Purple Innovation, Inc. 10-K/A

Item 7. 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 Consolidated Financial Statements alone. The discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in “Part II Item 8. Financial Statements.” Restatement of Previously Issued Consolidated Financial Statements The following discussion and analysis should be read in conjunction with the audited consolidated financial statements and notes thereto as of December 31, 2020 and 2019, and for the years then ended, included elsewhere in this Annual Report on Form 10-K/A. This Management’s Discussion and Analysis of Financial Condition and Results of Operations has been amended and restated to give effect to the restatement of the Company’s consolidated financial statements, as more fully described in Note 3, “Restatement of Previously Issued Consolidated Financial Statements,” of the Notes to the consolidated financial statements. The relevant unaudited interim financial information for each of the quarters during the years ended December 31, 2020 and 2019 has also been restated. See Note 3 for such restated information. For further detail regarding the restatement, see Explanatory Note and Item 9A. Controls and Procedures herein. 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”) online channels, retail brick-and-mortar wholesale partners, third-party online retailers and Company showrooms. 43 Organization The Company 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, the Company 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 December 31, 2020, 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. Because of the COVID-19 pandemic, we have taken 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 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 is where all our manufacturing operations took place as of December 31, 2020. If the State of Utah, as part of its 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 facility at a given time, our business and operations could be significantly adversely affected. 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 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 our product categories throughout the year. This increase in demand was a contributing factor to DTC net revenue growth of 83.0% over the prior year. There can be no assurance that this trend of strong demand through our DTC channel will continue. We 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 increased such that our net revenue from wholesale customers during the last six months of fiscal 2020 increased 8.1% over the prior year comparative six-month period. We currently have all our showrooms open and servicing our customers. Also, in July 2020, we signed a new lease for a manufacturing facility in Georgia and began operations on March 3, 2021 and for the remainder of 2021 will ramp up to planned capacity of four Mattress Max machines. The 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 because 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 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. 44 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 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. Whereas most state and local governments have eased restrictions on commercial retail activity, it is possible that a resurgence in COVID-19 cases could prompt a return to tighter restrictions in certain areas of the country. We also do not yet know the impact that vaccines may have in mitigating or ending the outbreak of COVID-19, or how the availability of such vaccines may affect our work force. Furthermore, while the bedding industry has fared much better during the pandemic than certain other sectors of the economy, continued economic weakness may eventually have an adverse impact upon the industry and our business. Therefore, significant uncertainty remains regarding the ongoing impact of the COVID-19 outbreak upon our financial condition and future results of operations, as well as upon the significant estimates and assumptions we utilize in reporting certain assets and liabilities. Significant Transactions in 2020 Financing Activities On September 3, 2020, the Company paid $45.0 million to retire, in full, all indebtedness related to Purple LLC’s Credit Agreement dated February 3, 2018 with the Lenders and all subsequent amendments and agreements (collectively referred to as 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 $0.9 million for accrued interest. As a result of paying off the Related Party Loan, the Company recognized a $5.8 million loss on extinguishment of debt in its 2020 consolidated statement of operations. On September 3, 2020, Purple LLC entered into the 2020 Credit Agreement with the Institutional Lenders, KeyBank National Association and a group of financial institutions 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 December 31, 2020, there was no balance outstanding on the revolving credit facility. Proceeds from the Term Loan were used to retire all indebtedness associated with the Related Party Loan. Warrant Liabilities There were 15.5 million public warrants issued in connection with GPAC’s formation and initial public offering (“IPO”) and 12.8 million sponsor warrants issued pursuant to a simultaneous private placement with the IPO. Each of the Company’s warrants entitled 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 each warrant agreement. 