What changed in this filing

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Item 1. Financial Statements

2021-05-17 compared with 2020-11-10 · 1254 added, 2414 removed, 150 unchanged (96% of the section changed)

FINANCIAL STATEMENTS

PURPLE INNOVATION,

Condensed Consolidated Balance Sheets

(In thousands, except par value)

September 30,

INNOVATION, INC.

Consolidated Balance Sheets

– in thousands, except for par value)

Current assets:

Cash and cash equivalents

Accounts receivable, net

Inventories, net

Prepaid inventory

Other current assets

Total current assets

Property and equipment, net

Intangible assets, net

Deferred income taxes

Other long-term assets

Liabilities and Stockholders’

Equity (Deficit)

and cash equivalents

receivable, net

current assets

and equipment, net

lease right-of-use assets

long-term assets

and Stockholders’ Equity

sales returns

rebates and allowances

lease obligations – current portion

current liabilities

Accounts payable

Accrued sales returns

Accrued compensation

Customer prepayments

Accrued sales tax

Accrued rebates and allowances

Other current liabilities

Total current liabilities

Long-term debt, related-party

Long-term debt, net of current portion

Warrant liabilities

Tax receivable agreement liability, net of current portion

Other long-term liabilities, net of current portion

Total liabilities

Commitments and contingencies (Note 11)

Stockholders’

equity (deficit):

current liabilities

net of current portion

lease obligations, net of current portion

Tax receivable

agreement liability, net of current portion

long-term liabilities, net of current portion

and contingencies (Note 13)

Stockholders’

Class A common stock;

$ 0.0001 par value, 210,000 shares authorized;

53,787 issued and outstanding at September 30, 2020 and 22,494 issued and outstanding at December 31, 2019

66,303 issued and outstanding at March 31, 2021 and 63,914 issued and outstanding at December 31, 2020

Class B common stock;

$ 0.0001 par value, 90,000 shares authorized;

605 issued and outstanding at September 30, 2020 and 31,394 issued and outstanding at December 31, 2019

Additional paid-in capital

Accumulated deficit

Total stockholders’

equity (deficit)

Noncontrolling interest

Total equity (deficit)

Total liabilities and stockholders’

equity (deficit)

The accompanying notes are an integral

part of these unaudited condensed consolidated financial statements.

PURPLE INNOVATION,

Condensed Consolidated Statements of

448 issued and outstanding at March 31, 2021 and 536 issued and outstanding at December 31, 2020

paid-in capital

stockholders’ equity

Noncontrolling

stockholders’ equity

liabilities and stockholders’ equity

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

INNOVATION, INC.

Consolidated Statements of Income

– in thousands, except per share amounts)

Three Months Ended

September 30,

Nine Months Ended

September 30,

Revenues, net

3 unchanged sentences

General and administrative

Research and development

and development

Total operating expenses

2 unchanged sentences

Interest expense

Other income, net

Loss on extinguishment of debt

Change in fair value –

warrant liabilities

Tax receivable agreement expense

Total other expense, net

Net income (loss) before income taxes

Benefit from income taxes

Net income (loss)

Net income (loss) attributable to noncontrolling interest

Net income (loss) attributable to Purple Innovation, Inc.

Net income (loss) per share:

Other income (expense),

Tax receivable agreement

income (expense)

in fair value – warrant liabilities

Total other income,

Net income before income taxes

tax benefit (expense)

income attributable to noncontrolling interest

Net income attributable

to Purple Innovation, Inc.

Net income per share:

Weighted average common shares outstanding:

The accompanying notes are an integral

part of these unaudited condensed consolidated financial statements.

PURPLE INNOVATION,

Condensed Consolidated Statements of

Stockholders’

Equity (Deficit)

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

INNOVATION, INC.

Consolidated Statements of Stockholders’ Equity (Deficit)

– in thousands)

Stockholders’

Noncontrolling

Balance –

– December 31, 2020

Stock-based compensation

Exchange of stock

Exercise of warrants

Tax Receivable Agreement liability

Accrued distributions

Issuance of common stock

Impact of transactions affecting NCI

Balance –

$ ( 265,856 )

of stock options

receivable agreement liability

distributions

indemnification payment

of transactions affecting NCI

– March 31, 2021

Net income (loss)

Stock-based compensation

Exchange of stock

Exercise of warrants

Exercise of stock options

Tax Receivable Agreement liability

Deferred income taxes

Accrued distributions

Issuance of common stock

Impact of transactions affecting NCI

Balance –

June 30, 2020

Net income (loss)

Stock-based compensation

Exchange of stock

Exercise of warrants

Exercise of stock options

Tax Receivable Agreement liability

Deferred income taxes

Accrued distributions

Forfeiture of unvested common stock

Impact of transactions affecting NCI

Balance –

September 30, 2020

Stockholders’

$ ( 245,032 )

Stockholders’

Noncontrolling

Balance –

– December 31, 2019

Stock-based compensation

Balance –

Receivable Agreement Liability

distributions

of transactions affecting NCI

– March 31, 2020

Stock-based compensation

Repurchase of stock options

Issuance of common stock

Balance –

June 30, 2019

Stock-based compensation

Conversion of stock

Forfeiture of unvested common stock

Impact of transactions affecting

Balance –

September 30, 2019

The accompanying notes are an integral

part of these unaudited condensed consolidated financial statements.

PURPLE INNOVATION,

Condensed Consolidated Statements of

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

INNOVATION, INC.

Consolidated Statements of Cash Flows

– in thousands)

Nine Months Ended

September 30,

Cash flows from operating activities:

Adjustments to reconcile net income to net cash from operating activities:

to reconcile net income to net cash used in operating activities:

Depreciation and amortization

Non-cash interest

Paid-in-kind interest

Loss on extinguishment of debt

Loss on change in fair value - warrant liabilities

Tax receivable agreement expense

Change in fair value

– warrant liabilities

Tax receivable agreement

(income) expense

Stock-based compensation

Non-cash lease expense

Deferred income taxes

Changes in operating assets and liabilities:

Decrease (increase) in accounts receivable

Increase in inventories

Increase in prepaid inventory and other assets

Increase in accounts payable

Increase (decrease) in accrued sales returns

Increase in accrued compensation

Increase (decrease) in customer prepayments

Decrease in income tax payable

Increase in other accrued liabilities

Net cash provided by operating activities

Changes in operating assets

and liabilities:

Accounts receivable

Prepaid inventory and

Accounts payable

Accrued sales returns

Accrued compensation

Customer prepayments

Accrued rebates and allowances

Operating lease obligations

accrued liabilities

Net cash used in operating

Cash flows from investing activities:

Purchase of property and equipment

Investment in intangible assets

Net cash used in investing activities

Purchase of property and

in intangible assets

Net cash used in investing

Cash flows from financing activities:

Proceeds from related-party debt

Proceeds from long-term debt

Proceeds from exercise of option and warrants

Repurchase of stock options

Payment on related-party debt

Payments for debt issuance costs

Payments on term loan

Proceeds from InnoHold indemnification

Tax receivable agreement

Distributions to members

Principal payments on capital lease obligations

Net cash provided by financing activities

Net increase in cash

Cash, beginning of the period

Cash, end of the period

Proceeds from exercise of warrants

from exercise of stock options

Net cash provided by

financing activities

Net decrease in cash

and cash equivalents, beginning of the year

and cash equivalents, end of the period

Supplemental disclosures of cash flow information:

Cash paid during the period for interest

Cash paid during the period for income taxes

Supplemental schedule of non-cash investing and financing activities:

Property and equipment included in accounts payable

Equipment acquired through capital lease

Non-cash leasehold improvements

Tax Receivable Agreement liability

Deferred income taxes

The accompanying notes are an integral

part of these unaudited condensed consolidated financial statements.

PURPLE INNOVATION,

Notes to Condensed Consolidated Financial

The Company’s

mission is to help people feel and live better through innovative comfort solutions.

Purple Innovation,

collectively with its subsidiary (the “Company”

or “Purple Inc.”) is a digitally-native vertical

paid during the year for interest

paid during the year for income taxes

Supplemental schedule of non-cash investing

and financing activities:

and equipment included in accounts payable

leasehold improvements

distributions

receivable agreement liability

Exercise of liability

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

INNOVATION, INC.

to Condensed Consolidated Financial Statements

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

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.

markets and sells its products through its direct-to-consumer (“DTC”) online channels, retail brick-and-mortar wholesale

partners, third-party online retailers and its Company factory outlet and showrooms.

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”)

for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business

combination involving the Company and one or more businesses.

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.

Summary of Significant Accounting Policies

Basis of Presentation

and Principles of Consolidation

The Company consists

of Purple Inc.

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, third-party

online retailers and Company showrooms.

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

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.

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.

of Significant Accounting Policies

of Presentation and Principles of Consolidation

Company consists of Purple Inc.

and its consolidated subsidiary, Purple LLC.

Pursuant to the Business Combination described in Note 3—

Combination , Purple Inc.

acquired approximately 18% of the common units of Purple LLC, while InnoHold, LLC (“InnoHold”)

retained approximately 82% of the common units in Purple LLC.

As of September 30, 2020, Purple Inc.

held approximately 99% of

the common units of Purple LLC and other Purple LLC Class B Unit holders held approximately 1% of the common units in Purple LLC.

The Business Combination

was structured similar to a reverse recapitalization.

The historical operations of Purple LLC are deemed to be those of the Company.

Thus, the financial statements included in this report reflect (i) the historical operating results of Purple LLC prior to

the Business Combination;

(ii) the combined results of the Company following the Business Combination;

(iii) the assets and liabilities

of Purple LLC at their historical cost;

and (iv) the Company’s equity and earnings per share for all periods presented.

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”)

As of March 31, 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.

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 the 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 2019 audited financial statements and accompanying notes included in the Company’s

Annual Report on Form 10-K filed March 9, 2020.

The unaudited condensed consolidated financial statements were prepared on the

same basis as the audited 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 months ended September 30, 2020 are not necessarily indicative of the results to be expected for the fiscal year ending

December 31, 2020 or for any other interim period or other future year.

COVID-19 Pandemic

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.

light of the COVID-19 pandemic, we have taken a number of precautionary measures to manage our resources and mitigate the

adverse impact of the pandemic, which is intended to help minimize the risk to our Company, employees, customers, and the communities

in which we operate.

Employees at the Company’s headquarters and certain other employees have been asked to work from home

where possible, with only limited access given to employees to work in the office when necessary.

For roles that require employees

to be on-site, such as our manufacturing facility and distribution center, we mandate protective equipment be worn, perform temperature

testing at the start of each shift and again during the shift, contact trace when risk of exposure is known, stagger shifts to

reduce concentration of employees, follow social distancing guidelines and sanitize daily including complete weekly anti-viral

The State of Utah, where all of our manufacturing operations currently take place, has experienced a significant resurgence

of COVID-19 cases.

If the State of Utah, as part of efforts to control the resurgence of COVID-19, requires us to close our facilities

temporarily or to reduce the number of employees working in our manufacturing at a given time, our business and operations could

be significantly adversely affected.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial

Despite the ongoing

challenges from COVID-19, the Company has been able to capitalize on the opportunities created by this situation.

We continue to

serve our customers through our Direct to Consumer (“DTC”) channel, which has remained strong throughout the year as

consumer demand for our premium, differentiated product offerings shifted to our DTC channel.

We continue to focus our efforts

in our DTC core competencies resulting in a continued strength in DTC channel sales across all of our product categories throughout

This increase in demand was a contributing factor to DTC net revenue growth of approximately 97% over the prior year

third quarter.

There can be no assurance that this trend of strong demand through our DTC channel will continue.

We initially experienced

a sharp decline in the wholesale side of our business as temporary shutdowns of non-essential businesses and shelter-at-home directives

occurred in most U.S.

As the shutdowns were lifted and stores began to open again, demand through the wholesale channel

increased such that our net revenue from wholesale customers this quarter is up approximately 7% over the prior year third quarter.

As of November 9, 2020 we have our factory outlet and all of our showrooms open and servicing our customers.

We recently opened

two new showrooms and have two more planned to open by the end of the year.

However, due to recent resurgence of COVID-19, we may

be required to close our factory outlet and showrooms in the future.

We have signed a new lease for a manufacturing facility in

Georgia and are proceeding with the buildout and purchasing of equipment to begin production.

This increase in demand

allowed us to work through a portion of our on-hand inventory and required us to ramp up production.

We continue to take advantage

of our vertically integrated business model to adjust production schedules to leverage inventory on hand and manage labor costs.

We also continue to dynamically adjust our significant discretionary online advertising spend in response to any changes in DTC

trends as they develop.

Our supply chain has not been significantly affected by COVID-19.

Suppliers in China were temporarily closed as a result of the pandemic, but we had sufficient inventory on hand.

These suppliers

have resumed production and are able to supply materials as needed.

Most of our domestic suppliers are able to continue operations

and provide necessary materials when needed.

We have experienced some constraints from certain suppliers due to our increased production

to meet demand.

We have also experienced some shipping delays in the delivery of our product to our customers.

This is due to the

increased nationwide demand placed on delivery companies.

Although the Company

has taken measures to protect the business, we cannot predict the specific duration for which these precautionary measures will

stay in effect, and we may elect or need 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.

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 new line of credit, and continuing resumption and 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.

extent to which the COVID-19 pandemic and our precautionary measures in response thereto may impact our business will depend on

future developments, which are highly uncertain and cannot be precisely predicted at this time.

Variable Interest

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 September 30, 2020, Purple Inc.

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.

At September 30,

2020, other parties owned approximately 1% of the economic interest in Purple LLC;

however, the other parties have disproportionally

fewer voting rights, and are shown as the noncontrolling interest (“NCI”) holder of Purple LLC.

For further discussion

see Note 13 —

Stockholders’

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 months ended March 31, 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.

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.

INNOVATION, INC.

to Condensed Consolidated Financial Statements

Interest Entities

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 March 31, 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 held

approximately 1 % of the economic interest in Purple LLC.

For further discussion see Note 13 — Stockholders’ Equity.

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 the previously reported net loss.

Use of Estimates

The preparation of

the unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the

amounts reported in the unaudited condensed consolidated financial statements and accompanying notes.

The Company regularly makes

significant estimates and assumptions including, but not limited to, estimates that affect the Company’s revenue recognition,

accounts receivable and allowance for doubtful accounts, valuation of inventories, cost of revenues, sales returns, warranty returns,

the recognition and measurement of loss contingencies, warrant liabilities, estimates of current and deferred income taxes, deferred

income tax valuation allowances and amounts associated with the Company’s Tax Receivable Agreement with InnoHold (the “Tax

Receivable Agreement”

or “TRA”).

Predicting future events is inherently an imprecise activity and, as such,

requires the use of judgment.

amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial

These reclassifications had no effect on net income, cash flows or shareholders’ equity previously reported.

