Purple Innovation, Inc. 10-K

Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Interim Chief Financial Officer (“CFO”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act). Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our certifying officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based upon this evaluation and the above criteria, our CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2022 at the reasonable assurance level. Management’s Annual Report on Internal Controls Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal controls over financial reporting were effective as of December 31, 2022. On August 31, 2022, we acquired Advanced Comfort Technologies, Inc., dba Intellibed (“Intellibed”). We are currently in the process of integrating Intellibed into our assessment of our internal control over financial reporting. Management’s assessment and conclusions on the effectiveness of our internal control over financial reporting as of December 31, 2022 excludes an assessment of the internal control over financial reporting of Intellibed. Intellibed represents approximately 1.7% of the Company’s total revenues for the 12 months ending December 31, 2022. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 has been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in their report which appears herein. Previously Reported Material Weakness As previously reported, during the quarter ended September 30, 2022, we determined a material weakness existed relating to ineffective ITGCs in the areas of user access and segregation of duties related to certain IT systems that support the Company’s financial reporting processes. We believe that these control deficiencies were a result of turnover of critical IT leadership; insufficient training of IT personnel; and inadequate risk-assessment processes to identify and assess user access in certain IT systems that could impact internal controls over financial reporting. As a result, we determined that we did not have effective controls to prevent or detect a material financial statement misstatement on a timely basis. In response to this material weakness, management, with oversight of the Audit Committee of the Board, effectively implemented a software solution to assist in managing access and segregation of duties, provided enhanced training to those responsible for IT systems, and implemented improvements to ITGC processes. Based on these measures, management has tested the ITGCs, found them effective, and concluded that the previously reported material weakness described above has been remediated as of December 31, 2022 . Changes in Internal Control over Financial Reporting Other than the remediation efforts related to the design and implementation of sufficient controls and processes around ITGCs, there were no changes in our internal control over financial reporting during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 64 Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Purple Innovation, Inc. Lehi, Utah Opinion on Internal Control over Financial Reporting We have audited Purple Innovation, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as “the financial statements”) and our report dated March 22, 2023 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ BDO USA, LLP Salt Lake City, Utah March 22, 2023 65 Item 9B. Other Information None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. 66 PART III Item 10. Directors, Executive Officers and Corporate Governance The information required under the captions “Directors” and “Corporate Governance” is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2022. Information concerning our executive officers is included in Part I of this report under the caption “Information About Our Executive Officers.” Item 11. Executive Compensation The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2022. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2022. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2022. Item 14 . Principal Accountant Fees and Services The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2022. 67 PART IV Item 15. Exhibits and Financial Statement Schedules (a) The following documents are filed as part of this Report: (1) Financial Statements The following financial statements are included in Part II, Item 8 of this Form 10-K: Report of Independent Registered Public Accounting Firm (BDO USA, LLP; Salt Lake City, Utah; PCAOB ID#243) F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Stockholders’ Equity (Deficit) F-5 Consolidated Statements of Cash Flows F-6 Notes to the Consolidated Financial Statements F-7 (2) Financial Statements Schedule All other financial statement schedules are omitted because they are not applicable or the amounts are immaterial and not required, or the required information is presented in the consolidated financial statements and notes thereto in Item 15 of Part IV below. (3) Exhibits We hereby file as part of this report the exhibits listed in the attached Exhibit Index. Exhibits which are incorporated herein by reference can be inspected and copied at the public reference facilities maintained by the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549 at prescribed rates or on the SEC website at www.sec.gov . 68 EXHIBIT INDEX Exhibit No. Description 2.1# Agreement and Plan of Merger, dated November 2, 2017, by and among Global Partner Acquisition Corp., PRPL Acquisition, LLC, Purple Innovation, LLC, InnoHold, LLC and Global Partner Sponsor I LLC (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on November 3, 2017) 2.2 Amendment No. 1 to Agreement and Plan of Merger, dated January 8, 2018, by and among Global Partner Acquisition Corp., Purple Innovation, LLC, PRPL Acquisition, LLC and other parties named therein (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on January 8, 2018) 2.3 Amendment No. 2 to Agreement and Plan of Merger, dated May 14, 2018, by and among Purple Innovation, Inc., Purple Innovation, LLC, Global Partner Sponsor I LLC and InnoHold, LLC (incorporated by reference to Exhibit 2.2 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on May 15, 2018) 2.4 Amendment No. 3 to Agreement and Plan of Merger, dated June 14, 2018, by and among Purple Innovation, Inc., Purple Innovation, LLC, Global Partner Sponsor I LLC and InnoHold, LLC (incorporated by reference to Exhibit 2.1 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on August 9, 2018) 2.5# Merger Agreement, dated as of August 31, 2022, by and among Purple Innovation, Inc., Gelato Intermediate, LLC, Gelato Merger Sub, Inc., Advanced Comfort Technologies, Inc., and D. Scott Peterson (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on September 1, 2022). 3.1 Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on November 6, 2019) 3.2 Second Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on December 15, 2022). 3.3 Certificate of Designation of the Preferred Stock of the Company, dated September 26, 2022 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on September 27, 2022). 3.4 Certificate of Designation of Proportional Representation Preferred Linked Stock of the Company, dated February 14, 2023 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 14, 2023). 4.1 Form of Class A Common Stock certificate (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 4.2 Form of Class B Common Stock certificate (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 4.3* Description of Registered Securities. 4.4 Stockholder Rights Agreement, dated as of September 25, 2022, by and between the Company and Pacific Stock Transfer Company, as rights agent (which includes the Form of Rights Certificate as Exhibit B thereto) (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on September 27, 2022). 10.1+ Form of Option Award Agreement (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on May 15, 2018) 10.2+ Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on May 15, 2018) 10.3+ Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on May 15, 2018) 10.4+ Form of Stock Appreciation Right Award Agreement (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on May 15, 2018) 10.5+ Form of Stock Bonus Award Agreement (incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on May 15, 2018) 10.6 Exchange Agreement, dated February 2, 2018, by and between Purple Innovation, Inc., Purple Innovation, LLC and InnoHold, LLC (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 69 10.7 Tax Receivable Agreement, dated February 2, 2018, by and between Purple Innovation, Inc. and InnoHold, LLC (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 10.8+ Employment Agreement, dated February 2, 2018, between Purple Innovation, Inc. and Tony Pearce (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 10.9+ Employment Agreement, dated February 2, 2018, between Purple Innovation, Inc. and Terry Pearce (incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 10.10+ Purple Innovation, Inc. 2017 Equity Incentive Plan (incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 10.11 Subscription Agreement, dated February 1, 2018, between Global Partner Acquisition Corp., Global Partner Sponsor I LLC, Coliseum Capital Partners, L.P. and Blackwell Partners LLC – Series A (incorporated by reference to Exhibit 10.15 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 10.12 Agreement to Assign Sponsor Warrants, dated February 2, 2018, between Global Partner Acquisition Corp., Global Partner Sponsor I LLC, Continental Stock Transfer and Trust Company, Coliseum Capital Partners, L.P., Blackwell Partners, LLC and Coliseum Co-Invest Debt Fund, L.P. (incorporated by reference to Exhibit 10.16 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 10.13 Agreement to Assign Founder Shares, dated February 2, 2018, between Global Partner Acquisition Corp., Global Partner Sponsor I LLC, Continental Stock Transfer and Trust Company and Coliseum Capital Partners, L.P., Blackwell Partners, LLC (incorporated by reference to Exhibit 10.17 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 10.14 Registration Rights Agreement, dated February 2, 2018, between Global Partner Acquisition Corp., Coliseum Capital Partners, L.P., Blackwell Partners, LLC and Coliseum Co-Invest Debt Fund, L.P. (incorporated by reference to Exhibit 10.18 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 8, 2018) 10.15† Second Amended and Restated Confidential Assignment and License Back Agreement between the Company and EdiZONE (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on November 14, 2018) 10.16+ Option Grant Agreement dated February 21, 2019 between Purple Innovation, Inc. and John Legg (incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 27, 2019) 10.17 Registration Rights Agreement dated February 26, 2019 between and among Purple Innovation, Inc., Coliseum Capital Partners, L.P., Blackwell Partners LLC – Series A and Coliseum Co-Invest Debt Fund, L.P. (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 27, 2019) 10.18 Statement of Work agreement dated March 1, 2019 by and between Purple Innovation, Inc. and FTI Consulting, Inc. (incorporated by reference to Exhibit 10.9 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on May 7, 2019) 10.19 Master Retailer Agreement dated September 18, 2018 by and between Purple Innovation LLC and Mattress Firm, Inc. (incorporated by reference to Exhibit 10.10 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on May 7, 2019) 10.20+ Purple Innovation, Inc. 2019 Long-Term Equity Incentive Plan (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on May 14, 2019) 10.21 Lease Agreement dated June 10, 2019 between Purple Innovation, LLC and North Slope One, LLC (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on August 13, 2019) 10.22 First Amendment to Lease dated November 19, 2019 between the Company and North Slope One, LLC (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on November 25, 2019) 10.23 Amendment to TNT Holdings Amended and Restated Lease Agreement dated April 23, 2020 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on May 11, 2020) 70 10.24 Lease Agreement between Purple Innovation, LLC and PNK S2, LLC dated July 21, 2020 (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on August 14, 2020) 10.25 Credit Agreement dated September 3, 2020 between and among Purple Innovation, LLC, Purple Innovation, Inc., KeyBank National Association, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on September 3, 2020) 10.26 Pledge and Security Agreement dated September 3, 2020 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on September 3, 2020) 10.27 Guaranty dated September 3, 2020 (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on September 3, 2020) 10.28 Collateral Assignment of Patents dated September 3, 2020 (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on September 3, 2020) 10.29 Collateral Assignment of Trademarks dated September 3, 2020 (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on September 3, 2020) 10.30 Collateral Assignment of Copyrights dated September 3, 2020 (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K (File No. 001-37523) filed with SEC on September 3, 2020) 10.31 License Transfer and IP Assignment Agreement between Purple Innovation, LLC and EdiZONE, LLC dated August 14, 2020 (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on November 10, 2020) 10.32+ Indemnification Agreement between Purple Innovation, Inc. and Paul Zepf dated August 18, 2020 (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on November 10, 2020) 10.33 First Amendment to Amended and Restated Credit Agreement by and among Purple Innovation, LLC, Purple Innovation, Inc., Coliseum Capital Partners, L.P., Blackwell Partners LLC-Series A, and Coliseum Co-Invest Debt Fund, L.P. dated March 27, 2020 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on March 30, 2020) 10.34 Second Amendment to Amended and Restated Credit Agreement by and among Purple Innovation, LLC, Purple Innovation, Inc., Coliseum Capital Partners, L.P., Blackwell Partners LLC-Series A, and Coliseum Co-Invest Debt Fund, L.P. dated May 15, 2020 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 37523) filed with the SEC on May 18, 2020) 10.35 Waiver and Consent to Amended and Restated Credit Agreement by and among Purple Innovation, LLC, Purple Innovation, Inc., Coliseum Capital Partners, L.P., Blackwell Partners LLC-Series A, and Coliseum Co-Invest Debt Fund, L.P. dated August 20, 2020 (incorporated by reference into Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on August 21, 2020) 10.36 Amendment to Lease Agreement between Purple Innovation, LLC and PNK S2, LLC dated March 4, 2021 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on May 17, 2021) 10.37 Second Amendment to Lease Agreement between Purple Innovation, LLC and PNK S2, LLC dated March 26, 2021 (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q (File No. 001-37523) filed with the SEC on May 17, 2021) 10.38+ Amendment to Purple Innovation, Inc. 2017 Equity Incentive Plan dated July 12, 2021 (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on July 13, 2021) 71 10.39+ Restated and Amended Purple Innovation, Inc. 2019 Long-Term Equity Incentive Plan dated July 12, 2021 (incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on July 13, 2021) 10.40+ Form of Restricted Share Unit Agreement (incorporated by reference to Exhibit 99.3 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on July 13, 2021) 10.41+ Form of Performance-Based Share Unit Agreement (incorporated by reference to Exhibit 99.4 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on July 13, 2021) 10.42+ Purple Innovation, Inc. 2021 Short-Term Cash Incentive Plan dated July 12, 2021 (incorporated by reference to Exhibit 99.5 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on July 13, 2021) 10.43 First Amendment to the 2020 Credit Agreement dated February 28, 2022 between and among Purple Innovation, LLC, Purple Innovation, Inc., KeyBank National Association, and the other lenders party thereto (incorporated by reference to Exhibit 10.60 to the Annual Report on Form 10-K (File No. 001-37523) filed with the SEC on March 1, 2022). 10.44+ Amended and Restated Employment Agreement, dated as of March 19, 2022, by and among Robert T. DeMartini and Purple Innovation, Inc. (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on March 22, 2022). 10.45 Second Amendment to the 2020 Credit Agreement dated March 23, 2022 by and among Purple Innovation, LLC, Purple Innovation, Inc., KeyBank National Association, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on March 24, 2022). 10.46+ Offer letter dated as of April 29, 2022, signed by Eric Haynor (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on May 3, 2022). 10.47+ Purple Innovation, Inc. 2022 Short-Term Cash Incentive Plan, dated as of May 26, 2022 (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on June 1, 2022). 10.48+ Second Amendment to Purple Innovation, Inc. 2017 Equity Incentive Plan dated June 2, 2022 (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on June 3, 2022). 10.49+ Second Consultancy Agreement, dated as of August 11, 2022, by and among Bennett Nussbaum and Purple Innovation, Inc. (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on August 16, 2022). 10.50+ Separation Agreement entered into between Purple Innovation, LLC and Patrice Varni dated November 5, 2022 (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on November 8, 2022). 10.51 Fifth Amendment to the 2020 Credit Agreement dated February 17, 2023 by and among Purple Innovation, LLC, Purple Innovation, Inc., KeyBank National Association, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-37523) filed with the SEC on February 21, 2023) . 14.1 Code of Ethics of Purple Innovation, Inc. (incorporated by reference into Exhibit 14.1 to the Annual Report on Form 10-K (File No. 001-37523) filed with the SEC on March 11, 2021) 21.1* List of Subsidiaries of the Registrant. 23.1* Consent of Independent Registered Public Accounting Firm 24.1* Power of Attorney (included on signature page) 31.1* Certification of the Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) 31.2* Certification of the Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) 32.1* Certification of the Principal Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350 32.2* Certification of the Principal Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350 101.INS Inline XBRL Instance Document. 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). * Filed herewith # Schedules and exhibits to the Merger Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to furnish supplementally a copy of any omitted schedules and exhibits to the Securities and Exchange Commission upon request. + Indicates management contract or compensatory plan. † Confidential treatment of certain provisions has been granted by the Securities and Exchange Commission. Item 16. Form 10-K Summary Not applicable. 72 PURPLE INNOVATION, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (BDO USA, LLP; Salt Lake City, Utah; PCAOB ID# 243 ) F-2 Consolidated Balance Sheets as of December 31, 2022 and 2021 F-3 Consolidated Statements of Operations for the years ended December 31, 2022, 2021 and 2020 F-4 Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2022, 2021 and 2020 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020 F-6 Notes to Consolidated Financial Statements F-7 F- 1 Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Purple Innovation, Inc. Lehi, Utah Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Purple Innovation, Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 , in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 22, 2023 expressed an unqualified opinion thereon. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. Warranty Accrual At December 31, 2022, the Company’s accrued warranty liability was $20.7 million. As discussed in Note 2 to the consolidated financial statements, the Company provides a limited warranty on most of its products sold. Warranty costs are estimated based on the results of product testing, industry and historical trends and warranty claim rates incurred, and are adjusted for any current or expected trends. These costs are recognized at the time of sale in cost of revenues. We identified the warranty accrual as a critical audit matter because of certain significant assumptions used by management to estimate warranty costs at the time of sale, specifically, estimated future warranty claims and estimated costs to remedy warranty claims. Auditing these certain significant management assumptions involved especially complex and subjective auditor judgment due to the nature and extent of audit effort required to address these matters. The primary procedures we performed to address this critical audit matter included: ● Evaluating management’s estimate of future warranty claims and estimated costs to remedy warranty claims by testing key inputs, including historical claims made and actual warranty costs incurred. ● Assessing the accuracy of management’s estimation of future warranty claims by performing a lookback analysis, which compared the amount of claims accrued in prior years to actual claims made in subsequent periods. ● Assessing management’s estimate of future warranty claims and estimated costs to remedy warranty claims by evaluating management’s analysis of the Company’s warranty expense as a percentage of revenues compared to that of peer companies based on available public information. /s/ BDO USA, LLP We have served as the Company’s auditor since 2017. Salt Lake City, Utah March 22, 2023 F- 2 PURPLE INNOVATION, INC. Consolidated Balance Sheets (In thousands, except for par value) December 31, 2022 2021 Assets Current assets: Cash, cash equivalents and restricted cash $ 41,754 $ 91,616 Accounts receivable, net 34,566 25,430 Inventories, net 73,197 98,690 Prepaid expenses 7,821 8,064 Other current assets 4,117 5,702 Total current assets 161,455 229,502 Property and equipment, net 136,673 112,614 Operating lease right-of-use assets 102,541 68,037 Goodwill 4,897 — Intangible assets, net 26,221 13,204 Deferred income taxes — 217,791 Other long-term assets 1,546 1,322 Total assets $ 433,333 $ 642,470 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 46,441 $ 79,752 Accrued sales returns 5,107 7,116 Accrued compensation 6,691 8,928 Customer prepayments 4,452 10,854 Accrued sales and use tax 2,978 4,672 Accrued rebates and allowances 9,804 10,169 Operating lease obligations – current portion 13,708 7,053 Other current liabilities 8,130 13,470 Total current liabilities 97,311 142,014 Debt, net of current portion 23,657 94,113 Operating lease obligations, net of current portion 115,599 81,159 Warrant liabilities — 4,343 Tax receivable agreement liability, net of current portion — 162,239 Other long-term liabilities, net of current portion 17,876 12,061 Total liabilities 254,443 495,929 Commitments and contingencies (Note 14) Stockholders’ equity: Class A common stock; $ 0.0001 par value, 210,000 shares authorized; 91,380 issued and outstanding at December 31, 2022 and 66,493 issued and outstanding at December 31, 2021 9 7 Class B common stock; $ 0.0001 par value, 90,000 shares authorized; 448 issued and outstanding at December 31, 2022 and 448 issued and outstanding at December 31, 2021 — — Additional paid-in capital 529,466 407,591 Accumulated deficit ( 351,514 ) ( 261,825 ) Total stockholders’ equity attributable to Purple Innovation, Inc. 177,961 145,773 Noncontrolling interest 929 768 Total stockholders’ equity 178,890 146,541 Total liabilities and stockholders’ equity $ 433,333 $ 642,470 The accompanying notes are an integral part of these consolidated financial statements. F- 3 PURPLE INNOVATION, INC. Consolidated Statements of Operations (In thousands, except per share amounts) Year Ended December 31, 2022 2021 2020 Revenues, net $ 575,692 $ 726,227 $ 648,471 Cost of revenues 365,110 431,253 343,374 Gross profit 210,582 294,974 305,097 Operating expenses: Marketing and sales 165,388 239,290 187,991 General and administrative 76,702 72,095 39,925 Research and development 8,755 6,939 5,955 Total operating expenses 250,845 318,324 233,871 Operating income (loss) ( 40,263 ) ( 23,350 ) 71,226 Other income (expense): Interest expense ( 3,536 ) ( 1,872 ) ( 4,654 ) Other income (expense), net 423 ( 194 ) ( 91 ) Loss on extinguishment of debt — — ( 5,782 ) Change in fair value – warrant liabilities 4,343 24,054 ( 300,073 ) Tax receivable agreement income (expense) 161,970 4,016 ( 34,155 ) Total other income (expense), net 163,200 26,004 ( 344,755 ) Net income (loss) before income taxes 122,937 2,654 ( 273,529 ) Income tax benefit (expense) ( 212,864 ) 1,217 43,749 Net income (loss) ( 89,927 ) 3,871 ( 229,780 ) Net income (loss) attributable to noncontrolling interest ( 238 ) ( 160 ) 7,087 Net income (loss) attributable to Purple Innovation, Inc. $ ( 89,689 ) $ 4,031 $ ( 236,867 ) Net income (loss) per share: Basic $ ( 1.10 ) $ 0.06 $ ( 6.04 ) Diluted $ ( 1.10 ) $ ( 0.30 ) $ ( 6.04 ) Weighted average common shares outstanding: Basic 81,779 65,928 39,219 Diluted 81,779 67,302 39,219 The accompanying notes are an integral part of these consolidated financial statements. F- 4 PURPLE INNOVATION, INC. Consolidated Statements of Stockholders’ Equity (Deficit) (In thousands) Class A Common Stock Class B Common Stock Additional Paid-in Accumulated Total Stockholders’ Equity attributable to Purple Innovation, Inc. Noncontrolling Total Equity Shares Par Value Shares Par Value Capital Deficit (Deficit) Interest (Deficit) Balance — December 31, 2019 22,494 $ 2 31,394 $ 3 $ 2,822 $ ( 28,989 ) $ ( 26,162 ) $ ( 2,378 ) $ ( 28,540 ) Net income (loss) — — — — — ( 236,867 ) ( 236,867 ) 7,087 ( 229,780 ) Stock-based compensation — — — — 2,185 — 2,185 — 2,185 Exchange of stock 30,858 3 ( 30,858 ) ( 3 ) — — — — — Exercise of warrants 7,621 1 — — 218,113 — 218,114 — 218,114 Exercise of incremental loan warrants 2,613 — — — 81,040 — 81,040 — 81,040 Exercise of stock options 281 — — — 2,007 — 2,007 — 2,007 Tax receivable agreement liability — — — — ( 137,314 ) — ( 137,314 ) — ( 137,314 ) Deferred income taxes — — — — 165,676 — 165,676 — 165,676 Accrued tax distributions — — — — ( 5,847 ) — ( 5,847 ) — ( 5,847 ) Issuance of stock 83 — — — — — — — — Forfeiture of unvested stock ( 36 ) — — — — — — — — Impact of transactions affecting NCI — — — — 4,365 — 4,365 ( 4,365 ) — Balance – December 31, 2020 63,914 $ 6 536 $ — $ 333,047 $ ( 265,856 ) $ 67,197 $ 344 $ 67,541 Net income (loss) — — — — — 4,031 4,031 ( 160 ) 3,871 Stock-based compensation — — — — 3,366 — 3,366 — 3,366 Exchange of stock 88 — ( 88 ) — — — — — — Exercise of warrants 2,298 1 — — 64,426 — 64,427 — 64,427 Exercise of stock options 171 — — — 1,418 — 1,418 — 1,418 Tax receivable agreement liability — — — — ( 760 ) — ( 760 ) — ( 760 ) Deferred income taxes — — — — 2,937 — 2,937 — 2,937 Accrued tax distributions — — — — ( 401 ) — ( 401 ) — ( 401 ) Issuance of stock 22 — — — — — — — — InnoHold indemnification payment — — — — 4,142 — 4,142 — 4,142 Impact of transactions affecting NCI — — — — ( 584 ) — ( 584 ) 584 — Balance – December 31, 2021 66,493 $ 7 448 $ — $ 407,591 $ ( 261,825 ) $ 145,773 $ 768 $ 146,541 Net loss — — — — — ( 89,689 ) ( 89,689 ) ( 238 ) ( 89,927 ) Stock-based compensation — — — — 3,366 — 3,366 — 3,366 Exercise of stock options 20 — — — 166 — 166 — 166 Issuance of stock upon underwritten public offering, net of costs 16,100 1 — — 92,865 — 92,866 — 92,866 Issuance of stock for acquisition 8,613 1 — — 26,105 — 26,106 — 26,106 Accrued distributions — — — — ( 228 ) — ( 228 ) — ( 228 ) Issuance of stock under equity compensation plans 154 — — — — — — — — Impact of transactions affecting NCI — — — — ( 399 ) — ( 399 ) 399 — Balance – December 31, 2022 91,380 $ 9 448 $ — $ 529,466 $ ( 351,514 ) $ 177,961 $ 929 $ 178,890 The accompanying notes are an integral part of these consolidated financial statements. F- 5 PURPLE INNOVATION, INC. Consolidated Statements of Cash Flows (In thousands) Years Ended December 31, 2022 2021 2020 Cash flows from operating activities: Net income (loss) $ ( 89,927 ) $ 3,871 $ ( 229,780 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 17,487 9,473 7,899 Non-cash interest 1,072 517 3,105 Paid-in-kind interest — — ( 6,616 ) Loss on extinguishment of debt — — 5,782 Loss on disposal of property and equipment 620 — — Change in fair value – warrant liabilities ( 4,343 ) ( 24,054 ) 300,073 Tax receivable agreement (income) expense ( 161,970 ) ( 4,016 ) 34,155 Stock-based compensation 3,366 3,366 2,185 Gain from effective settlement of preexisting relationship ( 1,421 ) — — Deferred income taxes 213,548 ( 3,608 ) ( 45,812 ) Changes in operating assets and liabilities: Accounts receivable ( 4,112 ) 3,681 ( 419 ) Inventories 28,956 ( 32,964 ) ( 18,098 ) Prepaid expenses and other assets 1,757 1,744 ( 5,047 ) Operating leases, net 7,709 2,159 1,396 Accounts payable ( 33,609 ) 6,796 16,049 Accrued sales returns ( 2,009 ) ( 1,312 ) 1,157 Accrued compensation ( 2,892 ) ( 5,482 ) 6,255 Customer prepayments ( 6,456 ) 4,601 ( 5 ) Accrued rebates and allowances ( 365 ) ( 722 ) 5,580 Other accrued liabilities 3,816 5,047 3,398 Net cash provided by (used in) operating activities ( 28,773 ) ( 30,903 ) 81,257 Cash flows from investing activities: Cash, cash equivalents and restricted cash acquired from acquisition, net of cash paid 3,660 — — Purchase of property and equipment ( 35,376 ) ( 53,938 ) ( 27,878 ) Investment in intangible assets ( 2,785 ) ( 3,121 ) ( 11,261 ) Net cash used in investing activities ( 34,501 ) ( 57,059 ) ( 39,139 ) Cash flows from financing activities: Proceeds from term loan — — 45,000 Payments on related-party loan — — ( 37,497 ) Payments on term loan ( 17,531 ) ( 2,250 ) ( 563 ) Proceeds from revolving line of credit — 55,000 — Payments on revolving line of credit ( 55,000 ) — — Proceeds from stock offering 98,210 — — Payments for stock offering costs ( 5,344 ) — — Proceeds from exercise of warrants — 116 46,359 Proceeds from exercise of stock options 166 1,418 2,007 Payments for debt issuance costs ( 1,242 ) — ( 2,460 ) Tax receivable agreement payments ( 5,847 ) ( 628 ) — Proceeds from InnoHold indemnification payment — 4,142 — Distributions to members — ( 1,175 ) ( 5,487 ) Net cash provided by financing activities 13,412 56,623 47,359 Net increase (decrease) in cash ( 49,862 ) ( 31,339 ) 89,477 Cash and cash equivalents, beginning of the year 91,616 122,955 33,478 Cash and cash equivalents, end of the year $ 41,754 $ 91,616 $ 122,955 Supplemental disclosures of cash flow information: Cash paid during the year for interest, net of amounts capitalized $ 2,693 $ 999 $ 8,167 Cash paid during the year for income taxes $ 303 $ 4,645 $ 2,060 Supplemental schedule of non-cash investing and financing activities: Property and equipment included in accounts payable $ 4,162 $ 6,443 $ 3,305 Issuance of stock for acquisition $ 26,106 $ — $ — Non-cash leasehold improvements $ — $ 3,238 $ 5,147 Accrued distributions $ 228 $ 401 $ 668 Tax receivable agreement liability $ — $ 760 $ 137,314 Deferred income taxes $ — $ 2,937 $ 165,676 Exercise of liability warrants $ — $ 64,311 $ 252,796 The accompanying notes are an integral part of these consolidated financial statements. F- 6 PURPLE INNOVATION, INC. Notes to the Consolidated Financial Statements 1. Organization The Company’s mission is to help people feel and live better through innovative comfort solutions. Purple Innovation, Inc., collectively with its subsidiary (the “Company” or “Purple Inc.”) began as a digitally-native vertical brand founded on comfort product innovation with premium offerings, and is now omni-channel. 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 owned 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. On August 31, 2022, the Company acquired all the issued and outstanding stock of Advanced Comfort Technologies, Inc., dba Intellibed (“Intellibed”) pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), in which Gelato Merger Sub, Inc., a wholly owned subsidiary of Purple Inc., merged with and into Intellibed, with Intellibed continuing as a wholly owned subsidiary of Purple Inc. On October 3, 2022, Purple Inc. contributed 100 % of the membership interest in Intellibed to Purple LLC and Intellibed became a wholly owned subsidiary of Purple LLC. For further discussion see Note 4 — Acquisition. 2. Summary of Significant Accounting Policies This summary of significant accounting policies is presented to assist in understanding the Company’s consolidated financial statements. The consolidated financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. Basis of Presentation and Principles of Consolidation The consolidated financial statements include the accounts of Purple Inc., its controlled subsidiary Purple LLC, and Intellibed, Purple LLC’s wholly owned subsidiary, from the date of acquisition. All intercompany balances and transactions have been eliminated in consolidation. As of December 31, 2022, Purple Inc. held 99.5 % of the common units of Purple LLC and other Purple LLC Class B Unit holders held 0.5 % of the common units in Purple LLC. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) and reflect the financial position, results of operations and cash flows of the Company. On December 31, 2020, the Company ceased to be an emerging growth company (“EGC”) and was no longer exempt from certain reporting requirements that apply to public companies. As an EGC prior to this date, Purple Inc. had elected to use extended transition periods available to private companies for complying with new or revised accounting standards. These accounting policies have been consistently applied in the preparation of the consolidated financial statements. F- 7 Variable Interest Entities Purple LLC is a variable interest entity. The Company determined that it is the primary beneficiary of Purple LLC as it is the sole managing member and has the power to direct the activities most significant to Purple LLC’s economic performance as well as the obligation to absorb losses and receive benefits that are potentially significant. At December 31, 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 consolidated financial statements contained herein. The holders of Class B Units held 0.5 % of the economic interest in Purple LLC as of December 31, 2022. For further discussion see Note 16— Stockholders’ Equity . Reclassification Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year presentation with no effect on previously reported net income (loss), cash flows or stockholders’ equity. The change in operating leases, previously reflected as two line items within cash flows from operating activities, is now presented on a net basis as a single line item within the changes in operating assets and liabilities section of the consolidated statement of cash flows. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires the Company to establish accounting policies and to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The Company regularly makes significant estimates and assumptions including, but not limited to, estimates that affect revenue recognition, accounts receivable and allowance for doubtful accounts, valuation of inventories, sales returns, warranty returns, fair value of assets acquired and liabilities assumed in a business combination, warrant liabilities, stock based compensation, the recognition and measurement of loss contingencies, estimates of current and deferred income taxes, deferred income tax valuation allowances, and amounts associated with the Company’s Tax Receivable Agreement with InnoHold, LLC (“InnoHold”). Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results could differ materially from those estimates. Cash, Cash Equivalents and Restricted Cash The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The carrying value of cash, cash equivalents and restricted cash approximates fair value because of the short-term maturity of those instruments. At December 31, 2022, cash, cash equivalents and restricted cash included $ 1.7 million of restricted cash deposited by Intellibed in a separate account pursuant to an escrow agreement with the Company. For further discussion regarding restricted cash, see Note 4 — Acquisition. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are recorded net of an allowance for expected losses and consist primarily of receivables from wholesale customers and receivables from third-party consumer financing partners and credit card processors. The allowance is recognized in an amount equal to anticipated future write-offs. Management estimates the allowance for doubtful accounts based on delinquencies, aging trends, industry risk trends, historical experience and current trends. Account balances are charged off against the allowance when management believes it is probable the receivable will not be recovered. The allowance for doubtful accounts at both December 31, 2022 and 2021 was not material. Inventories Inventories are comprised of raw materials, work-in-process and finished goods and are stated at the lower of cost or net realizable value. Manufactured inventory consists of raw material, direct labor and manufacturing overhead costs. Inventory cost is calculated using a method that approximates average cost. The Company reviews the components of its inventory on a regular basis for excess and obsolete inventory and makes appropriate adjustments when necessary. Once established, the original cost of the inventory less the related inventory allowance represents the new cost basis of such products. F- 8 Property and Equipment Property and equipment are stated at cost, net of depreciation. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the respective assets, ranging from 1 to 17 years , as follows: Years Equipment 5 - 10 Furniture and fixtures 3 - 7 Office equipment 3 - 5 Leasehold improvements 1 - 17 Major renewals and betterments that increase value or extend useful life are capitalized. The Company records depreciation and amortization in cost of sales for long-lived assets used in the manufacturing process, and within each line item of operating expenses for all other long-lived assets. Leasehold improvements are amortized over the shorter of the useful life of the leasehold improvements or the contractual term of the lease, with consideration of lease renewal options if exercise is reasonably certain. The cost and related accumulated depreciation of assets sold or retired is removed from the accounts with any resulting gain or loss included in the consolidated statement of operations. The Company capitalizes interest on borrowings during the active construction period of major capital projects. Interest capitalization ceases once a project is substantially complete or no longer undergoing construction activities to prepare it for its intended use. Capitalized interest is added to the cost of the underlying assets and is amortized over the useful lives of the assets. When no debt is specifically identified as being incurred in connection with a construction project, the Company capitalizes interest on amounts expended on the project using the weighted average cost of the Company’s outstanding borrowings. Leases The Company determines if an agreement contains a lease at the inception of a contract. For leases with an initial term greater than 12 months, a related lease liability is recorded on the balance sheet at the present value of future payments discounted at the estimated fully collateralized incremental borrowing rate (discount rate) corresponding with the lease term. In addition, a right-of-use (“ROU”) asset is recorded as the initial amount of the lease liability, plus any lease payments made to the lessor before or at the lease commencement date and any initial direct costs incurred, less any tenant improvement allowance incentives received. The Company elected not to separate lease and non-lease components for all real estate leases. The Company calculates the present value of future payments using its incremental borrowing rate when the discount rate implicit in the lease is not known. The incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. The Company determines the applicable incremental borrowing rate at the lease commencement date based on the rates of its secured borrowings, which is then adjusted for the appropriate lease term and risk premium. In determining the Company’s ROU assets and corresponding lease liabilities, the Company applies these incremental borrowing rates to the minimum lease payments within each lease agreement. Lease expense is recognized on a straight-line basis over the lease term. Tenant incentive allowances received from the lessor are amortized through the ROU asset as a reduction of rent expense over the lease term. Any variable lease costs are expensed as incurred. Leases with an initial term of 12 months or less (short-term leases) are not recorded as ROU assets and corresponding lease liabilities. Short-term lease expense is recognized on a straight-line basis over the lease term. ROU assets are assessed for impairment as part of long-lived assets, which is performed whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. F- 9 Business Combinations The Company accounts for business combinations using the acquisition method of accounting, in accordance with ASC 805, Business Combinations. When the Company completes an acquisition, the assets acquired and the liabilities assumed are recognized separately from goodwill at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of the fair value of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While best estimates and assumptions are used to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, the Company’s estimates are inherently uncertain and subject to refinement. If the Company obtains new information within the measurement period (up to one year from the acquisition date) about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are reflected in the consolidated statement of operations. In the event an acquisition involves an entity with which the Company has a preexisting relationship, the Company will generally recognize a gain or loss within the consolidated statement of operations to settle that relationship as of the acquisition date. Transaction costs associated with business combinations are expensed as incurred. Goodwill The Company accounts for goodwill in a business combination as the excess of the cost over the fair value of net assets acquired and is assigned to the reporting unit in which the acquired business will operate. The Company does not amortize goodwill but tests it for impairment each fiscal year or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. The recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The Company may elect to perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If the qualitative assessment is not performed or if the Company determines that it is not more likely than not that the fair value of the reporting unit exceeds the carrying value, the Company determines the fair value of its reporting units based on an average weighting of both projected discounted future results and the use of comparative market multiples. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a loss recognized in the amount equal to that excess. Intangible Assets Intangible assets include a customer relationship intangible associated with the Intellibed acquisition, developed technologies by Purple and Intellibed, trade names and trademarks, internal-use software, domain name costs, license fees and other patent and trademark related costs. Definite-lived intangible assets are being amortized using the straight-line method over their estimated lives, ranging from two to 15 years. For software developed or obtained for internal use, the Company capitalizes direct external costs associated with developing or obtaining internal-use software. In addition, the Company capitalizes certain payroll and payroll-related costs for employees who are directly involved with the development of such applications. Capitalized costs related to internal-use software under development are treated as construction-in-progress until the program, feature or functionality is ready for its intended use, at which time amortization commences. Capitalized software costs are amortized on a straight-line basis over three years . F- 10 Asset Impairment Charges Definite-lived Intangible Assets – Definite-lived intangible assets are reviewed for impairment annually or whenever events or changes in circumstances indicate impairment may have occurred. Any identified impairment would result in an adjustment to the Company’s results of operations. There were no impairment charges realized on definite-lived intangible assets during the years ended December 31, 2022 and 2021. During the year ended December 31, 2020, an impairment charge of $ 0.6 million was recorded to write-off the unamortized portion of license costs related to a vendor supply and services agreement. For further discussion see Note 9— Intangible Assets. Indefinite-lived Intangible Assets – Intangible assets that have indefinite lives are not amortized but are reviewed for impairment annually or when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. Impairment testing is based upon the best information available including estimates of fair value which incorporate assumptions marketplace participants would use in making their estimates of fair value. Accounting guidance provides for the performance of either a quantitative assessment or a qualitative assessment before calculating the fair value of an asset. For its indefinite lived intangibles assets, the Company assessed qualitative factors to determine whether any events or circumstances existed which indicated that it was more likely than not that the fair value of its indefinite lived assets did not exceed their carrying values. The Company concluded no such events or circumstances existed which would require an impairment test be performed beyond the qualitative assessment. In the future, if events or market conditions affect the estimated fair value to the extent that an asset is impaired, the Company will adjust the carrying value of these assets in the period in which the impairment occurs. Long-Lived Assets – Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is assessed by a comparison of the carrying amount of the asset to the estimated future undiscounted net cash flows expected to be generated by the asset or group of assets. If estimated future undiscounted net cash flows are less than the carrying amount of the asset or group of assets, the asset is considered impaired and an expense is recorded in an amount required to reduce the carrying amount of the asset to its then fair value. Fair value generally is determined from estimated discounted future net cash flows (for assets held for use) or net realizable value (for assets held for sale). The Company did not record any impairment losses on long-lived assets during the years ended December 31, 2022, 2021 or 2020. Cooperative Advertising, Rebate and Other Promotion Programs The Company enters into programs with certain wholesale partners to provide funds for advertising and promotions as well as volume and other rebate programs. When sales are made to these customers, the Company records liabilities pursuant to these programs. The Company periodically assesses these liabilities based on actual sales to determine whether all of the cooperative advertising earned will be used by the customer or whether the customer will meet the requirements to receive rebate funds. Significant estimates are required at any point in time with regard to the ultimate reimbursement to be claimed by the customers. Subsequent revisions to the estimates are recorded and charged to earnings in the period in which they are identified. Rebates and certain cooperative advertising amounts are classified as a reduction of revenue and presented within net revenues in the accompanying consolidated statements of operations. Cooperative advertising expenses that can be identified as a distinct good or service and for which the fair value can be reasonably estimated are recorded, when incurred, as components of marketing and sales expenses in the accompanying consolidated statements of operations. Marketing and sales expense in 2022, 2021 and 2020 included $ 4.1 million, $ 2.7 million and $ 1.2 million, respectively, related to shared advertising costs that the Company incurred under its cooperative advertising programs to the extent the fair value of the distinct good or service were reasonably estimable. F- 11 Advertising Costs The Company incurs advertising costs associated with print, digital and broadcast advertisements. Advertising costs are expensed when the advertisements are run for the first time and included in marketing and selling expenses in the accompanying consolidated statements of operations. Advertising expense was $ 61.0 million, $ 149.8 million and $ 130.3 million for the years ended December 31, 2022, 2021 and 2020, respectively. Revenue Recognition The Company markets and sells its products through e-commerce online channels, retail brick-and-mortar wholesale partners, Purple owned retail showrooms, and third-party online retailers. Revenue is recognized when the Company satisfies its performance obligations under the contract which involves transferring the promised products to the customer. This principle is achieved in the following steps: Identify the contract with the customer. A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods to be transferred and identifies the payment terms related to these goods, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for the goods that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company does not have significant costs to obtain contracts with customers. Identify the performance obligations in the contract . The Company’s contracts with customers do not include multiple performance obligations to be completed over a period of time. The performance obligations generally relate to delivering products to a customer, subject to the shipping terms of the contract. The Company has made an accounting policy election to account for shipping and handling activities performed after a customer obtains control of the goods, including “white glove” delivery services, as activities to fulfill the promise to transfer the goods. The Company does not offer extended warranty or service plans. The Company does not provide an option to its customers to purchase future products at a discount and therefore there are no material option rights. Determine the transaction price . Payment for sale of products through the e-commerce online channel, Purple owned retail showrooms and third-party online retailers is collected at point of sale in advance of shipping the products. Amounts received for unshipped products are recorded as customer prepayments. Payment by traditional wholesale customers is due under customary fixed payment terms. None of the Company’s contracts contain a significant financing component. Revenue is recorded at the net sales price, which includes estimates of variable consideration such as product returns, volume rebates, and other adjustments. The estimates of variable consideration are based on historical return experience, historical and projected sales data, and current contract terms. Variable consideration is included in revenue only to the extent that it is probable that a significant reversal of the revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues. Allocate the transaction price to performance obligations in the contract. The Company’s contracts with customers do not include multiple performance obligations. Therefore, the Company recognizes revenue upon transfer of the product to the customer’s control at contractually stated pricing. Recognize revenue when or as we satisfy a performance obligation. The Company satisfies performance obligations at a point in time upon either shipment or delivery of goods, in accordance with the terms of each contract with the customer. With the exception of third-party “white glove” delivery and certain wholesale partners, revenue generated from product sales is recognized at shipping point, the point in time the customer obtains control of the products. Revenue generated from sales through third-party “white glove” delivery is recognized at the point in time when the product is delivered to the customer. Revenue generated from certain wholesale partners is recognized at a point in time when the product is delivered to the wholesale partner’s warehouse. The Company does not have service revenue. F- 12 Cost of Revenues Costs associated with net revenues are recorded in cost of revenues in the same period in which related sales have been recorded. Cost of revenues includes the costs of receiving, producing, inspecting, warehousing, insuring, and shipping goods during the period, as well as depreciation and amortization of long-lived assets used in these processes. Cost of sales also includes shipping and handling costs associated with the delivery of goods to customers. Sales Returns The Company’s policy provides customers up to 100-days to return a mattress, pet bed or pillow and up to 30-days to return all other products (except power bases) for a full refund. Estimated sales returns, which are recorded as a reduction of revenue at the time of sale and recorded as a liability on the balance sheet, are based on historical trends and product return rates and are adjusted for any current or expected trends as appropriate. Actual sales returns could differ from these estimates. The Company regularly assesses and adjusts the estimate of accrued sales returns by updating the return rates for actual trends and projected costs. The Company classifies the estimated sales returns as a current liability as they are expected to be paid out in less than one year. As of December 31, 2022 and 2021, $ 5.1 million and $ 7.1 million, respectively, were included as accrued sales returns in the accompanying consolidated balance sheets. The Company had the following activity for sales returns: Years Ended December 31, (in thousands) 2022 2021 2020 Balance at beginning of period $ 7,116 $ 8,428 $ 7,271 Additions that reduced net revenue 35,479 45,561 50,504 Deduction from reserves for current year returns ( 37,488 ) ( 46,873 ) ( 49,347 ) Balance at end of period $ 5,107 $ 7,116 $ 8,428 Warranty Liabilities The Company provides a limited warranty on most of the products sold. The estimated warranty costs, which are expensed at the time of sale and included in cost of revenues, are based on the results of product testing, industry and historical trends and warranty claim rates incurred, and are adjusted for any current or expected trends as appropriate. Actual warranty claim costs could differ from these estimates. The Company regularly assesses and adjusts the estimate of accrued warranty claims by updating claims rates for actual trends and projected claim costs. The Company expects the estimated warranty liability to continue to increase as the Company has not reached a full 10-years of history on its 10-year mattress warranty. The Company classifies estimated warranty costs expected to be paid beyond a year as a long-term liability. As of December 31, 2022 and 2021, $ 5.0 million and $ 3.9 million of warranty liabilities are included in other current liabilities and $ 15.7 million and $ 11.1 million of warranty liabilities are included in other long-term liabilities on the accompanying consolidated balance sheets, respectively. The Company had the following activity for warranty liabilities: Years Ended December 31, (in thousands) 2022 2021 2020 Balance at beginning of period $ 15,013 $ 8,397 $ 4,621 Additions charged to expense for current year sales 9,856 9,234 6,399 Deduction from reserves for current year claims ( 4,125 ) ( 2,618 ) ( 2,623 ) Balance at end of period $ 20,744 $ 15,013 $ 8,397 Debt Issuance Costs and Discounts Debt issuance costs and discounts that relate to borrowings are presented in the consolidated balance sheet as a direct reduction from the carrying amount of the related debt liability and are amortized into interest expense using an effective interest rate over the duration of the debt. Debt issuance costs that relate to revolving lines of credit are carried as an asset in the consolidated balance sheet and amortized to interest expense on a straight-line basis over the term of the related line of credit facility. Refer to Note 11 – Debt. F- 13 Warrant Liabilities The Company accounted for its incremental loan warrants as liability warrants under the provisions of ASC 480, Distinguishing Liabilities from Equity . ASC 480 requires the recording of certain liabilities at their fair value. Changes in the fair value of these liabilities are recognized in earnings. These warrants contained a repurchase provision which, upon an occurrence of a fundamental transaction as defined in the warrant agreement, could have given rise to an obligation of the Company to pay cash to the warrant holders. In addition, other provisions may have led to a reduction in the exercise price of the warrants. The Company determined the fundamental transaction provisions required the warrants to be accounted for as a liability at fair value on the date of the transaction, with changes in fair value recognized in earnings in the period of change. The Company used the Monte Carlo Simulation of a Geometric Brownian Motion stock path model to determine the fair value of the liability. The model uses key assumptions and inputs such as exercise price, fair market value of common stock, risk free interest rate, warrant life, expected volatility and the probability of a warrant re-price. All of the incremental loan warrants were exercised during fiscal 2020. The Company accounted for its public warrants in accordance with ASC 815, Derivatives and Hedging—Contracts in Entity’s Own Equity , under which these warrants did not meet the criteria for equity classification and were recorded as liabilities. Since the public warrants met the definition of a derivative as contemplated in ASC 815, these warrants were measured at fair value at inception and at each reporting date in accordance with ASC 820, Fair Value Measurement , with changes in fair value recognized in earnings in the period of change. The Company determined the fair value of the public warrants based on their public trading price. All of the public warrants were exercised during fiscal 2020. The Company accounts for its sponsor warrants in accordance with ASC 815, under which these warrants do not meet the criteria for equity classification and must be recorded as liabilities. Since the sponsor warrants meet the definition of a derivative as contemplated in ASC 815, these warrants are measured at fair value at inception and at each reporting date in accordance with ASC 820 with changes in fair value recognized in earnings in the period of change. The Company uses the Black-Scholes model to determine the fair value of the liability associated with the sponsor warrants. The model uses key assumptions and inputs such as exercise price, fair market value of common stock, risk free interest rate, warrant life and expected volatility. At December 31, 2022, there were 1.9 million sponsor warrants outstanding. On February 3, 2023 all outstanding warrants expired. Fair Value Measurements The Company uses the fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are: Level 1—Quoted market prices in active markets for identical assets or liabilities; Level 2—Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable, such as interest rate and yield curves, and market-corroborated inputs); and Level 3—Unobservable inputs in which there is little or no market data, which require the reporting unit to develop its own assumptions. The classification of fair value measurements within the established three-level hierarchy is based upon the lowest level of input that is significant to the measurements. Financial instruments, although not recorded at fair value on a recurring basis include cash, cash equivalents and restricted cash, receivables, accounts payable, and the Company’s debt obligations. The carrying amounts of cash, cash equivalents and restricted cash, receivables and accounts payable approximate fair value because of the short-term nature of these accounts. The fair value of the Company’s debt instruments are estimated to be face value based on the contractual terms of the debt arrangements and market-based expectations. F- 14 The public warrant liabilities are Level 1 instruments as they use quoted market prices from an active market. The sponsor and incremental loan warrant liabilities are Level 3 instruments that use internal models to estimate fair value based on 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: December 31, (In thousands) Level 2022 2021 Sponsor warrants 3 $ — $ 4,343 The 1.9 million sponsor warrants outstanding at December 31, 2022 had a negligible fair value. The following table summarizes the Company’s total Level 3 liability activity for the years ended December 31, 2022, 2021 and 2020: (In thousands) Sponsor Warrants Incremental Loan Warrants Total Level 3 Liabilities Fair value as of December 31, 2019 $ 7,689 $ 21,622 $ 29,311 Initial measurement ( 1,275 ) — ( 1,275 ) Fair value transfer to Level 1 measurement ( 3,690 ) ( 81,040 ) ( 84,730 ) Change in valuation inputs (1) 89,984 59,418 149,402 Fair value as of December 31, 2020 $ 92,708 $ — $ 92,708 Fair value transfer to Level 1 measurement — — — Fair value of warrants exercised ( 64,311 ) — ( 64,311 ) Change in valuation inputs (1) ( 24,054 ) — ( 24,054 ) Fair value as of December 31, 2021 $ 4,343 $ — $ 4,343 Fair value transfer to Level 1 measurement — — — Fair value of warrants exercised — — — Change in valuation inputs (1) ( 4,343 ) — ( 4,343 ) Fair value as of December 31, 2022 $ — $ — $ — (1) Changes in valuation inputs are recognized as the change in fair value – warrant liabilities in the consolidated statement of operations. Stock Based Compensation The Company accounts for stock-based compensation under the provisions of ASC 718, Compensation—Stock Compensation . This standard requires the Company to record an expense associated with the fair value of stock-based compensation over the requisite service period. F- 15 During 2022, 2021 and 2020, the Company granted stock options under the Company’s 2017 Equity Incentive Plan (the “2017 Equity Incentive Plan”) to certain officers, executives and employees of the Company. The fair value for these awards was determined using the Black-Scholes option valuation model at the date of grant. Stock based compensation on these awards is expensed on a straight-line basis over the vesting period. Option pricing models require the input of subjective assumptions including the expected term of the stock option, the expected price volatility of the Company’s common stock over the period equal to the expected term of the grant, and the expected risk-free rate. Changes in these assumptions can materially affect the fair value estimate. The Company recognizes forfeitures of stock option awards as they occur. During 2022, 2021 and 2020, the Company granted stock awards under the 2017 Equity Incentive Plan to independent directors on the Company’s Board for services performed. Since all of these awards vested immediately, stock-based compensation was recorded on the grant date using the publicly quoted closing price of the Company’s common stock on that date as fair value. During 2022 and 2021, the Company granted restricted stock units under the Company’s 2017 Equity Incentive Plan to certain employees of the Company. A portion of the restricted stock units granted included a market vesting condition. The estimated fair value of the restricted stock units that do not have the market vesting condition is recognized on a straight-line basis over the vesting period. The estimated fair value of the stock units that included a market vesting condition was measured on the grant date using a Monte Carlo Simulation of a Geometric Brownian Motion stock path model and incorporated the probability of vesting occurring. The estimated fair value of these awards is recognized over the derived service period (as determined by the valuation model), with such recognition occurring regardless of whether the market condition is met. In May and June 2020, the Company granted restricted stock awards under the Company’s 2017 Equity Incentive Plan to certain employees of the Company. The stock awards vest over 3 to 4 years. The estimated fair value of restricted stock is measured on the grant date and is recognized as expense over the vesting period. In March 2020, the Company granted a restricted stock award under the Company’s 2017 Equity Incentive Plan to the Company’s independent Board advisor and GPAC observer. The stock award vested in March 2021. As this award included a service condition, the estimated fair value of the restricted stock was measured on the grant date and recognized over the service period. The Company determined that the fair value of the restricted stock on the grant date was immaterial. During 2019, the Company granted a restricted stock award that had certain vesting conditions which could be met at the earliest in the twelve months ended March 31, 2022. All of the vesting conditions were satisfied on September 30, 2021 and all of the shares became unrestricted on that date. As this award included a market vesting condition, stock-based compensation was determined as the estimated fair value of the restricted stock measured on the grant date using a Monte Carlo Simulation of a Geometric Brownian Motion stock path model which incorporated the probability of vesting occurring. The fair value of the restricted stock was expensed over the derived service period which ended when all of the shares became issuable. F- 16 Income Taxes Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that the deferred tax assets will be realized. Deferred tax assets and liabilities are calculated by applying existing tax laws and the rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change. The Company’s effective tax rate is primarily impacted by the allocation of income taxes to the noncontrolling interest and changes in our valuation allowance. The Company accounts for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return, which are subject to examination by federal and state taxing authorities. The tax benefit from an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination by taxing authorities based on technical merits of the position. The amount of the tax benefit recognized is the largest amount of the benefit that has a greater than 50 % likelihood of being realized upon ultimate settlement. The effective tax rate and the tax basis of assets and liabilities reflect management’s estimates of the ultimate outcome of various tax uncertainties. The Company recognizes penalties and interest related to uncertain tax positions within the provision (benefit) for income taxes line in the accompanying consolidated statements of operations. The Company files U.S. federal and certain state income tax returns. The income tax returns of the Company are subject to examination by U.S. federal and state taxing authorities for various time periods, depending on those jurisdictions’ rules, generally after the income tax returns are filed. Tax Receivable Agreement In connection with the Business Combination, the Company entered into the Tax Receivable Agreement with InnoHold, which provides for the payment by the Company to InnoHold of 80 % of the net cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes (or is deemed to realize in certain circumstances) in periods after the Closing as a result of (i) any tax basis increases in the assets of Purple LLC resulting from the distribution to InnoHold of the cash consideration, (ii) the tax basis increases in the assets of Purple LLC resulting from the redemption by Purple LLC or the exchange by the Company, as applicable, of Class B Paired Securities or cash, as applicable, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, payments it makes under the Tax Receivable Agreement. As noncontrolling interest holders exercise their right to exchange or cause Purple LLC to redeem all or a portion of its Class B Units, a liability under the Tax Receivable Agreement (a “TRA Liability”) may be recorded based on 80 % of the estimated future cash tax savings that the Company may realize as a result of increases in the basis of the assets of Purple LLC attributed to the Company as a result of such exchange or redemption. The amount of the increase in asset basis, the related estimated cash tax savings and the attendant TRA Liability to be recorded will depend on the price of the Company’s Class A 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. F- 17 Segment Information Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”). The role of the CODM is to make decisions about allocating resources and assessing performance. The Company’s operations are based on an omni-channel distribution strategy that allows the Company to offer a seamless shopping experience to its customers across multiple sales channels. The Company concluded its business operates in one operating segment as all of the Company’s sales channels are complementary and analyzed in the same manner. Also, the CODM reviews financial information presented on a consolidated basis for the purpose of allocating resources and evaluating financial performance . Since the Company operates in one operating segment, all required financial segment information can be found throughout the consolidated financial statements. The Company’s chief executive officer has been identified as its CODM. Net Income (Loss) Per Share Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of Class A common stock outstanding during each period. Diluted net income (loss) per share reflects the weighted-average number of common shares outstanding during the period used in the basic net income (loss) computation plus the effect of common stock equivalents that are dilutive. The Company uses the “if-converted” method to determine the potential dilutive effect of conversions of its outstanding Class B common stock, and the treasury stock method to determine the potential dilutive effect of its outstanding warrants, share-based payment awards and the vesting of unvested Class A common stock. Restructuring Activities 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 and 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 its current core business. As a result of the realignment and restructuring, the Company reduced employee headcount and recognized severance charges of $ 2.0 million during the year ended December 31, 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 consolidated statement of operations for the year ended December 31, 2022. During 2022, the Company implemented additional cost reduction and efficiency efforts to improve costs, increase margins and ensure compliance with debt covenants. If the Company’s cash flows from operations or other sources of financing are less than anticipated, the Company believes it will be able to fund operating expenses and continue satisfying the conditions of its 2020 financing arrangement, as amended, based on its ability to scale back operations, reduce marketing spend, prepay term debt, use available liquidity under its revolving line of credit, and postpone or discontinue growth strategies. In addition, the Company may also consider restructuring its obligations with current creditors, pursue work-out options or seek additional funding sources including new debt or equity capital. F- 18 In December 2022, the Company filed a registration statement on Form S-3 with the United States Securities and Exchange Commission using the “shelf” registration process. As a result, the Company may offer and sell from time to time, in one or more series or issuances and on terms that the Company will determine at the time of the offering, any combination of the securities described in the registration statement, up to an aggregate amount of $ 90.0 million. 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 Company does not currently have any receivables, hedging relationships, lease agreements, or debt agreements that reference LIBOR or another reference rate expected to be discontinued. In February 2022, the Company entered into an amendment to its 2020 financing arrangement that changed the interest reference rate on its term loan and revolving line of credit from LIBOR to the Secured Overnight Financing Rate (“SOFR”). The change to SOFR did not have a material impact on the Company’s consolidated financial statements – see Note 11— Debt for discussion of this amendment. 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. This standard is to be applied utilizing a modified retrospective approach. The adoption of this standard on January 1, 2023 did not have a material impact on the Company’s consolidated financial statements and related disclosures. F- 19 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 underwriters purchased the Class A common stock from the Company at a price of $ 5.65 per share, except that any shares sold by the underwriters 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 underwriters at a price of $ 6.10 per share. The aggregate net proceeds received by the Company from the offering, after deducting offering fees and expenses of $ 5.3 million, totaled $ 92.9 million. 4. Acquisition On August 31, 2022, pursuant to the Merger Agreement, the Company acquired Intellibed, a premium sleep and health wellness company, offering gel-based mattresses scientifically designed for maximum back support, spinal alignment and pressure point relief. We believe that the addition of Intellibed will increase product offerings to customers, expand market opportunities, capitalize on synergies of the combined companies, and increase opportunities for innovation. In addition, the acquisition allowed the Company to consolidate ownership of its intellectual property licensed to Intellibed and more fully capitalize on growing demand for products with gel technologies. The acquisition date fair value of the consideration transferred for Intellibed was $ 28.3 million, which consisted of the following (in thousands): Fair value of Class A common stock issued at closing $ 23,069 Fair value of Class A common stock held in escrow 1,467 Fair value of contingent consideration 1,471 Fair value of effective settlement of preexisting relationships 1,672 Transaction expenses paid on behalf of Intellibed 546 Due to seller 75 Fair value of total purchase consideration $ 28,300 The fair value of common stock issued at closing consisted of approximately 8.1 million shares of Class A common stock valued using the acquisition date closing price of $2.86. The fair value of common stock held in escrow consisted of 0.5 million shares of Class A common stock valued using the acquisition date closing price of $2.86. These shares are being held in escrow pending resolution of net working capital adjustments and certain indemnification matters, as described in the Merger Agreement. Contingent consideration represents the fair value of 1.5 million shares of Class A common stock issuable to Intellibed security holders if the closing price of the Company’s stock does not equal or exceed $ 5.00 for at least ten trading days over any period of 30 consecutive trading days during the period beginning on the six-month anniversary of the closing date and ending on the 18-month anniversary of the closing date. The contingent shares were valued using a Monte-Carlo simulation model. Because the contingent consideration is payable with a fixed number of shares of the Company’s Class A common stock, it is classified as equity and will not require remeasurement in subsequent periods. The fair value of effective settlement of preexisting relationships includes $ 1.4 million related to the fair value of a preexisting legal matter with Intellibed that was effectively settled on the acquisition date and $ 0.3 million related to the fair value of a preexisting royalty liability owed by Intellibed to the Company that was also effectively settled on the acquisition date. As a result of effectively settling the preexisting legal matter with Intellibed, the Company recorded a gain of $ 1.4 million as other income (expense), net in the consolidated statement of operations for the year ended December 31, 2022. As a result of effectively settling the preexisting royalty liability, the Company and Intellibed recorded a corresponding receivable and payable, respectively, for the same $ 0.3 million amount that was eliminated in consolidation as of December 31, 2022. F- 20 The Company recorded the acquisition based on the fair value of the consideration transferred and then allocated the purchase price to the identifiable assets acquired and liabilities assumed based on their respective preliminary estimated fair values as of the acquisition date. Determining the fair value of assets acquired and liabilities assumed required management to use significant judgment and estimates including the selection of valuation methodologies, estimates of future revenues and cash flows, discount rates, and asset lives, among other items. While the Company used its best estimates and assumptions as a part of the purchase price allocation process to accurately value the assets acquired, including intangible assets, and the liabilities assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject to refinement. Due to the close proximity of the acquisition date to the Company’s reporting date, the Company recorded the assets acquired and liabilities assumed at their preliminary estimated fair values. As of December 31, 2022, the Company had not finalized the determination of the working capital adjustments and the fair values allocated to various assets and liabilities, income tax provision, intangible assets and the residual amount allocated to goodwill. Consequently, during the measurement period, which could be up to one year from the acquisition date, the Company may record adjustments to the fair values of the assets acquired and the liabilities assumed, with a corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or the liabilities assumed, whichever comes first, any subsequent adjustments will be reflected in the Company’s consolidated statement of operations. Based upon the purchase price allocation, the following table summarizes the preliminary fair value of the assets acquired and liabilities assumed at the date of the acquisition (in thousands): Net tangible assets (liabilities): Cash, cash equivalents and restricted cash $ 4,206 Accounts receivable 5,024 Inventory 3,463 Other current assets 326 Property and equipment 7,000 Operating lease right-of-use assets 5,491 Other long-term assets 68 Accounts payable ( 2,807 ) Other current liabilities ( 2,273 ) Operating lease obligations ( 4,373 ) Deferred tax liabilities ( 4,242 ) Net tangible assets (liabilities) 11,883 Goodwill 4,897 Customer relationships 10,876 Developed technology 644 Net assets acquired and liabilities assumed $ 28,300 The Company believes the amount of goodwill resulting from the purchase price allocation is primarily attributable to expected synergies from the assembled workforce, an increase in development capabilities, increased offerings to customers, expanded market opportunities, and enhanced opportunities for growth and innovation. Goodwill will not be amortized but instead will be tested for impairment at least annually or more frequently if certain indicators of impairment are present. In the event that goodwill has become impaired, the Company will record an expense for the amount impaired during the quarter in which the determination is made. The goodwill recorded is not deductible for income tax purposes. The two identified definite lived intangible assets, comprised of customer relationships and developed technology, will be amortized over their estimated useful lives of ten and two years , respectively. The customer relationships intangible asset represents the estimated fair value of the underlying relationships with Intellibed customers, valued utilizing the multi-period excess earnings method. The developed technology intangible represents the fair value of Intellibed industry-specific cloud and mobile software and related technologies, valued using the cost to recreate method. The cash, cash equivalents and restricted cash balance acquired includes $ 1.7 million of cash deposited by Intellibed in a separate account pursuant to an escrow agreement with the Company. The purpose of the escrow cash amount is to cover Intellibed’s estimated state income tax liabilities, sales tax liabilities and related filing expenses that existed prior to the acquisition date. If the actual liabilities are less than estimated, any excess cash would be returned to the previous shareholders of Intellibed. If payments for these items exceed the escrow balance, the Company will be required to pay the excess. The Company recorded the $ 1.7 million of cash as an acquired restricted cash balance that is included in cash, cash equivalents and restricted cash in the consolidated balance sheet as of December 31, 2022. The Company also recorded an assumed liability totaling $ 1.3 million for the sales and use tax and state and local income tax liabilities exposure that is reflected in other current liabilities in the consolidated balance sheet as of December 31, 2022. F- 21 The Company has included the financial results of Intellibed in its consolidated financial statements from the date of acquisition and recorded net revenues and pre-tax income of $ 9.7 million and $ 1.6 million, respectively, for the period from August 31, 2022 through December 31, 2022. The transaction costs associated with the acquisition of $ 3.9 million were recorded as general and administrative expense in the consolidated statement of operations for the year ended December 31, 2022. The following table provides unaudited pro forma financial information as if Intellibed had been acquired by the Company as of January 1, 2021. The unaudited pro forma information reflects adjustments for transaction and litigation expenses, immediate restructuring savings and additional depreciation and amortization resulting from the fair value adjustments to assets acquired. The pro forma results do not include any other anticipated cost synergies or effects of the combined companies. Accordingly, pro forma amounts are not necessarily indicative of the results to be expected had the acquisition been completed on the date indicated, nor is it indicative of the future operating results of the combined company (in thousands): Year Ended December 31, 2022 2021 Net revenues $ 606,230 $ 774,886 Net income (loss) ( 83,323 ) 12,603 The unaudited pro forma amounts above include the following adjustments: ● A decrease of operating expenses by $4.4 million during the year ended December 31, 2022, to eliminate costs directly related to the acquisition that do not have a continuing impact on operating results. ● A decrease of operating expenses by $1.5 million during the year ended December 31, 2021 to eliminate litigation costs directly related to the lawsuit between the two Companies. ● A decrease of operating expenses by $1.5 million and $0.6 million during the years ended December 31, 2022 and 2021, respectively, to eliminate costs directly related to immediate restructuring that do not have a continuing impact on operating results. ● An increase of operating expenses by $2.2 million and $1.8 million during the years ended December 31, 2022 and 2021, respectively, to reflect the additional depreciation and amortization expense related to the increase in property and equipment assets and definite lived intangible assets. ● The combined pro forma results were tax effected using the Company’s effective tax rate for the respective periods. 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 owned retail showrooms, and third-party online retailers. Revenue is recognized when the Company satisfies its performance obligations under the contract which involves transferring the promised products to the customer as described in Note 2 – Summary of Significant Accounting Policies . Disaggregated Revenue The Company classifies revenue into two categories: Direct-to-Consumer (“DTC”) and wholesale. The DTC category is comprised of the e-commerce channel that sells directly to consumers who purchase online and through our contact center, and the Purple owned retail showrooms channel that sells directly to consumers who purchase at a Company showroom location. The wholesale channel includes all product sales to our retail brick and mortar wholesale partners where consumers make purchases at their retail locations or through their online channels. The Company classifies products into two major categories: sleep products and other. Sleep products include mattresses, platforms, adjustable bases, mattress protectors, pillows and sheets. Other products include cushions and various other products. F- 22 The following tables present the Company’s revenue disaggregated by sales channel and product category (in thousands): Years Ended December 31, Channel 2022 2021 2020 DTC $ 330,503 $ 474,217 $ 485,305 Wholesale 245,189 252,010 163,166 Revenues, net $ 575,692 $ 726,227 $ 648,471 Years Ended December 31, Product 2022 2021 2020 Sleep products $ 524,797 $ 664,484 $ 598,046 Other 50,895 61,743 50,425 Revenues, net $ 575,692 $ 726,227 $ 648,471 Contract Balances Payment for sale of products through the e-commerce online channel, third-party online retailers, Purple owned 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 $ 4.5 million and $ 10.9 million at December 31, 2022 and 2021, respectively. During the years ended December 31, 2022, 2021 and 2020, the Company recognized all of the revenue that was deferred in customer prepayments at December 31, 2021, 2020 and 2019, respectively. 6. Inventories Inventories consisted of the following: As of December 31, (in thousands) 2022 2021 Raw materials $ 31,803 $ 33,609 Work-in-process 2,261 4,023 Finished goods 40,476 63,419 Inventory obsolescence reserve ( 1,343 ) ( 2,361 ) Inventories, net $ 73,197 $ 98,690 F- 23 7. Property and Equipment Property and equipment consisted of the following: As of December 31, (in thousands) 2022 2021 Equipment $ 66,533 $ 58,094 Equipment in progress 19,099 19,840 Leasehold improvements 56,114 38,098 Furniture and fixtures 26,290 12,482 Office equipment 4,393 4,843 Total property and equipment 172,429 133,357 Accumulated depreciation ( 35,756 ) ( 20,743 ) Property and equipment, net $ 136,673 $ 112,614 Equipment in progress reflects equipment, primarily related to mattress manufacturing, which is being constructed and was not in service at December 31, 2022 or 2021. Interest capitalized on borrowings during the active construction period of major capital projects totaled $ 0.7 million and $ 1.0 million during the years ended December 31, 2022 and 2021, respectively. There was no interest capitalized during 2020. Depreciation expense was $ 16.2 million, $ 9.2 million and $ 5.5 million for the years ended December 31, 2022, 2021 and 2020, respectively. 8. Leases The Company leases its manufacturing and distribution facilities, corporate offices, Purple owned 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 owned retail showrooms have initial lease terms of up to ten years . Certain leases may contain options to extend the term of the original lease. The exercise of lease renewal options is at the Company’s discretion. Any lease renewal options are included in the lease term if exercise is reasonably certain at lease commencement. The Company also leases vehicles and other equipment under both operating and finance leases with initial lease terms of three to five years . The ROU asset for finance leases was $ 1.0 million and $ 0.7 million as of December 31, 2022 and 2021, respectively. The following table presents the Company’s lease costs (in thousands): Years Ended December 31, 2022 2021 2020 Operating lease costs $ 15,743 $ 8,910 $ 5,736 Variable lease costs 2,311 2,207 317 Short-term lease costs 11 224 34 Total lease costs $ 18,065 $ 11,341 $ 6,087 The table below reconciles the undiscounted cash flows for each of the first five years and total remaining years to the operating lease liabilities recorded on the consolidated balance sheet at December 31, 2022 (in thousands): Year ended December 31, 2023 (a) $ 18,332 2024 19,687 2025 19,638 2026 18,553 2027 18,813 Thereafter 69,282 Total operating lease payments 164,305 Less – lease payments representing interest ( 34,998 ) Present value of operating lease payments $ 129,307 (a) – Amount consists of $ 20.5 million of undiscounted cash flows offset by $ 2.2 million of tenant improvement allowances which are expected to be fully utilized in fiscal 2023. F- 24 As of December 31, 2022 and 2021, the weighted-average remaining term of operating leases was 8.8 years and 10.7 years, respectively, and the weighted-average discount rate was 5.51 % and 5.30 %, respectively, for operating leases recognized on the consolidated balance sheet. The following table provides supplemental information related to the Company’s consolidated statement of cash flows (in thousands): Years Ended December 31, 2022 2021 2020 Cash paid for amounts included in present value of operating lease liabilities (b) $ 9,003 $ 2,779 $ 1,732 ROU assets obtained in exchange for operating lease liabilities 38,599 31,567 17,216 (b) – Operating cash flows paid for operating leases are included within the change in other assets and liabilities within the Consolidated Statement of Cash Flows offset by non-cash ROU asset amortization and lease liability accretion. The Company initially recorded $ 1.7 million for the present value of asset retirement obligations (ARO) to cover costs associated with the future restoration of two leased properties. During the years ended December 31, 2022 and 2021, the Company recorded accretion of the ARO liabilities totaling $ 0.4 million and $ 0.1 million, respectively. The Company recorded a minimal amount of accretion in 2020. The outstanding ARO liabilities totaled $ 2.1 million and $ 0.9 million at December 31, 2022 and 2021, respectively and are recorded as other long-term liabilities, net of current portion in the consolidated balance sheet. 9. Intangible Assets The following table provides the components of intangible assets (in thousands, except useful life): As of December 31, 2022 As of December 31, 2021 Useful life Gross Accumulated Net Carrying Gross Accumulated Net Carrying (years) Cost Amortization Value Cost Amortization Value Indefinite-lived non-amortizing: License agreement $ 8,456 $ — $ 8,456 $ 8,456 $ — $ 8,456 Trademarks 30 — 30 30 — 30 Definite-lived amortizing: Internet domain 15 900 ( 310 ) 590 900 ( 250 ) 650 License agreement 1 2,220 ( 2,220 ) — 2,220 ( 2,220 ) — Customer relationships 10 10,876 ( 187 ) 10,689 — — — Developed technology 2 644 ( 107 ) 537 — — — Internal-use software 3 7,181 ( 1,262 ) 5,919 4,467 ( 399 ) 4,068 Intangible assets, net $ 30,307 $ ( 4,086 ) $ 26,221 $ 16,073 $ ( 2,869 ) $ 13,204 F- 25 On January 13, 2020, Purple LLC entered into a supply and services agreement with Responsive Surface Technology, LLC (“ReST”) whereby the Company acquired a license and made a prepayment for future products and services to be provided by the third party. The $4.0 million paid upon execution of the contract was allocated to a license for certain technologies ($2.2 million), inventory to be utilized by the third party in the production of goods ($0.8 million) and future professional services to be delivered by the third party ($1.0 million). On October 13, 2020, Purple LLC filed suit against ReST and its parent company for alleged violations under the contract. In response, ReST filed a counter lawsuit against Purple LLC. These lawsuits effectively ended any future performance under the contract. As a result, during the third quarter of fiscal 2020, the Company recorded as cost of revenues in its consolidated statement of operations an impairment charge of $ 0.6 million for unamortized license costs. The Company also recorded write-offs of $ 0.8 million, and $ 0.3 million for prepaid professional services and prepaid inventory, respectively. Refer to Note 14— Commitments and Contingencies — Legal Proceedings for additional information. There were no impairment charges related to intangible assets in 2021 or 2019. Amortization expense for intangible assets was $ 1.2 million, $ 0.3 million and $ 2.4 million for the years ended December 31, 2022, 2021 and 2020, respectively. Estimated amortization expense for definite-lived intangible assets is expected to be as follows for the next five years (in thousands): Year ended December 31, 2023 $ 3,380 2024 4,398 2025 3,489 2026 2,824 2027 1,321 Thereafter 2,323 Total future amortization for definite-lived intangible assets $ 17,735 10. Other Current Liabilities The Company’s other current liabilities consisted of the following (in thousands): As of December 31, 2022 2021 Warranty accrual - current portion $ 4,985 $ 3,914 Long-term debt and unamortized issuance costs - current portion — 2,297 Insurance financing 1,010 1,043 Accrued sales tax liability assumed in acquisition 753 — Accrued affiliate marketing 732 135 Tax Receivable Agreement Liability – current portion 269 5,847 Other 381 234 Total other current liabilities $ 8,130 $ 13,470 11. Debt Debt consisted of the following (in thousands): December 31, December 31, 2022 2021 Term loan $ 24,656 $ 42,188 Revolving line of credit — 55,000 Less: unamortized debt issuance costs ( 999 ) ( 778 ) Total debt 23,657 96,410 Current portion of debt and unamortized issuance costs — ( 2,297 ) Debt, net of current portion $ 23,657 $ 94,113 F- 26 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 benefiting the lenders. The 2020 Credit Agreement includes representations, warranties and certain covenants of Purple LLC and the Company. While any amounts are outstanding under the 2020 Credit Agreement, Purple LLC is subject to several affirmative and negative covenants, including covenants regarding dispositions of property, investments, forming or acquiring subsidiaries, business combinations or acquisitions, incurrence of additional indebtedness, and transactions with affiliates, among other customary covenants, subject to certain exceptions. In particular, Purple LLC is (i) subject to annual capital expenditure limits that can be adjusted based on the Company achieving certain net leverage ratio thresholds as provided in the 2020 Credit Agreement, (ii) restricted from incurring additional debt up to certain amounts, subject to limited exceptions, as set forth in the 2020 Credit Agreement, and (iii) maintain minimum consolidated net leverage and fixed charge coverage ratio thresholds at certain measurement dates (as defined in the 2020 Credit Agreement). Purple LLC is also restricted from paying dividends or making other distributions or payments on its capital stock, subject to limited exceptions. If the Company or Purple LLC fail to perform their obligations under these and other covenants, or should any event of default occur, the revolving loan commitments under the 2020 Credit Agreement may be terminated and any outstanding borrowings, together with accrued interest, could be declared immediately due and payable. The Company’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 were not 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 8.98 % at December 31, 2022. As of December 31, 2022, the Company was in compliance with all of the financial covenants related to the 2020 Credit Agreement, as amended. F- 27 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 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, on behalf of its funds and managed accounts (individually “CCM” and collectively “Coliseum”) 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 without constituting an event of default. Coliseum is considered a related party of the Company in that Adam Gray, a member of our Board, serves as a managing partner of Coliseum. For further discussion see Note 15— 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 consolidated balance sheet. The Company accounted for this amendment as a modification of existing debt in accordance with ASC 470 – Debt . On May 13, 2022 and September 9, 2022, the Company entered into a third and fourth amendment, respectively, to the 2020 Credit Agreement. These amendments modified the permitted leases schedule to reflect a change in showroom locations and a new lease for an innovation building. The amendments did not meet the criteria for a modification of existing debt and minimal expenses were recorded as general and administrative expense in the consolidated statement of operations. On July 14, 2022, the Company received consent under the 2020 Credit Agreement allowing the Company’s acquisition of Intellibed to constitute a permitted acquisition under the 2020 Credit Agreement. The Company incurred fees and expenses of $ 0.3 million that were recorded as general and administrative expense in the consolidated statement of operations. 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 stock offering to repay in full the $ 55.0 million of principal outstanding on the revolving line of credit. As of December 31, 2022, there was no balance outstanding on the revolving credit facility. In December 2022, the Company made a $15.0 million prepayment against the outstanding term loan without payment of a premium or penalty. On February 17, 2023, the Company entered into a fifth amendment to the 2020 Credit Agreement. In accordance with this amendment, the Company repaid in full the $ 24.7 million outstanding balance of the term loan plus accrued interest and reduced the amount available under the revolving line of credit to $ 50.0 million. For further discussion see Note 22 — Subsequent Events. There are no amounts currently drawn on the revolver and the available amount to draw is the full $ 50 million. In order to draw any amounts on the revolver, the Company must be in compliance with the covenants outlined in the fifth amendment. Interest expense under the 2020 Credit Agreement totaled $ 4.1 million, $ 2.4 million and $ 0.7 million for the years ended December 31, 2022, 2021 and 2020, respectively. Related Party Loan On February 2, 2018, Purple LLC entered into a financing arrangement with Coliseum Capital Partners, L.P. (“CCP”), Blackwell Partners LLC – Series A (“Blackwell”) and Coliseum Co-invest Debt Fund, L.P. (“CDF” and together with CCP and Blackwell, the “Lenders”), pursuant to which the Lenders agreed to make a loan (the “2018 Credit Agreement”) in an aggregate principal amount of $ 25.0 million (the “Original Loan”). F- 28 On January 28, 2019, Purple LLC entered into a First Amendment to the 2018 Credit Agreement (the “First Amendment”) whereby Purple LLC agreed to enter into the Amended and Restated Credit Agreement, under which two of the Lenders (“Incremental Lenders”) agreed to provide an incremental loan of $10.0 million (the “Incremental Loan”) such that the total amount of principal indebtedness provided to Purple LLC was increased to $35.0 million. Upon funding the $10.0 million Incremental Loan on February 26, 2019, the Company issued to the Incremental Lenders 2.6 million warrants (“Incremental Loan Warrants”) to purchase 2.6 million shares of the Company’s Class A common stock at a price of $5.74 per share, subject to certain adjustments. On September 3, 2020, the Company paid $ 45.0 million to retire, in full, all indebtedness related to Purple LLC’s 2018 Credit Agreement and all its related amendments and agreements. The payment included $ 25.0 million for the Original Loan, $ 10.0 for the Incremental Loan, $ 6.6 million of paid-in-kind interest, $ 2.5 million for a prepayment fee and $ 0.9 million for accrued interest. The Company accounted for the pay-off of the 2018 Credit Agreement and all its subsequent agreements and amendments as an extinguishment of debt in accordance with ASC 470 - Debt . Accordingly, the Company recognized a $ 5.8 million loss in 2020 that consisted of $ 2.5 million in prepayment fees and $ 3.3 million in the recognition of related unamortized debt discount and debt issuance costs. Interest expense under the 2018 Credit Agreement was $ 4.0 million for the year ended December 31, 2020. As of December 31, 2022, the scheduled maturities of debt outstanding for each of the next five years and thereafter are as follows (in thousands): Year ended December 31, Total 2022 $ — 2023 — 2024 24,656 2025 — 2026 — Thereafter — Total $ 24,656 12. Warrant Liabilities On February 26, 2019, the Incremental Lenders funded the $10.0 million Incremental Loan and received 2.6 million Incremental Loan Warrants to purchase 2.6 million shares of the Company’s Class A common stock at a price of $5.74 per share, subject to certain adjustments. In May 2020, Tony Pearce or Terry Pearce individually or together ceased to beneficially own at least 50% of the voting securities of the Company. As a result, the exercise price of the warrants was reduced to zero based on the formula established in the agreement. The Company accounted for the Incremental Loan Warrants as liabilities in accordance with ASC 480 - Distinguishing Liabilities from Equity and recorded them at fair value on the date of the transaction and subsequently re-measured to fair value at each reporting date with changes in the fair value included in earnings. On November 9, 2020, the Company issued 2.6 million shares of Class A common stock pursuant to the exercise of all the warrants held by the Incremental Lenders. The Company determined the fair value of the Incremental Loan Warrants to be $81.0 million at the time of exercise compared to $21.6 million at the end of 2019. This increase in fair value of $59.4 million was recognized as a loss during the year ended December 31, 2020. F- 29 The fair value of the Incremental Loan Warrants on the date of the exercise was calculated using a Monte Carlo Simulation of a Geometric Brownian Motion stock path model. The following are the assumptions used in calculating fair value: Trading price of common stock on measurement date $ 31.00 Exercise price — Risk free interest rate 0.90 % Warrant life in years 0.07 Expected volatility 45.46 % Expected dividend yield — Probability of an event causing a warrant re-price 100.00 % The public and sponsor warrants that were issued in connection with the Company’s initial public offering and a simultaneous private placement contain certain provisions that do not meet the criteria for equity classification and therefore must be recorded as liabilities. The liability for the warrants was recorded at fair value on the date of the Business Combination and subsequently re-measured to fair value at each reporting date or exercise date with changes in the fair value included in earnings. In 2021, 6.6 million sponsor warrants were exercised resulting in the issuance of 2.3 million shares of Class A common stock and cash proceeds to the Company of $ 0.1 million. During the year ended December 31, 2020, 15.5 million public warrants and 4.3 million sponsor warrants were exercised resulting in the issuance of 7.6 million shares of Class A common stock and cash proceeds to the Company of $ 46.4 million. At both December 31, 2022 and 2021, there were 1.9 million sponsor warrants outstanding. The five-year term associated with the sponsor warrants will expire on February 2, 2023. All of the public warrants were exercised during fiscal 2020. The Company determined the fair value of the public warrants based on their public trading price. The Company determined the fair value of the sponsor warrants using a Black-Scholes model with the following assumptions: December 31, 2022 2021 2020 Trading price of common stock on measurement date $ 4.79 $ 13.27 $ 32.94 Exercise price $ 5.75 $ 5.75 $ 5.75 Risk free interest rate 4.04 % 0.39 % 0.13 % Warrant life in years 0.1 1.1 2.1 Expected volatility 80.59 % 73.78 % 50.64 % Expected dividend yield — — — During the years ended December 31, 2022 and 2021, the Company recognized gains of $ 4.3 million and $ 24.1 million, respectively, in its 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 periods. During the year ended December 31, 2020, the Company recognized a loss of $ 240.7 million in its consolidated statement of operations related to increases in the fair value of the public and sponsor warrants exercised during the period or that were outstanding at the end of the period. F- 30 13. Other Long-Term Liabilities Other long-term liabilities consisted of the following (in thousands): As of December 31, 2022 2021 Warranty accrual $ 20,744 $ 15,013 Asset retirement obligations 2,098 932 Other 19 30 Total 22,861 15,975 Less: current portion of warranty accrual ( 4,985 ) ( 3,914 ) Other long-term liabilities, net of current portion $ 17,876 $ 12,061 14. Commitments and Contingencies Required Member Distributions Prior to the Business Combination and pursuant to the then applicable First Amended and Restated Limited Liability Company Agreement (the “First Purple LLC Agreement”), Purple LLC was required to distribute to its members an amount equal to 45 percent of Purple LLC’s net taxable income following the end of each fiscal year. The First Purple LLC Agreement was amended and replaced by the Second Amended and Restated Limited Liability Company Agreement (the “Second Purple LLC Agreement”) on February 2, 2018 as part of the Business Combination. The Second Purple LLC Agreement was amended and replaced by the Third Amended and Restated Limited Liability Company Agreement (the “Third Purple LLC Agreement”) on September 3, 2020. The Second Purple LLC Agreement and the Third Purple LLC Agreement do not include any mandatory distributions, other than tax distributions. During the years ended December 31, 2021 and 2020, the Company paid $ 1.2 million and $ 5.5 million, respectively, in tax distributions under these agreements. There were no tax distributions paid during the year ended December 31, 2022. At December 31, 2022, the Company’s consolidated balance sheet had $ 0.1 million of accrued tax distributions included in other current liabilities. At December 31, 2021, the Company’s consolidated balance sheet had a $ 0.1 million net asset associated with these tax distributions due to overpayments. Subscription Agreement and Preemptive Rights In February 2018, in connection with the Business Combination, the Company entered into a subscription agreement with CCP and Blackwell, pursuant to which CCP and Blackwell agreed to purchase from the Company an aggregate of 4.0 million shares of Class A common 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 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. F- 31 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 the 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 by the Company as general and administrative expense in the consolidated statement of operations for the year ended December 31, 2021. Stockholder Rights Agreement On September 25, 2022, with the authorization of the Board, a special committee of independent and disinterested directors of the Company (the “Special Committee”) approved the adoption of a limited-duration stockholder rights agreement (the “Rights Agreement”) with an expiration date of September 25, 2023. The Special Committee adopted the Rights Agreement in response to Coliseum’s substantial increase in ownership of the Company’s shares over the last year and the Special Committee’s desire to have the time and flexibility necessary to evaluate an unsolicited and non-binding proposal from Coliseum to acquire the outstanding common stock of the Company not already beneficially owned by Coliseum (See Note 15— Related Party Transactions — Coliseum Capital Management, LLC ). The Rights Agreement is intended to enable the Company’s shareholders to realize the full value of their investment and to guard against any attempts to gain control of the Company without paying all shareholders an appropriate control premium. The Rights Agreement applies equally to all current and future shareholders and does not deter any offer or preclude the Special Committee from considering an offer that is fair and otherwise in the best interest of the Company’s shareholders. Upon adopting the Rights Agreement, 300,000 shares of the Company’s authorized shares of preferred stock, par value $ 0.0001 per share, were designated as Series A Junior Participating Preferred Shares (the “Preferred Shares”). In accordance with the Rights Agreement, on September 25, 2022, the Special Committee authorized and declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of the Company’s Class A common stock and Class B common stock to stockholders of record at the close of business on October 6, 2022 . Upon the occurrence of certain triggering events , each Right entitles the holder to purchase from the Company one one-thousandth of a share of the newly designated Preferred Shares at an exercise price of $20.00, subject to certain adjustments. The Rights will be exercisable only if a person or group acquires beneficial ownership (including certain synthetic equity positions created by derivative securities) of 20% or more of the Company’s outstanding shares of common stock. Any person or group that beneficially owned more than the triggering percentage when the Board adopted the Rights Agreement may continue to own its shares of common stock but may not acquire any additional shares without triggering the Rights Agreement. F- 32 If the Rights become exercisable, each holder of a Right (other than the acquiring person or group whose Rights will automatically become void) will have the right to receive, upon exercise, Class A common stock having a value equal to two times the exercise price of the Right. Each Preferred Share, if issued, will not be redeemable, will entitle the holder, when, as and if declared, to quarterly dividend payments equal to the greater of $1,000 per share or 1,000 times the amount of all cash dividends plus 1,000 times the amount of non-cash dividends or other distributions paid on one share of common stock, will entitle the holder to receive $1,000 plus accrued and unpaid dividends per share upon liquidation, will have the same voting power as 1,000 shares of Class A common stock and, if shares of common stock are exchanged via merger, consolidation or a similar transaction, will entitle the holder thereof to a per share payment equal to the payment made on 1,000 shares of common stock. The initial issuance of the Rights as a dividend will have no financial accounting or reporting impact. The fair value of the Rights will be nominal since the Rights are not exercisable when issued and no value is attributable to them. Additionally, the Rights do not meet the definition of a liability under GAAP and will therefore not be accounted for as a long-term obligation. Accordingly, unless the Rights become exercisable as discussed above, the Rights Agreement has no impact on the Company’s consolidated financial statements . Purple LLC Class B Unit Exchange Right On February 2, 2018, in connection with the closing of the Business Combination, the Company entered into an exchange agreement with Purple LLC, InnoHold and Class B Unit holders who become a party thereto (the “Exchange Agreement”), which provides for the exchange of Purple LLC Class B Units (the “Class B Units”) and shares of Class B 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 also agreed to become parties to the Exchange Agreement. In June 2019, InnoHold distributed Paired Securities to certain current and former employees who also agreed to become parties to the exchange agreement. Holders of Class B Units may elect to exchange all or any portion of their Paired Securities as described above by delivering a notice to Purple LLC. In certain cases, adjustments to the exchange ratio will occur in case of a split, reclassification, recapitalization, subdivision or similar transaction of or relating to the Class B Units or the shares of Class A 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 year ended December 31, 2022. During the year ended December 31, 2021, 0.1 million of Paired Securities were exchanged for shares of Class A common stock. F- 33 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 our Rights Agreement, 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 LLC filed a motion to enforce a settlement agreement. On September 13, 2022, the Court granted Purple’s motion to enforce the settlement agreement and deemed the action to be discontinued on a without costs basis. As part of the settlement, PerfectSense is required to: (a) change their mattress design so as not to resemble any of Purple’s mattress designs, (b) change their website design to move away from Purple’s product designs, (c) not register or use any domains that include the word “Purple”, and (d) delete a number of domains that PerfectSense had previously registered which included the word “Purple”. PerfectSense was given 30 days from the date of the Court Order to comply with these terms. Purple is continuing to monitor PerfectSense to ensure compliance with the settlement agreement. Now that the action has been discontinued, Purple has received a refund of the $ 15,000 CAD that was posted as security for PerfectSense’s costs paid out of court. F- 34 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. On September 14, 2022, the plaintiffs submitted comments on the remand results. USTR filed their response to these comments on November 4, 2022. The plaintiffs filed a reply on December 5, 2022 and the court held a hearing on February 7, 2023. On March 17, 2023, the court issued a final opinion and order upholding the remand results. As a result, the duties will stay in place and no refunds will be issued. The courts order could be appealed to the U.S. Court of Appeals for the Federal Circuit. On October 13, 2020, Purple LLC filed a lawsuit against Responsive Surface Technology, LLC and its parent company, PatienTech, LLC (collectively referred to as “ReST”) in the U.S. District Court for the District of Utah. The lawsuit arises from ReST’s multiple breaches of its obligations to Purple LLC, including infringing upon Purple LLC’s trademarks, patents, and trade dress, among other claims. Purple seeks monetary damages, injunctive relief, and declaratory judgment based on certain conduct by ReST (“Case I”). On October 21, 2020, shortly after the complaint was filed in Case I, ReST filed a retaliatory lawsuit against Purple LLC, Gary DiCamillo, Adam Gray, Joseph Megibow, Terry Pearce, and Tony Pearce, also in the United States District Court for the District of Utah (“Case II”). Subsequently, the two cases were consolidated into one. Case II (now combined with Case I) involves many of the same facts and transactions as Case I. ReST subsequently 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. Currently, the parties are nearing the end of the fact discovery phase of the arbitration. The parties have taken several depositions and engaged in written discovery. The arbitration hearing is scheduled to begin on July 10, 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 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. On August 31, 2022, the Company acquired all of the issued and outstanding stock of Intellibed, as discussed above. In conjunction with the acquisition, the preexisting legal matter with Intellibed was effectively settled on the acquisition date. The fair value of the effective settlement of this legal matter was estimated to be a gain of $ 1.4 million, which was recorded by the Company as other income (expense), net in the consolidated statement of operations for year ended December 31, 2022. For additional information see Note 4— Acquisition . F- 35 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. The Company 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, the Company filed the aforementioned complaint for breach of contract against Photon seeking, among other damages, reimbursement for all amounts paid to Photon under the agreement. Photon counter-sued, seeking payment for the $ 0.1 million withheld by Purple, and also advancing a vague claim for tortious interference. On August 31, 2022, the Company filed an amended complaint adding additional claims pertaining to Photon’s failure to deliver a point of sale system pursuant to the Master Professional Services Agreement. Through the lawsuit, the Company seeks reimbursement of amounts paid to Photon plus indemnity in the amount paid by Company to address Photon’s failures. In total, the Company seeks judgment against Photon in the amount of $ 4 million. The litigation is presently in its discovery phase. The Company intends to vigorously litigate its claims to resolution. On August 5, 2022, Purple LLC filed a complaint with the U.S. 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 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. On September 6, 2022, the ITC instituted Investigation No. 337-TA-1328 in response to Purple LLC’s complaint. The ITC Administrative Law Judge set a Procedural Schedule for the Investigation that includes an April 12–14, 2023, Evidentiary Hearing and an October 12, 2023, Target Date for completion of the Investigation. Upon completion of fact discovery Purple voluntarily dismissed a number of Respondents with regard to the trade dress claims and all other Respondents have settled with regard to the patent infringement claims. No Respondents remain in the case and all that remains is motion practice to finalize the case and the final ruling to be handed down by the ITC. On September 22, 2022, the Company filed an action in the U.S. District Court for the District of Utah styled Purple Innovation , LLC v. Bedmate-U Co., Ltd. , against numerous entities and individuals from the People’s Republic of China and South Korea (“Respondents”). The complaint alleges that the Respondents have (a) violated Lanham Act § 43(a), 15 U.S.C. § 1125(a) by committing acts of trade dress infringement; (b) infringed U.S. Trademark Registration No. 5,661,556; (c) infringed U.S. Trademark Registration No. 6,551,053; (d) violated Lanham Act § 43(a), 15 U.S.C. § 1125(a) by committing acts of trademark infringement; (e) infringed U.S. Patent No. D909,092; (f) infringed U.S. Patent No. 10,772,445; (g) infringed U.S. Patent No. 10,863,837; (h) violated Utah Unfair Competition Act, Utah Code § 13-5a-101 et seq. ; and/or (i) committed common law unfair competition. The complaint seeks injunctive relief, compensatory damages, disgorgement of profits, punitive and exemplary damages, and attorneys’ fees and costs. This action is in its initial stages. The Company intends to vigorously litigate its claims to resolution. On December 16, 2022, Terry and Tony Pearce, Purple’s founders, filed a complaint against Purple Innovation Inc. in the Fourth Judicial District Court in the State of Utah. The Pearces allege that they each entered into employment agreements with Purple in February 2018. The Pearces contend that certain corporate transactions between May 2019 and June 2020 reduced their “ownership interest and voting power in Purple” and that, as a result, they should have continued to be paid a salary between August 2020, when they retired from Purple, and December 2021. The Pearces calculate that they are each owed “no less than $ 500,000 ” in unpaid salary. In February 2023, Purple filed a motion to dismiss the Pearces’ claims in full. The Company maintains insurance to defend against claims of this nature and intends to do so vigorously. On February 21, 2023, Coliseum filed a Complaint against the Company and several members of the Board in the Delaware Court of Chancery, captioned Coliseum Capital Management, LLC v. Anthos , Case No. 2023-0220-PAF (Del. Ch. Feb. 21, 2023). The complaint alleges that the Company and the named directors authorized an improper dividend of preferred stock in bad faith to impede stockholder voting rights and interfere with Coliseum’s nomination of a competing slate of director candidates ahead of the Company’s 2023 annual meeting of stockholders. Coliseum is seeking: (1) declarations that the authorization of the PRPLS violated the Company’s charter and amounted to a breach of the named directors’ fiduciary duties; (2) a declaration that the PRPLS is invalid, unenforceable, and void; (3) unspecified damages resulting from the alleged breach of duties; and (4) an award of costs and expenses incurred in pursuing the action. The parties have agreed to hold an expedited trial on Coliseum’s claims that will result in a resolution of the dispute before the Company’s 2023 annual meeting of stockholders. The outcome of this litigation cannot be predicted at this early stage. However, Purple intends to vigorously defend against the claims made by Coliseum. The Company is from time to time involved in various other claims, legal proceedings and complaints arising in the ordinary course of business. The Company does not believe that adverse decisions in any such pending or threatened proceedings, or any amount that the Company might be required to pay by reason thereof, would have a material adverse effect on the financial condition or future results of the Company. F- 36 15. Related-Party Transactions The Company had various transactions with entities or individuals which are considered related parties. Coliseum Capital Management LLC Immediately following the Business Combination, Adam Gray was appointed to the Company’s Board. Mr. Gray is a manager of Coliseum Capital, LLC, which is the general partner of CCP and CDF, and he is also a managing partner of Coliseum, which is the investment manager of Blackwell and also manages investment funds and accounts. Mr. Gray has voting and dispositive control over securities held by CCP, CDF and Blackwell which were also the Lenders under the Amended and Restated Credit Agreement. On September 17, 2022, the Company received an unsolicited and non-binding proposal from Coliseum on behalf of certain investment funds and accounts to acquire the remaining outstanding common stock of the Company not already beneficially owned by Coliseum for $ 4.35 per share in cash. At the time of the offer, Coliseum beneficially owned approximately 44.7 % of the outstanding equity of the Company. The Coliseum proposal was conditioned upon the transaction being (a) negotiated by, and subject to the approval of, Special Committee and (b) subject to a non-waivable condition requiring approval by the affirmative vote of a majority of the shares of common stock not owned by Coliseum or other interested parties. The Special Committee was formed by the Board to determine the necessary actions to evaluate the Coliseum proposal and determine the course of action that is in the best interests of all the Company’s shareholders. The Board expressly granted the Special Committee the ability to decline the Coliseum proposal. In addition, the Special Committee adopted the Rights Agreement to have the time and flexibility necessary to evaluate the Coliseum offer and to prevent a change of control without payment of an adequate control premium. See Note 14— Commitments and Contingencies — Subscription Agreement and Preemptive Rights and Commitments and Contingencies — Stockholder Rights Agreement for further discussion . See Note 22— Subsequent Events — Coliseum for further discussion on events occurring subsequent to December 31, 2022. Purple Founder Entities TNT Holdings, LLC (herein “TNT Holdings”), EdiZONE, LLC, (herein “EdiZONE”), an entity wholly owned by TNT Holdings, and InnoHold (collectively with TNT Holdings and EdiZONE the “Purple Founder Entities”) were entities under common control with Purple LLC prior to the Business Combination. TNT Holdings and InnoHold are majority owned and controlled by Terry Pearce and Tony Pearce (the “Purple Founders”), who were appointed to the Company’s Board following the Business Combination. InnoHold was a majority shareholder of the Company until it sold a portion of its interests in a secondary public offering in May 2020 and the remainder of its interests in a secondary public offering in September 2020. The Purple Founders also resigned as employees of Purple LLC and retired from the Board in August 2020. F- 37 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 $ 1.0 million, $ 0.9 million and $ 0.9 million in rent expense to 123E LLC or TNT Holdings for the building lease of the Alpine facility for the years ended December 31, 2022, 2021 and 2020, respectively. Purple LLC continues to lease the Alpine facility that was formerly the Company headquarters, for use in production, research and development and video production. In accordance with the terms of that lease, on September 1, 2021, Purple LLC gave notice to 123E LLC that it intended to exercise its right to an early termination of the lease to occur on September 30, 2022. 