income (expense):
Interest expense		(569	)		(0.3	)		(1,424	)		(0.9	)
Other income), net		26			—			16			—
Change in fair value – warrant liabilities		4,860			2.7			(130,264	)		(78.9	)
Tax receivable agreement expense		(381	)		(0.2	)		(32,823	)		(19.9	)
Total other income (expense), net		3,936			2.2			(164,495	)		(99.6	)
Net income (loss) before income taxes		1,395			0.8			(132,544	)		(80.3	)
Income tax benefit		1,167			0.6			35,428			21.5
Net income (loss)		2,562			1.4			(97,116	)		(58.8	)
Net loss attributable to noncontrolling interest		(16	)		—			(3,841	)		(2.3	)
Net income (loss) attributable to Purple Innovation, Inc.	$	2,578			1.4		$	(93,275	)		(56.5	)

	Nine Months Ended September 30,
	2020			% of Net Revenues			2019			% of Net Revenues
Revenues, net	$	474,582			100.0	%	$	304,058			100.0	%
Cost of revenues		251,515			53.0			174,323			57.3
Gross profit		223,067			47.0			129,735			42.7
Operating expenses:
Marketing and sales		127,313			26.8			94,039			30.9
General and administrative		27,312			5.8			19,243			6.3
Research and development		4,712			1.0			3,004			1.0
Total operating expenses		159,337			33.6			116,286			38.2
Operating income		63,730			13.4			13,449			4.4
Other income (expense):
Interest expense		(4,045	)		(0.9	)		(3,801	)		(1.3	)
Other income, net		109			0.0			373			0.1
Loss on extinguishment of debt		(5,782	)		(1.2	)		(6,299	)		(2.1	)
Change in fair value – warrant liabilities		(43,308	)		(9.1	)		(3,372	)		(1.1	)
Tax receivable agreement expense		(33,512	)		(7.1	)		—			0.0
Total other income (expense), net		(86,538	)		(18.2	)		(13,099	)		(4.3	)
Net income (loss) before income taxes		(22,808	)		(4.8	)		350			0.1
Benefit from income taxes		35,818			7.5			—			0.0
Net income		13,010			2.7			350			0.1
Net income attributable to noncontrolling interest		7,178			1.5			224			0.1
Net income attributable to Purple Innovation, Inc.	$	5,832			1.2		$	126			0.0

	Six Months Ended June 30,
	2021			% of Net Revenues			2020			% of Net Revenues
Revenues, net	$	369,015			100.0	%	$	287,471			100.0	%
Cost of revenues		199,804			54.1			152,658			53.1
Gross profit		169,211			45.9			134,813			46.9
Operating expenses:
Marketing and sales		114,212			31.0			76,107			26.5
General and administrative		36,987			10.0			16,225			5.6
Research and development		3,646			1.0			3,025			1.1
Total operating expenses		154,845			42.0			95,357			33.2
Operating income		14,366			3.9			39,456			13.7
Other income (expense):
Interest expense		(1,139	)		(0.3	)		(2,813	)		(1.0	)
Other income (expense), net		(42	)		—			106			—
Change in fair value – warrant liabilities		14,007			3.8			(108,631	)		(37.8	)
Tax receivable agreement expense		(207	)		(0.1	)		(32,945			(11.5	)
Total other income (expense), net		12,619			3.4			(144,283	)		(50.2	)
Net income (loss) before income taxes		26,985			7.3			(104,827	)		(36.5	)
Income tax benefit (expense)		(3,484	)		(0.9	)		35,712			12.4
Net income (loss)		23,501			6.4			(69,115	)		(24.0	)
Net income attributable to noncontrolling interest		99			—			7,325			2.5
Net income (loss) attributable to Purple Innovation, Inc.	$	23,402			6.3		$	(76,440	)		(26.6	)

Number		Description
~~10.1~~10.1+⁽¹⁾		~~Lease Agreement between Purple Innovation, LLC and PNK S2, LLC dated July 21, 2020.~~
10.2*		~~License Transfer and IP Assignment Agreement between Purple Innovation, LLC and EdiZONE, LLC dated August 14, 2020.~~
~~10.3*+~~		~~Indemnification Agreement between~~Amendment to Purple Innovation, Inc. ~~and Paul Zepf~~2017 Equity Incentive Plan dated ~~August 18, 2020.~~July 12, 2021.
~~10.4~~10.2+⁽²⁾⁽¹⁾		~~Waiver~~Restated and ~~Consent to~~ Amended ~~and Restated Credit Agreement dated August 20, 2020.~~
~~10.5~~⁽³⁾		~~Credit Agreement dated September 3, 2020 between and among Purple Innovation, LLC,~~ Purple Innovation, Inc.~~, KeyBank National Association, and the other lenders party thereto.~~ 2019 Long-Term Equity Incentive Plan, dated as of July 12, 2021.
~~10.6~~10.3+⁽³⁾⁽¹⁾		~~Pledge and Security Agreement dated September 3, 2020.~~Form of Restricted Share Unit Agreement.
~~10.7~~10.4+⁽³⁾⁽¹⁾		~~Guaranty dated September 3, 2020.~~Form of Performance-Based Share Unit Agreement.
~~10.8~~10.5+⁽³⁾⁽¹⁾		~~Collateral Assignment of Patents dated September 3, 2020.~~
~~10.9~~⁽³⁾		~~Collateral Assignment of Trademarks dated September 3, 2020.~~
~~10.10~~⁽³⁾		~~Collateral Assignment of Copyrights dated September 3, 2020.~~
~~10.11*+~~		Purple Innovation, Inc. ~~2020~~2021 Short-Term Cash Incentive ~~Plan.~~Plan, dated as of July 12, 2021.
31.1*		Certification by Joseph B. Megibow, Chief Executive Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification by Craig L. Phillips, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification by Joseph B. Megibow, Chief Executive Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification by Craig L. Phillips, Chief Financial Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

*	~~Filed herewith.~~
+ 104		Cover Page Interactive Data File––the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

(1)	~~Previously filed as an Exhibit to the Quarterly Report on Form 10-Q filed August 14, 2020.~~
~~(2)~~	Previously filed as an Exhibit to the Current Report on Form 8-K filed ~~August 21, 2020~~.
~~(3)~~	~~Previously filed as an Exhibit to the Current Report on Form 8-K filed September 3, 2020~~.July 13, 2021.

			PURPLE INNOVATION, INC.

Date: August 9, 2021	~~November 10, 2020~~By:	~~By:~~	/s/ Joseph B. Megibow
			Joseph B. Megibow
			Chief Executive Officer
			(Principal Executive Officer)

Date: August 9, 2021	~~November 10, 2020~~By:	~~By:~~	/s/ Craig L. Phillips
			Craig L. Phillips
			Chief Financial Officer
			(Principal Financial and Accounting Officer)