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.

Actual results could differ materially from those estimates.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial

Revenue Recognition

In May 2014, in addition

to several amendments issued during 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards

Update (“ASU”) No.

2014-09, Revenue from Contracts with Customers (Topic 606).

Topic 606 outlines a single comprehensive

model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue

recognition guidance, including industry-specific guidance.

The Company adopted this ASU effective January 1, 2019 on a modified

retrospective basis.

Adoption of this standard did not result in significant changes to the Company’s accounting policies,

business processes, systems or controls, or have a material impact on the Company’s financial position, results of operations,

or cash flows.

As such, the Company did not record a cumulative adjustment to the opening equity balance of accumulated deficit

as of January 1, 2019.

However, additional disclosures have been added in accordance with the requirements of Topic 606 and are

reflected in Note 4 –

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,

the Company factory outlet 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.

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.

Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment.

Actual results could differ

materially from those estimates.

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 ROU 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.

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, an 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.

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.

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.

with an initial term of 12 months or less (short-term leases) are not recorded as ROU assets and corresponding lease liabilities.

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.

INNOVATION, INC.

to Condensed Consolidated Financial Statements

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

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.

Company does not have significant costs to obtain contracts with customers.

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 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.

does not provide an option to its customers to purchase future products at a discount and therefore there are no material option

Determine the transaction

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.

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.

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

Therefore, the Company recognizes revenue upon transfer of the product to the customer’s control at contractually

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.

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

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.

does not have service revenue.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial

Debt Issuance

Costs and Discounts

Debt issuance costs

and discounts that relate to borrowings are presented in the balance sheet as a direct deduction 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 for the revolving line of credit facility available from the 2020 Credit Agreement are carried as an asset

and amortized to interest expense on a straight-line basis over the term of the line of credit facility.

Refer to Note 8 –

Warrant Liabilities

accounts for warrant liabilities under the provisions of ASC 480 - Distinguishing Liabilities from Equity .

480 requires the recording of certain liabilities at their fair value.

Changes in the fair value of these liabilities are

recognized in earnings.

The Incremental Loan Warrants issued in conjunction with the Amended and Restated Credit Agreement

contain a warrant repurchase provision which, upon an occurrence of a fundamental transaction as defined in the warrant

agreement, could give rise to an obligation of the Company to pay cash to the warrant holders.

In addition, other provisions

may require the exercise price of the warrants to be reduced.

The Company has determined that the fundamental transaction

provisions require 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.

The Company uses the Monte Carlo Simulation of a Geometric Brownian Motion stock path

model to determine the fair value of the liability.

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

INNOVATION, INC.

to Condensed Consolidated Financial Statements

Issuance Costs and Discounts

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.

to Note 8 – Debt .

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.

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 the warrant

Refer to Note 9 –

Warrant Liabilities .

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.

market value of common stock, risk free interest rate, warrant life, expected volatility and the probability of a warrant re-price.

of the Incremental Loan warrants were exercised during fiscal 2020.

Company accounted for its public warrants in accordance with ASC 815-40, “Derivatives and Hedging—Contracts in Entity’s

Own Equity” (“ASC 815”), 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

All of the public warrants were exercised during fiscal 2020.

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, Fair Value Measurement,

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 March 31, 2021, there were 1.9 million

sponsor warrants outstanding.

Value Measurements

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

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

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

The fair value of the Company’s debt instrument is estimated to be its face value based on the contractual terms

of the debt instrument and market-based expectations.

The warrant liability is a Level 3 instrument and uses an internal model

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 would 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 would generally increase (decrease) in value if the expected average life or expected volatility

were to increase (decrease).

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.

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

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);

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

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

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.

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

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).

INNOVATION, INC.

to Condensed Consolidated Financial Statements

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)

Public warrants

Sponsor warrants

Incremental Loan warrants

following table summarizes the Company’s total Level 3 liability activity for the three months ended March 31, 2021 and 2020:

(In thousands)

3 Liabilities

Fair value as of December 31, 2019

Fair value transfer to Level 1 measurement

in valuation inputs (1)

Fair value as of March 31, 2020

Fair value as of December 31, 2020

Fair value of warrants exercised

in valuation inputs (1)

Fair value as of March 31, 2021

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

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.

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

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 changes in our valuation allowance.

The Company accounts

for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in

a tax return, which are subject to examination by federal and state taxing authorities.

The tax benefit from an uncertain tax position

is recognized when it is more likely than not that the position will be sustained upon examination by taxing authorities based

on technical merits of the position.

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.

Company accounts for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to

be taken in a tax return, which are subject to examination by federal and state taxing authorities.

The tax benefit from an uncertain

tax position is recognized when it is more likely than not that the position will be sustained upon examination by taxing authorities

based on technical merits of the position.

The amount of the tax benefit recognized is the largest amount of the benefit that has

a greater than 50% likelihood of being realized upon ultimate settlement.

The effective tax rate and the tax basis of

assets and liabilities reflect management’s estimates of the ultimate outcome of various tax uncertainties.

The Company recognizes

penalties and interest related to uncertain tax positions within the provision (benefit) for income taxes line in the accompanying

consolidated statements of operations.

As of the third quarter of 2020, no uncertain tax positions have been recorded.

will continue to monitor this position each interim period.

The Company files

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.

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.

and state taxing authorities for various time periods, depending on those jurisdictions’

rules, generally after the income

tax returns are filed.

(Loss) Per Share

The two-class method

of computing net income (loss) per share is required for entities that have participating securities.

The two-class method is an

earnings allocation formula that determines net income (loss) per share for participating securities according to dividends declared

(or accumulated) and participation rights in undistributed earnings.

The Company’s Class B Stock has no economic interest

in the earnings of the Company, resulting in the two-class method not being applicable as of September 30, 2020 or in prior periods.

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 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 Class B Stock for Class A Stock, and the vesting of unvested and restricted Class A Stock.

An anti-dilutive

impact is 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.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial

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 and restricted Class A Stock.

Recent Accounting

Pronouncements

New Lease Guidance

In February 2016,

the FASB issued ASU No.

2016-02, “Leases,”

and in March 2019, the FASB issued ASU No.

2019-01, “Leases:

Codification Improvements”, which updated the accounting guidance related to leases to increase transparency and comparability

among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about

leasing arrangements.

They also clarify implementation issues.

These updates are effective for public companies for annual periods

beginning after December 15, 2018, including interim periods therein.

The Company is allowed to use the private company adoption

timelines, and therefore the standard is effective for the Company for its annual period beginning January 1, 2020, and interim

periods within annual periods beginning January 1, 2021.

The standard is to be applied utilizing a modified retrospective approach,

with early adoption permitted.

We are in the process of implementing a new lease accounting system in connection with the adoption.

While we expect a material impact to our consolidated balance sheet as a result of the adoption of this new guidance, we continue

to evaluate the effect of the new standard on our consolidated financial statements and related disclosures.

We also expect that

adoption of the new guidance will require changes to our internal controls over financial reporting.

Simplifying the Accounting for Income

In December 2019,

the FASB issued ASU No.

The income tax returns of the Company are subject to examination by

federal and state taxing authorities for various time periods, depending on those jurisdictions’ rules, generally after the

income tax returns are filed.

Income Per Share

net income per common share is calculated by dividing net income attributable to common shareholders by the weighted average number of

shares of Class A Stock outstanding each period.

Diluted net income 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 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.

INNOVATION, INC.

to Condensed Consolidated Financial Statements

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.

Accounting Pronouncements

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.

the Accounting for Income Taxes

December 2019, the FASB issued ASU No.

2019-12, Simplifying the Accounting for Income Taxes (ASU No.

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.

The new guidance 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.

Early adoption is permitted.

The Company is currently evaluating the impact

of adopting ASU 2019-12.

New Internal-Use Software Guidance

In August 2018, the

FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350) (“ASU 2018-15”).

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.

The new guidance 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.

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.

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.

We do not expect the adoption of this standard to have a material impact

on our consolidated financial statements.

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.

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.

of Credit Losses

June 2016, the FASB issued ASU No.

2016-13, “Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses

on Financial Instruments” (“ASU 2016-13”), which was further updated and clarified by the FASB through issuance of

additional related ASUs.

This guidance replaces the existing incurred loss impairment guidance and establishes a single allowance framework

for financial assets carried at amortized cost based on expected credit losses.

The estimate of expected credit losses requires

the incorporation of historical information, current conditions, and reasonable and supportable forecasts.

These updates are effective

for public companies, excluding Smaller Reporting Companies (“SRC”), for annual periods beginning after December 15,

2019, including interim periods therein.

The standard is effective for all other entities for annual periods beginning after December

15, 2022, including interim periods therein.

The standard is effective for our interim and annual financial periods beginning January

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

The standard is effective for all other entities for annual periods beginning after December 15, 2022, including interim periods

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.

This standard is to be applied utilizing a modified retrospective approach.

We are currently evaluating the impact of

this standard on our 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 our consolidated financial statements or related disclosures.

PURPLE INNOVATION,

Notes to Condensed

Consolidated Financial Statements

Business Combination

On February 2, 2018,

upon consummation of the Business Combination, Purple LLC merged with and into a wholly owned subsidiary of GPAC (PRPL Acquisition,

LLC), with Purple LLC being the survivor in that merger pursuant to an Agreement and Plan of Merger (the “Merger Agreement”),

by and among GPAC, PRPL Acquisition, LLC, a Delaware limited liability company and a wholly owned subsidiary of GPAC (“Merger

Sub”), Purple LLC and InnoHold.

In connection with the Closing, GPAC was renamed “Purple Innovation, Inc.”

its articles of incorporation were amended to rename its common stock to Class A common stock (“Class A Stock”) and

created a new class of stock named Class B common stock (“Class B Stock”) of which 44.1 million shares of Class B

Stock were issued to InnoHold (refer to Note 13 —

Stockholders’

Equity for a description of the Class A Stock

and Class B Stock).

Additionally, at the

Closing, 9.7 million Class A Units of Purple LLC were issued and are solely held by Purple Inc.

They are voting common units entitled

to share in the profits and losses of Purple LLC and receive distributions as declared by Purple LLC’s manager.

Approximately

44.1 million Class B Units of Purple LLC were issued to InnoHold, who had limited voting rights in Purple LLC and was entitled

to share in the profits and losses of Purple LLC and to receive distributions as declared by Purple LLC’s manager.

subsequently transferred a portion of its shares and units to permitted transfers and exchanged its remaining shares for Class

A Stock that it sold.

As of September 30, 2020, 0.6 million Class B Units of Purple LLC remain outstanding, all held by other parties.

The amended operating agreement appoints Purple Inc.

as the sole managing member of Purple LLC.

As the sole managing member, Purple

has the sole voting interest in and control of the management and operations of Purple LLC, including when it had only a minority

economic interest in Purple LLC.

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 factory outlet and 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 .

Contract Balances

Payment for sale of

products through the direct-to-consumer online channels, third-party online retailers and Company factory outlet and showrooms

is collected at point of sale in advance of shipping the products.

Amounts received for unshipped products are recorded as customer

Customer prepayments were $6.2 million at September 30, 2020 and $6.3 million at December 31, 2019.

During the nine

months ended September 30, 2020, the Company recognized $6.3 million of revenue that was deferred in customer prepayments at December

Disaggregated Revenue

The following table

presents the Company’s revenue disaggregated by sales channel and product (in thousands):

Three Months Ended

September 30,

Nine Months Ended

September 30,

Direct-to-consumer

Wholesale partner

Revenues, net

Three Months Ended

September 30,

Nine Months Ended

September 30,

Revenues, net

The Company sells products

through two channels:

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.

INNOVATION, INC.

to Condensed Consolidated Financial Statements

from Contracts with Customers

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 .

Disaggregated

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 the Company outlet and showrooms.

The Wholesale channel includes all product sales to traditional third-party

retailers for their in store and online channels.

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:

1 unchanged sentence

Bedding products include mattresses, platforms, adjustable bases, mattress protectors, pillows and sheets.

Other products include

cushions and various other products.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial

Inventories consist

of the following (in thousands):

September 30,

Other products

include cushions and various other products.

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

Direct-to-consumer

Wholesale partner

Revenues, net

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 $ 7.9 million and $ 6.3 million at March 31, 2021 and December 31, 2020, respectively.

During the three months

ended March 31, 2021 and 2020, the Company recognized all revenue that was deferred in customer prepayments at December 31, 2020 and

2019, respectively.

INNOVATION, INC.

to Condensed Consolidated Financial Statements

consisted of the following (in thousands):

Raw materials

1 unchanged sentence

Finished goods

Inventory obsolescence reserve

Inventory obsolescence

Inventories, net

Property and Equipment

Property and equipment

consist of the following (in thousands):

September 30,

and Equipment

and equipment consisted of the following (in thousands):

Equipment in progress

2 unchanged sentences

Office equipment

Equipment under capital lease

Total property and equipment

Accumulated depreciation and amortization

Property and equipment, net

recorded depreciation and amortization related to property and equipment of $1.4 million and $0.9 million during the three

months ended September 30, 2020 and 2019, respectively.

Depreciation and amortization related to property and equipment of

$4.0 million and $2.4 million were recorded during the nine months ended September 30, 2020 and 2019, respectively.

Other Current Liabilities

Other current liabilities

consist of the following (in thousands):

September 30,

Warranty accrual –

current portion

Long-term debt –

Accumulated depreciation

Property and equipment,

in progress reflects equipment, primarily related to mattress manufacturing, which is being constructed and was not in service at March 31,

2021 or December 31, 2020.

Depreciation expense was $ 1.5 million and $ 1.2 million during the three months ended March 31, 2021 and 2020,

respectively.

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 March 31, 2021 and December 31, 2020, respectively.

INNOVATION, INC.

to Condensed Consolidated Financial Statements

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

Operating lease costs

Variable lease costs

Short-term lease

Total lease costs

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 March 31, 2021 (in thousands):

(excluding the three months ended March 31, 2021) (1)

operating lease payments

– lease payments representing interest

value of operating lease payments

– Amount consists of $ 4.8 million of undiscounted cash flows offset by $ 6.6 million of tenant improvement allowances which are

expected to be fully utilized in fiscal 2021.

of March 31, 2021 and December 31, 2020, the weighted-average remaining term of operating leases was 12.3 years and 11.8 years, respectively,

and the weighted-average discount rate of operating leases was 5.60 % and 6.18 %, respectively.

following table provides supplemental information related to the Company’s condensed consolidated statement of cash flows for the

three months ended March 31, 2021 and 2020:

Three Months Ended

Cash paid for amounts included in present value of operating lease liabilities

Right-of-use assets obtained in exchange for operating lease liabilities

Current Liabilities

current liabilities consisted of the following (in thousands):

Warranty accrual – current

Long-term debt – current portion

Tax receivable agreement liability –

current portion

Insurance financing

Website commissions

Tax Receivable Agreement liability –

current portion

Accrued rent –

current portion

All other current liabilities

Income taxes payable

Total other current liabilities

Long-Term Debt,

Related-Party

Long-term debt, related-party

consists of the following (in thousands):

September 30,

Long-term debt, related-party

unamortized debt issuance costs and discounts

Total long-term debt, related-party

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial

Credit Agreement

On February 2, 2018,

Purple LLC entered into a Credit Agreement (the “Credit Agreement”) with Coliseum Capital Partners, L.P.

(“CCP”),

Blackwell Partners LLC –

Series A (“Blackwell”) and Coliseum Co-invest Debt Fund, L.P.

(“CDF”

together with CCP and Blackwell, the “Lenders”), pursuant to which the Lenders agreed to make a loan in an aggregate

principal amount of $25.0 million.

The Credit Agreement was closed and funded in connection with the Closing on February 2, 2018.

In conjunction with the Credit Agreement, Global Partner Sponsor I LLC (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.

The Credit Agreement was amended and

restated on January 28, 2019 as discussed below.

Amended and Restated

Credit Agreement

On January 28, 2019,

Purple LLC entered into a First Amendment to the Credit Agreement (the “First Amendment”) with the Lenders.

First Amendment, Purple LLC agreed to enter into the Amended and Restated Credit Agreement, under which two of the Lenders (“Incremental

Lenders”) agreed to provide an incremental loan of $10.0 million such that the total amount of principal indebtedness provided

to Purple LLC is increased to $35.0 million.

A stockholder meeting was held on February 25, 2019 at which time a majority of non-interested

stockholders voted in favor of this transaction.

The Amended and Restated Credit Agreement, and each of the related documents,

was accordingly closed, and the incremental $10.0 million loan was funded on February 26, 2019, and the Company issued to the Incremental

Lenders 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.

Among other things, the terms of the Amended and Restated Credit Agreement extends the maturity

date for all loans under the Credit Agreement to five years from closing of the incremental loan, lowers the amount allowed for

an asset-based loan to $10.0 million, revises certain restrictive covenants to make them more applicable to the Company’s

current business, provides the ability for the Company to request additional loans from the Lenders not to exceed $10 million and

other closing conditions, representations, warranties and covenants customary for a transaction of this type.

All indebtedness

under the Amended and Restated Credit Agreement bears interest at 12.0% per annum and is payable on the last business day of each

fiscal quarter, provided that Purple LLC will be required to pay up to an additional 4.0% of interest per annum if it fails to

meet certain EBITDA thresholds and an additional 2.0% of interest per annum if the Company is not in material compliance with the

Sarbanes-Oxley Act of 2002.

In addition, Purple LLC may elect for interest in excess of 5.0% per annum to be capitalized and added

to the principal amount.

Any principal pre-payments in the first year are subject to a make-whole payment, while principal pre-payments

in years two through four are subject to certain pre-payment penalties.

The Amended and Restated Credit Agreement provided for

certain remedies to the Lenders in the event of customary events of default and provides for standard indemnification of the Lenders.

In conjunction with

the incremental loan under the Amended and Restated Credit Agreement, the Company paid fees and debt issuance costs in the amount

of $0.5 million and $0.3 million, respectively.

Additionally, the $4.9 million fair value of the 2.6 million warrants at the time

of issuance was included as a component of the loss on extinguishment of debt.

On March 27, 2020,

the Company entered into the First Amendment to the Amended and Restated Credit Agreement with the Lenders.

The purpose of this

Amendment is to allow the Company to defer the remaining 5% of interest for the quarterly payments due March 31 and June 30, 2020

in an effort to reduce its cash disbursements during the COVID-19 impact.

Pursuant to the Amendment, the Company was allowed to

defer and capitalize the full amount of the interest payments due on March 31, 2020 and June 30, 2020.

The Company accounted

for the amendment as a modification of existing debt in accordance with ASC 470 - Debt .

expense related to the Amended and Restated Credit Agreement was $1.0 million and $1.4 million for the three months ended September

30, 2020 and 2019, respectively, and $3.8 million and $3.8 million for the nine months ended September 30, 2020 and 2019, respectively.

Retirement of Amended

and Restated Credit Agreement

On September 3, 2020,

the Company retired all indebtedness related to Purple LLC’s original Credit Agreement dated as of February 2, 2018, as amended

and restated in the Amended and Restated Credit Agreement dated February 26, 2019, and as further amended by the First Amendment

to Amended and Restated Credit Agreement dated as of March 27, 2020, the Second Amendment to Amended and Restated Credit Agreement

dated as of May 15, 2020, and the Waiver and Consent to Amended and Restated Credit Agreement dated as of August 20, 2020.

total amount paid for the retirement of the debt was $45.0 million comprised of $35.0 million original principal, $6.6 million

of paid-in-kind interest, $2.5 million in a prepayment fee and $0.9 million in accrued interest.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial

Loss on Extinguishment

February 2019, the Company accounted for the debt restructuring under the Amended and Restated Credit Agreement in accordance with

ASC 470 - Debt .

The Company determined that there are separate lenders for purposes of determining if there was an extinguishment

or modification.

The amended debt terms with CDF were not determined to be substantial and therefore the existing debt attributable

to CDF was accounted for as a modification of debt.

The amended debt terms with the Incremental Lenders were determined to be substantially

different terms from their existing debt and therefore required to be accounted for as an extinguishment of their existing debt.

Accordingly, the Company recognized a loss on the extinguishment of their existing debt of approximately $6.3 million for the three

and nine months ended March 31, 2019.

This is a non-cash expense primarily associated with the recognition of related unamortized

debt discount and debt issuance costs and the fair value of the incremental warrants issued.

September 2020, the Company accounted for the debt retirement of the Amended and Restated Credit Agreement in accordance with ASC

The Company determined that there are separate lenders and substantially different terms for the debt and therefore

required to be accounted for as an extinguishment of debt.

Accordingly, the Company recognized a loss on the extinguishment of

their existing debt of approximately $5.8 million for the three and nine months ended September 20, 2020 primarily associated with

the $2.5 million in prepayment fee and $3.3 million in the recognition of related unamortized debt discount and debt issuance costs.

Long-Term Debt

Long-term debt consists

of the following (in thousands):

September 30,

2020 Credit Agreement Term Loan

unamortized debt issuance costs

current portion of long-term debt

Total long-term debt

2020 Credit Agreement

On September 3,

2020, the Company entered into a Credit Agreement (the “2020 Credit Agreement”) by and between Purple LLC and

KeyBank National Association and a group of financial institutions.

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 will be based on Purple LLC’s leverage ratio, as defined in the Credit Agreement, and can range from LIBOR

plus 3.00 percent to 3.75 percent with a LIBOR minimum of 0.50 percent.

The initial borrowing rate is LIBOR plus 3.00 percent,

which is 3.50 percent.

The term loan will be repaid according to 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 based on excess cash flow.

Pursuant to a Pledge

and Security Agreement between Purple LLC, KeyBank, and the Company, Purple LLC’s obligations under the 2020 Credit Agreement

are secured by a perfected first-priority security interest in the assets of Purple LLC and the Company.

The Pledge and Security

Agreement contains a pledge, as security for its guaranty, all of its ownership interests in Purple LLC.

The 2020 Credit Agreement

provides for standard events of default such as for non-payment and failure to perform or observe covenants.

INNOVATION, INC.

to Condensed Consolidated Financial Statements

consisted of the following (in thousands):

unamortized debt

issuance costs

current portion

Long-term debt, net

Loan and Revolving Line of Credit

September 3, 2020, Purple LLC entered into a financing arrangement with KeyBank National Association and a group of financial institutions

(the “2020 Credit Agreement”).

contains standard indemnifications benefitting the Lenders.

The 2020 Credit

Agreement also contains 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 a number of 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 Credit

Agreement, and (iii) maintain minimum Consolidated Net Leverage Ratio and Fixed Charge Coverage Ratio (as those terms are

defined in the Credit Agreement) thresholds at certain measurement dates.

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 Credit Agreement may be terminated and any outstanding borrowings, together with accrued interest,

under the 2020 Credit Agreement could be declared immediately due and payable.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial

The Company has a $55.0

million revolving credit facility initially established under the 2020 Credit Agreement.

The revolving line of credit has

a term of five years and carries the same interest provisions as the term debt.

There is a commitment fee to be paid quarterly

calculated based on the applicable margin applied to the unused total revolving commitment.

The agreement for this revolving credit

facility contains customary covenants specified in the contractual agreement.

The agreement also contains customary events of default.

As of September 30, 2020, there was no balance outstanding on the revolving credit facility.

The foregoing summary

of the 2020 Credit Agreement does not purport to be compete and is subject to, and qualified in its entirety by, the full text

of the 2020 Credit Agreement, which is attached as Exhibit 10.5 to this report and is incorporated by reference herein.

The Company incurred

$2.5 million in debt issuance costs for the 2020 Credit Agreement.

These costs related to the entire credit arrangement and therefore

must be allocated between the term loan and the revolving line of credit.

Accordingly, $1.1 million of the debt issuance costs

relate to the term debt and are presented in the balance sheet as a direct deduction from the carrying amount of the debt liability.

The amount is amortized into interest expense using an effective interest rate over the duration of the debt.

The remaining $1.4

million of the debt issuance costs relate to the revolving line of credit facility carried as an asset and amortized to interest

expense on a straight-line basis over the term of the revolving credit facility.

In connection with

the Company’s entry into the 2020 Credit Agreement and the revolving credit facility, the Company entered into the Guaranty,

pursuant to which the Company agreed to an unconditional guaranty of the payment of all obligations and liabilities of Purple LLC

under the Credit Agreement and the other Loan Documents.

The foregoing summary of the Guaranty does not purport to be complete

and is subject to, and qualified in its entirety by, the full text of the Guaranty, which is attached as Exhibit 10.7 to this report

and is incorporated by reference herein.

Intellectual Property

Security Agreements

In connection with

the Company’s entry in the 2020 Credit Agreement and revolving credit facility, the Company and Purple LLC entered into a

Collateral Assignment of Patents, Collateral Assignment of Trademarks, and Collateral Assignment of Copyrights, pursuant to which

they granted to the Agent, on behalf of the Secured Creditors (as defined therein), a security interest in all of the intellectual

property of the Company and Purple LLC that constitutes collateral under the 2020 Credit Agreement and revolving credit facility.

The foregoing summary of the Collateral Assignment of Patents, Collateral Assignment of Trademarks, and Collateral Assignment of

Copyrights does not purport to be complete and is subject to, and qualified in its entirety by, the full text of such agreements,

which are attached as Exhibits 10.8, 10.9, and 10.10, respectively, to this report and are incorporated by reference herein.

The 2020 Credit Agreement provides for a $ 45.0 million term loan and a $ 55.0 million revolving

line of credit.

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 based on excess

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.

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 March 31, 2021, the Company was in compliance with all of the covenants related to the 2020 Credit Agreement.

$ 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

The agreement for this revolving credit facility contains customary covenants and events of default.

As of March 31, 2021,

there was no balance outstanding on the revolving credit facility.

Company incurred $ 2.5 million in debt issuance costs for the 2020 Credit Agreement.

These costs relate to the entire credit arrangement

and therefore were allocated between the term loan and the revolving line of credit.

The Company determined $ 1.1 million of the debt

issuance costs related to the term debt and are presented in the condensed consolidated balance sheet as 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 million of debt issuance costs were allocated to the revolving line of credit facility.

amount is classified as other assets and is being amortized to interest expense on a straight-line basis over the term of the revolving

credit facility.

expense under the 2020 Credit Agreement totaled $ 0.6 million for the three months ended March 31, 2021.

INNOVATION, INC.

to Condensed Consolidated Financial Statements

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 payment due on March 31, 2020 and June 30, 2020 to reduce cash disbursements during the COVID-19 pandemic.

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 $ 1.2 million for the three months ended March 31, 2020, all of which was paid-in-kind through additions to

the principal amount.

September 3, 2020, the Company paid $ 45.0 million to retire, in full, all indebtedness related to the Related Party Loan.

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 during

the third quarter of fiscal 2020, the Company recognized a $ 5.8 million loss on extinguishment of debt.

Warrant Liabilities

The Incremental Loan

Warrants issued in conjunction with the Amended and Restated Credit Agreement contain a warrant repurchase provision which, upon

an occurrence of a fundamental transaction, as defined in the warrant agreement, could give rise to an obligation of the Company

to pay cash to the warrant holders.

In addition, upon the occurrence of any of the following events:

(1) a fundamental transaction;

(2) acquisition of 25% or more of the total voting power of all the securities of the entity by any one person or group of affiliated

persons or entities;

(3) Tony Pearce or Terry Pearce individually or together ceasing to beneficially own at least 50% of the

voting securities of the Company;

or (4) the Board of Directors ceasing to be comprised of a majority of independent directors

as defined under NASDAQ rules, the exercise price of the warrant will be reduced by a value based upon a formula model established

in the agreement.

The formula model is a Black Scholes valuation model which would use the following inputs:

(1) share price would

be the greater of the volume weighted average price (“VWAP”) of the common stock for the prior 30 days before the

applicable event date or the VWAP of the trading day immediately preceding the event date;

(2) exercise price of $5.74, unless

previously adjusted under other terms of the warrant;

(3) volatility would be the greater of 100% and the historical volatility

of the Company’s common stock for the ninety days preceding the date of the triggering event;

and (4) the assumed risk-free

interest rate shall correspond to the US Treasury rate for a period equal to the remaining term of this warrant.

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 were reduced to $0, based on the formula established in the agreement.

The Company has determined

that the fundamental transaction provisions require the warrants to be accounted for as a liability at fair value on the date

of the transaction under guidance prescribed in ASC 480 - Distinguishing Liabilities from Equity .

The liability for the

warrants is subsequently re-measured to fair value at each reporting date with changes in the fair value included in earnings.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial

The Company determined

the fair value of the Incremental Loan Warrants to be $64.9 million and $21.6 million on September 30, 2020 and December 31, 2019,

respectively using a Monte Carlo Simulation of a Geometric Brownian Motion stock path model with the following assumptions:

September 30,

Trading price of common stock on measurement date

February 26, 2019, two of the lenders who originally financed the Related Party loan (the “Incremental Lenders”) funded a

$10.0 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 based on the formula established in the agreement.

The Company accounted for the Incremental

Loan Warrants as liabilities in accordance with ASC 480 - Distinguishing Liabilities from Equity and recorded them at fair value

on the date of the transaction and subsequently re-measured to fair value at each reporting date with changes in the fair value included

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.

the three months ended March 31, 2020, the Company recorded a $ 13.6 million gain on the decrease in fair value of the Incremental Loan

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 March 31, 2020:

Trading price of common stock on

measurement date

Exercise price

3 unchanged sentences

Expected dividend yield

Probability of an event causing a warrant re-price

The Company recorded

a $18.0 million and $1.4 million loss on the increase in fair value of the Incremental Loan Warrants for the three months ended

September 30, 2020 and 2019, respectively.

The Company recorded a $43.3 million and $3.4 million loss on the increase in fair

value of the Incremental Loan Warrants for the nine months ended September 30, 2020 and 2019, respectively.

Other Long-Term Liabilities

Probability of warrant re-price

public and sponsor warrants that were issued in connection with the Company’s IPO and simultaneous private placement contain certain

provisions that do not meet the criteria for equity classification and therefore must be recorded as liabilities.

The liability for these

warrants was recorded at fair value on the date of the Business Combination and subsequently re-measured to fair value at each reporting

date or exercise date with changes in the fair value included in earnings.

the three months ended March 31, 2021, 6.6 million sponsor warrants were exercised resulting in the issuance of 2.3 million shares of

Class A common stock.

The 1.9 million sponsor warrants outstanding at March 31, 2021 had a fair value of $ 19.4 million.

All of the public

warrants were exercised during fiscal 2020.

At March 31, 2020 the fair value of the 18.8 million public warrants and the 9.6 million

sponsor warrants outstanding was $ 15.8 million.

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:

Trading price of common stock on

measurement date

Exercise price

Risk free interest rate

Warrant life in years

Expected volatility

Expected dividend yield

the three months ended March 31, 2021 and 2020, the Company recognized gains of $ 9.1 million and $ 8.0 million, respectively, in its condensed

consolidated statements of income related to decreases 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 periods.

INNOVATION, INC.

to Condensed Consolidated Financial Statements

Other Long-Term Liabilities

consist of the following (in thousands):

September 30,

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

Warranty accrual

Deferred rent expense

Capital leases

current portion

of warranty accrual

Other long-term liabilities,

Total other long-term liabilities

current portion of long-term liabilities

Other long-term liabilities, net of current portion

Commitments and Contingencies

Required Member

Distributions

Prior to the Business

Combination and pursuant to the then applicable First Amended and Restated Limited Liability Company Agreement (the “First

Purple LLC Agreement”), Purple LLC was required to distribute to its members an amount equal to 45 percent of Purple LLC’s

net of current portion

and Contingencies

Member Distributions

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 prior to retiring the debt

owed under the Amended and Restated Credit Agreement and entering into the 2020 Credit Agreement and revolving credit facility.

The Second Purple LLC Agreement and the Third Purple LLC Agreement do not include any mandatory distributions, other than tax distributions.

No distributions were made under the Second Purple LLC Agreement in 2019.

During the nine months ended September 30, 2020, the

Company has paid out $5.0 million in tax distributions under the Second Purple LLC Agreement.

Service Agreement

In October 2017, the

Company entered into an electric service agreement with the local power company.

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 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 three months ended March 31,

2021, the Company paid $ 0.2 million in tax distributions under the Third Purple LLC Agreement.

At March 31, 2021, the Company’s

condensed consolidated balance sheet had $ 0.2 million of accrued tax distributions included in other current liabilities.

October 2017, the Company entered into an electric service agreement with the local power company in Grantsville, Utah.

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, 2020, the early termination penalty was $0.9 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

Operating Leases

The Company leases

various office and warehouse facilities under non-cancellable operating leases.

Office and manufacturing

space for its facility in Alpine, Utah is leased from TNT Holdings an entity under common control with InnoHold, which was historically

the majority and controlling owner of Purple LLC.

The lease was originally entered into in 2010, but in October 2017 was amended

with a lease term of 10 years that expires in September 2027 with an early-out clause without penalties after 5 years and includes

an option for a 5-year extension.

The Company leases

a facility located in Grantsville, Utah for use primarily as manufacturing and warehouse space.

The lease was entered into in August

2016 with a lease term of 66 months and expires in January 2022 with two 5-year extension options.

The Company also leases another

facility in Grantsville, Utah for use as temporary warehouse space.

The lease was entered into in May 2019 with a lease term of

4 months which expired in August 2019 with a holdover option on a month to month basis.

In June 2019, the Company

entered into a lease for Corporate office and showroom space in Lehi, Utah with a lease term of 10 years, an option to early terminate

after the eighty-fourth calendar month, and an option for two 5-year extensions.

The Lehi lease commenced in November 2019 and

the Company moved its headquarters into the building in February 2020.

In addition, in November 2019, the Company entered into

an amendment to the Lehi lease for additional office space.

During 2019 and 2020,

the Company entered into numerous leases for a Factory Outlet and Company showrooms, which have various commencement dates, with

lease terms of 3 to 36 months with various renewal options.

In July 2020, the Company

entered into a lease for a new facility in McDonough, Georgia.

The Company immediately commenced preparing the building for use

as a manufacturing, distribution and office facility and expects it to be fully operational in 2021.

The term of the Lease is 128

months including an eight-month free rent period, which will commence upon completion of the landlord’s work on the Company’s

space in the building.

The Company anticipates the landlord’s work to be completed by the middle of first quarter 2021.

lease also provides the Company with an option to extend the Lease term for two additional five-year periods.

The lease also provides

the Company with signage rights and a right of first refusal on other contiguous space.

The Company recognizes rent expense on lease payments, including

those with rent escalations and rent-free periods, on a straight-line basis over the expected lease term.

During the three months

ended September 30, 2020 and 2019, the Company recognized rent expense in the amount of $1.6 million and $0.8 million, respectively.

During the nine months ended September 30, 2020 and 2019, the Company recognized rent expense in the amount of $4.2 million and

$2.6 million, respectively.

At September 30, 2020, the Company had deferred rent of $6.7 million, of which $0.3 million is short-term

and included in other current liabilities and $6.4 million is long-term and included in other long-term liabilities on the accompanying

balance sheets.

At December 31, 2019, the Company had deferred rent of $5.1 million all of which is long-term and included in other

long-term liabilities on the accompanying balance sheets.

Purchase Agreement

In February 2018,

the Company entered into a purchase contract with a supplier of mineral oil that includes a minimum purchase commitment over a

two-year period.

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 March 31, 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.

February 2018, the Company entered into a purchase contract with a supplier of mineral oil that includes a minimum purchase commitment

over a two-year period.

In April 2019, the contract was amended to provide for a minimum purchase commitment over a four-year period

ending in April 2023.

In exchange, the Company is offered a further discount per gallon.

As of September 30, 2020, approximately

$6.2 million remains on the purchase contract.

Based on current usage rates, the Company expects to fulfill its commitments under

the agreement in the normal course of business, and as such, no liability has been recorded.

In exchange, the Company agreed to a further discount per gallon.

During the three months ended March 31, 2021

and 2020, the Company made purchases under the contract totaling $ 3.6 million and $ 2.4 million, respectively.

As of March 31, 2021, the

Company had met its commitment under the purchase contract.

Indemnification

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;

agreements with the Company’s officers and directors under which the Company may be required to indemnify such persons for

In connection with the closing of the Business Combination, to secure the 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 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 Closing 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 to

be held in escrow.

As of September 30, 2020, the Company has estimated amounts totalling $4.2 million would qualify for indemnification

if actually incurred.

No claims have yet been submitted by the Company and $5.0 million remains deposited in an escrow account.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial

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.

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 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.

INNOVATION, INC.

to Condensed Consolidated Financial Statements

Agreement and Preemptive Rights

In February 2018,

in connection with the Business Combination, the Company entered into a subscription agreement with CCP and Blackwell, pursuant

to which CCP and Blackwell agreed to purchase from the Company an aggregate of 4.0 million shares of Class A 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 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.

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 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 Coliseum Co-Invest Debt Fund, L.P.

The subscription

agreement provides CCP and Blackwell with preemptive rights with respect to future sales of the Company’s securities.

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.

Rights of Securities

The holders of certain

Warrants exercisable into Class A Stock and certain other unregistered Class A Stock were entitled to registration rights pursuant

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.

of Securities Holders

holders of certain Warrants exercisable into Class A Stock, including CCP, Blackwell and CDF, were entitled to registration rights pursuant

to certain registration rights agreements of the Company as of the Business Combination date.

In March 2018, the Company filed

a registration statement registering the Warrants (and any shares of Class A Stock issuable upon the exercise of the Warrants),

and certain unregistered shares of Class A Stock.

In March 2018, the Company filed a registration

statement registering the Warrants (and any shares of Class A Stock issuable upon the exercise of the Warrants), and certain unregistered

shares of Class A Stock.

The registration statement was declared effective on April 3, 2018.

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.

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 held by them, including

in underwritten offerings.

In an underwritten offering of such Warrants and shares of Class A Stock by the Coliseum Investors, the Company

will pay underwriting discounts and commissions and certain expenses incurred by the Coliseum Investors.

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 the 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 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).

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.

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.

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 (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 at an initial

exchange ratio equal to one Paired Security for one share of Class A 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 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.

2018, InnoHold distributed Paired Securities to Terry Pearce and Tony Pearce who also agreed to become parties to the Exchange

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.

See Note 16 —

Equity Compensation Plans.

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 and Class B Stock or a transaction in which the Class A Stock

is exchanged or converted into other securities or property.

The registration statement

was declared effective on May 17, 2019, pursuant to which, the Company issued 2.6 million shares of Class A common stock in exchange

for the Incremental Loan Warrants on November 9, 2020.

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.

LLC Class B Unit Exchange Right

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 (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 at an initial exchange ratio

equal to one Paired Security for one share of Class A 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 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.

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 and Class B Stock or a transaction in which the Class

A 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.

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 Operating Agreement, or if such exchange would cause Purple LLC to

be treated as a “publicly traded partnership”

under applicable tax laws.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial

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.

During the nine months

ended September 30, 2020, 30.8 million Paired Securities were exchanged for shares of Class A Stock.

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 Operating Agreement, or if such exchange would cause Purple LLC to

be treated as a “publicly traded partnership” under applicable tax laws.

INNOVATION, INC.

to Condensed Consolidated Financial Statements

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.

the three months ended March 31, 2021 and 2020, 0.1 million and 1.1 million, respectively, of Paired Securities were exchanged for shares

of Class A Stock.

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 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) and (ii) the number of corresponding outstanding equity securities of Purple LLC.

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.

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 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) 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

Related Taxes

Supreme Court

ruling in South Dakota v.

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.

We cannot predict the effect of these and other attempts to impose sales, income or other

taxes on e-commerce.

, 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.

the application of existing, new or revised taxes on our 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 our 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 we conduct or will conduct business.

Legal Proceedings

On September 9, 2019,

Purple LLC filed a Statement of Claim against PerfectSense Home Inc.

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.

September 9, 2019, Purple LLC filed a Statement of Claim against PerfectSense Home Inc.

and PerfectSense Trading Co.

(collectively, “PerfectSense”)

in the Federal Court of Canada.

(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.

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:

1 unchanged sentence

(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);

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).

the statement of claim, Purple LLC posted $15,000 CAD as security for PerfectSense’s costs.

PerfectSense recently

brought a motion to strike that was resolved on consent.

Pleadings are now closed, and the action is proceeding under case

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.

will oppose this informal request.

On September 20, 2020,

we filed a complaint at the U.S.

Purple LLC is suing

for a declaration that PerfectSense has infringed Purple LLC’s copyright and trademark rights and committed the tort of passing

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 are engaged in litigation discovery and recently exchanged affidavits of documents.

INNOVATION, INC.

to Condensed Consolidated Financial Statements

On September 20, 2020, Purple LLC filed a complaint at 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.

The United States has not yet filed an answer to our complaint.

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

The Company is from

time to time involved in various other claims, legal proceedings and complaints arising in the ordinary course of business.

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.

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

the Company’s.

If successful, this litigation could result in a refund of some or all of the Section 301 duties.

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

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

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.

Briefing is complete on ReST’s motion to compel arbitration,

and the Court has set a hearing for May 25, 2021 to hear argument from the lawyers on the motion.

On March 5, 2021, Purple LLC,

Gary DiCamillo, Adam Gray, Joseph Megibow, Terry Pearce, and Tony Pearce, filed a motion to dismiss the claims set forth in Case II.

Briefing on the motion to dismiss is ongoing.

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

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

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.

Both motions to dismiss are still pending

before the Court.

The case is in the early stages.

No substantial discovery has taken place.

The Court has not yet entered

a Scheduling Order governing the case, and no trial date has been set.

INNOVATION, INC.

to Condensed Consolidated Financial Statements

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.

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.

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

Capital Management, LLC

following the Business Combination, Adam Gray was appointed to the Company’s board of directors.

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.

Gray has voting and dispositive control over securities

held by CCP, CDF and Blackwell which are also Lenders under the Amended and Restated Credit Agreement.

In 2018, the Lenders agreed

to make a loan in an aggregate principal amount of $25.0 million pursuant to the Credit Agreement entered into as part of the Business

In conjunction with the Credit 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, two of the Lenders, the Incremental Lenders, agreed to provide

an incremental loan of $10.0 million (see Note 10 –

The Lenders in aggregate had $41.6 million in principal

borrowings outstanding, comprised of $35.0 million in original loan amount and $6.6 million in capitalized interest and accrued

interest of $0.9 million as of September 3, 2020.

Pursuant to the First Amendment to the Amended and Restated Credit Agreement,

the Company did not make any cash interest payments to the Lenders during the three or nine months ended September 30, 2020.

Company made a cash interest payment of $0.5 million and $1.3 million during the three and nine months ended September 30, 2019,

respectively.

Pursuant to the Second Amendment to the Amended and Restated Credit Agreement, a negative covenant was removed so

that there would not be an event of default if Lenders acquired 25% or more ownership of the Company.

As part of the Amended and

Restated Credit Agreement, CCP and Blackwell 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 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 warrants were adjusted to $0 per share.

In February 2018,

in connection with the Business Combination, the Company entered into a subscription agreement with CCP and Blackwell, pursuant

to which CCP and Blackwell agreed to purchase from the Company an aggregate of 4.0 million shares of Class A 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 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.

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.

Retirement of Amended

and Restated Credit Agreement

On September 3, 2020,

the Company retired all indebtedness related to Purple LLC’s original Credit Agreement dated as of February 2, 2018, as amended

and restated in the Amended and Restated Credit Agreement dated February 26, 2019, and as further amended by the First Amendment

to Amended and Restated Credit Agreement dated as of March 27, 2020, the Second Amendment to Amended and Restated Credit Agreement

dated as of May 15, 2020, and the Waiver and Consent to Amended and Restated Credit Agreement dated as of August 20, 2020.

total amount paid for the retirement of the debt was $45.0 million, comprised of $35.0 million in original principal, $6.6 million

of paid-in-kind interest, $2.5 million in a prepayment fee and $0.9 million in accrued interest.

Purple Founder

TNT Holdings, LLC (herein

“TNT Holdings”), EdiZONE, LLC (herein “EdiZONE”) and InnoHold, LLC (herein “InnoHold”) (the

“Purple Founder Entities”) were entities under common control with Purple LLC prior to the Business Combination as

TNT Holdings and InnoHold are majority owned and controlled by Terry Pearce and Tony Pearce (with EdiZONE being wholly owned by

TNT Holdings) who also were the founders of Purple LLC and immediately following the Business Combination were appointed to the

Company’s Board (the “Purple Founders”).

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 were sold in a secondary public

offering in September 2020.

The Purple Founders also retired from the Company’s Board in August 2020.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial

TNT Holdings owns

the Alpine facility Purple LLC has been leasing since 2010.

Effective as of October 31, 2017, Purple LLC entered into an Amended

and Restated Lease Agreement with TNT Holdings.

The Company determined that TNT Holdings is not a VIE as neither the Company nor

Purple LLC hold any explicit or implicit variable interest in TNT Holdings and do not have a controlling financial interest in

TNT Holdings.

The Company incurred $0.2 million and $0.2 million in rent expense to TNT Holdings for the building lease of the

Alpine facility for the three months ended September 30, 2020 and 2019, respectively and $0.7 million and $0.8 million for the

nine months ended September 30, 2020 and 2019, respectively.

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.

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 Loan 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

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 first 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 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”).

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.

Company has filed a registration statement with respect to such securities.

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.

Founder Entities

Holdings, LLC (herein “TNT Holdings”), EdiZONE, (wholly owned by TNT Holdings) and InnoHold (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 of Directors

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.

Founders also resigned as employees of the Company and retired from the Board in August 2020.

INNOVATION, INC.

to Condensed Consolidated Financial Statements

Holdings owns the Alpine facility Purple LLC has been leasing since 2010.

Effective as of October 31, 2017, Purple LLC entered into an

Amended and Restated Lease Agreement with TNT Holdings.

The Company determined that TNT Holdings is not a VIE as neither the Company

nor Purple LLC hold any explicit or implicit variable interest in TNT Holdings and do not have a controlling financial interest in TNT

The Company incurred $ 0.2 million and $ 0.2 million in rent expense to TNT Holdings for the building lease of the Alpine facility

for the three months ended March 31, 2021 and 2020, respectively.

The Company continues to lease the Alpine facility that was formerly

the Company headquarters, for use in production, research and development and video production.

During the nine months

ended September 30, 2020, 30.1 million Paired Securities have been exchanged for Class A Stock by InnoHold.

On August 14, 2020,

Purple LLC entered into a License Transfer and IP Assignment agreement with EdiZONE for the transfer and assignment to Purple LLC

all of EdiZONE’s rights, interests, and obligations under a certain license agreement, and certain intellectual property

rights of EdiZONE, and indemnify and hold EdiZONE harmless from liability related to the certain license agreement.

paid EdiZONE $8.5 million as consideration for the agreement.

The rights, interests, and obligations under the assigned license

agreement now owned by Purple LLC, including the right to receive royalty payments from the licensee, pertain to certain intellectual

property owned by Purple LLC that was licensed back to EdiZONE for purposes of allowing EdiZONE to maintain its license with the

third party licensee that existed prior to both the Business Combination and EdiZONE’s related assignment of all its material

intellectual property to Purple LLC pursuant to the Second Amended and Restated Assignment and License Back between EdiZONE and

Purple LLC dated November 9, 2018, resulting in Purple LLC now being the direct licensor to that third party licensee of the intellectual

property owned by Purple LLC.

The additional intellectual property assigned to Purple LLC, and now also owned by Purple LLC, includes

the INTELLIPILLOW and GEL MATRIX trademarks.

For the avoidance of doubt, and stated simply, Purple LLC acquired the rights of EdiZONE

to be the direct licensor with the third party licensee of the intellectual property, namely patents and trade secrets, that were

and are owned by Purple LLC.

The foregoing description of the License Transfer and IP Assignment Agreement does not purport to

be complete and is qualified in its entirety by reference to the complete terms of the agreement, a copy of which is filed as Exhibit

10.2 to this Quarterly Report on Form 10-Q and incorporated herein by reference.

In July 2020 and September

2020, Purple LLC paid InnoHold either directly or through withholding payments directly to various states, an aggregate of $4.7

million in required tax distributions pursuant to the Second Purple LLC Agreement.

Stockholders’

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.

the three months ended March 31, 2021, certain current and former employees of the Company who received distributions of Paired Securities

from InnoHold exchanged 0.1 million of Paired Securities for Class A Stock.

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.

the three months ended March 31, 2021, Purple LLC paid InnoHold through withholding payments directly to various states, an aggregate

of $ 0.3 million in required tax distributions pursuant to the Third Purple LLC Agreement.

Stockholders’ Equity

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

The Company has 210.0

million shares of Class A Stock authorized at a par value of $0.0001 per share.

Holders of the Company’s Class A 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

A Common Stock

Company has 210.0 million shares of Class A Stock authorized at a par value of $ 0.0001 per share.

Holders of the Company’s Class

A 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 and holders of the

Class B 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 and Class B Stock are entitled to one vote

per share on matters to be voted on by stockholders.

At September 30, 2020, 53.8 million shares of Class A 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 the nine months ended September 30, 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

Accordingly, the shares of Class A Stock are no longer subject to vesting or forfeiture.

Class B Common

The Company has 90.0

million shares of Class B Stock authorized at a par value of $0.0001 per share.

Holders of the Company’s Class B Stock will

vote together as a single class with holders of the Company’s Class A Stock on all matters properly submitted to a vote

of the stockholders.

Shares of Class B 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 shares of Class B 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 Second Purple LLC Agreement.

The Class B 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.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial

In connection with

the Business Combination, approximately 44.1 million shares of Class B 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 that it sold.

At September 30, 2020, 0.6 million shares of Class B Stock were outstanding all 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.

Holders of the Class A Stock and holders of the Class

B 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 and Class B Stock are entitled to one vote per share on matters to

be voted on by stockholders.

At March 31, 2021, 66.3 million shares of Class A Stock were outstanding.

accordance with the terms of the Business Combination, approximately 1.3 million shares of Class A Stock were subject to vesting and

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, the shares of Class A Stock are no longer subject to

vesting or forfeiture.

B Common Stock

The Company has 90.0 million

shares of Class B Stock authorized at a par value of $ 0.0001 per share.

Holders of the Company’s Class B Stock will vote together

as a single class with holders of the Company’s Class A Stock on all matters properly submitted to a vote of the stockholders.

of Class B 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 shares of Class B 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 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

INNOVATION, INC.

to Condensed Consolidated Financial Statements

connection with the Business Combination, approximately 44.1 million shares of Class B 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 that it sold.

All of the 0.4 million shares of Class B Stock outstanding at March 31, 2021 were held by other parties.

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 30, 2020, there were no shares of preferred

stock outstanding.

Sponsor Warrants

There were 15.5 million

public warrants (the “Public Warrants”) issued in connection with GPAC’s formation and IPO and 12.8 million

warrants (the “Sponsor Warrants”), issued pursuant to a private placement simultaneously with the IPO.

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

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 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 March 31, 2021, there were no shares of preferred stock outstanding.

and Sponsor Warrants

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 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 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;

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.

Company may call the warrants for redemption if the reported last sale price of the Class A 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 equal to the quotient obtained by dividing

(x) the product of the number of shares of Class A Stock underlying the Sponsor Warrants, multiplied by the difference between

the exercise price of the Sponsor Warrants and the “fair market value”

(defined below), by (y) the fair market value.

The “fair market value”

means the average reported last sale price of the Class A 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.

Both the Public and Sponsor Warrants are

classified as equity instruments in the accompanying condensed consolidated balance sheet.

From the time of GPAC’s

IPO up to the Business Combination with Purple LLC, there were 28.3 million warrants outstanding.

During the nine months ended

September 30, 2020, 0.9 million warrants have been exercised.

At September 30, 2020, approximately 27.4 million warrants remain

Loan Warrants

In connection with

the Amended and Restated Credit Agreement, the Company issued to CCP and Blackwell, as the Incremental Lenders funding the Incremental

Loan, 2.6 million Incremental Loan Warrants to purchase 2.6 million shares of the Company’s Class A Stock.

Each Incremental

Loan Warrant entitles 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.

The Incremental Loan Warrants have a five-year term

and will expire on February 26, 2024, or earlier upon redemption or liquidation.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial

The Company may call

the warrants for redemption at a price of $0.01 per Share of Class A Stock if the reported last sale price of the Class A 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.

If the Company calls the Incremental Loan Warrants

for redemption, it will have the option to require the holder to exercise the Incremental Loan Warrants on a cashless basis, by

surrendering their Incremental Loan Warrants for that number of shares of Class A Stock equal to the quotient obtained by dividing

(x) the product of the number of shares of Class A Stock underlying the Incremental Loan Warrants, multiplied by the difference

between the exercise price of the Sponsor Warrants and the “fair market value”

(defined below), by (y) the fair market

The “fair market value”

means the average reported last sale price of the Class A Stock for the 10 trading

days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of Incremental

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 equal to the quotient obtained by dividing (x) the product of the number

of shares of Class A Stock underlying the sponsor warrants, multiplied by the difference between the exercise price of the Sponsor Warrants

and the “fair market value” (defined below), by (y) the fair market value.

The “fair market value” means the

average reported last sale price of the Class A 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.

Both the public and sponsor warrants are classified as equity instruments in the accompanying condensed

consolidated balance sheet.

October 27, 2020, 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 November

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.

the three months ended March 31, 2021, 6.6 million sponsor warrants were exercised resulting in the issuance of 2.3 million shares of

Class A common stock.

At March 31, 2021, there were 1.9 million warrants outstanding all of which were sponsor warrants.

Loan Warrants

In the event of a

“fundamental transaction”

as defined in the warrant agreement, the holder will have the right to purchase and receive

the same kind and amount of consideration receivable by the stockholders of the Company upon the occurrence of such fundamental

The warrant agreement requires the Company to cause the surviving company in a fundamental transaction, to assume

the obligations of the Company under the Incremental Loan Warrants.

In addition, a clause in the Incremental Loan Warrant Agreement

states, upon the occurrence of a fundamental transaction, that the holders of the Incremental Loan Warrants may elect to either

(i) have the exercise price of the warrant reduced by the Black-Scholes value of the Incremental Loan Warrants (as set forth in

the Incremental Loan Warrants Agreement) or (ii) cause the Company or its successor to repurchase all or a portion of the Incremental

Loan Warrants at the Black-Scholes value (as set forth in the Incremental Loan Warrants).

In addition, upon the occurrence of

any of the additional following events:

(1) acquisition of 25% or more of the total voting power of all the securities of the

entity by any one person or group of affiliated persons or entities;

(2) Tony Pearce or Terry Pearce individually or together

ceasing to beneficially own at least 50% of the voting securities of the Company;

or (3) the Board of Directors ceasing to be

comprised of a majority of independent directors as defined under NASDAQ rules, the exercise price of the warrant will be reduced

by a value based upon a formula model established in the agreement.

As a result of these clauses, the Incremental Loan Warrants

embody an obligation to repurchase the Company’s equity shares, or is indexed to such an obligation, and may require the

Company to settle the obligation by transferring assets.

As such, the Incremental Loan Warrants are classified as liabilities

under ASC 480 - Distinguishing Liabilities from Equity .

During the nine months

ended September 30, 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 were reduced to $0, based on the formula established

in the agreement.

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.

INNOVATION, INC.

to Condensed Consolidated Financial Statements

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 November 30, 2020.

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.

Noncontrolling

Noncontrolling interest

(“NCI”) is the membership interest held by holders other than the Company.

On February 2, 2018, upon the close of

the Business Combination, and at December 31, 2018, InnoHold’s and other Purple LLC Class B Unit holders’

NCI percentage in Purple LLC was approximately 82%.

At September 30, 2020, the combined NCI percentage in Purple LLC was approximately

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.

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 materially from the statutory rate.

The primary factors impacting the expected tax are the allocation

of tax benefit to noncontrolling interest and the impact of the valuation allowance.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial

In prior periods the

Company had 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 prior periods, management had determined that its net deferred tax

assets were not more likely than not going to be realized due to existence of critical negative evidence that the Company was

in a three-year cumulative loss position.

Considering this and other factors, a valuation allowance of $44.3 million was maintained

through the period ending March 31, 2020.

For the period ended

June 30, 2020, and in assessing the realizability of deferred tax assets, management determined that it was more likely than not

that its net deferred tax assets would be realized and that a full valuation allowance for its deferred tax assets was no longer

As of the period ended June 30, 2020, the Company was no longer in a three-year cumulative loss position.

of the removal of this negative evidence and other items of positive evidence, the Company determined that the deferred tax assets

were more likely than not to be realized.

Accordingly, through the period ended September 30, 2020, $35.4 million of the valuation

allowance associated with the Company’s federal and state deferred tax assets was released and recorded as an income tax

An additional $0.7 million of remaining valuation allowance will be released in the fourth quarter of 2020 as taxes are

In addition, and in conjunction with the removal of the valuation allowance, the Company recorded an additional $172.8

million in deferred tax assets primarily related to tax basis increases resulting from exchanges of Class B Paired Securities during

the nine months ended September 30, 2020.

The deferred tax assets at September 30, 2020 are $205.5 million net of $0.7 million

of valuation allowance recorded against the deferred tax assets, which will be released in subsequent quarters and $11.0 million

of 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.

The Company currently

estimates its annual effective income tax rate to be 3.14%.

The annualized effective tax rate for the Company differs from the

federal rate of 21% primarily due to (1) the release of a portion of the valuation allowance through the current year’s

annual effective tax rate calculation, and (2) NCI in Purple LLC that is allocated to InnoHold and others.

The effective tax rate

as of September 30, 2020, is 162% primarily due to the tax benefit from the release of the valuation allowance.

For the three months

and nine months ended September 30, 2020, the Company has recorded an income tax benefit of $0.1 million and $35.8 million, respectively.

In response to the

COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in March 2020.

Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (2017 Tax Act).

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 March 31, 2021, the combined NCI percentage in Purple LLC was approximately 1 %.

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.

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.

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.

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 deferred tax assets at March 31, 2021 totaled

$210.4 million, which is net of a $69.7 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 $ 17.8 million

in the valuation allowance from December 31, 2020 to March 31, 2021, primarily as a result of an increase in the residual outside partnership

Company currently estimates its annual effective income tax rate to be 26.35 %.

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 and state and

local income taxes.

the three months ended March 31, 2021, the Company has recorded income tax expense of $ 4.7 million.

The effective tax rate for the three

months ended March 31, 2021 was 18.20 %, which is less than the federal statutory rate because the gain related to the change in fair

value of the warrant liability is excluded from taxable income for income tax purposes.