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. During the year ended December 31, 2020, 15.5 million public warrants and 4.3 million sponsor warrants were exercised resulting in the issuance of 7.6 million shares of Class A Stock and cash proceeds to the Company of $46.4 million. The Company has 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 and upon exercise with changes in the fair value included in earnings. The 8.5 million sponsor warrants outstanding at December 31, 2020 had a fair value of $92.7 million. The fair value of the public and sponsor warrants outstanding at December 31, 2019 was $23.8 million. During the years ended December 31, 2020 and 2019, the Company recognized losses of $240.7 million and $18.5 million, respectively, in its consolidated statement of operations related to increases in the fair value of the public and sponsor warrants exercised during the respective periods or that were outstanding at the end of the respective periods. See Note 3, “Restatement of Previously Issued Consolidated Financial Statements,” for more information. On February 26, 2019, the Incremental Lenders funded a $10.0 million increase in the Related Party Loan and received 2.6 million warrants (“Incremental Loan 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. The Company accounted for the Incremental Loan 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 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 these warrants held by the Incremental Lenders. The Company determined the fair value of these warrants to be $81.0 million at the time of the exercise. The fair value of the warrants was $21.6 million at December 31, 2019. During the year ended December 31, 2020, the Company recognized a loss of $59.4 million in its consolidated statement of operations related to the increase in the fair value of the warrants. 45 Tax Receivable Agreement 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 increases in our allocable share of the tax basis of the tangible and intangible assets of Purple LLC. As a result of the initial merger transaction, subsequent exchanges of 43.5 million Class B Units for Class A Stock and changes in estimates relating to the expected tax benefits associated with the Tax Receivable Agreement, we increased the Tax Receivable Agreement liability from $0.5 million at December 31, 2019 to $172.0 million at December 31, 2020. Of this $171.5 million increase, $137.3 million relates to current year exchanges and was recorded as a decrease to additional paid-in capital in the 2020 consolidated statement of stockholders’ equity and $34.2 million was recorded in the 2020 consolidated statement of operations as tax receivable agreement expense to re-establish the liability related to prior year exchanges. As of December 31, 2020, approximately 99% of the Class B Units have been exchanged. Income Tax Benefit During the year ended December 31, 2020, the Company recognized an income tax benefit of $43.7 million due to the release of federal and state valuation allowances and the recognition of deferred tax assets as of December 31, 2020. No income tax benefit was recorded during the year ended December 31, 2019 as the Company had a full valuation allowance on the deferred tax assets. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. We believe the following are the more critical accounting policies that impact our consolidated financial statements, some of which are based on management’s best estimates available at the time of preparation. Actual future experience may differ significantly from these estimates. Revenue Recognition The Company markets and sells its products through DTC online channels, traditional wholesale partners, third-party online retailers, and Company showrooms. Revenue is recognized when the obligations under the terms of the contract with the customer are satisfied, which is generally when control of the product has transferred to the customer. Transferring control of each product sold is considered a separate performance obligation. The Company transfers control and recognizes a sale when the product ships to the customer or when the customer receives the product based upon agreed shipping terms. Each unit sold is considered an independent, unbundled performance obligation. The Company does not have any additional performance obligations other than product sales that are material in the context of the contract. The Company’s revenue recognition accounting methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the amount and timing of future sales returns and uncollectible accounts. The Company’s estimates of the amount and timing of sales returns and uncollectible accounts are based primarily on historical transaction experience. The Company does not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to establish the liability for sales returns and exchanges and credit losses. However, if actual results are not consistent with the Company’s estimates or assumptions, it may be exposed to losses or gains that could be material. 46 Sales Returns The Company offers up to 100 days to return a mattress, pet bed or pillow and 30 days to return all other products (except power bases) for a full refund. The Company’s policy grants to customers a right of return requiring the Company to reduce the amount of the revenue recognized by the amount of the estimated returns. The estimated sales returns, which are recorded as a reduction of revenue at the time of sale and are recorded as a liability on the balance sheet, are based on historical trends and product return rates and are adjusted for any current or expected trends as appropriate. Actual sales returns could differ from these estimates. The Company regularly assesses and adjusts the estimate of accrued sales returns by updating the return rates for actual trends and projected costs. The Company classifies the estimated sales returns as a current liability as they are expected to be paid out in less than one year. Warranty Liabilities The Company provides a limited warranty on most of the products sold. The estimated warranty costs, which are expensed at the time of sale and included in cost of revenues, are based on the results of product testing, industry and historical trends and warranty claim rates incurred and are adjusted for any current or expected trends as appropriate. Actual warranty claim costs could differ from these estimates. The Company regularly assesses and adjusts the estimate of accrued warranty claims by updating claims rates for actual trends and projected claim costs. The Company classifies as non-current those estimated warranty costs expected to be paid out in greater than one year. Warrants The Company accounts for its Incremental Loan Warrants as liability warrants under the provisions of the Financial Accounting Standards Board Accounting Standards Codification (“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. These warrants contained a repurchase provision which, upon an occurrence of a fundamental transaction as defined in the warrant agreement, could have given rise to an obligation of the Company to pay cash to the warrant holders. In addition, other provisions may have led to a reduction in the exercise price of the warrants. The Company determined the fundamental transaction provisions 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 in the period of change. The Company used the Monte Carlo Simulation of a Geometric Brownian Motion stock path model to determine the fair value of the liability associated with the Incremental Loan Warrants. 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 a warrant re-price. The Company accounts for the public and sponsor warrants issued in connection with its IPO and a simultaneous private placement in accordance with ASC 815, under which certain provisions in the public and sponsor warrant agreements do not meet the criteria for equity classification and therefore these warrants must be recorded as liabilities. Since the public and sponsor warrants both 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, Fair Value Measurement, with changes in fair value recognized in earnings in the period of change. The Company uses the Black Scholes model to determine the fair value of the sponsor warrant liability. The model uses key assumptions and inputs such as exercise price, fair market value of warrants, risk free interest rate, warrant life and expected volatility. The Company determined the fair value of the public warrants based on their public trading price. 47 Income Taxes 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. During fiscal 2020, the Company achieved three-year cumulative income for the first time and determined that it would likely generate sufficient taxable income to utilize some of its deferred tax assets. Based on this and other positive evidence, the Company concluded it was more likely than not that some of its deferred tax assets would be realized and that a full valuation allowance for its deferred tax assets was no longer appropriate. 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 in our valuation allowance. 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 line in the accompanying consolidated statements of operations. Tax Receivable Agreement In connection with the Business Combination, the Company entered into the Tax Receivable Agreement, 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 of the Business Combination 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 Tax Receivable Agreement. As noncontrolling interest holders exercise their right to exchange or cause Purple LLC to redeem all or a portion of its Class B Units, a liability under the Tax Receivable Agreement 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 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 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, subsequent exchanges of 43.5 million Class B Units for Class A Stock and changes in estimates relating to the expected tax benefits associated with the Tax Receivable Agreement, we increased the Tax Receivable Agreement liability from $0.5 million at December 31, 2019 to $172.0 million at December 31, 2020. Of this $171.5 million increase, $137.3 million relates to current year exchanges and was recorded as a decrease to additional paid-in capital in the 2020 consolidated statement of stockholders’ equity and $34.2 million was recorded in the 2020 consolidated statement of operations as tax receivable agreement expense to re-establish the liability related to prior year exchanges. Any additional changes to the existing TRA liability will be recorded through the statement of operations. As of December 31, 2020, approximately 99% of the Class B Units have been exchanged for Class A Stock. Any changes as a result of the remaining exchanges of Class B Units would be recorded through equity. Additionally, we estimated the amount of TRA Payments expected to be paid within the next 12 months to be $6.5 million and classified this amount as a current liability in our 2020 Consolidated Balance Sheet. To the extent our estimate differs from actual results, we may be required to reclassify portions of our liabilities under the Tax Receivable Agreement between current and non-current. 48 Operating Results for the Year Ended December 31, 2020 and 2019 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: Year Ended December 31, 2020 As Restated % of Net Revenues 2019 As Restated % of Net Revenues Revenues, net $ 648,471 100.0 % $ 428,358 100.0 % Cost of revenues 343,374 53.0 239,387 55.9 Gross profit 305,097 47.0 188,971 44.1 Operating expenses: Marketing and sales 187,991 29.0 141,975 33.1 General and administrative 39,925 6.2 26,918 6.3 Research and development 5,955 0.9 3,864 0.9 Total operating expenses 233,871 36.1 172,757 40.3 Operating income 71,226 11.0 16,214 3.8 Other income (expense): Interest expense (4,654 ) (0.7 ) (5,180 ) (1.2 ) Other income, net (91 ) 0.0 545 0.1 Loss on extinguishment of debt (5,782 ) (0.9 ) (6,299 ) (1.5 ) Change in fair value – warrant liabilities (300,073 ) (46.3 ) (35,304 ) (8.2 ) Tax receivable agreement expense (34,155 ) (5.3 ) (501 ) (0.1 ) Total other expense, net (344,755 ) (53.2 ) (46,739 ) (10.9 ) Net loss before income taxes (273,529 ) (42.2 ) (30,525 ) (7.1 ) Income tax benefit (expense) 43,749 6.7 (400 ) (0.1 ) Net income (loss) (229,780 ) (35.4 ) (30,925 ) (7.2 ) Net income (loss) attributable to noncontrolling interest 7,087 1.1 (8,352 ) (1.9 ) Net income (loss) attributable to Purple Innovation, Inc. $ (236,867 ) (36.5 ) $ (22,573 ) (5.3 ) Revenues, net Total net revenues increased $220.1 million, or 51.4%, to $648.5 million for the year ended December 31, 2020 compared to $428.4 million for the year ended December 31, 2019. Despite the ongoing challenges related to the COVID-19 pandemic, the Company was able to capitalize on the shift in customer demand and grew DTC net revenues by $220.1 million, or 83.0%, in 2020. Net revenues from our wholesale business totaled $163.2 million in both 2020 and 2019. The sales growth we experienced from our wholesale business during the first, third and fourth quarters of 2020 was offset by a sharp decline in net revenues during the second quarter as temporary shutdowns of non-essential businesses and shelter-at-home directives that occurred in most U.S. states negatively impacted sales from our wholesale channel. The increase in net revenues from a product perspective in 2020 consisted of a $145.7 million increase in mattress sales, a $50.9 million increase in other bedding products and a $23.5 million increase in sales of other products. Cost of Revenues The cost of revenues increased $104.0 million, or 43.4%, to $343.4 million for the year ended December 31, 2020 from $239.4 million for the year ended December 31, 2019. The increase was primarily due to a $47.7 million increase in direct material costs, a $23.4 million increase in labor and overhead, a $16.5 million increase in freight charges, a $10.5 million increase in merchant processing fees, and a $5.9 million increase in other costs, all associated with increased sales. The gross profit percentage increased to 47.0% of net revenues for the year ended December 31, 2020 compared to 44.1% for the year ended December 31, 2019. The improvement in 2020 gross profit was primarily driven by a higher proportion of DTC channel revenue, which carries a higher gross margin than revenue from the wholesale channel. Marketing and Sales Marketing and sales expenses increased $46.0 million, or 32.4%, to $188.0 million for the year ended December 31, 2020 from $142.0 million for the year ended December 31, 2019. The increase was due to a $26.1 million increase in advertising costs, a $12.2 million increase in marketing salaries related to an increase in personnel and a $7.7 million increase in other marketing and sales expenses. Marketing and sales expense as a percentage of net revenues was 29.0% for the year ended December 31, 2020 compared to 33.1% for the prior year. This decrease was due to efficiencies realized in our advertising spending created from enhanced marketing strategies, lower advertising costs in the second and third quarters of 2020 and a temporary reduction in advertising spending as part of our COVID-19 related cash preservation initiatives in the second quarter of this year. 49 General and Administrative General and administrative expenses increased $13.0 million, or 48.3%, to $39.9 million for the year ended December 31, 2020 from $26.9 million for the year ended December 31, 2019. This increase was primarily due to a $4.1 million increase in salaries related to an increase in personnel, a $4.0 million increase in software subscriptions, a $2.7 million increase in legal fees related to InnoHold’s two secondary public offerings that concluded in May 2020 and September 2020, a $1.9 million increase related to a new corporate building lease, and $0.3 million in all other expenses. Research and Development Research and development costs increased $2.1 million, or 54.1%, to $6.0 million for the year ended December 31, 2020 from $3.9 million for the year ended December 31, 2019. The increase was primarily due to $1.6 million in amortization of a one-year license agreement for innovative technology and a $0.5 million increase in other research and development expenses as we added resources for new product innovation. Operating Income Operating income increased $55.0 million, or 339.3%, to $71.2 million for the year ended December 31, 2020 from operating income of $16.2 million for the year ended December 31, 2019. The increase was primarily due to an increase in higher margin DTC sales coupled with lower marketing and sales costs as a percentage of net revenues. Interest Expense Interest expense totaled $4.7 million for the year ended December 31, 2020 as compared to $5.2 million for the year ended December 31, 2019. The $0.5 million decrease was primarily due to the $35.0 million Related Party Loan, which carried an interest rate of 12.00%, being refinanced in the third quarter of 2020 with the $45.0 million Term Loan at an initial interest rate of 3.50%. Loss on Extinguishment of Debt On September 3, 2020, the Company paid $45.0 million to retire, in full, all indebtedness related to Purple LLC’s 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 $0.9 million for accrued interest. As a result of paying off the Related Party Loan, the Company recognized a $5.8 million loss on extinguishment of debt in its 2020 consolidated statement of operations. In February 2019, the Incremental Lenders from the Related Party Loan funded a $10.0 million increase in the Related Party Loan. The Company concluded there were separate lenders for purposes of determining if there was an extinguishment or modification. The amended debt terms with the Incremental Lenders were determined to be substantially different terms from the existing debt agreement and therefore required to be accounted for as an extinguishment of existing debt. Accordingly, the Company recognized a loss on the extinguishment of its existing debt of $6.3 million in its 2019 consolidated statement of operations. This was a non-cash