Purple Innovation, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS PURPLE INNOVATION, INC. Condensed Consolidated Balance Sheets (unaudited – in thousands, except for par value) June 30, 2022 December 31, 2021 Assets Current assets: Cash and cash equivalents $ 41,169 $ 91,616 Accounts receivable, net 31,578 25,430 Inventories, net 84,886 98,690 Prepaid expenses 5,111 8,064 Other current assets 5,369 5,702 Total current assets 168,113 229,502 Property and equipment, net 127,752 112,614 Operating lease right-of-use assets 88,986 68,037 Intangible assets, net 14,687 13,204 Deferred income taxes 223,952 217,791 Other long-term assets 1,617 1,322 Total assets $ 625,107 $ 642,470 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 39,986 $ 79,752 Accrued sales returns 5,111 7,116 Accrued compensation 9,370 8,928 Customer prepayments 5,132 10,854 Accrued sales tax 3,129 4,672 Accrued rebates and allowances 7,315 10,169 Operating lease obligations – current portion 9,882 7,053 Warrant liabilities 69 — Other current liabilities 8,047 13,470 Total current liabilities 88,041 142,014 Debt, net of current portion 37,198 94,113 Operating lease obligations, net of current portion 103,457 81,159 Warrant liabilities — 4,343 Tax receivable agreement liability, net of current portion 161,970 162,239 Other long-term liabilities, net of current portion 15,320 12,061 Total liabilities 405,986 495,929 Commitments and contingencies (Note 13) Stockholders’ equity: Class A common stock; $ 0.0001 par value, 210,000 shares authorized; 82,764 issued and outstanding at June 30, 2022 and 66,493 issued and outstanding at December 31, 2021 8 7 Class B common stock; $ 0.0001 par value, 90,000 shares authorized; 448 issued and outstanding at June 30, 2022 and at December 31, 2021 — — Additional paid-in capital 501,997 407,591 Accumulated deficit ( 283,667 ) ( 261,825 ) Total stockholders’ equity 218,338 145,773 Noncontrolling interest 783 768 Total stockholders’ equity 219,121 146,541 Total liabilities and stockholders’ equity $ 625,107 $ 642,470 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 PURPLE INNOVATION, INC. Condensed Consolidated Statements of Operations (unaudited – in thousands, except per share amounts) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Revenues, net $ 144,109 $ 182,586 $ 287,288 $ 369,015 Cost of revenues 95,297 100,899 186,850 199,804 Gross profit 48,812 81,687 100,438 169,211 Operating expenses: Marketing and sales 40,373 59,844 90,332 114,212 General and administrative 18,779 22,461 36,667 36,987 Research and development 1,748 1,923 3,891 3,646 Total operating expenses 60,900 84,228 130,890 154,845 Operating income (loss) ( 12,088 ) ( 2,541 ) ( 30,452 ) 14,366 Other income (expense): Interest expense ( 707 ) ( 569 ) ( 1,730 ) ( 1,139 ) Other income (expense), net ( 136 ) 26 ( 119 ) ( 42 ) Change in fair value – warrant liabilities 346 4,860 4,274 14,007 Tax receivable agreement expense — ( 381 ) — ( 207 ) Total other income (expense), net ( 497 ) 3,936 2,425 12,619 Net income (loss) before income taxes ( 12,585 ) 1,395 ( 28,027 ) 26,985 Income tax benefit (expense) 4,175 1,167 5,986 ( 3,484 ) Net income (loss) ( 8,410 ) 2,562 ( 22,041 ) 23,501 Net income (loss) attributable to noncontrolling interest ( 70 ) ( 16 ) ( 199 ) 99 Net income (loss) attributable to Purple Innovation, Inc. $ ( 8,340 ) $ 2,578 $ ( 21,842 ) $ 23,402 Net income (loss) per share: Basic $ ( 0.10 ) $ 0.04 $ ( 0.29 ) $ 0.36 Diluted $ ( 0.10 ) $ ( 0.03 ) $ ( 0.29 ) $ 0.14 Weighted average common shares outstanding: Basic 82,703 66,277 74,924 65,439 Diluted 83,151 66,864 75,372 68,341 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 PURPLE INNOVATION, INC. Condensed Consolidated Statements of Stockholders’ Equity (unaudited – in thousands) Class A Class B Additional Total Common Stock Common Stock Paid-in Accumulated Stockholders’ Noncontrolling Total Shares Par Value Shares Par Value Capital Deficit Equity Interest Equity Balance - December 31, 2021 66,493 $ 7 448 $ — $ 407,591 $ ( 261,825 ) $ 145,773 $ 768 $ 146,541 Net loss — — — — — ( 13,502 ) ( 13,502 ) ( 129 ) ( 13,631 ) Stock-based compensation — — — — 542 — 542 — 542 Exercise of stock options 20 — — — 166 — 166 — 166 Issuance of stock under equity compensation plans 25 — — — — — — — — Issuance of stock upon underwritten public offering, net of costs 16,100 1 — — 92,894 — 92,895 — 92,895 Accrued distributions — — — — ( 228 ) — ( 228 ) — ( 228 ) Impact of transactions affecting NCI — — — — ( 141 ) — ( 141 ) 141 — Balance – March 31, 2022 82,638 $ 8 448 $ — $ 500,824 $ ( 275,327 ) $ 225,505 $ 780 $ 226,285 Net loss — — — — — ( 8,340 ) ( 8,340 ) ( 70 ) ( 8,410 ) Stock-based compensation — — — — 1,275 — 1,275 — 1,275 Issuance of common stock under equity compensation plans 126 — — — — — — — — Additional costs associated with underwritten public stock offering — — — — ( 29 ) — ( 29 ) — ( 29 ) Impact of transactions affecting NCI — — — — ( 73 ) — ( 73 ) 73 — Balance – June 30, 2022 82,764 $ 8 448 $ — $ 501,997 $ ( 283,667 ) $ 218,338 $ 783 $ 219,121 Class A Class B Additional Accumulated Total Common Stock Common Stock Paid-in Equity Stockholders’ Noncontrolling Total Shares Par Value Shares Par Value Capital (Deficit) Equity Interest Equity Balance - December 31, 2020 63,914 $ 6 536 $ — $ 333,047 $ ( 265,856 ) $ 67,197 $ 344 $ 67,541 Net income — — — — — 20,824 20,824 115 20,939 Stock-based compensation — — — — 479 — 479 — 479 Exchange of stock 88 — ( 88 ) — — — — — — Exercise of warrants 2,291 1 — — 64,261 — 64,262 — 64,262 Exercise of stock options 10 — — — 83 — 83 — 83 Tax Receivable Agreement liability — — — — ( 777 ) — ( 777 ) — ( 777 ) Deferred income taxes — — — — 971 — 971 — 971 Accrued distributions — — — — ( 99 ) — ( 99 ) — ( 99 ) InnoHold indemnification payment — — — — 4,142 — 4,142 — 4,142 Impact of transactions affecting NCI — — — — ( 265 ) — ( 265 ) 265 — Balance – March 31, 2021 66,303 $ 7 448 $ — $ 401,842 $ ( 245,032 ) $ 156,817 $ 724 $ 157,541 Net income (loss) — — — — — 2,578 2,578 ( 16 ) 2,562 Stock-based compensation — — — — 1,113 — 1,113 — 1,113 Exercise of warrants 1 — — — 26 — 26 — 26 Exercise of stock options 45 — — — 369 — 369 — 369 Tax Receivable Agreement liability — — — — ( 3 ) — ( 3 ) — ( 3 ) Deferred income taxes — — — — 3 — 3 — 3 Accrued distributions — — — — ( 87 ) — ( 87 ) — ( 87 ) Issuance of common stock 22 — — — — — — — — Impact of transactions affecting NCI — — — — ( 192 ) — ( 192 ) 192 — Balance – June 30, 2021 66,371 $ 7 448 $ — $ 403,071 $ ( 242,454 ) $ 160,624 $ 900 $ 161,524 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 PURPLE INNOVATION, INC. Condensed Consolidated Statements of Cash Flows (unaudited – in thousands) Six Months Ended June 30, 2022 2021 Cash flows from operating activities: Net income (loss) $ ( 22,041 ) $ 23,501 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 7,583 3,544 Non-cash interest 360 257 Change in fair value – warrant liabilities ( 4,274 ) ( 14,007 ) Tax receivable agreement expense — 207 Stock-based compensation 1,817 1,592 Deferred income taxes ( 6,161 ) 3,170 Changes in operating assets and liabilities: Accounts receivable ( 6,148 ) 4,007 Inventories 13,804 931 Prepaid expenses and other assets 3,481 ( 2,263 ) Operating leases, net 4,178 785 Accounts payable ( 37,027 ) ( 11,783 ) Accrued sales returns ( 2,005 ) ( 1,466 ) Accrued compensation 354 ( 5,002 ) Customer prepayments ( 5,722 ) 11,081 Accrued rebates and allowances ( 2,854 ) ( 4,021 ) Other accrued liabilities 1,851 936 Net cash provided by (used in) operating activities ( 52,804 ) 11,469 Cash flows from investing activities: Purchase of property and equipment ( 24,233 ) ( 26,162 ) Investment in intangible assets ( 1,822 ) ( 285 ) Net cash used in investing activities ( 26,055 ) ( 26,447 ) Cash flows