INNOVATION, INC.

to Condensed Consolidated Financial Statements

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.

In addition, the CARES

Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally

eligible for 15-year cost-recovery and 100% bonus depreciation.

The enactment of the CARES Act resulted in two adjustments to

our income tax provision for the six months ended June 30, 2020, relating to increased 2019 NOL utilization and tax benefits from

NOL carrybacks.

We have recorded a discrete benefit of $0.5 million in our income tax provision for the nine months ended September

30, 2020 related to the CARES Act.

In connection with

the Business Combination, the Company entered into the TRA 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

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.

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.

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.

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 TRA.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial

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 TRA

Liability is recorded based on 80% of the estimated future cash tax savings that the Company may realize as a result of increases

in the basis of the assets of Purple LLC attributed to the Company as a result of such exchange or redemption.

The amount of the

increase in asset basis, the related estimated cash tax savings and the attendant TRA Liability to be recorded will depend on

the price of the Company’s Class A Stock at the time of the relevant redemption or exchange.

The estimation of liability

under the TRA is by its nature imprecise and subject to significant assumptions regarding the amount and timing of future taxable

As a result of the initial merger transaction and the subsequent exchanges of 43.5 million Class B Units for Class A Stock

as of September 30, 2020, the potential future TRA liability is $169.6 million, of which $169.0 million has been recorded through

the third quarter of 2020.

Due to the release of the Company’s valuation allowance on the deferred tax assets to which the

Tax Receivable Agreement liability relates, only $169.0 of the $169.6 million has been recorded to date ($0.5 million in 2019 and

an incremental $168.5 million through September 30, 2020).

Of the total liability recorded during 2020, $134.9 million relates

to current year exchanges and was recorded as an adjustment to equity and $33.5 million was recorded to expense in order to re-establish

the TRA related to prior year exchanges.

The additional $0.6 million is expected to be recorded in the fourth quarter of the year

ending December 31, 2020.

The effects of uncertain

tax positions are recognized in the consolidated financial statements if these positions meet a “more-likely-than-not”

from, payments it makes under the tax receivable agreement.

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 at the time of the relevant redemption or exchange.

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, the potential future tax receivable agreement liability is $171.9 million.

Of the tax receivable agreement liability

recorded during the three months ended March 31, 2021, $0.8 million relates to current year exchanges and was recorded as an adjustment

to stockholders’ equity and $0.2 million was recorded as income in the condensed consolidated statement of income to reflect the

impact of the change in rate associated with state income taxes.

Company has no federal net operating loss (“NOL”) carryforwards after utilization of the remaining carryforwards in 2020.

effects of uncertain tax positions are recognized in the consolidated financial statements if these positions meet a “more-likely-than-not”

For those uncertain tax positions that are recognized in the consolidated financial statements, liabilities are established

to reflect the portion of those positions it cannot conclude “more-likely-than-not”

to be realized upon ultimate settlement.

The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits on the income tax expense

line in the accompanying consolidated statement of operations.

Accrued interest and penalties would be included on the related

tax liability line in the consolidated balance sheet.

As of September 30, 2020, no uncertain tax positions were recognized as

liabilities in the condensed consolidated financial statements.

Net Income (Loss) Per Common Share

The following table

sets forth the calculation of basic and diluted weighted average shares outstanding and earnings per share for the periods presented

(in thousands, except per share amounts):

Three Months Ended

September 30,

Nine Months Ended

September 30,

Net income (loss) (numerator):

Net income (loss) attributable to Purple Innovation, Inc.-basic

Net income (loss) attributed to the noncontrolling interest

Net income (loss) attributable to Purple Innovation, Inc.-diluted

Weighted average shares (denominator):

Weighted average shares—basic

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 March 31, 2021, no uncertain tax positions were recognized as liabilities in the condensed consolidated

financial statements.

INNOVATION, INC.

to Condensed Consolidated Financial Statements

Net Income Per Common Share

following table sets forth the calculation of basic and diluted weighted average shares outstanding and earnings per share for the periods

presented (in thousands, except per share amounts):

income attributable to Purple Innovation, Inc.

dilutive effect of change in fair value – warrant liabilities

income attributable to Purple Innovation, Inc.

average shares—basic

dilutive effects of equity awards

Dilutive effects of Class B common stock

Weighted average shares—diluted

Net income (loss) per common share:

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial

For the three months

ended September 30, 2020, the Company excluded 9.9 million Paired Securities exchangeable into shares of Class A Stock and 10.4

million shares of Class A Stock issuable upon exercise of certain Company warrants and stock options as the effect was anti-dilutive.

For the nine months ended September 30, 2020, the Company excluded 21.6 million Paired Securities exchangeable into shares of Class

A Stock and 2.6 million shares of Class A Stock issuable upon exercise of certain Company warrants as the effect was anti-dilutive.

For the three and nine months ended September 30, 2019, the Company excluded 17.0 million shares of Class A Stock issuable upon

conversion of the Company’s warrants and stock options and 1.3 million shares of issued Class A Stock subject to vesting

as the effect was anti-dilutive.

Equity Compensation Plans

2017 Equity Incentive

The Purple Innovation,

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 Class A 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 September

30, 2020, approximately 2.1 million shares remain available under the 2017 Incentive Plan.

Class A Common Stock Awards

In March 2020, the

Company granted a restricted stock award under the Company’s 2017 Equity Incentive Plan to the Company’s independent

Board advisor and GPAC observer.

The stock award 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.

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.

determined that the fair value of the restricted stock on the grant dates was $0.7 million.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial

Employee Stock Options

During the nine months

ended September 30, 2020, the Company granted stock options under the Company’s 2017 Equity Incentive Plan to certain management

dilutive effects of warrants

average shares—diluted

income per common share:

the three months ended March 31, 2021, the Company excluded 0.4 million Paired Securities convertible into shares of Class A Stock as

the effect was anti-dilutive.

For the three months ended March 31, 2020, the Company excluded 31.3 million Paired Securities convertible

into shares of Class A Stock, 14.2 million shares of Class A Stock issuable upon conversion of certain Company warrants and stock options

and 0.1 million shares of issued Class A Stock subject to vesting as the effect was anti-dilutive.

Compensation Plans

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.

March 31, 2021, an aggregate of 1.9 million shares remain available for issuance or use under the 2017 Incentive Plan.

INNOVATION, INC.

to Condensed Consolidated Financial Statements

Stock Options

March 2021, the Company granted 0.1 million stock options under the Company’s 2017 Equity Incentive Plan to certain management

of the Company.

The stock options have an exercise price ranging from of $12.76 to $15.12 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 amortized

over the options vesting period on a straight-line basis.

The Company determined the fair value of the options granted during the

nine months ended September 30, 2020 using the Black Scholes method with the following assumptions:

The stock options have an exercise price of $ 32.28 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 amortized over the options vesting period

on a straight-line basis.

The Company determined the fair value of these options using the Black Scholes method with the following assumptions:

Fair market value

4 unchanged sentences

Expected dividend yield

The following table

summarizes the Company’s total stock option activity for the nine months ended September 30, 2020:

As of September 30, 2020:

following table summarizes the Company’s total stock option activity for the three months ended March 31, 2021:

Options outstanding as of January 1, 2021

Forfeited/cancelled

Options outstanding as of September 30, 2020

Outstanding and exercisable stock options

as of September 30, 2020 are as follows:

Options Outstanding

Options Exercisable

Exercise Prices

Options outstanding as of March 31, 2021

and exercisable stock options as of March 31, 2021 are as follows:

(in thousands)

1 unchanged sentence

(in thousands)

The estimated fair

value of the Company stock options, less expected forfeitures, is amortized over the options vesting period on the straight-line

The Company recognized $0.3 million and $0.2 million in stock-based compensation expenses related to stock options during

the three months ended September 30, 2020 and 2019, respectively.

The Company recognized $0.9 million and $0.4 million in stock-based

compensation expenses related to stock options during the nine months ended September 30, 2020 and 2019, respectively.

As of September 30,

2020, there was $3.0 million of total unrecognized stock compensation cost with a remaining recognition period of 2.60 years.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial

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.

incentive unit holders accepted the offer, and the terms and distribution of each transaction were finalized and closed on June

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.

September 30, 2020, 0.6 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-Based Compensation

The Company has accounted

for all stock-based compensation under the provisions of ASC 718 Compensation—Stock Compensation.

This standard requires

the Company to record a non-cash expense associated with the fair value of stock-based compensation over the requisite service

The table below summarizes the aggregate non-cash stock-based compensation recognized in the statement of operations for

stock awards, employee stock options and the distribution by InnoHold of Paired Securities.

Remaining Life (Years)

INNOVATION, INC.

to Condensed Consolidated Financial Statements

following table summarizes the Company’s unvested stock option activity for the three months ended March 31, 2021:

(in thousands)

Three Months Ended

September 30,

Nine Months Ended

September 30,

Nonvested options as of January 1, 2021

Nonvested options as of March 31, 2021

estimated fair value of Company stock options, less expected forfeitures, is amortized over the options vesting period on a straight-line

The Company recognized $ 0.5 million and $ 0.2 million in stock-based compensation expense related to stock options during the three

months ended March 31, 2021 and 2020, respectively.

of March 31, 2021, outstanding stock options had $ 4.8 million of unrecognized stock compensation cost with a remaining recognition period

of 2.3 years.

Incentive Units

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.

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 March 31, 2021, 0.4 million of the Paired Securities remain

to be exchanged for Class A Stock by the incentive unit holders.

Non-Cash Stock-Based Compensation

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

The table below summarizes the aggregate non-cash stock-based compensation recognized in the statement of operations for stock

awards, employee stock options and the distribution by InnoHold of Paired Securities.

(in thousands)

Stock-Based Compensation

Cost of revenues

1 unchanged sentence

General and administrative

Research and development

Total non-cash stock-based compensation

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.

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.

and development

Total non-cash stock-based

Retirement Plan

July 2018 the Company established a 401(k) plan that qualifies as a deferred compensation arrangement under Section 401 of the IRS

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.

matching contribution expense was $0.5 million and $0.4 million for the three months ended September 30, 2020 and 2019,

respectively, and $1.7 million and $1.0 million for the nine months ended September 30, 2020 and 2019, respectively.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial

Subsequent Events

On October 1, 2020,

pursuant to his employment agreement, the Company granted Joseph B.

Megibow, Chief Executive Officer, nonqualified stock options

to purchase 0.2 million shares of the Company’s Class A Stock.

The options have an exercise price of $21.70 per share, vest

over a four-year period and expire five years from the date of issuance.

In addition, the Company determined to increase Mr.

Megibow’s

salary by $50,000 to $500,000 annually, continue to provide Mr.

Megibow with such airfare reimbursement and housing stipend for

six additional months, expiring March 31, 2021, and extend Mr.

Megibow’s relocation reimbursements until September 30, 2021.

In October we received

a claim that one of our products does not have the proper warning label required by California’s Proposition 65, which requires

businesses to provide warnings to Californians about significant exposures to chemicals that are known to California to cause

cancer, birth defects or other reproductive harm.

While we are investigating this claim and generally make efforts to comply with

Proposition 65, we may be subject to such claims and, as a result, we may be required to expend resources in defense of these

claims and incur costs to comply with the regulations that could increase our cost of doing business

On October 13, 2020,

Purple LLC filed a lawsuit against Responsive Surface Technology, LLC (“ReST”) and its parent company, PatienTech,

LLC (“PatienTech”) in the United States District Court for the District of Utah.

Purple, LLC seeks monetary damages,

injunctive relief, and declaratory judgment based on certain conduct by ReST and PatienTech (“Case I”).

Due to confidentiality

obligations between the parties, the publicly-filed complaint was filed in a redacted form, and the substance of the dispute cannot

be revealed at this time.

The defendants’

responses to the complaint have not yet come due, and no motions have been filed.

Case I remains in its infancy.

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”).

Although ReST seeks to cast the situation in a light unfavorable to Purple

LLC, Case II involves the same facts and transactions as Case I.

As a result, Case II is subject to the same confidentiality restrictions,

and its substance cannot be revealed at this time.

Purple LLC, has not yet filed its response to ReST’s complaint.

Purple LLC, intends to file a motion to consolidate Case II into Case I in the near future.

Purple LLC seeks over $4 million in

damages from ReST and PatienTech in Case I, while ReST claims in Case II that Purple LLC is liable to it for tens of millions of

The outcomes of the cases cannot be predicted at this early stage.

However, we intend to vigorously pursue our claims

under Case I and defend against the claims made by ReST in Case II.

During October

2020, approximately 8.0 million Public Warrants were exercised for $45.6 million in cash and approximately 4.0 million shares

of Class A Stock were issued.

On October 27, 2020,

the Company provided notice to the holders of the Public Warrants and the Incremental Loan Warrants that the Company is exercising

their right under the terms of the Public Warrants and Incremental Loan Warrants to redeem such warrants by paying to such warrant

holders the redemption price of $0.01 per warrant on November 30, 2020.

Any exercise of the warrants prior to that date must be

done on a cashless basis, in accordance with the terms of the warrants.

As of November 9, 2020, 1.7 million Public Warrants and

2.6 million Incremental Loan Warrants have been exercised resulting in the issuance of 3.1 million shares of Class A stock.

On November 4, 2020,

the Company’s Board approved a Short-Term Cash Incentive Plan (the “STIP”) for the 2020 plan year.

Participation

in the STIP is limited to key employees who are employed to serve as Senior Vice Presidents, Vice Presidents, or Senior Directors.

Not all eligible employees are guaranteed to participate in the plan, as participation will be subject to Board discretion and

The STIP will be administered by the HR & Compensation Committee as authorized by the Board.

For the STIP to activate,

the company must achieve certain net revenue and adjusted EBITDA targets.

If the Company does not reach the minimum targets, no

cash awards will be paid to any of the participants under the Plan.

The amount of the total payment to each participant is adjustable

to account for personal performance criteria, as follows:

70% of the amount is based on the Company’s achievement of at least

the minimum Company-level performance targets and the remaining 30% is based on the participant’s achievement of personal

performance criteria selected or approved by the Board.

Subject to the other provisions of the STIP, payment to a participant will

be made in cash in an amount up to the product determined by multiplying a certain percentage from 50% to 150% by the participant’s

targeted bonus amount.

That percentage will be determined based on whether and the extent to which the net revenue target and adjusted

EBITDA target both exceed certain minimum target threshold amounts.

The bonus target applicable to each participant is determined

by multiplying (x) the participant’s annual base salary by (y) the participant’s share of the total bonus fund amount,

as determined in accordance with the STIP.

A participant will have no right to receive a payment under the STIP unless the

participant remains in good standing with the Company during the plan year and remains in the employ of the Company through and

including the payment date in 2021.

This summary of the STIP does not purport to be complete and is subject to, and qualified in

its entirety by, the full text of the STIP, which is attached as Exhibit 10.11 to this 10-Q and is incorporated by reference herein.

