UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED ~~September~~ June 30, ~~2021~~2022

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

FOR THE TRANSITION PERIOD FROM _____________ TO _____________

Commission File Number: 001-37523

PURPLE INNOVATION, INC.

(Exact name of registrant as specified in its charter)

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

4100 NORTH CHAPEL RIDGE ROAD SUITE 200

~~LEHI,~~ ~~UTAH~~ ~~84043~~

~~(Address of principal executive offices, including zip code)~~

LEHI, UTAH

84043

(Address of principal executive offices)

(Zip Code)

~~(801) 756-2600~~

(Registrant’s telephone number, including area ~~code)~~code: (801) 756-2600

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Class A Common Stock, par value $0.0001 per share		PRPL		The NASDAQ Stock Market LLC

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

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

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

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

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

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

As of ~~November 5, 2021, 66,479,872~~August 8, 2022, 82,763,884 shares of the registrant’s Class A common stock, $0.0001 par value per share, and 448,279 shares of the registrant’s Class B common stock, $0.0001 par value per share, were outstanding.

PURPLE INNOVATION, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

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

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

We also have a number of common law trademarks, including Harmony^™, Purple Harmony Pillow^{^™}, Harmony Pillow^™, Purple +^™, Purple Plus^™, Find Comfort^™, Dreams On Dreams^™, Reinventing Sleep™, Reinventing Comfort^™, Gelflex^™, Ascent^™, Purple Ascent^™, Comfort Reinvented^™, Softstretch^™, Purple Powerbase^™, Purple Powerbase Premier^™, Purple Powerbase Plus^™, Purple Glove^™, Eidertech^™, Mattress Max^™, WonderGel Original^™, WonderGel Extreme^™, DoubleGel^™, DoubleGel Plus^™, DoubleGel Ultra^™, Roll n’ Go^™, Fold N’ Go^™, Purple Bed^™, Purple Top^™, Purple Pillow^™, Portable Purple^™, Everywhere Purple^™, Simply Purple^™, Lite Purple^™, Royal Purple^™, Double Purple^™, Deep Purple^™, Ultimate Purple^™, Purple Back^™, EquaGel Straight Comfort^™, EquaGel General^™, EquaGel Protector^™, and EquaGel Adjustable^™.

Many of the common law marks have registrations pending with the USPTO and other international jurisdictions. Solely for convenience, we refer to our trademarks in this Quarterly Report without the ^™ or ^® symbol, but such references are not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights to our trademarks.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PURPLE INNOVATION, INC.

Condensed Consolidated Balance Sheets

(unaudited – in thousands, except for par value)

	September 30, 2021			December 31, 2020			June 30, 2022			December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	83,616		$	122,955		$	41,169		$	91,616
Accounts receivable, net		27,570			29,111			31,578			25,430
Inventories, net		84,045			65,726			84,886			98,690
Prepaid inventory		1,316			826
Prepaid expenses								5,111			8,064
Other current assets		11,739			10,453			5,369			5,702
Total current assets		208,286			229,071			168,113			229,502
Property and equipment, net		101,049			61,486			127,752			112,614
Operating lease right-of-use assets		61,798			41,408			88,986			68,037
Intangible assets, net		11,466			9,945			14,687			13,204
Deferred income taxes		213,951			211,244			223,952			217,791
Other long-term assets		1,390			1,578			1,617			1,322
Total assets	$	597,940		$	554,732		$	625,107		$	642,470

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	70,407		$	69,594		$	39,986		$	79,752
Accrued sales returns		6,903			8,428			5,111			7,116
Accrued compensation		13,392			14,209			9,370			8,928
Customer prepayments		9,283			6,253			5,132			10,854
Accrued sales tax		4,512			6,015			3,129			4,672
Accrued rebates and allowances		8,071			10,891			7,315			10,169
Operating lease obligations – current portion		5,776			3,235			9,882			7,053
Warrant liabilities								69			—
Other current liabilities		15,031			13,583			8,047			13,470
Total current liabilities		133,375			132,208			88,041			142,014
Debt, net of current portion		39,899			41,410			37,198			94,113
Operating lease obligations, net of current portion		75,340			48,936			103,457			81,159
Warrant liabilities		9,018			92,708			—			4,343
Tax receivable agreement liability, net of current portion		165,632			165,426			161,970			162,239
Other long-term liabilities, net of current portion		9,826			6,503			15,320			12,061
Total liabilities		433,090			487,191			405,986			495,929

Commitments and contingencies (Note 11)
Commitments and contingencies (Note 13)

Stockholders’ equity:
Class A common stock; $0.0001 par value, 210,000 shares authorized; 66,449 issued and outstanding at September 30, 2021 and 63,914 issued and outstanding at December 31, 2020		7			6
Class B common stock; $0.0001 par value, 90,000 shares authorized; 448 issued and outstanding at September 30, 2021 and 536 issued and outstanding at December 31, 2020		—			—
Class A common stock; $0.0001 par value, 210,000 shares authorized; 82,764 issued and outstanding at June 30, 2022 and 66,493 issued and outstanding at December 31, 2021								8			7
Class B common stock; $0.0001 par value, 90,000 shares authorized; 448 issued and outstanding at June 30, 2022 and at December 31, 2021								—			—
Additional paid-in capital		404,214			333,047			501,997			407,591
Accumulated deficit		(240,283	)		(265,856	)		(283,667	)		(261,825	)
Total stockholders’ equity		163,938			67,197			218,338			145,773
Noncontrolling interest		912			344			783			768
Total stockholders’ equity		164,850			67,541			219,121			146,541
Total liabilities and stockholders’ equity	$	597,940		$	554,732		$	625,107		$	642,470

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.

Condensed Consolidated Statements of Operations

(unaudited – in thousands, except per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020			2022			2021			2022			2021
Revenues, net	$	170,781		$	187,111		$	539,796		$	474,582		$	144,109		$	182,586		$	287,288		$	369,015
Cost of revenues		109,701			98,857			309,505			251,515			95,297			100,899			186,850			199,804
Gross profit		61,080			88,254			230,291			223,067			48,812			81,687			100,438			169,211
Operating expenses:
Marketing and sales		48,841			51,206			163,053			127,313			40,373			59,844			90,332			114,212
General and administrative		17,037			11,087			54,024			27,312			18,779			22,461			36,667			36,987
Research and development		1,784			1,687			5,430			4,712			1,748			1,923			3,891			3,646
Total operating expenses		67,662			63,980			222,507			159,337			60,900			84,228			130,890			154,845
Operating income (loss)		(6,582	)		24,274			7,784			63,730			(12,088	)		(2,541	)		(30,452	)		14,366
Other income (expense):
Interest income (expense), net		10			(1,232	)		(1,129	)		(4,045	)
Interest expense														(707	)		(569	)		(1,730	)		(1,139	)
Other income (expense), net		12			3			(30	)		109			(136	)		26			(119	)		(42	)
Change in fair value – warrant liabilities		5,362			(103,962	)		19,369			(212,593	)		346			4,860			4,274			14,007
Loss on extinguishment of debt		—			(5,782	)		—			(5,782	)
Tax receivable agreement income (expense)		846			(567	)		639			(33,512	)
Tax receivable agreement expense														—			(381	)		—			(207	)
Total other income (expense), net		6,230			(111,540	)		18,849			(255,823	)		(497	)		3,936			2,425			12,619
Net income (loss) before income taxes		(352	)		(87,266	)		26,633			(192,093	)		(12,585	)		1,395			(28,027	)		26,985
Income tax benefit (expense)		2,479			106			(1,005	)		35,818			4,175			1,167			5,986			(3,484	)
Net income (loss)		2,127			(87,160	)		25,628			(156,275	)		(8,410	)		2,562			(22,041	)		23,501
Net income (loss) attributable to noncontrolling interest		(44	)		(147	)		55			7,178			(70	)		(16	)		(199	)		99
Net income (loss) attributable to Purple Innovation, Inc.	$	2,171		$	(87,013	)	$	25,573		$	(163,453	)	$	(8,340	)	$	2,578		$	(21,842	)	$	23,402

Net income (loss) per share:
Basic	$	0.03		$	(1.97	)	$	0.39		$	(5.09	)	$	(0.10	)	$	0.04		$	(0.29	)	$	0.36
Diluted	$	(0.05	)	$	(1.97	)	$	0.09		$	(5.09	)	$	(0.10	)	$	(0.03	)	$	(0.29	)	$	0.14

Weighted average common shares outstanding:
Basic		66,335			44,266			65,741			32,117			82,703			66,277			74,924			65,439
Diluted		67,287			44,266			68,319			32,117			83,151			66,864			75,372			68,341

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.

Condensed Consolidated Statements of Stockholders’ Equity ~~(Deficit)~~

(unaudited – in thousands)

Class A Class B Additional Accumulated Total
Common Stock Common Stock Paid-in Equity Stockholders’ Noncontrolling Total
Shares Par Value Shares Par Value Capital (Deficit) Equity Interest Equity

Balance - December 31, 2020 63,914 $ 6 536 $ — $ 333,047 $ (265,856 ) $ 67,197 $ 344 $ 67,541
Net income — — — — — 20,824 20,824 115 20,939
Stock-based compensation — — — — 479 — 479 — 479
Exchange of stock 88 — (88 ) — — — — — —
Exercise of warrants 2,291 1 — — 64,261 — 64,262 — 64,262
Exercise of stock options 10 — — — 83 — 83 — 83
Tax Receivable Agreement liability — — — — (777 ) — (777 ) — (777 )
Deferred income taxes — — — — 971 — 971 — 971
Accrued distributions — — — — (99 ) — (99 ) — (99 )
InnoHold
indemnification payment — — — — 4,142 — 4,142 — 4,142
Impact of transactions affecting NCI — — — — (265 ) — (265 ) 265 —
Balance – March 31, 2021 66,303 $ 7 448 $ — $ 401,842 $ (245,032 ) $ 156,817 $ 724 $ 157,541
Net income (loss) — — — — — 2,578 2,578 (16 ) 2,562
Stock-based compensation — — — — 1,113 — 1,113 — 1,113
Exercise of warrants 1 — — — 26 — 26 — 26
Exercise of stock options 45 — — — 369 — 369 — 369
Tax Receivable Agreement liability — — — — (3 ) — (3 ) — (3 )
Deferred income taxes — — — — 3 — 3 — 3
Accrued distributions — — — — (87 ) — (87 ) — (87 )
Issuance of common stock 22 — — — — — — — —
Impact of transactions affecting NCI — — — — (192 ) — (192 ) 192 —
Balance – June 30, 2021 66,371 $ 7 448 $ — $ 403,071 $ (242,454 ) $ 160,624 $ 900 $ 161,524
Net income (loss) — — — — — 2,171 2,171 (44 ) 2,127
Stock-based compensation — — — — 765 — 765 — 765
Exercise of warrants 6 — — — 149 — 149 — 149
Exercise of stock options 72 — — — 590 — 590 — 590
Tax Receivable Agreement liability — — — — 4 — 4 — 4
Deferred income taxes — — — — (5 ) — (5 ) — (5 )
Accrued distributions — — — — (304 ) — (304 ) — (304 )
Impact of transactions affecting NCI — — — — (56 ) — (56 ) 56 —
Balance – September 30, 2021 66,449 $ 7 448 $ — $ 404,214 $ (240,283 ) $ 163,938 $ 912 $ 164,850

	Class A				Class B				Additional						Total
	Common Stock				Common Stock				Paid-in			Accumulated			Stockholders’			Noncontrolling			Total
	Shares		Par Value		Shares		Par Value		Capital			Deficit			Equity			Interest			Equity
Balance - December 31, 2021		66,493	$	7		448	$	—	$	407,591		$	(261,825	)	$	145,773		$	768		$	146,541
Net loss		—		—		—		—		—			(13,502	)		(13,502	)		(129	)		(13,631	)
Stock-based compensation		—		—		—		—		542			—			542			—			542
Exercise of stock options		20		—		—		—		166			—			166			—			166
Issuance of stock under equity compensation plans		25		—		—		—		—			—			—			—			—
Issuance of stock upon underwritten public offering, net of costs		16,100		1		—		—		92,894			—			92,895			—			92,895
Accrued distributions		—		—		—		—		(228	)		—			(228	)		—			(228	)
Impact of transactions affecting NCI		—		—		—		—		(141	)		—			(141	)		141			—
Balance – March 31, 2022		82,638	$	8		448	$	—	$	500,824		$	(275,327	)	$	225,505		$	780		$	226,285
Net loss		—		—		—		—		—			(8,340	)		(8,340	)		(70	)		(8,410	)
Stock-based compensation		—		—		—		—		1,275			—			1,275			—			1,275
Issuance of common stock under equity compensation plans		126		—		—		—		—			—			—			—			—
Additional costs associated with underwritten public stock offering		—		—		—		—		(29	)		—			(29	)		—			(29	)
Impact of transactions affecting NCI		—		—		—		—		(73	)		—			(73	)		73			—
Balance – June 30, 2022		82,764	$	8		448	$	—	$	501,997		$	(283,667	)	$	218,338		$	783		$	219,121

	Class A						Class B						Additional			Accumulated			Total Stockholders’						Total			Class A				Class B					Additional			Accumulated			Total
	Common Stock						Common Stock						Paid-in			Equity			Equity			Noncontrolling			Equity			Common Stock				Common Stock					Paid-in			Equity			Stockholders’			Noncontrolling			Total
	Shares			Par Value			Shares			Par Value			Capital			(Deficit)			(Deficit)			Interest			(Deficit)			Shares		Par Value		Shares			Par Value		Capital			(Deficit)			Equity			Interest			Equity

Balance – December 31, 2019		22,494		$	2			31,394		$	3		$	2,822		$	(28,989	)	$	(26,162	)	$	(2,378	)	$	(28,540	)
Balance - December 31, 2020																													63,914	$	6		536		$	—	$	333,047		$	(265,856	)	$	67,197		$	344		$	67,541
Net income		—			—			—			—			—			16,835			16,835			11,166			28,001			—		—		—			—		—			20,824			20,824			115			20,939
Stock-based compensation		—			—			—			—			250			—			250			—			250
Exchange of stock		1,124			—			(1,124	)		—			—			—			—			—			—
Exercise of warrants		1			—			—			—			17			—			17			—			17
Tax Receivable Agreement liability		—			—			—			—			(221	)		—			(221	)		—			(221	)
Accrued distributions		—			—			—			—			(196	)		—			(196	)		—			(196	)
Issuance of common stock		3			—			—			—			—			—			—			—			—
Impact of transactions affecting NCI		—			—			—			—			120			—			120			(120	)		—
Balance – March 31, 2020		23,622		$	2			30,270		$	3		$	2,792		$	(12,154	)	$	(9,357	)	$	8,668		$	(689	)
Net loss		—			—			—			—			—			(93,275	)		(93,275	)		(3,841	)		(97,116	)
Stock-based compensation		—			—			—			—			962			—			962			—			962			—		—		—			—		479			—			479			—			479
Exchange of stock		12,760			1			(12,760	)		(1	)		—			—			—			—			—			88		—		(88	)		—		—			—			—			—			—
Exercise of warrants		1			—			—			—			19			—			19			—			19			2,291		1		—			—		64,261			—			64,262			—			64,262
Exercise of stock options		5			—			—			—			(61	)		—			(61	)		—			(61	)		10		—		—			—		83			—			83			—			83
Tax Receivable Agreement liability		—			—			—			—			(45,045	)		—			(45,045	)		—			(45,045	)		—		—		—			—		(777	)		—			(777	)		—			(777	)
Deferred income taxes		—			—			—			—			56,636			—			56,636			—			56,636			—		—		—			—		971			—			971			—			971
Accrued distributions		—			—			—			—			(4,327	)		—			(4,327	)		—			(4,327	)		—		—		—			—		(99	)		—			(99	)		—			(99	)
Issuance of common stock		80			1			—			—			—			—			1			—			1
InnoHold indemnification payment																													—		—		—			—		4,142			—			4,142			—			4,142
Impact of transactions affecting NCI		—			—			—			—			6,453			—			6,453			(6,453	)		—			—		—		—			—		(265	)		—			(265	)		265			—
Balance – June 30, 2020		36,468		$	4			17,510		$	2		$	17,429		$	(105,429	)	$	(87,994	)	$	(1,626	)	$	(89,620	)
Balance – March 31, 2021																													66,303	$	7		448		$	—	$	401,842		$	(245,032	)	$	156,817		$	724		$	157,541
Net income (loss)		—			—			—			—			—			(87,013	)		(87,013	)		(147	)		(87,160	)		—		—		—			—		—			2,578			2,578			(16	)		2,562
Stock-based compensation		—			—			—			—			347			—			347			—			347			—		—		—			—		1,113			—			1,113			—			1,113
Exchange of stock		16,905			2			(16,905	)		(2	)		—			—			—			—			—
Exercise of warrants		266			—			—			—			5,240			—			5,240			—			5,240			1		—		—			—		26			—			26			—			26
Exercise of stock options		184			—			—			—			1,394			—			1,394			—			1,394			45		—		—			—		369			—			369			—			369
Tax Receivable Agreement liability		—			—			—			—			(89,677	)		—			(89,677	)		—			(89,677	)		—		—		—			—		(3	)		—			(3	)		—			(3	)
Deferred income taxes		—			—			—			—			112,670			—			112,670			—			112,670			—		—		—			—		3			—			3			—			3
Accrued distributions		—			—			—			—			(176	)		—			(176	)		—			(176	)		—		—		—			—		(87	)		—			(87	)		—			(87	)
Forfeiture of unvested common stock		(36	)		(1	)		—			—			1			—			—			—			—
Issuance of common stock																													22		—		—			—		—			—			—			—			—
Impact of transactions affecting NCI		—			—			—			—			(1,817	)		—			(1,817	)		1,817			—			—		—		—			—		(192	)		—			(192	)		192			—
Balance – September 30, 2020		53,787		$	5			605		$	—		$	45,411		$	(192,442	)	$	(147,026	)	$	44		$	(146,982	)
Balance – June 30, 2021																													66,371	$	7		448		$	—	$	403,071		$	(242,454	)	$	160,624		$	900		$	161,524

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited – in thousands)

	Nine Months Ended September 30,						Six Months Ended June 30,
	2021			2020			2022			2021
Cash flows from operating activities:
Net income (loss)	$	25,628		$	(156,275	)	$	(22,041	)	$	23,501
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		6,355			6,366			7,583			3,544
Non-cash interest		388			2,973			360			257
Paid-in-kind interest		—			(6,616	)
Loss on extinguishment of debt		—			5,782
Change in fair value – warrant liabilities		(19,369	)		212,593			(4,274	)		(14,007	)
Tax receivable agreement (income) expense		(639	)		33,512
Tax receivable agreement expense								—			207
Stock-based compensation		2,357			1,559			1,817			1,592
Non-cash lease expense		3,361			2,210
Deferred income taxes		(1,737	)		(35,818	)		(6,161	)		3,170
Changes in operating assets and liabilities:
Accounts receivable		1,541			6,798			(6,148	)		4,007
Inventories		(18,319	)		(3,147	)		13,804			931
Prepaid inventory and other assets		2,169			(5,740	)
Prepaid expenses and other assets								3,481			(2,263	)
Operating leases, net								4,178			785
Accounts payable		(2,199	)		9,678			(37,027	)		(11,783	)
Accrued sales returns		(1,525	)		3,014			(2,005	)		(1,466	)
Accrued compensation		(817	)		4,561			354			(5,002	)
Customer prepayments		3,030			(51	)		(5,722	)		11,081
Accrued rebates and allowances		(2,820	)		1,921			(2,854	)		(4,021	)
Operating lease obligations		(1,824	)		(1,274	)
Other accrued liabilities		4,552			5,354			1,851			936
Net cash provided by operating activities		132			87,400
Net cash provided by (used in) operating activities								(52,804	)		11,469

Cash flows from investing activities:
Purchase of property and equipment		(40,146	)		(14,194	)		(24,233	)		(26,162	)
Investment in intangible assets		(1,352	)		(10,890	)		(1,822	)		(285	)
Net cash used in investing activities		(41,498	)		(25,084	)		(26,055	)		(26,447	)

Cash flows from financing activities:
Proceeds from term loan		—			45,000
Payments on term loan		(1,688	)		—			(2,531	)		(1,125	)
Payments on related party loan		—			(37,497	)
Payments on revolving line of credit								(55,000	)		—
Payments for debt issuance costs		—			(2,460	)		(1,242	)		—
Proceeds from stock offering								93,125			—
Payments for public offering costs								(259	)		—
Proceeds from InnoHold indemnification payment		4,142			—			—			4,142
Tax receivable agreement payments		(628	)		—			(5,847	)		(628	)
Distributions to members		(957	)		(5,006	)		—			(853	)
Proceeds from exercise of warrants		116			706			—			116
Proceeds from exercise of stock options		1,042			1,418			166			452
Net cash provided by financing activities		2,027			2,161			28,412			2,104

Net (decrease) increase in cash		(39,339	)		64,477
Net decrease in cash								(50,447	)		(12,874	)
Cash and cash equivalents, beginning of the year		122,955			33,478			91,616			122,955
Cash and cash equivalents, end of the period	$	83,616		$	97,955		$	41,169		$	110,081

Supplemental disclosures of cash flow information:
Cash paid during the period for interest, net of amounts capitalized	$	389		$	954		$	1,345		$	858
Cash paid during the period for income taxes	$	4,495		$	2,422		$	219		$	4,434

Supplemental schedule of non-cash investing and financing activities:
Property and equipment included in accounts payable	$	5,707		$	2,786		$	3,648		$	3,367
Non-cash leasehold improvements	$	3,238		$	615		$	—		$	3,239
Accrued distributions	$	304		$	4,523		$	228		$	—
Tax receivable agreement liability	$	776		$	134,943		$	—		$	780
Deferred income taxes	$	969		$	169,306		$	—		$	974
Exercise of liability warrants	$	64,321		$	4,570		$	—		$	64,172

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.

~~PURPLE INNOVATION, INC.~~
Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Organization

The Company’s mission is to ~~help people feel and live~~improve the lives of our consumers by delivering innovative better ~~through innovative comfort~~sleep solutions.

Purple Innovation, Inc. collectively with its subsidiary (the “Company” or “Purple Inc.”) is a digitally-native vertical brand founded on comfort product innovation with premium offerings. The Company designs and manufactures a variety of innovative, branded and premium comfort products, including mattresses, pillows, cushions, bases, sheets, and other products. The Company markets and sells its products through its ~~direct-to-consumer (“DTC”)~~e-commerce online channels, retail brick-and-mortar wholesale partners, ~~Company~~Purple retail showrooms, and third-party online retailers.

The Company was incorporated in Delaware on May 19, 2015 as a special purpose acquisition company under the name of Global Partnership Acquisition Corp (“GPAC”). On February 2, 2018, the Company consummated a transaction structured similar to a reverse recapitalization (the “Business Combination”) pursuant to which the Company acquired a portion of the equity of Purple Innovation, LLC (“Purple LLC”). At the closing of the Business Combination (the “Closing”), the Company became the sole managing member of Purple LLC, and GPAC was renamed Purple Innovation, Inc.

As the sole managing member of Purple LLC, Purple Inc. through its officers and directors is responsible for all operational and administrative decision making and control of the day-to-day business affairs of Purple LLC without the approval of any other member.

2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The ~~Company consists~~condensed consolidated financial statements include the accounts of Purple Inc. and its ~~consolidated~~controlled subsidiary Purple LLC. All intercompany balances and transactions have been eliminated in consolidation. As of ~~September~~June 30, ~~2021,~~2022, Purple Inc. held ~~approximately 99%~~99.5% of the common units of Purple LLC and Purple LLC Class B Unit holders held ~~approximately 1%~~0.5% of the common units in Purple LLC.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting and reflect the financial position, results of operations and cash flows of the Company. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, these unaudited condensed consolidated financial statements should be read in conjunction with the ~~2020~~ audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form ~~10-K/A filed May 10,~~10-K for the fiscal year ended December 31, 2021. The unaudited condensed consolidated financial statements were prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which were considered of normal recurring nature) considered necessary to present fairly the Company’s financial results. The results of the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, ~~2021~~2022 or for any other interim period or other future year.

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.

Variable Interest Entities

Purple LLC is a variable interest ~~entity (“VIE”).~~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 ~~September~~June 30, ~~2021,~~2022, Purple Inc. had ~~approximately~~ a ~~99%~~99.5% economic interest in Purple LLC and consolidated 100% of Purple LLC’s assets, liabilities and results of operations in the Company’s unaudited condensed consolidated financial statements contained herein. The holders of Purple LLC Class B Units (the “Class B Units”) held ~~approximately 1%~~0.5% of the economic interest in Purple ~~LLC.~~LLC as of June 30, 2022. For further discussion see Note 1315 — Stockholders’ Equity.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

~~Reclassification~~

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on net income (loss), cash flows or stockholders’ equity previously reported.

Use of Estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to establish accounting policies and to make estimates and judgments that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The Company regularly makes significant estimates and assumptions including, but not limited to, estimates that affect revenue recognition, accounts receivable and allowance for doubtful accounts, valuation of inventories, ~~cost of revenues,~~ sales returns, warranty returns, warrant ~~liability,~~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.

~~Leases~~Restructuring Charges

In February and April 2022, because of lower-than-expected demand and higher labor and overhead costs that adversely affected our results of operations in the fourth quarter of 2021 which continued into the first quarter of 2022, the Company completed a restructuring of its workforce to balance production, improve efficiencies and realign the Company’s cost structure to focus on quality of earnings in our current core business. As a result of the realignment and restructuring, the Company reduced employee headcount and incurred severance charges of $2.0 million during the six months ended June 30, 2022.

In ~~February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02,~~ ~~Leases (“~~~~ASC 842~~”)~~, which required an entity to recognize lease liabilities and assets on the balance sheet and to disclose key information about an entity’s leasing arrangements. Because~~June 2022, the Company ~~ceased being an EGC on December 31, 2020,~~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 ~~standard became effective~~condensed consolidated statement of operations for the Company for its annual reporting period beginning January 1, 2020, and interim reporting periods within the annual period beginning January 1, 2020. The adoption of ASC 842 and all related amendments using the modified retrospective transition approach effective for the Company’s annual reporting period beginning January 1, 2020 resulted in the initial recognition of operating lease right-of-use (“ROU”) assets of $27.9 million and operating lease liabilities of $33.0 million in the Company’s consolidated balance sheet. Pre-existing liabilities for deferred rent and various lease incentives totaling $5.1 million were reclassified to operating lease ROU assets in connection with the adoption. The adoption of ASC 842 did not have a material impact on the Company’s consolidated results of operations or cash flows and had no impact on retained earnings. At January 1, 2020, the effective date of adoption, the Company’s finance ROU assets and lease liabilities were not material.three months ended June 30, 2022.

The Company ~~determines if an agreement contains a lease at~~has also initiated other cost reduction and efficiency efforts to improve costs, increase margins and ensure compliance with debt covenants. If the ~~inception~~Company’s cash flow from operations or other sources of ~~a contract. For leases~~financing are less than anticipated, the Company believes it will be able to fund operating expenses and comply with ~~an initial term greater than 12 months, a related lease liability is recorded~~debt covenants based on its ability to scale back operations, reduce marketing spend, use the ~~balance sheet at the present value~~liquidity available under its revolving line of ~~future payments discounted at the estimated fully collateralized incremental borrowing rate (discount rate) corresponding with the lease term.~~credit and postpone or discontinue growth strategies. In addition, ~~a ROU asset is recorded as~~in order to continue satisfying the initial amount of the lease liability, plus any lease payments made to the lessor before or at the lease commencement date and any initial direct costs incurred, less any tenant improvement allowance incentives received.

The Company calculates the present value of future payments using its incremental borrowing rate when the discount rate implicit in the lease is not known. The incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. The Company determines the applicable incremental borrowing rate at the lease commencement date based on the rates of its secured borrowings, which is then adjusted for the appropriate lease term and risk premium. In determining the Company’s ROU assets and operating lease liabilities, the Company applies these incremental borrowing rates to the minimum lease payments within each lease agreement.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Operating lease expense is recognized on a straight-line basis over the lease term. Tenant incentive allowances received from the lessor are amortized through the ROU asset as a reduction of 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 the impairment 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.

~~Revenue Recognition~~

The Company markets and sells its products through DTC online channels, retail brick-and-mortar wholesale partners, Company showrooms, and third-party online retailers. Revenue is recognized when the Company satisfies its performance obligations under the contract which is transferring the promised products to the customer. This principle is achieved in the following steps:

~~Identify the contract with the customer.~~ A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods to be transferred and identifies the payment terms related to these goods, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for the goods that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company does not have significant costs to obtain contracts with customers.

~~Identify the performance obligations in the contract~~. The Company’s contracts with customers do not include multiple performance obligations to be completed over a period of time. The performance obligations generally relate to delivering products to a customer, subject to the shipping terms of the contract. The Company has made an accounting policy election to account for shipping and handling activities performed after a customer obtains control of the goods, including “white glove” delivery services, as activities to fulfill the promise to transfer the goods. The Company does not offer extended warranty or service plans. The Company does not provide an option to its customers to purchase future products at a discount and therefore there are no material option rights.

~~Determine the transaction price~~. Payment for sale of products through the direct-to-consumer online channels and third-party online retailers is collected at point of sale in advance of shipping the products. Amounts received for unshipped products are recorded as customer prepayments. Payment by traditional wholesale customers is due under customary fixed payment terms. None of the Company’s contracts contain a significant financing component. Revenue is recorded at the net sales price, which includes estimates of variable consideration such as product returns, volume rebates, and other adjustments. The estimates of variable consideration are based on historical return experience, historical and projected sales data, and current contract terms. Variable consideration is included in revenue only to the extent that it is probable that a significant reversal of the revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues.

~~Allocate the transaction price to performance obligations in the contract.~~ The Company’s contracts with customers do not include multiple performance obligations. Therefore, the Company recognizes revenue upon transfer of the product to the customer’s control at contractually stated pricing.

~~Recognize revenue when or as we satisfy a performance obligation.~~ The Company satisfies performance obligations at a point in time upon either shipment or delivery of goods, in accordance with the terms of each contract with the customer. With the exception of third-party “white glove” delivery and certain wholesale partners, revenue generated from product sales is recognized at shipping point, the point in time the customer obtains control of the products. Revenue generated from sales through third-party “white glove” delivery is recognized at the point in time when the product is delivered to the customer. Revenue generated from certain wholesale partners is recognized at a point in time when the product is delivered to the wholesale partner’s warehouse. The Company does not have service revenue.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

~~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 September 30, 2021, there were 1.9 million sponsor warrants outstanding.

~~Fair Value Measurements~~

The Company uses the fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:

~~Level 1—Quoted market prices in active markets for identical assets or liabilities;~~

Level 2—Significant other observable inputs (e.g. quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable, such as interest rate and yield curves, and market-corroborated inputs); and

~~Level 3—Unobservable inputs in which there is little or no market data, which require the reporting unit to develop its own assumptions.~~

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

The classification of fair value measurements within the established three-level hierarchy is based upon the lowest level of input that is significant to the measurements. Financial instruments, although not recorded at fair value on a recurring basis include cash and cash equivalents, receivables, accounts payable and the Company’s debt obligations. The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair value because of the short-term nature of these accounts. The fair value of the Company’s debt instruments is estimated to be face value based on the contractual termsconditions of the debt ~~arrangements and market-based expectations.~~

The public warrant liabilities are Level 1 instruments as they have quoted market prices in an active market. The sponsor and incremental loan warrant liabilities are Level 3 instruments and use internal models to estimate fair value using certain significant unobservable inputs which requires determination of relevant inputs and assumptions. Accordingly, changes in these unobservable inputs may have a significant impact on fair value. Such inputs include risk free interest rate, expected average life, expected dividend yield, and expected volatility. These Level 3 liabilities generally decrease (increase) in value based upon an increase (decrease) in risk free interest rate and expected dividend yield. Conversely, the fair value of these Level 3 liabilities generally increase (decrease) in value if the expected average life or expected volatility were to increase (decrease).

~~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~~agreement the Company ~~utilized~~may be required to ~~determine such fair value:~~

(In thousands) Level September 30,
2021 December 31,
2020
Sponsor warrants 3 $ 9,018 $ 92,708

~~All of the public warrants (a Level 1 fair value liability)~~scale back operations, reduce marketing spend, prepay debt and ~~all of the incremental loan warrants (a Level 3 fair value liability) were exercised during 2020.~~

~~The following table summarizes the Company’s total Level 3 liability activity for the nine months ended September 30, 2021 and 2020:~~

(In thousands) Sponsor
Warrants Incremental
Loan
Warrants Total Level 3
Liabilities
Fair value as of December 31, 2020 $ 92,708 $ — $ 92,708
Fair value transfer to Level 1 measurement (64,321 ) — (64,321 )
Change in valuation inputs⁽¹⁾ (19,369 ) — (19,369 )
Fair value as of September 30, 2021 $ 9,018 $ — $ 9,018

Fair value as of December 31, 2019 $ 7,689 $ 21,622 $ 29,311
Fair value of warrants exercised (4,965 ) — (4,965 )
Change in valuation inputs⁽¹⁾ 57,434 43,308 100,742
Fair value as of September 30, 2020 $ 60,158 $ 64,930 $ 125,088

~~(1)~~

~~Changes in valuation inputs are recognized in the change in fair value – warrant liabilities in the condensed consolidated statements of operations.~~

~~Income Taxes~~

In calculating the provision for interim income taxes, in accordance with ASC Topic 740, an estimated annual effective tax rate is applied to year-to-date ordinary income. At the end of each interim period, the Company estimates the effective tax rate expected to be applicable for the full fiscal year. This differs from the method utilized at the end of an annual period.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

For annual periods, the Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that the deferred tax assets will be realized. Deferred tax assets and liabilities are calculated by applying existing tax laws and the rates expected to apply to taxable income in the years in which those temporary differences are expected to be recoveredpostpone or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change. Our effective tax rate is primarily impacted by the allocation of income taxes to the noncontrolling interest and the non-taxable nature of the change in fair value of the warrant liability.

The Company 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 income tax benefit (expense) line in the accompanying condensed 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.

~~Net Income (Loss) Per Share~~

Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to common shareholders by the weighted average number of shares of Class A Common Stock, par value $0.0001 per share (the “Class A Stock”), outstanding each period. Diluted net income (loss) per share adds to those shares the incremental shares that would have been outstanding and potentially dilutive assuming exchanges of the Company’s outstanding warrants, stock options and shares of Class B Common Stock, par value $0.0001 per share (the “Class B Stock”), for Class A Stock, and the vesting of unvested and restricted Class A Stock. An anti-dilutive impact represents an increase in net income per share or a reduction in net loss per share resulting from the conversion, exercise or contingent issuance of certain securities.

The Company uses the “if-converted” method to determine the potential dilutive effect of conversions of its outstanding Class B Stock, and the treasury stock method to determine the potential dilutive effect of its outstanding warrants and stock options exercisable for shares of Class A Stock and the vesting of unvested Class A Stock.discontinue our growth strategies.

Recent Accounting Pronouncements

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides guidance to alleviate the burden in accounting for reference rate reform by allowing certain expedients and exceptions in applying generally accepted accounting principles to contracts, hedging relationships, and other transactions impacted by reference rate reform. The provisions of ASU 2020-04 apply only to those transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. This standard is currently effective and upon adoption may be applied prospectively to contract modifications made on or before December 31, 2022, when the reference rate replacement activity is expected to be completed. The interest ~~rate~~rates on the Company’s term loan isand revolving line of credit were originally based on LIBOR. ~~The~~In February 2022, the Company ~~plans~~entered into an amendment to ~~apply~~ the ~~amendments in this update to account for any contract modifications~~2020 Credit Agreement that ~~result from changes in~~changed the interest reference rate ~~used.~~from LIBOR to the Secured Overnight Financing Rate (“SOFR”). The ~~Company does~~change to SOFR did not ~~expect these amendments to~~ have ~~a material~~any impact on ~~its~~the Company’s condensed consolidated financial statements ~~and related disclosures.~~– see Note 10—Debt for discussion of the amendment to the 2020 Credit Agreement.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

~~Simplifying the Accounting for Income Taxes~~

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The new guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance is effective for fiscal years beginning after December 15, 2020 and for interim periods within those fiscal years. The adoption of this standard by the Company on January 1, 2021 did not have a material impact on the Company’s financial position, results of operations, or cash flows.

~~Internal-Use Software~~

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350) (“ASU 2018-15”). The objective of ASU 2018-15 is to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with those incurred to develop or obtain internal-use software. The guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The amendments can be applied either retrospectively or prospectively. Because the Company lost its EGC status on December 31, 2020, the standard became effective for the Company for its annual period beginning January 1, 2020, and interim periods within the annual period beginning January 1, 2021. The Company elected to apply the amendments on a prospective basis. Adoption of this standard did not have a material impact on the Company’s financial position, results of operations, or cash flows.

Measurement of Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which was further updated and clarified by the FASB through issuance of additional related ASUs. This guidance replaces the existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost based on expected credit losses. The estimate of expected credit losses requires the incorporation of historical information, current conditions, and reasonable and supportable forecasts. These updates are effective for public companies, excluding Smaller Reporting Companies (“SRC”), for annual periods beginning after December 15, 2019, including interim periods therein. The standard is effective for all other entities for annual periods beginning after December 15, 2022, including interim periods therein. ~~Since the Company was considered an SRC on the deferral date of this~~The standard ~~the guidance~~ is effective for the Company’s interim and annual financial periods beginning January 1, 2023. ~~ASU 2016-13~~This standard is to be applied utilizing a modified retrospective approach. The Company is currently evaluating the impact of this standard on its accounts receivable, cash and cash equivalents, and any other financial assets measured at amortized ~~cost and do not expect that adoption will have a material impact on its consolidated financial statements or related disclosures.~~cost.

3. Underwritten Offering

In March 2022, the Company completed an underwritten offering of 16.1 million shares of Class A common stock, which included the underwriters exercising their over-allotment option in full to purchase an additional 2.1 million shares. The underwriter purchased the Class A common stock from the Company at a price of $5.65 per share, except that any shares sold by the underwriter to Coliseum Capital Partners, L.P. and Blackwell Partners LLC – Series A, up to an aggregate of 29.81% of the shares of Class A common stock pursuant to the offering, were purchased from the Company by the underwriter at a price of $6.10 per share. The aggregate gross proceeds received by the Company from the offering, including the exercise of the over-allotment, was $93.1 million. After deducting offering expenses of $0.3 million, aggregate net proceeds totaled $92.9 million.

4. Fair Value Measurements

Level 1—Quoted market prices in active markets for identical assets or liabilities;

Level 2—Significant other observable inputs (i.e., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable, such as interest rate and yield curves, and market-corroborated inputs); and

Level 3—Unobservable inputs in which there is little or no market data, which require the reporting unit to develop its own assumptions.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

The classification of fair value measurements within the established three-level hierarchy is based upon the lowest level of input that is significant to the measurements. Financial instruments, although not recorded at fair value on a recurring basis include cash and cash equivalents, receivables, accounts payable and the Company’s debt obligations. The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair value because of the short-term nature of these accounts. The fair value of the Company’s debt instruments is estimated to be face value based on the contractual terms of the debt arrangements and market-based expectations.

The sponsor warrant liabilities (see Note 11 — Warrant Liabilities for more information) are Level 3 instruments and use internal models to estimate fair value using certain significant unobservable inputs which requires determination of relevant inputs and assumptions. Accordingly, changes in these unobservable inputs may have a significant impact on fair value. Such inputs include risk free interest rate, expected average life, expected dividend yield, and expected volatility. These Level 3 liabilities generally decrease (increase) in value based upon an increase (decrease) in risk free interest rate and expected dividend yield. Conversely, the fair value of these Level 3 liabilities generally increase (decrease) in value if the expected average life or expected volatility were to increase (decrease).

The following table presents information about the Company’s liabilities that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value (dollars in thousands):

		Level				June 30, 2022				December 31, 2021
Sponsor warrants			3			$	69			$	4,343

The following table summarizes the Company’s total Level 3 liability activity for the six months ended June 30, 2022 and 2021 (in thousands):

	Sponsor Warrants
Fair value as of December 31, 2021	$	4,343
Fair value of warrants exercised		—
Change in valuation inputs⁽¹⁾		(4,274	)
Fair value as of June 30, 2022	$	69

Fair value as of December 31, 2020	$	92,708
Fair value of warrants exercised		(64,172	)
Change in valuation inputs⁽¹⁾		(14,007	)
Fair value as of June 30, 2021	$	14,529

(1)	Changes in valuation inputs are recognized as the change in fair value – warrant liabilities in the condensed consolidated statement of operations.

5. Revenue from Contracts with Customers

The Company markets and sells its products through ~~DTC~~e-commerce online channels, retail brick-and-mortar wholesale partners, ~~Company~~Purple retail showrooms, and third-party online retailers. Revenue is recognized when the Company satisfies its performance obligations. These performance obligations ~~under the contract which is transferring the promised~~generally relate to delivering products to a customer, subject to the ~~customer as described in Note 2 –~~ ~~Summary~~shipping terms of ~~Significant Accounting Policies~~.the contract.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Disaggregated Revenue

The Company classifies revenue into two sales categories: Direct-to-Consumer (“DTC”) and wholesale. The DTC category is comprised of the Company’s e-commerce channel that sells ~~products~~directly to consumers who purchase online and through ~~two channels: Direct-to-Consumer~~our contact center, and ~~Wholesale.~~the Purple retail showrooms channel that sells directly to consumers who purchase at a Company showroom location. The ~~Direct-to-Consumer channel includes product sales through various DTC channels including Company showrooms and contact center. The Wholesale channel~~wholesale category includes all product sales to ~~traditional third-party retailers for both in store~~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: Bedding~~types: sleep products and ~~Other. Bedding~~other. Sleep products include mattresses, platforms, adjustable bases, mattress protectors, pillows and sheets. Other products include cushions and various other products.

The following tables present the Company’s net revenue disaggregated by sales ~~channel~~category and product ~~category~~type (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
Channel	2021		2020		2021		2020		2022		2021		2022		2021
Direct-to-consumer	$	112,863	$	134,252	$	353,985	$	360,119
Wholesale partner		57,918		52,859		185,811		114,463
DTC									$	81,628	$	116,219	$	167,164	$	241,123
Wholesale										62,481		66,367		120,124		127,892
Revenues, net	$	170,781	$	187,111	$	539,796	$	474,582	$	144,109	$	182,586	$	287,288	$	369,015

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
Product	2021		2020		2021		2020		2022		2021		2022		2021
Bedding	$	156,077	$	172,806	$	494,628	$	437,809
Sleep products									$	131,738	$	166,708	$	260,704	$	338,551
Other		14,704		14,305		45,168		36,773		12,371		15,878		26,584		30,464
Revenues, net	$	170,781	$	187,111	$	539,796	$	474,582	$	144,109	$	182,586	$	287,288	$	369,015

Contract Balances

Payment for sale of products through the ~~DTC~~e-commerce online ~~channels,~~channel, third-party online retailers, ~~Company~~Purple retail showrooms and contact center is collected at point of sale in advance of shipping the products. Amounts received for unshipped products are recorded as customer prepayments. Customer prepayments totaled ~~$9.3~~$5.1 million and ~~$6.3~~$10.9 million at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. During the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, the Company recognized all revenue that was deferred in customer prepayments at ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively.

4.6. Inventories, Net

Inventories, net consisted of the following (in thousands):

	September 30,			December 31,			June 30,			December 31,
	2021			2020			2022			2021
Raw materials	$	28,788		$	26,372		$	31,621		$	33,609
Work-in-process		4,203			3,593			2,041			4,023
Finished goods		52,481			36,280			52,870			63,419
Inventory obsolescence reserve		(1,427	)		(519	)		(1,646	)		(2,361	)
Inventories, net	$	84,045		$	65,726		$	84,886		$	98,690

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

5.7. Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):

	September 30,			December 31,			June 30,			December 31,
	2021			2020			2022			2021
Equipment	$	54,008		$	30,508		$	61,194		$	58,094
Equipment in progress		19,099			18,648			20,181			19,840
Leasehold improvements		30,676			15,758			48,255			38,098
Furniture and fixtures		10,759			5,160			20,909			12,482
Office equipment		4,465			3,185			4,359			4,843
Total property and equipment		119,007			73,259			154,898			133,357
Accumulated depreciation		(17,958	)		(11,773	)		(27,146	)		(20,743	)
Property and equipment, net	$	101,049		$	61,486		$	127,752		$	112,614

Equipment in progress reflects equipment, primarily related to mattress manufacturing, which is being constructed and was not in service at ~~September~~June 30, ~~2021~~2022 or December 31, 2020. Depreciation expense was $2.8 million and $6.2 million during the three and nine months ended September 30, 2021, respectively, and totaled $1.4 million and $4.0 million during the three and nine months ended September 30, 2020, respectively.

~~The Company capitalizes interest~~2021. Interest capitalized on borrowings during the active construction period of major capital ~~projects. Capitalized~~projects totaled $0.2 million and $0.4 million during the three and six months ended June 30, 2022, respectively. There was no interest ~~is added to~~capitalized during the ~~cost of~~three and six months ended June 30, 2021. Depreciation expense was $3.6 million and $7.1 million during the ~~underlying assets~~three and ~~is amortized over~~six months ended June 30, 2022, respectively, and totaled $1.9 million and $3.5 million during the ~~useful lives of the assets. Capitalized interest as of September~~three and six months ended June 30, 2021, ~~totaled $0.8 million of which $0.6 million related to an error affecting periods prior to the third quarter of 2021 relating to unrecorded capitalized interest.~~ ~~Such amount was determined to not be material to prior or current financial statements~~ ~~and was recorded as an out-of-period correction in the third quarter of 2021.~~respectively.

6.8. Leases

The Company leases its manufacturing and distribution facilities, corporate offices, Purple retail showrooms and certain equipment under non-cancelable operating leases with various expiration dates through 2036. The Company’s office and manufacturing leases provide for initial lease terms up to 16 years, while Purple retail showrooms have initial lease terms of up to ten years. Certain leases may contain options to extend the term of the original lease. The exercise of lease renewal options is at the Company’s discretion. Any lease renewal options are included in the lease term if exercise is reasonably certain at lease commencement. The Company also leases vehicles and other equipment under both operating and finance leases with initial lease terms of three to five years. The ~~ROU~~right-of-use asset for finance leases was $0.6 million and $0.7 million ~~and $0.6 million as of September~~at June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

The following table presents the Company’s lease costs (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Operating lease costs	$	2,329	$	1,530	$	6,200	$	4,005	$	3,690	$	2,064	$	6,838	$	3,871
Variable lease costs		819		6		1,396		32		409		482		1,123		577
Short-term lease costs		67		59		191		178		—		68		11		124
Total lease costs	$	3,215	$	1,595	$	7,787	$	4,215	$	4,099	$	2,614	$	7,972	$	4,572

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

The table below reconciles the undiscounted cash flows for each of the first five years and total remaining years to the operating lease liabilities recorded on the condensed consolidated balance sheet at ~~September~~June 30, ~~2021~~2022 (in thousands):

2021 (excluding the nine months ended September 30, 2021) ⁽¹⁾	$	(123	)
2022		10,496
2022 (excluding the six months ended June 30, 2022)⁽¹⁾				$	3,905
2023		10,211			16,076
2024		10,222			16,176
2025		10,186			16,192
2026					16,209
Thereafter		70,391			79,900
Total operating lease payments		111,383			148,458
Less – lease payments representing interest		(30,267	)		(35,119	)
Present value of operating lease payments	$	81,116		$	113,339

(1)	– Amount consists of ~~$2.2~~$8.0 million of undiscounted cash flows offset by ~~$2.3~~$4.1 million of tenant improvement allowances which are expected to be fully utilized in fiscal ~~2021.~~2022.

As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the weighted-average remaining term of operating leases was ~~11.2~~9.7 years and ~~11.8~~10.7 years, respectively, and the weighted-average discount rate of operating leases was ~~5.38%~~5.33% and ~~6.18%~~5.30%, respectively.

The following table provides supplemental information related to the Company’s condensed consolidated statement of cash flows for the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021 ~~and 2020:~~(in thousands):

	Nine Months Ended September 30,				Six Months Ended June 30,
	2021		2020		2022		2021
Cash paid for amounts included in present value of operating lease liabilities	$	1,824	$	1,274	$	3,425	$	1,273
Right-of-use assets obtained in exchange for operating lease liabilities		23,751		15,821		25,029		14,984

7.9. Other Current Liabilities

Other current liabilities consisted of the following (in thousands):

	September 30,		December 31,		June 30,		December 31,
	2021		2020		2022		2021
Warranty accrual – current portion	$	4,259	$	2,806	$	4,447	$	3,914
Long-term debt – current portion		2,012	$	2,004
Insurance financing						1,243	$	1,043
Long-term debt, net of unamortized issuance costs – current portion						1,290		2,297
Tax receivable agreement liability – current portion		5,847		6,545		269		5,847
Insurance financing		2,133		910
Other		780		1,318		798		369
Total other current liabilities	$	15,031	$	13,583	$	8,047	$	13,470

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

8.10. Debt

Debt consisted of the following (in thousands):

	September 30,			December 31,			June 30,			December 31,
	2021			2020			2022			2021
Term loan	$	42,750		$	44,438		$	39,656		$	42,188
Less: unamortized debt issuance costs		(839	)		(1,024	)
Revolving line of credit								—			55,000
Less: unamortized issuance costs								(1,168	)		(778	)
Total debt		41,911			43,414			38,488			96,410
Less: current portion of debt		(2,012	)		(2,004	)
Less: current portion of debt, net of unamortized issuance costs								(1,290	)		(2,297	)
Long-term debt, net	$	39,899		$	41,410		$	37,198		$	94,113

Term Loan and Revolving Line of Credit

On September 3, 2020, Purple LLC entered into a financing arrangement with KeyBank National Association and a group of financial institutions (the “2020 Credit Agreement”). The 2020 Credit Agreement provides for a $45.0 million term loan and a $55.0 million revolving line of credit.

The borrowing rates for the term loan are based on Purple LLC’s leverage ratio, as defined in the 2020 Credit Agreement, and can range from LIBOR plus a 3.00% to 3.75% margin with a LIBOR minimum of 0.50%. The initial borrowing rate of 3.50% is based on LIBOR plus 3.00%. The term loan will be repaid in accordance with a five-year amortization schedule and may be prepaid in whole or in part at any time without premium or penalty, subject to reimbursement of certain costs. ~~There may be mandatory prepayment obligations~~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 ~~excess cash flow.~~the applicable margin applied to the unused total revolving commitment. The initial borrowing rate of 3.50% was based on LIBOR plus 3.00%.

Pursuant to a Pledge and Security Agreement between Purple LLC, KeyBank and the Company (the “Security Agreement”), the 2020 Credit Agreement is secured by a perfected first-priority security interest in the assets of Purple LLC and the Company, including a security interest in all intellectual property. Also, the Company agreed to an unconditional guaranty of the payment of all obligations and liabilities of Purple LLC under the 2020 Credit Agreement. The Security Agreement contains a pledge, as security for the Company’s guaranty, of all its ownership interest in Purple LLC. The 2020 Credit Agreement also provides for standard events of default, such as for non-payment and failure to perform or observe covenants, and contains standard indemnifications benefitting the lenders.

The 2020 Credit Agreement includes representations, warranties and certain covenants of Purple LLC and the Company. While any amounts are outstanding under the 2020 Credit Agreement, Purple LLC is subject to several affirmative and negative covenants, including covenants regarding dispositions of property, investments, forming or acquiring subsidiaries, business combinations or acquisitions, incurrence of additional indebtedness, and transactions with affiliates, among other customary covenants, subject to certain exceptions. In particular, Purple LLC is (i) subject to annual capital expenditure limits that can be adjusted based on the Company achieving certain net leverage ratio thresholds as provided in the 2020 Credit Agreement, (ii) restricted from incurring additional debt up to certain amounts, subject to limited exceptions, as set forth in the 2020 Credit Agreement, and (iii) maintain minimum consolidated net leverage and fixed charge coverage ratio thresholds at certain measurement dates (as defined in the 2020 Credit Agreement). Purple LLC is also restricted from paying dividends or making other distributions or payments on its capital stock, subject to limited exceptions. If the Company or Purple LLC fail to perform their obligations under these and other covenants, or should any event of default occur, the revolving loan commitments under the 2020 Credit Agreement may be terminated and any outstanding borrowings, together with accrued interest, could be declared immediately due and payable. ~~As of September 30, 2021, the Company was in compliance with all of the covenants related to the 2020 Credit Agreement.~~

The $55.0 million revolving credit facility established under the 2020 Credit Agreement has a term of five years and carries the same interest provisions as the term debt. A commitment fee is due quarterly based on the applicable margin applied to the unused total revolving commitment. The agreement for this revolving credit facility contains customary covenants and events of default. As of September 30, 2021, there was no balance outstanding on the revolving credit facility.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

The ~~Company incurred $2.5 million in debt issuance costs~~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. ~~These costs relate~~On February 28, 2022, prior to the ~~entire credit arrangement~~covenant compliance certification date, the Company entered into the first amendment of the 2020 Credit Agreement to avoid a breach of these covenants and ~~therefore were allocated between~~potential default. This amendment contained a covenant waiver period such that the net leverage ratio and fixed charge coverage ratio would not be tested for the fiscal quarters ended December 31, 2021, March 31, 2022 and June 30, 2022. Other modifications in the amendment included revised leverage ratio and fixed charge coverage definitions and thresholds, the addition of minimum liquidity requirements with mandatory prepayments of the revolving loan if cash exceeded $25.0 million, new weekly and monthly reporting requirements, limits on the amount of capital expenditures, the addition of a lease incurrence test for opening additional showrooms, and additional negative covenants during a covenant amendment period that extends into 2023 until certain conditions are met. In addition, the interest rate on any outstanding borrowings under the 2020 Credit Agreement was changed from LIBOR with a floor of 0.5% plus an applicable margin (historically at 3.0%) to an initial rate of SOFR with a floor of 0.5% plus an applicable margin of 4.75%, for a total rate of 5.25% if the applicable liquidity threshold is met. If the Company does not meet this threshold, the interest rate would increase to SOFR with a floor of 0.5% plus 9.00%. Once the Company achieves a consolidated leverage ratio that is below 3.00 to 1.00, the interest rate will be based on SOFR with a floor of 0.5% plus a 3.00% to 3.75% margin depending on the consolidated leverage ratio. The interest rate on the term loan ~~and~~was 6.07% as of June 30, 2022.

Pursuant to the ~~revolving line of credit. The Company determined $1.1 million~~first amendment of the 2020 Credit Agreement, the Company incurred fees and expenses of $0.9 million that were recorded as debt issuance costs ~~related to the term debt and are presented~~ in the condensed consolidated balance sheet asand made a ~~direct reduction from the carrying amount of the debt liability. This amount is being amortized into interest expense using an effective interest rate over the duration of the debt. The remaining $1.4~~$2.5 million ~~of debt issuance costs were allocated to the revolving line of credit facility. This amount is classified as other assets and is being amortized to interest expense~~payment on ~~a straight-line basis over~~ the term ofloan to cover the ~~revolving credit facility.~~

Interest expense under the 2020 Credit Agreement totaled $0.5 million and $1.6 million for the three and nine months ended September 30, 2021, respectively, and totaled $0.2 million and $0.2 million during the three and nine months ended September 30, 2020, respectively.

~~Related Party Loan~~

On March 27, 2020, the Company entered into an amendment to Purple LLC’s Credit Agreement dated February 3, 2018 and all subsequent amendments and agreements (collectively referred to as the “Related Party Loan”) that provided for the deferral of the full amount of the interest paymentfour quarterly principal payments due ~~on March 31, 2020 and June 30, 2020 to reduce cash disbursements during the COVID-19 pandemic.~~in 2022. The Company accounted for this amendment as a modification of existing debt in accordance with ASC 470 -– Debt. ~~Interest expense on the Related Party Loan was $1.0 million and $3.8 million for the three and nine months ended September 30, 2020, respectively.~~

On ~~September 3, 2020,~~March 23, 2022, the Company ~~paid $45.0 million to retire, in full, all indebtedness related~~entered into a second amendment to the 2020 Credit Agreement. This amendment modified the 2020 Credit Agreement to allow Coliseum Capital Management, LLC (“CCM”) and its investment affiliates to acquire 35% or more of the combined voting power of all equity interests of the Company entitled to vote for the election of members of the Company’s board of directors without constituting an event of default. CCM is considered a related party of the Company in that Adam Gray, a member of our board of directors, serves as a managing partner of CCM. For further discussion see Note 14—Related Party ~~Loan. The payment included $25.0 million for~~Transactions—Coliseum Capital Management, LLC.

Pursuant to the ~~original loan under~~second amendment of the agreement, $10.0 million for a subsequent incremental loan, $6.6 million for paid-in-kind interest, $2.5 million for a prepayment fee and $0.9 million for accrued interest. As a result of paying off the Related Party Loan during the third quarter of fiscal 2020 Credit Agreement, the Company ~~recognized~~incurred fees and expenses of $0.4 million that were recorded as debt issuance costs in the condensed consolidated balance sheet. The Company accounted for this amendment as a ~~$5.8 million loss on extinguishment~~modification of ~~debt.~~

~~9. Warrant Liabilities~~existing debt in accordance with ASC 470 – Debt.

In November 2021, the Company executed a $55.0 million draw on its revolving line of credit. On ~~February 26, 2019, two~~March 31, 2022, the Company used a portion of the ~~lenders who originally financed~~net proceeds received from its March 2022 offering to repay in full the ~~Related Party loan (the “Incremental Lenders”) funded a $10.0~~$55.0 million ~~increase in the loan and received 2.6 million warrants (“Incremental Loan Warrants”) to purchase 2.6 million shares~~ of the Company’s Class A Stock at a price of $5.74 per share, subject to certain adjustments. 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 basedprincipal outstanding 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~~revolving line of the transaction and subsequently re-measured to fair value at each reporting date with changes in the fair value included in earnings. On November 9, 2020, the Company issued 2.6 million shares of Class A Stock pursuant to the exercise of all of the warrants held by the Incremental Lenders.credit.

For the three and nine months ended September 30, 2020, the Company recognized losses of $18.0 million and $43.3 million, respectively, in its condensed consolidated statements of operations related to increases in the fair value of the Incremental Loan Warrants. The fair value of the Incremental Loan Warrants was calculated using a Monte Carlo Simulation of a Geometric Brownian Motion stock path model. The following are the assumptions used in calculating fair value on September 30, 2020:

Trading price of common stock on measurement date $ 24.86
Exercise price $ —
Risk free interest rate 0.16 %
Warrant life in years 3.4
Expected volatility 51.30 %
Expected dividend yield —
Probability of warrant re-price 100.00 %

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Interest expense under the 2020 Credit Agreement totaled $0.9 million and $2.0 million for the three and six months ended June 30, 2022, respectively, and totaled $0.6 million and $1.1 million for the three and six months ended June 30, 2021, respectively.

11. Warrant Liabilities

The ~~public and~~Company issued 12.8 million sponsor warrants ~~that were issued in connection~~pursuant to a private placement conducted simultaneously with its initial public offering. Each of these warrants entitles the registered holder to purchase one-half of one share of the Company’s Class A common stock at a price of $5.75 per half share ($11.50 per full share), subject to adjustment pursuant to the terms of the warrant agreement. In accordance with the ~~Company’s IPO~~warrant agreement, a warrant holder may exercise its warrants only for a whole number of shares of the Class A common stock. In no event will the Company be required to net cash settle any warrant. The warrants have a five-year term which commenced on March 2, 2018, 30 days after the completion of the Business Combination, and ~~simultaneous private placement~~will expire on February 2, 2023, or earlier upon redemption or liquidation. These sponsor warrants contain certain provisions that do not meet the criteria for equity classification and therefore must be recorded as liabilities. The liability for these warrants was recorded at fair value on the date of the Business Combination and are subsequently re-measured to fair value at each reporting date or exercise date with changes in the fair value included in earnings.

During the ~~nine~~six months ended ~~September~~June 30, 2021, 6.6 million sponsor warrants were exercised resulting in the issuance of 2.3 million shares of Class A common stock. There were no sponsor warrants exercised during the six months ended June 30, 2022. The 1.9 million sponsor warrants outstanding at ~~September~~June 30, 2022 and December 31, 2021 had a fair ~~value~~values of ~~$9.0 million. All of the public warrants were exercised during fiscal 2020.~~$0.1 million and $4.3 million, respectively.

~~The Company used public trading prices of the public warrants to determine their fair value.~~ The Company determined the fair value of the sponsor warrants using the Black Scholes model with the following assumptions:

	September 30,
	2021			2020			June 30, 2022			December 31, 2021
Trading price of common stock on measurement date	$	21.02		$	24.86		$	3.06		$	13.27
Exercise price	$	5.75		$	5.75		$	5.75		$	5.75
Risk free interest rate		0.09	%		0.13	%		2.51	%		0.39	%
Warrant life in years		1.3			2.3			0.6			1.1
Expected volatility		34.99	%		46.90	%		98.78	%		73.78	%
Expected dividend yield		—			—			—			—

During the three and ~~nine~~six months ended ~~September~~June 30, 2022, the Company recognized gains of $0.3 million and $4.3 million, respectively, and during the three and six months ended June 30, 2021, the Company recognized gains of ~~$5.4~~$4.9 million and ~~$19.4~~$14.0 million, respectively, in its condensed consolidated statements of operations related to decreases in the fair value of the sponsor warrants exercised during the respective periods or that were outstanding at the end of the respective period. For the three and nine months ended September 30, 2020, the Company recognized losses of $86.0 million and $169.3 million, respectively, in its condensed consolidated statements of operations related to increases in the fair value of the public and sponsor warrants exercised during the respective periods or that were outstanding at the end of the respective period.

~~10.~~12. Other Long-Term Liabilities

Other long-term liabilities consist of the following (in thousands):

	September 30,			December 31,			June 30,			December 31,
	2021			2020			2022			2021
Warranty accrual	$	13,135		$	8,397		$	17,709		$	15,013
Other		950			912			2,058			962
Total		14,085			9,309			19,767			15,975
Less: current portion of warranty accrual		(4,259	)		(2,806	)
Less – current portion of warranty accrual								(4,447	)		(3,914	)
Other long-term liabilities, net of current portion	$	9,826		$	6,503		$	15,320		$	12,061

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

~~11.~~13. Commitments and Contingencies

Warranty Liabilities

The Company provides a limited warranty on most of the products it sells. The estimated warranty costs, which are expensed at the time of sale and included in cost of revenues, are based on the results of product testing, industry and historical trends and warranty claim rates incurred, and are adjusted for any current or expected trends as appropriate. Actual warranty claim costs could differ from these estimates. The Company regularly assesses and adjusts the estimate of accrued warranty claims by updating claims rates for actual trends and projected claim costs. The Company classifies estimated warranty costs expected to be paid beyond a year as a long-term liability.

The Company had the following activity for warranty liabilities (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Balance at beginning of period	$	16,368		$	9,375		$	15,013		$	8,397
Additions charged to expense for current period sales		2,173			2,526			4,336			4,198
Deduction from reserves for current period claims		(832	)		(623	)		(1,640	)		(1,317	)
Balance at end of period	$	17,709		$	11,278		$	17,709		$	11,278

Required Member Distributions

Prior to the Business Combination and pursuant to the then applicable First Amended and Restated Limited Liability Company Agreement (the “First Purple LLC Agreement”), Purple LLC was required to distribute to its members an amount equal to 45 percent of Purple LLC’s net taxable income following the end of each fiscal year. The First Purple LLC Agreement was amended and replaced by the Second Amended and Restated Limited Liability Company Agreement (the “Second Purple LLC Agreement”) on February 2, 2018 as part of the Business Combination. The Second Purple LLC Agreement was amended and replaced by the Third Amended and Restated Limited Liability Company Agreement (the “Third Purple LLC Agreement”) on September 3, 2020. The Second Purple LLC Agreement and the Third Purple LLC Agreement do not include any mandatory distributions, other than tax distributions. During the ~~nine~~six months ended ~~September~~June 30, 2021, the Company paid ~~$1.0~~$0.9 million in tax distributions under the Third Purple LLC Agreement. There were no tax distributions paid during the six months ended June 30, 2022. At ~~September~~June 30, ~~2021,~~2022, the Company’s condensed consolidated balance sheet had ~~a minimal amount~~$0.1 million of accrued tax distributions included in other current ~~liabilities.~~

~~Service Agreement~~

In October 2017, the Company entered into an electric service agreement with the local power company in Grantsville, Utah. The agreement provided for the construction and installation of certain utility improvements to provide increased power capacity to the manufacturing and warehouse facility in Grantsville, Utah. The Company prepaid $0.5 million related to the improvements and agreed to a minimum contract billing amount over a 15-year period based on regulated rate schedules and changes in actual demand during the billing period. The agreement includes an early termination clause that requires the Company to pay a pro-rata termination charge if the Company terminates within the first 10 years of the service start date. The original early termination charge was $1.3 million and is reduced annually on a straight-line basis over the 10-year period. During 2018, the utility improvements construction was completed and were made available to the Company. As of September 30, 2021, the early termination penalty was $0.8 million and the Company expects to fulfill its commitments under the agreement in the normal course of business, and as such, no liability has been recorded.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

~~Indemnification Obligations~~

From time to time, the Company enters into contracts that contingently require it to indemnify parties against claims. These contracts primarily relate to provisions in the Company’s services agreements with related parties that may require the Company to indemnify the related parties against services rendered; and certain agreements with the Company’s officers and directors under which the Company may be required to indemnify such persons for liabilities.

Subscription Agreement and Preemptive Rights

In February 2018, in connection with the Business Combination, the Company entered into a subscription agreement with Coliseum Capital Partners (“CCP”) and Blackwell Partners LLC – Series A (“Blackwell”), pursuant to which CCP and Blackwell agreed to purchase from the Company an aggregate of 4.0 million shares of Class A Stock at a purchase price of $10.00 per share (the “Coliseum Private Placement”). In connection with the Coliseum Private Placement, the Sponsor assigned (i) an aggregate of 1.3 million additional shares of Class A ~~Stock~~common stock to CCP and Blackwell and (ii) an aggregate of 3.3 million warrants to purchase 1.6 million shares of Class A ~~Stock~~common stock to CCP, Blackwell, and Coliseum Co-Invest Debt Fund, L.P. (“CDF”). The subscription agreement provides CCP and Blackwell with preemptive rights with respect to future sales of the Company’s securities. It also provides them with a right of first refusal with respect to certain debt and preferred equity financings by the Company. The Company also entered into a registration rights agreement with CCP, Blackwell, and CDF, providing for the registration of the shares of Class A ~~Stock~~common stock issued and assigned to CCP and Blackwell in the Coliseum Private Placement, as well as the shares of Class A ~~Stock~~common stock underlying the warrants received by CCP, Blackwell and CDF. The Company has filed a registration statement with respect to such securities.

Rights of Securities Holders

The holders of certain warrants exercisable into Class A ~~Stock,~~common stock, including CCP, Blackwell and CDF, were entitled to registration rights pursuant to certain registration rights agreements of the Company as of the Business Combination date. In March 2018, the Company filed a registration statement registering these warrants (and any shares of Class A ~~Stock~~common stock issuable upon the exercise of the warrants), and certain unregistered shares of Class A ~~Stock.~~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 ~~Stock~~common stock held by them, including in underwritten offerings. In an underwritten offering of such warrants and shares of Class A ~~Stock~~common stock by the Coliseum Investors, the Company will pay underwriting discounts and commissions and certain expenses incurred by the Coliseum Investors.

On May 21, 2021, 7.3 million shares of Class A common stock were sold in a secondary offering by the Coliseum Investors at a price of $30.00 per share. The Company did not receive any of the proceeds from the secondary offering. The underwriting discount, commission and other related costs incurred by the Company for the secondary offering totaled $7.9 million and was recorded in May 2021 as general and administrative expense.

The holders of the Incremental Loan Warrants exercisable into Class A Stock were entitled to registration rights pursuant to the registration rights agreement of the Company in connection with the Amended and Restated Credit Agreement. In March 2019, the Company filed a registration statement registering these warrants (and any shares of Class A Stock issuable upon the exercise of the warrants). The registration statement was declared effective on May 17, 2019. On November 9, 2020, the Company issued 2.6 million shares of Class A common stock in exchange for the exercised Incremental Loan Warrants.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

On February 2, 2018, in connection with the closing of the Business Combination, the Company entered into a Registration Rights Agreement with InnoHold and the Parent Representative (the “InnoHold Registration Rights Agreement”). Under the InnoHold Registration Rights Agreement, InnoHold holds registration rights that obligate the Company to register for resale under the Securities Act, all or any portion of the Equity Consideration (including Class A Stock issued in exchange for the equity consideration received in the Business Combination) (the “Registrable Securities”). InnoHold is entitled to make a written demand for registration under the Securities Act of all or part of its Registrable Securities (up to a maximum of three demands in total). Pursuant to the InnoHold Registration Rights Agreement, the Company filed a registration statement on Form S-3 that was declared effective on November 8, 2019, pursuant to which InnoHold, Tony Pearce and Terry Pearce sold 11.5 million shares of Class A Stock. The Company filed a second registration statement on Form S-3 that was declared effective on May 14, 2020, pursuant to which InnoHold sold 12.4 million shares of Class A Stock. The Company filed a third and final registration statement on Form S-3 that was declared effective on September 9, 2020, pursuant to which InnoHold sold 16.8 million shares of Class A Stock.

Purple LLC Class B Unit Exchange Right

On February 2, 2018, in connection with the closing of the Business Combination, the Company entered into an exchange agreement with Purple LLC and InnoHold and Class B Unit holders who become a party thereto (the “Exchange Agreement”), which provides for the exchange of Purple LLC Class B Units (the “Class B Units”) and shares of Class B ~~Stock~~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 ~~Stock~~common stock at an initial exchange ratio equal to one Paired Security for one share of Class A ~~Stock~~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 ~~Stock~~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 ~~Stock~~common stock and Class B ~~Stock~~common stock or a transaction in which the Class A ~~Stock~~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 ~~Stock.~~common stock.

The right of a holder of Paired Securities to exchange may be limited by the Company if it reasonably determines in good faith that such restrictions are required by applicable law (including securities laws), such exchange would not be permitted under other agreements of such holder with the Company or its subsidiaries, including the Third Purple LLC Agreement, or if such exchange would cause Purple LLC to be treated as a “publicly traded partnership” under applicable tax laws.

The Company and each holder of Paired Securities shall bear its own expense regarding the exchange except that the Company shall be responsible for transfer taxes, stamp taxes and similar duties.

There were no Paired Securities exchanged for Class A common stock during the six months ended June 30, 2022. During the ~~nine~~six months ended ~~September~~June 30, 2021, ~~and 2020,~~ 0.1 million ~~and 30.8 million, respectively,~~ of Paired Securities were exchanged for shares of Class A ~~Stock.~~common stock.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Maintenance of One-to-One Ratios

The Third Purple LLC Agreement includes provisions intended to ensure that the Company at all times maintains a one-to-one ratio between (a) (i) the number of outstanding shares of Class A ~~Stock~~common stock and (ii) the number of Class A Units owned by the Company (subject to certain exceptions for certain rights to purchase equity securities of the Company under a “poison pill” or similar stockholder rights plan, if any, certain convertible or exchangeable securities issued under the Company’s equity compensation plan and certain equity securities issued pursuant to the Company’s equity compensation plan (other than a stock option plan) that are restricted or have not vested thereunder) and (b) (i) the number of other outstanding equity securities of the Company (including the warrants exercisable for shares of Class A ~~Stock)~~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:~~has designed their mattresses with the same look as the Purple mattresses (white mattress top, purple stripe, and grey bottom); used many of the marketing elements on Purple’s website (including a similar “exploded view” image of their mattress); and adopted the color purple as their dominant marketing color. Purple LLC is suing for a declaration that PerfectSense has infringed Purple LLC’s copyright and trademark rights and committed the tort of passing off. Purple LLC is asking for injunctive relief, damages, an accounting of profits, interest, costs, and delivery up or destruction of the infringing products (including delivery up of the www.purplesleep.ca domain). After filing the statement of claim, Purple LLC posted $15,000 CAD as security for PerfectSense’s costs. PerfectSense brought a motion to strike that was resolved on consent. Pleadings are now closed, and the action is proceeding under case management. Counsel for the defendant was removed from the record at their own request by Court Order. The Court further ordered the defendant to either appoint counsel or file a motion to permit an officer or director to represent the defendant in legal proceedings. On November 6, 2020, the defendant informally requested that the Court permit Mr. Henderson, the CEO and shareholder of the defendant, to represent the defendant in the action until such time as a lawyer could be appointed. Purple opposed this informal request, and it was denied by the Court. After granting PerfectSense a final extension of time to either appoint counsel or file a motion to permit Mr. Henderson to represent the defendant, PerfectSense appointed new counsel. The parties engaged in litigation discovery, exchanged affidavits of documents and scheduled examinations for discovery. Shortly thereafter, discovery adjourned and continues to be stayed while the parties negotiate formal terms of settlement. PerfectSense has not responded to Purple’s repeated attempts to finalize the settlement. Purple filed a motion to enforce a settlement agreement. The ~~Company believes settlement~~Court has directed the motion be heard before a Judge, which will ~~be finalized soon and the action then dismissed, but if not, Purple LLC will resume vigorously pursuing its claims.~~likely take place in September of 2022.

On September 20, 2020, Purple LLC filed a complaint in the U.S. Court of International Trade seeking to recover approximately $7.0 million of Section 301 duties paid at the time of importation on certain Chinese-origin goods. More than 4,000 other complaints have been filed by other companies seeking similar refunds. On March 12, 2021 the United States filed a master answer that applies to all the Section 301 cases, including Purple LLC’s. On July 6, 2021, the court granted a preliminary injunction against liquidation of any unliquidated entries. On April 1, 2022, the court issued an opinion that remanded the case back to the U.S. Trade Representative (“USTR”) to address certain procedural flaws in USTR’s process for determining whether certain products were subject to the Section 301 duties. On August 1, 2022, USTR issued its remand results. The court has not yet established a briefing schedule for comments on the remand results. If successful, this litigation could result in a refund of some or all of the Section 301 duties.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

On October 13, 2020, Purple LLC filed a lawsuit against Responsive Surface Technology, LLC and its parent company, PatienTech, LLC (collectively referred to as “ReST”) in the United States District Court for the District of Utah. The lawsuit arises from ReST’s multiple breaches of its obligations to Purple LLC, including infringing upon Purple LLC’s trademarks, patents, and trade dress, among other claims. Purple seeks monetary damages, injunctive relief, and declaratory judgment based on certain conduct by ReST (“Case I”). On October 21, 2020, shortly after the complaint was filed in Case I, ReST filed a retaliatory lawsuit against Purple LLC, Gary DiCamillo, Adam Gray, Joseph Megibow, Terry Pearce, and Tony Pearce, also in the United States District Court for the District of Utah (“Case II”). Subsequently, the two cases were consolidated into one. Case II (now combined with Case I) involves many of the same facts and transactions as Case I. On January 19, 2021, ReST filed a motion to compel arbitration of the claims in Case I. Purple LLC opposed the motion to compel arbitration, arguing that ReST waived any rights they may have had to arbitration and that all the claims in both cases should stay in the courts. However, the Court granted ReST’s motion to compel arbitration, and stayed the proceedings in the United States District Court for the District of Utah. Additionally, the Court ruled that ReST’s claims against the Purple board members were not subject to arbitration, and the Court stayed ReST’s claims against those individuals. Pursuant to the Court’s order, Purple filed a demand for arbitration with the American Arbitration Association (the “AAA”) on September 1, 2021. ReST filed its counterclaim with the AAA on September 21, ~~2021.~~2021.The parties have selected an arbitrator and they have agreed upon a scheduling order. Currently, the parties are in the fact discovery phase of the arbitration. The parties ~~are currently working with the AAA to select an arbitrator for the arbitration hearing. No date for the~~have scheduled several depositions and exchange documents and discovery requests. The arbitration hearing ~~has been set.~~is set to begin on April 17, 2023, and it will continue through April 28, 2023. Purple LLC seeks over $4 million in damages from ReST, whereas ReST claims that Purple is liable to it for tens of millions of dollars. The outcome of this litigation cannot be predicted at this ~~early~~ stage. However, Purple intends to vigorously pursue its claims and defend against the claims made by ReST.

On November 19, 2020, Purple LLC sued Advanced Comfort Technologies, Inc., dba Intellibed (“Intellibed”) in the U.S. District Court for the District of Utah for patent infringement, trademark infringement, trade secret misappropriation, and a number of related state law based claims. The principal allegations are that Intellibed has manufactured and sold unauthorized, infringing products under the Sleepy’s brand name owned by third-party Mattress Firm. Purple LLC also requested declaratory relief related to certain assignment terms of a license agreement in which Purple LLC is the licensor and Intellibed is the licensee. On December 14, 2020, Intellibed filed a motion to dismiss Counts I through XI of Purple LLC’s Complaint on the ground that these Counts fail to state a claim upon which relief can be granted. On December 15, 2020, Intellibed filed an Answer to Purple LLC’s complaint and also asserted against Purple LLC a total of eight counterclaims, including a number of declaratory judgment claims, breach of contract, and tortious interference claims. Intellibed’s main allegations are that its use of Purple LLC’s patents, trademark, and trade secrets in connection with Mattress Firm’s Sleepy’s products is authorized under the license agreement. On January 19, 2021, Purple LLC filed a motion to dismiss Intellibed’s fifth, sixth, seventh, and eighth counterclaims on the ground that these counterclaims fail to state a claim upon which relief can be granted. Briefing on Purple LLC’s partial motion to dismiss was completed on March 2, 2021. On January 19, 2021, Purple LLC also filed an Answer to Intellibed’s counterclaims, which were not subject to Purple LLC’s motion to dismiss. On January 27, 2021, Purple LLC filed a First Amended Complaint in response to Intellibed’s initial motion to dismiss. On February 10, 2021, Intellibed filed a motion to dismiss Counts I through XI of Purple LLC’s First Amended Complaint. Briefing on Intellibed’s partial motion to dismiss was completed on March 24, 2021. On September 28, 2021, the District Court dismissed Purple’s complaint without prejudice, and also dismissed ACTI’s counterclaim without prejudice, while the parties pursued dispute-resolution procedures set out in the license agreement. Because the Court found that the license agreement required the parties to follow the contractual dispute-resolution procedures prior to filing a lawsuit, Purple initiated those procedures in accordance with the license agreement and intends to continue to vigorously pursue its claims.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

On June 8, 2021, Serta Simmons Bedding, LLC (“SSB”) filed a Complaint against the Company in the Superior Court of Gwinnett County, Georgia, Case No. 21-A-04413-1 (the “Georgia Litigation”). SSB’s Complaint alleges that the Company intentionally interfered with SSB’s business and contractual relations and violated the Georgia Trade Secrets Act by hiring one of SSB’s former employees in the face of an allegedly valid 2015 noncompete agreement. SSB seeks compensatory damages, punitive damages, equitable relief, and attorneys’ fees as a result of the conduct alleged in the Complaint. SSB also initiated arbitration proceedings against its former employee who Purple LLC has agreed to indemnify, subject to certain conditions. On July 12, 2021, the Company filed an Answer to SSB’s Complaint in the Georgia Litigation, denying all allegations of unlawful conduct, and further moved to dismiss the Georgia Litigation on the grounds that Georgia is an inconvenient forum and the parties’ dispute should instead be litigated in Utah. The Company’s motion to dismiss is fully briefed and oral argument is scheduled to occur on October 26, 2021. The Court is expected to render a decision on the Company’s motion to dismiss in November 2021. On July 9, 2021, the Company filed its own Complaint in the Fourth Judicial District Court of Salt Lake County, Utah, Case No. 21040011 (the “Utah Litigation”), seeking: (1) a declaratory judgment that the arbitration clause in the former employee’s 2015 noncompete agreement is unenforceable, (2) a declaratory judgment that the restrictive covenants in the former employee’s 2015 noncompete agreement are unenforceable, and (3) an order enjoining arbitration proceedings initiated by SSB and currently pending against the former employee. The Company filed a motion for summary judgment on these claims on August 16, 2021. SSB filed an Answer on August 18, 2021. ~~The Company and SSB attended~~After attending a mediation, ~~on August 30, 2021 and~~ the parties ~~anticipate that~~entered in a settlement agreement on December 31, 2021 resolving all claims ~~between the parties will be resolved and that~~in the Georgia Litigation and Utah Litigation. The Company did not pay any monetary consideration to SSB in connection with the settlement agreement. On January 12, 2022, pursuant to the terms of the settlement agreement, SSB dismissed the Georgia Litigation without prejudice and the Company dismissed the Utah Litigation ~~will each be dismissed~~ without prejudice.

On May 3, 2022, the Company filed a Complaint against Photon Interactive UK Limited (“Photon”) in the U.S. District Court for the District of Delaware regarding a Master Professional Services Agreement with Photon dated on or around November 1, 2019. Pursuant to the agreement, Photon was required to rebuild Purple’s website architecture and checkout process. Purple paid Photon $0.9 million under the Agreement. However, Photon failed to deliver any of the required deliverables as specified in the agreement. Purple withheld payment of the final $0.1 million due pursuant to Photon’s invoices pending a resolution with Photon. Since resolution discussions with Photon have failed, Purple filed the aforementioned complaint for breach of contract against Photon seeking, among other damages, reimbursement for all amounts paid to under the agreement. It is anticipated that Photon will counter-sue for amounts they claim are owed.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

The Company is from time to time involved in various other claims, legal proceedings and complaints arising in the ordinary course of business. The Company does not believe that adverse decisions in any such pending or threatened proceedings, or any amount that the Company might be required to pay by reason thereof, would have a material adverse effect on the financial condition or future results of the Company.

~~12.~~14. Related Party Transactions

The Company had various transactions with entities or individuals which are considered related parties.

Coliseum Capital Management, LLC

Immediately following the Business Combination, Adam Gray was appointed to the Company’s Board of Directors (the “Board”). Mr. Gray is a manager of Coliseum Capital, LLC, which is the general partner of CCP and CDF, and he is also a managing partner of Coliseum Capital Management, LLC (“CCM”), which is the investment manager of Blackwell. Mr. Gray has voting and dispositive control over securities held by CCP, CDF and Blackwell which were also Lenders under the Amended and Restated Credit Agreement. In 2018, the Lenders agreed to make the Related Party Loan in an aggregate principal amount of $25.0 million pursuant to an agreement entered into as part of the Business Combination. In conjunction with this agreement, the Sponsor agreed to assign to the Lenders an aggregate of 2.5 million warrants to purchase 1.3 million shares of its Class A Stock. In 2019, the Incremental Lenders funded a $10.0 million increase in the Related Party LoanSee Note 13—Commitments and were granted 2.6 million warrants to purchase 2.6 million shares of the Company’s Class A Stock at a price of $5.74 per share, subject to certain adjustments. In accordance with an amendment to the Related Party Loan dated March 27, 2020, the Company did not make any cash interest payments to the Lenders during the firstContingencies—Subscription Agreement and second quarters of 2020. On September 3, 2020, the Company paid $45.0 million to retire, in full, the Related Party Loan. The payment included the $25.0 million original loan under the agreement, $10.0 million Preemptive Rights for the subsequent incremental loan, $6.6 million of paid-in-kind interest, $2.5 million in a prepayment fee and $0.9 million in accrued interest. In connection with the Business Combination, the Company entered into a subscription agreement with CCP and Blackwell, pursuant to which CCP and Blackwell agreed to purchase from the Company an aggregate of 4.0 million shares of Class A Stock at a purchase price of $10.00 per share (the “Coliseum Private Placement”)further discussion. In connection with the Coliseum Private Placement, the Sponsor assigned (i) an aggregate of 1.3 million additional shares of Class A Stock to CCP and Blackwell and (ii) an aggregate of 3.3 million warrants to purchase 1.6 million shares of Class A Stock to CCP, Blackwell, and CDF. The subscription agreement provides CCP and Blackwell with preemptive rights with respect to future sales of the Company’s securities. It also provides them with a right of first refusal with respect to certain debt and preferred equity financings by the Company. The Company also entered into a registration rights agreement with CCP, Blackwell, and CDF, providing for the registration of the shares of Class A Stock issued and assigned to CCP and Blackwell in the Coliseum Private Placement, as well as the shares of Class A Stock underlying the warrants received by CCP, Blackwell and CDF. The Company has filed a registration statement with respect to such securities.

In May 2020, pursuant to the terms of the warrant agreement upon the condition that Tony Pearce or Terry Pearce individually or together ceased to beneficially own at least 50% of the voting securities of the Company, the exercise price of the Incremental Loan Warrants was adjusted to zero. On November 9, 2020, the Company issued 2.6 million shares of Class A common stock in exchange for the Incremental Loan Warrants held by the Incremental Lenders.

Purple Founder Entities

TNT Holdings, LLC (herein “TNT Holdings”), EdiZONE, LLC, (herein EdiZONE an entity wholly owned by TNT Holdings) and InnoHold (collectively the “Purple Founder Entities”) were entities under common control with Purple LLC prior to the Business Combination. TNT Holdings and InnoHold are majority owned and controlled by Terry Pearce and Tony Pearce (the “Purple Founders”), who were appointed to the Company’s Board following the Business Combination. InnoHold was a majority shareholder of the Company until it sold a portion of its interests in a secondary public offering in May 2020 and the remainder of its interests in a secondary public offering in September 2020. The Purple Founders also resigned as employees of Purple LLC and retired from the Company’s Board in August 2020.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

TNT Holdings owned the Alpine facility Purple LLC has been leasing since 2010, and the Purple Founders informed Purple LLC that TNT Holdings recently transferred ownership to 123E LLC, an entity controlled by the Purple Founders. Effective as of October 31, 2017, Purple LLC entered into an Amended and Restated Lease Agreement with TNT Holdings. The Company determined that neither TNT Holdings nor 123E LLC are a VIE as neither the Company nor Purple LLC hold any explicit or implicit variable interest in TNT Holdings or 123E LLC and do not have a controlling financial interest in TNT Holdings or 123E LLC. Purple LLC incurred $0.2 million and ~~$0.2~~$0.4 million in rent expense to 123E LLC or TNT Holdings for the building lease of the Alpine facility for the three and six months ended ~~September~~June 30, ~~2021 and 2020,~~2022, respectively, and ~~$0.7~~$0.2 million and ~~$0.7~~$0.4 million for the ~~nine~~three and six months ended ~~September~~June 30, 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 3, 2021, Purple LLC gave notice to 123E LLC that it intended to exercise its right to an early termination of the lease to occur on September 30, 2022.

During the ~~nine~~six months ended ~~September~~June 30, 2021, certain current and former employees of Purple LLC who received distributions of Paired Securities from InnoHold exchanged 0.1 million of Paired Securities for Class A ~~Stock.~~common stock. There were no such exchanges during the six months ended June 30, 2022.

On November 9, 2018, Purple LLC and EdiZONE executed the Second Amended and Restated Confidential Assignment and License Back Agreement (the “Revised License Agreement”), pursuant to which EdiZONE assigned all of its comfort and cushioning intellectual property to Purple LLC and further limited the subset of such intellectual property licensed back to EdiZONE to only those uses that enabled EdiZONE to comply with its obligations under previously existing contracts, agreements and licenses. On August 14, 2020, Purple LLC entered into a separate agreement whereby EdiZONE, for consideration of $8.5 million, assigned a license agreement with Advanced Comfort Technologies, Inc., dba Intellibed (“Intellibed”), and related royalties payable thereunder, to Purple LLC, along with the trademarks GEL MATRIX and INTELLIPILLOW. In connection with such assignment, the Company agreed to indemnify EdiZONE against claims by Intellibed relating to EdiZONE’s breach under the agreement.

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 ~~Stock~~common stock and 0.5 million Class B Units otherwise issuable to InnoHold as equity consideration were deposited in an escrow account for up to three years from the date of the Business Combination pursuant to a contingency escrow agreement. In September 2020, an amendment to the escrow agreement was signed whereby the 0.5 million shares of Class B Stock and 0.5 million Class B Units held in escrow were exchanged for $5.0 million. On February 3, 2021, the Company received $4.1 million from InnoHold as reimbursement for amounts that qualified for indemnification from the $5.0 million being held in escrow. The remaining $0.9 million in escrow was returned to InnoHold. The amount received from InnoHold was recorded as additional paid-in capital in the condensed consolidated balance sheet.

During the ~~nine~~six months ended ~~September~~June 30, 2021, Purple LLC paid InnoHold through withholding payments directly to various states, an aggregate of $0.4 million in required tax distributions pursuant to the Third Purple LLC Agreement. There were no such payments made by Purple LLC during the six months ended June 30, 2022.

~~13.~~15. Stockholders’ Equity

Prior to the Business Combination, GPAC was a shell company with no operations, formed as a vehicle to effect a business combination with one or more operating businesses. After the Closing, the Company became a holding company whose sole material asset consists of its interest in Purple LLC.

Class A Common Stock

The Company has 210.0 million shares of Class A ~~Stock~~common stock authorized at a par value of $0.0001 per share. Holders of the Company’s Class A ~~Stock~~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 ~~the~~ Class A ~~Stock~~common stock and holders of ~~the~~ Class B ~~Stock~~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 ~~Stock~~common stock and Class B ~~Stock~~common stock are entitled to one vote per share on matters to be voted on by stockholders. At ~~September~~June 30, ~~2021, 66.4~~2022, 82.8 million shares of Class A ~~Stock~~common stock were outstanding.

In accordance with the terms of the Business Combination, approximately 1.3 million shares of Class A Stock were subject to vesting and forfeiture. The shares of Class A Stock subject to vesting will be forfeited eight years from the Closing, unless any of the following events (each a “Triggering Event”) occurs prior to that time:(i) the closing price of the Class A Stock on the principal exchange on which it is listed is at or above $12.50 for 20 trading days over a thirty trading day period (subject to certain adjustments), (ii) a change of control of the Company, (iii) a “going private” transaction by the Company pursuant to Rule 13e-3 under the Exchange Act or such other time as the Company ceases to be subject to the reporting obligations under Section 13 or 15(d) of the Exchange Act, or (iv) the time that the Company’s Class A Stock ceases to be listed on a national securities exchange. During fiscal 2020, a Triggering Event occurred as the closing price of the Class A Stock on the principal exchange on which it is listed was at or above $12.50 for 20 trading days over a thirty-trading day period. Accordingly, these shares of Class A Stock are no longer subject to vesting or forfeiture.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Class B Common Stock

The Company has 90.0 million shares of Class B ~~Stock~~common stock authorized at a par value of $0.0001 per share. Holders of the Company’s Class B ~~Stock~~common stock will vote together as a single class with holders of the Company’s Class A ~~Stock~~common stock on all matters properly submitted to a vote of the stockholders. Shares of Class B ~~Stock~~common stock may be issued only to InnoHold, their respective successors and assigns, as well as any permitted transferees of InnoHold. A holder ~~of Class B Stock~~ may transfer their shares of Class B ~~Stock~~common stock to any transferee (other than the Company) only if such holder also simultaneously transfers an equal number of such holder’s Purple LLC Class B Units to such transferee in compliance with the Third Purple LLC Agreement. The Class B ~~Stock~~common stock is not entitled to receive dividends, if declared by the Board, or to receive any portion of any such assets in respect of their shares upon liquidation, dissolution, distribution of assets or winding-up of the Company in excess of the par value of such stock.

In connection with the Business Combination, approximately 44.1 million shares of Class B ~~Stock~~common stock were issued to InnoHold as part of the equity consideration. InnoHold subsequently transferred a portion of its shares to permitted transfers and exchanged its remaining shares for Class A ~~Stock~~common stock that it sold. All of the 0.4 million shares of Class B ~~Stock~~common stock outstanding at ~~September~~June 30, ~~2021~~2022 were held by other parties.

Preferred Stock

The Company has 5.0 million shares of preferred stock authorized at a par value of $0.0001 per share. The preferred stock may be issued from time to time in one or more series. The directors are expressly authorized to provide for the issuance of shares of the preferred stock in one or more series and to establish from time to time the number of shares to be included in each such series and to fix the voting rights, designations and other special rights or restrictions. At ~~September~~June 30, ~~2021,~~2022, there were no shares of preferred stock outstanding.

~~Public and~~ Sponsor Warrants

There were ~~15.5 million public warrants issued in connection with GPAC’s formation and IPO and~~ 12.8 million sponsor warrants issued pursuant to a private placement simultaneously with the Company’s IPO. Each of the Company’s warrants entitles the registered holder to purchase one-half of one share of the Company’s Class A Stock at a price of $5.75 per half share ($11.50 per full share), subject to adjustment pursuant to the terms of the warrant agreement. Pursuant to the warrant agreement, a warrant holder may exercise its warrants only for a whole number of shares of the Class A Stock. For example, if a warrant holder holds one warrant to purchase one-half of one share of Class A Stock, such warrant will not be exercisable. If a warrant holder holds two warrants, such warrants will be exercisable for one share of the Class A Stock. In no event will the Company be required to net cash settle any warrant. The warrants have a five-year term which commenced on March 2, 2018, 30 days after the completion of the Business Combination, and will expire on February 2, 2023, or earlier upon redemption or liquidation.

The Company may call the warrants for redemption if the reported last sale price of the Class A ~~Stock~~common stock equals or exceeds $24.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date the Company sends the notice of redemption to the warrant holders; provided, however, that the sponsor warrants are not redeemable by the Company so long as they are held by the Sponsor or its permitted transferees. In addition, ~~with respect to the sponsor warrants,~~ so long as such sponsor warrants are held by the Sponsor or its permitted transferee, the holder may elect to exercise the sponsor warrants on a cashless basis, by surrendering their sponsor warrants for that number of shares of Class A ~~Stock~~common stock equal to the quotient obtained by dividing (x) the product of the number of shares of Class A ~~Stock~~common stock underlying the sponsor warrants, multiplied by the difference between the exercise price of the ~~Sponsor Warrants~~sponsor warrants and the “fair market value” (defined below), by (y) the fair market value. The “fair market value” means the average reported last sale price of the Class A ~~Stock~~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. ~~All other terms, rights and obligations of the sponsor warrants remain the same as the public warrants.~~

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

~~On October 27, 2020,~~There were no sponsor warrants exercised during the Company provided notice to the holders of the public warrants that the Company was exercising its right under the terms of the Public Warrants to redeem such warrants by paying to the warrant holders the redemption price of $0.01 per warrant on Novembersix months ended June 30, 2020. Any exercise of the warrants prior to that date was to be done on a cashless basis, in accordance with the terms of the warrants. All of the public warrants were exercised or redeemed by November 30, 2020.

2022. During the ~~nine~~six months ended ~~September~~June 30, 2021, 6.6 million sponsor warrants were exercised resulting in the issuance of 2.3 million shares of Class A common stock. ~~At September 30, 2021, there~~There were 1.9 million sponsor warrants outstanding ~~all of which were sponsor warrants.~~

~~Incremental Loan Warrants~~

In connection with the Amended and Restated Credit Agreement, the Company issued to the Incremental Lenders 2.6 million Incremental Loan Warrants to purchase 2.6 million shares of the Company’s Class A Stock. Each Incremental Loan Warrant entitled the registered holder to purchase one share of the Company’s Class A Stock at a price of $5.74 per share, subject to adjustment pursuant to the terms of the warrant agreement. In May 2020, Tony Pearce and Terry Pearce individually or together ceased to beneficially own at least 50% of the voting securities of the Company. As a result, the exercise price of the warrants was reduced to zero based on the formula established in the agreement.

On October 27, 2020, the Company provided notice to the holders of the Incremental Loan Warrants that the Company was exercising its right to redeem such warrants by paying to the warrant holders the redemption price of $0.01 per warrant on NovemberJune 30, 2020. Any exercise of the warrants prior to that date was to be done on a cashless basis, in accordance with the terms of the warrants. On November 9, 2020, upon the exercise of all the Incremental Loan Warrants, the Company issued 2.6 million shares of Class A common stock in exchange for the Incremental Loan Warrants held by the Incremental Lenders.2022.

Noncontrolling Interest

Noncontrolling interest (“NCI”) is the membership interest in Purple LLC held by holders other than the Company. Upon the close of the Business Combination, and at December 31, 2018, InnoHold’s and other Class B Unit holders’ combined NCI percentage in Purple LLC was approximately 82%. At ~~September~~June 30, ~~2021,~~2022, the combined NCI percentage in Purple LLC was ~~approximately 1%~~0.5%. The Company has consolidated the financial position and results of operations of Purple LLC and reflected the proportionate interest held by all such Purple LLC Class B Unit holders as NCI.

~~14.~~16. Income Taxes

At each interim period, the Company estimates its forecasted full-year effective tax rate. That forecasted rate is applied to year-to-date ordinary income or loss to compute the year-to-date income tax provision. In order to compute the annual effective tax rate, the Company estimates its full year ordinary income and total tax provision, including both current and deferred taxes.

For annual periods, the Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that the deferred tax assets will be realized. Deferred tax assets and liabilities are calculated by applying existing tax laws and the rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change. Our effective tax rate is primarily impacted by the allocation of income taxes to the noncontrolling interest and the non-taxable nature of the change in fair value of the warrant liability.

The Company’s sole material asset is Purple LLC, which is treated as a partnership for U.S. federal income tax purposes and for purposes of certain state and local income taxes. Purple LLC’s net taxable income and any related tax credits are passed through to its members and are included in the members’ tax returns, even though such net taxable income or tax credits may not have actually been distributed. While the Company consolidates Purple LLC for financial reporting purposes, the Company will be taxed on its share of earnings of Purple LLC not attributed to the noncontrolling interest holders, which will continue to bear their share of income tax on its allocable earnings of Purple LLC. The income tax burden on the earnings taxed to the noncontrolling interest holders is not reported by the Company in its consolidated financial statements under GAAP. As a result, the Company’s effective tax rate differs from the statutory rate. The primary factors impacting ~~the~~ expected tax are ~~the allocation of tax benefit to noncontrolling interest and the non-taxable nature of~~ the change in fair value of the warrant ~~liability.~~liabilities and remeasurement of deferred taxes primarily as a result of the change in the estimated state tax rate.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Prior to the second quarter of 2020, the Company maintained a full valuation allowance on its net deferred tax assets which are comprised primarily of basis differences in Purple LLC. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income sufficient to utilize the deferred tax assets on income tax returns. In periods prior to the second quarter of 2020, management made the determination that its net deferred tax assets were not more likely than not going to be realized because the Company was in a three-year cumulative loss position and the generation of future taxable income was uncertain. Considering this and other factors, the Company maintained a full valuation allowance of $44.3 million through the period ending March 31, 2020.

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 during 2020 and recorded as an income tax benefit. The deferredDeferred tax assets at ~~September~~June 30, ~~2021~~2022 totaled ~~$214.0~~$224.0 million, which is net of a ~~$70.8~~$93.7 million valuation allowance that has been recorded against the residual outside partnership basis for the amount the Company believes is not more likely than not realizable. As a result, there was an overall increase of ~~$18.8~~$23.8 million in the valuation allowance from December 31, ~~2020~~2021 to ~~September~~June 30, ~~2021,~~2022, primarily as a result of an increase in the residual outside partnership basis.

The Company currently estimates its annual effective income tax rate to be ~~7.53%~~21.6%. The annualized effective tax rate for the Company differs from the federal rate of 21% primarily due to the non-taxable nature of the change in fair value of the warrant ~~liability~~liabilities and state and local income taxes.

For the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, the Company has recorded an income ~~tax expense~~benefit of ~~$1.0~~$6.0 million. The effective tax rate for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was ~~3.77%, which~~21.4%. This is less than the federal statutory rate ~~because~~due primarily to a reduction of deferred tax assets associated with adjustments for stock based compensation and the gain ~~related~~relating to the change in fair value of the warrant liability is excluded from taxable income for income tax purposes.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (2017 Tax Act). Corporate taxpayers may carryback net operating losses (NOLs) originating during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act.

On March 11, 2021, Congress passed, and the President signed into law, the American Rescue Plan Act, 2021 (the “ARP”), which includes certain business tax provisions. At this point the Company does not believe that these changes will have a material impact on its income tax provision for 2021. The Company will continue to evaluate the impact of new legislation on its financial position, results of operations, and cash flows.

In connection with the Business Combination, the Company entered into a tax receivable agreement with InnoHold, which provides for the payment by the Company to InnoHold of 80% of the net cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes (or is deemed to realize in certain circumstances) in periods after the Closing as a result of (i) any tax basis increases in the assets of Purple LLC resulting from the distribution to InnoHold of the cash consideration, (ii) the tax basis increases in the assets of Purple LLC resulting from the redemption by Purple LLC or the exchange by the Company, as applicable, of Class B Paired Securities or cash, as applicable, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, payments it makes under the ~~tax receivable~~ agreement.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

As noncontrolling interest holders exercise their right to exchange or cause Purple LLC to redeem all or a portion of their Class B Units, a 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 ~~tax receivable agreement~~ liability to be recorded will depend on the price of the Company’s Class A ~~Stock~~common stock at the time of the relevant redemption or exchange.

The estimation of liability under the tax receivable agreement is by its nature imprecise and subject to significant assumptions regarding the amount and timing of future taxable income. As a result of the initial merger transaction, ~~and~~ the subsequent exchanges of Class B Units for Class A ~~Stock,~~common stock and changes in estimates relating to the expected tax benefits associated with the liability under the agreement, the potential future tax receivable agreement liability ~~is $171.5 million. Of~~was $162.2 million and $168.1 million as of June 30, 2022 and December 31, 2021, respectively. The reduction in the June 30, 2022 tax receivable agreement liability ~~recorded during the nine months ended September 30, 2021, $0.8~~reflected a payment of $5.8 million ~~relates to current year exchanges and was recorded as an adjustment to stockholders’ equity and $0.6 million was recorded as income~~made in ~~the condensed consolidated statement of operations to reflect the impact of recording the 2020 provision to return adjustments.~~January 2022.

~~The~~As of December 31, 2021, the Company ~~has no~~estimated $10.0 million of U.S. federal and $2.7 million of state net operating loss carryforwards available to reduce future taxable income. The federal net operating losses may be carried forward indefinitely for U.S. federal tax purposes, while some state carryforwards are subject to expiration beginning in 2026. It is possible that we will not generate taxable income in time to use all or a portion of these net operating loss ~~(“NOL”)~~ carryforwards ~~after~~before their expiration or at all. Additionally, the Company may be subject to the NOL utilization provisions of Section 382 of the ~~remaining~~Internal Revenue Code of 1986, as amended due to ownership changes that may have occurred previously or that could occur in the future. The effect of an ownership change may be the imposition of an annual limitation on the use of NOL carryforwards attributable to periods before the change. The amount of the annual limitation depends upon the value of the Company immediately before the change, changes to the Company’s capital during a specified period prior to the change, and the federal published interest rate. As of June 30, 2022, the Company has not completed its analyses in ~~2020.~~respect of Section 382 to determine whether a change in ownership has occurred, the annual limitation, if any, or whether any of the tax attributes are subject to a permanent limitation. Until an analysis is completed, there can be no assurance that the existing net operating loss carry-forwards or credits are not subject to significant limitation.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

The effects of uncertain tax positions are recognized in the consolidated financial statements if these positions meet a “more-likely-than-not” threshold. For those uncertain tax positions that are recognized in the consolidated financial statements, liabilities are established to reflect the portion of those positions it cannot conclude “more-likely-than-not” to be realized upon ultimate settlement. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of income. Accrued interest and penalties would be included on the related tax liability line in the consolidated balance sheet. As of ~~September~~June 30, ~~2021,~~2022, no uncertain tax positions were recognized as liabilities in the condensed consolidated financial statements.

~~15.~~17. Net Income (Loss) Per Common Share

Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of Class A stock outstanding during each period. Diluted net income (loss) per share reflects the weighted-average number of common shares outstanding during the period used in the basic net income (loss) computation plus the effect of common stock equivalents that are dilutive.

The following table sets forth the calculation of basic and diluted weighted average shares outstanding and earnings (loss) per share for the periods presented (in thousands, except per share amounts):

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020			2022			2021			2022			2021
Numerator:
Net income (loss) attributable to Purple Innovation, Inc.-basic	$	2,171		$	(87,013	)	$	25,573		$	(163,453	)	$	(8,340	)	$	2,578		$	(21,842	)	$	23,402
Less: Dilutive effect of change in fair value – warrant liabilities		(5,362	)		—			(19,369	)		—
Less: Net loss attributed to noncontrolling interest		(44	)		—			—			—
Less – dilutive effect of change in fair value of warrant liabilities														—			(4,860	)		—			(14,007	)
Less – net loss attributed to noncontrolling interest														(70	)		—			(199	)		—
Net income (loss) attributable to Purple Innovation, Inc.-diluted	$	(3,235	)	$	(87,013	)	$	6,204		$	(163,453	)	$	(8,410	)	$	(2,282	)	$	(22,041	)	$	9,395
Denominator
Weighted average shares—basic		66,335			44,266			65,741			32,117			82,703			66,277			74,924			65,439
Add: Dilutive effect of equity awards		504			—			2,578			—
Add: Dilutive effect of Class B shares		448			—			—			—
Add – dilutive effect of equity awards														—			—			—			1,499
Add – dilutive effect of warrants														—			587			—			1,403
Add – dilutive effect of Class B shares														448			—			448			—
Weighted average shares—diluted		67,287			44,266			68,319			32,117			83,151			66,864			75,372			68,341
Net income (loss) per common share:
Basic	$	0.03		$	(1.97	)	$	0.39		$	(5.09	)	$	(0.10	)	$	0.04		$	(0.29	)	$	0.36
Diluted	$	(0.05	)	$	(1.97	)	$	0.09		$	(5.09	)	$	(0.10	)	$	(0.03	)	$	(0.29	)	$	0.14

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

For the three and six months ended ~~September~~June 30, ~~2021,~~2022, the Company excluded ~~1.3~~3.3 million ~~shares~~and 3.5 million, respectively, of Class A ~~Stock~~common shares issuable upon conversion of certain warrants, stock options, restricted stock and Class A shares subject to vesting as the effect was anti-dilutive. For the ~~nine~~three and six months ended ~~September~~June 30, 2021, the Company excluded 0.4 million and 0.5 million, ~~of Paired Securities convertible into an equal number of Class A shares as the effect was anti-dilutive. For the three months ended September 30, 2020, the Company excluded 10.0 million~~respectively, of Paired Securities convertible into shares of Class A Stock and 10.4 million shares of Class A Stock issuable upon conversion of certain Company warrants, stock options and Class A shares subject to vesting as the effect was anti-dilutive. For the nine months ended September 30, 2020, the Company excluded 21.6 million of Paired Securities convertible into shares of Class A Stock and 7.1 million shares of Class A Stock issuable upon conversion of certain Company warrants, stock options and Class A shares subject to vesting as the effect was anti-dilutive.

~~16.~~18. Equity Compensation Plans

2017 Equity Incentive Plan

The Purple Innovation, Inc. 2017 Equity Incentive Plan (the “2017 Incentive Plan”) provides for grants of stock options, stock appreciation rights, restricted stock units and other stock-based awards. Directors, officers and other employees and subsidiaries and affiliates, as well as others performing consulting or advisory services for the Company and its subsidiaries, will be eligible for grants under the 2017 Incentive Plan. As of ~~September~~June 30, ~~2021,~~2022, an aggregate of ~~1.8~~1.0 million shares ~~remain~~are available for issuance or use under the 2017 Incentive Plan.

Class A Stock Awards

In May ~~2021,~~2022, 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 issued 0.1 million shares of Class A common stock and recognized $0.6 million in expense during the ~~nine~~three months ended ~~September~~June 30, ~~2021~~2022, which represented the fair value of the stock ~~award~~awards on the grant date.

Employee Stock Options

In March ~~2021,~~and June 2022, the Company granted 0.5 million and 0.1 million stock options, respectively, under the ~~Company’s~~ 2017 ~~Equity~~ Incentive Plan to ~~certain management of the Company. The stock options have~~its chief executive officer at an exercise price of ~~$32.28~~$6.82 per option. The stock options expire in five years and vest over a ~~four-year~~three-year period. ~~The estimated fair value~~In April 2022, with the chief executive officer’s consent, the Company rescinded and cancelled 0.4 million of the stock options ~~less expected forfeitures, is amortized over~~granted in March 2022 because of annual limits set forth in the ~~options vesting period on a straight-line basis.~~2017 Incentive Plan. The Company determined the fair value of ~~these~~the net award of 0.2 million stock options to be $0.4 million which will be expensed on a straight-line basis over the vesting period.

The Company determined the fair value of the options granted during the six months ended June 30, 2022 using the Black Scholes method with the following weighted average assumptions:

Fair market value	$	11.71		$	2.02
Exercise price	$	32.28		$	6.82
Risk free interest rate		0.45	%		2.67	%
Expected term in years		3.46			3.45
Expected volatility		52.46	%		54.22	%
Expected dividend yield		—			—

The following table summarizes the Company’s total stock option activity for the ~~nine~~six months ended ~~September~~June 30, ~~2021:~~2022:

	Options (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years		Intrinsic Value (in thousands)		Options (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years		Intrinsic Value (in thousands)
Options outstanding as of January 1, 2021		2,234		$	8.71		3.5	$	54,133
Options outstanding as of January 1, 2022											1,552		$	8.65		1.9	$	8,667
Granted		55			32.28		—		—		594			6.82		—		—
Exercised		(128	)		8.14		—		—		(20	)		8.32		—		—
Forfeited/cancelled		(154	)		8.56		—		—		(545	)		8.11		—		—
Options outstanding as of September 30, 2021		2,007		$	9.40		2.7	$	24,056
Options outstanding as of June 30, 2022											1,581		$	8.15		1.7	$	—

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Outstanding and exercisable stock options as of ~~September~~June 30, ~~2021~~2022 are as follows:

		Options Outstanding				Options Exercisable							Options Outstanding				Options Exercisable
Exercise Prices	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)		Exercise Prices	Number of Options Outstanding (in thousands)		Weighted Average Remaining Life (Years)		Number of Options Exercisable (in thousands)		Weighted Average Remaining Life (Years)		Intrinsic Value (in thousands)
$	5.75		210		2.4		121		2.4	$	1,855	5.75		158		0.3		158		0.3	$	—
	5.95		538		2.0		392		2.0		5,912	5.95		426		0.4		426		0.4		—
	6.51		241		2.6		130		2.6		1,885	6.51		196		1.9		152		1.9		—
	6.65		173		2.6		90		2.6		1,289	6.65		173		1.9		127		1.9		—
	7.99		19		3. 2		8		3.2		106	6.82		205		4.8		—		—		—
	8.17		24		0.2		24		0.2		310	7.99		19		2.4		13		2.4		—
	8.32		187		2.8		72		2.8		912	8.32		108		2.0		68		2.0		—
	8.55		179		3.0		86		3.0		1,072	8.55		97		0.4		97		0.7		—
	12.76		25		3.5		9		3.5		77	13.12		110		2.4		72		2.1		—
	13.12		174		3.5		68		3.3		540	15.12		2		0.2		2		0.2		—
	15.12		3		3.6		1		3.6		7	21.70		52		0.4		52		0.4		—
	21.70		179		4.0		—		—		—	32.28		35		3.7		12		3.7		—
	32.28		55		4.5		—		—		—

The following table summarizes the Company’s unvested stock option activity for the ~~nine~~six months ended ~~September~~June 30, ~~2021:~~2022:

	Options (in thousands)			Weighted Average Grant Date Fair Value		Options (in thousands)			Weighted Average Grant Date Fair Value
Nonvested options as of January 1, 2021		1,568		$	3.20
Nonvested options as of January 1, 2022							416		$	3.60
Granted		55			11.71		594			3.41
Vested		(464	)		2.18		(125	)		3.30
Forfeited		(154	)		1.86		(482	)		2.73
Nonvested options as of September 30, 2021		1,005		$	4.33
Nonvested options as of June 30, 2022							403		$	2.84

The estimated fair value of Company stock options ~~less expected forfeitures,~~ is amortized over the options vesting period on a straight-line basis. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, the Company recognized stock option expense of ~~$0.4~~$0.2 million and ~~$1.3~~$0.3 million, respectively. The Company recorded stock option expense of ~~$0.3~~$0.5 million and $0.9 million during the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, respectively.

As of ~~September~~June 30, ~~2021,~~2022, outstanding stock options had ~~$3.7~~$1.1 million of unrecognized stock compensation cost with a remaining recognition period of 2.0 years.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Employee Restricted Stock Units

~~During the first nine months of 2021,~~In March and June 2022, the Company granted 0.5 million and 0.1 million restricted stock units, respectively, under the 2017 Incentive Plan to the Company’s chief executive officer. These restricted stock awards had a grant date fair value of $6.32 and $4.81 per share, respectively. In April 2022, with the chief executive officer’s consent, the Company rescinded and cancelled 0.4 million of the restricted stock units granted in March 2022 because of annual limits set forth in the 2017 Incentive Plan. The estimated fair value of the net award of 0.2 million restricted stock units is being recognized on a straight-line basis over the three-year vesting period.

During the second quarter of 2022, the Company granted 1.1 million restricted stock units under the ~~Company’s~~ 2017 ~~Equity~~ Incentive Plan to certain management of the Company. Approximately ~~half~~one-half of the restricted stock units granted included a market vesting condition. The restricted stock awards that dodid not have ~~the~~a market vesting condition had a weighted average grant date fair value of ~~$27.80~~$5.53 per share. The estimated fair value of these awards is recognized on a straight-line basis over the ~~four-year~~ vesting period. For those awards that include a market vesting condition, the estimated fair value of the restricted stock was measured on the grant date and incorporated the probability of vesting occurring. The estimated fair value is recognized over the derived service period (as determined by the valuation model), with such recognition occurring regardless of whether the market condition is met. The Company determined the weighted average grant date fair value of the awards with the market vesting condition to be ~~$18.29~~$3.68 per share using a Monte Carlo Simulation of a Geometric Brownian Motion stock path model with the following weighted average assumptions:

Trading price of common stock on measurement date	$	27.59		$	5.34
Risk free interest rate		0.34	%		2.64	%
Expected life in years		2.6			2.9
Expected volatility		77.2	%		84.3	%
Expected dividend yield		—			—

The following table summarizes the Company’s restricted stock unit activity for the ~~nine~~six months ended ~~September~~June 30, ~~2021:~~2022:

	Number Outstanding (in thousands)		Weighted Average Grant Date Fair Value		Number Outstanding (in thousands)			Weighted Average Grant Date Fair Value
Nonvested restricted stock units as of January 1, 2021		—	$	—
Nonvested restricted stock units as of January 1, 2022						165		$	17.84
Granted		111		23.39		1,181			4.77
Vested		—		—		(31	)		18.52
Forfeited		—		—		(68	)		12.19
Nonvested restricted stock units as of September 30, 2021		111	$	23.39
Nonvested restricted stock units as of June 30, 2022						1,247		$	5.75

The Company recorded restricted stock unit expense of ~~$0.3~~$0.5 million and ~~$0.3~~$0.9 million during the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, respectively. There ~~was~~were no restricted stock ~~unit~~units outstanding and no expense recorded ~~in 2020.~~during the six months ended June 30, 2021.

As of June 30, 2022, outstanding restricted stock units had $6.4 million of unrecognized stock compensation cost with a remaining recognition period of 2.6 years.

PURPLE INNOVATION, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

~~InnoHold Incentive Units~~

In January 2017, pursuant to the 2016 Equity Incentive Plan approved by InnoHold and Purple LLC that authorized the issuance of 12.0 million incentive units, Purple LLC granted 11.3 million incentive units to Purple Team LLC, an entity for the benefit of certain employees who were participants in that plan. In conjunction with the Business Combination, Purple Team LLC was merged into InnoHold with InnoHold being the surviving entity and the Purple Team LLC incentive units were cancelled and new incentive units were issued by InnoHold under its own limited liability company agreement (the “InnoHold Agreement”). On February 8, 2019, InnoHold initiated a tender offer to each of these incentive unit holders, some of which are current employees of Purple LLC, to distribute to each a pro rata number of 2.5 million Paired Securities held by InnoHold in exchange for the cancellation of their ownership interests in InnoHold. All InnoHold incentive unit holders accepted the offer, and the terms and distribution of each transaction were finalized and closed on June 25, 2019. At the closing of the tender offer, those incentive unit holders received, based on their pro rata holdings of InnoHold Class B Units, a portion of 2.5 million Paired Securities held by InnoHold. As of September 30, 2021, 0.4 million of the Paired Securities remain to be exchanged for Class A Stock by the incentive unit holders.

Aggregate Non-Cash Stock-Based Compensation

The Company has accounted for all stock-based compensation under the provisions of ASC 718 Compensation—Stock ~~Compensation.~~Compensation. This standard requires the Company to record a non-cash expense associated with the fair value of stock-based compensation over the requisite service period.

The following table ~~below~~ summarizes the aggregate non-cash stock-based compensation recognized in the statement of operations for stock awards, employee stock options and employee restricted stock ~~units.~~units (in thousands):

(in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
Non-Cash Stock-Based Compensation	2021		2020		2021		2020
									Three Months Ended June 30,				Six Months Ended June 30,
									2022		2021		2022		2021
Cost of revenues	$	119	$	44	$	208	$	124	$	104	$	44	$	170	$	89
Marketing and sales		209		76		427		224		266		114		403		218
General and administrative		414		181		1,689		840		861		951		1,184		1,275
Research and development		23		46		33		371		44		4		60		10
Total non-cash stock-based compensation	$	765	$	347	$	2,357	$	1,559	$	1,275	$	1,113	$	1,817	$	1,592

~~17.~~19. Employee Retirement Plan

In July 2018 the Company established a 401(k) plan that qualifies as a deferred compensation arrangement under Section 401 of the IRS Code. All eligible employees over the age of 18 and with 4 months’ service are eligible to participate in the plan. The plan provides for Company matching of employee contributions up to 5% of eligible earnings. Company contributions immediately vest. The Company’s matching contribution expense was ~~$0.8~~$0.9 million and ~~$0.5~~$1.9 million for the three and six months ended ~~September~~June 30, ~~2021 and 2020,~~2022, respectively, and ~~$2.3~~$0.8 million and ~~$1.7~~$1.6 million for the ~~nine~~three and six months ended ~~September~~June 30, 2021, ~~and 2020,~~ respectively.

~~18.~~20. Subsequent Events

On October 11, 2021, Purple LLC sued The Sleep Company, an Indian private limited company, in Delhi High court case CS(COMM) 517/2021, for among other things infringement of Purple LLC’s intellectual property. On October 12, 2021, the Delhi High Court awarded Purple LLC a limited injunction against The Sleep Company for its infringement. Further legal proceedings are pending, and the Company intends to vigorously pursue its claims against The Sleep Company.

On November 8, 2021, Purple LLC and Mattress Firm agreed to terminate the Master Retailer Agreement (the “Agreement”) dated September 18, 2018 between Purple and Mattress Firm. The Agreement was replaced by a new Master Retailer Agreement with terms consistent with the Company’s standard retailer agreement. The replacement agreement eliminates all of the prior exclusivity arrangements.

On ~~November 8, 2021, pursuant to the 2020 Credit Agreement,~~July 20, 2022, the Company ~~provided~~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 ~~KeyBank National Association requesting~~be effective September 30, 2022 and extended the term such that the lease will remain in effect until September 30, 2023.

On August 5, 2022, the Company filed a ~~$55.0 million draw on~~Complaint with the ~~revolving line~~United States International Trade Commission (“ITC”) against numerous entities and individuals from the People’s Republic of ~~credit, which represents~~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 ~~full amount available~~proposed Respondents are violating 19 U.S.C. § 1337 (“Section 337”) by importing into the United States, selling for importation into the United States, and/or selling in the United States after importation pillow and seat cushion products that infringe Purple’s trade dress rights or otherwise constitute unfair competition, infringe a certain Purple design patent, infringe Purple trademarks, and/or infringe Purple utility patents. The Complaint requests that the ITC issue at least the following relief: (i) a General Exclusion Order excluding from entry into the United States all pillow and seat cushion products that infringe any asserted Purple intellectual property right; (ii) Limited Exclusion Orders excluding from entry into the United States all pillow and cushion products of the proposed Respondents named in the Complaint that infringe any asserted Purple intellectual property right; and (iii) Cease and Desist Orders against the proposed Respondents named in the Complaint barring them from marketing, selling, advertising, or distributing infringing products in the United States, including via on-line retailers. The ITC is currently determining whether to institute an unfair import investigation under ~~the revolving line of credit. The initial borrowing rate will be 3.50%, based on the LIBOR floor of 0.5% plus 3.00%.~~Section 337 in connection with Purple’s Complaint.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to provide a more comprehensive review of the operating results and financial condition of Purple Innovation, Inc. than can be obtained from reading the Unaudited Condensed Consolidated Financial Statements alone. The discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and the notes thereto included in “Part I. Item 1. Financial Statements.”

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that represent our current expectations and beliefs. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws. In some cases, you can identify these statements by forward-looking words such as “believe,” “expect,” “project,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “will,” “would,” “could,” “may,” “might,” the negative of these words and other similar words.

All forward-looking statements included in this Quarterly Report are made only as of the date thereof. It is routine for our internal projections and expectations to change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end of the next quarter or year. ~~Investors~~In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses (including the discussion under the heading “Outlook for Growth”), and other characterizations of future events or circumstances are forward-looking statements.

We caution and advise readers that these statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those included in the “Risk Factors” section of this Quarterly Report and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2022. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements and investors are cautioned not to place undue reliance on any such ~~forward-looking~~ statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.

We caution and advise readers that these statements are based on assumptions that may not be realized and involve risks and uncertainties that could cause actual results to differ materially from the expectations and beliefs contained herein. These risks include, among others, the evolving impact and duration of the COVID-19 pandemic, global supply chain issues, including increased shipping, material, and labor costs, and the impact of production and delivery issues on demand for our products. For a summary of these risks, see the risk factors included in the “Risk Factors” section in this Quarterly Report and in our Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on May 10, 2021.

Overview of Our Business

Our mission is to ~~help people feel and live~~improve the lives of our consumers by delivering innovative better ~~through innovative comfort~~sleep solutions.

We are a digitally-native vertical brand founded on comfort product innovation with premium offerings. We design and manufacture a variety of innovative, branded and premium comfort products, including mattresses, pillows, cushions, frames, sheets, and other products. Our products are the result of over 30 years of innovation and investment in proprietary and patented comfort technologies and the development of our own manufacturing processes. Our proprietary gel technology, Hyper-Elastic Polymer, underpins many of our comfort products and provides a range of benefits that differentiate our offerings from other competitors’ products. We market and sell our products directly to consumers through our ~~DTC online~~e-commerce and Purple retail showroom channels and through our retail brick-and-mortar wholesale ~~partners, Company showrooms and third-party online retailers.~~partner channel.

Organization

Our business consists of Purple Inc. and its consolidated subsidiary, Purple LLC. Purple Inc. was incorporated in Delaware on May 19, 2015 as a special purpose acquisition company under the name of GPAC. On February 2, 2018, Purple Inc. consummated a transaction structured similar to a reverse recapitalization ~~(the “Business Combination”)~~ pursuant to which Purple Inc. acquired an equity interest in Purple LLC and became its sole managing member. As the sole managing member of Purple LLC, Purple Inc., through its officers and directors, is responsible for all operational and administrative decision making and control of the day-to-day business affairs of Purple LLC without the approval of any other member. In connection with the Business Combination, InnoHold retained an 82% economic interest in Purple LLC. InnoHold subsequently transferred a portion of its Class B Units to permitted transferees and exchanged its remaining shares for shares of Class A Stock that it sold. At ~~September~~June 30, ~~2021,~~2022, Purple Inc. had a ~~99%~~99.5% economic interest in Purple LLC while other Class B Unit holders had the remaining ~~1%.~~0.5%

~~COVID-19 Pandemic~~Executive Summary – Results of Operations

Net revenues decreased 21.1% to $144.1 million and 22.1% to $287.3 million for the three and six months ended June 30, 2022, respectively, when compared to the corresponding periods in the prior year. These decreases were primarily due to softening demand for home related products, inflationary pressures on consumer discretionary spending, management’s decision to reduce advertising spending, and the prior year pull forward of demand driven by the effects of COVID and economic stimulus experienced in the first half of 2021.

Gross profit decreased 40.2% to $48.8 million and 40.6% to $100.4 million for the three and six months ended June 30, 2022, respectively, when compared to the corresponding periods in the prior year. These decreases reflected the impact of lower sales and channel mix combined with unfavorable cost absorption and elevated levels of materials, labor and overhead costs, partially offset by benefits realized from our workforce restructuring.

Operating expenses decreased 27.7% to $60.9 million and 15.5% to $130.9 million for the three and six months ended June 30, 2022, respectively, when compared to the corresponding periods in the prior year. These decreases primarily reflected the impact of management’s decisions to reduce advertising spend, execute two workforce reductions and implement other cost saving measures.

Net loss was $8.3 million and $21.8 million for the three and six months ended June 30, 2022, respectively, compared to net income of $2.6 million and $23.4 million for the three and six months ended June 30, 2021, respectively.

Recent Developments in Our Business

Equity Financing

In March 2022, the Company completed an underwritten public offering of 16.1 million shares of Class A common stock, which included the additional 2.1 million shares of the over-allotment option that the underwriters exercised in full. The aggregate net proceeds received by the Company from the offering, after deducting offering expenses of $0.3 million, totaled $92.9 million.

Debt Financing

On September 3, 2020, Purple LLC entered into the 2020 Credit Agreement that provided for a $45.0 million term loan and a $55.0 million revolving line of credit. In November 2021, the Company executed a $55.0 million draw on its revolving line of credit, which represented the full amount available under the line. On March 31, 2022, the Company used a portion of the net proceeds from its underwritten public offering, described above, to repay in full the $55.0 million of principal outstanding on the revolving line of credit.

The Company’s operating and financial results for the year ended December 31, 2021 did not satisfy the financial and performance covenants required under the 2020 Credit Agreement. On February 28, 2022, prior to the covenant compliance certification date, the Company entered into the first amendment of the 2020 Credit Agreement to avoid a breach of these covenants and potential default. This amendment contained a covenant waiver period such that the net leverage ratio and fixed charge coverage ratio would not be tested for the fiscal quarters ended December 31, 2021, March 31, 2022 and June 30, 2022. Other modifications in the amendment included revised leverage ratio and fixed charge coverage definitions and thresholds, the addition of minimum liquidity requirements with mandatory prepayments of the revolving loan if cash exceeded $25.0 million, new weekly and monthly reporting requirements, limits on the amount of capital expenditures, the addition of a lease incurrence test for opening additional showrooms, additional negative covenants during a covenant amendment period that extends into 2023 until certain conditions are met, and the interest rate was changed from LIBOR plus 3.00% to SOFR plus 4.75%. Pursuant to this amendment, the Company made a $2.5 million payment on the term loan to cover the four quarterly principal payments due in 2022 and incurred fees and expenses of $0.8 million that were recorded as debt issuance costs in the condensed consolidated balance sheet.

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 CCM and its investment affiliates to acquire 35% or more of the combined voting power of all equity interests of the Company entitled to vote for the election of members of the Company’s board of directors without constituting an event of default. CCM is considered a related party of the Company in that Adam Gray, a member of our board of directors, serves as a managing partner of CCM. Pursuant to this amendment, the Company incurred fees and expenses of $0.4 million that were recorded as debt issuance costs in the condensed consolidated balance sheet.

Operational Developments

The COVID-19 pandemic has impacted many aspects of our operations, directly and indirectly, including disruption of our employees, consumer behavior, distribution and logistics, our suppliers, and the market overall. The scope and nature of these impacts continue to evolve. Because of the COVID-19 pandemic, we ~~have taken~~took precautionary measures recommended by the appropriate national and state health agencies to manage our resources and mitigate the adverse impact of the pandemic, which iswas intended to help minimize the risk to our Company, employees, customers, and the communities in which we operate. Soon after the pandemic began, we also experienced an increase in demand in our e-commerce channel, and in 2020 and 2021 the Company increased its production capacity to match actual and anticipated demand growth. In 2022, after two years of the pandemic, we are experiencing a pull-back in growth that left us with excess operational capacity in facilities, equipment, and personnel. Beginning in the first quarter of 2022 and continuing into the second quarter, we have rebalanced production and fulfillment operations in our different facilities, reduced employee headcount and taken other actions to lower costs.

Although we have taken measures to protect our business, we cannot predict the specific duration for which precautionary measures relating to COVID-19 will stay in effect, and we may elect or be required to take additional measures as the information available to us continues to develop, including with respect to our employees, manufacturing facilities and distribution center, and relationships with our suppliers and customers. Also, we do not know the impact proposed government mandated vaccine policies for employers will have on our workforce. Subject to certain assumptions regarding the duration and severity of the COVID-19 pandemic, and government, consumer, and our responses thereto, based on our current projections we believe our cash on hand, ongoing cash generated from e-commerce, liquidity available under our line of credit, and continuing ramp up of store operations and our wholesale business, will be sufficient to cover our working capital requirements and anticipated capital expenditures for the next 12 months.

While most state and local governments have eased restrictions on commercial retail activity, it is possible that a resurgence in cases of COVID-19 or one of its variants could prompt a return to tighter restrictions in certain areas of the country. Furthermore, while the bedding industry has fared much better during the pandemic than certain other sectors of the economy, continued economic weakness mayeventually have an adverse impact upon the industry and our business. Therefore, significant uncertainty remains regarding the ongoing impact of the COVID-19 outbreak upon our financial condition and future results of operations, as well as upon the significant estimates and assumptions we utilize in reporting certain assets and liabilities.

~~Recent Developments in our Business~~

~~Production and Demand Developments~~

During the second quarter of 2021, following an accident resulting in the death of an employee and subsequent safety improvements involving the Mattress Max machines, we encountered isolated production challenges caused by unanticipated mechanical and maintenance issues when bringing the machines back online. As a result, we experienced significantly reduced production levels causing shipment backlogs that unfavorably affected both second and third quarter net revenues. We exited the month of July with production from our existing machines back at planned levels and emerged from our backlog position at the end of August. We are confident that these mechanical and maintenance challenges are an isolated event and will have no impact on our ability to scale production beyond 2021. With our production back at planned levels, we were able to increase our finished goods inventory to adequate stock levels to enable timely shipments to our customers.

However, even though we were able to return to planned production capacity in the third quarter, our results of operations have not yet returned to expected levels, which we believe is due primarily to slower than expected acceleration back to prior trending demand levels, as well as increases in the costs of shipping, materials and labor. We believe that the production challenges experienced in the second and third quarters adversely affected the confidence of consumers and our wholesale partners in our ability to timely deliver our products, which resulted in reduced orders and increased cancellations in both our DTC and wholesale channels. Further, in an effort to manage costs as we worked to resolve the production issues described above, we reduced our spending on marketing, which reduced demand for our products, particularly in our DTC channel. In addition to adversely impacting demand for our products, these issues also interrupted our momentum in growth. While our production has returned to normal and we have ramped up our marketing efforts, it is unclear how long it will take for demand, in both our DTC and wholesale channels, to return to expected levels. Given that we had not yet returned to normal levels by the end of the third quarter of 2021, we expect such issues to adversely impact our operating results for the fourth quarter of 2021.

In addition to a slower recovery to expected demand levels following our return to full production capacity, our business has also been adversely impacted by increases in the cost of shipping, raw materials and labor. While we are still able to obtain necessary materials when needed, the costs of such materials have increased materially, consistent with general macroeconomic trends. In addition, as experienced in other industries, in order to remain competitive in hiring the labor necessary to maintain our production, we have had to increase wages and other compensation. These increases in materials and labor costs have resulted in higher cost of goods sold and lower margins. We believe that shipping, material and labor costs will continue to remain at elevated levels or increase further in the foreseeable future.

~~In addition to the above issues, we are also~~ closely monitoring the impacts of COVID-19 and general economic conditions on global supply chain, manufacturing, and logistics operations. As inflationary pressures increase, we anticipate that our production and operating costs will similarly increase. In addition, COVID-19 and other events, including port closures or labor shortages, have resulted in the continuation or worsening of manufacturing and shipping costs, delays and constraints. While most of our domestic suppliers have been able to continue operations and provide necessary materials when needed, we have experienced some constraints from certain suppliers, with respect to both the availability and cost of materials. In addition, as experienced in other industries, in order to remain competitive in hiring and retaining the labor necessary to maintain our production levels, we have increased wages and other compensation. These increases in materials, labor and freight costs have resulted in higher cost of goods sold and lower margins. We believe that materials, labor and freight costs will continue to remain at elevated levels or increase further in the foreseeable future.

In the fourth quarter of 2021 and continuing into 2022, our gross margins and results of operations have been, and we expect will continue to be adversely affected by elevated levels of materials, labor and freight costs and lower-than-expected demand levels. In early 2022, to offset the impact of higher costs on our gross margins, we increased prices and initiated several other projects to improve efficiencies and reduce costs. Also, we have continued to invest in showroom expansion and growing wholesale partner door count and productivity in response to a return to more normalized consumption patterns where consumer demand has shifted away from e-commerce and back to brick and mortar buying. We ended the second quarter with 40 showrooms after opening 6 net new locations during the quarter and we plan to add 14 more showrooms over the remainder of the year. In addition, at the end of the second quarter, our products are being sold through approximately 3,200 wholesale doors, having added approximately 700 net new doors during the first six months of 2022. Improving the sales productivity of our wholesale doors remains a primary focus and a critical component of our strategy to combat shifting demand patterns. After several years of hyper growth and increased investments to support current and future expansion, we are now building the framework for strong operational maturity and accountability after focusing on right-sizing our operations, improving our execution, and refining our strategies to drive profitable growth in the current market environment. We have also ~~experienced some delays~~intentionally reduced our advertising spending in ~~shipments~~2022 to improve marketing efficiency and stabilize profitability in a challenging macroeconomic environment.

Outlook for Growth

To support our plans for future growth, we are focusing on the following opportunities:

	●	Develop and execute on strategies to meaningfully expand our wholesale presence.

	●	Build premium brand position to grow market share of the premium mattress category.

	●	Refine and enhance marketing strategies to reach a broader audience, increase customer engagement and reduce dependency on price promotions as a means of driving sales.

	●	Strengthen research and development disciplines and go-to-market processes to further develop our current product categories and position our business to eventually expand to adjacent categories.

	●	Manage production labor and capacity utilization to promote efficient use of our manufacturing facilities as we grow into our production footprint.

	●	Manage input costs, operating efficiencies, and pricing to offset gross margin erosion and exit the year with gross margins close to 40%.

There is no guarantee that we will be able to effectively execute on these opportunities, which are subject to risks, uncertainties, and assumptions that are difficult to predict, including the risks described under “Risk Factors” and elsewhere herein. Therefore, actual results may differ materially and adversely from ~~our suppliers. Any significant delay~~those described above. In addition, we may, in the future, adapt these focuses in response to changes in the market or ~~interruption in our supply chain could impair our ability to meet the demands of our customers and could harm~~ our business.

~~Mattress Firm Relationship~~

The new agreement provides opportunity for continued partnership and growth with Mattress Firm. With this new agreement in place, our ability to work with new wholesale customers will no longer be limited because of contractual exclusivity with specialty retailers and other constraints on entering markets in which Mattress Firm conducts business, which creates new opportunities.

Operating Results for the Three Months Ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021

The following table sets forth for the periods indicated, our results of operations and the percentage of total revenue represented in our condensed consolidated statements of operations:

	Three Months Ended September 30,												Three Months Ended June 30,
	2021			% of Net Revenues			2020			% of Net Revenues			2022			% of Net Revenues			2021			% of Net Revenues
Revenues, net	$	170,781			100.0	%	$	187,111			100.0	%	$	144,109			100.0	%	$	182,586			100.0	%
Cost of revenues		109,701			64.2			98,857			52.8			95,297			66.1			100,899			55.3
Gross profit		61,080			35.8			88,254			47.2			48,812			33.9			81,687			44.7
Operating expenses:
Marketing and sales		48,841			28.6			51,206			27.4			40,373			28.0			59,844			32.8
General and administrative		17,037			10.0			11,087			5.9			18,779			13.0			22,461			12.3
Research and development		1,784			1.0			1,687			0.9			1,748			1.2			1,923			1.1
Total operating expenses		67,662			39.6			63,980			34.2			60,900			42.3			84,228			46.1
Operating income (loss)		(6,582	)		(3.9	)		24,274			13.0			(12,088	)		(8.4	)		(2,541	)		(1.4	)
Other income (expense):
Interest income (expense), net		10			—			(1,232	)		(0.7	)
Other income, net		12			—			3			—
Interest expense														(707	)		(0.5	)		(569	)		(0.3	)
Other income (expense), net														(136	)		(0.1	)		26			—
Change in fair value – warrant liabilities		5,362			3.1			(103,962	)		(55.6	)		346			0.2			4,860			2.7
Loss on extinguishment of debt		—			—			(5,782	)		(3.1	)
Tax receivable agreement income (expense)		846			0.5			(567	)		(0.3	)
Tax receivable agreement expense														—			—			(381	)		(0.2	)
Total other income (expense), net		6,230			3.6			(111,540	)		(59.6	)		(497	)		(0.3	)		3,936			2.2
Net loss before income taxes		(352	)		(0.2	)		(87,266	)		(46.6	)
Net income (loss) before income taxes														(12,585	)		(8.7	)		1,395			0.8
Income tax benefit		2,479			1.5			106			0.1			4,175			2.9			1,167			0.6
Net income (loss)		2,127			1.2			(87,160	)		(46.6	)		(8,410	)		(5.8	)		2,562			1.4
Net loss attributable to noncontrolling interest		(44	)		—			(147	)		(0.1	)		(70	)		—			(16	)		—
Net income (loss) attributable to Purple Innovation, Inc.	$	2,171			1.3		$	(87,013	)		(46.5	)	$	(8,340	)		(5.8	)	$	2,578			1.4

~~Revenue~~Revenues, Net

Net revenues decreased ~~$16.3~~$38.5 million, or ~~8.7%~~21.1%, to ~~$170.8~~$144.1 million for the three months ended ~~September~~June 30, ~~2021~~2022 compared to ~~$187.1~~$182.6 million for the three months ended ~~September~~June 30, 2020. We believe that third quarter 2020 revenues were positively impacted during the COVID-19 pandemic, as individuals focused on home improvement activities, including purchasing mattresses and bedding products.2021. The ~~year-over-year decrease~~decline in net revenues consisted of DTC net revenues declining $21.4 million, or 15.9%, offset in part by net revenue growth of $5.1 million, or 9.6%, in our wholesale business. DTC net revenues were unfavorably impacted by the impact of production delays on our ability to manufacture and deliver products to our DTC customers in the third quarter, as well as reduced demand in our DTC channel in the same period. While our wholesale business was favorably impacted by wholesale partner expansion combined with a reopening of wholesale partner doors, we also experienced lower than expected demand from our wholesale customers. We believe that wholesale and DTC demand were adversely affected by the production issues we experienced in the second and third quarters of 2021, as our ability to manufacture and deliver our products to both DTC and wholesale customers was interrupted. In addition, in response to production delays we temporarily reduced our marketing spending, which reduced demand for our products, particularly with respect to our DTC channel. While we have returned to planned production and marketing activities, it is unclear when customer demand will return to expected levels. We currently anticipate that net revenues in the fourth quarter of 2021 will continue to be adversely impacted by slower than anticipated recovery to prior demand levels. Net revenues from a product perspective reflected a ~~$20.5~~$32.3 million decrease in mattress sales, a ~~$3.8~~$2.7 million ~~increase~~decrease in other ~~bedding~~sleep product sales and a ~~$0.4~~$3.5 million ~~increase~~decrease in other product sales. The decrease in net revenues for all three product types was primarily due to softening demand for home related products, inflationary pressures on consumer discretionary spending, management’s decision to reduce advertising spend, and the prior year pull forward of demand driven by the effects of COVID and economic stimulus in the first half of 2021. The decline in net revenues from a sales channel perspective consisted of DTC net revenues decreasing $34.6 million, or 29.8% and wholesale net revenues decreasing $3.9 million, or 5.9%. In addition to the factors discussed above, the decrease in DTC net revenues was impacted by a return to more normalized consumption patterns after two years of COVID-driven demand coupled with customers shifting back to brick and mortar buying. The decrease in wholesale net revenues reflected reduced purchases by our existing wholesale partners, offset in part by the impact of adding approximately 700 net new wholesale partner doors during the first six months of 2022.

Cost of Revenues

~~The cost~~Cost of revenues ~~increased $10.8~~decreased $5.6 million, or ~~11.0%~~5.6%, to ~~$109.7~~$95.3 million for the three months ended ~~September~~June 30, ~~2021~~2022 compared to ~~$98.9~~$100.9 million for the three months ended ~~September~~June 30, ~~2020.~~2021. This ~~increase reflected an increase~~decrease was primarily due to the corresponding decrease in ~~direct material costs coupled with higher labor~~sales volume, offset in part by increases in materials, freight and overhead costs. Our gross profit percentage, which decreased to ~~35.8%~~33.9% of net revenues ~~for~~in the ~~three months ended September 30,~~second quarter of 2022 from 44.7% in the second quarter of 2021, ~~compared to 47.2% for the same period in 2020. The decrease in our gross profit percentage~~ was ~~primarily~~adversely impacted by ~~inefficiencies as we worked to resolve production issues, rising shipping, raw material and labor costs and a higher~~lower sales with an increased proportion of wholesale channel revenue which carries a lower average selling price than sales from our DTC channel and unfavorable cost absorption from lower than planned production volumes in prior months. Additionally, our gross ~~margin than revenue from~~profit percentage reflects the ~~DTC channel. We anticipate that shipping, raw material and labor costs will remain at~~impact of elevated levels ~~or continue to increase in the foreseeable future.~~of materials, labor and overhead costs, partially offset by benefits realized from our workforce restructuring.

Marketing and Sales

Marketing and sales ~~expenses~~expense decreased ~~$2.4~~$19.5 million, or ~~4.6%~~32.5%, to ~~$48.8~~$40.4 million for the three months ended ~~September~~June 30, ~~2021 from $51.2~~2022 compared to $59.8 million for the three months ended ~~September~~June 30, ~~2020. The~~2021. This decrease reflected a ~~$10.1~~$24.1 million decline in advertising spending and a $2.7 million decrease in other marketing costs due in part to workforce reductions. The intentional reduction in advertising ~~spend~~spending was due to management’s efforts to improve marketing efficiency and stabilize profitability in ~~response to production delays,~~a challenging macroeconomic environment. These decreases were offset in part by a ~~$4.7~~$2.0 million increase in ~~personnel~~wholesale-related marketing and sales costs ~~related~~as we continue to ~~planned growth~~focus on improving the sales productivity of our ~~workforce~~wholesale doors and a ~~$3.0~~$5.3 million increase in ~~other~~ marketing and sales ~~expenses.~~costs associated with our continued showroom expansion. Marketing and sales expense as a percentage of net revenues was ~~28.6% for~~28.0% in the ~~three months ended September 30, 2021~~second quarter of 2022 compared to ~~27.4% for the comparative prior period. The higher percentage~~32.8% in the ~~current~~second quarter of 2021. This decrease was primarily due to the reduction we made in ~~part to net revenues being unfavorably impacted by production and demand issues, as described above.~~advertising spending.

General and Administrative

General and administrative ~~expenses increased $6.0~~expense decreased $3.7 million, or ~~53.7%~~16.4%, to ~~$17.0~~$18.8 million for the three months ended ~~September~~June 30, ~~2021~~2022 compared to ~~$11.1~~$22.5 million for the three months ended ~~September~~June 30, ~~2020. The increase~~2021. This decrease was primarily due to a ~~$2.5~~$5.3 million ~~increase~~decrease in legal and professional fees, ~~associated with increased expenses for consulting, professional staffing and executive placement costs,~~offset in part by a ~~$1.9~~$1.4 million increase in ~~personnel~~payroll costs related to planned ~~growth of our workforce,~~increases in general and administrative personnel over the past twelve months and a ~~$1.5~~$0.2 million increase in ~~all~~ other expenses. The decrease in legal and professional fees was primarily due to $7.9 million of underwriting commissions and other related costs we paid in the prior year second quarter for shares sold by Coliseum Capital Partners. This decrease was partially offset by a one-time $3.1 million separation fee incurred by the Company during the second quarter of 2022 for not continuing with the services of a professional services provider.

Research and Development

Research and development costs ~~increased $0.1~~decreased $0.2 million, or ~~5.7%~~9.1%, to ~~$1.8 million for the three months ended September 30, 2021 from~~ $1.7 million for the three months ended ~~September~~June 30, ~~2020. The increase~~2022 from $1.9 million for the three months ended June 30, 2021. This decrease was primarily due to lower professional services costs as product development priorities were being refocused. This decrease was offset in part by an increase in ~~professional services~~payroll costs related to ~~product~~planned increases in our research and development ~~activities.~~workforce including the addition of a chief innovation officer.

Operating Income (Loss)

Operating ~~income (loss) decreased $30.9~~loss increased $9.5 million to ~~an operating loss of $6.6~~$12.1 million for the three months ended ~~September~~June 30, ~~2021~~2022 compared to ~~operating income of $24.3~~$2.5 million for the three months ended ~~September~~June 30, ~~2020.~~2021. This ~~decrease~~increase was primarily due to ~~net revenues being unfavorably impacted during~~ the ~~quarter~~decrease in gross profit, offset in part by ~~production and demand issues (as described above), increased costs and a higher proportion of wholesale channel revenue, which carries a~~ lower ~~gross margin than revenue from the DTC channel.~~operating expenses.

Interest Expense

~~During the three months ended September 30, 2021, interest~~Interest expense totaling $0.8 million was offset by $0.8 million of capitalized interest, of which $0.6 million related to periods prior to the third quarter of 2021 and was recorded as an out-of-period correction in the third quarter of 2021. The Company incurred interest expense of $1.2totaled $0.7 million for the three months ended ~~September~~June 30, ~~2020.~~2022 compared to $0.6 million for the three months ended June 30, 2021. The ~~$0.4~~$0.1 million ~~decrease in interest expense~~increase was primarily due to the ~~$35.0 million Related Party Loan, which carried an~~term loan interest rate ~~of 12.00%, being refinanced in~~increasing from 3.50% during the ~~third~~second quarter of ~~2020 with a $45.0 million term loan at an initial interest rate~~2021 to 6.07% during the second quarter of ~~3.50%. Interest expense in 2021 also includes amortization of deferred loan costs associated with~~2022. In February 2022, the Company entered into the first amendment to the 2020 Credit Agreement which, among other things, changed the reference interest rate from LIBOR to SOFR and ~~fees related to~~increased the ~~revolving line~~applicable margins. The impact of ~~credit.~~this increase was offset in part by $0.2 million of interest capitalized during the second quarter of 2022. There was no interest capitalized during the three months ended June 30, 2021.

Change in Fair Value – Warrant Liabilities

On February 26, 2019, the Incremental Lenders funded a $10.0 million increase in the Related Party Loan and received 2.6 million warrants to purchase 2.6 million shares of our Class A Stock at a price of $5.74 per share, subject to certain adjustments. We accounted for the Incremental Loan Warrants as liabilities and recorded them at fair value on the date of the transaction and subsequently re-measured to fair value at each reporting date with changes in the fair value included in earnings. We determined the fair value of the Incremental Loan Warrants to be $64.9 million at September 30, 2020. During the three months ended September 30, 2020, we recognized a loss of $18.0 million in our condensed consolidated statement of operations related to the change in fair value of these warrants. There was no gain or loss on the Incremental Loan Warrants for the three months ended September 30, 2021 as they were exercised in 2020.

There were 15.5 million public warrants issued in connection with GPAC’s formation and IPO and 12.8 million sponsor warrants issued pursuant to a simultaneous private placement with the IPO. We have accounted for these warrants as liabilities and recorded them at fair value on the date of the transaction and subsequently re-measured to fair value at each reporting date with changes in fair value included in earnings. The 1.9 million sponsor warrants outstanding at ~~September~~both June 30, 2022 and 2021 had fair values of $0.1 million and $14.5 million, respectively. The decrease in fair value was primarily due to the Company’s Class A stock price, one of the primary assumptions used to re-measure the warrant liability, declining from $26.41 at June 30, 2021 ~~had a fair value of $9.0 million. The fair value of the public and sponsor warrants outstanding~~to $3.06 at ~~September~~June 30, ~~2020 was $188.5 million.~~2022. During the three months ended ~~September~~June 30, 2022 and 2021, we recognized ~~a gain~~gains of ~~$5.4~~$0.3 million and $4.9 million, respectively, in our condensed consolidated ~~statement~~statements of operations related to ~~a decrease~~decreases in the fair value of the ~~sponsor~~ warrants ~~exercised during the quarter or that were~~ outstanding at the end of the quarter. During the three months ended September 30, 2020, we recognized a loss of $86.0 million in our condensed consolidated statement of operations related to an increase in the fair value of the public and sponsor warrants exercised during the prior year quarter or that were outstanding at the end of the prior year quarter.

~~Loss on Extinguishment of Debt~~

On September 3, 2020, the Company paid $45.0 million to retire, in full, all indebtedness related to Purple LLC’s Related Party Loan. The payment included $25.0 million for the original loan under the agreement, $10.0 million for a subsequent incremental loan, $6.6 million for paid-in-kind interest, $2.5 million for a prepayment fee and $0.9 million for accrued interest. As a result of paying off the Related Party Loan, the Company recognized a $5.8 million loss on extinguishment of debt during the three months ended September 30, 2020.

~~Tax Receivable Agreement Expense~~

We are party to a tax receivable agreement which generally provides for the payment by us to InnoHold of 80% of certain tax benefits, if any, that we realize as a result of increases in its allocable share of the tax basis of the tangible and intangible assets of Purple LLC. Because of the Business Combination, subsequent exchanges of 43.5 million Class B Units for Class A Stock and changes in estimates relating to the expected tax benefits associated with the tax receivable agreement, the tax receivable agreement liability totaled $171.5 million and $172.0 million at September 30, 2021 and December 31, 2020, respectively. During the third quarter of 2021, we realized $0.8 million of tax receivable agreement income due to the impact of recording the 2020 provision to return adjustments. Of the $90.2 million liability recorded during the three months ended September 30, 2020, $89.7 million related to current period exchanges and was recorded as an adjustment to stockholders’ equity and $0.6 was recorded to expense as it related to reestablishing the tax receivable agreement liability related to prior year exchanges.respective periods.

Income Tax (Expense) Benefit

~~Our~~We had an income tax benefit ~~was $2.5~~of $4.2 million for the three months ended ~~September~~June 30, ~~2021,~~2022 compared to ~~$0.1~~an income tax benefit of $1.2 million for the three months ended ~~September~~June 30, ~~2020. This increase primarily resulted from a change~~2021. The income tax benefit in the ~~effective tax rate due to a portion~~second quarter of 2022 was primarily the result of the ~~valuation allowance being released in 2020 and the change in fair value~~Company having a net loss before income taxes of ~~the warrant liability which is treated as a permanent item for tax purposes.~~$12.6 million.

Noncontrolling Interest

~~We attribute net income or loss to the Class B Units in Purple LLC as a noncontrolling interest at their aggregate ownership percentage. We calculate~~The Company calculates net income or loss attributable to noncontrolling interests on a quarterly basis using their weighted average ownership percentage. Net loss attributed to noncontrolling interests was $0.1 million in the second quarter of 2022 while net loss attributed to noncontrolling interests was negligible for the three months ended ~~September~~June 30, 2021 compared to a net loss of $0.1 million for the three months ended September 30, 2020. The decrease in the net income level attributed to noncontrolling interests primarily resulted from the noncontrolling ownership interest declining to approximately 1% for the three months ended September 30, 2021 from approximately 18% for the three months ended September 30, 2020.2021.

Operating Results for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021

The following table sets forth for the periods indicated, our results of operations and the percentage of total revenue represented in our statements of operations:

	Nine Months Ended September 30,												Six Months Ended June 30,
	2021			% of Net Revenues			2020			% of Net Revenues			2022			% of Net Revenues			2021			% of Net Revenues
Revenues, net	$	539,796			100.0	%	$	474,582			100.0	%	$	287,288			100.0	%	$	369,015			100.0	%
Cost of revenues		309,505			57.3			251,515			53.0			186,850			65.0			199,804			54.1
Gross profit		230,291			42.7			223,067			47.0			100,438			35.0			169,211			45.9
Operating expenses:
Marketing and sales		163,053			30.2			127,313			26.8			90,332			31.4			114,212			31.0
General and administrative		54,024			10.0			27,312			5.8			36,667			12.8			36,987			10.0
Research and development		5,430			1.0			4,712			1.0			3,891			1.4			3,646			1.0
Total operating expenses		222,507			41.2			159,337			33.6			130,890			45.6			154,845			42.0
Operating income		7,784			1.4			63,730			13.4
Operating income (loss)														(30,452	)		(10.6	)		14,366			3.9
Other income (expense):
Interest expense		(1,129	)		(0.2	)		(4,045	)		(0.9	)		(1,730	)		(0.6	)		(1,139	)		(0.3	)
Other income (expense), net		(30	)		—			109			—
Other expense, net														(119	)		—			(42	)		—
Change in fair value – warrant liabilities		19,369			3.6			(212,593	)		(44.8	)		4,274			1.5			14,007			3.8
Loss on extinguishment of debt		—			—			(5,782	)		(1.2	)
Tax receivable agreement income (expense)		639			0.1			(33,512	)		(7.1	)
Total other income (expense), net		18,849			3.5			(255,823	)		(53.9	)
Tax receivable agreement expense														—			—			(207	)		(0.1	)
Total other income, net														2,425			0.8			12,619			3.4
Net income (loss) before income taxes		26,633			4.9			(192,093	)		(40.5	)		(28,027	)		(9.8	)		26,985			7.3
Income tax benefit (expense)		(1,005	)		(0.2	)		35,818			7.5			5,986			2.1			(3,484	)		(0.9	)
Net income (loss)		25,628			4.7			(156,275	)		(32.9	)		(22,041	)		(7.7	)		23,501			6.4
Net income attributable to noncontrolling interest		55			—			7,178			1.5
Net income (loss) attributable to noncontrolling interest														(199	)		(0.1	)		99			—
Net income (loss) attributable to Purple Innovation, Inc.	$	25,573			4.7		$	(163,453	)		(34.4	)	$	(21,842	)		(7.6	)	$	23,402			6.3

~~Revenue~~Revenues, Net

Net revenues ~~increased $65.2~~decreased $81.7 million, or ~~13.7%~~22.1%, to ~~$539.8~~$287.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 compared to ~~$474.6~~$369.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020. This increase consisted of wholesale~~2021. The decline in net revenues ~~increasing $71.3~~reflected a $69.8 million ~~or 62.3%, offset~~decrease in ~~part by DTC~~mattress sales, an $8.0 million decrease in other sleep product sales and a $3.9 million decrease in other product sales. The decrease in net revenues ~~decreasing $6.1 million, or 1.7%. Our wholesale business~~for all three product types was favorably impacted by wholesale partner expansion combined with a reopening of wholesale partner doors. However, this favorable impact was offset by lower-than expected demand from our wholesale customers in the third quarter of 2021, primarily due to ~~production delays experienced~~softening demand for home related products, inflationary pressures on consumer discretionary spending, management’s decision to reduce advertising spend, and the prior year pull forward of demand driven by the effects of COVID and economic stimulus in the ~~second and third quarter~~first half of ~~2021, as described above. DTC net revenues were also unfavorably impacted by the impact of production and demand issues on second and third quarter net revenues.~~2021. The ~~increase~~decline in net revenues from a ~~product~~sales channel perspective ~~reflected~~consisted of DTC net revenues decreasing $74.0 million, or 30.7% and wholesale net revenues decreasing $7.8 million, or 6.1%. In addition to the factors discussed above, the decrease in DTC net revenues was impacted by a ~~$37.8 million increase in mattress sales, a $19.0 million increase in other bedding product sales~~return to more normalized consumption patterns after two years of COVID-driven demand coupled with customers shifting back to brick and ~~an $8.4 million increase in other product sales. This growth was primarily driven by an increase~~mortar buying. The decrease in wholesale ~~customer demand. However, we believe that~~net revenues reflected reduced purchases by our existing wholesale ~~and DTC demand were adversely affected~~partners during the first six months of 2022, offset in part by the ~~production issues we experienced in~~impact of adding approximately 700 net new wholesale partner doors during the second and third quarters of 2021, as our ability to manufacture and deliver our products to both DTC and wholesale customers was interrupted. In addition, in response to production delays, we temporarily reduced our marketing spending, which reduced demand for our products, particularly with respect to our DTC channel. While we have returned to planned production and marketing activities, it is unclear when customer demand will return to expected levels. We currently anticipate that net revenues in the fourth quarter of 2021 will continue to be adversely impacted by slower than anticipated recovery to prior demand levels.same time frame.

Cost of Revenues

~~The cost~~Cost of revenues ~~increased $58.0~~decreased $13.0 million, or ~~23.1%~~6.5%, to ~~$309.5~~$186.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 compared to ~~$251.5~~$199.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020. The increase, which~~2021. This decrease was primarily due to ~~a $32.7 million~~the corresponding decrease in sales volume, offset in part by an increase in ~~direct material costs, a $21.3 million increase in labor and~~materials, freight overhead ~~costs, and a $4.0 million increase in other costs, was primarily associated with increased product sales and higher production, shipping, material and labor~~ costs. ~~The~~Our gross profit percentage, which decreased to ~~42.7%~~35.0% of net revenues during the first six months of 2022 from 45.9% for the ~~nine~~first six months ~~ended September 30,~~of 2021, ~~from 47.0% for the comparative prior year period. The decrease in our gross profit percentage~~ was ~~primarily driven~~adversely impacted by ~~a higher~~lower sales with an increased proportion of wholesale channel revenue which carries a lower ~~gross margin~~average selling price than ~~revenue~~sales from ~~the~~our DTC channel ~~rising raw material~~ and ~~labor costs and~~unfavorable cost absorption from lower than planned production volumes in prior months. Additionally, our gross profit percentage reflects the ~~unfavorable~~ impact of ~~production issues. While we have returned to planned production capacity, we anticipate that shipping, raw material and labor costs will continue to remain at~~ elevated levels ~~or increase in the foreseeable future.~~of materials, labor and overhead costs, partially offset by benefits realized from our workforce restructuring.

Marketing and Sales

Marketing and sales ~~expenses increased $35.7~~expense decreased $23.9 million, or ~~28.1%~~20.9%, to ~~$163.1~~$90.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 compared to ~~$127.3~~$114.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. This ~~increase~~decrease reflected a ~~$12.8~~$39.7 million decline in advertising spending and a $1.3 million decrease in other marketing costs due in part to workforce reductions. The intentional reduction in advertising spending was due to management’s efforts to improve marketing efficiency and stabilize profitability in a challenging macroeconomic environment. These decreases were offset in part by a $7.0 million increase in ~~advertising~~wholesale-related marketing and sales costs ~~due~~as we continue to ~~higher advertising rates in 2021~~focus on improving the sales productivity of our wholesale doors and ~~advertising costs in the prior year second quarter being uncharacteristically low due to the pandemic,~~ a ~~$12.3~~$10.1 million increase in ~~personnel costs related to planned growth of our workforce and a $10.7 million increase in other~~ marketing and sales ~~expenses.~~costs associated with our continued showroom expansion. Marketing and sales expense as a percentage of net revenues was ~~30.2%~~31.4% during the first six months of 2022 compared to 31.0% for the ~~nine months ended September 30, 2021 compared to 26.8% for the nine months ended September 30, 2020. The higher percentage of net revenues in the~~ first ~~nine~~six months of 2021 was due in part to product sales being unfavorably impacted by production and demand issues experienced in the second and third quarters of 2021, as described above, coupled with higher advertising rates in 2021 and advertising costs in the prior year second quarter being uncharacteristically low because of the pandemic.2021.

General and Administrative

General and administrative ~~expenses increased $26.7 million, or 97.8%,~~expense decreased to ~~$54.0~~$36.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 compared to ~~$27.3~~$37.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. This ~~increase~~decrease was primarily due to a ~~$16.8~~$4.6 million ~~increase~~decrease in legal and professional fees, offset in part by a $3.6 million increase in payroll costs related to ~~offering costs, including~~planned increases in general and administrative personnel over the past twelve months and a $0.7 million increase in other expenses. The decrease in legal and professional fees was primarily due to $7.9 million of underwriting commissions ~~related to~~and other costs we paid in the prior year second quarter for shares sold by Coliseum Capital ~~Partners, and increased expenses~~Partners. This decrease was partially offset by a one-time $3.1 million separation fee incurred by the Company during the second quarter of 2022 for ~~consulting,~~not continuing with the services of a professional ~~staffing and executive placement costs, a $5.3 million increase related to planned increases in our workforce, and a $4.6 million increase in all other expenses.~~services provider.

Research and Development

Research and development costs increased ~~$0.7~~$0.2 million, or ~~15.2%~~6.7%, to ~~$5.4~~$3.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 from ~~$4.7~~$3.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. This increase was primarily due to an increase in payroll costs related to planned increases in our research and development workforce including the addition of a chief innovation officer, offset in part by a decrease in professional services costs ~~related to~~as product development ~~activities.~~priorities were being refocused.

Operating Income (Loss)

Operating income decreased ~~$55.9~~$44.8 million ~~or 87.8%,~~ to ~~$7.8~~an operating loss of $30.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021, from~~2022 compared to operating income of ~~$63.7~~$14.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. This decrease was primarily due to ~~net revenues being unfavorably impacted~~the decrease in gross profit, offset in part by ~~production and demand issues in the second and third quarters of 2021, increased costs and a higher proportion of wholesale channel revenue, which carries a~~ lower ~~gross margin than revenue from the DTC channel.~~operating expenses.

Interest Expense

Interest expense totaled $1.7 million for the six months ended June 30, 2022 compared to $1.1 million for the ~~nine~~six months ended ~~September~~June 30, 2021. The $0.6 million increase was primarily due to interest expense of $0.6 million incurred on the $55.0 million revolving line of credit that was drawn down by the Company in November 2021 ~~as compared~~and repaid in full on March 31, 2022. The increase was also impacted by the term loan average interest rate increasing from 3.50% during the first six months of 2021 to ~~$4.0 million for~~5.10% during the ~~nine~~first six months ~~ended September 30, 2020. Interest expense in 2021~~of 2022. In February 2022, the Company entered into the first amendment to the 2020 Credit Agreement which, among other things, changed the reference interest rate from LIBOR to SOFR and increased the applicable margins. The impact of these increases was offset in part by ~~$0.8~~$0.4 million of interest capitalized during the first six months of 2022. There was no interest ~~of which $0.6 million related to periods prior to~~capitalized during the ~~third quarter of 2021 and was recorded as an out-of-period correction in the third quarter of~~six months ended June 30, 2021. The $2.9 million decrease was also due to the $35.0 million Related Party Loan, which carried an interest rate of 12.00%, being refinanced in the third quarter of 2020 with a $45.0 million term loan at an initial interest rate of 3.50%. Interest expense in 2021 also includes amortization of deferred loan costs associated with the 2020 Credit Agreement and fees related to the revolving line of credit.

Change in Fair Value – Warrant Liabilities

On February 26, 2019, the Incremental Lenders funded a $10.0 million increase in the Related Party Loan and received 2.6 million warrants to purchase 2.6 million shares of our Class A Stock at a price of $5.74 per share, subject to certain adjustments. We accounted for the Incremental Loan Warrants as liabilities and recorded them at fair value on the date of the transaction and subsequently re-measured to fair value at each reporting date with changes in the fair value included in earnings. We determined the fair value of the Incremental Loan Warrants to be $64.9 million at September 30, 2020. During the nine months ended September 30, 2020, we recognized a loss of $43.3 million in our condensed consolidated statement of operations related to the change in fair value of these warrants. There was no gain or loss on the Incremental Loan Warrants for the nine months ended September 30, 2021 as they were all exercised in 2020.

There were 15.5 million public warrants issued in connection with GPAC’s formation and IPO and 12.8 million sponsor warrants issued pursuant to a simultaneous private placement with the IPO. We have accounted for these warrants as liabilities and recorded them at fair value on the date of the transaction and subsequently re-measured to fair value at each reporting date with changes in fair value included in earnings. The 1.9 million sponsor warrants outstanding at ~~September~~both June 30, 2022 and 2021 had fair values of $0.1 million and $14.5 million, respectively. The decrease in fair value was primarily due to the Company’s Class A stock price, one of the primary assumptions used to re-measure the warrant liability, declining from $26.41 at June 30, 2021 ~~had a fair value of $9.0 million. The fair value of the public and sponsor warrants outstanding~~to $3.06 at ~~September~~June 30, ~~2020 was $188.5 million.~~2022. During the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021, we recognized ~~a gain~~gains of ~~$19.4~~$4.3 million and $14.0 million, respectively, in our condensed consolidated ~~statement~~statements of operations related to ~~a decrease~~decreases in the fair value of the ~~sponsor~~ warrants exercised during the nine-month period or that were outstanding at September 30, 2021. During the nine months ended September 30, 2020, we recognized a loss of $169.3 million in our condensed consolidated statement of operations related to an increase in the fair value of the public and sponsor warrants exercised during the prior year nine-month period or that were outstanding at the end of ~~September 30, 2020.~~

~~Loss on Extinguishment of Debt~~

~~On September 3, 2020,~~ the Company paid $45.0 million to retire, in full, all indebtedness related to Purple LLC’s Related Party Loan. The payment included $25.0 million for the original loan under the agreement, $10.0 million for a subsequent incremental loan, $6.6 million for paid-in-kind interest, $2.5 million for a prepayment fee and $0.9 million for accrued interest. As a result of paying off the Related Party Loan, the Company recognized a $5.8 million loss on extinguishment of debt during the nine months ended September 30, 2020.respective periods.

Income Tax ~~Receivable Agreement Expense~~(Expense) Benefit

The tax receivable agreement liability totaled $171.5 million and $172.0 million at September 30, 2021 and December 31, 2020, respectively. During the first nine months of 2021, we realized $0.6 million of tax receivable agreement income due to the impact of recording the 2020 provision to return adjustments. Of the $168.3 million liability recorded during the nine months ended September 30, 2020, $134.9 million relates to current year exchanges and was recorded as an adjustment to stockholders’ equity and $33.5 million was recorded to expense as it related to reestablishing the tax receivable agreement liability related to prior year exchanges.

~~Income Tax Benefit (Expense)~~

~~Income tax expense was $1.0 million for the nine months ended September 30, 2021, compared to~~We had an income tax benefit of ~~$35.8~~$6.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020. Income~~2022 compared to income tax expense of $3.5 million for the ~~nine~~six months ended ~~September~~June 30, 2021 was primarily the result of no longer having a full valuation allowance, the decrease in noncontrolling interest, and the change in fair value of the warrant liability which is treated as a permanent item for tax purposes.2021. The income tax benefit in the ~~comparative prior nine-month period~~first six months of 2022 was primarily ~~due to a portion~~the result of the ~~valuation allowance associated with the Company’s federal and state deferred tax assets being released and recorded as an~~Company having a net loss before income ~~tax benefit during the nine months ended September 30, 2020.~~taxes of $28.0 million.

Noncontrolling Interest

The Company calculates net income or loss attributable to noncontrolling interests on a quarterly basis using their weighted average ownership percentage. Net ~~income~~loss attributed to noncontrolling interests was $0.2 million for the six months ended June 30, 2022 compared to net income of $0.1 million for the ~~nine~~six months ended ~~September~~June 30, 2021, compared to $7.2 million for the nine months ended September 30, 2020. This decrease is the result of the noncontrolling interest ownership percentage being significantly lower in 2021 than 2020.2021.

Liquidity and Capital Resources

Our ~~primary~~principal sources of funds are cash ~~needs have historically consisted~~flows from operations and cash and cash equivalents on hand, supplemented with borrowings made pursuant to our credit facilities and proceeds received from offerings of ~~working capital,~~our equity capital. Principal uses of funds consist of payments of principal and interest on our debt facilities, capital expenditures and ~~debt service.~~working capital needs as well as other contractual obligations described below. Our working capital needs depend largely upon the timing of cash receipts from product sales, payments to vendors and others, changes in inventories, and operating lease payment obligations. Our cash and working capital positions were ~~$83.6~~$41.2 million and ~~$74.9~~$80.1 million, respectively, as of ~~September~~June 30, ~~2021~~2022 compared to ~~$123.0~~$91.6 million and ~~$96.9~~$87.5 million, respectively, as of December 31, 2020. Inventories as of September 30, 2021 totaled $84.0 million compared with $65.7 million as of December 31, 2020 as production returned to planned levels and we were able to increase our finished goods inventory to adequate stock levels to enable timely shipments to our customers.2021. Cash used for ~~purchases~~capital expenditures decreased from $26.4 million in the first six months of ~~property and equipment increased from $14.2~~2021 to $26.1 million during the first ~~nine~~six months of ~~2020 to $40.1 million during~~2022. Our capital expenditures in the first ~~nine~~six months of ~~2021. This increase~~2022 primarily ~~resulted from continuing to invest in our business by building out our~~consisted of leasehold improvements and furniture and fixtures associated with the opening of new manufacturing facility in Georgia that began operations in March 2021, enhancing our manufacturing capabilities in Utah, scaling our infrastructure to support the growth of our workforce, and opening 11 new Company showrooms during the first nine months of 2021.Purple retail showrooms.

In response to the COVID-19 pandemic, we took a number of precautionary measures to manage our resources and mitigate its adverse impact. Given the initial difficulty in predicting how long the pandemic would persist and its full impact, we managed our business and opportunities to preserve liquidity. In the second half of 2020, we ended most of the cash preservation programs and returned to full production to meet increased demand. During 2021, we have increased our inventory levels and invested in our manufacturing capacity and showroom expansion. Subject to certain assumptions regarding the duration and severity of the COVID-19 pandemic, and our responses thereto, based on our current projections we believe our cash on hand, ongoing cash generated from our DTC business, amounts available under our line of credit, increasing demand of our products in the wholesale channel and continuing ramp up of store operations, will be sufficient to cover our working capital requirements and anticipated capital expenditures for the next 12 months.

On September 3, 2020, we paid $45.0 million to retire, in full, all indebtedness related to Purple LLC’s Related Party Loan. The payment included $25.0 million for the original loan under the agreement, $10.0 million for a subsequent incremental loan, $6.6 million for paid-in-kind interest, $2.5 million for a prepayment fee and $0.9 million for accrued interest.

Also on September 3, 2020, Purple LLC entered into the 2020 Credit Agreement that provided for a $45.0 million term loan (the “Term Loan”) and a $55.0 million revolving line of credit. The agreement has a five-year term and borrowing rates for both the Term Loan and revolving line of credit are based on Purple LLC’s leverage ratio and can range from LIBOR plus a 3.00% to 3.75% margin with a LIBOR minimum of 0.50%. As of September 30, 2021, there was no balance outstanding on the revolving credit facility. Proceeds from the Term Loan were used to retire all indebtedness associated with the Related Party Loan.

During the nine months ended September 30, 2021, 6.6 million sponsor warrants were exercised on a cash and cashless basis resulting in the issuance of 2.3 million shares of Class A Stock. The proceeds received for the cash exercise was $0.1 million. At September 30, 2021, there were 1.9 million sponsor warrants outstanding.

In the event our cash flow from operations or other sources of financing are less than anticipated, we believe we will be able to fund operating expenses and comply with debt covenants based on our ability to scale back operations, reduce marketing spend, use the liquidity we have available under our revolving line of credit and postpone or discontinue our growth strategies. In such event, this could result in slower growth or no growth, and we may run the risk of losing key suppliers, we may not be able to timely satisfy customer orders, and we may not be able to retain all of our employees. In addition, we may be forced to restructure our obligations to current creditors or pursue work-out options.

~~On November 8, 2021, we provided notice to KeyBank National Association requesting a $55.0 million draw on our revolving line of credit under the~~Our 2020 Credit Agreement, ~~which represents the full amount available under the revolving line of credit. The initial borrowing rate will be 3.50%, based on the LIBOR floor of 0.5% plus 3.00%.~~

As described above, we experienced production and demand issues in the second and third quarters of 2021 that adversely affected net revenues. We have also experienced increases in shipping, raw material and labor costs. While we have returned to planned production levels, we currently anticipate that the impact of lower-than-expected demand and higher shipping, material and labor costs will continue to adversely affect our business and results of operations through the fourth quarter of 2021. These issues may adversely affect our ability to comply with covenants under the 2020 Credit Agreement, which could result in our default under such covenants. If we are unable to comply with theas amended, includes various covenants and other conditions under the 2020 Credit Agreement, we will need to seek a waiver or amendment to avoid a default. However, we may not be able to obtain such a waiver or amendment or may be required to incur additional expenses or accept unfavorable terms.

If cash flow from operations or available financing under the 2020 Credit Agreement are not sufficient to fund our operating expenses or our growth strategies, we may need to raise additional capital. Our ability to obtain additional or alternative capital on acceptable terms or at all is subject to a variety of uncertainties, including instability in the credit and financial markets resulting from macroeconomic factors and approval from the lenders under the 2020 Credit Agreement. Adequate financing may not be available or, if offered, may only be available on unfavorable terms. The restrictive covenants in the 2020 Credit Agreementobligations that may make it difficult to obtain additional capital on terms that are favorable to us and to execute on our growth strategies. In addition, in order to continue satisfying the conditions of the debt agreement we may ~~not~~ be ~~able~~required to ~~satisfy~~scale back operations, reduce marketing spend, prepay debt and postpone or discontinue our growth strategies. We may also be forced to restructure our obligations to current creditors, pursue work-out options or seek additional funding sources including new debt or equity capital.

Based on our current projections, we believe our cash on hand, amounts available under our revolving line of credit, and expected cash to be generated from e-commerce, wholesale, and Purple retail store channels will be sufficient to meet our working capital requirements, comply with debt covenants and cover anticipated capital expenditures for the ~~conditions necessary~~next 12 months and beyond.

Underwritten Offering

Debt

On September 3, 2020, Purple LLC entered into the 2020 Credit Agreement that provided for a $45.0 million term loan and a $55.0 million revolving line of credit. The term loan is being 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 ~~obtain additional funds pursuant to the~~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. In November 2021, the Company executed a $55.0 million draw on its revolving line of credit, which represented the full amount available under the line. On March 31, 2022, the Company used a portion of the net proceeds from the offering to repay in full the $55.0 million of principal outstanding on the revolving line of credit.

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. ~~There~~On February 28, 2022, prior to the covenant compliance certification date, the Company entered into the first amendment of the 2020 Credit Agreement to avoid a breach of these covenants and potential default. This amendment contained a covenant waiver period such that the net leverage ratio and fixed charge coverage ratio would not be tested for the fiscal quarters ended December 31, 2021, March 31, 2022 and June 30, 2022. Other modifications in the amendment included revised leverage ratio and fixed charge coverage definitions and thresholds, the addition of minimum liquidity requirements with mandatory prepayments of the revolving loan if cash exceeded $25.0 million, new weekly and monthly reporting requirements, limits on the amount of capital expenditures, the addition of a lease incurrence test for opening additional showrooms, and additional negative covenants during a covenant amendment period that extends into 2023 until certain conditions are met. In addition, the interest rate on any outstanding borrowings under the 2020 Credit Agreement was changed from LIBOR with a floor of 0.5% plus an applicable margin (historically at 3.0%) to an initial rate of SOFR with a floor of 0.5% plus 4.75%, for a total rate of 5.25% if the applicable liquidity threshold is ~~no assurance we will obtain~~met. If the ~~capital we require. As~~Company does not meet this threshold, the interest rate would increase to SOFR with a ~~result, there can be no assurance~~floor of 0.5% plus 9.00%. Once the Company achieves a consolidated leverage ratio that weis below 3.00 to 1.00, the interest rate will be ~~able~~based on SOFR with a floor of 0.5% plus a 3.00% to ~~fund our future operations or growth strategies. In addition, future equity or~~3.75% margin depending on the consolidated leverage ratio. The interest rate on the term loan was 6.07% as of June 30, 2022.

Pursuant to the first amendment of the 2020 Credit Agreement, the Company incurred fees and expenses of $0.9 million that were recorded as debt financings may require us to also issue warrants or other equity securities that are likely to be dilutive to our existing stockholders. Newly issued securities may include preferences or superior voting rights or, as described above, may be combined with the issuance ~~of warrants or other derivative securities, which each may have additional dilutive effects. Furthermore, we may incur substantial~~ costs in ~~pursuing future capital~~the condensed consolidated balance sheet and ~~financing, including~~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 CCM and its investment ~~banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required~~affiliates to ~~recognize non-cash expenses~~acquire 35% or more of the combined voting power of all equity interests of the Company entitled to vote for the election of members of the Company’s board of directors without constituting an event of default. CCM is considered a related party of the Company in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition. If we cannot raise additional funds on favorable terms or at all, we may not be able to carry out all or partsthat Adam Gray, a member of our ~~long-term growth strategy, maintain our growth~~board of directors, serves as a managing partner of CCM.

Pursuant to the second amendment of the 2020 Credit Agreement, the Company incurred fees and ~~competitiveness or continue~~expenses of $0.4 million that were recorded as debt issuance costs in ~~business.~~the condensed consolidated balance sheet. The Company accounted for this amendment as a modification of existing debt in accordance with ASC 470 – Debt.