expense primarily associated with the recognition of related unamortized debt discount and debt issuance costs and the $4.9 million fair value of the Incremental Loan Warrants at the time of issuance. Change in Fair Value – Warrant Liabilities 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. The Company has 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 8.5 million sponsor warrants outstanding at December 31, 2020 had a fair value of $92.7 million. The fair value of the public and sponsor warrants outstanding at December 31, 2019 was $23.8 million. During the years ended December 31, 2020 and 2019, the Company recognized losses of $240.7 million and $18.5 million, respectively, in its consolidated statement of operations related to increases in the fair value of the public and sponsor warrants exercised during the respective periods or that were outstanding at the end of the respective periods. See Note 3, “Restatement of Previously Issued Consolidated Financial Statements,” for more information. On February 26, 2019, the Incremental Lenders from the 2018 credit arrangement funded a $10.0 million increase in the Related Party Loan and received 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. The Company accounted for the Incremental Loan 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 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 these warrants held by the Incremental Lenders. The Company determined the fair value of the Incremental Loan Warrants to be $81.0 million at the time of the exercise. The fair value of the warrants was $21.6 million at December 31, 2019. During the years ended December 31, 2020 and 2019, the Company recorded losses related to increases in the fair value of the warrants of $59.4 million and $16.8 million, respectively. 50 Tax Receivable Agreement Expense In connection with the Business Combination, we entered into an 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 increases in our allocable share of the tax basis of the tangible and intangible assets of Purple LLC. As a result of the Business Combination, subsequent exchanges of 43.5 million Class B Units for Class A Stock and changes in estimates relating to the expected tax benefits associated with the Tax Receivable Agreement, we increased the Tax Receivable Agreement liability from $0.5 million at December 31, 2019 to $172.0 million at December 31, 2020. Of this $171.5 million increase, $137.3 million relates to current year exchanges and was recorded as a decrease to additional paid-in capital in the 2020 consolidated statement of stockholders’ equity and $34.2 million was recorded as tax receivable agreement expense to re-establish the liability related to prior year exchanges in the 2020 consolidated statement of operations. The Tax Receivable Agreement expense incurred in 2019 was $0.5 million. Benefit from Income Taxes Our income tax benefit was $43.7 million for the year ended December 31, 2020, compared to no income tax benefit for the year ended December 31, 2019. Our income tax benefit is primarily due to the release of federal and state valuation allowances and the recognition of deferred tax assets as of December 31, 2020. No income tax benefit was recorded during the year ended December 31, 2019 as the Company had a full valuation allowance on its deferred tax assets. Noncontrolling Interest We attribute net income or loss to the Class B Units in Purple LLC, owned by InnoHold and other parties, as a noncontrolling interest at their aggregate ownership percentage. The Company calculates net income or loss attributable to noncontrolling interests on a quarterly basis using their weighted average ownership percentage. Net loss for the Company was $229.8 million in 2020 whereas net income attributed to noncontrolling interests was $7.1 million. The high net income level attributed to noncontrolling interests resulted from the noncontrolling ownership interest in 2020 being at its highest level during the first quarter of 2020 when the Company generated $28.0 million of net income and $11.2 million was attributed to noncontrolling interests. For the remainder of 2020, the Company had a net loss of $257.8 million of which only $4.1 million of the net loss was attributed to noncontrolling interests because the noncontrolling ownership interest declined from 56.2% at March 31, 2020 to 1.0% at December 31, 2020. 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 operating lease payment obligations. Our cash and working capital positions have grown to $123.0 million and $96.9 million, respectively, as of December 31, 2020 compared to $33.5 million and $27.3 million, respectively, as of December 31, 2019. While net revenues increased 51.4% during 2020, our accounts receivable balance stayed relatively consistent compared to the prior year. Cash used for purchases of property and equipment increased from $10.5 million in 2019 to $27.9 million in 2020. This increase primarily resulted from enhancing our manufacturing capabilities in Utah, scaling our infrastructure to support the doubling of our workforce, opening several new Company showrooms across the country, and expanding our manufacturing capacity by establishing a new manufacturing facility in Georgia that began operations on March 3, 2021 and for the remainder of 2021 will ramp up to capacity of four Mattress Max machines. 51 In response to the COVID-19 pandemic, we took a number of precautionary measures to manage our resources and mitigate its adverse impact. Given the initial difficultly in predicting how long 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 Related Party Loan which allowed 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 $45.0 million term loan at a rate of interest lower than the Related Party Loan and a $55.0 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 $89.5 million during the year ended December 31, 2020. We have now ended most of the cash preservation programs and have returned to full production to meet increased demand. 