November 9, 2020, the Company mailed to Paul Zepf a notice terminating Mr.

Zepf’s Observer and Indemnification Agreement

dated February 2, 2018 (the “Observer Agreement”).

Zepf was appointed to the Board of Directors on August

18, 2020, his service as an observer was no longer necessary.

The Observer Agreement provided for one-year automatic renewals until

the Company provided written notice of termination not less than thirty days prior to the renewal period.

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.

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 are cautioned not to place undue reliance on any such forward-looking

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.

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 filed with the Securities

and Exchange Commission on March 9, 2020.

Introductory Note

On February 2, 2018,

our predecessor, GPAC, consummated the Business Combination pursuant to the Merger Agreement, by and among GPAC, Merger Sub, Purple

LLC, InnoHold and the Sponsor, which provided for the Company’s acquisition of Purple LLC’s business through the merger

of Merger Sub with and into Purple LLC, with Purple LLC being the survivor in the Business Combination.

In connection with

the closing of the Business Combination, the Company changed its name from “Global Partner Acquisition Corp.”

to “Purple

Innovation, Inc.”

The Business Combination was accounted for as a reverse recapitalization because the former owners of

Purple LLC had control over the combined company through their 82% ownership of the common stock of the Company.

Company was the legal acquirer, the historical operations of Purple LLC are deemed to be those of the Company.

Thus, the financial

statements included in this Quarterly Report on Form 10-Q reflect (i) the historical operating results of Purple LLC prior to

the Business Combination;

(ii) the combined results of the Company following the Business Combination;

(iii) the assets and liabilities

of Purple LLC at their historical cost;

and (iv) the Company’s equity and earnings per share for all periods (both pre-

and post-Business Combination) presented.

Overview of Our Business

Our mission is to

help people feel and live better through innovative comfort 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.

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’

We market and sell our

products through our direct-to-consumer (“DTC”) online channels, retail brick-and-mortar wholesale partners, third-party

online retailers and our Company showrooms.

COVID-19 Pandemic

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.

light of the COVID-19 pandemic, we have taken a number of precautionary measures to manage our resources and mitigate the

adverse impact of the pandemic, which is intended to help minimize the risk to our Company, employees, customers, and the communities

in which we operate.

Employees at the Company’s headquarters and certain other employees have been asked to work from home

where possible, with only limited access given to employees to work in the office when necessary.

For roles that require employees

to be on-site, such as our manufacturing facility and distribution center, we mandate protective equipment be worn, perform temperature

testing at the start of each shift and again during the shift, contact trace when risk of exposure is known, stagger shifts to

reduce concentration of employees, follow social distancing guidelines and sanitize daily including complete weekly anti-viral

The State of Utah, where all of our manufacturing operations currently take place, has experienced a significant resurgence

of COVID-19 cases.

If the State of Utah, as part of efforts to control the resurgence of COVID-19, requires us to close our facilities

temporarily or to reduce the number of employees working in our manufacturing at a given time, our business and operations could

be adversely affected.

Despite the ongoing

challenges from COVID-19, the Company has been able to capitalize on the opportunities created by this situation.

We continue to

serve our customers through our Direct to Consumer (“DTC”) channel, which has remained strong throughout the year as

consumer demand for our premium, differentiated product offerings shifted to our DTC channel.

We continue to focus our efforts

in our DTC core competencies resulting in a continued strength in DTC channel sales across all of our product categories throughout

This increase in demand was a contributing factor to DTC net revenue growth of approximately 97% over the prior year

third quarter.

There can be no assurance that this trend of strong demand through our DTC channel will continue.

We initially experienced

a sharp decline in the wholesale side of our business as temporary shutdowns of non-essential businesses and shelter-at-home directives

occurred in most U.S.

As the shutdowns were lifted and stores began to open again, demand through the wholesale channel

increased such that our net revenue from wholesale customers this quarter is up 7% over the prior year third quarter.

factory outlet and all of our showrooms open and servicing our customers.

We recently opened two new showrooms and have two more

planned to open by the end of the year.

However, due to recent resurgence of COVID-19, we may be required to close our factory

outlet and showrooms in the future.

We have signed a new lease for a manufacturing facility in Georgia and are proceeding with

the buildout and purchasing of equipment to begin production.

This increase in demand

allowed us to work through a portion of our on-hand inventory and required us to ramp up production.

We continue to take advantage

of our vertically integrated business model to adjust production schedules to leverage inventory on hand and manage labor costs.

We also continue to dynamically adjust our significant discretionary online advertising spend in response to any changes in DTC

trends as they develop.

Our supply chain has

not been significantly affected by COVID-19.

Suppliers in China were temporarily closed as a result of the pandemic, but we

had sufficient inventory on hand.

These suppliers have resumed production and are able to supply materials as needed.

of our domestic suppliers are able to continue operations and provide necessary materials when needed.

We have experienced some

constraints from certain suppliers due to our increased production to meet demand.

We have also experienced some shipping delays

in the delivery of our product to our customers.

This is due to the increased nationwide demand placed on delivery companies.

Although the Company

has taken measures to protect the business, we cannot predict the specific duration for which these precautionary measures will

stay in effect, and we may elect or need 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.

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 new line of credit, and continuing resumption and 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.

However, the extent to which the COVID-19 pandemic and our precautionary measures in response thereto may

impact our business will depend on future developments, which are highly uncertain and cannot be precisely predicted at this time.

Operating Results for the Three Months Ended September 30,

2020 and 2019

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:

Three Months Ended September 30,

Revenues, net

Cost of revenues

Operating expenses:

Marketing and sales

General and administrative

Research and development

Total operating expenses

Operating income

Other income (expense):

Interest expense

Other income, net

Loss on extinguishment of debt

Change in fair value –

warrant liabilities

Tax receivable agreement expense

Total other income (expense), net

Net income (loss) before income taxes

Benefit from income taxes

Net income (loss)

Net income attributable to noncontrolling interest

Net income (loss) attributable to Purple Innovation, Inc.

Total net revenue

increased $69.7 million, or 59.4%, to $187.1 million for the three months ended September 30, 2020 from $117.4 million for the

three months ended September 30, 2019 due to a $49.4 million increase in mattress sales, a $13.4 million increase in top of mattress

sales and a $6.9 million net increase in other products.

These increases in revenue were primarily attributable to an increase

in demand across all product lines due to recent increases in online shopping in home furnishings.

Cost of Revenues

The cost of revenues

increased $34.4 million, or 53.2%, to $98.8 million for the three months ended September 30, 2020 from $64.5 million for the three

months ended September 30, 2019.

The increase was primarily due to a $15.9 million increase in direct material costs, a $7.6 million

increase in labor and overhead, a $5.3 million increase in freight charges, a $3.5 million increase in merchant processing fees

and a $2.1 million increase in all other costs, all due to the increase in revenue.

The gross profit percentage increased to 47.2%

of net revenues for the three months ended September 30, 2020 from 45.0% for the same period in 2019.

The improvement in gross

profit was primarily driven by higher margins due to channel shift toward higher margin DTC sales.

Marketing and Sales

Marketing and sales

expenses increased $17.2 million, or 50.4%, to $51.2 million for the three months ended September 30, 2020 from $34.1 million

for the three months ended September 30, 2019.

The increase was due to an $11.9 million increase in advertising costs, a $3.2 million

increase in marketing salaries related to an increase in personnel and an increase of $2.1 million in other marketing and sales

The marketing and sales expense as a percentage of net revenue was 27.4% for the three months ended September 30, 2020.

This is a decrease from 29.0% for the three months ended September 30, 2019 due to efficiencies in our advertising spending created

from enhanced marketing strategies and lower advertising costs.

General and Administrative

General and administrative

expenses increased $4.4 million, or 64.4%, to $11.1 million for the three months ended September 30, 2020 from $6.7 million for

the three months ended September 30, 2019.

The increase was primarily due to a $2.3 million increase in salaries related to an

increase in personnel, $0.7 million additional expense for previous years sales tax liability, $0.9 million in legal and professional

fees and $0.5 million increase in all other expenses.

Research and Development

Research and development

costs increased $0.6 million, or 57.7%, to $1.7 million for the three months ended September 30, 2020 from $1.1 million for the

three months ended September 30, 2019.

The increase was due to a $0.8 million amortization of a one-year license agreement for

innovative technology, a $0.1 million increase in other R&D expenses, partially offset by a decrease of $0.3 million in salaries

as Tony and Terry Pearce resigned their positions as Co-Directors of Research and Development in August 2020.

Operating Income

Operating income increased

$13.3 million to $24.3 million for the three months ended September 30, 2020, from operating income of $11.0 million for the three

months ended September 30, 2019.

The increase was primarily due to increased DTC sales with higher margins and lower marketing

and sales costs as a percentage of revenue.

Interest Expense

We incurred $1.2 million

in interest expense for the three months ended September 30, 2020 including $0.9 million related to the Amended and Restated Credit

Agreement and $0.2 million related to the 2020 Credit Agreement.

In addition, for the three months ended September 30, 2020 we

incurred discounts and debt issuance costs related to the Amended and Restated Credit Agreement in the amount of $0.1 million

which was amortized to interest expense as non-cash interest.

The Amended and Restated Credit Agreement was retired during the

quarter and the 2020 Credit Agreement had an outstanding principal balance of $45.0 million at September 30, 2020.

Under the 2020

Credit Agreement, interest for the Term Debt accrues at LIBOR (with a floor) plus 3%.

Interest expense was $1.4 million for the

three months ended September 30, 2019.

The portion relating to the Amended and Restated Credit Agreement was $1.2 million of which

$0.7 million was paid-in-kind through additions to the principal amount and $0.5 million was paid in cash.

In addition, for the

three months ended September 30, 2019 we incurred discounts and debt issuance costs related to the Amended and Restated Credit

Agreement in the amount of $0.2 million which was amortized to interest expense as non-cash interest.

Loss on Extinguishment of Debt

In September 2020,

the retirement of the Amended and Restated Credit Agreement was accounted for as an extinguishment of debt.

Accordingly, the Company

recognized a loss on the extinguishment of debt of approximately $5.8 million, made up primarily of $3.3 million in the write-off

of the unamortized portion of the debt discount related to the Amended and Restated Credit Agreement and $2.5 million in a pre-payment

Change in Fair Value –

The Incremental Loan

Warrants issued in conjunction with the Amended and Restated Credit Agreement are classified as liabilities and recorded 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.

An increase in fair value for the three months ended September 30, 2020 resulted in a non-cash loss

in the amount of $18.0 million recorded in earnings for the period.

The increase in the fair value of the Incremental Loan Warrants

as of September 30, 2020 was due primarily to the increase in our stock price.

On October 27, 2020, we notified the holders of

the Incremental Loan Warrants that we would redeem any unexercised Incremental Loan Warrants on November 30, 2020.

The Incremental

Loan Warrants have been exercised prior to this redemption date.

Tax Receivable Agreement Expense

In connection with

the Business Combination, the Company entered into the TRA with InnoHold.

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 TRA Liability is 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.

There were 16.9 million exchanges of Class B Stock for

Class A Stock that occurred during the three months ended September 30, 2020.

As a result, an additional $90.3 million was recorded

to the TRA liability of which $89.7 million was recorded as an adjustment to equity and $0.6 million was recorded to expense during

the three months ended September 30, 2020.

There was no TRA expense incurred for the three months ended September 30, 2019 as

the Company had a full valuation allowance on the deferred tax assets and no TRA liability was recorded.

Benefit from Income Taxes

Our income tax benefit

was $0.1 million for the three months ended September 30, 2020, compared to no income tax benefit for the three months ended September

Our income tax benefit for the three months ended September 30, 2020 is primarily due to the change in the effective

tax rate during the period.

No income tax benefit was recorded during the three months ended September 30, 2019 as the Company

had a full valuation allowance on the deferred tax assets.

Noncontrolling Interest

As a result of the

Business Combination in 2018, we attribute net income or loss to the Class B units in Purple LLC, owned by InnoHold and other parties,

as a noncontrolling interest at their aggregate ownership percentage.

At September 30, 2020, this ownership percentage was approximately

1%, a decrease from approximately 81% at September 30, 2019.

This decrease was the result of the exchange of 43.5 million Paired

Securities for Class A Stock, mostly attributed to InnoHold’s three secondary public offerings concluded in November 2019,

May 2020 and September 2020.

Operating Results for the Nine Months Ended September 30,

2020 and 2019

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,

Revenues, net

Cost of revenues

Operating expenses:

Marketing and sales

General and administrative

Research and development

Total operating expenses

Operating income

Other income (expense):

Interest expense

Other income, net

Loss on extinguishment of debt

Change in fair value –

warrant liabilities

Tax receivable agreement expense

Total other income (expense), net

Net income (loss) before income taxes

Benefit from income taxes

Net income attributable to noncontrolling interest

Net income attributable to Purple Innovation, Inc.

Total net revenue

increased $170.5 million, or 56.1%, to $474.6 million for the nine months ended September 30, 2020 from $304.1 million for the

nine months ended September 30, 2019 due mainly to a $116.1 million increase in mattress sales, a $37.9 million increase in top

of mattress sales and a $16.5 million net increase in other products.

These increases in revenue were primarily attributable to

an increase in demand across all product lines due to recent increases in online shopping in home furnishings.

Cost of Revenues

The cost of revenues

increased $77.2 million, or 44.3%, to $251.5 million for the nine months ended September 30, 2020 from $174.3 million for the nine

months ended September 30, 2019.

The increase was primarily due to a $35.0 million increase in direct material costs, a $18.0 million

increase in labor and overhead, $11.9 million increase in freight charges, $8.6 million increase in merchant processing fees, and

a $3.7 million increase in other costs, all associated with increased sales.

The gross profit percentage increased to 47.0% of

net revenues for the nine months ended September 30, 2020 from 42.7% for the same period in 2019.

The improvement in gross profit

was primarily driven by higher margins due to channel shift toward higher margin DTC sales.

Marketing and Sales

Marketing and sales

expenses increased $33.3 million, or 35.4%, to $127.3 million for the nine months ended September 30, 2020 from $94.0 million

for the nine months ended September 30, 2019.

The increase was due to a $22.4 million increase in advertising costs, a $8.3 million

increase in marketing salaries related to an increase in personnel and a $2.6 million increase in other marketing and sales expenses.

The marketing and sales expense as a percentage of net revenue was 26.8% for the nine months ended September 30, 2020.

a decrease from 30.9% for the nine months ended September 30, 2019 due to efficiencies in our advertising spending created from

enhanced marketing strategies, lower advertising costs and a temporary reduction in advertising spending as part of our cash preservation

initiatives in the second quarter of this year.

General and Administrative

General and administrative

expenses increased $8.1 million, or 41.9%, to $27.3 million for the nine months ended September 30, 2020 from $19.2 million for

the nine months ended September 30, 2019.