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. During the year ended December 31, 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 year ended December 31, 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 consolidated balance sheet. During the year ended December 31, 2021, Purple LLC paid InnoHold through withholding payments directly to various states, an aggregate of $ 0.6 million in required tax distributions pursuant to the Third Purple LLC Agreement. There were no such payments made by Purple LLC during the year ended December 31, 2022. 16. 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 December 31, 2022, 91.4 million shares of Class A common stock were outstanding. 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 to any transferee (other than the Company) only if such holder also simultaneously transfers an equal number of such holder’s Purple LLC Class B units to such transferee in compliance with the Second Purple LLC Agreement. The Class B 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. F- 38 In connection with the Business Combination, approximately 44.1 million shares of Series B Stock were issued to InnoHold as part of the equity consideration. InnoHold subsequently transferred a portion of its shares to permitted transferees and exchanged its remaining shares for Class A common stock that it sold. All of the 0.4 million shares of Class B common stock outstanding at December 31, 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. On September 25, 2022 the Rights Agreement was adopted and 0.3 million shares of the Company’s preferred stock were designated as Series A Junior Participating Preferred Shares. See Note 14— Commitments and Contingencies — Stockholder Rights Agreement for further discussion regarding preferred stock. At December 31, 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 initial public offering. Each of these warrants entitled 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 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 will expire on February 2, 2023, or earlier upon redemption or liquidation. The sponsor warrants are not redeemable by the Company so long as they are held by the sponsor or its permitted transferees. In addition, with respect to the sponsor warrants, so long as such sponsor warrants are held by the sponsor or its permitted transferee, the holder may elect to exercise the sponsor warrants on a cashless basis, by surrendering their sponsor warrants for that number of shares of Class A 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. In 2021, 6.6 million sponsor warrants were exercised resulting in the issuance of 2.3 million shares of Class A common stock and cash proceeds to the Company of $ 0.1 million. There were no sponsor warrants exercised during 2022. At both December 31, 2022 and 2021, there were 1.9 million sponsor warrants outstanding. Noncontrolling Interest Noncontrolling interest (“NCI”) is the membership interest in Purple LLC held by holders other than the Company. At December 31, 2022 and 2021, the combined NCI percentage in Purple LLC was 0.5 % and 0.7 %, respectively. 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. F- 39 17. Net Income (Loss) Per Common Share The following table sets forth the calculation of basic and diluted weighted average shares outstanding and earnings (loss) per share for the periods presented (in thousands, except per share amounts): Years Ended December 31, 2022 2021 2020 Numerator: Net income (loss) attributable to Purple Innovation, Inc. – basic $ ( 89,689 ) $ 4,031 $ ( 236,867 ) Less: Dilutive effect of change in fair value – warrant liabilities — ( 24,054 ) — Less: Net loss attributable to noncontrolling interest — ( 160 ) — Net loss attributable to Purple Innovation, Inc. – diluted $ ( 89,689 ) $ ( 20,183 ) $ ( 236,867 ) Denominator Weighted average shares – basic 81,779 65,928 39,219 Add: Dilutive effect of warrants — 920 — Add: Dilutive effect of Class B shares — 454 — Weighted average shares – diluted 81,779 67,302 39,219 Net income (loss) per common share: Basic $ ( 1.10 ) $ 0.06 $ ( 6.04 ) Diluted $ ( 1.10 ) $ ( 0.30 ) $ ( 6.04 ) For the year ended December 31, 2022, the Company excluded 3.5 million of Class A common shares issuable upon conversion of certain warrants, stock options, restricted stock and Class A shares subject to vesting, and 0.4 million of Paired Securities convertible into shares of Class A common stock as their effect was anti-dilutive. For the year ended December 31, 2021, the Company excluded 2.6 million shares of Class A common stock issuable upon conversion of certain stock options, restricted stock and Class A shares subject to vesting as the effect was anti-dilutive. For the year ended December 31, 2020, the Company excluded 0.1 million shares of issued Class A common stock subject to vesting, 6.5 million shares of Class A common stock issuable upon conversion of the Company’s warrants and options, and 0.5 million of Paired Securities convertible into shares of Class A common stock as the effect was anti-dilutive. 18. Equity Compensation Plans 2017 Equity Incentive Plan The 2017 Equity Incentive Plan provides for grants of stock options, stock appreciation rights, restricted stock and other stock-based awards. Directors, officers and other employees and subsidiaries and affiliates, as well as others performing consulting or advisory services for the Company and its subsidiaries, will be eligible for grants under the 2017 Incentive Plan. The aggregate number of shares of Common Stock which may be issued or used for reference purposes under the 2017 Incentive Plan or with respect to which awards may be granted may not exceed 4.1 million shares. As of December 31, 2022, 1.4 million shares remain available for issuance under the 2017 Incentive Plan. During the years ended December 31, 2022, 2021 and 2020, stock-based compensation associated with equity awards issued under the 2017 Incentive Plan totaled $ 3.4 million, $ 3.4 million and $ 2.2 million, respectively, while the related tax benefits recognized on these awards were $ 0.9 million, $ 1.7 million and $ 5.6 million, respectively. F- 40 Class A Common Stock Awards In May 2022, the Company granted stock awards under the 2017 Equity 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 year ended December 31, 2022, which represented the fair value of the stock awards on the grant date. In May 2021, the Company granted stock awards under the Company’s 2017 Equity Incentive Plan to independent directors on the Board. The stock awards vested immediately and the Company recognized $ 0.6 million in expense during year ended December 31, 2021, which represented the fair value of the stock award on the grant date. In March 2020, the Company granted a restricted stock award under the Company’s 2017 Equity Incentive Plan to the Company’s Board advisor and GPAC observer. The stock award vested in March 2021. As this award included a service condition, the estimated fair value of the restricted stock was measured on the grant date and recognized over the service period. The Company determined that the fair value of the restricted stock on the grant date was immaterial. In 2020, the Company granted stock awards under the Company’s 2017 Equity Incentive Plan to independent directors on the Board and to the Board advisor and GPAC observer. The stock awards vested immediately and the Company recognized $ 0.5 million in expense during the year ended December 31, 2020, which represented the fair value of the stock awards on the grant date. In May and June 2020, the Company granted restricted stock awards under the Company’s 2017 Equity Incentive Plan to certain employees of the Company. The stock awards vest over 3 to 4 years. The estimated fair value of the restricted stock is measured on the grant date and is recognized over the vesting period. The Company determined that the fair value of the restricted stock on the grant dates was $ 0.7 million. Employee Stock Options In March and June 2022, the Company granted 0.5 million and 0.1 million stock options, respectively, under the 2017 Equity 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 Equity 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. During the year ended December 31, 2021, the Company granted 0.2 million stock options under the Company’s 2017 Equity Incentive Plan to certain management of the Company. These stock options have exercise prices ranging from $ 22.57 to $ 32.28 . The stock options expire in five years and vest over a four -year period. The estimated fair value of the stock options is amortized over the options vesting period on a straight-line basis. The Company determined the fair value of the 0.2 million options granted during the year ended December 31, 2021 to be $ 2.0 million which will be expensed over the vesting period. Included in that amount were 0.2 million stock options with a fair value of $ 1.4 million that were subsequently forfeited in December 2021. F- 41 During the year ended December 31, 2020, the Company granted 0.5 million stock options under the Company’s 2017 Equity Incentive Plan to certain management of the Company. These stock options have exercise prices ranging from $ 12.76 to $ 21.70 . The stock options expire in five years and vest over a four -year period. The estimated fair value of the stock options is amortized over the options vesting period on a straight-line basis. The Company determined the fair value of the 0.5 million options granted during the year ended December 31, 2020 to be $ 3.4 million which will be expensed over the vesting period. The following are the weighted average assumptions used in calculating the fair value of the total stock options granted in 2022, 2021 and 2020 using the Black-Scholes method: Year Ended December 31, 2022 2021 2020 Fair market value $ 2.02 $ 8.71 $ 6.93 Risk free rate 2.67 % 0.58 % 0.25 % Dividend yield — — — Expected volatility 54.22 % 52.43 % 50.34 % Expected term in years 3.45 3.55 3.41 In December 2021, 0.6 million of vested stock options related to the former Chief Executive Officer had the post-termination exercise period extended from 90 days to 352 days upon his resignation and departure from the Company. The $ 0.5 million of additional cost associated with this modification was recorded as stock-based compensation expense in the 2021 consolidated statement of operations. The following table summarizes the Company’s total stock option activity for the years ended December 31, 2022, 2021 and 2020: Options (in thousands) Weighted Average Exercise Price Weighted Average Remaining Contractual Term in Years Intrinsic Value $ (in thousands) Options outstanding as of December 31, 2019 2,136 $ 6.95 4.3 $ 3,752 Granted 488 16.26 — — Exercised ( 281 ) 7.68 — — Forfeited/expired ( 109 ) 10.80 — — Options outstanding as of December 31, 2020 2,234 8.71 3.5 54,133 Granted 234 24.85 — — Exercised ( 171 ) 8.26 — — Forfeited/expired ( 745 ) 14.02 — — Options outstanding as of December 31, 2021 1,552 8.65 1.9 8,667 Granted 594 6.82 — — Exercised ( 20 ) 8.32 — — Forfeited/expired ( 1,307 ) 7.80 — — Options outstanding as of December 31, 2022 819 8.68 2.3 — F- 42 Outstanding and exercisable stock options as of December 31, 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) $ 6.51 194 1.3 152 1.3 $   — 6.65 173 1.4 181 1.4 — 6.82 205 4.3 — — — 7.99 19 1.9 17 1.9 — 8.32 108 1.5 86 1.5 — 13.12 85 2.3 59 2.2 — 32.28 35 3.2 17 3.2 — 819 2.3 512 1.5 $ — The following table summarizes the Company’s unvested stock option activity for the years ended December 31, 2022, 2021 and 2020: Options (in thousands) Weighted Average Grant Date Fair Value Nonvested options as of December 31, 2019 1,979 $ 1.75 Granted 488 6.93 Vested ( 790 ) 1.82 Forfeited ( 109 ) 3.65 Nonvested options as of December 31, 2020 1,568 3.20 Granted 234 8.71 Vested ( 641 ) 2.97 Forfeited ( 745 ) 4.90 Nonvested options as of December 31, 2021 416 3.60 Granted 594 2.31 Vested ( 217 ) 3.09 Forfeited ( 486 ) 2.73 Nonvested options as of December 31, 2022 307 $ 2.84 The Company recognized $ 0.7 million, $ 2.1 million and $ 1.3 million in stock-based compensation expense related to stock options during the years ended December 31, 2022, 2021 and 2020, respectively. For stock options outstanding as of December 31, 2022, there was $ 0.7 million of total unrecognized stock compensation cost with a remaining recognition period of 1.8 years. As of December 31, 2021, there was $ 1.3 million of total unrecognized stock compensation cost with a remaining recognition period of 1.6 years. F- 43 Cash received from the exercise of stock options was $ 0.2 million, $ 1.4 million and $ 2.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. The tax benefit associated with the exercise of stock options was $ 0.4 million, $ 1.6 million and $ 4.5 million for the years ended December 31, 2022, 2021 and 2020, respectively. 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 Equity 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 Equity Incentive Plan. The Company determined the fair value of the net award of 0.2 million restricted stock units to be $ 1.2 million which will be expensed on a straight-line basis over the vesting period. During 2022, the Company granted 1.1 million restricted stock units under the 2017 Equity Incentive Plan to certain management of the Company. Approximately one-half of these restricted stock unit grants included a market vesting condition. In 2021, the Company granted 0.2 million of restricted stock units under the Company’s 2017 Equity Incentive Plan to certain management of the Company. Approximately one-third of these restricted stock unit grants included a market vesting condition. The restricted stock awards granted in 2022 and 2021 that did not have a market vesting condition had a weighted average grant date fair value of $ 5.53 and $ 19.25 per share, respectively. The estimated fair value of these awards is recognized on a straight-line basis over the vesting period. The restricted stock awards granted in 2022 and 2021 that did have a market vesting condition had a weighted average grant date fair value of $ 3.71 and $ 16.28 per share, respectively. For these awards, the estimated fair value 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 of these awards using a Monte Carlo Simulation of a Geometric Brownian Motion stock path model with the following weighted average assumptions: Years Ended December 31, 2022 2021 Trading price of common stock on measurement date $ 5.33 $ 24.88 Risk free interest rate 2.89 % 0.43 % Expected life in years 2.9 2.7 Expected volatility 85.1 % 77.0 % Expected dividend yield — — F- 44 The following table summarizes the Company’s restricted stock unit activity for the years ended December 31, 2022 and 2021: Options (in thousands) Weighted Average Grant Date Fair Value Nonvested restricted stock units as of December 31, 2020 — $ — Granted 177 18.18 Vested — — Forfeited ( 12 ) 22.96 Nonvested restricted stock units as of December 31, 2021 165 17.84 Granted 1,257 4.72 Vested ( 43 ) 16.90 Forfeited ( 144 ) 9.72 Nonvested restricted stock units as of December 31, 2022 1,235 $ 5.47 The Company recorded restricted stock unit expense of $ 2.1 million and $ 0.5 million during the years ended December 31, 2022 and 2021, respectively. There was no restricted stock unit expense recorded in 2020. For restricted stock units outstanding as of December 31, 2022, there was $ 4.9 million of total unrecognized stock compensation cost with a remaining recognition period of 2.2 years. As of December 31, 2021, there was $ 2.4 million of total unrecognized stock compensation cost with a remaining recognition period of 1.9 years. Aggregate Non-Cash Stock Compensation The Company has accounted for all stock-based compensation under the provisions of ASC 718 Compensation—Stock Compensation. This standard requires the Company to record a non-cash expense associated with the fair value of stock-based compensation over the requisite service period. The table below summarizes the aggregate non-cash stock compensation recognized in the statement of operations for stock awards, employee stock options and the distribution by InnoHold of Paired Securities (in thousands). Years Ended December 31, 2022 2021 2020 Cost of revenues $ 305 $ 303 $ 169 Marketing and sales 863 541 302 General and administrative 2,033 2,472 1,353 Research and development 165 50 361 Total non-cash stock compensation $ 3,366 $ 3,366 $ 2,185 19. Employee Retirement Plan In 2018 the Company established a 401(k) plan that qualifies as a deferred compensation arrangement under Section 401 of the IRS Code. All eligible employees over the age of 18 and with 4 months’ service are eligible to participate in the plan. The plan provides for Company matching of employee contributions up to 5% of eligible earnings. Company contributions immediately vest. The Company matching contribution expense was $ 3.6 million, $ 3.2 million and $ 2.3 million for the years ended December 31, 2022, 2021 and 2020, respectively. F- 45 20. Concentrations The Company had the following revenues by product (in thousands): Years Ended December 31, 2022 2021 2020 Sleep products $ 524,797 $ 664,484 $ 598,046 Other 50,895 61,743 50,425 Total revenue, net $ 575,692 $ 726,227 $ 648,471 The following disaggregates net revenues by geographic region (in thousands): Years Ended December 31, 2022 2021 2020 United States $ 566,418 $ 710,204 $ 642,718 International 9,274 16,023 5,753 Total revenue, net $ 575,692 $ 726,227 $ 648,471 The Company had one individual customer that accounted for approximately 52 % and 41 % of accounts receivable at December 31, 2022 and 2021, respectively, and approximately 15 %, 15 % and 15 % of net revenue during the years ended December 31, 2022, 2021 and 2020, respectively. The Company currently obtains materials and components used in production from outside sources. As a result, the Company is dependent upon suppliers that in some instances, are the sole source of supply. The Company is continuing efforts to dual-source key components. The failure of one or more of the Company’s suppliers to provide materials or components on a timely basis could significantly impact the results of operations. The Company believes that it can obtain these raw materials and components from other sources of supply in the ordinary course of business, although an unexpected loss of supply over a short period of time may not allow for the replacement of these sources in the ordinary course of business. The Company maintains its cash balances in financial institutions based in the United States that are insured by the Federal Deposit Insurance Corporation (FDIC) up to $ 250,000 for each financial institution per entity. At times, the Company’s cash balance deposited at financial institutions exceed the federally insured deposit limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk related to these deposits. F- 46 21. Income Taxes The Company’s income (loss) before income taxes of $ 122.9 million, $ 2.7 million and $( 273.5 ) million during the years ended December 31, 2022, 2021 and 2020, respectively, consisted entirely of income earned in the United States. Income tax (benefit) expense for the years ended December 31, 2022, 2021 and 2020 consist of the following (in thousands): Year ended December 31, 2022 2021 2020 Current: Federal $ ( 1,029 ) $ 1,692 $ 1,112 State 345 699 951 Total current ( 684 ) 2,391 2,063 Deferred: Federal 168,936 ( 6,436 ) ( 35,747 ) State 44,612 2,828 ( 10,065 ) Total deferred 213,548 ( 3,608 ) ( 45,812 ) Income tax (benefit) expense $ 212,864 $ ( 1,217 ) $ ( 43,749 ) Income tax (benefit) expense differs from the amount computed at the federal statutory corporate income tax rate as follows (in thousands): Year ended December 31, 2022 2021 2020 Tax benefit at Federal statutory rate $ 25,817 $ 557 $ ( 57,441 ) State income tax provision (benefit), net of federal benefit 293 ( 771 ) 499 Noncontrolling interest 56 ( 420 ) ( 117 ) Tax receivable agreement liability ( 34,014 ) ( 843 ) ( 1,518 ) Change in fair value – warrant liabilities ( 912 ) ( 5,051 ) 50,537 Change in valuation allowance 189,035 — ( 35,531 ) Remeasurement due to rate change 2,527 3,287 40 Research and development tax credits ( 1,763 ) Remeasurement of investment in Purple LLC 29,834 1,834 — Nondeductible compensation — 531 — Stock-based compensation 2.303 ( 330 ) — Other ( 312 ) ( 11 ) ( 218 ) Income tax (benefit) expense $ 212,864 $ ( 1,217 ) $ ( 43,749 ) F- 47 Deferred income taxes at December 31, 2022 and 2021 consisted of the