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Equity Compensation Plans

12 Months Ended

Dec. 31, 2020

Share-based Payment Arrangement [Abstract]

17. Equity Compensation Plans

2017 Equity Incentive Plan

The Purple Innovation, Inc. 2017 Equity Incentive Plan (the “2017 Incentive Plan”) provides for grants of stock options, stock appreciation rights, restricted stock and other stock-based awards. Directors, officers and other employees and subsidiaries and affiliates, as well as others performing consulting or advisory services for the Company and its subsidiaries, will be eligible for grants under the 2017 Incentive Plan. The aggregate number of shares of Common Stock which may be issued or used for reference purposes under the 2017 Incentive Plan or with respect to which awards may be granted may not exceed 4.1 million shares. As of December 31, 2020, approximately 1.9 million shares remain available under the 2017 Incentive Plan.

Class A Stock Awards

In March 2020, the Company granted a restricted stock award under the Company’s 2017 Equity Incentive Plan to the Company’s Board advisor and GPAC observer. The stock award vests in March 2021. As this award includes a service condition, the estimated fair value of the restricted stock is measured on the grant date and is recognized over the service period. The Company determined that the fair value of the restricted stock on the grant date was immaterial. During 2020, the Company granted stock awards under the Company’s 2017 Equity Incentive Plan to independent directors on the Board and to the Board advisor and GPAC observer. The stock awards vested immediately and the Company recognized $0.5 million in expense during the year ended December 31, 2020 which represented the fair value of the stock award on the grant date. In 2019, the Company granted stock awards under the Company’s 2017 Equity Incentive Plan to independent directors on the Board and to the Board advisor and GPAC observer. The stock awards vested immediately and the Company recognized $0.3 million in expense during the year ended December 31, 2019 which represented the fair value of the stock award on the grant date.

In May and June 2020, the Company granted restricted stock awards under the Company’s 2017 Equity Incentive Plan to certain employees of the Company. The stock awards vest over 3 to 4 years. The estimated fair value of the restricted stock is measured on the grant date and is recognized over the vesting period. The Company determined that the fair value of the restricted stock on the grant dates was $0.7 million.

In May 2019, the Company granted a restricted stock award to the Company’s Chief Executive Officer (the “CEO”) pursuant to the terms of his employment agreement. The restricted stock award is for 0.1 million shares and has certain vesting conditions, including vesting on the earlier of a change in control or the satisfaction of all three specific service and market conditions. Such conditions require: (i) the CEO to stay employed as CEO through September 30, 2021, unless terminated without cause; (ii) the CEO to retain certain shares of common stock owned at the time of the grant through September 30, 2021; and (iii) the common stock of the Company to trade above $10 a share for any twenty of thirty consecutive trading days during the twelve months ended March 31, 2022. Accordingly, the earliest the three vesting conditions could all be met is at some point during the twelve months ended March 31, 2022. As this award includes a market vesting condition, the estimated fair value of the restricted stock is measured on the grant date and incorporates the probability of vesting occurring. The Company determined the fair value of the restricted stock on the grant date to be $0.2 million and the derived service period to be 2.58 years using a Monte Carlo Simulation of a Geometric Brownian Motion stock path model with the following assumptions:

Trading price of common stock on measurement date	$	6.56
Risk free interest rate		1.9	%
Expected life in years		3.0
Expected volatility		36.5	%
Expected dividend yield		—

The estimated fair value is recognized over the derived service period (as determined by the valuation model) on a straight-line basis, with such recognition occurring whether the instrument ultimately vests or not. During both years ended December 31, 2020 and 2019, the Company recognized a de minimis amount of expense.

Employee Stock Options

During the year ended December 31, 2020, the Company granted 0.5 million stock options under the Company’s 2017 Equity Incentive Plan to certain management of the Company. These stock options have exercise prices ranging from $12.76 to $21.70. The stock options expire in five years and vest over a four-year period. The estimated fair value of the stock options, less expected forfeitures, is amortized over the options vesting period on a straight-line basis. The Company determined the fair value of the 0.5 million options granted during the year ended December 31, 2020 to be $3.4 million which will be expensed over the vesting period.

During the year ended December 31, 2019, the Company granted 1.6 million stock options under the Company’s 2017 Equity Incentive Plan to certain management of the Company. These stock options have exercise prices that range from $5.75 to $8.55 per option. The stock options expire in five years and vest over a four-year period. The estimated fair value of the stock options, less expected forfeitures, is being amortized over the options vesting period on a straight-line basis. The Company determined the fair value of the 1.6 million options granted during the year ended December 31, 2019 to be $2.9 million which will be expensed over the vesting period.

The following are the weighted average assumptions used in calculating the fair value of the total stock options granted in 2020 and 2019 using the Black-Scholes method:

	Year Ended December 31,
	2020			2019
Fair market value	$	6.93		$	6.83
Risk free rate		0.25	%		1.88	%
Dividend yield		—			—
Expected volatility		50.34	%		36.79	%
Expected term in years		3.41			3.47

During the year ended December 31, 2019, 0.3 million of unvested stock options were forfeited by Mark Watkins, the former Chief Financial Officer (“CFO”) of the Company, upon his resignation and departure from the Company. As the CFO, he was not permitted to exercise and sell all of his 0.1 million vested options during the limited 90-day exercise time period under the terms of his option grant. The Company entered into an agreement whereby the Company paid Mr. Watkins a settlement amount equal to the difference between the closing price of the stock on the date of the settlement and the exercise strike price of $5.95. The Company paid Mr. Watkins $0.1 million and cancelled his vested stock options.

