Purple Innovation, Inc. 10-K

Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Interim Chief Financial Officer (“CFO”), 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 Exchange Act). Our disclosure controls and procedures are designed to provide reasonable assurance that the 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. 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 previously reported material weakness described below, the Company’s disclosure controls and procedures were not effective as of December 31, 2021. Management’s Annual Report on Internal Controls Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2021, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that due to the previously reported material weakness described below, our internal controls over financial reporting were not effective as of December 31, 2021. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 has been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in their report which appears herein. Previously Reported Material Weakness As previously reported, we determined a material weakness existed relating to ineffective information technology general controls (“ITGCs”) in the areas of user access and segregation of duties related to certain information technology (“IT”) systems that support the Company’s financial reporting processes. We believe that these control deficiencies were a result of turnover of critical IT leadership; insufficient training of IT personnel; and inadequate risk-assessment processes to identify and assess user access in certain IT systems that could impact internal controls over financial reporting. As a result, we determined that we did not have effective controls to prevent or detect a material financial statement misstatement on a timely basis. In response to this material weakness, management, with oversight of the Audit Committee of the Board of Directors, has identified and is in the process of implementing steps to remediate the material weakness. The Company has allocated resources to remediate user access related control and segregation of duties deficiencies. Our remediation efforts also include providing training to personnel associated with reviewing IT user access. In addition, we continue to engage consultants to advise us on making further improvements to our ITGCs. Although we intend to complete the remediation process as promptly as possible, we cannot at this time estimate how long it will take to remediate this material weakness. Until this material weakness is remediated, we plan to continue to perform additional analyses and other procedures to ensure that our consolidated financial statements are prepared in accordance with GAAP. Changes in Internal Control over Financial Reporting Other than the remediation efforts related to the design and implementation of sufficient controls and processes around ITGCs, there were no changes in our internal control over financial reporting during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 62 Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Purple Innovation, Inc. Lehi, Utah Opinion on Internal Control over Financial Reporting We have audited Purple Innovation, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria. We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as “the financial statements”) and our report dated March 1, 2022 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A material weakness is 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 the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness regarding management’s failure to design and maintain effective information technology general controls (“ITGCs”) in the areas of user access and segregation of duties related to certain information technology (“IT”) systems that support the Company’s financial reporting processes has been identified and described in management’s assessment. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2021 financial statements, and this report does not affect our report dated March 1, 2022 on those financial statements. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ BDO USA, LLP Salt Lake City, Utah March 1, 2022 63 Item 9B. Other Information Amendment to 2020 Credit Agreement On February 28, 2022, the Company entered into a First Amendment to 2020 Credit Agreement (the “Amendment”). The Amendment changes LIBOR to SOFR with a floor of 0.50%. Until a compliance certificate is delivered showing a consolidated leverage ratio of less than 3.00 to 1.00, the borrowing rates are set at term SOFR plus (a) 4.75% if the Company is greater than or equal to the then applicable liquidity threshold and (b) 9.00% if the Company’s liquidity is less than the then applicable liquidity threshold. Once a compliance certificate is delivered showing a consolidated leverage ratio of less than 3.00 to 1.00, pricing will range from SOFR plus a 3.00% to 3.75% margin based upon a consolidated leverage ratio, unless there have been no outstanding revolving loans for a specified period of time, in which case pricing will be based upon a consolidated net leverage ratio. The amount of the excess cash flow mandatory prepayment is now based upon a consolidated leverage ratio, unless there have been no outstanding revolving loans for a specified period of time, in which case it will be based on a consolidated net leverage ratio. The Amendment also adds a covenant amendment period that starts on the Amendment effective date and lasts until the later of (a) delivery of the June 30, 2023 compliance certificate and (b) the 5th business day after a compliance certificate is delivered showing a consolidated leverage ratio of less than 2.00x for two consecutive quarters. Monthly, during the covenant amendment period and quarterly thereafter, the Company must provide to the lenders reports containing showroom sales performance and bi-weekly a rolling 13-week cash flow forecast. Incremental term loan commitments and incremental revolving loan commitments are not available during the covenant amendment period. The Amendment adds a new mandatory prepayment requirement, providing that if any revolving loans are outstanding and the aggregate amount of cash and cash equivalents exceed $25.0 million, the Company must prepay the revolving loans in the amount of the lesser of (i) the outstanding revolving loans and (ii) the amount of cash and cash equivalents in excess of $25.0 million. The Amendment also adds a limitation on borrowings under the revolver, prohibiting additional borrowings under the revolver if after giving effect to any borrowing and any transactions to be consummated therewith, the aggregate amount of cash and cash equivalents exceeds $25.0 million. In addition, swing loans are now discretionary rather than mandatory even if all conditions have been satisfied. The Amendment provides that the consolidated net leverage ratio and fixed charge coverage ratio financial covenants will not be tested for the fiscal quarter ended December 31, 2021 through the fiscal quarter ending June 30, 2022, and beginning with the fiscal quarter ending September 30, 2022 a consolidated leverage ratio financial covenant goes into effect at a level of 5.75 to 1.00, stepping down to 3.00 to 1.00 at December 31, 2022 and 2.50 to 1.00 thereafter. The Amendment also adds an additional financial covenant relating to minimum liquidity which is applicable during the covenant amendment period and a negative covenant restricting the Company from entering into new leases unless certain financial tests are satisfied. The covenant limiting certain capital expenditures is not being tested for the fiscal year ending December 31, 2021, total capital expenditures are capped at $17.5 million for the fiscal quarter ending June 30, 2022 and growth capital expenditures are capped at $37.5 million for the fiscal year ending December 31, 2022, $41.0 million for the fiscal year ending December 31, 2023, and $41.5 million for the fiscal year ending December 31, 2024. The Amendment also eliminates the availability of certain baskets under certain negative covenants during the covenant amendment period, including but not limited to consolidations, mergers, acquisitions, asset sales, statutory divisions, liens, indebtedness, investments, guaranty obligations, and restricted payments. Pursuant to the Amendment, the Company paid fees and expenses of $0.9 million and prepaid all principal payments due in 2022 of $2.5 million. The foregoing summary of the Amendment does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Amendment, a copy of which is attached as Exhibit 10.60 to this 10-K and is incorporated by reference herein. Appointment of Permanent Chief Executive Officer On March 1, 2022, the Board appointed Robert DeMartini as the Company’s permanent Chief Executive Officer, effective upon the execution of an amended and restated employment agreement. Mr. DeMartini has served as the Company’s Acting CEO since January 2022. There are no related party transactions between Mr. DeMartini and the Company as defined in Item 404(a) of Regulation S-K. There are no family relationships between Mr. DeMartini and any other director, executive officer or person nominated or chosen to be a director or executive officer of the Company. Mr. DeMartini’s biographical information is included under Part I, Item 1, “Information About our Executive Officers” above. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. 64 PART III Item 10. Directors, Executive Officers and Corporate Governance The information required under the captions “Directors” and “Corporate Governance” is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2021. Information concerning our executive officers is included in Part I of this report under the caption “Information About Our Executive Officers.” Item 11. Executive Compensation The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2021. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2021. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2021. Item 14 . Principal Accountant Fees and Services The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2021. 65 PART IV Item 15. Exhibits and Financial Statement Schedules (a) The following documents are filed as part of this Report: (1) Financial Statements The following financial statements are included in Part II, Item 8 of this Form 10-K: Report of Independent Registered Public Accounting Firm (BDO USA, LLP; Salt Lake City, Utah; PCAOB ID#243) F-2 Consolidated Balance Sheets F-4 Consolidated Statements of Operations F-5 Consolidated Statements of Stockholders’ Equity (Deficit) F-6 Consolidated Statements of Cash Flows F-7 Notes to the Consolidated Financial Statements F-8 (2) Financial Statements Schedule All other financial statement schedules are omitted because they are not applicable or the amounts are immaterial and not required, or the required information is presented in the consolidated financial statements and notes thereto in Item 15 of Part IV below. (3) Exhibits We hereby file as part of this report the exhibits listed in the attached Exhibit Index. Exhibits which are incorporated herein by reference can be inspected and copied at the public reference facilities maintained by the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549 at prescribed rates or on the SEC website at www.sec.gov . 66 EXHIBIT INDEX Exhibit No. Description 2.1# Agreement and Plan of Merger, dated November 2, 2017, by and among Global Partner Acquisition Corp., PRPL Acquisition, LLC, Purple Innovation, LLC, InnoHold, LLC and Global Partner Sponsor I LLC (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on November 3, 2017) 2.2 Amendment No. 1 to Agreement and Plan of Merger, dated January 8, 2018, by and among Global Partner Acquisition Corp., Purple Innovation, LLC, PRPL Acquisition, LLC and other parties named therein (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on January 8, 2018) 2.3 Amendment No. 2 to Agreement and Plan of Merger, dated May 14, 2018, by and among Purple Innovation, Inc., Purple Innovation, LLC, Global Partner Sponsor I LLC and InnoHold, LLC (incorporated by reference to Exhibit 2.2 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on May 15, 2018) 2.4 Amendment No. 3 to Agreement and Plan of Merger, dated June 14, 2018, by and among Purple Innovation, Inc., Purple Innovation, LLC, Global Partner Sponsor I LLC and InnoHold, LLC (incorporated by reference to Exhibit 2.1 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on August 9, 2018) 3.1 Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on November 6, 2019) 3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 3.3 Amendment No. 1 to the Amended and Restated Bylaws (incorporated by reference into Exhibit 3.3 to the Annual Report on Form 10-K (File No. 001-37523) filed with the SEC on March 11, 2021) 4.1 Form of Class A Common Stock certificate (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 4.2 Form of Class B Common Stock certificate (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 4.3 Specimen Warrant Certificate (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-1/A (File No. 333-204907) filed with the SEC on July 13, 2015) 4.4 Warrant Agreement dated July 29, 2015, between Continental Stock Transfer & Trust Company and the Company (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on August 4, 2015) 4.5 Form of Class A Common Stock Purchase Warrant (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 27, 2019) 4.6 Description of Registered Securities (incorporated by reference into Exhibit 4.6 to the Annual Report on Form 10-K (File No. 001-37523) filed with the SEC on March 11, 2021) 10.1+ Form of Option Award Agreement (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on May 15, 2018) 10.2+ Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on May 15, 2018) 10.3+ Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on May 15, 2018) 10.4+ Form of Stock Appreciation Right Award Agreement (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on May 15, 2018) 10.5+ Form of Stock Bonus Award Agreement (incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on May 15, 2018) 10.6 Exchange Agreement, dated February 2, 2018, by and between Purple Innovation, Inc., Purple Innovation, LLC and InnoHold, LLC (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 67 10.7 Tax Receivable Agreement, dated February 2, 2018, by and between Purple Innovation, Inc. and InnoHold, LLC (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 10.8 Registration Rights Agreement, dated February 2, 2018, by and among Purple Innovation, Inc., InnoHold, LLC and Global Partner Sponsor I LLC (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 10.9 Non-Competition and Non-Solicitation Agreement, dated February 2, 2018, by and among Purple Innovation, Inc., InnoHold, LLC, Purple Innovation, LLC, Terry Pearce and Tony Pearce (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 10.10+ Employment Agreement, dated February 2, 2018, between Purple Innovation, Inc. and Tony Pearce (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 10.11+ Employment Agreement, dated February 2, 2018, between Purple Innovation, Inc. and Terry Pearce (incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 10.12+ Purple Innovation, Inc. 2017 Equity Incentive Plan (incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 10.13 Subscription and Backstop Agreement, dated January 29, 2018, between Global Partner Acquisition Corp., Global Partner Sponsor I LLC, Baleen Capital Investors II LLC, Baleen Capital Fund LP, Greenhaven Road Capital Fund 1, L.P., Royce Value Trust, Inc., David Capital Partners Fund, LP, Pleiades Investment Partners – DC, L.P. and