following (in thousands): 2022 2021 Basis difference in Purple LLC investment $ 130,298 $ 203,393 Tax over book basis in capital contributions 100,413 69,859 Start-up costs 449 478 Stock-based compensation 874 722 Interest carryforwards 1,573 548 Research and development tax credits 1,389 — Charitable contribution carryforwards 77 — Net operating losses 32,681 12,650 Total net deferred income tax asset 267,754 287,650 Less: Valuation allowance ( 267,754 ) ( 69,859 ) Net deferred income tax asset $ — $ 217,791 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 included in the members’ tax returns, even though such net taxable income or tax credits may not have actually been distributed. While the Company consolidates Purple LLC for financial reporting purposes, the Company will be taxed on its share of earnings of Purple LLC not attributed to the noncontrolling interest holders, which will continue to bear their share of income tax on its allocable earnings of Purple LLC. The income tax burden on the earnings taxed to the noncontrolling interest holders is not reported by the Company in its consolidated financial statements under GAAP. As a result, the Company’s effective tax rate differs materially from the statutory rate. The primary factors impacting expected tax are tax exempt income from the Tax Receivable Agreement, remeasurement of the deferred taxes associated with the investment in Purple LLC, and the impact of recording a valuation allowance. At December 31, 2019, the Company maintained a full valuation allowance on its deferred tax assets which were more likely than not realizable at the time. During fiscal 2020, the Company achieved three-year cumulative income for the first time and determined that it would likely generate sufficient taxable income to utilize some of its deferred tax assets. Based on this and other positive evidence, the Company concluded it was more likely than not that some of its deferred tax assets would be realized and that a full valuation allowance for its deferred tax assets was no longer appropriate. As a result, $ 35.5 million of the valuation allowance associated with the Company’s federal and state deferred tax assets was released and recorded as an income tax benefit in 2020. At December 31, 2021, the Company did not record a valuation allowance on its deferred tax assets except for the tax over book basis in capital contributions, which was determined to not be realizable. During 2022, the Company entered into a three-year cumulative loss position and determined that it would not be able to generate sufficient taxable income to utilize its deferred tax assets. Based on this and other negative evidence, the Company concluded it was more likely than not that its deferred tax assets would not be realized and that a full valuation allowance for its deferred tax assets was required. As a result, $ 176.9 million of the valuation allowance associated with the Company’s federal and state deferred tax assets was recorded along with an income tax expense in 2022. In connection with the Business Combination, the Company entered into the Tax Receivable Agreement with InnoHold, which provides for the payment by the Company to InnoHold of 80 % of the net cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes (or is deemed to realize in certain circumstances) in periods after the Closing as a result of (i) any tax basis increases in the assets of Purple LLC resulting from the distribution to InnoHold of the cash consideration, (ii) the tax basis increases in the assets of Purple LLC resulting from the redemption by Purple LLC or the exchange by the Company, as applicable, of Class B Paired Securities or cash, as applicable, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, payments it makes under the agreement. 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. F- 48 During 2022, the Company concluded it was more likely than not that its deferred tax assets would not be realized and a full valuation allowance for its deferred tax assets was required and has determined the Tax Receivable Agreement liability is not probable and therefore has not recorded a tax receivable liability. As a result, the Company correspondingly reduced its tax receivable agreement liability to zero and the Company recognized tax receivable agreement income of $ 162.0 million in the Company’s consolidated statement of operations for the year ended December 31, 2022. The estimation of liability under the Tax Receivable Agreement is by its nature imprecise and subject to significant assumptions regarding the amount and timing of future taxable income. As a result of the initial merger transaction, the subsequent exchanges of 43.6 million Class B Units for Class A common stock as of December 31, 2022 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 $0.3 million, of which $168.1 million was recorded in the year ended December 31, 2021, offset by a $167.8 million reduction recorded in 2022. The $167.8 million reduction in the 2022 Tax Receivable Agreement liability reflected $162.0 million that was recorded as Tax Receivable Agreement income coupled with a payment of $5.8 million made during the year. As of December 31, 2022, the Company estimated that if all the remaining 0.4 million Class B units were redeemed for shares of our Class A common stock, the Tax Receivable Agreement liability would be approximately $ 168.8  million. If we experience a change of control (as defined under the Tax Receivable Agreement, which includes certain mergers, asset sales and other forms of business combinations and change of control events), we could be required to make an immediate lump-sum payment under the terms of the Tax Receivable Agreement. Management currently estimates the liability associated with this lump-sum payment (or “early termination payment”) would be approximately $ 108.5  million, discounted. This potential early termination payment can be significantly impacted by the discounted interest rate at the time of termination. The Company estimates federal net operating loss (“NOL”) carryforwards will be approximately $ 26.3 million as of December 31, 2022, of which $ 25.9 million do not have an expiration date and $ 0.5 million expire in 2037. The Company also had approximately $ 6.3 million of NOL carryforwards to reduce future state taxable income at December 31, 2022, which have various carryforward periods and begin to expire in 2026, if unused. Under Section 382 and related provisions of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation undergoes an “ownership change” generally defined as a greater than 50 percentage point change (by value) in its equity ownership by certain stockholders over a three-year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. If finalized, Treasury Regulations currently proposed under Section 382 of the Code may further limit our ability to utilize our pre-change NOLs or other tax attributes if we undergo a future ownership change. Thus, our ability to utilize carryforwards of our net operating losses, including net operating losses acquired from the Intellibed acquisition, and other tax attributes to reduce future tax liabilities may be substantially restricted. As of December 31, 2022, we have not completed a Section 382 analysis and an ownership change may have occurred. There may be significant annual limitations on the NOLs and other tax attributes. 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. The Company estimates federal research and development (“R&D”) tax credit carryforwards will be approximately $ 0.9 million as of December 31, 2022, which expire in 2042, if unused. The Company also had approximately $ 0.7 million of state tax credit carryforwards to reduce future state tax liability at December 31, 2022, which have various carryforward periods and begin to expire in 2033, if unused. The effects of uncertain tax positions are recognized in the consolidated financial statements if these positions meet a “more-likely-than-not” threshold. For those uncertain tax positions that are recognized in the consolidated financial statements, liabilities are established to reflect the portion of those positions it cannot conclude “more-likely-than-not” to be realized upon ultimate settlement. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. Accrued interest and penalties would be included on the related tax liability line in the consolidated balance sheet. As of December 31, 2022 and 2021, no material uncertain tax positions were recognized as liabilities in the consolidated financial statements. The Company remains subject to income tax examinations for its U.S. federal income taxes for 2016 through 2022. The Company also remains subject to income tax examinations for U.S. state and local income taxes generally for 2016 through 2022. 22. Subsequent Events Tax Receivable Agreement Payments On January 17, 2023, the Company paid InnoHold $ 0.3 million pursuant to the terms of the Tax Receivable Agreement. This amount was included with other current liabilities in the accompanying consolidated balance sheet as of December 31, 2022. Expiration of Sponsor Warrants On February 2, 2023, the 1.9 million sponsor warrants outstanding at December 31, 2022 expired per the terms of the agreement. Each of these warrants entitled 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). The sponsor warrants had no fair value on the date of expiration. Underwritten Offering On February 13, 2023, the Company completed an underwritten offering of 13.4 million shares of Class A common stock. The underwriters did not exercise their over-allotment option. The aggregate net proceeds received by the Company from the offering, after deducting offering fees and expenses of $3.3 million, totaled $57.0 million. F- 49 Credit Agreement Amendment On February 17, 2023, the Company entered into a fifth amendment to the 2020 Credit Agreement. In accordance with this amendment, the Company repaid in full the $ 24.7 million outstanding balance of the term loan plus accrued interest. The amendment also provides that the maximum leverage ratio covenant will not be tested for the first and second quarters of 2023 and revises the ratio to 4.50x for the third quarter of 2023 and 3.00x for all quarters thereafter. In addition, the minimum fixed charge coverage ratio covenant will not be tested for the first and second quarters of 2023 and revised to 1.50 x for the third and fourth quarters of 2023, and 2.00 x for all quarters thereafter. The amendment will also revise the lease incurrence test which will allow us to incur ten new showroom leases for stores that will open in 2023 and six new leases for stores that will open in 2024. Moreover, beginning in the fourth quarter of 2023, we will be allowed to begin incurring leases for stores that will open in 2024, subject to leverage ratio requirements. The leverage ratio must be less than 2.50 x to sign leases, with up to a maximum of six new leases per quarter, increasing to eight new leases per quarter if the leverage ratio is less than 2.00 x. The amendment will also provide certain minimum consolidated EBITDA covenants for the first and second quarters of 2023 based on our total unrestricted cash and unused revolver availability. The amendment also modified the definition of consolidated EBITDA to allow for nonrecurring/one-time and non-cash expenses and certain other expenses that are cash capped. In addition, for purposes of the definition of consolidated EBITDA, annual non-recurring and unusual out-of-pocket legal expenses will be capped at $5.0 million for 2023 and $2.0 million per year thereafter. The amendment also (i) reduced the amount available under the revolving line of credit to $50.0 million, (ii) provides that the maturity date of the 2020 Credit Agreement will spring forward to June 30, 2024 if our consolidated EBITDA is not greater than $15.0 million for 2023, (iii) reduce limits on maximum growth capital expenditures to $32.0 million for 2023 and $35.0 million for 2024 and 2025, and (iv) revises the current minimum liquidity covenant of $25.0 million to provide that it will increase to $30.0 million for each three-month period following the applicable fiscal quarter if the leverage ratio is greater than 3.00x for any fiscal quarter ending on or after the third quarter of 2023. Pursuant to this amendment, we incurred fees and expenses of $2.7 million that will be recorded as debt issuance costs. The amendment will be accounted for as an extinguishment of debt and approximately $1.1 million of unamortized debt issuance costs will be expensed. There are no amounts currently drawn on the revolver and the available amount to draw is the full $ 50 million. In order to draw any amounts on the revolver, the Company must be in compliance with the covenants outlined in the fifth amendment. Coliseum On January 12, 2023, the Company issued a press release stating the Special Committee had rejected Coliseum’s unsolicited proposal. On January 13, 2023, Coliseum submitted a letter to the chairman of the Board setting forth a cooperation proposal (the “Cooperation Proposal”). On January 16, 2023, the Special Committee responded to the Cooperation Proposal. On January 17, 2023, Coliseum filed a Schedule 13D/A with the SEC indicating that, in the absence of an agreement, Coliseum intended to nominate a slate of directors for election at the 2023 annual meeting of the stockholders of the Company, which slate would constitute a majority of the Board. On January 19, 2023, the Special Committee issued a press release stating the position of the Special Committee with respect to the Coliseum proposal. On February 13, 2023, Coliseum submitted a notice of its intention to nominate four persons to the Board, replacing four of the seven member Board and retaining only Mr. DeMartini, the Company’s Chief Executive Officer, Mr. Gray, CCM’s manager, and one of the existing non-executive directors. In response, on February 13, 2023, the Company issued a press release expressing the Special Committee’s response and position with respect to Coliseum’s proposal. On February 14, 2023, the Company declared a dividend of one new PRPLS for each 100 shares of Purple common stock (“Common Stock”) owned by Purple’s shareholders. Each PRPLS votes together with the Common Stock in the election of directors, and related matters, and carries 10,000 votes each. Holders of PRPLS will be entitled to allocate their votes among the nominees in director elections on a cumulative basis. PRPLS holders can allocate all, none, or a portion of their votes to each director nominee up for election at the Company’s meetings of shareholders. On February 24, 2023, the Company issued 1.0 million PRPLS shares which trade with the Common Stock. Any new issuance of Common Stock will automatically include a proportionate number of PRPLS. The PRPLS are redeemable at any time by an affirmative vote of two-thirds of the members of the Board. PRPLS do not have any dividend rights and will be entitled to only a limited payment upon any liquidation, dissolution or winding up in priority to any payments on the Common Stock but will not otherwise participate in any liquidating distributions. On February 21, 2023, Coliseum filed a lawsuit in the Delaware Court of Chancery to invalidate Purple’s issued PRPLS, alleging that the issuance deprived Purple stockholders of a fair and democratic election of directors at the Company’s 2023 Annual Meeting and other related allegations. F- 50 On February 21, 2023, Coliseum filed a Complaint against the Company and several members of the Board in the Delaware Court of Chancery, captioned Coliseum Capital Management, LLC v. Anthos , Case No. 2023-0220-PAF (Del. Ch. Feb. 21, 2023). The complaint alleges that the Company and the named directors authorized an improper dividend of preferred stock in bad faith to impede stockholder voting rights and interfere with Coliseum’s nomination of a competing slate of director candidates ahead of the Company’s 2023 annual meeting of stockholders. Coliseum is seeking: (1) declarations that the authorization of the PRPLS violated the Company’s charter and amounted to a breach of the named directors’ fiduciary duties; (2) a declaration that the PRPLS is invalid, unenforceable, and void; (3) unspecified damages resulting from the alleged breach of duties; and (4) an award of costs and expenses incurred in pursuing the action. The parties have agreed to hold an expedited trial on Coliseum’s claims that will result in a resolution of the dispute before the Company’s 2023 annual meeting of stockholders. The outcome of this litigation cannot be predicted at this early stage. However, Purple intends to vigorously defend against the claims made by Coliseum. On March 9, 2023, the Special Committee offered Coliseum a settlement proposal that included the following provisions, (i) Coliseum would have the right to identify three of the six non-management members of a seven-member board, (ii) the other three non-management seats would be filled by two existing independent directors and a new director who is a significant shareholder. In addition to Dawn Zier, who already announced her intention not to stand for election at the 2023 Annual Meeting due to other commitments, two other current directors would retire at or before the 2023 Annual Meeting, (iii) Coliseum managing partner Adam Gray would become Chairman of the Board, (iv) the Special Committee would name one of the existing incumbent independent directors as Lead Independent Director, and (v) Coliseum would commit to customary standstill provisions to provide stability for the Company for approximately 18 months. On March 16, 2023, the Special Committee announced that Coliseum has rejected the settlement proposal. Silicon Valley Bank On March 10, 2023, the Federal Deposit Insurance Corporation announced that Silicon Valley Bank (“SVB”) had been closed by the California Department of Financial Protection and Innovation. We have cash accounts, credit card processing and a borrowing relationship with SVB, At the time of the closure we had cash and cash equivalents of approximately $ 4.2 million deposited with them. SVB is also one of the Institutional Lenders under the 2020 Credit Agreement, with $ 7.25 million of the $ 50.0 million revolving line of credit being made available through that bank. We currently have access to all of our funds and accounts at SVB. Amended Grant Agreements On March 15, 2023, the Company and Robert T. DeMartini, the Company’s Chief Executive Officer, entered into amended and restated grant agreements relating to restricted stock units and stock options granted to Mr. DeMartini in March 2022 and June 2022, revising the vesting schedule of the awards included in each grant. The amended and restated grant agreements provide that 0.33 million of the restricted stock units and stock options will vest in full on March 25, 2023 and 0.33 million of the restricted stock units and stock options and conditionally granted restricted units and stock options, conditioned on shareholder approval of the Company’s proposed amendments to Section 5(f) of the Plan ,will vest on March 25, 2024. The amendments also provide that the remaining 0.33 million conditionally granted restricted stock units and stock options will vest in full on March 25, 2025. The amendments will result in an acceleration of approximately $ 0.8 million of stock-based compensation expense recognized by the Company into the first quarter of 2023 from other future periods over the previous vesting period. F- 51 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Purple Innovation, Inc. March 22, 2023 By: /s/ Robert T. DeMartini Name: Robert T. DeMartini Title: Chief Executive Officer (Principal Executive Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert T. DeMartini and Bennett L. Nussbaum, jointly and severally, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her, and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises hereby ratifying and confirming all that said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name Position Date /s/ Robert T. DeMartini Chief Executive Officer and Director March 22, 2023 Robert T. DeMartini (Principal Executive Officer) /s/ Bennett L. Nussbaum Interim Chief Financial Officer March 22, 2023 Bennett L. Nussbaum (Principal Financial Officer) /s/ George T. Ulrich Vice President, Accounting and Financial Reporting March 22, 2023 George T. Ulrich (Principal Accounting Officer) /s/ Paul J. Zepf Chairman of the Board of Directors March 22, 2023 Paul J. Zepf /s/ Pano T. Anthos Director March 22, 2023 Pano T. Anthos /s/ Gary T. DiCamillo Director March 22, 2023 Gary T. DiCamillo /s/ Adam L. Gray Director March 22, 2023 Adam L. Gray /s/ Claudia Hollingsworth Director March 22, 2023 Claudia Hollingsworth /s/ Dawn M. Zier Director March 22, 2023 Dawn M. Zier 73