Tax Receivable Agreement

We are required to make certain payments to InnoHold under ~~the~~a tax receivable agreement, which may have a material adverse effect on our liquidity and capital resources. We are currently unable to determine the total future amount of these payments due to the unpredictable nature of several factors, including the timing of future exchanges, the market price of shares of Class A ~~Stock~~common stock at the time of the exchanges, the extent to which such exchanges are taxable and the amount and timing of future taxable income sufficient to utilize tax attributes that give rise to the payments under the ~~tax receivable~~ agreement. As of ~~September~~June 30, 2022 and December 31, 2021, the tax receivable agreement liability reflected in ~~our condensed~~the Company’s consolidated balance sheet ~~is $171.5~~was $162.2 million and $168.1 million, respectively. This decrease was due to a $5.8 million payment that was made during the first quarter of ~~which $5.9 million is classified as other current liabilities in the condensed consolidated balance sheet.~~2022.

Other Contractual Obligations

In addition to the material contractual obligations discussed above, other material contractual obligations primarily include operating lease payments obligations. See Note 8 of the condensed consolidated financial statements for additional information.

Cash Flows for the ~~Nine months~~Six Months Ended ~~September~~June 30, 2022 Compared to the Six Months Ended June 30, 2021 ~~and 2020~~

The following summarizes our cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 as reported in our condensed consolidated statements of cash flows (in thousands):

Nine Months Ended
September 30,
2021 2020
Net cash provided by operating activities $ 132 $ 87,400
Net cash used in investing activities (41,498 ) (25,084 )
Net cash provided by financing activities 2,027 2,161
Net (decrease) increase in cash (39,339 ) 64,477
Cash, beginning of the period 122,955 33,478
Cash, end of the period $ 83,616 $ 97,955

~~Nine months ended September 30, 2021 Compared to the Nine months ended September 30, 2020~~

	Six Months Ended June 30,
	2022			2021
Net cash provided by (used in) operating activities	$	(52,804	)	$	11,469
Net cash used in investing activities		(26,055	)		(26,447	)
Net cash provided by financing activities		28,412			2,104
Net decrease in cash		(50,447	)		(12,874	)
Cash, beginning of the period		91,616			122,955
Cash, end of the period	$	41,169		$	110,081

Cash ~~provided by~~used in operating activities ~~was minimal during the nine months ended September 30, 2021 compared to $87.4~~of $52.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020. The decrease in cash provided by operations~~2022 primarily resulted from a ~~$49.9~~$22.0 million ~~decrease in cash provided by operating income which was mainly driven by~~ net ~~revenues being unfavorably impacted by production and demand issues experienced in the second and third quarters of 2021, coupled~~loss combined with ~~higher marketing and sales expenses, increased legal and professional fees and planned increases in our workforce. The decrease in cash provided by operations was further impacted by~~ a ~~$37.3~~$30.1 million decrease in operating cash ~~flows~~flow related to net changes inof operating assets and ~~liabilities for the nine months ended September 30, 2021 compared~~liabilities. These decreases related mostly to ~~the corresponding nine-month period in the prior year. This decrease consisted of decreased cash from changes in period-over-period fluctuations~~a $6.1 million increase in accounts receivable ~~inventories~~ and ~~liabilities,~~a $37.0 million decrease in accounts payable, offset in part by ana $13.8 million decrease in inventories. The increase in ~~cash related~~accounts receivable was primarily due to ~~a change~~the timing of wholesale partner payments. The decline in accounts payable was mainly due to the ~~year-over-year fluctuation~~balance at prior year-end being higher than normal because of payment timing coupled with the impact of larger advertising spend in ~~prepaid inventory and other assets. We currently anticipate that our operating results for~~ the fourth quarter of ~~2021, including cash provided by operating activities, will continue~~2021. The decrease in inventory was primarily due to ~~be adversely impacted by slower recovery~~management’s efforts to ~~prior demand levels,~~rebalance production and ~~rising shipping, material and labor costs.~~fulfillment operations during the first half of 2022.

Cash used in investing activities ~~was $41.5~~reflected capital expenditures of $26.1 million during the six months ended June 30, 2022 compared to $26.4 million for the ~~nine~~six months ended ~~September~~June 30, 2021 compared to $25.1 million for the nine months ended September 30, 2020. This increase primarily resulted from continuing to invest in our business by building out our new manufacturing facility in Georgia that began operations in March 2021, enhancing our manufacturing capabilities in Utah, scaling our infrastructure to support the growth of our workforce, and opening 11 new Company showrooms2021. Capital expenditures during the first ~~nine~~six months of ~~2021.~~2022 primarily consisted of investments in leasehold improvements and furniture and fixtures related to the opening of new Purple retail showrooms.

Cash provided by financing activities was $28.4 million during the ~~nine~~six months ended ~~September~~June 30, ~~2021 was $2.0 million~~2022 compared to ~~$2.2~~$2.1 million ~~of cash provided by financing~~during the six months ended June 30, 2021. Financing activities during the ~~nine months ended September 30, 2020. Financing activities in the~~ first ~~nine~~six months of ~~2021~~2022 included ~~$4.1 million in proceeds from an InnoHold indemnification payment and $1.2~~$92.9 million of net proceeds received from ~~warrant and~~the underwritten stock ~~option exercises,~~offering, offset in part by ~~$1.7~~a $55.0 million ~~in principal payments on the Term Loan, member tax distributions~~revolving line of ~~$1.0 million and~~credit payment, a ~~$0.6~~$5.8 million payment ~~for~~on the tax receivable ~~agreement.~~agreement, and $3.8 million in other debt related payments.

Critical Accounting Policies

We discuss our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our ~~2020~~2021 Annual Report on Form ~~10-K/A~~10-K filed ~~May 10, 2021.~~March 1, 2022. There were no significant changes in our critical accounting policies since the end of fiscal ~~2020.~~2021.

~~Off-Balance-Sheet Arrangements and Contractual Obligations~~

As of September 30, 2021, we were not involved in any unconsolidated special purpose entity transactions and did not have any off-balance-sheet financing. Also, there was no balance outstanding on our $55.0 million revolving credit facility as of September 30, 2021.

There have been no material changes to our contractual obligations during the three months ended September 30, 2021 from those previously disclosed in our Form 10-Q for the quarterly period ended March 31, 2021.

~~Seasonality and Cyclicality~~

We believe that sales of our products are typically subject to seasonality corresponding to different periods of the consumer spending cycle, holidays and other seasonal factors. Our sales may also vary with the performance of the broader economy consistent with the market.

Available Information

Our website address is www.purple.com. We make available free of charge on the Investor Relations portion of our website, investors.purple.com, our annual report on Form ~~10-K/A,~~10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~Not Applicable.~~Interest Rate Risk

Our operating results are subject to risk from interest rate fluctuations on the outstanding borrowings under our 2020 Credit Agreement. Our term loan and revolving line of credit both bear interest at variable rates, which exposes us to market risks relating to changes in interest rates. Interest rate risk is highly sensitive due to many factors, including U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our control. As of June 30, 2022, we had $39.7 million of variable rate debt outstanding under our term loan. We had no borrowings outstanding under our revolving line of credit as of June 30, 2022. An increase of 100 basis points in the effective interest rate on our outstanding debt at June 30, 2022 would result in an increase in interest expense of approximately $0.4 million over the next 12 months. We do not use derivative financial instruments for speculative or trading purposes, but this does not preclude our adoption of specific hedging strategies in the future.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Interim Chief Financial Officer (“CFO” and together with the CEO, the “Certifying Officers”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Certifying Officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

Based upon this evaluation, and the above criteria, our CEO and CFO concluded that due to the previously reported material weakness described below, the Company’s disclosure controls and procedures were not effective as of ~~September~~June 30, ~~2021.~~2022.

Previously Reported Material Weakness in Internal Control ~~over Financial Reporting~~

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

~~During the Quarter ended September 30, 2021,~~As previously reported, we ~~identified~~determined a material weakness ~~in internal control over financial reporting related~~existed relating to ineffective information technology general controls (“ITGCs”) in the areas of user access and segregation of duties related to certain information technology (“IT”) systems that support the Company’s financial reporting processes. We believe that these control deficiencies were a result of turnover of critical IT leadership; insufficient training of IT ~~resources;~~personnel; and inadequate risk-assessment processes to identify and assess user access in certain IT ~~environments~~systems that could impact internal controls over financial reporting.

~~The material weakness~~ As a result, we determined that we did not ~~result in any identified misstatements in our consolidated financial statements, and there were no changes~~have effective controls to ~~previously issued financial results. However, because the material weakness creates a reasonable possibility that~~prevent or detect a material ~~misstatement to our consolidated~~ financial ~~statements would not be prevented or detected~~statement misstatement on a timely ~~basis, the Company’s management concluded that at September 30, 2021, the Company’s internal control over financial reporting was ineffective.~~

~~Management’s Plan for Remediation~~basis.

In response to this material weakness, management, with oversight of the Audit Committee of the Board of Directors, has identified and ~~begun to implement~~is in the process of implementing steps to remediate the material weakness. The Company has allocated resources to remediate user access related control and segregation of duties deficiencies. Our remediation ~~plan~~efforts also ~~includes~~include providing training to personnel associated with reviewing IT user access. In addition, we continue to engage consultants to advise us on making further improvements to our ITGCs. Although we intend to complete the remediation process as promptly as possible, we cannot at this time estimate how long it will take to remediate this material weakness. Until this material weakness is remediated, we plan to continue to perform additional analyses and other procedures to ensure that our consolidated financial statements are prepared in accordance with GAAP.

~~Previously Reported Material Weakness~~The material weakness did not result in ~~Internal Control over Financial Reporting~~

Asany identified misstatements in our condensed consolidated financial statements, and there were no changes to previously ~~reported, we determined~~issued financial results. However, because the material weakness creates a reasonable possibility that a material ~~weakness existed related~~misstatement to the design and implementation of sufficient controls and processes around the assessment of complex accounting issues reached in prior periods that continue to impact the Company, specifically related to the valuation and classification of warrants. As a result, we determined that we didour condensed consolidated financial statements would not ~~have effective controls to prevent~~be prevented or ~~detect a financial statement misstatement~~detected on a timely ~~basis.~~

~~In response to this material weakness, we effectively implemented enhanced processes and controls to include additional steps in management’s review of historical complex accounting issues~~basis, the Company’s management concluded that ~~may continue to impact~~at June 30, 2022, the Company. We have also increased communication among our personnel and third-party professionals with whom we consult regarding the application of complex accounting transactions. Based on these measures, management has tested theCompany’s internal control ~~activities and found them to be effective and has concluded that the previously reported material weakness described above has been remediated as of September 30, 2021.~~over financial reporting was ineffective.

(b) Changes in Internal Controls Over Financial Reporting.

Other than the ~~changes described above, during~~remediation efforts related to the ~~three months ended September 30, 2021,~~design and implementation of sufficient controls and processes around ITGCs, there ~~have been~~were no changes in our internal control over financial reporting during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal ~~controls~~control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is from time to time involved in various claims, legal proceedings and complaints arising in the ordinary course of business. Please refer to Note 1113 — Commitments and Contingencies and Note 20 – Subsequent Events to the condensed consolidated financial statements contained in this report for certain information regarding our legal proceedings.

ITEM 1A. RISK FACTORS

Except as described below, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K filed with the SEC on March ~~11, 2021 as amended by Form 10-K/A filed on May 10, 2021.The~~1, 2022.The disclosure of risks identified below does not imply that the risk has not already materialized.

~~Lack~~Changes in economic conditions, including inflationary trends in the price of ~~availability and quality of~~our input costs, such as raw materials and labor, and ~~shipping services, or increases in the cost of such inputs,~~impacts on our consumers, could ~~cause~~adversely affect our business and ~~has caused delays that could result in our inability to provide goods to our customers or could increase our costs, either of which could decrease our earnings.~~financial results.

The bedding industry is subject to volatility in the price of petroleum-based and steel products, which affects the cost of certain raw materials. The price and availability of these raw materials are subject to market conditions affecting supply and demand. Given the significance of the cost of these materials to our products, volatility in the prices of the underlying commodities can significantly affect profitability.

We have experienced and may continue to experience, volatility and increases in the price of certain of these raw materials as a result of a global market and supply chain disruptions, continuing impacts of the COVID-19 pandemic, and the broader inflationary environment.

In ~~manufacturing~~addition, persistent inflation has and may continue to erode consumer discretionary spending. Reductions in consumer discretionary spending have and we anticipate will continue to adversely affect demand for our products.

We may not be able to successfully anticipate consumer trends and demand and our failure to do so may lead to loss of consumer acceptance of the products we ~~use various commodity components, such~~sell, resulting in reduced net sales.

Our success depends in part on our ability to anticipate and respond to changing trends and consumer demands in a timely manner. Changes in consumers’ tastes and trends and the resulting change in our product mix, as ~~polyurethane foam, oil,~~well as failure to offer our ~~spring units, ingredients~~consumers multiple avenues for purchasing our products, could adversely affect our business and operating results. For example, as retail stores began to reopen following the elimination or easing of restrictions in connection with the COVID-19 pandemic, consumers began to shift away from online retail purchases towards brick-and-mortar shopping. Our gross margins for sales through wholesale customers are lower than those in our DTC channel and, as a result, this shift in customer preference has and we anticipate will continue to adversely impact our gross margins.

Further, general macroeconomic conditions, including persistent inflation, has and may continue to adversely affect consumer demand for our ~~Hyper-Elastic Polymer material, our water-based adhesive and other raw materials. Because we~~products, which are ~~dependent on outside suppliers~~generally priced at a premium. Any reductions in consumer demand for our ~~raw materials, lack~~products has and may continue to adversely affect our sales and financial position.

If we fail to identify and respond to emerging trends, consumer acceptance of ~~availability,~~the products we manufacture and ~~quality~~sell and our image with current or potential customers may be harmed, which could reduce our net sales. If we misjudge market trends, we may significantly overstock inventory and be forced to take significant inventory markdowns, which would have a negative ~~effect~~impact on our ~~cost~~gross profit and cash flow. Conversely, shortages of ~~sales and~~inventory or time to fulfillment of our ~~ability to meet~~products that prove popular could also reduce our ~~customers’ demands. Competitive and marketing pressures may prevent us from passing along price increases to our customers, and the inability to meet our customers’ demands could cause us to lose~~ sales.

~~Some components, such as foam~~The previous growth of our business placed significant strain on our resources and spring units, are widely used in our industry. Shortages in such components, due to any reason including increase in demand, weather events, supply chain difficulties within the supplier or otherwise, could adversely affect our production capacity and financial results. If we were unable to obtain raw materials and components from suppliers, we would have to find replacement suppliers. Any new arrangements for raw materials and components might not be on favorable terms, if we are ~~able~~unable to ~~enter into new arrangements at all. If a supplier for a component failed to supply such component in required amounts this could significantly interrupt production and increase costs.~~manage future growth, we may not have profitable operations or sufficient capital resources.

~~Even if~~Historically, we ~~are able~~have expanded our operations, including expanding our workforce, increasing our product offerings and scaling our infrastructure to obtain raw materials and other production inputs in a timely manner, supply chain constraints, inflation, and other factors may increase the costs of shipping, raw materials, labor, and other production and operational resources. We have experienced and expect to continue to experience increases in the cost of core materials and labor needed to manufacture our products. Such cost increases could adversely impact our production capacity and efficiency and reduce our gross margins and earnings.

The ongoing COVID-19 pandemic, including measures taken in response by governments and businesses worldwide to contain its spread, and general economic conditions have adversely impacted and are expected to continue to adversely impact global supply chain, manufacturing, and logistics operations. Shipping and freight costs and delays have also been increasing as port closures, port congestion, and shipping container and ship shortages have increased over the last several months. To the extent the COVID-19 pandemic and other events result in continuation or worsening of manufacturing and shipping delays and constraints, our suppliers of raw materials and other components may have difficulty obtaining and providing the materials we require to manufacture our products or may increase the costs of such materials, which could adversely affect our earnings and our ability to acquire and maintain adequate inventory and meet demand for our products. Any significant delay or interruption in our supply chain, or our inability to obtain substitute components or materials from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demandsupport expansion of our ~~customers~~manufacturing capacity, our wholesale channel expansion and ~~could harm~~the opening of Purple retail showrooms. Our planned growth includes increasing our ~~business.~~manufacturing efficiencies, developing and introducing new products and developing new and broader distribution channels, including wholesale and Purple retail showrooms, and extending our global reach to other countries. This expansion increases the complexity of our business and places significant strain on our management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions.

Our continued success depends, in part, upon our ability to manage and expand our operations and facilities and production capacity. The growth in our operations has placed, and may continue to place, significant demands on our management and operational and financial infrastructure. If we do not manage growth effectively, the quality of our products and fulfillment capabilities may suffer which could adversely affect our operating results. Our revenue growth may not be sustainable, and our percentage growth rates may decrease. If we are unable to satisfy our liquidity and capital resource requirements, we may have to scale back, postpone or discontinue our growth strategies, which could result in slower growth, no growth, or shrinking, and we may run the risk of losing key suppliers, we may not be able to timely satisfy customer orders, and we may not be able to retain our employees. In addition, we may be forced to restructure our obligations to creditors or pursue work-out options.

Our growth depends in part on our ability to manage the opening and operating of new production facilities and Purple retail showrooms, which will require our entering into leases and other obligations. To be successful, we will need to continue developing retail expertise and we will need to hire new employees in states that may have employment laws that could increase our expenses. In general, operating new facilities and opening Purple retail showrooms in new locations exposes us to laws in other states, including California, that may not be as employer-friendly as those in which we currently operate, and may expose us to new liabilities. If we are not able to successfully manage the process of expanding operations geographically, opening Purple retail showrooms and maintaining operations in an expanding number of facilities and Purple retail showrooms, we may have to close Purple retail showrooms or operations facilities and incur sunk costs and continuing obligations that could put a strain upon our resources, damage our brand and reputation and limit our growth.

To manage growth effectively, we would need to continue to implement operational, financial and management controls and reporting systems and procedures and improve the systems and procedures that are currently in place. There is no assurance that we will be able to fulfill our staffing requirements for our business, successfully train and assimilate new employees, or expand our management base and enhance our operating and financial systems. Failure to achieve any of these goals will prevent us from managing our growth in an effective manner and could have a material adverse effect on our business, financial condition or results of operations. In addition, a softening of demand, whether caused by changes in customer preferences or a weakening of the U.S. or global economies, may result and has resulted in decreased revenue or growth. For example, we are experiencing weaker demand in part as a result of current inflationary trends. Further, we may not be able to accurately forecast our growth rate. We base our expense levels and investment plans on sales estimates. A significant portion of our expenses and investments is fixed, and we may not be able to adjust our spending quickly enough if our sales are less than expected.

We have identified the need for improved processes and procedures to avoid delays in the timely delivery of our mattress products and to improve the customer’s experience. Also, we have experienced rapid growth in our employee base, and the need to implement processes and procedures for improving employee training and retention. Competition for employees where our production facilities are located also has increased the costs for employee retention. We have implemented improved processes and procedures in an environment of continuous change, but our use of resources may not be as effective as intended or we may need to apply more resources than expected to continue to make changes to improve our employee retention and effectiveness and the quality of our products and services over time. If we are unable to make continuous improvement, achieve greater efficiencies in our operating expenses and improve our products and services, our business could be adversely affected.

Our expansion into new products, market segments and geographic regions subjects us to additional business, legal, financial, and competitive risks.

The majority of our sales are made directly to consumers through our DTC channels. We have been expanding our business into the wholesale distribution channel through relationships with our wholesale partners but there can be no assurance that we will continue to experience success with our wholesale partners or that anticipated new locations will be successful.

We may be unsuccessful in generating additional sales through wholesale channels. We may extend credit terms in connection with such relationships and such relationships may expose us to the risk of unpaid or late paid invoices. In addition, we may provide fixtures to such partners that may be difficult to recover or re-use. Our wholesale customers may not purchase our products in the volume we expect.

Profitability, if any, from sales to wholesale customers and new product offerings may be lower than from our DTC model and current products, and we may not be successful enough in these newer activities to recoup our investments in them. If any of these issues were to arise, they could damage our reputation, limit our growth, and negatively affect our operating results.

We may be unsuccessful in opening any Purple retail showrooms beyond those already opened in cities across the U.S. Operating Purple retail showrooms includes additional risks. For example, we will incur expenses and accept obligations related to additional leases, insurance, distribution and delivery challenges, increased employee management, and new marketing challenges. If we are not successful in our efforts to profitably operate these new stores, our reputation and brand could be damaged, growth could be limited, and our business may be harmed.

In addition, offerings of new products through our e-commerce, wholesale distribution channel and Purple retail showrooms may present new and difficult challenges, and we may be subject to claims if customers of these offerings experience service disruptions or failures or other quality issues. Expansion of sales channels may require the development of additional, differentiated products to avoid price and distribution conflicts between and within sales channels. Wholesale expansion increases our risk as our wholesale partners will require delaying payments to us on net terms ranging from a few days to 60 or more days, or they may delay paying us beyond the agreed-upon net terms or fail to pay. Our Company showroom expansion increases our risk for inventory shrinkage from destruction, theft, obsolescence and other factors that render such inventory unusable or unsellable.

New products may come with unknown warranty and return risks. New product offerings or expansion into new market channels or geographic regions may subject us to new or additional regulation, which would impose potentially significant compliance and distribution costs.

Our future growth and profitability depend ~~in part,~~ upon the strength of our Purple brand and the effectiveness and efficiency of our marketing programs and our ability to ~~achieve~~attract and ~~maintain sufficient production capacity to meet customer demands.~~retain customers.

We ~~manufacture~~are highly dependent on the effectiveness of our ~~mattresses using~~marketing messages and the efficiency of our ~~proprietary~~advertising expenditures in generating consumer awareness and ~~patented Mattress Max machinery~~sales of our products. We continue to ~~make~~evolve our ~~Hyper-Elastic Polymer cushioning material. Because these machines are proprietary~~marketing strategies, adjusting our messages, the amount we spend on advertising and where we ~~do not yet have a long history of their maintenance needs, we~~spend it. We may not always be ~~able~~successful in developing effective messages and new marketing channels, as consumer preferences and competition change, and in achieving efficiency in our advertising expenditures.

We depend heavily on internet-based advertising to sufficiently maintain them for operation at full capacity or at all when needed. We have experienced unexpected maintenance issues following a shutdown of these machines that took longer to bring them up to full operating capacity then what we expected. Also, because of the unique features ofmarket our ~~Mattress Max machines,~~products through internet-based media and due to continuing improvements to these machines, new machines are not readily available and must be constructed which takes time. We also have experienced inefficiencies in sourcing of materials and production of finished products. We have taken steps to improve our processes and capabilities, but if we are unable to maintain our improvements and continue our improvement initiatives to increase efficiencies, we may not be able to keep up with demand which would harm our business.e-commerce platforms. If we are unable to ~~construct new Mattress Max machines~~continue utilizing such platforms, if those media and ~~implement them into our production process~~platforms diminish in ~~a timely manner,~~efficacy, importance or size, if ~~our existing Mattress Max machines are unable to function at~~consumer usage of the ~~desired capacity,~~platform decreases, or if we are unable to ~~develop replacements for the existing Mattress Max machines if such replacements should become necessary,~~direct our ~~production capacity~~advertising to our target consumer groups, our advertising efforts may be ~~constrained~~ineffective, and our ~~ability to respond to customer demand may~~business could be adversely impacted. We manufacture mattresses and other products using components provided by third-party suppliers. If those third-party suppliers are unable to provide us with such components or if our assembly capacity is insufficient, our ability to respond to customer demand may be adversely impacted. This would negatively impact our ability to grow our business and achieve profitability.

~~Disruption of operations in our manufacturing facilities, including as a result of, among other things, workplace injuries, pandemics or natural disasters, has and could increase our~~affected. The costs of ~~doing business or lead~~advertising through these platforms have increased significantly, which has resulted in decreased efficiency in the use of our advertising expenditures, and we expect these costs may continue to ~~delays~~increase in ~~shipping our products and could materially adversely affect our operating results and our ability to grow our business.~~the future.

We have ~~three manufacturing plants, which~~relationships with traditional and digital media partners, online services, search engines, affiliate marketing websites, directories and other website and e-commerce businesses to provide content, advertising and other links that direct customers to our website. We rely on these relationships as significant sources of traffic to our website and to generate new customers. If we are ~~located in Alpine, Utah, Grantsville, Utah,~~unable to develop or maintain these relationships or develop and ~~McDonough, Georgia. We began operations~~maintain new relationships for newly developed and necessary marketing services on ~~March 3, 2021 in McDonough, Georgia.~~acceptable terms, our ability to attract new customers and our financial condition would suffer. In addition, current or future relationships or agreements may fail to produce the ~~future~~sales that we ~~may also enter into leases~~anticipate. The cost of advertising for ~~additional manufacturing plants.~~web-based platforms, such as Facebook, are increasing. Increasing advertising costs erode the efficiency of our advertising efforts. If we are unable to effectively manage our advertising costs or if our advertising efforts fail to produce the sales that we anticipate, our business could be adversely affected.

~~The disruption~~On October 20, 2020, the United States Department of ~~operations~~Justice brought an antitrust lawsuit against Google claiming that Google improperly uses its monopoly over Internet search to impede competition and harm consumers. Our cost of ~~our manufacturing facilities for a significant period~~advertising on Google may remain high if Google’s monopoly over internet searches is not prevented and competitive search engines are not allowed to compete. Alternatively, if Google is required because of ~~time,~~this lawsuit to split up the company or ~~even permanently, or disruptions to the planned further build-out of the Georgia facility such as through a closure related to the COVID-19 pandemic or the loss of a lease,~~sell assets, there is no assurance this will decrease advertising costs and it may ~~increase our costs of doing business and~~ lead to ~~delays~~increased costs due to an increased number of service providers who obtain oligopoly power to control advertising costs or inefficiencies from a reduction in ~~manufacturing~~scale. Although this lawsuit may lower our advertising costs, there is risk that it may not and shipping our products to customers and could materially and adversely affect our operating results and our ability to grow our business. In addition, the occurrence of workplace injuries or other industrial accidents at one or more of our manufacturing plants has required, and may require in the future, that we suspend production or modify our operations, which couldwould lead to ~~delays in manufacturing~~increased costs which would reduce our profitability and shipping our products to customers. Likewise, acts of workplace violence may require us to temporarily suspend production or modify our operations. Such delays could adversely affect our sales, customer satisfaction, profitability, cash flows, liquidity and financial condition. Because two of our currently operating manufacturing plants are located within the same geographic region, regional economic downturns, natural disasters, closures due to COVID-19, the unavailability of utilities as a result of climate events or otherwise, or other issues could potentially disrupt a significant portion of our manufacturing and other operating activities, which could adversely affect our business. Our Utah facilities are near earthquake fault lines and our Georgia facility is located in an area that may be subject to hurricanes; such natural disasters in these areas could disrupt manufacturing and other operating activities, which could adversely affectharm our business.

~~The ongoing COVID-19 pandemic~~Consumers are increasingly using digital tools as a part of their shopping experience. As a result, our future growth and ~~responses thereto~~profitability will depend in part on (i) the effectiveness and efficiency of our online experience for disparate worldwide audiences, including advertising and search optimization programs in generating consumer awareness and sales of our products, (ii) our ability to prevent confusion among consumers that can result from search engines that allow competitors to use or bid on our trademarks to direct consumers to competitors’ websites, (iii) our ability to prevent internet publication or television broadcast of false or misleading information regarding our products or our competitors’ products, (iv) the nature and tone of consumer sentiment published on various social media sites, and (v) the stability of our website. In recent years, a number of direct to consumer, internet-based retailers, like us, have ~~adversely affected~~emerged and have driven up the cost of basic search terms, which has and may continue to ~~adversely affect aspects~~increase the cost of our ~~business, including, among other things,~~internet-based marketing programs. More recently, the large traditional mattress manufacturers have been increasing their efforts to increase their direct to consumer sales which also is increasing the cost of our ~~supply chain, workforce,~~internet-based marketing programs and ~~operations.~~

The COVID-19 pandemic has resulted in far-reaching economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, the Company’s business, financial condition, capital, liquidity and resultscost of operations. The U.S. federal government, U.S. states and many local jurisdictions have issued at various times, and others in the future may issue, “shelter-in-place” orders, quarantines, mandatory vaccinations, executive orders and similar government orders, restrictions, and recommendations for their residents and employers within their jurisdictions to control the spread of COVID-19. Such orders, restrictions and recommendations, and the perception that additional orders, restrictions or recommendations could occur, have resulted in widespread closures of businesses not deemed “essential,” work stoppages, slowdowns and delays, supply chain constraints (including, for example, shipping delays, capacity constraints, and supply shortages), work-from-home policies, travel restrictions, cancellation of events and decreased employee satisfaction, as well as increased volatility in stock prices, among other effects. While certain jurisdictions may ease some restrictions, we cannot be certain that other jurisdictions will do so or that eased restrictions are permanent. Furthermore, many jurisdictions have experienced a resurgence in COVID-19 cases, which has prompted governments to reinstate previously scaled back restrictions and propose new restrictions. If other jurisdictions experience a resurgence in COVID-19 cases, they may also prolong restrictions or adopt additional restrictions that could negatively affect our business, including, but not limited to, requiring us to close our manufacturing facilities or to require our employees to be vaccinated including those employees who are concerned about being vaccinated as required by federal, state or local rule or regulation. In addition, policies in the United States regarding the government response to the COVID-19 pandemic may further change.customer conversion.

~~We continue~~In the past, we have been the target of publications by purported consumer reviewers who claim to ~~monitor~~have identified health and safety concerns with our ~~operations~~products. While we believe such claims to be baseless, refuting such claims requires us to expend significant resources to educate current and ~~government mandates~~potential customers on the safety of our products. Even if we are able to broadly disseminate factual information to refute such claims and ~~may elect or be required to temporarily close our offices, manufacturing plants or Company showrooms to protect our employees, and limit our access to customers and limit customer use~~reinforce the safety of our products, ~~as they are required to prioritize resources to address the public healthcare needs arising from the COVID-19 pandemic. The disruptions to~~such claims and attendant adverse publicity could persist and damage our ~~activities~~reputation and ~~operations may negatively impact our business, operating results~~brand value and financial condition. There is a risk that government actions, or lack thereof, will not be effective at containing COVID-19, and that government actions or inactions, including the orders and restrictions described above and premature lessening of those restrictions, that are intended to contain the spread of COVID-19 while also minimizing harm to the economy, will have a devastating negative impact on the world economy at large,result in ~~which case the risks to our sales, operating results and financial condition described herein would be elevated significantly.~~lower sales.

The ~~duration~~number of ~~the COVID-19 pandemic’s impact~~third-party review websites is increasing and customers have many platforms on which they can review our ~~business~~products, and such reviews are becoming increasingly influential with consumers. Negative reviews from such sources may receive widespread attention from consumers, which could damage our reputation and brand value and result in lower sales. If we are unable to effectively manage relationships with such reviewers to promote accurate reviews of our products, reviewers may decline to review our products or may post reviews with misleading information, which could damage our reputation and make it more difficult for us to improve our brand value.

If our marketing messages are ineffective or our advertising expenditures, geographic price-points, and other marketing programs, including digital programs, are inefficient in creating awareness and consideration of our products and brand name and in driving consumer traffic to our website, our sales, profitability, cash flows and financial condition may be ~~difficult~~adversely impacted. In addition, if we are not effective in preventing the publication of confusing, false or misleading information regarding our brand or our products, or if there arises significant negative consumer sentiment on social media regarding our brand or our products, our sales, profitability, cash flows and financial condition may be adversely impacted.

We are required to ~~assess or predict. The widespread pandemic has resulted,~~make certain prepayments to any revolving loans and thereafter may continue to result for an extended period, in significant disruption of global financial markets, and may restrict our ability to access capital, which would negatively affect our liquidity. While we have beennot be able to ~~reverse some previous actions undertaken, such~~draw upon our revolving line of credit.

Under the 2020 Credit Agreement, as ~~among others, temporarily deferring capital expenditures, furloughing certain employees,~~amended, if the aggregate amount of cash and ~~temporarily deferring compensation for our senior executives,~~cash equivalents we ~~may be~~hold exceeds $25.0 million, we are required to ~~take such actions again, or take~~prepay an amount equal to the lesser of (i) the outstanding revolving loans and (ii) the amount of cash and cash equivalents in excess of $25.0 million. In addition, we are prohibited from making additional ~~actions,~~borrowings under the revolver if ~~there is a resurgence~~after giving effect to any borrowing, and any transactions to be consummated therewith, the aggregate amount of ~~COVID-19 cases or reinstatement of government restrictions.~~cash and cash equivalents exceeds $25.0 million. As a result of ~~such actions or~~these two restrictions, ~~we may be unable to complete capital expenditure projects or investments in the future, which would limit~~ our ability to ~~grow~~accumulate cash in excess of $25.0 million is limited. If for any reason we are unable to borrow on our ~~business,~~revolving credit facility, we would be limited in available cash to pay expenses and meet our ~~results~~obligations, which lack of ~~operations~~liquidity could impair our relationships with suppliers and ~~financial condition will be adversely affected.~~vendors, delay our growth plans or prevent us from taking actions in our best interest or even continue in business.

~~Further, quarantines~~We may issue debt and equity securities or ~~government reaction or shutdowns for COVID-19 could disrupt our supply chain. Travel and import restrictions~~securities convertible into equity securities, any of which may ~~also disrupt our ability to manufacture or distribute our products. Any import or export or other cargo restrictions related~~be senior to our ~~products~~Class A Stock as to distributions and in liquidation, which could negatively affect the value of our Class A Stock.

In the future, we may attempt to increase our capital resources by entering into additional debt or debt-like financing that is unsecured or secured by up to all of our assets, or by issuing additional debt or equity securities, which could include issuances of secured or unsecured notes, preferred stock, hybrid securities or securities convertible into or exchangeable for equity securities. For example, in March 2022 we completed a public offering of shares of Class A Stock. In the ~~raw materials used~~event of our liquidation, our lenders and holders of our debt would receive distributions of our available assets before distributions to ~~manufacture~~holders of our ~~products~~Class A Stock, and holders of securities senior to the Class A Stock would ~~restrict~~receive distributions of our ~~ability~~available assets before distributions to ~~manufacture~~the holders of our Class A Stock. Because our decision to incur debt and ~~ship products and harm our business, financial condition and results of operations. Our key personnel~~issue securities in future offerings may be influenced by market conditions and other ~~employees could also be affected by COVID-19, potentially reducing their availability. In addition,~~factors beyond our control, we cannot predict or estimate the ~~government responses to COVID-19~~amount, timing or ~~the procedures we take to mitigate its effect on our workforce could reduce the efficiency~~nature of our ~~operations~~future offerings or ~~prove insufficient~~debt financings. Further, market conditions could require us to ~~mitigate~~accept less favorable terms for the ~~adverse impact~~issuance of ~~COVID-19 on~~ our ~~business. We may delay or reduce certain capital spending and related projects until the travel and logistical impacts of COVID-19 are lifted, which could delay the completion of such projects.~~

While many initial quarantines and other government restrictions have been scaled back, there is risk that we will be unable to continue normal production and operations, due to, among other things, disruptions and delays in our supply chain, government relief programs that enable production workers to remain out of the workforce, and difficulties in ramping up our own operations. Quarantines and other restrictions may also be reestablished in response to further outbreaks of COVID-19 or its variants. We may also experience disputes with our suppliers and/or customers as a result of such difficulties. Further, there may be subsequent outbreaks of COVID-19 that could disrupt our operations. In addition, as employees return to work, we may face claims by such employees or regulatory authorities that we have not provided adequate protection to our employees with respect to the spread of COVID-19 at our facilities.

The global outbreak of COVID-19 continues to rapidly evolve. The ultimate impact of the COVID-19 outbreak is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business or the global economy as a whole. We do not yet know the impact that vaccines may have in mitigating or ending the outbreak of COVID-19, or how the availability of such vaccines may affect our work force. We also do not know the impact that government mandated vaccine policies for employers will have on our workforce. However, these effects could have a continuing material impact on our operations, sales and ability to continue as a going concern. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our level of indebtedness, our need to generate sufficient cash flows to service our indebtedness and our ability to comply with the covenants containedsecurities in the ~~agreements that govern our indebtedness.~~future.

Our manufacturing processes involve the use of heavy machinery and equipment, which exposes us to potentially significant financial losses and reputational harm due to workplace injuries or industrial accidents that may occur at our facilities.

Our manufacturing processes involve the use of heavy machinery and equipment and are subject to risks involving workplace injuries, mechanical failures, and industrial accidents, including, among other things, personal injury or death resulting from such incidents at our manufacturing plants. A workplace accident, mechanical failure, industrial accident or any similar problem involving any one or more of our facilities has required, and may require in the future, that we suspend production at one or more of our manufacturing plants, which could lead to delays in manufacturing and shipping our products and adversely affect our business and results of operations. The occurrence of such incidents, or any perceived insufficiency in our response to any such deficiency or problem, could also adversely and materially affect our reputation. If we are unable to meet workplace safety standards or, if our employees or customers perceive us having a poor safety record, it could materially impact our ability to attract and retain new employees and our reputation with our customers could suffer, which could adversely affect our business and results of operations.

In 2021, we experienced an incident involving our manufacturing equipment that resulted in the death of one of our employees. As a result, we shut down our manufacturing equipment while we evaluated the safety of our manufacturing equipment and identified and implemented safety improvements. In addition, once safety improvements were implemented and manufacturing resumed, we experienced unanticipated mechanical and maintenance issues while ramping up to normal production. These delays in production limited our ability to fill customer orders, which has adversely affected our financial results and relationships with customers, including wholesale partners delaying when they started or intend to start ordering products again. Other incidents could result in further production delays, which could adversely affect our operating performance and reputation with our customers. While we have lowered our risk of future safety incidents by committing significant financial resources and time to implementing safety improvements, these safety improvements may cause our production output to decrease and could materially adversely affect our operating results and our ability to grow our business.

The occurrence of such incidents has resulted in and could in the future result in investigations by or the imposition of fines from regulatory authorities or require us to implement corrective actions to address the causes of such incidents, which could require the expenditure of significant resources and may adversely affect our financial condition and operations. Further, the occurrence of such incidents may result in litigation, including personal injury or workers’ compensation claims, which could also adversely affect our financial condition and reputation. While we maintain insurance coverage for certain types of losses, such insurance coverage may be insufficient to cover all losses that may arise.

We have in some instances kept excess amounts of raw material inventory and some finished goods inventory, which could be susceptible to shrinkage that may harm our ability to use or sell such inventory and may adversely impact our profitability.

Although we attempt to maintain only the necessary amounts of raw material inventory on hand, in some instances we have accumulated excess amounts of raw materials inventory. We also have accumulated in the past excess amounts of some finished goods inventory, and we may again have excess amounts of some of our inventory. All such excess inventory is subject to shrinkage from destruction, theft, obsolescence and factors that render such inventory unusable or unsellable, and we have lost inventory for such reasons. Excessive inventory also takes warehouse space that prevents efficient use for other activities. While we take efforts to right-size all raw materials and finished goods inventory, if our efforts are not successful, we could continue to experience excess amounts of some items of raw materials and finished goods and related shrinkage and inefficiencies that could adversely impact our cash flow, margins and profitability.

As a result of production delays earlier this year that limited our ability to fill customer orders, many of our wholesale partners had to adjust their business plans due to the disruption this caused them and they stopped ordering the volume of products we had anticipated, and has taken longer to ramp to volumes that predated the production delays. Despite our ability to again produce enough products to meet the needs of our wholesale customers, expected orders were not received at the levels we anticipated, and it is unknown when they will be received, which could leave us with a larger than desired inventory of finished mattress products that we are ready to deliver. Until we receive orders and are able to deliver these products, they are subject to the risks associated with holding excess inventory. If this occurs, this also could unfavorably impact our cash flow and available working capital and could increase our accounts receivables when orders are received and filled in accordance with payment terms with our wholesale customers.

~~Our business could suffer if we are unsuccessful in making, integrating, and maintaining commercial agreements, strategic alliances, and other business relationships.~~

To successfully operate our business, we rely on commercial agreements and strategic relationships with suppliers, service providers and certain wholesale partners and customers. As we grow, we may acquire other businesses to incorporate into our operations. These arrangements can be complex and require substantial infrastructure capacity, personnel, and other resource commitments. Further, our business partners may have disruptions in their businesses or choose to no longer do business with us and the impact of such disruption or choices could be magnified to the extent such business partners represent a significant part of our business. We may not be able to implement, maintain, or develop the components of these commercial relationships. Moreover, we may not be able to enter into additional commercial relationships and strategic alliances on favorable terms or at all.

Our wholesale relationships may from time to time be terminated by us or our partners, or the terms of such relationships may be amended or modified. As a result of such terminations, we would lose sales previously generated through such relationships, which could have a material adverse impact on our net sales, profitability and financial position. Disputes with wholesale partners also may arise related to such relationships, or any terminations of related agreements, which could cause us to incur expenses, delay our receipt of amounts owed to us, interfere with our relationship with other retailers, subject us to liabilities and distract us from our strategic objectives. As our agreements terminate or relationships unwind, we may be unable to renew or replace these agreements on comparable terms, or at all, and the loss of sales from such relationships could harm our business. We may in the future enter into amendments on less favorable terms or encounter parties that have difficulty meeting their contractual obligations to us, which could adversely affect our operating results.

~~Our present and future services agreements, other commercial agreements, and strategic relationships and acquisitions create additional risks such as:~~

●

~~failure to effectively integrate acquisitions;~~

●

~~disruption of our ongoing business, including loss of management focus on existing businesses;~~

●

~~impairment of other relationships;~~

●

~~variability in revenue and income from entering into, amending, or terminating such agreements or relationships; and~~

●

~~difficulty integrating under the commercial agreements.~~

We have entered into arrangements with several wholesale partners through which we sell certain of our products in their retail stores. We anticipate increasing the number of these partnerships. Our relationships with our wholesale partners may not be profitable to us or may impose additional costs that we would not otherwise incur under our DTC operations. Our wholesale partners may choose not to continue doing business with us or may choose to reduce the amount of our products they order, which would result in a corresponding loss of revenue. Our wholesale partners may experience their own business disruptions, including for example bankruptcy, that could affect their ability to continue to do business with us. Our wholesale partners may engage in conduct that could breach the contractual rights we owe other wholesale partners or interfere with their other legal rights. Our wholesale partners may compete against us in DTC or other channels that are important to us and may erode our business in such channels. Further, maintaining these relationships may require the commitment of significant amounts of time, financial resources and management attention, and may result in prohibitions on certain sales channels through exclusivity requirements, which may adversely affect other aspects of our business.

We have opened and plan to continue to open a growing number of Company showrooms in cities across the U.S. Our business is expanding into additional Company showrooms which, like our online e-commerce retail store, may compete more directly with our wholesale partners for customers. In our effort to make our products available to consumers in multiple retail channels, there is the risk that sales may diminish in other channels, costs may be incurred without an increase in overall sales and our wholesale partners may no longer carry our products. Managing an omni-channel distribution strategy, including the relationships with business partners in each channel, may require significant amounts of time, resources and attention which may adversely affect other aspects of our business.

We attempt to maintain only the necessary amounts of raw material inventory and products, which could leave us vulnerable to shortages in supply of components and products that may harm our ability to satisfy consumer demand and may adversely impact our sales and profitability.

We attempt to maintain only the necessary amounts of products and raw material inventory on hand, which could leave us vulnerable to shortages in supply of products or components that may harm our ability to satisfy consumer demand and may adversely impact our sales and profitability. Lead times for ordered components and products may vary significantly, especially as we source some of our materials and products from China or other countries. Our business may be harmed by legal, regulatory, economic, political, health concerns and unforeseen risks associated with international trade in those countries. Moreover, we may experience increased costs in sourcing Chinese materials as a result of the uncertain status of the U.S.-China trade relationship or may experience related disruption if we seek to replace Chinese suppliers with suppliers in other countries. In addition, some components used to manufacture our products are provided on a sole source basis. Any unexpected shortage of products or materials caused by any disruption of supply or an unexpected increase in the demand for our products, could lead to delays in shipping our products to customers. Any such delays could adversely affect our sales, customer satisfaction, profitability, cash flows and financial condition.

We rely upon several key suppliers that are, in some instances, the only source of supply currently used by us for particular products, materials, components or services. A disruption in the supply or substantial increase in cost of any of these products or services could harm our sales, profitability, cash flows and financial condition.

We currently obtain all of the raw materials and components used to produce our mattresses, pillows and cushions from outside sources. In some cases, we have chosen to obtain these materials and components from suppliers who serve as the only source of supply, or who supply the vast majority of our needs of the particular material or component. While we believe that these materials and components, or suitable replacements, could be obtained from other sources, in the event of a disruption or loss of supply of relevant materials or components for any reason, we may not be able to find alternative sources of supply, or if found, may not be found on comparable terms. In addition, a change in the financial condition of some of our suppliers could impede their ability to provide products to us in a timely manner.

If our relationship with the primary supplier of our mineral oil is terminated, we could have short-term difficulty in replacing this source since there are relatively few other suppliers presently capable of supplying the local volume that we would need in a short period of time.

In addition, shipping and freight delays have also been increasing as port closures, port congestion, and shipping container and ship shortages have increased over the last several months. These events, combined with the impacts of the ongoing COVID-19 pandemic, could result in manufacturing and shipping delays and constraints and limit the ability of our suppliers to provide raw materials and other components in a timely manner, which could adversely affect our ability to acquire and maintain adequate inventory and meet demand for our products. Shipping delays could also adversely affect our ability to deliver products to our customers in a timely manner, which could harm our business.

Our success is highly dependent on our ability to provide timely delivery on a cost-effective basis to our customers, and any disruption in our delivery capabilities or our related planning and control processes may adversely affect our operating results.

An important part of our success is due to our ability to deliver our products to our customers in a timely manner. This in turn is due to our successful planning and distribution infrastructure, including ordering, transportation and receipt processing, the ability of our suppliers to meet our distribution requirements and the ability of our contractors to meet our delivery requirements. Our ability to maintain this success depends on the continued identification and implementation of improvements to our planning processes, distribution infrastructure and supply chain. We also need to ensure that our distribution infrastructure and supply chain keep pace with our anticipated growth and increased product output. The cost of these enhanced processes could be significant and any failure to maintain, grow or improve them could adversely affect our operating results.

We rely on common carriers and freight forwarders to deliver our products to customers on a timely, convenient, and cost-effective basis. We also rely on the systems of such carriers to provide us with accurate information about the status and delivery of our products. Any disruption to the business of delivery carriers could cause our business to be adversely affected. Any significant delay in deliveries to our customers could lead to increased cancellations and returns and cause us to lose sales. Any increase in freight charges could increase our costs of doing business and harm our sales, profitability, cash flows and financial condition. Lack of accurate information from such carriers could damage our brand and our relationship with our customers. In some areas, we are testing Company-owned delivery services that have been successful and efficient, and we intend to continue growing such services as demand and volume dictate. If our Company-owned delivery services do not continue to deliver products in a timely or cost-effective manner, we may need to revert to third party carriers and our reputation and business may be adversely affected.

Our business could also be adversely affected if there are delays in product shipments to us due to freight difficulties, supply chain disruptions or delays (including, for example, from port closures or shipping or labor shortages), delays in product shipments clearing U.S. Customs and Border Protection (“CBP”) for reasons of non-compliance or otherwise, challenges with our suppliers or contractors involving strikes or other difficulties at their principal transport providers or otherwise. The adverse effect on our business could include increase in freight costs if we choose to use more air freight. Our business could also be adversely affected if the business of our suppliers is disrupted because of infectious diseases or fear thereof such that quarantines, factory closures, labor disturbances, and transportation delays result. Such delays and events could adversely affect our profitability and reputation, as well as demand for our products.

In addition, if we are unable to deliver our products in a timely manner, our customers, both DTC and wholesale, may choose to limit future orders of our products, or choose to not order products from us at all. If, as a result of production or shipment issues, demand for our products declines or does not increase, our business and results of operations could be materially and adversely affected.

~~We depend on executive employees, and if we lose the services of members of the executive team, we may not be able to run our business effectively.~~

Our future success depends in part on our ability to attract and retain key executive, merchandising, marketing, sales, finance, operations and engineering personnel. If any of our executives cease to be employed by us, or if our growth or other changes in circumstances require executives with additional skill sets, we would have to hire replacement or additional qualified personnel. Our ability to successfully attract and hire other experienced and qualified executives cannot be assured and may be difficult because we face competition for these professionals from our competitors, our suppliers and other companies operating in our industry and in our geographic locations. Departures and any delay in replacing executives could significantly disrupt our ability to grow and pursue our strategic plans. While we believe our current executives have benefitted and will continue to benefit us, finding qualified replacements is time-consuming, takes Company resources, and can disrupt our growth and achievement of strategic plans. We do not maintain key-person insurance for members of our executive management team.

We have identified a material weakness in our internal control over financial reporting and if we are unable to develop and maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results in a timely manner, which may adversely affect investor confidence in us and materially and adversely affect our business and operating results

During the Quarter ended September 30, 2021, we identified a material weakness in internal control over financial reporting related to ineffective information technology general controls (“ITGCs”) in the areas of user access and segregation of duties related to certain information technology (“IT”) systems that support the Company’s financial reporting processes. We believe that these control deficiencies were a result of turnover of critical IT leadership; insufficient training of IT resources; and inadequate risk-assessment processes to identify and assess access in certain IT environments that could impact internal controls over financial reporting. The material weakness did not result in any identified misstatements in the consolidated financial statements, and there were no changes to previously issued financial results. However, because the material weakness creates a reasonable possibility that a material misstatement to our consolidated financial statements would not be prevented or detected on a timely basis, the Company’s management concluded that at September 30, 2021, the Company’s internal control over financial reporting was ineffective.

We continue to evaluate, design and work through the process of implementing controls and procedures under a remediation plan designed to address this material weakness, but there can be no assurance that we will be able to remediate this material weakness in a timely manner or at all. If our remediation measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our financial statements may contain material misstatements and we could be required to restate our financial results, which could lead to substantial additional costs for accounting and legal fees and stockholder litigation.

Any failure to maintain such internal control could adversely impact our ability to report our financial position and results from operations on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations. Likewise, if our financial statements are not filed on a timely basis, we could be subject to sanctions or investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory authorities. In either case, this could result in a material adverse effect on our business. Failure to timely file will cause us to be ineligible to utilize short form registration statements on Form S-3, which may impair our ability to obtain capital in a timely fashion to execute our business strategies or issue shares to effect an acquisition. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.

~~Regulatory requirements relating to the manufacture and disposal of mattresses may increase our product costs and increase the risk of disruption to our business.~~

The U.S. Consumer Product Safety Commission (“CPSC”) and other jurisdictions have adopted rules relating to fire retardancy standards for the mattress industry. Some states and the U.S. Congress continue to consider fire retardancy regulations that may be different from or more stringent than the current standard. In addition, these regulations require manufacturers to implement quality assurance programs and encourage manufacturers to conduct random testing of products. These regulations also require maintenance and retention of compliance documentation. These quality assurance and documentation requirements are costly to implement and maintain. If any product testing, other evidence, or regulatory inspections yield results indicating that any of our products may not meet the flammability standards, we may be required to temporarily cease production and distribution or to recall products from the field, and we may be subject to fines or penalties, any of which outcomes could harm our business, reputation, sales, profitability, cash flows and financial condition.

The CPSC adopted new flammability standards and related regulations which became effective nationwide in July 2007 for mattresses and mattress and foundation sets. Compliance with these requirements has resulted in higher materials and manufacturing costs for our products and has required modifications to our information systems and business operations, further increasing our costs and negatively impacting our capacity. Some states and the U.S. Congress continue to consider fire retardancy regulations that may be different from or more stringent than the CPSC standard. Adoption of multi-layered regulatory regimes, particularly if they conflict with each other, could increase our costs, alter our manufacturing processes and impair the performance of our products which may have an adverse effect on our business.

Also, California recently enacted laws effective in 2021 requiring mattress retailers delivering mattresses via common carrier in California to offer to pick up their customers’ old mattresses at no cost to the customer. Additionally, California, Rhode Island and Connecticut have all enacted laws requiring the recycling of mattresses discarded in their states. State and local bedding industry regulations vary among the states in which we operate but generally impose requirements as to the proper labeling of bedding merchandise, restrictions regarding the identification of merchandise as “new” or otherwise, controls as to hygiene and other aspects of product handling, disposal, sales, resales and penalties for violations. We or our suppliers may be required to incur significant expense to the extent that these regulations change and require new and different compliance measures.

New legislation aimed at improving the fire retardancy of mattresses, regulating the handling of mattresses in connection with preventing or controlling the spread of bed bugs could be passed, or requiring the collection or recycling of discarded mattresses, could result in product recalls or in a significant increase in the cost of operating our business. In addition, failure to comply with these various regulations may result in penalties, the inability to conduct business as previously conducted or at all, or adverse publicity, among other things. Adoption of multi-layered regulatory regimes, particularly if they conflict with each other, could increase our costs, alter our manufacturing processes and impair the performance of our products which may have an adverse effect on our business. We are also subject to various health and environmental provisions such as 16 CFR Part 1633 (Standard for the Flammability (Open Flame) of Mattress Sets).

Our business and our reputation could be adversely affected by the failure to protect sensitive employee, customer and consumer data, or to comply with evolving regulations relating to our obligation to protect such data.

In the ordinary course of our business, we collect and store certain personal information from individuals, such as our customers and suppliers, and we process customer payment card and check information for purchases via our website. In addition, we may share with third-parties personal information we have collected. Cyber-attacks designed to gain access to sensitive information by breaching security systems of large organizations leading to unauthorized release of confidential information have occurred recently at a number of major U.S. companies despite widespread recognition of the cyber-attack threat and improved data protection methods. Computer hackers may attempt to penetrate our computer system or the systems of third-parties with which we have shared personal information and, if successful, misappropriate personal information, payment card or check information or confidential Company business information. In addition, a Company employee, contractor or other third party with whom we do business may attempt to circumvent our security measures in order to obtain such information and may purposefully or inadvertently cause a breach involving such information. Breaches involving any such information could be more likely to the extent we have any material weakness in internal control over financial reporting related to 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 and third-parties with which we have shared personal information have been subject to attempts to breach the security of networks, IT infrastructure, and controls through cyber-attack, malware, computer viruses, social engineering attacks, and other means of unauthorized access. To the best of our knowledge, attempts to breach our networks and IT infrastructure have not been successful to date, but we have been a victim of a spear-phishing attack. A breach of systems that resulted in the unauthorized release of sensitive data could adversely affect our reputation and lead to financial losses from remedial actions or potential liability, possibly including punitive damages. An electronic security breach resulting in the unauthorized release of sensitive data from information systems could also materially increase the costs we already incur to protect against these risks. We continue to balance the additional risk with the cost to protect us against a breach. Additionally, while losses arising from a breach may be covered in part by insurance that we carry, such coverage may not be adequate for liabilities or losses actually incurred.

We may be subject to data privacy and data breach laws in the states in which we do business, and as we expand into other countries, we may be subject to additional data privacy laws and regulations. State data privacy laws (such as the California Consumer Privacy Act), including application and interpretation, are rapidly evolving. The rapidly evolving nature of state and federal privacy laws, including potential inconsistencies between such laws and uncertainty as to their application, adds additional compliance costs and increases our risk of non-compliance. While we attempt to comply with such laws, we may not be in compliance at all times in all respects. Failure to comply with such laws may subject us to fines, administrative actions, and reputational harm.

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS to be updated

Number		Description
10.1+⁽¹⁾		Separation Agreement entered into between Purple Innovation, LLC and John A. Legg dated April 13, 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 April 14, 2022).
10.2+		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).
10.3+		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.
10.4+		Second Amendment to Purple Innovation, Inc. 2017 Equity Incentive Plan dated ~~July 12, 2021.~~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.
~~10.2+~~⁽¹⁾		~~Restated and Amended Purple Innovation, Inc. 2019 Long-Term Equity Incentive Plan, dated as of July 12, 2021.~~
~~10.3+~~⁽¹⁾		~~Form of Restricted Share Unit Agreement.~~
~~10.4+~~⁽¹⁾		~~Form of Performance-Based Share Unit Agreement.~~
~~10.5+~~⁽¹⁾		~~Purple Innovation, Inc. 2021 Short-Term Cash Incentive Plan, dated as of July 12, 2021.~~
~~10.6+~~⁽²⁾		~~Consultancy Agreement entered into between Purple Innovation, LLC and Bennett Nussbaum dated August 19, 2021.~~
31.1*		Certification by ~~Joseph B. Megibow,~~Robert T. DeMartini, Chief Executive Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification by Bennett L. Nussbaum, Interim Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification by ~~Joseph B. Megibow,~~Robert T. DeMartini, Chief Executive Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification by Bennett L. Nussbaum, Interim Chief Financial Officer, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File––the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

*	Filed herewith.

+	Indicates management contract or compensatory plan.

~~(1)~~	~~Previously filed as an Exhibit to the Current Report on Form 8-K filed July 13, 2021.~~

~~(2)~~	~~Previously filed as an Exhibit to the Current Report on Form 8-K filed August 24, 2021.~~

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PURPLE INNOVATION, INC.

Date: ~~November~~August 9, ~~2021~~2022	By:	/s/ ~~Joseph B. Megibow~~Robert T. DeMartini
		~~Joseph B. Megibow~~Robert T. DeMartini
		Chief Executive Officer
		(Principal Executive Officer)

Date: ~~November~~August 9, ~~2021~~2022	By:	/s/ Bennett L. Nussbaum
		Bennett L. Nussbaum
		Interim Chief Financial Officer
		(Principal Financial Officer)

Date: ~~November~~August 9, ~~2021~~2022	By:	/s/ George T. Ulrich
		George T. Ulrich
		VP Accounting and Financial Reporting
		(Principal Accounting Officer)

5646

0001643953 us-gaap:GeneralAndAdministrativeExpenseMember 2021-04-01 2021-06-30 iso4217:USD xbrli:shares

				Page
Part I.	Financial Information			1
	Item 1.	Financial Statements (Unaudited):		1
		Condensed Consolidated Balance Sheets		1
		Condensed Consolidated Statements of Operations		2
		Condensed Consolidated Statements of Stockholders’ Equity ~~(Deficit)~~		3
		Condensed Consolidated Statements of Cash Flows	4
		Notes to Condensed Consolidated Financial Statements	5
		~~Notes to Condensed Consolidated Financial Statements~~		6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		3429
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		4439
	Item 4.	Controls and Procedures		4539

Part II.	Other Information			4641
	Item 1.	Legal Proceedings		4641
	Item 1A.	Risk Factors		4641
	Item 6.	~~Exhibits~~		55Exhibits	45
	Signatures			5646

(In thousands)	Sponsor Warrants			Incremental Loan Warrants		Total Level 3 Liabilities
Fair value as of December 31, 2020	$	92,708		$	—	$	92,708
Fair value transfer to Level 1 measurement		(64,321	)		—		(64,321	)
Change in valuation inputs⁽¹⁾		(19,369	)		—		(19,369	)
Fair value as of September 30, 2021	$	9,018		$	—	$	9,018

Fair value as of December 31, 2019	$	7,689		$	21,622	$	29,311
Fair value of warrants exercised		(4,965	)		—		(4,965	)
Change in valuation inputs⁽¹⁾		57,434			43,308		100,742
Fair value as of September 30, 2020	$	60,158		$	64,930	$	125,088