Dane Capital Fund LP (incorporated by reference to Exhibit 10.12 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 10.14 Agreement to Assign Sponsor Warrants, dated February 2, 2018, between Global Partner Acquisition Corp., Global Partner Sponsor I LLC, Continental Stock Transfer and Trust Company, Baleen Capital Investors II LLC, Baleen Capital Fund LP, Greenhaven Road Capital Fund 1, L.P., Royce Value Trust, Inc., David Capital Partners Fund, LP, Pleiades Investment Partners – DC, L.P. and Dane Capital Fund LP (incorporated by reference to Exhibit 10.13 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 10.15 Registration Rights Agreement, dated February 2, 2018, between Global Partner Acquisition Corp., Baleen Capital Investors II LLC, Baleen Capital Fund LP, Greenhaven Road Capital Fund 1, L.P., Royce Value Trust, Inc., David Capital Partners Fund, LP, Pleiades Investment Partners – DC, L.P. and Dane Capital Fund LP (incorporated by reference to Exhibit 10.14 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 10.16 Subscription Agreement, dated February 1, 2018, between Global Partner Acquisition Corp., Global Partner Sponsor I LLC, Coliseum Capital Partners, L.P. and Blackwell Partners LLC – Series A (incorporated by reference to Exhibit 10.15 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 10.17 Agreement to Assign Sponsor Warrants, dated February 2, 2018, between Global Partner Acquisition Corp., Global Partner Sponsor I LLC, Continental Stock Transfer and Trust Company, Coliseum Capital Partners, L.P., Blackwell Partners, LLC and Coliseum Co-Invest Debt Fund, L.P. (incorporated by reference to Exhibit 10.16 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 10.18 Agreement to Assign Founder Shares, dated February 2, 2018, between Global Partner Acquisition Corp., Global Partner Sponsor I LLC, Continental Stock Transfer and Trust Company and Coliseum Capital Partners, L.P., Blackwell Partners, LLC (incorporated by reference to Exhibit 10.17 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 10.19 Registration Rights Agreement, dated February 2, 2018, between Global Partner Acquisition Corp., Coliseum Capital Partners, L.P., Blackwell Partners, LLC and Coliseum Co-Invest Debt Fund, L.P. (incorporated by reference to Exhibit 10.18 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 68 10.20+ Employment Agreement with the Company and Joseph B. Megibow (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on September 25, 2018) 10.21+ Offer Letter between the Company and Mark A. Watkins (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on October 4, 2018) 10.22+ Amended and Restated Option Grant Agreement between the Company and Mark A. Watkins (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K/A (File No. 001-37523) filed with the SEC on November 9, 2018) 10.23† Second Amended and Restated Confidential Assignment and License Back Agreement between the Company and EdiZONE (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on November 14, 2018) 10.24+ Offer Letter between Purple Innovation, LLC and John Legg dated January 12, 2019 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on January 14, 2019) 10.25 + Option Grant Agreement dated February 21, 2019 between Purple Innovation, Inc. and John Legg (incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 27, 2019) 10.26 Registration Rights Agreement dated February 26, 2019 between and among Purple Innovation, Inc., Coliseum Capital Partners, L.P., Blackwell Partners LLC – Series A and Coliseum Co-Invest Debt Fund, L.P. (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 27, 2019) 10.27 Statement of Work agreement dated March 1, 2019 by and between Purple Innovation, Inc. and FTI Consulting, Inc. (incorporated by reference to Exhibit 10.9 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on May 7, 2019) 10.28 Master Retailer Agreement dated September 18, 2018 by and between Purple Innovation LLC and Mattress Firm, Inc. (incorporated by reference to Exhibit 10.10 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on May 7, 2019) 10.29+ Purple Innovation, Inc. 2019 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on May 14, 2019) 10.30+ Purple Innovation, Inc. 2019 Short-Term Cash Incentive Plan (incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on May 14, 2019) 10.31 Lease Agreement dated June 10, 2019 between Purple Innovation, LLC and North Slope One, LLC (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on August 13, 2019) 10.32+ Settlement and General Release of Claims Agreement dated May 28, 2019 between Purple Innovation, Inc. and Mark Watkins (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on August 13, 2019) 10.33+ Employment Agreement between the Company and Craig L. Phillips (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on October 4, 2019) 10.34+ Option Grant Agreement between the Company and Craig L. Phillips (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on October 4, 2019) 10.35 First Amendment to Lease dated November 19, 2019 between the Company and North Slope One, LLC (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on November 25, 2019) 10.36 Amendment to TNT Holdings Amended and Restated Lease Agreement dated April 23, 2020 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on May 11, 2020) 69 10.37 Lease Agreement between Purple Innovation, LLC and PNK S2, LLC dated July 21, 2020 (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on August 13, 2020) 10.38 Credit Agreement dated September 3, 2020 between and among Purple Innovation, LLC, Purple Innovation, Inc., KeyBank National Association, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on September 3, 2020) 10.39 Pledge and Security Agreement dated September 3, 2020 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on September 3, 2020) 10.40 Guaranty dated September 3, 2020 (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on September 3, 2020) 10.41 Collateral Assignment of Patents dated September 3, 2020 (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on September 3, 2020) 10.42 Collateral Assignment of Trademarks dated September 3, 2020 (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on September 3, 2020) 10.43 Collateral Assignment of Copyrights dated September 3, 2020 (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K (File No. 001-37523) filed with SEC on September 3, 2020) 10.44+ Purple Innovation, Inc. 2020 Short-Term Cash Incentive Plan (incorporated by reference to Exhibit 10.11 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on November 10, 2020) 10.45 License Transfer and IP Assignment Agreement between Purple Innovation, LLC and EdiZONE, LLC dated August 14, 2020 (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on November 10, 2020) 10.46+ Indemnification Agreement between Purple Innovation, Inc. and Paul Zepf dated August 18, 2020 (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on November 10, 2020) 10.47 First Amendment to Amended and Restated Credit Agreement by and among Purple Innovation, LLC, Purple Innovation, Inc., Coliseum Capital Partners, L.P., Blackwell Partners LLC-Series A, and Coliseum Co-Invest Debt Fund, L.P. dated March 27, 2020 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on March 30, 2020) 10.48 Second Amendment to Amended and Restated Credit Agreement by and among Purple Innovation, LLC, Purple Innovation, Inc., Coliseum Capital Partners, L.P., Blackwell Partners LLC-Series A, and Coliseum Co-Invest Debt Fund, L.P. dated May 15, 2020 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 37523) filed with the SEC on May 18, 2020) 10.49 Waiver and Consent to Amended and Restated Credit Agreement by and among Purple Innovation, LLC, Purple Innovation, Inc., Coliseum Capital Partners, L.P., Blackwell Partners LLC-Series A, and Coliseum Co-Invest Debt Fund, L.P. dated August 20, 2020 (incorporated by reference into Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on August 21, 2020) 10.50 Amendment to Lease Agreement between Purple Innovation, LLC and PNK S2, LLC dated March 4, 2021 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on May 17, 2021) 10.51 Second Amendment to Lease Agreement between Purple Innovation, LLC and PNK S2, LLC dated March 26, 2021 (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on May 17, 2021) 10.52+ Amendment to Purple Innovation, Inc. 2017 Equity Incentive Plan dated July 12, 2021 (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on July 12, 2021) 70 10.53+ Restated and Amended Purple Innovation, Inc. 2019 Long-Term Equity Incentive Plan dated July 12, 2021 (incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on July 12, 2021) 10.54+ Form of Restricted Share Unit Agreement (incorporated by reference to Exhibit 99.3 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on July 12, 2021) 10.55+ Form of Performance-Based Share Unit Agreement (incorporated by reference to Exhibit 99.4 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on July 12, 2021) 10.56+ Purple Innovation, Inc. 2021 Short-Term Cash Incentive Plan dated July 12, 2021 (incorporated by reference to Exhibit 99.5 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on July 12, 2021) 10.57+ Separation Agreement and General Release, dated December 13, 2021, by and between Purple Innovation, Inc. and Joseph B. Megibow (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on December 13, 2021) 10.58+ Employment Agreement, dated December 13, 2021, by and between Purple Innovation, Inc. and Robert T. DeMartini (incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on December 13, 2021) 10.59+ Amended and Restated Consultancy Agreement, dated December 13, 2021, by and between Purple Innovation, Inc. and Bennett Nussbaum (incorporated by reference to Exhibit 99.3 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on December 13, 2021) 10.60* First Amendment to the 2020 Credit Agreement dated February 28, 2022 between and among Purple Innovation, LLC, Purple Innovation, Inc., KeyBank National Association, and the other lenders party thereto 14.1 Code of Ethics of Purple Innovation, Inc. (incorporated by reference into Exhibit 14.1 to the Annual Report on Form 10-K (File No. 001-37523) filed with the SEC on March 11, 2021) 21.1 List of Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 23.1* Consent of Independent Registered Public Accounting Firm 31.1* Certification of the Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) 31.2* Certification of the Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) 32.1* Certification of the Principal Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350 32.2* Certification of the Principal Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350 101.INS Inline XBRL Instance 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. 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). * Filed herewith # Schedules and exhibits to the Merger Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to furnish supplementally a copy of any omitted schedules and exhibits to the Securities and Exchange Commission upon request. + Indicates management contract or compensatory plan. † Confidential treatment of certain provisions has been granted by the Securities and Exchange Commission. Item 16. Form 10-K Summary Not applicable. 71 PURPLE INNOVATION, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (BDO USA, LLP; Salt Lake City, Utah; PCAOB ID# 243 ) F-2 Consolidated Balance Sheets as of December 31, 2021 and 2020 F-4 Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019 F-5 Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2021, 2020 and 2019 F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 F-7 Notes to Consolidated Financial Statements F-8 F- 1 Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Purple Innovation, Inc. Lehi, Utah Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Purple Innovation, Inc. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 , in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 1, 2022 expressed an adverse opinion thereon because of a material weakness. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Deferred Tax Asset Valuation Allowance As described in Notes 2 and 19 to the Company’s consolidated financial statements, the Company has approximately $217.8 million of net deferred income tax assets. 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. We identified the Company’s evaluation of whether certain of its deferred tax assets are realizable as a critical audit matter. Significant management judgments are required in evaluating and weighting the collective positive and negative evidence that are used to assess the realizability of deferred tax assets. This evidence includes various assumptions surrounding cumulative income in recent years, projected future taxable income, and the rate of expected growth. Auditing these elements involved especially complex auditor judgment due to the nature and extent of audit effort required to address these matters, including the need to involve personnel with specialized skill and knowledge. The primary procedures we performed to address this critical audit matter included: - Assessing the reasonableness of the Company’s ability to generate future income and utilize the deferred tax assets by evaluating forecasts of future income and the rate of expected growth against the Company’s historical performance and performing independent estimates of the expected rate of continued growth to evaluate the changes in realizability of deferred tax assets that would result from changes in those assumptions. - Utilizing personnel with specialized knowledge and skill in income taxes to assist in the evaluation of the Company’s assessment of positive and negative evidence, and whether the estimated future sources of taxable income were sufficient to utilize the deferred tax assets in the relevant time period. F- 2 Warranty Accrual At December 31, 2021, the Company’s accrued warranty liability was $15.0 million. As discussed in Note 2 to the consolidated financial statements, the Company provides a limited warranty on most of its products sold. Warranty costs are estimated 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. These costs are recognized at the time of sale in cost of revenues. We identified the Company’s evaluation of the completeness and valuation of the warranty accrual as a critical audit matter. Specifically, the evaluation includes various management assumptions, including estimated future warranty claims and estimated costs to remedy warranty claims. Auditing the accrued warranty liability involved especially complex and subjective auditor judgment due to significant management judgment required in evaluating the warranty liability. The primary procedures we performed to address this critical audit matter included: - Obtaining an understanding, evaluating the design and testing the operating effectiveness of controls over the completeness and valuation of the warranty liability. Specifically, we tested controls over management’s review of inputs into the warranty calculation (historical returns by year, actual warranty costs incurred and estimated warranty costs on products sold), as well as their review of mathematical calculation of the warranty liability. - Testing a sample of key inputs to the warranty liability, including actual claims made and actual warranty costs incurred. - Assessing the accuracy of management’s estimation by performing a lookback analysis, which compared the amount of claims accrued in prior years to actual claims made in subsequent periods. - Comparing the Company’s warranty expense as a percentage of revenues to available public information