The following table summarizes the Company’s total stock option activity for the years ended December 31, 2020 and 2019:

	Options (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years		Intrinsic Value $ (in thousands)
Options outstanding as of January 1, 2019		933		$	5.96		4.8	$	—
Granted		1,598			7.29		—		—
Exercised		—			—		—		—
Forfeited/expired		(395	)		5.97		—		—
Options outstanding as of December 31, 2019		2,136			6.95		4.3		3,752
Granted		488			16.26		—		—
Exercised		(281	)		7.68		—		—
Forfeited/expired		(109	)		10.80		—		—
Options outstanding as of December 31, 2020		2,234			8.71		3.5		54,133

Outstanding and exercisable stock options as of December 31, 2020 are as follows:

		Options Outstanding				Options Exercisable
Exercise Prices		Number of Options Outstanding (in thousands)		Weighted Average Remaining Life (Years)		Number of Options Exercisable (in thousands)		Weighted Average Remaining Life (Years)		Intrinsic Value (in thousands)
$	5.75		210		3.14		75		3.14	$	2,028
	5.95		538		2.75		292		2.75		7,866
	6.51		261		3.39		86		3.39		2,275
	6.65		173		3.36		52		3.36		1,371
	7.99		19		3.92		3		3.92		74
	8.07		5		3.65		—		—		—
	8.17		225		3.75		42		3.75		1,045
	8.32		226		3.50		64		3.50		1,580
	8.55		179		3.75		52		3.75		1,276
	12.76		25		4.19		—		—		—
	13.12		191		4.38		—		—		—
	15.12		3		4.38		—		—		—
	21.70		179		4.75		—		—		—
			2,234		3.49		666		3.14		17,515

The following table summarizes the Company’s unvested stock option activity for the years ended December 31, 2020 and 2019:

	Options (in thousands)			Weighted Average Grant Date Fair Value
Nonvested options as of January 1, 2019		845		$	1.37
Granted		1,598			1.83
Vested		(157	)		1.39
Forfeited		(307	)		1.33
Nonvested options as of December 31, 2019		1,979			1.75
Granted		488			6.93
Vested		(790	)		1.82
Forfeited		(109	)		3.65
Nonvested options as of December 31, 2020		1,568			3.20

The estimated fair value of the Company stock options, less expected forfeitures, is amortized over the options vesting period on the straight-line basis. The Company recognized $1.3 million and $0.7 million in stock-based compensation expenses related to stock options during the years ended December 31, 2020 and 2019, respectively.

As of December 31, 2020, there was $4.6 million of total unrecognized stock compensation cost with a remaining recognition period of 2.5 years. As of December 31, 2019, there was $2.9 million of total unrecognized stock compensation cost with a remaining recognition period of 3.2 years.

InnoHold Incentive Units

In January 2017, pursuant to the 2016 Equity Incentive Plan approved by InnoHold and Purple LLC that authorized the issuance of 12.0 million incentive units, Purple LLC granted 11.3 million incentive units to Purple Team LLC, an entity for the benefit of certain employees who were participants in that plan. In conjunction with the Business Combination, Purple Team LLC was merged into InnoHold with InnoHold being the surviving entity and the Purple Team LLC incentive units were cancelled and new incentive units were issued by InnoHold under its own limited liability company agreement (the “InnoHold Agreement”). On February 8, 2019, InnoHold initiated a tender offer to each of these incentive unit holders, some of which are current employees of Purple LLC, to distribute to each a pro rata number of 2.5 million Paired Securities held by InnoHold in exchange for the cancellation of their ownership interests in InnoHold. All InnoHold incentive unit holders accepted the offer, and the terms and distribution of each transaction were finalized and closed on June 25, 2019. At the closing of the tender offer, those incentive unit holders received, based on their pro rata holdings of InnoHold Class B Units, a portion of 2.5 million Paired Securities held by InnoHold. The distribution by InnoHold to current employees of Purple LLC as of the distribution date resulted in the recognition of non-cash stock compensation expense for Purple LLC in the amount of $9.0 million which represented the fair value of the Paired Securities as of the distribution date in 2019. As of December 31, 2020, 0.5 million of the Paired Securities remain to be exchanged for Class A Stock by the incentive unit holders. A small number of Paired Securities remain subject to vesting contingent upon such current employees’ continued employment with the Company.

Aggregate Non-Cash Stock Compensation

The Company has accounted for all stock-based compensation under the provisions of ASC 718 Compensation—Stock Compensation. This standard requires the Company to record a non-cash expense associated with the fair value of stock-based compensation over the requisite service period. The table below summarizes the aggregate non-cash stock compensation recognized in the statement of operations for stock awards, employee stock options and the distribution by InnoHold of Paired Securities.

(in thousands)	Years Ended December 31,
Non-Cash Stock Compensation	2020		2019
Cost of revenues	$	169	$	663
Marketing and sales		302		4,285
General and administrative		1,353		4,356
Research and development		361		759
Total non-cash stock compensation	$	2,185	$	10,063