from financing activities: Payments on term loan ( 2,531 ) ( 1,125 ) Payments on revolving line of credit ( 55,000 ) — Payments for debt issuance costs ( 1,242 ) — Proceeds from stock offering 93,125 — Payments for public offering costs ( 259 ) — Proceeds from InnoHold indemnification payment — 4,142 Tax receivable agreement payments ( 5,847 ) ( 628 ) Distributions to members — ( 853 ) Proceeds from exercise of warrants — 116 Proceeds from exercise of stock options 166 452 Net cash provided by financing activities 28,412 2,104 Net decrease in cash ( 50,447 ) ( 12,874 ) Cash and cash equivalents, beginning of the year 91,616 122,955 Cash and cash equivalents, end of the period $ 41,169 $ 110,081 Supplemental disclosures of cash flow information: Cash paid during the period for interest, net of amounts capitalized $ 1,345 $ 858 Cash paid during the period for income taxes $ 219 $ 4,434 Supplemental schedule of non-cash investing and financing activities: Property and equipment included in accounts payable $ 3,648 $ 3,367 Non-cash leasehold improvements $ — $ 3,239 Accrued distributions $ 228 $ — Tax receivable agreement liability $ — $ 780 Deferred income taxes $ — $ 974 Exercise of liability warrants $ — $ 64,172 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) 1. Organization The Company’s mission is to improve the lives of our consumers by delivering innovative better sleep 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 Basis of Presentation and Principles of Consolidation The condensed 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 June 30, 2022, Purple Inc. held 99.5 % of the common units of Purple LLC and Purple LLC Class B Unit holders held 0.5 % of the common units in Purple LLC. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting and reflect the financial position, results of operations and cash flows of the Company. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The unaudited condensed consolidated financial statements were prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which were considered of normal recurring nature) considered necessary to present fairly the Company’s financial results. The results of the three and six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2022 or for any other interim period or other future year. 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 June 30, 2022, Purple Inc. had a 99.5 % economic interest in Purple LLC and consolidated 100 % of Purple LLC’s assets, liabilities and results of operations in the Company’s unaudited condensed consolidated financial statements contained herein. The holders of Purple LLC Class B Units (the “Class B Units”) held 0.5 % of the economic interest in Purple LLC as of June 30, 2022. For further discussion see Note 15 — Stockholders’ Equity. 5 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) Use of Estimates The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to establish accounting policies and to make estimates and judgments that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities as of the date of the unaudited condensed 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. Restructuring Charges In February and April 2022, because of lower-than-expected demand and higher labor and overhead costs that adversely affected our results of operations in the fourth quarter of 2021 which continued into the first quarter of 2022, the Company completed a restructuring of its workforce to balance production, improve efficiencies and realign the Company’s cost structure to focus on quality of earnings in our current core business. As a result of the realignment and restructuring, the Company reduced employee headcount and incurred severance charges of $ 2.0 million during the six months ended June 30, 2022. In June 2022, the Company incurred a one-time separation fee of $ 3.1 million with a professional services provider for not continuing with their services. The fee was recorded as general and administrative expense in the condensed consolidated statement of operations for the three months ended June 30, 2022. The Company has also initiated other cost reduction and efficiency efforts to improve costs, increase margins and ensure compliance with debt covenants. If the Company’s cash flow from operations or other sources of financing are less than anticipated, the Company believes it will be able to fund operating expenses and comply with debt covenants based on its ability to scale back operations, reduce marketing spend, use the liquidity available under its revolving line of credit and postpone or discontinue growth strategies. In addition, in order to continue satisfying the conditions of the debt agreement the Company may be required to scale back operations, reduce marketing spend, prepay debt and postpone or discontinue our growth strategies. 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 were originally 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 the Secured Overnight Financing Rate (“SOFR”). The change to SOFR did not have any impact on the Company’s condensed consolidated financial statements – see Note 10— Debt for discussion of the amendment to the 2020 Credit Agreement. 6 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) 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. 3. Underwritten Offering In March 2022, the Company completed an underwritten offering of 16.1 million shares of Class A common stock, which included the underwriters exercising their over-allotment option in full to purchase an additional 2.1 million shares. The underwriter purchased the Class A common stock from the Company at a price of $ 5.65 per share, except that any shares sold by the underwriter to Coliseum Capital Partners, L.P. and Blackwell Partners LLC – Series A, up to an aggregate of 29.81 % of the shares of Class A common stock pursuant to the offering, were purchased from the Company by the underwriter at a price of $6.10 per share. The aggregate gross proceeds received by the Company from the offering, including the exercise of the over-allotment, was $ 93.1 million. After deducting offering expenses of $ 0.3 million, aggregate net proceeds totaled $ 92.9 million. 4. 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 (i.e., 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. 7 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) The classification of fair value measurements within the established three-level hierarchy is based upon the lowest level of input that is significant to the measurements. Financial instruments, although not recorded at fair value on a recurring basis include cash and cash equivalents, receivables, accounts payable and the Company’s debt obligations. The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair value because of the short-term nature of these accounts. The fair value of the Company’s debt instruments is estimated to be face value based on the contractual terms of the debt arrangements and market-based expectations. The sponsor warrant liabilities (see Note 11 — Warrant Liabilities for more information) 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). 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 (dollars in thousands): Level June 30, 2022 December 31, 2021 Sponsor warrants 3 $ 69 $ 4,343 The following table summarizes the Company’s total Level 3 liability activity for the six months ended June 30, 2022 and 2021 (in thousands): Sponsor Warrants Fair value as of December 31, 2021 $ 4,343 Fair value of warrants exercised — Change in valuation inputs (1) ( 4,274 ) Fair value as of June 30, 2022 $ 69 Fair value as of December 31, 2020 $ 92,708 Fair value of warrants exercised ( 64,172 ) Change in valuation inputs (1) ( 14,007 ) Fair value as of June 30, 2021 $ 14,529 (1) Changes in valuation inputs are recognized as the change in fair value – warrant liabilities in the condensed consolidated statement of operations. 5. Revenue from Contracts with Customers 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. These performance obligations generally relate to delivering products to a customer, subject to the shipping terms of the contract. 8 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) Disaggregated Revenue The Company classifies revenue into two sales categories: Direct-to-Consumer (“DTC”) and wholesale. The DTC category is comprised of the Company’s 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 Company showroom location. The wholesale category includes all product sales to our retail brick and mortar wholesale partners where consumers make purchases at their retail locations or through their online channels. The Company classifies products into two major types: 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 net revenue disaggregated by sales category and product type (in thousands): Three Months Ended June 30, Six Months Ended June 30, Channel 2022 2021 2022 2021 DTC $ 81,628 $ 116,219 $ 167,164 $ 241,123 Wholesale 62,481 66,367 120,124 127,892 Revenues, net $ 144,109 $ 182,586 $ 287,288 $ 369,015 Three Months Ended June 30, Six Months Ended June 30, Product 2022 2021 2022 2021 Sleep products $ 131,738 $ 166,708 $ 260,704 $ 338,551 Other 12,371 15,878 26,584 30,464 Revenues, net $ 144,109 $ 182,586 $ 287,288 $ 369,015 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 $ 5.1 million and $ 10.9 million at June 30, 2022 and December 31, 2021, respectively. During the three months ended June 30, 2022 and 2021, the Company recognized all revenue that was deferred in customer prepayments at March 31, 2022 and 2021, respectively. 6. Inventories, Net Inventories, net consisted of the following (in thousands): June 30, December 31, 2022 2021 Raw materials $ 31,621 $ 33,609 Work-in-process 2,041 4,023 Finished goods 52,870 63,419 Inventory obsolescence reserve ( 1,646 ) ( 2,361 ) Inventories, net $ 84,886 $ 98,690 9 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) 7. Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): June 30, December 31, 2022 2021 Equipment $ 61,194 $ 58,094 Equipment in progress 20,181 19,840 Leasehold improvements 48,255 38,098 Furniture and fixtures 20,909 12,482 Office equipment 4,359 4,843 Total property and equipment 154,898 133,357 Accumulated depreciation ( 27,146 ) ( 20,743 ) Property and equipment, net $ 127,752 $ 112,614 Equipment in progress reflects equipment, primarily related to mattress manufacturing, which is being constructed and was not in service at June 30, 2022 or December 31, 2021. Interest capitalized on borrowings during the active construction period of major capital projects totaled $ 0.2 million and $ 0.4 million during the three and six months ended June 30, 2022, respectively. There was no interest capitalized during the three and six months ended June 30, 2021. Depreciation expense was $ 3.6 million and $ 7.1 million during the three and six months ended June 30, 2022, respectively, and totaled $ 1.9 million and $ 3.5 million during the three and six months ended June 30, 2021, respectively. 8. 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 right-of-use asset for finance leases was $ 0.6 million and $ 0.7 million at June 30, 2022 and December 31, 2021, respectively. The following table presents the Company’s lease costs (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Operating lease costs $ 3,690 $ 2,064 $ 6,838 $ 3,871 Variable lease costs 409 482 1,123 577 Short-term lease costs — 68 11 124 Total lease costs $ 4,099 $ 2,614 $ 7,972 $ 4,572 10 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) The table below reconciles the undiscounted cash flows for each of the first five years and total remaining years to the operating lease liabilities recorded on the condensed consolidated balance sheet at June 30, 2022 (in thousands): 2022 (excluding the six months ended June 30, 2022) (1) $ 3,905 2023 16,076 2024 16,176 2025 16,192 2026 16,209 Thereafter 79,900 Total operating lease payments 148,458 Less – lease payments representing interest ( 35,119 ) Present value of operating lease payments $ 113,339 (1) Amount consists of $ 8.0 million of undiscounted cash flows offset by $ 4.1 million of tenant improvement allowances which are expected to be fully utilized in fiscal 2022. As of June 30, 2022 and December 31, 2021, the weighted-average remaining term of operating leases was 9.7 years and 10.7 years, respectively, and the weighted-average discount rate of operating leases was 5.33 % and 5.30 %, respectively. The following table provides supplemental information related to the Company’s condensed consolidated statement of cash flows for the six months ended June 30, 2022 and 2021 (in thousands): Six Months Ended June 30, 2022 2021 Cash paid for amounts included in present value of operating lease liabilities $ 3,425 $ 1,273 Right-of-use assets obtained in exchange for operating lease liabilities 25,029 14,984 9. Other Current Liabilities Other current liabilities consisted of the following (in thousands): June 30, December 31, 2022 2021 Warranty accrual – current portion $ 4,447 $ 3,914 Insurance financing 1,243 $ 1,043 Long-term debt, net of unamortized issuance costs – current portion 1,290 2,297 Tax receivable agreement liability – current portion 269 5,847 Other 798 369 Total other current liabilities $ 8,047 $ 13,470 11 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) 10. Debt Debt consisted of the following (in thousands): June 30, December 31, 2022 2021 Term loan $ 39,656 $ 42,188 Revolving line of credit — 55,000 Less: unamortized issuance costs ( 1,168 ) ( 778 ) Total debt 38,488 96,410 Less: current portion of debt, net of unamortized issuance costs ( 1,290 ) ( 2,297 ) Long-term debt, net $ 37,198 $ 94,113 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 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. The revolving credit facility 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 initial borrowing rate of 3.50% was based on LIBOR plus 3.00%. 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. 12 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) The Company’s operating and financial results for the year ended December 31, 2021 did not satisfy the financial and performance covenants required under the 2020 Credit Agreement. On February 28, 2022, prior to the covenant compliance certification date, the Company entered into the first amendment of the 2020 Credit Agreement to avoid a breach of these covenants and potential default. This amendment contained a covenant waiver period such that the net leverage ratio and fixed charge coverage ratio would not be tested for the fiscal quarters ended December 31, 2021, March 31, 2022 and June 30, 2022. Other modifications in the amendment included revised leverage ratio and fixed charge coverage definitions and thresholds, the addition of minimum liquidity requirements with mandatory prepayments of the revolving loan if cash exceeded $ 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, and additional negative covenants during a covenant amendment period that extends into 2023 until certain conditions are met. In addition, the interest rate on any outstanding borrowings under the 2020 Credit Agreement was changed from LIBOR with a floor of 0.5% plus an applicable margin (historically at 3.0%) to an initial rate of SOFR with a floor of 0.5% plus an applicable margin of 4.75%, for a total rate of 5.25% if the applicable liquidity threshold is met. If the Company does not meet this threshold, the interest rate would increase to SOFR with a floor of 0.5% plus 9.00%. Once the Company achieves a consolidated leverage ratio that 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% margin depending on the consolidated leverage ratio. The interest rate on the term loan was 6.07 % as of June 30, 2022. Pursuant to the first amendment of the 2020 Credit Agreement, the Company incurred fees and expenses of $ 0.9 million that were recorded as debt issuance costs in the condensed consolidated balance sheet and made a $ 2.5 million payment on the term loan to cover the four quarterly principal payments due in 2022. The Company accounted for this amendment as a modification of existing debt in accordance with ASC 470 – Debt . On March 23, 2022, the Company entered into a second amendment to the 2020 Credit Agreement. This amendment modified the 2020 Credit Agreement to allow Coliseum Capital Management, LLC (“CCM”) and its investment affiliates to acquire 35 % or more of the combined voting power of all equity interests of the Company entitled to vote for the election of members of the Company’s board of directors without constituting an event of default. CCM is considered a related party of the Company in that Adam Gray, a member of our board of directors, serves as a managing partner of CCM. For further discussion see Note 14— Related Party Transactions — Coliseum Capital Management, LLC. Pursuant to the second amendment of the 2020 Credit Agreement, the Company incurred fees and expenses of $ 0.4 million that were recorded as debt issuance costs in the condensed consolidated balance sheet. The Company accounted for this amendment as a modification of existing debt in accordance with ASC 470 – Debt . In November 2021, the Company executed a $ 55.0 million draw on its revolving line of credit. On March 31, 2022, the Company used a portion of the net proceeds received from its March 2022 offering to repay in full the $ 55.0 million of principal outstanding on the revolving line of credit. 13 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) Interest expense under the 2020 Credit Agreement totaled $ 0.9 million and $ 2.0 million for the three and six months ended June 30, 2022, respectively, and totaled $ 0.6 million and $ 1.1 million for the three and six months ended June 30, 2021, respectively. 11. Warrant Liabilities The Company issued 12.8 million sponsor warrants pursuant to a private placement conducted simultaneously with its initial public offering. Each of these warrants entitles the registered holder to purchase one-half of one share of the Company’s Class A common stock at a price of $5.75 per half share ($11.50 per full share), subject to adjustment pursuant to the terms of the warrant agreement. In accordance with the warrant agreement, a warrant holder may exercise its warrants only for a whole number of shares of the Class A common 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. These sponsor warrants contain certain provisions that do not meet the criteria for equity classification and therefore must be recorded as liabilities. The liability for these warrants was recorded at fair value on the date of the Business Combination and are subsequently re-measured to fair value at each reporting date or exercise date with changes in the fair value included in earnings. During the six months ended June 30, 2021, 6.6 million sponsor warrants were exercised resulting in the issuance of 2.3 million shares of Class A common stock. There were no sponsor warrants exercised during the six months ended June 30, 2022. The 1.9 million sponsor warrants outstanding at June 30, 2022 and December 31, 2021 had fair values of $ 0.1 million and $ 4.3 million, respectively. The Company determined the fair value of the sponsor warrants using the Black Scholes model with the following assumptions: June 30, 2022 December 31, 2021 Trading price of common stock on measurement date $ 3.06 $ 13.27 Exercise price $ 5.75 $ 5.75 Risk free interest rate 2.51 % 0.39 % Warrant life in years 0.6 1.1 Expected volatility 98.78 % 73.78 % Expected dividend yield — — During the three and six months ended June 30, 2022, the Company recognized gains of $ 0.3 million and $ 4.3 million, respectively, and during the three and six months ended June 30, 2021, the Company recognized gains of $ 4.9 million and $ 14.0 million, respectively, in its condensed consolidated statements 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. 12. Other Long-Term Liabilities Other long-term liabilities consist of the following (in thousands): June 30, December 31, 2022 2021 Warranty accrual $ 17,709 $ 15,013 Other 2,058 962 Total 19,767 15,975 Less – current portion of warranty accrual ( 4,447 ) ( 3,914 ) Other long-term liabilities, net of current portion $ 15,320 $ 12,061 14 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) 13. Commitments and Contingencies Warranty Liabilities The Company provides a limited warranty on most of the products it sells. 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. The Company had the following activity for warranty liabilities (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Balance at beginning of period $ 16,368 $ 9,375 $ 15,013 $ 8,397 Additions charged to expense for current period sales 2,173 2,526 4,336 4,198 Deduction from reserves for current period claims ( 832 ) ( 623 ) ( 1,640 ) ( 1,317 ) Balance at end of period $ 17,709 $ 11,278 $ 17,709 $ 11,278 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 six months ended June 30, 2021, the Company paid $ 0.9 million in tax distributions under the Third Purple LLC Agreement. There were no tax distributions paid during the six months ended June 30, 2022. At June 30, 2022, the Company’s condensed consolidated balance sheet had $ 0.1 million of accrued tax distributions included in other current liabilities. Subscription Agreement and Preemptive Rights In February 2018, in connection with the Business Combination, the Company entered into a subscription agreement with Coliseum Capital Partners (“CCP”) and Blackwell Partners LLC – Series A (“Blackwell”), pursuant to which CCP and Blackwell agreed to purchase from the Company an aggregate of 4.0 million shares of Class A Stock at a purchase price of $10.00 per share (the “Coliseum Private Placement”). In connection with the Coliseum Private Placement, the Sponsor assigned (i) an aggregate of 1.3 million additional shares of Class A common stock to CCP and Blackwell and (ii) an aggregate of 3.3 million warrants to purchase 1.6 million shares of Class A common stock to CCP, Blackwell, and Coliseum Co-Invest Debt Fund, L.P. (“CDF”). The subscription agreement provides CCP and Blackwell with preemptive rights with respect to future sales of the Company’s securities. It also provides them with a right of first refusal with respect to certain debt and preferred equity financings by the Company. The Company also entered into a registration rights agreement with CCP, Blackwell, and CDF, providing for the registration of the shares of Class A common stock issued and assigned to CCP and Blackwell in the Coliseum Private Placement, as well as the shares of Class A common 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 common 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 these warrants (and any shares of Class A common stock issuable upon the exercise of the warrants), and certain unregistered shares of Class A common 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 common stock held by them, including in underwritten offerings. In an underwritten offering of such warrants and shares of Class A common stock by the Coliseum Investors, the Company will pay underwriting discounts and commissions and certain expenses incurred by the Coliseum Investors. On May 21, 2021, 7.3 million shares of Class A common stock were sold in a secondary offering by the Coliseum Investors at a price of $ 30.00 per share. The Company did not receive any of the proceeds from the secondary offering. The underwriting discount, commission and other related costs incurred by the Company for the secondary offering totaled $ 7.9 million and was recorded in May 2021 as general and administrative expense. 15 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) Purple LLC Class B Unit Exchange Right On February 2, 2018, in connection with the closing of the Business Combination, the Company entered into an exchange agreement with Purple LLC and InnoHold and Class B Unit holders who become a party thereto (the “Exchange Agreement”), which provides for the exchange of Purple LLC Class B Units (the “Class B Units”) and shares of Class B common 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 common stock at an initial exchange ratio equal to one Paired Security for one share of Class A common 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 common 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 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 common stock and Class B common stock or a transaction in which the Class A common 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 common 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. There were no Paired Securities exchanged for Class A common stock during the six months ended June 30, 2022. During the six months ended June 30, 2021, 0.1 million of Paired Securities were exchanged for shares of Class A common stock. 16 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) Maintenance of One-to-One Ratios The Third Purple LLC Agreement includes provisions intended to ensure that the Company at all times maintains a one-to-one ratio between (a) (i) the number of outstanding shares of Class A common 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 common 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. Legal Proceedings On September 9, 2019, Purple LLC filed a Statement of Claim against PerfectSense Home Inc. and PerfectSense Trading Co. Ltd. (collectively, “PerfectSense”) in the Federal Court of Canada. PerfectSense is a manufacturer and supplier of mattresses and related products. PerfectSense owns the domain name www.purplesleep.ca, which used to, but no longer, redirects to its website at www.perfectsense.ca. In addition to this, Purple LLC has alleged that PerfectSense has designed their mattresses with the same look as the Purple mattresses (white mattress top, purple stripe, and grey bottom); used many of the marketing elements on Purple’s website (including a similar “exploded view” image of their mattress); and adopted the color purple as their dominant marketing color. Purple LLC is suing for a declaration that PerfectSense has infringed Purple LLC’s copyright and trademark rights and committed the tort of passing off. Purple LLC is asking for injunctive relief, damages, an accounting of profits, interest, costs, and delivery up or destruction of the infringing products (including delivery up of the www.purplesleep.ca domain). After filing the statement of claim, Purple LLC posted $ 15,000 CAD as security for PerfectSense’s costs. PerfectSense brought a motion to strike that was resolved on consent. Pleadings are now closed, and the action is proceeding under case management. Counsel for the defendant was removed from the record at their own request by Court Order. The Court further ordered the defendant to either appoint counsel or file a motion to permit an officer or director to represent the defendant in legal proceedings. On November 6, 2020, the defendant informally requested that the Court permit Mr. Henderson, the CEO and shareholder of the defendant, to represent the defendant in the action until such time as a lawyer could be appointed. Purple opposed this informal request, and it was denied by the Court. After granting PerfectSense a final extension of time to either appoint counsel or file a motion to permit Mr. Henderson to represent the defendant, PerfectSense appointed new counsel. The parties engaged in litigation discovery, exchanged affidavits of documents and scheduled examinations for discovery. Shortly thereafter, discovery adjourned and continues to be stayed while the parties negotiate formal terms of settlement. PerfectSense has not responded to Purple’s repeated attempts to finalize the settlement. Purple filed a motion to enforce a settlement agreement. The Court has directed the motion be heard before a Judge, which will likely take place in September of 2022. 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. On April 1, 2022, the court issued an opinion that remanded the case back to the U.S. Trade Representative (“USTR”) to address certain procedural flaws in USTR’s process for determining whether certain products were subject to the Section 301 duties. On August 1, 2022, USTR issued its remand results. The court has not yet established a briefing schedule for comments on the remand results. If successful, this litigation could result in a refund of some or all of the Section 301 duties. 17 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) On October 13, 2020, Purple LLC filed a lawsuit against Responsive Surface Technology, LLC and its parent company, PatienTech, LLC (collectively referred to as “ReST”) in the United States District Court for the District of Utah. The lawsuit arises from ReST’s multiple breaches of its obligations to Purple LLC, including infringing upon Purple LLC’s trademarks, patents, and trade dress, among other claims. Purple seeks monetary damages, injunctive relief, and declaratory judgment based on certain conduct by ReST (“Case I”). On October 21, 2020, shortly after the complaint was filed in Case I, ReST filed a retaliatory lawsuit against Purple LLC, Gary DiCamillo, Adam Gray, Joseph Megibow, Terry Pearce, and Tony Pearce, also in the United States District Court for the District of Utah (“Case II”). Subsequently, the two cases were consolidated into one. Case II (now combined with Case I) involves many of the same facts and transactions as Case I. On January 19, 2021, ReST filed a motion to compel arbitration of the claims in Case I. Purple LLC opposed the motion to compel arbitration, arguing that ReST waived any rights they may have had to arbitration and that all the claims in both cases should stay in the courts. 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 agreed upon a scheduling order. Currently, the parties are in the fact discovery phase of the arbitration. The parties have scheduled several depositions and exchange documents and discovery requests. The arbitration hearing is set to begin on April 17, 2023, and it will continue through April 28, 2023. Purple LLC seeks over $ 4 million in damages from ReST, whereas ReST claims that Purple is liable to it for tens of millions of dollars. The outcome of this litigation cannot be predicted at this 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. 18 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) 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 seeks 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 has 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 in 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. On May 3, 2022, the Company filed a Complaint against Photon Interactive UK Limited (“Photon”) in the U.S. District Court for the District of Delaware regarding a Master Professional Services Agreement with Photon dated on or around November 1, 2019. Pursuant to the agreement, Photon was required to rebuild Purple’s website architecture and checkout process. Purple paid Photon $ 0.9 million under the Agreement. However, Photon failed to deliver any of the required deliverables as specified in the agreement. Purple withheld payment of the final $ 0.1 million due pursuant to Photon’s invoices pending a resolution with Photon. Since resolution discussions with Photon have failed, Purple filed the aforementioned complaint for breach of contract against Photon seeking, among other damages, reimbursement for all amounts paid to under the agreement. It is anticipated that Photon will counter-sue for amounts they claim are owed. 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. 14. 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 of Directors (the “Board”). Mr. Gray is a manager of Coliseum Capital, LLC, which is the general partner of CCP and CDF, and he is also a managing partner of Coliseum Capital Management, LLC (“CCM”), which is the investment manager of Blackwell. Mr. Gray has voting and dispositive control over securities held by CCP, CDF and Blackwell which were also Lenders under the Amended and Restated Credit Agreement. See Note 13— Commitments and Contingencies — Subscription Agreement and Preemptive Rights for further discussion . 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 Company’s Board in August 2020. 19 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) 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 $ 0.2 million and $ 0.4 million in rent expense to 123E LLC or TNT Holdings for the building lease of the Alpine facility for the three and six months ended June 30, 2022, respectively, and $ 0.2 million and $ 0.4 million for the three and six months ended June 30, 2021, 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 3, 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 six months ended June 30, 2021, certain current and former employees of Purple LLC who received distributions of Paired Securities from InnoHold exchanged 0.1 million of Paired Securities for Class A common stock. There were no such exchanges during the six months ended June 30, 2022. In connection with the Business Combination, to secure payment of a certain portion of specified post-closing indemnification rights of the Company under the Merger Agreement, 0.5 million shares of Class B common 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 condensed consolidated balance sheet. During the six months ended June 30, 2021, Purple LLC paid InnoHold through withholding payments directly to various states, an aggregate of $ 0.4 million in required tax distributions pursuant to the Third Purple LLC Agreement. There were no such payments made by Purple LLC during the six months ended June 30, 2022. 15. Stockholders’ Equity Class A Common Stock The Company has 210.0 million shares of Class A common stock authorized at a par value of $ 0.0001 per share. Holders of the Company’s Class A common 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 Class A common stock and holders of Class B common 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 common stock and Class B common stock are entitled to one vote per share on matters to be voted on by stockholders. At June 30, 2022, 82.8 million shares of Class A common stock were outstanding. 20 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) Class B Common Stock The Company has 90.0 million shares of Class B common stock authorized at a par value of $ 0.0001 per share. Holders of the Company’s Class B common stock will vote together as a single class with holders of the Company’s Class A common stock on all matters properly submitted to a vote of the stockholders. Shares of Class B common stock may be issued only to InnoHold, their respective successors and assigns, as well as any permitted transferees of InnoHold. A holder may transfer their shares of Class B common 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 Third Purple LLC Agreement. The Class B common stock is not entitled to receive dividends, if declared by the Board, or to receive any portion of any such assets in respect of their shares upon liquidation, dissolution, distribution of assets or winding-up of the Company in excess of the par value of such stock. In connection with the Business Combination, approximately 44.1 million shares of Class B common stock were issued to InnoHold as part of the equity consideration. InnoHold subsequently transferred a portion of its shares to permitted transfers and exchanged its remaining shares for Class A common stock that it sold. All of the 0.4 million shares of Class B common stock outstanding at June 30, 2022 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 June 30, 2022, there were no shares of preferred stock outstanding. Sponsor Warrants There were 12.8 million sponsor warrants issued pursuant to a private placement simultaneously with the Company’s IPO. The Company may call the warrants for redemption if the reported last sale price of the Class A common stock equals or exceeds $24.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date the Company sends the notice of redemption to the warrant holders; provided, however, that the sponsor warrants are not redeemable by the Company so long as they are held by the Sponsor or its permitted transferees. In addition, 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 common stock equal to the quotient obtained by dividing (x) the product of the number of shares of Class A common 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 common stock for the 10 trading days ending on the third trading day prior to the date on which the notice of warrant exercise is sent to the warrant agent. 21 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) There were no sponsor warrants exercised during the six months ended June 30, 2022. During the six months ended June 30, 2021, 6.6 million sponsor warrants were exercised resulting in the issuance of 2.3 million shares of Class A common stock. There were 1.9 million sponsor warrants outstanding at June 30, 2022. Noncontrolling Interest Noncontrolling interest (“NCI”) is the membership interest in Purple LLC held by holders other than the Company. Upon the close of the Business Combination, and at December 31, 2018, InnoHold’s and other Class B Unit holders’ combined NCI percentage in Purple LLC was approximately 82 %. At June 30, 2022, the combined NCI percentage in Purple LLC was 0.5 %. 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. 16. Income Taxes At each interim period, the Company estimates its forecasted full-year effective tax rate. That forecasted rate is applied to year-to-date ordinary income or loss to compute the year-to-date income tax provision. In order to compute the annual effective tax rate, the Company estimates its full year ordinary income and total tax provision, including both current and deferred taxes. For annual periods, the Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that the deferred tax assets will be realized. Deferred tax assets and liabilities are calculated by applying existing tax laws and the rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change. Our effective tax rate is primarily impacted by the allocation of income taxes to the noncontrolling interest and the non-taxable nature of the change in fair value of the warrant liability. The Company’s sole material asset is Purple LLC, which is treated as a partnership for U.S. federal income tax purposes and for purposes of certain state and local income taxes. Purple LLC’s net taxable income and any related tax credits are passed through to its members and are included in the members’ tax returns, even though such net taxable income or tax credits may not have actually been distributed. While the Company consolidates Purple LLC for financial reporting purposes, the Company will be taxed on its share of earnings of Purple LLC not attributed to the noncontrolling interest holders, which will continue to bear their share of income tax on its allocable earnings of Purple LLC. The income tax burden on the earnings taxed to the noncontrolling interest holders is not reported by the Company in its consolidated financial statements under GAAP. As a result, the Company’s effective tax rate differs 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. 22 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) Deferred tax assets at June 30, 2022 totaled $ 224.0 million, which is net of a $ 93.7 million valuation allowance that has been recorded against the residual outside partnership basis for the amount the Company believes is not more likely than not realizable. As a result, there was an overall increase of $ 23.8 million in the valuation allowance from December 31, 2021 to June 30, 2022, primarily as a result of an increase in the residual outside partnership basis. The Company currently estimates its annual effective income tax rate to be 21.6 %. The annualized effective tax rate for the Company differs from the federal rate of 21 % primarily due to the non-taxable nature of the change in fair value of the warrant liabilities and state and local income taxes. For the six months ended June 30, 2022, the Company has recorded an income benefit of $ 6.0 million. The effective tax rate for the six months ended June 30, 2022 was 21.4 %. This is less than the federal statutory rate due primarily to a reduction of deferred tax assets associated with adjustments for stock based compensation and the gain relating to the change in fair value of the warrant liability is excluded from taxable income for income tax purposes. In connection with the Business Combination, the Company entered into a tax receivable agreement with InnoHold, which provides for the payment by the Company to InnoHold of 80 % of the net cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes (or is deemed to realize in certain circumstances) in periods after the Closing as a result of (i) any tax basis increases in the assets of Purple LLC resulting from the distribution to InnoHold of the cash consideration, (ii) the tax basis increases in the assets of Purple LLC resulting from the redemption by Purple LLC or the exchange by the Company, as applicable, of Class B Paired Securities or cash, as applicable, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, payments it makes under the agreement. 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 common 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 Class B Units for Class A common stock 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 $ 162.2 million and $ 168.1 million as of June 30, 2022 and December 31, 2021, respectively. The reduction in the June 30, 2022 tax receivable agreement liability reflected a payment of $ 5.8 million made in January 2022. As of December 31, 2021, the Company estimated $ 10.0 million of U.S. federal and $ 2.7 million of state net operating loss carryforwards available to reduce future taxable income. The federal net operating losses may be carried forward indefinitely for U.S. federal tax purposes, while some state carryforwards are subject to expiration beginning in 2026. It is possible that we will not generate taxable income in time to use all or a portion of these net operating loss carryforwards before their expiration or at all. Additionally, the Company may be subject to the NOL utilization provisions of Section 382 of the Internal Revenue Code of 1986, as amended due to ownership changes that may have occurred previously or that could occur in the future. The effect of an ownership change may be the imposition of an annual limitation on the use of NOL carryforwards attributable to periods before the change. The amount of the annual limitation depends upon the value of the Company immediately before the change, changes to the Company’s capital during a specified period prior to the change, and the federal published interest rate. As of June 30, 2022, the Company has not completed its analyses in respect of Section 382 to determine whether a change in ownership has occurred, the annual limitation, if any, or whether any of the tax attributes are subject to a permanent limitation. Until an analysis is completed, there can be no assurance that the existing net operating loss carry-forwards or credits are not subject to significant limitation. 23 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) 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 income. Accrued interest and penalties would be included on the related tax liability line in the consolidated balance sheet. As of June 30, 2022, no uncertain tax positions were recognized as liabilities in the condensed consolidated financial statements. 17. Net Income (Loss) Per Common 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 following table sets forth the calculation of basic and diluted weighted average shares outstanding and earnings (loss) per share for the periods presented (in thousands, except per share amounts): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Numerator: Net income (loss) attributable to Purple Innovation, Inc.-basic $ ( 8,340 ) $ 2,578 $ ( 21,842 ) $ 23,402 Less – dilutive effect of change in fair value of warrant liabilities — ( 4,860 ) — ( 14,007 ) Less – net loss attributed to noncontrolling interest ( 70 ) — ( 199 ) — Net income (loss) attributable to Purple Innovation, Inc.-diluted $ ( 8,410 ) $ ( 2,282 ) $ ( 22,041 ) $ 9,395 Denominator Weighted average shares—basic 82,703 66,277 74,924 65,439 Add – dilutive effect of equity awards — — — 1,499 Add – dilutive effect of warrants — 587 — 1,403 Add – dilutive effect of Class B shares 448 — 448 — Weighted average shares—diluted 83,151 66,864 75,372 68,341 Net income (loss) per common share: Basic $ ( 0.10 ) $ 0.04 $ ( 0.29 ) $ 0.36 Diluted $ ( 0.10 ) $ ( 0.03 ) $ ( 0.29 ) $ 0.14 24 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) For the three and six months ended June 30, 2022, the Company excluded 3.3 million and 3.5 million, respectively, of Class A common shares issuable upon conversion of certain warrants, stock options, restricted stock and Class A shares subject to vesting as the effect was anti-dilutive. For the three and six months ended June 30, 2021, the Company excluded 0.4 million and 0.5 million, respectively, of Paired Securities convertible into shares of Class A Stock as the effect was anti-dilutive. 18. 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 units 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. As of June 30, 2022, an aggregate of 1.0 million shares are available for issuance or use under the 2017 Incentive Plan. Class A Stock Awards In May 2022, the Company granted stock awards under the 2017 Incentive Plan to independent directors on the Board. The stock awards vested immediately and the Company issued 0.1 million shares of Class A common stock and recognized $ 0.6 million in expense during the three months ended June 30, 2022, which represented the fair value of the stock awards on the grant date. Employee Stock Options In March and June 2022, the Company granted 0.5 million and 0.1 million stock options, respectively, under the 2017 Incentive Plan to its chief executive officer at an exercise price of $ 6.82 per option. The stock options expire in five years and vest over a three-year period. In April 2022, with the chief executive officer’s consent, the Company rescinded and cancelled 0.4 million of the stock options granted in March 2022 because of annual limits set forth in the 2017 Incentive Plan. The Company determined the fair value of the net award of 0.2 million stock options to be $ 0.4 million which will be expensed on a straight-line basis over the vesting period. The Company determined the fair value of the options granted during the six months ended June 30, 2022 using the Black Scholes method with the following weighted average assumptions: Fair market value $ 2.02 Exercise price $ 6.82 Risk free interest rate 2.67 % Expected term in years 3.45 Expected volatility 54.22 % Expected dividend yield — The following table summarizes the Company’s total stock option activity for the six months ended June 30, 2022: Options (in thousands) Weighted Average Exercise Price Weighted Average Remaining Contractual Term in Years Intrinsic Value (in thousands) Options outstanding as of January 1, 2022 1,552 $ 8.65 1.9 $ 8,667 Granted 594 6.82 — — Exercised ( 20 ) 8.32 — — Forfeited/cancelled ( 545 ) 8.11 — — Options outstanding as of June 30, 2022 1,581 $ 8.15 1.7 $ — 25 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) Outstanding and exercisable stock options as of June 30, 2022 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) $ 5.75 158 0.3 158 0.3 $ — 5.95 426 0.4 426 0.4 — 6.51 196 1.9 152 1.9 — 6.65 173 1.9 127 1.9 — 6.82 205 4.8 — — — 7.99 19 2.4 13 2.4 — 8.32 108 2.0 68 2.0 — 8.55 97 0.4 97 0.7 — 13.12 110 2.4 72 2.1 — 15.12 2 0.2 2 0.2 — 21.70 52 0.4 52 0.4 — 32.28 35 3.7 12 3.7 — The following table summarizes the Company’s unvested stock option activity for the six months ended June 30, 2022: Options (in thousands) Weighted Average Grant Date Fair Value Nonvested options as of January 1, 2022 416 $ 3.60 Granted 594 3.41 Vested ( 125 ) 3.30 Forfeited ( 482 ) 2.73 Nonvested options as of June 30, 2022 403 $ 2.84 The estimated fair value of Company stock options is amortized over the options vesting period on a straight-line basis. For the three and six months ended June 30, 2022, the Company recognized stock option expense of $ 0.2 million and $ 0.3 million, respectively. The Company recorded stock option expense of $ 0.5 million and $ 0.9 million during the three and six months ended June 30, 2021, respectively. As of June 30, 2022, outstanding stock options had $ 1.1 million of unrecognized stock compensation cost with a remaining recognition period of 2.0 years. 26 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) Employee Restricted Stock Units In March and June 2022, the Company granted 0.5 million and 0.1 million restricted stock units, respectively, under the 2017 Incentive Plan to the Company’s chief executive officer. These restricted stock awards had a grant date fair value of $ 6.32 and $ 4.81 per share, respectively. In April 2022, with the chief executive officer’s consent, the Company rescinded and cancelled 0.4 million of the restricted stock units granted in March 2022 because of annual limits set forth in the 2017 Incentive Plan. The estimated fair value of the net award of 0.2 million restricted stock units is being recognized on a straight-line basis over the three-year vesting period. During the second quarter of 2022, the Company granted 1.1 million restricted stock units under the 2017 Incentive Plan to certain management of the Company. Approximately one-half of the restricted stock units granted included a market vesting condition. The restricted stock awards that did not have a market vesting condition had a weighted average grant date fair value of $ 5.53 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 $ 3.68 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 $ 5.34 Risk free interest rate 2.64 % Expected life in years 2.9 Expected volatility 84.3 % Expected dividend yield — The following table summarizes the Company’s restricted stock unit activity for the six months ended June 30, 2022: Number Outstanding (in thousands) Weighted Average Grant Date Fair Value Nonvested restricted stock units as of January 1, 2022 165 $ 17.84 Granted 1,181 4.77 Vested ( 31 ) 18.52 Forfeited ( 68 ) 12.19 Nonvested restricted stock units as of June 30, 2022 1,247 $ 5.75 The Company recorded restricted stock unit expense of $ 0.5 million and $ 0.9 million during the three and six months ended June 30, 2022, respectively. There were no restricted stock units outstanding and no expense recorded during the six months ended June 30, 2021. As of June 30, 2022, outstanding restricted stock units had $ 6.4 million of unrecognized stock compensation cost with a remaining recognition period of 2.6 years. 27 PURPLE INNOVATION, INC. Notes to Condensed Consolidated Financial Statements (unaudited) Aggregate Non-Cash Stock-Based Compensation The Company has accounted for all stock-based compensation under the provisions of ASC 718 Compensation—Stock Compensation . This standard requires the Company to record a non-cash expense associated with the fair value of stock-based compensation over the requisite service period. The following table summarizes the aggregate non-cash stock-based compensation recognized in the statement of operations for stock awards, employee stock options and employee restricted stock units (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Cost of revenues $ 104 $ 44 $ 170 $ 89 Marketing and sales 266 114 403 218 General and administrative 861 951 1,184 1,275 Research and development 44 4 60 10 Total non-cash stock-based compensation $ 1,275 $ 1,113 $ 1,817 $ 1,592 19. Employee Retirement Plan In July 2018 the Company established a 401(k) plan that qualifies as a deferred compensation arrangement under Section 401 of the IRS Code. All eligible employees over the age of 18 and with 4 months’ service are eligible to participate in the plan. The plan provides for Company matching of employee contributions up to 5% of eligible earnings. Company contributions immediately vest. The Company’s matching contribution expense was $ 0.9 million and $ 1.9 million for the three and six months ended June 30, 2022, respectively, and $ 0.8 million and $ 1.6 million for the three and six months ended June 30, 2021, respectively. 20. Subsequent Events On July 20, 2022, the Company entered into an amendment to its Alpine facility lease agreement with 123E LLC. The amendment rescinded the Company’s previous notice of termination that was scheduled to be effective September 30, 2022 and extended the term such that the lease will remain in effect until September 30, 2023. On August 5, 2022, the Company filed a Complaint with the United States International Trade Commission (“ITC”) against numerous entities and individuals from the People’s Republic of China and South Korea (“Respondents”) that have been violating Purple’s intellectual property rights related to pillow and seat cushion products. The Complaint alleges that the proposed Respondents are violating 19 U.S.C. § 1337 (“Section 337”) by importing into the United States, selling for importation into the United States, and/or selling in the United States after importation pillow and seat cushion products that infringe Purple’s trade dress rights or otherwise constitute unfair competition, infringe a certain Purple design patent, infringe Purple trademarks, and/or infringe Purple utility patents. The Complaint requests that the ITC issue at least the following relief: (i) a General Exclusion Order excluding from entry into the United States all pillow and seat cushion products that infringe any asserted Purple intellectual property right; (ii) Limited Exclusion Orders excluding from entry into the United States all pillow and cushion products of the proposed Respondents named in the Complaint that infringe any asserted Purple intellectual property right; and (iii) Cease and Desist Orders against the proposed Respondents named in the Complaint barring them from marketing, selling, advertising, or distributing infringing products in the United States, including via on-line retailers. The ITC is currently determining whether to institute an unfair import investigation under Section 337 in connection with Purple’s Complaint. 28