to determine if the Company’s warranty expense was consistent with peer companies. /s/ BDO USA, LLP We have served as the Company's auditor since 2017. Salt Lake City, Utah March 1, 2022 F- 3 PURPLE INNOVATION, INC. Consolidated Balance Sheets (In thousands, except for par value) December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 91,616 $ 122,955 Accounts receivable, net 25,430 29,111 Inventories, net 98,690 65,726 Prepaid expenses 8,064 6,718 Other current assets 5,702 4,561 Total current assets 229,502 229,071 Property and equipment, net 112,614 61,486 Operating lease right-of-use assets 68,037 41,408 Intangible assets, net 13,204 9,945 Deferred income taxes 217,791 211,244 Other long-term assets 1,322 1,578 Total assets $ 642,470 $ 554,732 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 79,752 $ 69,594 Accrued sales returns 7,116 8,428 Accrued compensation 8,928 14,209 Customer prepayments 10,854 6,253 Accrued sales tax 4,672 6,015 Accrued rebates and allowances 10,169 10,891 Operating lease obligations – current portion 7,053 3,235 Other current liabilities 13,470 13,583 Total current liabilities 142,014 132,208 Debt, net of current portion 94,113 41,410 Operating lease obligations, net of current portion 81,159 48,936 Warrant liabilities 4,343 92,708 Tax receivable agreement liability, net of current portion 162,239 165,426 Other long-term liabilities, net of current portion 12,061 6,503 Total liabilities 495,929 487,191 Commitments and contingencies (Note 12) Stockholders’ equity: Class A common stock; $ 0.0001 par value, 210,000 shares authorized; 66,493 issued and outstanding at December 31, 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 December 31, 2021 and 536 issued and outstanding at December 31, 2020 — — Additional paid-in capital 407,591 333,047 Accumulated deficit ( 261,825 ) ( 265,856 ) Total stockholders’ equity attributable to Purple Innovation, Inc. 145,773 67,197 Noncontrolling interest 768 344 Total stockholders’ equity 146,541 67,541 Total liabilities and stockholders’ equity $ 642,470 $ 554,732 The accompanying notes are an integral part of these consolidated financial statements. F- 4 PURPLE INNOVATION, INC. Consolidated Statements of Operations (In thousands, except per share amounts) Year Ended December 31, 2021 2020 2019 Revenues, net $ 726,227 $ 648,471 $ 428,358 Cost of revenues 431,253 343,374 239,387 Gross profit 294,974 305,097 188,971 Operating expenses: Marketing and sales 239,290 187,991 141,975 General and administrative 72,095 39,925 26,918 Research and development 6,939 5,955 3,864 Total operating expenses 318,324 233,871 172,757 Operating income (loss) ( 23,350 ) 71,226 16,214 Other income (expense): Interest expense ( 1,872 ) ( 4,654 ) ( 5,180 ) Other income (expense), net ( 194 ) ( 91 ) 545 Loss on extinguishment of debt — ( 5,782 ) ( 6,299 ) Change in fair value – warrant liabilities 24,054 ( 300,073 ) ( 35,304 ) Tax receivable agreement income (expense) 4,016 ( 34,155 ) ( 501 ) Total other income (expense), net 26,004 ( 344,755 ) ( 46,739 ) Net income (loss) before income taxes 2,654 ( 273,529 ) ( 30,525 ) Income tax benefit (expense) 1,217 43,749 ( 400 ) Net income (loss) 3,871 ( 229,780 ) ( 30,925 ) Net income (loss) attributable to noncontrolling interest ( 160 ) 7,087 ( 8,352 ) Net income (loss) attributable to Purple Innovation, Inc. $ 4,031 $ ( 236,867 ) $ ( 22,573 ) Net income (loss) per share: Basic $ 0.06 $ ( 6.04 ) $ ( 2.26 ) Diluted $ ( 0.30 ) $ ( 6.04 ) $ ( 2.26 ) Weighted average common shares outstanding: Basic 65,928 39,219 10,006 Diluted 67,302 39,219 10,006 The accompanying notes are an integral part of these consolidated financial statements. F- 5 PURPLE INNOVATION, INC. Consolidated Statements of Stockholders’ Equity (Deficit) (In thousands) Class A Common Stock Class B Common Stock Additional Paid-in Accumulated Total Stockholders’ Equity attributable to Purple Innovation, Inc. Noncontrolling Total Equity Shares Par Value Shares Par Value Capital Deficit (Deficit) Interest (Deficit) Balance — December 31, 2018 9,731 $ 1 44,071 $ 4 $ 487 $ ( 6,416 ) $ ( 5,924 ) $ ( 1,349 ) $ ( 7,273 ) Net loss — — — — — ( 22,573 ) ( 22,573 ) ( 8,352 ) ( 30,925 ) Stock-based compensation — — — — 10,063 — 10,063 — 10,063 Repurchase of stock option — — — — ( 97 ) — ( 97 ) — ( 97 ) Issuance of stock 96 — — — — — — — — Exchange of stock 12,670 1 ( 12,670 ) ( 1 ) — — — — — Forfeiture of unvested stock ( 3 ) — ( 7 ) — — — — — — Accrued tax distributions — — — — ( 308 ) — ( 308 ) — ( 308 ) Impact of transactions affecting NCI — — — — ( 7,323 ) — ( 7,323 ) 7,323 — Balance – December 31, 2019 22,494 $ 2 31,394 $ 3 $ 2,822 $ ( 28,989 ) $ ( 26,162 ) $ ( 2,378 ) $ ( 28,540 ) Net income (loss) — — — — — ( 236,867 ) ( 236,867 ) 7,087 ( 229,780 ) Stock-based compensation — — — — 2,185 — 2,185 — 2,185 Exchange of stock 30,858 3 ( 30,858 ) ( 3 ) — — — — — Exercise of warrants 7,621 1 — — 218,113 — 218,114 — 218,114 Exercise of incremental loan warrants 2,613 — — — 81,040 — 81,040 — 81,040 Exercise of stock options 281 — — — 2,007 — 2,007 — 2,007 Tax receivable agreement liability — — — — ( 137,314 ) — ( 137,314 ) — ( 137,314 ) Deferred income taxes — — — — 165,676 — 165,676 — 165,676 Accrued tax distributions — — — — ( 5,847 ) — ( 5,847 ) — ( 5,847 ) Issuance of stock 83 — — — — — — — — Forfeiture of unvested stock ( 36 ) — — — — — — — — Impact of transactions affecting NCI — — — — 4,365 — 4,365 ( 4,365 ) — Balance – December 31, 2020 63,914 $ 6 536 $ — $ 333,047 $ ( 265,856 ) $ 67,197 $ 344 $ 67,541 Net income (loss) — — — — — 4,031 4,031 ( 160 ) 3,871 Stock-based compensation — — — — 3,366 — 3,366 — 3,366 Exchange of stock 88 — ( 88 ) — — — — — — Exercise of warrants 2,298 1 — — 64,426 — 64,427 — 64,427 Exercise of stock options 171 — — — 1,418 — 1,418 — 1,418 Tax receivable agreement liability — — — — ( 760 ) — ( 760 ) — ( 760 ) Deferred income taxes — — — — 2,937 — 2,937 — 2,937 Accrued tax distributions — — — — ( 401 ) — ( 401 ) — ( 401 ) Issuance of common stock 22 — — — — — — — — InnoHold indemnification payment — — — — 4,142 — 4,142 — 4,142 Impact of transactions affecting NCI — — — — ( 584 ) — ( 584 ) 584 — Balance – December 31, 2021 66,493 $ 7 448 $ — $ 407,591 $ ( 261,825 ) $ 145,773 $ 768 $ 146,541 The accompanying notes are an integral part of these consolidated financial statements. F- 6 PURPLE INNOVATION, INC. Consolidated Statements of Cash Flows (In thousands) Years Ended December 31, 2021 2020 2019 Cash flows from operating activities: Net income (loss) $ 3,871 $ ( 229,780 ) $ ( 30,925 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 9,473 7,899 4,308 Non-cash interest 517 3,105 3,313 Paid-in-kind interest — ( 6,616 ) — Loss on extinguishment of debt — 5,782 6,299 Change in fair value – warrant liabilities ( 24,054 ) 300,073 35,304 Tax receivable agreement (income) expense ( 4,016 ) 34,155 501 Stock-based compensation 3,366 2,185 10,063 Non-cash lease expense 4,938 3,128 — Deferred income taxes ( 3,608 ) ( 45,812 ) — Changes in operating assets and liabilities: Accounts receivable 3,681 ( 419 ) ( 18,451 ) Inventories ( 32,964 ) ( 18,098 ) ( 24,688 ) Prepaid expenses and other assets 1,744 ( 5,047 ) ( 2,557 ) Accounts payable 6,796 16,049 25,132 Accrued sales returns ( 1,312 ) 1,157 1,814 Accrued compensation ( 5,482 ) 6,255 5,263 Customer prepayments 4,601 ( 5 ) ( 1,264 ) Accrued rebates and allowances ( 722 ) 5,580 4,881 Operating lease obligations ( 2,779 ) ( 1,732 ) — Other accrued liabilities 5,047 3,398 3,887 Net cash provided by (used in) operating activities ( 30,903 ) 81,257 22,880 Cash flows from investing activities: Purchase of property and equipment ( 53,938 ) ( 27,878 ) ( 10,459 ) Investment in intangible assets ( 3,121 ) ( 11,261 ) ( 320 ) Net cash used in investing activities ( 57,059 ) ( 39,139 ) ( 10,779 ) Cash flows from financing activities: Proceeds from related-party loan — — 10,000 Proceeds from term loan — 45,000 — Payments on related-party loan — ( 37,497 ) — Payments on term loan ( 2,250 ) ( 563 ) — Proceeds from revolving line of credit 55,000 — — Proceeds from exercise of warrants 116 46,359 — Proceeds from exercise of stock options 1,418 2,007 — Repurchase of stock options — — ( 97 ) Payments for debt issuance costs — ( 2,460 ) ( 758 ) Tax receivable agreement payments ( 628 ) — — Proceeds from InnoHold indemnification payment 4,142 — — Distributions to members ( 1,175 ) ( 5,487 ) — Net cash provided by financing activities 56,623 47,359 9,145 Net increase (decrease) in cash ( 31,339 ) 89,477 21,246 Cash and cash equivalents, beginning of the year 122,955 33,478 12,232 Cash and cash equivalents, end of the year $ 91,616 $ 122,955 $ 33,478 Supplemental disclosures of cash flow information: Cash paid during the year for interest, net of amounts capitalized $ 999 $ 8,167 $ 1,869 Cash paid during the year for income taxes $ 4,645 $ 2,060 $ 122 Supplemental schedule of non-cash investing and financing activities: Property and equipment included in accounts payable $ 6,443 $ 3,305 $ 743 Issuance of liability warrants $ — $ — $ 4,864 Non-cash leasehold improvements $ 3,238 $ 5,147 $ 1,938 Accrued tax distributions $ 401 $ 668 $ 308 Tax receivable agreement liability $ 760 $ 137,314 $ — Deferred income taxes $ 2,937 $ 165,676 $ — Exercise of liability warrants $ 64,311 $ 252,796 $ — The accompanying notes are an integral part of these consolidated financial statements. F- 7 PURPLE INNOVATION, INC. Notes to the Consolidated Financial Statements 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 e-commerce online channels, retail brick-and-mortar wholesale partners, Purple retail showrooms, and third-party online 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”). 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 This summary of significant accounting policies is presented to assist in understanding the Company’s consolidated financial statements. The consolidated financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. Basis of Presentation and Principles of Consolidation The consolidated financial statements include the accounts of Purple Inc. and its controlled subsidiary Purple LLC. All intercompany balances and transactions have been eliminated in consolidation. As of December 31, 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 accompanying 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”) and reflect the financial position, results of operations and cash flows of the Company. On December 31, 2020, the Company ceased to be an emerging growth company (“EGC”) and was no longer exempt from certain reporting requirements that apply to public companies. As an EGC prior to this date, Purple Inc. had elected to use extended transition periods available to private companies for complying with new or revised accounting standards. These accounting policies have been consistently applied in the preparation of the consolidated financial statements. F- 8 Variable Interest Entities Purple LLC is a variable interest entity. 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 December 31, 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 consolidated financial statements contained herein. The holders of Purple LLC Class B Units (the “Class B Units”) held approximately 1 % of the economic interest in Purple LLC as of December 31, 2021. For further discussion see Note 14— Stockholders’ Equity . Reclassification Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year presentation with no effect on previously reported net income (loss), cash flows or stockholders’ equity. Prepaid expenses, previously included in the consolidated balance sheet within other current assets, are now presented separately. Also, the change in accrued rebates and allowances, previously reflected in the consolidated statement of cash flows within the change in other accrued liabilities, is now presented separately. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires the Company to establish accounting policies and to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the 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, sales returns, warranty returns, warrant liabilities, 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. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The carrying value of cash and cash equivalents approximates fair value because of the short-term maturity of those instruments. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are recorded net of an allowance for expected losses and consist primarily of receivables from wholesale customers and receivables from third-party consumer financing partners and credit card processors. The allowance is recognized in an amount equal to anticipated future write-offs. Management estimates the allowance for doubtful accounts based on delinquencies, aging trends, industry risk trends, historical experience and current trends. Account balances are charged off against the allowance when management believes it is probable the receivable will not be recovered. The allowance for doubtful accounts as of December 31, 2021 and 2020 was not material. Inventories Inventories are comprised of raw materials, work-in-process and finished goods and are stated at the lower of cost or net realizable value. Manufactured inventory consists of raw material, direct labor and manufacturing overhead costs. Inventory cost is calculated using a method that approximates average cost. The Company reviews the components of its inventory on a regular basis for excess and obsolete inventory and makes appropriate adjustments when necessary. Once established, the original cost of the inventory less the related inventory allowance represents the new cost basis of such products. F- 9 Property and Equipment Property and equipment are stated at cost, net of depreciation. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the respective assets, ranging from 1 to 16 years, as follows: Years Equipment 10 Furniture and fixtures 7 Office equipment 3 Leasehold improvements 1 - 16 Major renewals and betterments that increase value or extend useful life are capitalized. The Company records depreciation and amortization in cost of sales for long-lived assets used in the manufacturing process, and within each line item of operating expenses for all other long-lived assets. Leasehold improvements are amortized over the shorter of the useful life of the leasehold improvements or the contractual term of the lease, with consideration of lease renewal options if exercise is reasonably certain. The cost and related accumulated depreciation of assets sold or retired is removed from the accounts with any resulting gain or loss included in the consolidated statement of operations. The Company capitalizes interest on borrowings during the active construction period of major capital projects. Interest capitalization ceases once a project is substantially complete or no longer undergoing construction activities to prepare it for its intended use. Capitalized interest is added to the cost of the underlying assets and is amortized over the useful lives of the assets. When no debt is specifically identified as being incurred in connection with a construction project, the Company capitalizes interest on amounts expended on the project using the weighted average cost of the Company’s outstanding borrowings. Leases In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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 being an EGC on December 31, 2020, the standard became effective for the Company for its annual reporting period beginning January 1, 2020. The adoption of ASC 842 and all related amendments using the modified retrospective transition approach effective for the Company’s 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 consolidated results of operations or cash 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 elected not to separate lease and non-lease components for all real estate leases. 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 applies these incremental borrowing rates to the minimum lease payments within each lease agreement. 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 right-of-use asset as a reduction of rent expense over the lease term. Any variable lease costs are expensed as incurred. Leases with an initial term of 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 long-lived assets, which is performed whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. F- 10 Prior to fiscal 2020 , total lease payments over the non-cancellable term of a lease were recognized as rent expense on a straight-line basis over the lease term, with the excess of expense recognized over lease payments made recorded as a deferred rent liability on the balance sheet. Any lease incentive payments received from lessors were recorded as a liability on the balance sheet and amortized as a reduction of rent expense over the term of the lease. Intangible Assets Intangible assets include developed technologies and trade names / trademarks, internal-use software, domain name costs, license fees and other patent and trademark related costs. Definite-lived intangible assets are being amortized using the straight-line method over their estimated lives, ranging from three to 15 years . For software developed or obtained for internal use, the Company capitalizes direct external costs associated with developing or obtaining internal-use software. In addition, the Company capitalizes certain payroll and payroll-related costs for employees who are directly involved with the development of such applications. Capitalized costs related to internal-use software under development are treated as construction-in-progress until the program, feature or functionality is ready for its intended use, at which time amortization commences. Capitalized software costs are amortized on a straight-line basis over three years . Asset Impairment Charges Definite-lived Intangible Assets – Definite-lived intangible assets are reviewed for impairment annually or whenever events or changes in circumstances indicate impairment may have occurred. Any identified impairment would result in an adjustment to the Company’s results of operations. There were no impairment charges realized on definite-lived intangible assets during the years ended December 31, 2021 and 2019. During the year ended December 31, 2020, an impairment charge of $ 0.6 million was recorded to write-off the unamortized portion of license costs related to a vendor supply and services agreement. For further discussion see Note 7— Intangible Assets. Indefinite-lived Intangible Assets – Intangible assets that have indefinite lives are not amortized but are reviewed for impairment annually or when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. Impairment testing is based upon the best information available including estimates of fair value which incorporate assumptions marketplace participants would use in making their estimates of fair value. Accounting guidance provides for the performance of either a quantitative assessment or a qualitative assessment before calculating the fair value of an asset. For its indefinite lived intangibles assets, the Company assessed qualitative factors to determine whether any events or circumstances existed which indicated that it was more likely than not that the fair value of its indefinite lived assets did not exceed their carrying values. The Company concluded no such events or circumstances existed which would require an impairment test be performed beyond the qualitative assessment. In the future, if events or market conditions affect the estimated fair value to the extent that an asset is impaired, the Company will adjust the carrying value of these assets in the period in which the impairment occurs. Long-Lived Assets – Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is assessed by a comparison of the carrying amount of the asset to the estimated future undiscounted net cash flows expected to be generated by the asset or group of assets. If estimated future undiscounted net cash flows are less than the carrying amount of the asset or group of assets, the asset is considered impaired and an expense is recorded in an amount required to reduce the carrying amount of the asset to its then fair value. Fair value generally is determined from estimated discounted future net cash flows (for assets held for use) or net realizable value (for assets held for sale). The Company did not record any impairment losses on long-lived assets during the years ended December 31, 2021, 2020 or 2019. Cooperative Advertising, Rebate and Other Promotion Programs The Company enters into programs with certain wholesale partners to provide funds for advertising and promotions as well as volume and other rebate programs. When sales are made to these customers, the Company records liabilities pursuant to these programs. The Company periodically assesses these liabilities based on actual sales to determine whether all of the cooperative advertising earned will be used by the customer or whether the customer will meet the requirements to receive rebate funds. Significant estimates are required at any point in time with regard to the ultimate reimbursement to be claimed by the customers. Subsequent revisions to the estimates are recorded and charged to earnings in the period in which they are identified. Rebates and certain cooperative advertising amounts are classified as a reduction of revenue and presented within net revenues in the accompanying consolidated statements of operations. Cooperative advertising expenses that can be identified as a distinct good or service and for which the fair value can be reasonably estimated are recorded, when incurred, as components of marketing and sales expenses in the accompanying consolidated statements of operations. F- 11 Advertising Costs The Company incurs advertising costs associated with print, digital and broadcast advertisements. Advertising costs are expensed when the advertisements are run for the first time and included in marketing and selling expenses in the accompanying consolidated statements of operations. Advertising expense was $ 149.8 million, $ 130.3 million and $ 112.1 million for the years ended December 31, 2021, 2020 and 2019, respectively. Advertising costs in 2021 and 2020 included $ 2.7 million and $ 1.2 million, respectively, related to shared advertising costs that the Company incurred under its cooperative advertising programs to the extent the fair value of the distinct good or service were reasonably estimable. There were no cooperative advertising costs in 2019. Revenue Recognition The Company markets and sells its products through e-commerce online channels, retail brick-and-mortar wholesale partners, Purple retail showrooms, and third-party online retailers. Revenue is recognized when the Company satisfies its performance obligations under the contract which involves 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 e-commerce online channel, Purple retail showrooms 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. F- 12 Cost of Revenues Costs associated with net revenues are recorded in cost of revenues in the same period in which related sales have been recorded. Cost of revenues includes the costs of receiving, producing, inspecting, warehousing, insuring, and shipping goods during the period, as well as depreciation and amortization of long-lived assets used in these processes. Cost of sales also includes shipping and handling costs associated with the delivery of goods to customers. Sales Returns The Company’s policy provides customers up to 100-days to return a mattress, pet bed or pillow and up to 30-days to return all other products (except power bases) for a full refund. Estimated sales returns, which are recorded as a reduction of revenue at the time of sale and 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. As of December 31, 2021 and 2020, $ 7.1 million and $ 8.4 million, respectively, were included as accrued sales returns in the accompanying consolidated balance sheets. The Company had the following activity for sales returns: Years Ended December 31, (in thousands) 2021 2020 2019 Balance at beginning of period $ 8,428 $ 7,271 $ 5,457 Additions that reduced net revenue 45,561 50,504 34,390 Deduction from reserves for current year returns ( 46,873 ) ( 49,347 ) ( 32,576 ) Balance at end of period $ 7,116 $ 8,428 $ 7,271 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 estimated warranty costs expected to be paid beyond a year as a long-term liability. As of December 31, 2021 and 2020, $ 3.9 million and $ 2.8 million of warranty liabilities are included in other current liabilities and $ 11.1 million and $ 5.6 million of warranty liabilities are included in other long-term liabilities on the accompanying consolidated balance sheets, respectively. The Company had the following activity for warranty liabilities: Years Ended December 31, (in thousands) 2021 2020 2019 Balance at beginning of period $ 8,397 $ 4,621 $ 2,009 Additions charged to expense for current year sales 9,234 6,399 4,185 Deduction from reserves for current year claims ( 2,618 ) ( 2,623 ) ( 1,573 ) Balance at end of period $ 15,013 $ 8,397 $ 4,621 Debt Issuance Costs and Discounts Debt issuance costs and discounts that relate to borrowings are presented in the consolidated balance sheet as a direct 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 that relate to revolving lines of credit are carried as an asset in the 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 9 – Debt. F- 13 Warrant Liabilities The Company accounted for 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. 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. 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. 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 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 December 31, 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. 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, and the Company’s debt obligations. The carrying amounts of cash and cash equivalents, receivables and accounts payable approximate fair value because of the short-term nature of these accounts. The fair value of the Company’s debt instruments is estimated to be face value based on the contractual terms of the debt arrangements and market-based expectations. The public warrant 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 instruments and use internal 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 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 generally increase (decrease) in value if the expected average life or expected volatility were to increase (decrease). F- 14 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: December 31, (In thousands) Level 2021 2020 Sponsor warrants 3 $ 4,343 $ 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 years ended December 31, 2021, 2020 and 2019: (In thousands) Sponsor Warrants Incremental Loan Warrants Total Level 3 Liabilities Fair value as of December 31, 2018 $ 2,673 $ — $ 2,673 Initial measurement — 4,864 4,864 Fair value transfer to Level 1 measurement ( 321 ) — ( 321 ) Change in valuation inputs (1) 5,337 16,758 22,095 Fair value as of December 31, 2019 $ 7,689 $ 21,622 $ 29,311 Fair value transfer to Level 1 measurement ( 1,275 ) — ( 1,275 ) Fair value of warrants exercised ( 3,690 ) ( 81,040 ) ( 84,730 ) Change in valuation inputs (1) 89,984 59,418 149,402 Fair value as of December 31, 2020 $ 92,708 $ — $ 92,708 Fair value transfer to Level 1 measurement — — — Fair value of warrants exercised ( 64,311 ) — ( 64,311 ) Change in valuation inputs (1) ( 24,054 ) — ( 24,054 ) Fair value as of December 31, 2021 $ 4,343 $ — $ 4,343 (1) Changes in valuation inputs are recognized as the change in fair value – warrant liabilities in the consolidated statement of operations. Stock Based Compensation The Company accounts for stock-based compensation under the provisions of ASC 718, Compensation—Stock Compensation . This standard requires the Company to record an expense associated with the fair value of stock-based compensation over the requisite service period. During 2021, 2020 and 2019, the Company granted stock options under the Company’s 2017 Equity Incentive Plan to certain officers, executives and employees of the Company. The fair value for these awards was determined using the Black-Scholes option valuation model at the date of grant. Stock based compensation on these awards is expensed on a straight-line basis over the vesting period. Option pricing models require the input of subjective assumptions including the expected term of the stock option, the expected price volatility of the Company’s common stock over the period equal to the expected term of the grant, and the expected risk-free rate. Changes in these assumptions can materially affect the fair value estimate. The Company recognizes forfeitures of stock option awards as they occur. During 2021, 2020 and 2019, the Company granted stock awards under the 2017 Equity Incentive Plan to members of the Company’s Board of Directors and Board advisor for services performed. Stock based compensation for these stock awards was determined on the grant date based on the publicly quoted closing price of our common stock and was expensed on the grant date since all the awards were immediately vested. During 2021, the Company granted restricted stock units under the Company’s 2017 Equity Incentive Plan to certain employees of the Company. Approximately one-third of the restricted stock units granted included a market vesting condition. The estimated fair value of the restricted stock units that do not have the market vesting condition is recognized on a straight-line basis over the vesting period. The estimated fair value of the stock units that included a market vesting condition was measured on the grant date using a Monte Carlo Simulation of a Geometric Brownian Motion stock path model and incorporated the probability of vesting occurring. The estimated fair value of these awards is recognized over the derived service period (as determined by the valuation model), with such recognition occurring regardless of whether the market condition is met. F- 15 In May and June 2020, the Company granted restricted stock awards under the Company’s 2017 Equity Incentive Plan to certain employees of the Company. The stock awards vest over 3 to 4 years. The estimated fair value of restricted stock is measured on the grant date and is recognized as expense over the vesting period. In March 2020, 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 vested in March 2021. As this award included a service condition, the estimated fair value of the restricted stock was measured on the grant date and recognized over the service period. The Company determined that the fair value of the restricted stock on the grant date was immaterial. During 2019, the Company granted a restricted stock award that had certain vesting conditions which could be met at the earliest in the twelve months ended March 31, 2022. All of the vesting conditions were satisfied on September 30, 2021 and all of the shares became unrestricted on that date. As this award included a market vesting condition, stock-based compensation was determined as the estimated fair value of the restricted stock measured on the grant date using a Monte Carlo Simulation of a Geometric Brownian Motion stock path model which incorporated the probability of vesting occurring. The fair value of the restricted stock was expensed over the derived service period which ended when all of the shares became issuable. 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. 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. The Company’s 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. 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. Tax Receivable Agreement In connection with the Business Combination, the Company entered into the 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 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 (a “TRA 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 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. F- 16 Segment Information Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”). The role of the CODM is to make decisions about allocating resources and assessing performance. The Company’s operations are based on an omni-channel distribution strategy that allows the Company to offer a seamless shopping experience to its customers across multiple sales channels. The Company concluded its business operates in one operating segment as all of the Company’s sales channels are complimentary and analyzed in the same manner. Also, the CODM reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance . Since the Company operates in one operating segment, all required financial segment information can be found throughout the consolidated financial statements. The Company’s chief executive officer has been identified as its CODM. Net Income (Loss) Per Share Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of Class A stock outstanding during each period. Diluted net income (loss) per share reflects the weighted-average number of common shares outstanding during the period used in the basic net income (loss) computation plus the effect of common stock equivalents that are dilutive. 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, share-based payment awards and the vesting of unvested Class A Stock. Recent Accounting Pronouncements Reference Rate Reform In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04), which provides guidance to alleviate the burden in accounting for reference rate reform by allowing certain expedients and exceptions in applying generally accepted accounting principles to contracts, hedging relationships, and other transactions impacted by reference rate reform. The provisions of ASU 2020-04 apply only to those transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. This standard is currently effective and 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 rates on the Company’s term loan and revolving line of credit are based on LIBOR. In February 2022 the Company entered into an amendment to the 2020 Credit Agreement that changed the interest reference rate from LIBOR to SOFR. See Note 20— Subsequent Events for discussion of the amendment to the 2020 Credit Agreement. The Company plans to apply the amendments in this update to account for this and any contract modifications that result from changes in the reference rate used. The Company does not expect these amendments to have a material impact on its consolidated financial statements and related disclosures. 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). 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 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 became effective for fiscal years beginning after December 15, 2020 and for interim periods within those fiscal years. Early adoption was permitted. The adoption of this standard by the Company on January 1, 2021 did not have a material impact on the Company’s financial position, results of operations, or cash flows. Measurement of Credit Losses In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial 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 standard is effective for the Company’s interim and annual financial periods beginning January 1, 2023. This standard is to be applied utilizing a modified retrospective approach. The Company is currently evaluating the impact of this standard on its accounts receivable, cash and cash equivalents, and any other financial assets measured at amortized cost and does not expect that adoption will have a material impact on its consolidated financial statements or related disclosures. F- 17 3. Revenue from Contracts with Customers Revenue is recognized when the Company satisfies its performance obligations under the contract which involves transferring the promised products to the customer as described in Note 2 – Summary of Significant Accounting Policies . Disaggregated Revenue The Company classifies revenue into two categories: DTC and Wholesale. The DTC category is comprised of the e-commerce channel that sells directly to consumers who purchase online and through our contact center, and the Purple retail showrooms channel that sells directly to consumers who purchase at a showroom location. The wholesale channel includes all product sales to our retail brick and mortar wholesale partners where consumers make purchases at their retail locations or their online channels. The Company classifies products into two major categories: sleep products and other. Sleep 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): Years Ended December 31, Channel 2021 2020 2019 Direct-to-consumer $ 474,217 $ 485,305 $ 265,205 Wholesale 252,010 163,166 163,153 Revenues, net $ 726,227 $ 648,471 $ 428,358 Years Ended December 31, Product 2021 2020 2019 Sleep products $ 664,484 $ 598,046 $ 401,499 Other 61,743 50,425 26,859 Revenues, net $ 726,227 $ 648,471 $ 428,358 Contract Balances Payment for sale of products through the e-commerce online channel, third-party online retailers, Purple retail 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 $ 10.9 million and $ 6.3 million at December 31, 2021 and 2020, respectively. During the years ended December 31, 2021, 2020 and 2019, the Company recognized all of the revenue that was deferred in customer prepayments at December 31, 2020, 2019 and 2018, respectively. 4. Inventories Inventories consisted of the following: As of December 31, (in thousands) 2021 2020 Raw materials $ 33,609 $ 26,372 Work-in-process 4,023 3,593 Finished goods 63,419 36,280 Inventory obsolescence reserve ( 2,361 ) ( 519 ) Inventories, net $ 98,690 $ 65,726 F- 18 5. Property and Equipment Property and equipment consisted of the following: As of December 31, (in thousands) 2021 2020 Equipment $ 58,094 $ 30,508 Equipment in progress 19,840 18,648 Leasehold improvements 38,098 15,758 Furniture and fixtures 12,482 5,160 Office equipment 4,843 3,185 Total property and equipment 133,357 73,259 Accumulated depreciation ( 20,743 ) ( 11,773 ) Property and equipment, net $ 112,614 $ 61,486 Equipment in progress reflects equipment, primarily related to mattress manufacturing, which is being constructed and was not in service at December 31, 2021 or 2020. Interest capitalized on borrowings during the active construction period of major capital projects totaled $ 1.0 million during the year ended December 31, 2021. There was no interest capitalized during 2020 or 2019. Depreciation expense was $ 9.2 million, $ 5.5 million and $ 3.6 million for the years ended December 31, 2021, 2020 and 2019, respectively. 6. Leases The Company leases its manufacturing and distribution facilities, corporate offices, Purple retail 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 Purple retail showrooms have initial lease terms of up to ten 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 $ 0.7 million and $ 0.6 million as of December 31, 2021 and 2020, respectively. The following table presents the Company’s lease costs (in thousands): Years Ended December 31, 2021 2020 Operating lease costs $ 8,910 $ 5,736 Variable lease costs 2,207 317 Short-term lease costs 224 34 Total lease costs $ 11,341 $ 6,087 In 2019, the Company recorded 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 year ended December 31, 2019, the Company recognized rent expense of $ 3.9 million. The table below reconciles the undiscounted cash flows for each of the first five years and total remaining years to the operating lease liabilities recorded on the consolidated balance sheet at December 31, 2021 (in thousands): Year ended December 31, 2022 (1) $ 8,453 2023 11,475 2024 11,514 2025 11,408 2026 11,286 Thereafter 63,360 Total operating lease payments 117,496 Less – lease payments representing interest ( 29,284 ) Present value of operating lease payments $ 88,212 (1) – Amount consists of $ 11.6 million of undiscounted cash flows offset by $ 3.2 million of tenant improvement allowances which are expected to be fully utilized in fiscal 2022. F- 19 As of December 31, 2021 and 2020, the weighted-average remaining term of operating leases was 10.7 years and 11.8 years, respectively, and the weighted-average discount rate was 5.30 % and 6.18 %, respectively, for operating leases recognized on the consolidated balance sheet. The following table provides supplemental information related to the Company’s consolidated statement of cash flows (in thousands): Years Ended December 31, 2021 2020 Cash paid for amounts included in present value of operating lease liabilities $ 2,779 $ 1,732 Right-of-use assets obtained in exchange for operating lease liabilities 31,567 17,216 At the inception of a lease entered into in fiscal 2020, the Company recorded $ 0.9 million for the present value of an asset retirement obligation (ARO) to cover costs associated with the future restoration of the leased property. During the year ended December 31, 2021, the Company recorded accretion of the ARO liability totaling $ 0.1 million. The Company recorded a minimal amount of accretion in 2020. The ARO liability at both December 31, 2021 and 2020 was $ 0.9 million. 7. Intangible Assets The following table provides the components of intangible assets: As of December 31, 2021 As of December 31, 2020 (in thousands, Useful life Gross Accumulated Net Carrying Gross Accumulated Net Carrying except useful life) (years) Cost Amortization Value Cost Amortization Value Indefinite-lived non-amortizing: License agreement $ 8,456 $ — $ 8,456 $ 8,456 $ — $ 8,456 Trademarks 30 — 30 30 — 30 Definite-lived amortizing: Internet domain 15 900 ( 250 ) 650 900 ( 190 ) 710 License agreement 1 2,220 ( 2,220 ) — 2,220 ( 2,220 ) — Internal-use software 3 4,467 ( 399 ) 4,068 921 ( 172 ) 749 Intangible assets, net $ 16,073 $ ( 2,869 ) $ 13,204 $ 12,527 $ ( 2,582 ) $ 9,945 Prior to the Business Combination, Purple LLC entered into an agreement pursuant to which EdiZONE transferred tangible and intellectual property to Purple LLC that was then licensed back to EdiZONE to enable them to continue to meet certain preexisting license obligations it had with various third parties. On August 14, 2020, Purple LLC entered into a separate agreement whereby EdiZONE, for consideration of $ 8.5 million, assigned a license agreement with Advanced Comfort Technologies, Inc. dba Intellibed (“ACTI”), and related royalties payable thereunder, to Purple LLC, along with the trademarks GEL MATRIX and INTELLIPILLOW. The payment made to EdiZONE was recorded in the Company’s consolidated balance sheet at December 31, 2020 as an indefinite-lived non-amortizing license because the agreement with ACTI is perpetual. F- 20 On January 13, 2020, Purple LLC entered into a supply and services agreement with Responsive Surface Technology, LLC (“ReST”) whereby the Company acquired a license and made a prepayment for future products and services to be provided by the third party. The $4.0 million paid upon execution of the contract was allocated to a license for certain technologies ($2.2 million), inventory to be utilized by the third party in the production of goods ($0.8 million) and future professional services to be delivered by the third party ($1.0 million). On October 13, 2020, Purple LLC filed suit against ReST and its parent company for alleged violations under the contract. In response, ReST filed a counter lawsuit against Purple LLC. These lawsuits effectively ended any future performance under the contract. As a result, during the third quarter of fiscal 2020, the Company recorded as cost of revenues in its consolidated statement of operations an impairment charge of $ 0.6 million for unamortized license costs. The Company also recorded write-offs of $ 0.8 million, and $ 0.3 million for prepaid professional services and prepaid inventory, respectively. Refer to Note 12 — Commitments and Contingencies — Legal Proceedings for additional information. There were no impairment charges related to intangible assets in 2021 or 2019. Amortization expense for intangible assets was $ 0.3 million, $ 2.4 million and $ 0.7 million for the years ended December 31, 2021, 2020 and 2019, respectively. Estimated amortization expense for definite-lived intangible assets is expected to be as follows for the next five years: (in thousands) Year ended December 31, 2022 $ 1,039 2023 1,233 2024 1,304 2025 533 2026 259 Thereafter 350 Total future amortization for definite-lived intangible assets $ 4,718 8. Other Current Liabilities The Company’s other current liabilities consisted of the following: As of December 31, (in thousands) 2021 2020 Warranty accrual - current portion $ 3,914 $ 2,806 Long-term debt and unamortized issuance costs - current portion 2,297 2,004 Insurance financing 1,043 910 Tax receivable agreement liability – current portion 5,847 6,545 Other 369 1,318 Total other current liabilities $ 13,470 $ 13,583 9. Debt Debt consisted of the following (in thousands): December 31, December 31, 2021 2020 Term loan $ 42,188 $ 44,438 Revolving line of credit 55,000 — Less: unamortized debt issuance costs ( 778 ) ( 1,024 ) Total debt 96,410 43,414 Less: current portion of debt and unamortized issuance costs ( 2,297 ) ( 2,004 ) Debt, net of current portion $ 94,113 $ 41,410 F- 21 Term Loan and Revolving Line of Credit On September 3, 2020, Purple LLC entered into a financing arrangement with KeyBank National Association and a group of financial 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 are based on Purple LLC’s leverage ratio, as defined in the 2020 Credit Agreement, and can range from LIBOR plus a 3.00 % to 3.75 % margin with a LIBOR minimum of 0.50%. The current borrowing rate of 3.50% is based on LIBOR plus 3.00%. The term loan will be repaid 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. As of December 31, 2021, there was no mandatory prepayment obligation. Pursuant to a Pledge and Security Agreement between Purple LLC, KeyBank and the Company (the “Security Agreement”), the 2020 Credit Agreement is secured by a perfected first-priority security interest in the assets of Purple LLC and the 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 Security Agreement contains a pledge, as security for the Company’s guaranty, of all its ownership 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, and contains standard indemnifications benefitting the lenders. The 2020 Credit Agreement 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 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 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 and fixed charge coverage ratio thresholds at certain measurement 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, could be declared immediately due and payable. The Company was unable to meet certain financial and performance covenants required pursuant to the 2020 Credit agreement for the year ended December 31, 2021. The Company was granted a waiver and entered into an amendment of the 2020 Credit Agreement. See Note 20— Subsequent Events for a discussion of the amendment. The $ 55.0 million revolving credit facility established under the 2020 Credit Agreement has a term of five years and carries the same interest provisions as the term debt. A commitment fee is due quarterly based on the applicable margin applied to the unused total revolving commitment. The agreement for this revolving credit facility contains customary covenants and events of default. In November 2021, pursuant to the 2020 Credit Agreement, the Company executed a $55.0 million draw on its revolving line of credit, which represents the full amount available under the revolving credit facility. The initial borrowing rate of 3.50% was based on the LIBOR floor of 0.5% plus 3.00%. The Company incurred $ 2.5 million in debt issuance costs for the 2020 Credit Agreement. These costs relate to the entire credit arrangement and therefore were allocated between the term loan and the revolving line of credit. The Company determined $ 1.1 million of the debt issuance costs related to the term debt and are presented in the consolidated balance sheet as a direct reduction from the carrying amount of the debt liability. 