The increase was primarily due to a $2.4 million increase in salaries related to an increase

in personnel, a $3.5 million increase in software subscriptions, legal fees related to InnoHold’s two secondary public offerings

concluded in May 2020 and September 2020 and a new corporate building lease, $0.7 million in additional expense for previous years

sales tax liability and $1.5 million increase in all other expenses.

Research and Development

Research and development

costs increased $1.7 million, or 56.9%, to $4.7 million for the nine months ended September 30, 2020 from $3.0 million for the

nine months ended September 30, 2019.

The increase was primarily due to $1.6 million in amortization of a one-year license agreement

for innovative technology and a $0.1 million increase in other R&D expenses as we added resources for new product innovation.

Operating Income

Operating income increased

$50.3 million, or 373.9%, to $63.7 million for the nine months ended September 30, 2020, from operating income of $13.4 million

for the nine months ended September 30, 2019.

The increase was primarily due to increased DTC sales with higher margins and lower

marketing and sales costs as a percentage of revenue.

Interest Expense

We incurred $4.0 million in interest expense

for the nine months ended September 30, 2020 including $3.3 million related to the Amended and Restated Credit Agreement and $0.2

million related to the 2020 Credit Agreement.

In addition, for the nine months ended September 30, 2020 we incurred discounts

and debt issuance costs related to the Amended and Restated Credit Agreement in the amount of $0.5 million which was amortized

to interest expense as non-cash interest.

The Amended and Restated Credit Agreement was retired in September 2020.

Under the Amended

and Restated Credit Agreement, interest accrued at a fixed rate of 12%.

Under the 2020 Credit Agreement, interest for the Term

Debt accrues at LIBOR (with a floor) plus 3%.

Interest expense was $3.8 million for the nine months ended September 30, 2019.

The portion relating to the Amended and Restated Credit Agreement was $3.2 million of which $1.9 million was paid-in-kind through

additions to the principal amount and $1.3 million was paid in cash.

In addition, for the nine months ended September 30, 2019

we incurred discounts and debt issuance costs related to the Amended and Restated Credit Agreement in the amount of $0.6 million

which was amortized to interest expense as non-cash interest.

Loss on Extinguishment of Debt

In September 2020,

the retirement of the Amended and Restated Credit Agreement was accounted for as an extinguishment of debt.

Accordingly, the Company

recognized a loss on the extinguishment of debt of approximately $5.8 million, consisting primarily of $3.3 million in the write-off

of the unamortized portion of the debt discount related to the Amended and Restated Credit Agreement and $2.5 million in a pre-payment

February 2019, in conjunction with the Incremental Loan under the Amended and Restated Credit Agreement, we determined that the

amended debt terms resulted in substantially different terms for a portion of the existing debt and therefore was required to

be accounted for as an extinguishment of a portion of the existing debt.

Accordingly, we recognized a non-cash loss on the extinguishment

of a portion of the existing debt of approximately $6.3 million.

This was a non-cash expense primarily associated with the recognition

of related unamortized debt discount and debt issuance costs and the fair value of the Incremental Loan Warrants issued.

Change in Fair Value –

The Incremental Loan

Warrants issued in conjunction with the Amended and Restated Credit Agreement are classified as liabilities and recorded 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.

An increase in fair value for the nine months ended September 30, 2020 resulted in a non-cash loss

in the amount of $43.3 million recorded in earnings for the period.

The increase in the fair value of the Incremental Loan Warrants

as of September 30, 2020 was due primarily to the increase in our stock price and the decrease of the Pearce’s ownership

interest below 50%, which triggered a change in the exercise price of the outstanding Incremental Loan Warrants to $0.

October 27, 2020, we notified the holders of the Incremental Loan Warrants that we would redeem any unexercised Incremental Loan

Warrants on November 30, 2020.

The Incremental Loan Warrants have been exercised prior to this redemption date.

Tax Receivable Agreement Expense

In connection with

the Business Combination, the Company entered into the TRA with InnoHold.

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 TRA Liability is 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.

As a result of the initial merger transaction and 43.5

million subsequent exchanges of Class B Stock for Class A Stock and the release of the Company’s valuation allowance on the

deferred tax assets to which the TRA liability relates, $169.0 million has been recorded as of September 30, 2020, of which $168.5

million was recorded during the nine months ended September 30, 2020.

Of the total 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 equity and $33.5 million

was recorded to expense as it related to reestablishing the TRA related to prior year exchanges.

There was no TRA expense incurred

for the nine months ended September 30, 2019 as the Company had a full valuation allowance on the deferred tax assets and no TRA

liability was recorded.

Benefit from Income Taxes

Our income tax benefit

was $35.8 million for the nine months ended September 30, 2020, compared to no income tax benefit for the nine months ended September

Our income tax benefit is primarily due to the release of the federal and state valuation allowance and the recognition

of deferred tax assets as of September 30, 2020.

No income tax benefit was recorded during the nine months ended September

30, 2019 as the Company had a full valuation allowance on the deferred tax assets.

Noncontrolling Interest

As a result of the

Business Combination in 2018, we attribute net income or loss to the Class B units in Purple LLC, owned by InnoHold and other parties,

as a noncontrolling interest at their aggregate ownership percentage.

At September 30, 2020, this ownership percentage was approximately

1%, a decrease from approximately 81% at September 30, 2019.

This decrease was the result of the exchange of 43.5 million Paired

Securities for Class A Stock, mostly attributed to InnoHold’s three secondary public offerings concluded in November 2019,

May 2020 and September 2020.

Liquidity and Capital Resources

Our primary cash needs

have historically consisted of working capital, capital expenditures and debt service.

Our working capital needs depend upon the

timing of cash receipts from sales, payments to vendors and others, changes in inventories, and capital and operating lease payment

Our cash and working capital positions are strong.

We had cash in the amount of $98.0 million as of September 30,

2020 and $33.5 million as of December 31, 2019.

We had working capital of $67.4 million as of September 30, 2020, and working

capital of $27.3 million as of December 31, 2019.

During the nine months ended September 30, 2020, our accounts receivable decreased

by $6.8 million.

Our capital expenditures primarily relate to acquiring and maintaining manufacturing equipment and expanding

capacity and cash used for capital expenditures was $14.2 million for the nine months ended September 30, 2020.

We financed these

capital expenditures through cash provided by operating activities.

In response to the

COVID-19 pandemic, we took a number of precautionary measures to manage our resources and mitigate the adverse impact of the pandemic.

Given the initial difficultly in predicting how long this pandemic would persist and its full impact, we managed our business

and opportunities to preserve liquidity.

We temporarily reduced our capital spend by delaying all non-maintenance related projects

and investments in non-essential initiatives and headcount additions.

Other proactive steps were taken to carefully manage cash

and quickly and prudently respond to the rapidly changing circumstances including temporarily furloughing a portion of our permanent

workforce, temporarily deferring a portion of the cash compensation of Senior Executives and all the cash compensation of members

of our Board of Directors, and limiting other discretionary expenses.

We also entered into an amendment to our Amended and Restated

Credit Agreement to allow the Company to defer 5% of the interest for quarterly payments due during the first two quarters of

In September 2020, this debt was subsequently retired and replaced with a $45 million term loan and a $55 million line

In addition, our receivables from our wholesale partners remain healthy.

Most of our wholesale partners continue to

make payments in accordance with their original contract terms and remain current on their outstanding balances.

As a result of our

precautionary measures, continued payments from wholesale customers, and our strong DTC sales, our cash balance increased by $64.5

million during the nine months ended September 30, 2020.

We have now ended many of the cash preservation programs and have returned

to full production to meet increased demand.

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, along with ongoing cash

generated from our DTC business, amounts available under our line of credit, strong demand of our product in the Wholesale channel and

eventual resumption and ramp up of store operations, will be sufficient to cover our working capital requirements and

anticipated capital expenditures for the next 12 months.

On January 28, 2019,

Purple LLC entered into the First Amendment, which amended the Credit Agreement.

In the First Amendment, Purple LLC agreed to

enter into the Amended and Restated Credit Agreement under which the Incremental Lenders agreed to provide an incremental loan

of $10.0 million such that the total amount of principal indebtedness provided to Purple LLC was increased to $35.0 million.

stockholder meeting was held on February 25, 2019 at which time a majority of non-interested stockholders voted in favor of this

Accordingly, the Amended and Restated Credit Agreement, and each related document, was closed and an incremental

loan of $10.0 million was funded.

In addition, we issued to the Incremental Lenders 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.

On February 26, 2019, we received

approximately $9.2 million in proceeds after debt issuance costs and fees.

For additional information regarding our credit agreement

with Coliseum, refer to Note 8 —

Long-Term Debt, Related Party of our condensed consolidated financial statements.

On September 3, 2020,

Purple LLC entered into a 2020 Credit Agreement with KeyBank National Association and other lenders.

The 2020 Credit Agreement

provided for a $45.0 million term loan and a $55.0 million revolving line of credit.

Proceeds from the term loan, which were fully

drawn at closing, were used to retire all indebtedness related to Purple LLC’s existing Amended and Restated Credit Agreement.

The retirement of the loan under the Amended and Restated Credit Agreement included a prepayment fee of approximately $2.5 million.

Debt service for the

nine months ended September 30, 2020 totaled $3.5 million and consisted of interest paid on the Amended and Restated Credit Agreement,

the 2020 Credit Agreement, as well as principal and interest payments on certain capital leases.

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

based on our ability to scale back operations, reduce marketing spend and postpone or discontinue our growth strategies.

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.

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 the COVID-19

pandemic and other things such as civil unrest and macroeconomic factors and approval from the lenders under the 2020 Credit Agreement.

Adequate financing may not be available or, if available, may only be available on unfavorable terms.

In response to the economic

fallout of the COVID-19 pandemic, the U.S.

government established a Main Street Lending Program to support lending to small and

medium-sized businesses.

However, there is no guarantee that we will be eligible to participate in such program or that, if we

are eligible to participate, that we will receive any benefits under this program.

Further, the Main Street Lending Program imposes

restrictions on how funds received are used that would limit our ability to operate our business.

The restrictive covenants in

the 2020 Credit Agreement may make it difficult to obtain additional capital on terms that are favorable to us, and we may not

be able to satisfy the conditions necessary to obtain additional funds pursuant to the revolving credit facility under the 2020

Credit Agreement.

There is no assurance we will obtain the capital we require.

As a result, there can be no assurance that we will

be able to fund our future operations or growth strategies.

In addition, future equity or 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 and financing, including investment banking fees, legal fees, accounting fees, printing and distribution expenses

and other costs.

We may also be required to recognize non-cash expenses 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 parts of our long-term growth strategy, maintain our growth and

competitiveness or continue in business.

We are required to

make certain payments to InnoHold under the TRA, which payments may have a material adverse effect on our liquidity and capital

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 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 TRA.

As of September 30, 2020, the estimated future payments under the TRA are $169.0 million

with approximately $0.7 million due to be paid within the next 12 months.

Cash Flows for the Nine Months Ended September 30, 2020

The following summarizes

our cash flows for the nine months ended September 30, 2020 and 2019 as reported in our condensed consolidated statements of cash

flows (in thousands):

Nine Months Ended

September 30,

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net increase in cash

Cash, beginning of the period

Cash, end of the period

Nine months ended September 30, 2020

Compared to the Nine months ended September 30, 2019

Cash provided by operating

activities was $87.5 million for the nine months ended September 30, 2020, an increase of $71.6 million from cash provided by operating

activities of $15.8 million during the nine months ended September 30, 2019.

This is due to a $39.4 million increase in cash provided

by operations as a result of increased operating income over last year driven mainly by an acceleration of DTC sales and a $32.2

million increase from all other changes in operating assets and liabilities due mainly to $23.2 million in additional cash from

a year-over-year increase in the change in accounts receivable and $8.7 million in additional cash from a year-over-year increase

in the change in inventory and $0.3 million in additional cash from year-over-year increase in the change in all other operating

assets and liabilities.

Cash used in investing

activities was $25.1 million for the nine months ended September 30, 2020, an increase of $19.2 million from cash used in investing

activities of $5.9 million during the nine months ended September 30, 2019.

This increase is due mainly to increases in purchases

of property and equipment and investment in intangible assets of $8.5 million and $10.6 million, respectively, over the same period

in the prior year.

Cash provided by financing

activities was $2.1 million in the nine months ended September 30, 2020, a decrease of $7.0 million from cash provided by financing

of $9.1 million during the nine months ended September 30, 2019.

The cash provided in 2020 represented $45.0 million in proceeds

from the 2020 Credit Agreement, $2.1 million of proceeds from warrant and stock option exercises, offset by a $37.5 million payment

to retire the Amended and Restated Credit Agreement, $5.0 million in distributions to members and $2.5 million in debt issuance

The cash provided in 2019 represented the $10.0 million in funds received from the Amended and Restated Credit Agreement,

partially offset by $0.8 million in debt issuance costs and $0.1 million in other financing payments.

Critical Accounting Policies

For a description

of our critical accounting policies, refer to Note 2 —

Summary of Significant Accounting Policies of our condensed

consolidated financial statements.

Contractual Obligations

On July 21, 2020, the

Company signed a Lease (the “Lease”) with PNK S2, LLC for approximately 520,000 square feet located at 1325 Hwy 42

S., Building B, McDonough, Georgia (the “Building”).

A copy of the Lease is attached as Exhibit 10.1 to this report

and incorporated by reference.

The Company anticipates immediately preparing the Building for use as a manufacturing, distribution

and office facility and expects it to be fully operational in 2021.

The term of the Lease

is 128 months including an eight-month free rent period, which will commence upon completion of the landlord’s work on the

Company’s space in the Building.

The Company anticipates the landlord’s work is expected to be completed by the middle

of first quarter 2021.

Prior to the commencement of the term, the Company has an immediate right to make use of the Building.

Under the Lease, the Company will pay $3.41 per square foot annually or $147,675 per month for the initial lease year.

the basic monthly rent increases 2% per year.

The Lease also provides the Company with an option to extend the Lease term for

two additional five-year periods at rates for the first renewal term of $4.24 per square foot with 2% annual increases and for

the second renewal term of $4.75 per square foot with annual increases of 3.5%.

The Company is also responsible for its proportionate

share of the operating expenses incurred by the landlord for the Building.

The Lease provides for a tenant improvement allowance

of $12.50 per usable square foot.

The Lease also provides the Company with signage rights and a right of first refusal on other

contiguous space.

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 reports on Form 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 Securities and Exchange Commission.

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, Securities

and Exchange Commission filings and public conference calls and webcasts.

The contents of our website shall not be deemed to be

incorporated herein by reference.

AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

The Company’s

matching contribution expense was $ 0.7 million and $ 0.4 million for the three months ended March 31, 2021 and 2020, respectively.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements