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 June 30, 2021

☐ 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)

(801) 756-2600

(Registrant’s telephone number, including area code)

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 August 6, 2021, 66,371,411 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

			Page
Part I.	Financial Information		1
	Item 1.	Financial Statements (Unaudited):	1
		Condensed Consolidated Balance Sheets	1
		Condensed Consolidated Statements of Income	2
		Condensed Consolidated Statements of Stockholders’ Equity (Deficit)	3
		Condensed Consolidated Statements of Cash Flows	4
		Notes to Condensed Consolidated Financial Statements	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42
	Item 4.	Controls and Procedures	43

Part II.	Other Information		44
	Item 1.	Legal Proceedings	44
	Item 1A.	Risk Factors	44
	Item 6.	Exhibits	46
	Signatures		47

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, 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 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™.

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)

	June 30, 2021			December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	110,081		$	122,955
Accounts receivable, net		25,104			29,111
Inventories, net		64,795			65,726
Prepaid inventory		1,799			826
Other current assets		14,972			10,453
Total current assets		216,751			229,071
Property and equipment, net		87,496			61,486
Operating lease right-of-use assets		54,334			41,408
Intangible assets, net		10,376			9,945
Deferred income taxes		209,048			211,244
Other long-term assets		1,458			1,578
Total assets	$	579,463		$	554,732

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	58,419		$	69,594
Accrued sales returns		6,962			8,428
Accrued compensation		9,207			14,209
Customer prepayments		17,334			6,253
Accrued sales tax		3,596			6,015
Accrued rebates and allowances		6,870			10,891
Operating lease obligations – current portion		4,255			3,235
Other current liabilities		13,733			13,583
Total current liabilities		120,376			132,208
Debt, net of current portion		40,403			41,410
Operating lease obligations, net of current portion		67,924			48,936
Warrant liabilities		14,529			92,708
Tax receivable agreement liability, net of current portion		166,413			165,426
Other long-term liabilities, net of current portion		8,294			6,503
Total liabilities		417,939			487,191

Commitments and contingencies (Note 11)

Stockholders’ equity:
Class A common stock; $0.0001 par value, 210,000 shares authorized; 66,371 issued and outstanding at June 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 June 30, 2021 and 536 issued and outstanding at December 31, 2020		—			—
Additional paid-in capital		403,071			333,047
Accumulated deficit		(242,454	)		(265,856	)
Total stockholders’ equity		160,624			67,197
Noncontrolling interest		900			344
Total stockholders’ equity		161,524			67,541
Total liabilities and stockholders’ equity	$	579,463		$	554,732

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 June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
Revenues, net	$	182,586		$	165,096		$	369,015		$	287,471
Cost of revenues		100,899			83,465			199,804			152,658
Gross profit		81,687			81,631			169,211			134,813
Operating expenses:
Marketing and sales		59,844			39,423			114,212			76,107
General and administrative		22,461			8,677			36,987			16,225
Research and development		1,923			1,580			3,646			3,025
Total operating expenses		84,228			49,680			154,845			95,357
Operating income (loss)		(2,541	)		31,951			14,366			39,456
Other income (expense):
Interest expense		(569	)		(1,424	)		(1,139	)		(2,813	)
Other income (expense), net		26			16			(42	)		106
Change in fair value – warrant liabilities		4,860			(130,264	)		14,007			(108,631	)
Tax receivable agreement expense		(381	)		(32,823	)		(207	)		(32,945	)
Total other income (expense), net		3,936			(164,495	)		12,619			(144,283	)
Net income (loss) before income taxes		1,395			(132,544	)		26,985			(104,827	)
Income tax benefit (expense)		1,167			35,428			(3,484	)		35,712
Net income (loss)		2,562			(97,116	)		23,501			(69,115	)
Net income (loss) attributable to noncontrolling interest		(16	)		(3,841	)		99			7,325
Net income (loss) attributable to Purple Innovation, Inc.	$	2,578		$	(93,275	)	$	23,402		$	(76,440	)

Net income (loss) per share:
Basic	$	0.04		$	(3.19	)	$	0.36		$	(2.94	)
Diluted	$	(0.03	)	$	(3.19	)	$	0.14		$	(2.94	)

Weighted average common shares outstanding:
Basic		66,277			29,277			65,439			25,976
Diluted		66,864			29,277			68,341			25,976

The accompanying notes are an integral part of these 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

	Class A				Class B						Additional			Accumulated			Total Stockholders’						Total
	Common Stock				Common Stock						Paid-in			Equity			Equity			Noncontrolling			Equity
	Shares		Par Value		Shares			Par Value			Capital			(Deficit)			(Deficit)			Interest			(Deficit)
Balance – December 31, 2019		22,494	$	2		31,394		$	3		$	2,822		$	(28,989	)	$	(26,162	)	$	(2,378	)	$	(28,540	)
Net income		—		—		—			—			—			16,835			16,835			11,166			28,001
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
Exchange of stock		12,760		1		(12,760	)		(1	)		—			—			—			—			—
Exercise of warrants		1		—		—			—			19			—			19			—			19
Exercise of stock options		5		—		—			—			(61	)		—			(61	)		—			(61	)
Tax Receivable Agreement liability		—		—		—			—			56,857			—			56,857			—			56,857
Deferred income taxes		—		—		—			—			(45,266	)		—			(45,266	)		—			(45,266	)
Accrued distributions		—		—		—			—			(4,327	)		—			(4,327	)		—			(4,327	)
Issuance of common stock		80		1		—			—			—			—			1			—			1
Impact of transactions affecting NCI		—		—		—			—			6,453			—			6,453			(6,453	)		—
Balance – June 30, 2020		36,468	$	4		17,510		$	2		$	17,429		$	(105,429	)	$	(87,994	)	$	(1,626	)	$	(89,620	)

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)

	Six Months Ended June 30,
	2021			2020
Cash flows from operating activities:
Net income (loss)	$	23,501		$	(69,115	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		3,544			3,816
Non-cash interest		257			2,791
Change in fair value – warrant liabilities		(14,007	)		108,631
Tax receivable agreement expense		207			32,945
Stock-based compensation		1,592			1,212
Non-cash lease expense		2,058			1,400
Deferred income taxes		3,170			(44,007	)
Changes in operating assets and liabilities:
Accounts receivable		4,007			9,663
Inventories		931			7,807
Prepaid inventory and other assets		(2,263	)		(3,049	)
Accounts payable		(11,783	)		903
Accrued sales returns		(1,466	)		4,678
Accrued compensation		(5,002	)		2,374
Customer prepayments		11,081			2,080
Accrued rebates and allowances		(4,021	)		(891	)
Operating lease obligations		(1,273	)		(849	)
Other accrued liabilities		936			11,957
Net cash provided by operating activities		11,469			72,346

Cash flows from investing activities:
Purchase of property and equipment		(26,162	)		(8,010	)
Investment in intangible assets		(285	)		(2,435	)
Net cash used in investing activities		(26,447	)		(10,445	)

Cash flows from financing activities:
Payments on term loan		(1,125	)		—
Proceeds from InnoHold indemnification payment		4,142			—
Tax receivable agreement payments		(628	)		—
Distributions to members		(853	)		—
Proceeds from exercise of warrants		116			23
Proceeds from exercise of stock options		452			—
Net cash provided by financing activities		2,104			23

Net (decrease) increase in cash		(12,874	)		61,924
Cash and cash equivalents, beginning of the year		122,955			33,478
Cash and cash equivalents, end of the period	$	110,081		$	95,402

Supplemental disclosures of cash flow information:
Cash paid during the year for interest	$	858		$	22
Cash paid during the year for income taxes	$	4,434		$	72

Supplemental schedule of non-cash investing and financing activities:
Property and equipment included in accounts payable	$	3,367		$	1,025
Non-cash leasehold improvements	$	3,239		$	615
Accrued distributions	$	—		$	4,523
Tax receivable agreement liability	$	780		$	45,266
Deferred income taxes	$	974		$	56,636
Exercise of liability warrants	$	64,172		$	23

The accompanying notes are an integral part of these consolidated financial statement.

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

1. Organization

The Company’s mission is to help people feel and live better through innovative comfort solutions.

Purple Innovation, Inc. collectively with its subsidiary (the “Company” or “Purple Inc.”) is a digitally-native vertical brand founded on comfort product innovation with premium offerings. The Company designs and manufactures a variety of innovative, branded and premium comfort products, including mattresses, pillows, cushions, bases, sheets, and other products. The Company markets and sells its products through its direct-to-consumer (“DTC”) online channels, retail brick-and-mortar wholesale partners, Company 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 of Purple Inc. and its consolidated subsidiary, Purple LLC. As of June 30, 2021, Purple Inc. held approximately 99% of the common units of Purple LLC and Purple LLC Class B Unit holders held approximately 1% 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, 2021. The unaudited condensed consolidated financial statements were prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which were considered of normal recurring nature) considered necessary to present fairly the Company’s financial results. The results of the three and six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2021 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”). The Company determined that it is the primary beneficiary of Purple LLC as it is the sole managing member and has the power to direct the activities most significant to Purple LLC’s economic performance as well as the obligation to absorb losses and receive benefits that are potentially significant. At June 30, 2021, Purple Inc. had approximately a 99% economic interest in Purple LLC and consolidated 100% of Purple LLC’s assets, liabilities and results of operations in the Company’s unaudited condensed consolidated financial statements contained herein. The holders of Purple LLC Class B Units (the “Class B Units”) held approximately 1% of the economic interest in Purple LLC. For further discussion see Note 13 — 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, 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

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (“ASC 842”), which required an entity to recognize lease liabilities and assets on the balance sheet and to disclose key information about an entity’s leasing arrangements. Because the Company ceased to be an EGC on December 31, 2020, the standard became effective 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.

The Company determines if an agreement contains a lease at the inception of a contract. For leases with an initial term greater than 12 months, a related lease liability is recorded on the balance sheet at the present value of future payments discounted at the estimated fully collateralized incremental borrowing rate (discount rate) corresponding with the lease term. In addition, a ROU asset is recorded as the initial amount of the lease liability, plus any lease payments made to the lessor before or at the lease commencement date and any initial direct costs incurred, less any tenant improvement allowance incentives received.

The Company 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 direct-to-consumer online channels, traditional wholesale partners, third-party online retailers, and Company showrooms. 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)

Debt Issuance Costs and Discounts

Debt issuance costs and discounts that relate to borrowings are presented in the condensed consolidated balance sheet as a direct reduction from the carrying amount of the related debt liability and are amortized into interest expense using an effective interest rate over the duration of the debt. Debt issuance costs that relate to revolving lines of credit are carried as an asset in the condensed consolidated balance sheet and amortized to interest expense on a straight-line basis over the term of the related line of credit facility. Refer to Note 8 – Debt.

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 June 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, accrued expenses 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 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 the Company utilized to determine such fair value:

(In thousands)	Level		June 30, 2021		December 31, 2020
Sponsor warrants		3	$	14,529	$	92,708

All of the public warrants (a Level 1 fair value liability) and all of the incremental loan warrants (a Level 3 fair value liability) were exercised during 2020.

The following table summarizes the Company’s total Level 3 liability activity for the six months ended June 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		(64,172	)		—		(64,172	)
Change in valuation inputs⁽¹⁾		(14,007	)		—		(14,007	)
Fair value as of June 30, 2021	$	14,529		$	—	$	14,529

Fair value as of December 31, 2019	$	7,689		$	21,622	$	29,311
Fair value of warrants exercised		(763	)		—		(763	)
Change in valuation inputs⁽¹⁾		30,806			25,336		56,142
Fair value as of June 30, 2020	$	37,732		$	46,958	$	84,690

(1)	Changes in valuation inputs are recognized in the change in fair value – warrant liabilities in the Consolidated Statements of Income.

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 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 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 income.

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.

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 on the Company’s term loan is based on LIBOR. The Company plans to apply the amendments in this update to account for any contract modifications that result from changes in the reference rate used. The Company does not expect these amendments to have a material impact on its condensed consolidated financial statements and related disclosures.

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 standard, the guidance is effective for the Company’s interim and annual financial periods beginning January 1, 2023. ASU 2016-13 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.

3. Revenue from Contracts with Customers

The Company markets and sells its products through direct-to-consumer online channels, traditional wholesale partners, third-party online retailers and Company showrooms. Revenue is recognized when the Company satisfies its performance obligations under the contract which is transferring the promised products to the customer as described in Note 2 – Summary of Significant Accounting Policies.

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

Disaggregated Revenue

The Company sells products through two channels: Direct-to-Consumer and Wholesale. The Direct-to-Consumer channel includes product sales through various direct-to-consumer channels including Company showrooms and contact center. The Wholesale channel includes all product sales to traditional third-party retailers for both in store and online channels. The Company classifies products into two major categories: Bedding and Other. Bedding products include mattresses, platforms, adjustable bases, mattress protectors, pillows and sheets. Other products include cushions and various other products.

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

	Three Months Ended June 30,				Six Months Ended June 30,
Channel	2021		2020		2021		2020
Direct-to-consumer	$	116,219	$	145,180	$	241,123	$	225,867
Wholesale partner		66,367		19,916		127,892		61,604
Revenues, net	$	182,586	$	165,096	$	369,015	$	287,471

	Three Months Ended June 30,				Six Months Ended June 30,
Product	2021		2020		2021		2020
Bedding	$	166,708	$	150,503	$	338,551	$	265,004
Other		15,878		14,593		30,464		22,467
Revenues, net	$	182,586	$	165,096	$	369,015	$	287,471

Contract Balances

Payment for sale of products through the direct-to-consumer online channels, third-party online retailers, Company 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 $17.3 million and $6.3 million at June 30, 2021 and December 31, 2020, respectively. During the three months ended June 30, 2021 and 2020, the Company recognized all revenue that was deferred in customer prepayments at March 31, 2021 and 2020, respectively.

4. Inventories

Inventories consisted of the following (in thousands):

	June 30,			December 31,
	2021			2020
Raw materials	$	36,315		$	26,372
Work-in-process		1,991			3,593
Finished goods		27,446			36,280
Inventory obsolescence reserve		(957	)		(519	)
Inventories, net	$	64,795		$	65,726

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

5. Property and Equipment

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

	June 30,			December 31,
	2021			2020
Equipment	$	45,037		$	30,508
Equipment in progress		20,175			18,648
Leasehold improvements		24,716			15,758
Furniture and fixtures		8,566			5,160
Office equipment		4,191			3,185
Total property and equipment		102,685			73,259
Accumulated depreciation		(15,189	)		(11,773	)
Property and equipment, net	$	87,496		$	61,486

Equipment in progress reflects equipment, primarily related to mattress manufacturing, which is being constructed and was not in service at June 30, 2021 or December 31, 2020. Depreciation expense was $1.9 million and $3.5 million during the three and six months ended June 30, 2021, respectively, and totaled $1.4 million and $2.6 million during the three and six months ended June 30, 2020, respectively.

6. Leases

The Company leases its manufacturing and distribution facilities, corporate offices, 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 retail showrooms have initial lease terms of up to seven years. Certain leases may contain options to extend the term of the original lease. The exercise of lease renewal options is at the Company’s discretion. Any lease renewal options are included in the lease term if exercise is reasonably certain at lease commencement. The Company also leases vehicles and other equipment under both operating and finance leases with initial lease terms of three to five years. The ROU asset for finance leases was $0.8 million and $0.6 million as of June 30, 2021 and December 31, 2020, respectively.

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Operating lease costs	$	2,064	$	1,267	$	3,871	$	2,475
Variable lease costs		482		18

SEC Form 10-Q filed by Purple Innovation, Inc.