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 debt issuance costs were allocated to the revolving line of credit. This amount is classified as other assets and is being amortized to interest expense on a straight-line basis over the term of the revolving credit facility. The interest rate for both the term loan and revolving credit facility throughout the year ended December 31, 2021 was 3.5% based on the LIBOR floor of 0.5% plus 3.0%. Interest expense under the 2020 Credit Agreement totaled $ 2.4 million and $ 0.7 million for the years ended December 31, 2021 and 2020, respectively. Related Party Loan On February 2, 2018, Purple LLC entered into a 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 (the “2018 Credit Agreement”) in an aggregate principal amount of $ 25.0 million (the “Original Loan”). F- 22 On January 28, 2019, Purple LLC entered into a First Amendment to the 2018 Credit Agreement (the “First Amendment”) whereby 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 (the “Incremental Loan”) such that the total amount of principal indebtedness provided to Purple LLC was increased to $35.0 million. Upon funding the $10.0 million Incremental Loan on February 26, 2019, the Company issued to the Incremental Lenders 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. 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 concluded there were 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 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 during 2019. 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 warrants at the time of issuance. On March 27, 2020, the Company entered into the First Amendment to the Amended and Restated Credit Agreement with the Lenders. Pursuant to the Amendment, the Company deferred and capitalized the full amount of interest payments 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 existing debt in accordance with ASC 470 - Debt . On September 3, 2020, the Company paid $ 45.0 million to retire, in full, all indebtedness related to Purple LLC’s 2018 Credit Agreement and all its related amendments and agreements. The payment included $ 25.0 million for the Original Loan, $ 10.0 for the Incremental Loan, $ 6.6 million of paid-in-kind interest, $ 2.5 million for a prepayment fee and $ 0.9 million for accrued interest. The Company accounted for the pay off of the 2018 Credit Agreement and all its subsequent agreements and amendments as an extinguishment of debt in accordance with ASC 470 - Debt . Accordingly, the Company recognized a $ 5.8 million loss in 2020 that consisted of $ 2.5 million in prepayment fees and $ 3.3 million in the recognition of related unamortized debt discount and debt issuance costs. Interest expense under the 2018 Credit Agreement was $ 4.0 million and $ 4.4 million for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2021, the scheduled maturities of debt outstanding for each of the next five years and thereafter are as follows (in thousands): Year ended December 31, Total 2022 $ 2,532 2023 3,375 2024 3,656 2025 87,625 2026 — Thereafter — Total $ 97,188 F- 23 10. Warrant Liabilities On February 26, 2019, the Incremental Lenders funded the $10.0 million Incremental Loan and received 2.6 million 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. 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 was reduced to zero based on the formula established in the agreement. The Company accounted for the Incremental Loan Warrants as liabilities in accordance with ASC 480 - Distinguishing Liabilities from Equity 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 all of the 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 exercise. The fair value of the Incremental Loan Warrants was $ 21.6 million at December 31, 2019. The Company recorded losses of $ 59.4 million and $ 16.8 million related to increases in the fair value of the Incremental Loan Warrants for the years ended December 31, 2020 and 2019, respectively. The fair value of the Incremental Loan Warrants 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 the date of the exercise: Trading price of common stock on measurement date $ 31.00 Exercise price — Risk free interest rate 0.90 % Warrant life in years 0.07 Expected volatility 45.46 % Expected dividend yield — Probability of an event causing a warrant re-price 100.00 % The following are the assumptions used in calculating fair value on December 31, 2019: Trading price of common stock on measurement date $ 8.71 Exercise price $ 5.74 Risk free interest rate 1.69 % Warrant life in years 4.2 Expected volatility 36.82 % Expected dividend yield — Probability of warrant re-price 95 % The public and sponsor warrants that were issued in connection with the Company’s initial public offering and a 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 the 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. In 2021, 6.6 million sponsor warrants were exercised resulting in the issuance of 2.3 million shares of Class A common stock and cash proceeds to the Company of $ 0.1 million. 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. There were no public warrants or sponsor warrants exercised during 2019. The 1.9 million sponsor warrants outstanding at December 31, 2021 had a fair value of $ 4.3 million, while the 8.5 million sponsor warrants outstanding at December 31, 2020 had a fair value of $ 92.7 million. All of the public warrants were exercised during fiscal 2020. The fair value of the public and sponsor warrants outstanding at December 31, 2019 was $ 23.8 million. F- 24 The Company determined the fair value of the public warrants based on their public trading price. The Company determined the fair value of the sponsor warrants using a Black Scholes model with the following assumptions: December 31, 2021 2020 2019 Trading price of common stock on measurement date $ 13.27 $ 32.94 $ 8.71 Exercise price $ 5.75 $ 5.75 $ 5.75 Risk free interest rate 0.39 % 0.13 % 1.62 % Warrant life in years 1.1 2.1 3.1 Expected volatility 73.78 % 50.64 % 38.06 % Expected dividend yield — — — During the year ended December 31, 2021, the Company recognized a gain of $ 24.1 million in its consolidated statement of operations related to decreases in the fair value of the sponsor warrants exercised during the respective periods or that were outstanding at the end of the respective period. 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. 11. Other Long-Term Liabilities Other long-term liabilities consisted of the following (in thousands): As of December 31, 2021 2020 Warranty accrual $ 15,013 $ 8,397 Other 962 912 Total 15,975 9,309 Less: current portion of warranty accrual ( 3,914 ) ( 2,806 ) Other long-term liabilities, net of current portion $ 12,061 $ 6,503 12. 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. The Second Purple LLC Agreement and the Third Purple LLC Agreement do not include any mandatory distributions, other than tax distributions. During the years ended December 31, 2021 and 2020, the Company paid $ 1.2 million and $ 5.5 million, respectively, in tax distributions under these agreements. At December 31, 2021, the Company’s consolidated balance sheet had a $ 0.1 million net asset associated with these tax distributions due to overpayments. At December 31, 2020, the Company’s consolidated balance sheet had $ 0.7 million of accrued tax distributions included in other current liabilities. No distributions were made under these agreements in 2019. Service Agreement In October 2017, the Company entered into an electric service agreement with the local power 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 there. 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 December 31, 2021, the early termination penalty was $ 0.7 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. F- 25 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 Business Combination, to secure the payment of a certain portion of specified post-closing indemnification rights of the Company, 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 date of the Business Combination 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. 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 fiscal 2021 consolidated balance sheet. Subscription Agreement and Preemptive Rights 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. Rights of Securities Holders The holders of certain warrants exercisable into Class A Stock, including CCP, Blackwell and 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 by the Company as general and administrative expense in the consolidated statement of operations for the year ended December 31, 2021. 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. On November 9, 2020, the Company issued 2.6 million shares of Class A common stock in exchange for the exercised Incremental Loan Warrants. 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. F- 26 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, 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. 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 Third Purple LLC Agreement, or if such exchange would cause Purple LLC to be treated as a “publicly traded partnership” under applicable tax laws. 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 years ended December 31, 2021 and 2020, 0.1 million and 30.9 million, respectively, of Paired Securities were exchanged for shares of Class A Stock. 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. The 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 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 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 the Company conducts or will conduct business. F- 27 Legal Proceedings On September 20, 2020, Purple LLC filed a complaint in 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. On March 12, 2021, the United States filed a master answer that applies to 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. 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 U.S. 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 because Case II 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. However, the Court granted ReST’s motion to compel arbitration, and stayed the proceedings in the United States District Court for the District of Utah. Additionally, the Court ruled that ReST’s claims against the Purple board members were not subject to arbitration, and the Court stayed ReST’s claims against those individuals. Pursuant to the Court’s order, Purple filed a demand for arbitration with the American Arbitration Association (the “AAA”) on September 1, 2021. ReST filed its counterclaim with the AAA on September 21, 2021. The parties have selected an arbitrator, and they have proposed a scheduling order for the arbitrator. The proposed scheduling order contemplates an arbitration hearing to occur during the fourth quarter of 2022. Purple LLC seeks $5.5 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. 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. On September 28, 2021, the District Court dismissed Purple’s complaint without prejudice, and also dismissed ACTI’s counterclaim without prejudice, while the parties pursued dispute-resolution procedures set out in the license agreement. Because the Court found that the license agreement required the parties to follow the contractual dispute-resolution procedures prior to filing a lawsuit, Purple initiated those procedures in accordance with the license agreement and intends to continue to vigorously pursue its claims. 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 an allegedly valid 2015 noncompete agreement. SSB sought compensatory damages, punitive damages, equitable relief, and attorneys’ fees as a result of the conduct alleged in the Complaint. SSB also initiated arbitration proceedings against its former employee who Purple LLC agreed to indemnify, subject to certain conditions. 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. 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. The Company filed a motion for summary judgment on these claims on August 16, 2021. SSB filed an answer on August 18, 2021. After attending a mediation, the parties entered into a settlement agreement on December 31, 2021 resolving all claims in the Georgia Litigation and Utah Litigation. The Company did not pay any monetary consideration to SSB in connection with the settlement agreement. On January 12, 2022, pursuant to the terms of the settlement agreement, SSB dismissed the Georgia Litigation without prejudice and the Company dismissed the Utah Litigation without prejudice. 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. F- 28 13. 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. 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 were also the Lenders under the Amended and Restated Credit Agreement. In 2018, the Lenders agreed to make the Original Loan in an aggregate principal amount of $ 25.0 million pursuant to the 2018 Credit Agreement entered into as part of the Business Combination. In conjunction with the 2018 Credit 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, the Incremental Lenders agreed to provide the $10.0 million Incremental Loan and 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, the exercise price of the Incremental Loan Warrants was adjusted to zero pursuant to the terms of the warrant agreement. On November 9, 2020, the Company issued 2.6 million shares of Class A common stock in exchange for the Incremental Loan Warrants held by the Incremental Lenders (See Note 10 — Warrant Liabilities) . In accordance with the First Amendment to the Amended and Restated Credit Agreement, the Company did not make any cash interest payments to the Lenders during the first and second quarters of 2020. On September 3, 2020, the Company paid $45.0 million to retire, in full, all indebtedness related to Purple LLC’s 2018 Credit Agreement. The payment included the $25.0 million Original Loan, the $10.0 Incremental Loan, $6.6 million of paid-in-kind interest, $2.5 million in a prepayment fee and $0.9 million in accrued interest (See Note 9 — Debt) . 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. F- 29 Purple Founder Entities TNT Holdings, LLC (herein “TNT Holdings”), EdiZONE, LLC, (herein EdiZONE an entity wholly owned by TNT Holdings) and InnoHold (collectively the “Purple Founder Entities”) were entities under common control with Purple LLC prior to the Business Combination. TNT Holdings and InnoHold are majority owned and controlled by Terry Pearce and Tony Pearce (the “Purple Founders”), who were appointed to the Company’s Board 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 in a secondary public offering in September 2020. The Purple Founders also resigned as employees of Purple LLC and retired from the Board in August 2020. TNT Holdings owned the Alpine facility Purple LLC has been leasing since 2010, and the Purple Founders informed Purple LLC 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 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 or 123E LLC. Purple LLC incurred $ 0.9 million, $ 0.9 million and $ 1.0 million in rent expense to 123E LLC or TNT Holdings for the building lease of the Alpine facility for the years ended December 31, 2021, 2020 and 2019, respectively. Purple LLC continues to lease the Alpine facility that was formerly the Company headquarters, for use in production, research and development and video production. In accordance with the terms of that lease, on September 1, 2021, Purple LLC gave notice to 123E LLC that it intended to exercise its right to an early termination of the lease to occur on September 30, 2022. During the years ended December 31, 2021 and 2020, 0.1 million and 30.9 million Paired Securities, respectively, have been exchanged for Class A Stock by InnoHold and certain current and former employees of the Company who received distributions of such Paired Securities from InnoHold. 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 separate agreement whereby EdiZONE, for consideration of $ 8.5 million, assigned a license agreement with Advanced Comfort Technologies, Inc., dba Intellibed (“Intellibed”), and related royalties payable thereunder, to Purple LLC, 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. During the year ended December 31, 2021, Purple LLC paid InnoHold through withholding payments directly to various states, an aggregate of $ 0.6 million in required tax distributions pursuant to the Third Purple LLC Agreement. During the year ended December 31, 2020, Purple LLC paid InnoHold either directly or through withholding payments directly to various states, an aggregate of $ 4.6 million in required tax distributions pursuant to the Second Purple LLC Agreement. 14. 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 December 31, 2021, 66.5 million shares of Class A Stock were outstanding. F- 30 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 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 day period. Accordingly, these shares of Class A Stock are no longer subject to vesting or forfeiture. 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 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. In connection with the Business Combination, approximately 44.1 million shares of Series B Stock were issued to InnoHold as part of the equity consideration. InnoHold subsequently transferred a portion of its shares to permitted transferees and exchanged its remaining shares for Class A Stock that it sold. All of the 0.4 million shares of Class B Stock outstanding at December 31, 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 December 31, 2021, there were no shares of preferred stock outstanding. Public and Sponsor Warrants There were 15.5 million public warrants issued in connection with GPAC’s formation and initial public offering and 12.8 million warrants issued pursuant to a private placement simultaneously with the initial public offering. 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 the terms of the warrant agreement. In accordance with the warrant agreement, a warrant holder may exercise its warrants only for a whole number of shares 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. F- 31 The 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, so long as such sponsor warrants are held by the sponsor or its permitted transferee, the holder may elect to exercise the sponsor warrants on a cashless basis, by surrendering their 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, 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 remain the same as the public warrants. 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 warrants 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. In 2021, 6.6 million sponsor warrants were exercised resulting in the issuance of 2.3 million shares of Class A common stock and cash proceeds to the Company of $ 0.1 million. During the year ended December 31, 2020, 15.5 million Public Warrants and 4.3 million Sponsor Warrants were exercised or redeemed resulting in the issuance of 7.6 million shares of Class A common stock and cash proceeds to the Company of $ 46.4 million. There were no public warrants or sponsor warrants exercised during 2019. At December 31, 2021 and 2020, there were 1.9 million and 8.5 million sponsor warrants outstanding, respectively. All of the public warrants were exercised during fiscal 2020. Incremental Loan Warrants In connection with the Amended and Restated Credit Agreement, the Company issued to the Incremental Lenders 2.6 million Incremental Loan Warrants to purchase 2.6 million shares of the Company’s Class A Stock. Each Incremental Loan Warrant 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. 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 was reduced to 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. F- 32 Noncontrolling Interest Noncontrolling interest (“NCI”) is the membership interest in Purple LLC held by holders other than the Company. At December 31, 2021 and 2020, 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. 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): Years Ended December 31, 2021 2020 2019 Numerator: Net income (loss) attributable to Purple Innovation, Inc. – basic $ 4,031 $ ( 236,867 ) $ ( 22,573 ) Less: Dilutive effect of change in fair value – warrant liabilities ( 24,054 ) — — Less: Net loss attributable to noncontrolling interest ( 160 ) — — Net loss attributable to Purple Innovation, Inc. – diluted $ ( 20,183 ) $ ( 236,867 ) $ ( 22,573 ) Denominator Weighted average shares – basic 65,928 39,219 10,006 Add: Dilutive effect of equity awards 920 — — Add: Dilutive effect of Class B shares 454 — — Weighted average shares – diluted 67,302 39,219 10,006 Net income (loss) per common share: Basic $ 0.06 $ ( 6.04 ) $ ( 2.26 ) Diluted $ ( 0.30 ) $ ( 6.04 ) $ ( 2.26 ) For the year ended December 31, 2021, the Company excluded 2.6 million shares of Class A Stock issuable upon conversion of certain stock options, restricted stock and Class A shares subject to vesting as the effect was anti-dilutive. For the year ended December 31, 2020, the Company excluded 0.1 million shares of issued Class A Stock subject to vesting, 6.5 million shares of Class A Stock issuable upon conversion of the Company’s warrants and options, and 0.5 million Paired Securities convertible into shares of Class A Stock as the effect was anti-dilutive. For the year ended December 31, 2019, the Company excluded 1.4 million shares of issued Class A Stock subject to vesting, 18.9 million shares of Class A Stock issuable upon conversion of the Company’s warrants and options, and 31.4 million Paired Securities convertible into shares of Class A Stock 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 aggregate number of shares of Common Stock which may be issued or used for reference purposes under the 2017 Incentive Plan or with respect to which awards may be granted may not exceed 4.1 million shares. As of December 31, 2021, 2.1 million shares remain available for issuance under the 2017 Incentive Plan. During the years ended December 31, 2021, 2020 and 2019, stock-based compensation associated with equity awards issued under the 2017 Incentive Plan totaled $ 3.4 million, $ 2.2 million and $ 10.1 million, respectively, while the related tax benefits recognized on these awards were $ 1.7 million, $ 5.6 million and $ 6.8 million, respectively. Class A Stock Awards In May 2021, the Company granted stock awards under the Company’s 2017 Equity Incentive Plan to independent directors on the Board. The stock awards vested immediately and the Company recognized $ 0.6 million in expense during year ended December 31, 2021, which represented the fair value of the stock award on the grant date. In March 2020, the Company granted a restricted stock award under the Company’s 2017 Equity Incentive Plan to the Company’s Board advisor and GPAC observer. The stock award vested in March 2021. As this award included a service condition, the estimated fair value of the restricted stock was measured on the grant date and recognized over the service period. The Company determined that the fair value of the restricted stock on the grant date was immaterial. F- 33 During 2020 and 2019, the Company granted stock awards under the Company’s 2017 Equity Incentive Plan to independent directors on the Board and to the Board advisor and GPAC observer. The stock awards vested immediately and the Company recognized $ 0.5 million and $ 0.3 million in expense during the years ended December 31, 2020 and 2019, respectively, which represented the fair value of the stock awards on the grant date. In May and June 2020, the Company granted restricted stock awards under the Company’s 2017 Equity Incentive Plan to certain employees of the Company. The stock awards vest over 3 to 4 years. The estimated fair value of the restricted stock is measured on the grant date and is recognized over the vesting period. The Company determined that the fair value of the restricted stock on the grant dates was $ 0.7 million. In May 2019, the Company granted a restricted stock award to the Company’s CEO at that time pursuant to the terms of his employment agreement. The restricted stock award was for 0.1 million shares and had certain vesting conditions which at the earliest could be met during the twelve months ended March 31, 2022. As this award included a market vesting condition, stock-based compensation was determined as the estimated fair value of the restricted stock measured on the grant date using a Monte Carlo Simulation of a Geometric Brownian Motion stock path model which incorporated the probability of vesting occurring. The Company determined the fair value of the restricted stock on the grant date to be $ 0.2 million and the derived service period to be 2.58 years. All of the vesting conditions were satisfied on September 30, 2021 and all of the shares became issuable on that date. The fair value of the restricted stock was expensed over the derived service period which ended when all of the shares became issuable. Employee Stock Options During the year ended December 31, 2021, the Company granted 0.2 million stock options under the Company’s 2017 Equity Incentive Plan to certain management of the Company. These stock options have exercise prices ranging from $22.57 to $32.28. The stock options expire in five years and vest over a four-year period. The estimated fair value of the stock options is amortized over the options vesting period on a straight-line basis. The Company determined the fair value of the 0.2 million options granted during the year ended December 31, 2021 to be $ 2.0 million which will be expensed over the vesting period. Included in that amount were 0.2 million stock options with a fair value of $ 1.4 million that were subsequently forfeited in December 2021. During the year ended December 31, 2020, the Company granted 0.5 million stock options under the Company’s 2017 Equity Incentive Plan to certain management of the Company. These stock options have exercise prices ranging from $ 12.76 to $ 21.70 . The stock options expire in five years and vest over a four-year period. The estimated fair value of the stock options is amortized over the options vesting period on a straight-line basis. The Company determined the fair value of the 0.5 million options granted during the year ended December 31, 2020 to be $ 3.4 million which will be expensed over the vesting period. During the year ended December 31, 2019, the Company granted 1.6 million stock options under the Company’s 2017 Equity Incentive Plan to certain management of the Company. These stock options have exercise prices that range from $ 5.75 to $ 8.55 per option. The stock options expire in five years and vest over a four-year period. The estimated fair value of the stock options is being amortized over the options vesting period on a straight-line basis. The Company determined the fair value of the 1.6 million options granted during the year ended December 31, 2019 to be $ 2.9 million which will be expensed over the vesting period. The following are the weighted average assumptions used in calculating the fair value of the total stock options granted in 2021, 2020 and 2019 using the Black-Scholes method: Year Ended December 31, 2021 2020 2019 Fair market value $ 8.71 $ 6.93 $ 6.83 Risk free rate 0.58 % 0.25 % 1.88 % Dividend yield — — — Expected volatility 52.43 % 50.34 % 36.79 % Expected term in years 3.55 3.41 3.47 In December 2021, 0.6 million of vested stock options related to the former Chief Executive Officer had the post-termination exercise period extended from 90 days to 352 days upon his resignation and departure from the Company. The $ 0.5 million of additional cost associated with this modification was recorded as stock-based compensation expense in the 2021 consolidated statement of operations. During the year ended December 31, 2019, 0.3 million of unvested stock options were forfeited by a former Chief Financial Officer (“CFO”) of the Company upon his resignation and departure from the Company. As the CFO, he was not permitted to exercise and sell all of his 0.1 million vested options during the limited 90-day exercise time period under the terms of his option grant. The Company entered into an agreement whereby the Company paid this former CFO $0.1 million for the difference between the closing price of the stock on the date of the settlement and the exercise strike price of $5.95. F- 34 The following table summarizes the Company’s total stock option activity for the years ended December 31, 2021, 2020 and 2019: Options (in thousands) Weighted Average Exercise Price Weighted Average Remaining Contractual Term in Years Intrinsic Value $ (in thousands) Options outstanding as of January 1, 2019 933 $ 5.96 4.8 $ — Granted 1,598 7.29 — — Exercised — — — — Forfeited/expired ( 395 ) 5.97 — — Options outstanding as of December 31, 2019 2,136 6.95 4.3 3,752 Granted 488 16.26 — — Exercised ( 281 ) 7.68 — — Forfeited/expired ( 109 ) 10.80 — — Options outstanding as of December 31, 2020 2,234 8.71 3.5 54,133 Granted 234 24.85 — — Exercised ( 171 ) 8.26 — — Forfeited/expired ( 745 ) 14.02 — — Options outstanding as of December 31, 2021 1,552 8.65 1.9 8,667 Outstanding and exercisable stock options as of December 31, 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 2.14 137 2.14 $ 1,031 5.95 426 0.91 426 0.91 3,118 6.51 224 2.39 137 2.38 925 6.65 173 2.36 102 2.36 676 7.99 19 2.92 10 2.92 52 8.32 147 1.89 88 1.47 433 8.55 97 0.91 97 0.91 459 12.76 10 0.08 10 0.08 5 13.12 136 2.95 71 2.55 11 15.12 3 3.38 1 3.38 — 21.70 52 0.91 52 0.91 — 32.28 55 4.20 5 4.20 — 1,552 1.86 1,136 1.54 $ 6,710 The following table summarizes the Company’s unvested stock option activity for the years ended December 31, 2021, 2020 and 2019: Options (in thousands) Weighted Average Grant Date Fair Value Nonvested options as of January 1, 2019 845 $ 1.37 Granted 1,598 1.83 Vested ( 157 ) 1.39 Forfeited ( 307 ) 1.33 Nonvested options as of December 31, 2019 1,979 1.75 Granted 488 6.93 Vested ( 790 ) 1.82 Forfeited ( 109 ) 3.65 Nonvested options as of December 31, 2020 1,568 3.20 Granted 234 8.71 Vested ( 641 ) 2.97 Forfeited ( 745 ) 4.90 Nonvested options as of December 31, 2021 416 $ 3.60 F- 35 The Company recognized $ 2.1 million, $ 1.3 million and $ 0.7 million in stock-based compensation expenses related to stock options during the years ended December 31, 2021, 2020 and 2019, respectively. For stock options outstanding as of December 31, 2021, there was $ 1.3 million of total unrecognized stock compensation cost with a remaining recognition period of 1.6 years. As of December 31, 2020, there was $ 4.6 million of total unrecognized stock compensation cost with a remaining recognition period of 2.5 years. Cash received from the exercise of stock options was $ 1.4 million and $ 2.0 million for the years ended December 31, 2021 and 2020, respectively. The tax benefit associated with the exercise of stock options was $ 1.6 million and $ 4.5 million for the years ended December 31, 2021 and 2020, respectively. There were no stock option exercises in 2019. Employee Restricted Stock Units During the year ended December 31, 2021, the Company granted 0.2 million of restricted stock units under the Company’s 2017 Equity Incentive Plan to certain management of the Company. Approximately one-third of the restricted stock units granted included a market vesting condition. The restricted stock awards that do not have the market vesting condition had a weighted average grant date fair value of $ 19.25 per share. The estimated fair value of these awards is recognized on a straight-line basis over the vesting period. For those awards that include a market vesting condition, the estimated fair value of the restricted stock was measured on the grant date and incorporated the probability of vesting occurring. The estimated fair value is recognized over the derived service period (as determined by the valuation model), with such recognition occurring regardless of whether the market condition is met. The Company determined the weighted average grant date fair value of the awards with the market vesting condition to be $ 16.28 per share using a Monte Carlo Simulation of a Geometric Brownian Motion stock path model with the following weighted average assumptions: Trading price of common stock on measurement date $ 24.88 Risk free interest rate 0.43 % Expected life in years 2.7 Expected volatility 77.0 % Expected dividend yield — The following table summarizes the Company’s restricted stock unit activity for the year ended December 31, 2021: Number Outstanding (in thousands) Weighted Average Grant Date Fair Value Nonvested restricted stock units as of January 1, 2021 — $ — Granted 177 18.18 Vested — — Forfeited ( 12 ) 22.96 Nonvested restricted stock units as of December 31, 2021 165 17.84 The Company recorded restricted stock unit expense of $ 0.5 million during the year ended December 31, 2021. There was no restricted stock unit expense recorded in 2020 or 2019. For restricted stock units outstanding as of December 31, 2021, there was $ 2.4 million of total unrecognized stock compensation cost with a remaining recognition period of 1.9 years. F- 36 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 December 31, 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 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 compensation recognized in the statement of operations for stock awards, employee stock options and the distribution by InnoHold of Paired Securities. (in thousands) Years Ended December 31, Non-Cash Stock Compensation 2021 2020 2019 Cost of revenues $ 303 $ 169 $ 663 Marketing and sales 541 302 4,285 General and administrative 2,472 1,353 4,356 Research and development 50 361 759 Total non-cash stock compensation $ 3,366 $ 2,185 $ 10,063 17. Employee Retirement Plan In 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 matching contribution expense was $ 3.2 million, $ 2.3 million and $ 1.3 million for the years ended December 31, 2021, 2020 and 2019, respectively. 18. Concentrations The Company had the following revenues by product: Years Ended December 31, (in thousands) 2021 2020 2019 Sleep products $ 664,484 $ 598,046 $ 401,499 Other 61,743 50,425 26,859 Total revenue, net $ 726,227 $ 648,471 $ 428,358 The following disaggregates net revenues by geographic region: Years Ended December 31, (in thousands) 2021 2020 2019 United States $ 710,204 $ 642,718 $ 426,494 International 16,023 5,753 1,864 Total revenue, net $ 726,227 $ 648,471 $ 428,358 The Company had one individual customer that accounted for approximately 41 % and 79 % of accounts receivable at December 31, 2021 and 2020, respectively, and approximately 15 %, 15 % and 26 % of net revenue during the years ended December 31, 2021, 2020 and 2019, respectively. F- 37 The Company currently obtains materials and components used in production from outside sources. As a result, the Company is dependent upon suppliers that in some instances, are the sole source of supply. The Company is continuing efforts to dual-source key components. The failure of one or more of the Company’s suppliers to provide materials or components on a timely basis could significantly impact the results of operations. The Company believes that it can obtain these raw materials and components from other sources of supply in the ordinary course of business, although an unexpected loss of supply over a short period of time may not allow for the replacement of these sources in the ordinary course of business. The Company maintains its cash balances in financial institutions based in the United States that are insured by the Federal Deposit Insurance Corporation (FDIC) up to $ 250,000 for each financial institution per entity. At times, the Company’s cash balance deposited at financial institutions exceed the federally insured deposit limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk related to these deposits. 19. Income Taxes The Company’s income before income taxes of $ 2.7 million and losses before income taxes of $ 273.5 million and $ 30.5 million during the years ended December 31, 2021, 2020 and 2019, respectively, consisted entirely of income earned in the United States. Income tax (benefit) expense for the years ended December 31, 2021, 2020 and 2019 consist of the following (in thousands): Year ended December 31, 2021 2020 2019 Current: Federal $ 1,692 $ 1,112 $ 88 State 699 951 312 Total current 2,391 2,063 400 Deferred: Federal ( 6,436 ) ( 35,747 ) — State 2,828 ( 10,065 ) — Total deferred ( 3,608 ) ( 45,812 ) — Income tax (benefit) expense $ ( 1,217 ) $ ( 43,749 ) $ 400 Income tax (benefit) expense differs from the amount computed at the federal statutory corporate income tax rate as follows (in thousands): Year ended December 31, 2021 2020 2019 Tax expense (benefit) at Federal statutory rate $ 557 $ ( 57,441 ) $ ( 6,410 ) State income tax provision (benefit), net of federal benefit ( 771 ) 499 3 Noncontrolling interest ( 420 ) ( 117 ) 1,754 Tax receivable agreement liability ( 843 ) ( 1,518 ) — Change in fair value – warrant liabilities ( 5,051 ) 50,537 3,894 Change in valuation allowance — ( 35,531 ) 1,565 Remeasurement due to rate change 3,287 40 ( 477 ) Remeasurement of investment in Purple LLC 1,834 — — Nondeductible compensation 531 — — Stock-based compensation ( 330 ) — — Other ( 11 ) ( 218 ) 71 Income tax (benefit) expense $ ( 1,217 ) $ ( 43,749 ) $ 400 F- 38 Deferred income taxes at December 31, 2021 and 2020 consisted of the following (in thousands): 2021 2020 Basis difference in Purple LLC investment $ 203,393 $ 210,480 Tax over book basis in capital contributions 69,859 51,995 Start-up costs 478 529 Accruals and reserves — 38 Stock-based compensation 722 191 Interest carryforwards 548 — Net operating losses 12,650 6 Total net deferred income tax asset 287,650 263,239 Less: Valuation allowance ( 69,859 ) ( 51,995 ) Net deferred income tax asset $ 217,791 $ 211,244 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 is 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 from the statutory rate. The primary factors impacting expected tax are the change in fair value of the warrant liabilities and remeasurement of deferred taxes primarily as a result of the change in the estimated state tax rate. At December 31, 2019, the Company maintained a full valuation allowance on its deferred tax assets which were more likely than not realizable at the time. 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. As a result, $ 35.5 million of the valuation allowance associated with the Company’s federal and state deferred tax assets was released and recorded as an income tax benefit in 2020. Deferred tax assets at December 31, 2021 were $217.8 million, which is net of $69.9 million of valuation allowance that was recorded against the residual outside partnership basis for the amount the Company believes is not more likely than not realizable. As a result, the valuation allowance at December 31, 2021 increased $ 17.9 million compared to December 31, 2020. The Company remains subject to income tax examinations for its U.S. federal income taxes for 2017 through 2021. The Company also remains subject to income tax examinations for U.S. state and local income taxes generally for 2016 through 2021. 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, the CARES Act raises 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 our income tax provision, relating to increased 2019 NOL utilization and tax benefits from NOL carrybacks. We have recorded $ 0.2 million in our income tax provision for the year ended December 31, 2020 related to the CARES Act. In connection with the Business Combination, the Company entered into the 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 agreement. F- 39 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 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 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, the subsequent exchanges of 43.6 million Class B Units for Class A Stock as of December 31, 2021 and changes in estimates relating to the expected tax benefits associated with the liability under the agreement, the potential future tax receivable agreement liability was $168.1 million, of which $172.0 million was recorded in the year ended December 31, 2020, offset in part by a $3.9 million benefit recorded in 2021. The $3.9 million reduction in the 2021 tax receivable agreement liability reflected $4.0 million that was recorded as tax receivable agreement income coupled with a payment of $0.6 million made during the year. These decreases in the liability were offset in part by $ 0.8 million that related to current year exchanges and was recorded as a decrease to additional paid-in capital in the 2021 consolidated statement of stockholders’ equity. Of the total liability recorded during 2020, $ 137.3 million related to current year exchanges and was recorded as an adjustment to equity and $ 34.2 million was recorded as tax receivable agreement expense in the 2020 consolidated statement of operations to re-establish the liability related to prior year exchanges. The Company estimates federal net operating loss (“NOL”) carryforwards will be approximately $ 10.0 million as of December 31, 2021. The federal NOL carryforward does not have an expiration date. The Company also had approximately $ 2.7 million of NOL carryforwards to reduce future state taxable income at December 31, 2021, which have various carryforward periods and begin to expire in 2026, if unused. 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. Accrued interest and penalties would be included on the related tax liability line in the consolidated balance sheet. As of December 31, 2021 and 2020, no uncertain tax positions were recognized as liabilities in the consolidated financial statements. 20. Subsequent Events On January 27, 2022, the Company paid InnoHold $ 5.8 million pursuant to the terms of the tax receivable agreement. This amount was reflected as a current liability in the December 31, 2021 consolidated balance sheet. In connection with lower-than-expected demand and higher material, labor and freight costs that impacted results in the second half of 2021, and are expected to adversely affect results of operations into the first quarter of 2022, in February 2022, the Company completed a restructuring of its workforce that was necessitated by a realignment of the Company’s cost structure. As a result of the realignment and restructuring, the Company reduced its employee headcount by approximately 15 % and incurred a restructuring charge of $ 1.1 million in the first quarter of 2022. In addition, in order to improve operating margins, the Company has taken a pricing action in early 2022 and initiated a number of other projects to improve efficiencies and reduce costs. In February 2022 the Company entered into the first amendment of the 2020 Credit Agreement. The operating and financial results for the year ended December 31, 2021 did not satisfy the financial and performance covenants required pursuant to the 2020 Credit Agreement. In order to avoid a breach of such covenants and related default and prior to the covenant compliance certification date under the 2020 Credit Agreement, the Company entered into the first amendment of the 2020 Credit Agreement. The amendment contains a covenant waiver period for certain ratios that will not be tested for the fiscal quarter ended December 31, 2021 through the fiscal quarter ended June 30, 2022. Other changes in the amendment include modification of leverage ratio and fixed charge coverage definitions and thresholds, the addition of minimum liquidity requirements with mandatory prepayments of the revolving loan if cash exceeds $ 25.0 million, new weekly and monthly reporting requirements, limits on the amount of capital expenditures, the addition of a lease incurrence test for opening additional showrooms, additional negative covenants during a covenant amendment period that will extend into 2023 until certain conditions are met, and increase in the interest rate on outstanding borrowings under the 2020 Credit Agreement changed to an initial rate of SOFR with a floor of 0.5 % plus 4.75 %, for a total rate of 5.25 % as long as the applicable liquidity threshold is met. If the liquidity test is not met, then the interest rate goes to SOFR with a floor of 0.5 % plus 9.00%. Once the consolidated leverage ratio is below 3.00 to 1.00, the interest rate will be based on SOFR with a floor of 0.5% plus a 3.00 % to 3.75% depending on the consolidated leverage ratio. Pursuant to the amendment, the Company paid fees and expenses of $ 0.9 million and prepaid all principal payments due in 2022 of $ 2.5 million. The Company expects to meet the covenants included in the first amendment of the 2020 Credit Agreement. 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. F- 40 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities 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. March 1. 2022 By: /s/ Robert T. DeMartini Name: Robert T. DeMartini Title: Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name Position Date /s/ Robert T. DeMartini Chief Executive Officer and Director March 1, 2022 Robert T. DeMartini (Principal Executive Officer) /s/ Bennett L. Nussbaum Interim Chief Financial Officer March 1, 2022 Bennett L. Nussbaum (Principal Financial Officer) /s/ George T. Ulrich Vice President, Accounting and Financial Reporting March 1, 2022 George T. Ulrich (Principal Accounting Officer) /s/ Paul J. Zepf Chairman of the Board of Directors March 1, 2022 Paul J. Zepf /s/ Pano T. Anthos Director March 1, 2022 Pano T. Anthos /s/ Gary T. DiCamillo Director March 1, 2022 Gary T. DiCamillo /s/ Adam L. Gray Director March 1, 2022 Adam L. Gray /s/ Claudia Hollingsworth Director March 1, 2022 Claudia Hollingsworth /s/ Gary A. Kiedaisch Director March 1, 2022 Gary A. Kiedaisch /s/ Dawn M. Zier Director March 1, 2022 Dawn M. Zier 72