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, ongoing cash generated from our DTC business, amounts available under our new line of credit, continued demand of our product in the wholesale channel 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 September 3, 2020, the Company paid $45.0 million to retire, in full, all indebtedness related to Purple LLC’s 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 $0.9 million for accrued interest. On September 3, 2020, Purple LLC entered into the 2020 Credit Agreement that provides for a $45.0 million 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 December 31, 2020, there was no balance outstanding on the revolving credit facility. Proceeds from the Term Loan were used to retire all indebtedness associated with the Related Party Loan. During the year ended December 31, 2020, 15.5 million public warrants and 4.3 million sponsor warrants were exercised resulting in the issuance of 7.6 million shares of Class A common stock and cash proceeds to the Company of $46.4 million. At December 31, 2020, there were 8.5 million warrants outstanding all of which were sponsor warrants. 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. 52 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, political or social unrest, other macroeconomic factors and approval from the Institutional Lenders under the 2020 Credit Agreement. Adequate financing may not be available or, if offered, 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 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 Tax Receivable Agreement, which 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 the Tax Receivable Agreement. As of December 31, 2020, the Tax Receivable Agreement liability reflected in the Company’s consolidated balance sheet is $172.0 million of which $6.5 million is presented as a short-term liability. Cash Flows for the Year Ended December 31, 2020 and 2019 The following summarizes our cash flows for the year ended December 31, 2020 and 2019 as reported in our consolidated statements of cash flows (in thousands): Year Ended December 31, 2020 2019 Net cash provided by operating activities $ 81,257 $ 22,880 Net cash used in investing activities (39,139 ) (10,779 ) Net cash provided by financing activities 47,359 9,145 Net increase in cash 89,477 21,246 Cash, beginning of the period 33,478 12,232 Cash, end of the period $ 122,955 $ 33,478 Year ended December 31, 2020 Compared to the Year ended December 31, 2019 Cash provided by operating activities was $81.3 million for the year ended December 31, 2020, an increase of $58.4 million from cash provided by operating activities of $22.9 million during the year ended December 31, 2019. The $45.3 million increase in cash provided by operations primarily resulted from operating income growth in 2020 which was driven mainly by increased DTC sales. This increase was also impacted by a $13.1 million increase in operating cash flows related to favorable net changes in operating assets and liabilities in 2020 compared to the prior year. This increase consisted of additional cash from favorable changes in year-over-year fluctuations in accounts receivable and inventory, offset in part by decreases in cash related to unfavorable changes in year-over-year fluctuations in accounts payable and all other operating assets and liabilities. Cash used in investing activities was $39.1 million for the year ended December 31, 2020, an increase of $28.4 million from cash used in investing activities of $10.8 million during the year ended December 31, 2019. This increase was due mainly to increases in purchases of property and equipment and intangible assets of $17.4 million and $10.9 million, respectively, over the same period in the prior year. Cash provided by financing activities was $47.4 million in the year ended December 31, 2020, an increase of $38.2 million from cash provided by financing activities of $9.1 million during the year ended December 31, 2019. The cash provided in 2020 consisted of $45.0 million in proceeds from the 2020 Credit Agreement and $48.4 million of proceeds from warrant and stock option exercises. The cash received from these financing activities was offset in part by a $37.5 million payment to retire the Related Party Loan, a $0.6 million principal payment on the Term Loan, $5.5 million in distributions to members and $2.5 million in debt issuance costs related to the 2020 Credit Agreement. 53 Off-Balance Sheet Arrangements We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other non-consolidated entities, or entered into any non-financial assets. Recent Accounting Pronouncements For a description of recently adopted and issued accounting standards, including the respective dates of adoption and expected effects on our results of operations and financial condition, refer to Note 2 to our financial statements included in this Annual Report on Form 10-K/A. Contractual Obligations On July 21, 2020, the Company entered into a lease agreement (the “Lease”) with PNK S2, LLC for approximately 520,000 square feet of building space located in McDonough, Georgia (the “Building”) to be used as a manufacturing, distribution and office facility. The Company began operations in the new facility on March 3, 2021 and for the remainder of 2021 will ramp up to planned capacity of four Mattress Max machines. 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. 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 month 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 which equates to approximately $6.5 million. The Lease also provides the Company with signage rights and a right of first refusal on other contiguous space. 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. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable.