What changed in this filing

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Item 1. Financial Statements

2021-08-09 compared with 2021-05-17 · 721 added, 588 removed, 816 unchanged (62% of the section changed)

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Current assets:

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

Cash and cash equivalents

Accounts receivable, net

Inventories, net

Prepaid inventory

Other current assets

Total current assets

Property and equipment, net

Operating lease right-of-use assets

Intangible assets, net

Deferred income taxes

Other long-term assets

Liabilities and Stockholders’ Equity

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’

Accounts payable

Accrued sales returns

Accrued compensation

Customer prepayments

Accrued sales tax

Accrued rebates and allowances

Operating lease obligations – current portion

Other current liabilities

Total current liabilities

Debt, net of current portion

Operating lease obligations, 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:

Class A common stock;

$ 0.0001 par value, 210,000 shares authorized;

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

66,371 issued and outstanding at June 30, 2021 and 63,914 issued and outstanding at December 31, 2020

Class B common stock;

$ 0.0001 par value, 90,000 shares authorized;

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

448 issued and outstanding at June 30, 2021 and 536 issued and outstanding at December 31, 2020

Additional paid-in capital

Accumulated deficit

Total stockholders’ equity

Noncontrolling interest

Total stockholders’ equity

Total liabilities and stockholders’ equity

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

INNOVATION, INC.

Consolidated Statements of Income

Consolidated Statements of Operations

– in thousands, except per share amounts)

Three Months Ended

Six Months Ended

Revenues, net

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General and administrative

and development

Research and development

Total operating expenses

Operating income

Operating income (loss)

Other income (expense):

Interest expense

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:

Other income (expense), net

Change in fair value – warrant liabilities

Tax receivable agreement expense

Total other income (expense), net

Net income (loss) before income taxes

Income tax benefit (expense)

Net income (loss)

Net income (loss) attributable to noncontrolling interest

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

Net income (loss) per share:

Weighted average common shares outstanding:

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Noncontrolling

– December 31, 2020

Balance - December 31, 2020

$ ( 265,856 )

of stock options

receivable agreement liability

distributions

indemnification payment

of transactions affecting NCI

– March 31, 2021

Stock-based compensation

Exchange of stock

Exercise of warrants

Exercise of stock options

Tax Receivable Agreement liability

Deferred income taxes

Accrued distributions

InnoHold indemnification payment

Impact of transactions affecting NCI

Balance – March 31, 2021

$ ( 245,032 )

Net income (loss)

Stock-based compensation

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, 2021

$ ( 242,454 )

Stockholders’

Noncontrolling

– December 31, 2019

Receivable Agreement Liability

distributions

of transactions affecting NCI

– March 31, 2020

Balance – December 31, 2019

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 – March 31, 2020

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

$ ( 105,429 )

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

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– in thousands)

Six Months Ended

Cash flows from operating activities:

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

Net income (loss)

Adjustments to reconcile net income (loss) to net cash

provided by operating activities:

Depreciation and amortization

Non-cash interest

Change in fair value

– warrant liabilities

Tax receivable agreement

(income) expense

Change in fair value – warrant liabilities

Tax receivable agreement expense

Stock-based compensation

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Deferred income taxes

Changes in operating assets

and liabilities:

Changes in operating assets and liabilities:

Accounts receivable

Prepaid inventory and

Prepaid inventory and other assets

Accounts payable

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Operating lease obligations

accrued liabilities

Net cash used in operating

Other accrued liabilities

Net cash provided by operating activities

Cash flows from investing activities:

Purchase of property and

in intangible assets

Net cash used in investing

Purchase of property and equipment

Investment in intangible assets

Net cash used in investing activities

Cash flows from financing activities:

Payments on term loan

Proceeds from InnoHold indemnification

Tax receivable agreement

Proceeds from InnoHold indemnification payment

Tax receivable agreement payments

Distributions to members

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

Proceeds from exercise of stock options

Net cash provided by financing activities

Net (decrease) increase in cash

Cash and cash equivalents, beginning of the year

Cash and cash equivalents, end of the period

Supplemental disclosures of cash flow information:

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

Cash paid during the year for interest

Cash paid during the year for income taxes

Supplemental schedule of non-cash investing and financing activities:

Property and equipment included in accounts payable

Non-cash leasehold improvements

Accrued distributions

Tax receivable agreement liability

Deferred income taxes

Exercise of liability warrants

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

INNOVATION, INC.

to Condensed Consolidated Financial Statements

Notes 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.

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.

Purple Innovation, Inc.

collectively with its subsidiary (the “Company”

or “Purple Inc.”) is a digitally-native vertical brand founded on comfort product innovation with premium offerings.

designs and manufactures a variety of innovative, branded and premium comfort products, including mattresses, pillows, cushions, bases,

sheets, and other products.

The Company markets and sells its products through its direct-to-consumer (“DTC”) online channels,

retail brick-and-mortar wholesale partners, Company showrooms, and third-party online retailers.

Company was incorporated in Delaware on May 19, 2015 as a special purpose acquisition company under the name of Global Partnership Acquisition

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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

Summary of Significant Accounting Policies

of Presentation and Principles of Consolidation

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and its consolidated subsidiary, Purple LLC.

As of March 31, 2021, Purple Inc.

As of June 30, 2021, Purple Inc.

held approximately 99%

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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.

The results of the three and six months ended June 30,

2021 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2021 or for any other interim

period or other future year.

December 31, 2020, the Company ceased to be an emerging growth company (“EGC”) and was no longer exempt from certain reporting

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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.

Purple LLC is a variable interest entity (“VIE”).

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

At June 30, 2021, Purple Inc.

had approximately a 99 % economic interest in Purple LLC and consolidated 100 % of Purple LLC’s

assets, liabilities and results of operations in the Company’s unaudited condensed consolidated financial statements contained herein.

The holders of Purple LLC Class B Units (the “Class B Units”) held approximately 1 % of the economic interest in Purple LLC.

For further discussion see Note 13 — Stockholders’ Equity.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Reclassification

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.

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.

Certain amounts in the prior period financial statements have been

reclassified to conform to the presentation of the current period financial statements.

These reclassifications had no effect on net income

(loss), cash flows or stockholders’ equity previously reported.

The preparation of the unaudited condensed consolidated financial statements

in conformity with GAAP requires the Company to establish accounting policies and to make estimates and judgments that affect the reported

amounts of assets and liabilities and disclose contingent assets and liabilities as of the date of the unaudited condensed consolidated

financial statements and the reported amounts of revenues and expenses during the reporting period.

The Company bases its estimates on

historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments

about the carrying values of assets and liabilities.

The Company regularly makes significant estimates and assumptions including, but

not limited to, estimates that affect revenue recognition, accounts receivable and allowance for doubtful accounts, valuation of inventories,

cost of revenues, sales returns, warranty returns, warrant liability, stock based compensation, the recognition and measurement of loss

contingencies, estimates of current and deferred income taxes, deferred income tax valuation allowances and amounts associated with the

Company’s tax receivable agreement with InnoHold, LLC (“InnoHold”).

Predicting future events is inherently an imprecise

activity and, as such, requires the use of judgment.

Actual results could differ materially from those estimates.

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.

(“ ASC 842 ”) , which required an entity to recognize lease liabilities and assets on the balance sheet and to disclose

key information about an entity’s leasing arrangements.

Because the Company ceased to be an EGC on December 31, 2020, the standard

became effective for the Company for its annual reporting period beginning January 1, 2020, and interim reporting periods within the

annual period beginning January 1, 2020.

The adoption of ASC 842 and all related amendments using the modified retrospective transition

approach effective for the Company’s annual reporting period beginning January 1, 2020 resulted in the initial recognition of operating

lease right-of-use (“ROU”) assets of $ 27.9 million and operating lease liabilities of $ 33.0 million in the Company’s

consolidated balance sheet.

Pre-existing liabilities for deferred rent and various lease incentives totaling $ 5.1 million were reclassified

to operating lease ROU assets in connection with the adoption.

The adoption of ASC 842 did not have a material impact on the Company’s

consolidated results of operations or cash flows and had no impact on retained earnings.

At January 1, 2020, the effective date of adoption,

the Company’s finance ROU assets and lease liabilities were not material.

Company determines if an agreement contains a lease at the inception of a contract.

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collateralized incremental borrowing rate (discount rate) corresponding with the lease term.

In addition, an ROU asset is recorded as

In addition, a ROU asset is recorded as

the initial amount of the lease liability, plus any lease payments made to the lessor before or at the lease commencement date and any

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these incremental borrowing rates to the minimum lease payments within each lease agreement.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

lease expense is recognized on a straight-line basis over the lease term.

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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

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INNOVATION, INC.

to Condensed Consolidated Financial Statements

Notes to Condensed Consolidated Financial Statements

Issuance Costs and Discounts

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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 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

The Company accounted for its incremental loan warrants as liability

warrants under the provisions of ASC 480 - Distinguishing Liabilities from Equity .

ASC 480 requires the recording of certain liabilities

at their fair value.

Changes in the fair value of these liabilities are recognized in earnings.

These warrants contained a repurchase

provision which, upon an occurrence of a fundamental transaction as defined in the warrant agreement, could have given rise to an obligation

of the Company to pay cash to the warrant holders.

In addition, other provisions may have led to a reduction in the exercise price of

the warrants.

The Company determined the fundamental transaction provisions required the warrants to be accounted for as a liability at

fair value on the date of the transaction, with changes in fair value recognized in earnings in the period of change.

The Company used

the Monte Carlo Simulation of a Geometric Brownian Motion stock path model to determine the fair value of the liability.

The model uses

key assumptions and inputs such as exercise price, fair market value of common stock, risk free interest rate, warrant life, expected

volatility and the probability of a warrant re-price.

All of the Incremental Loan warrants were exercised during fiscal 2020.

The Company accounted for its public warrants in accordance with ASC

815 – Derivatives and Hedging—Contracts in Entity’s Own Equity , under which these warrants did not meet the criteria

for equity classification and were recorded as liabilities.

Since the public warrants met the definition of a derivative as contemplated

in ASC 815, these warrants were measured at fair value at inception and at each reporting date in accordance with ASC 820, Fair Value

Measurement, with changes in fair value recognized in earnings in the period of change.

The Company determined the fair value of the public

warrants based on their public trading price.

All of the public warrants were exercised during fiscal 2020.

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.

The Company accounts for its

sponsor warrants in accordance with ASC 815, under which these warrants do not meet the criteria for equity classification and must be

recorded as liabilities.

Since the sponsor warrants meet the definition of a derivative as contemplated in ASC 815, these warrants are

measured at fair value at inception and at each reporting date in accordance with ASC 820 with changes in fair value recognized in earnings

in the period of change.

The Company uses the Black Scholes model to determine the fair value of the liability associated with the sponsor

The model uses key assumptions and inputs such as exercise price, fair market value of common stock, risk free interest rate,

warrant life and expected volatility.

At June 30, 2021, there were 1.9 million sponsor warrants outstanding.

Value Measurements

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

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

classification of fair value measurements within the established three-level hierarchy is based upon the lowest level of input that is

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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

The public warrant liabilities are Level 1 instruments as they have

quoted market prices in an active market.

The sponsor and incremental loan warrant liabilities are Level 3 instruments and use internal

models to estimate fair value using certain significant unobservable inputs which requires determination of relevant inputs and assumptions.

Accordingly, changes in these unobservable inputs may have a significant impact on fair value.

Such inputs include risk free interest

rate, expected average life, expected dividend yield, and expected volatility.

These Level 3 liabilities generally decrease (increase)

in value based upon an increase (decrease) in risk free interest rate and expected dividend yield.

Conversely, the fair value of these

Level 3 liabilities generally increase (decrease) in value if the expected average life or expected volatility were to increase (decrease).

following table presents information about the Company’s liabilities that are measured at fair value on a recurring basis and indicates

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(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:

All of the public warrants

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

following table summarizes the Company’s total Level 3 liability activity for the six months ended June 30, 2021 and 2020:

(In thousands)

3 Liabilities

Total Level 3

Fair value as of December 31, 2020

Fair value transfer to Level 1 measurement

in valuation inputs (1)

Fair value as of March 31, 2020

Change in valuation inputs (1)

Fair value as of June 30, 2021

Fair value as of December 31, 2019

Fair value of warrants exercised

in valuation inputs (1)

Fair value as of March 31, 2021

Change in valuation inputs (1)

Fair value as of June 30, 2020

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

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This differs from the method utilized at the end of an annual period.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

annual periods, the Company accounts for income taxes using the asset and liability method.

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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

Income (Loss) Per Share

Basic net income (loss) per common share is calculated by dividing

net income (loss) attributable to common shareholders by the weighted average number of shares of Class A Common Stock, par value $ 0.0001

per share (the “Class A Stock”), outstanding each period.

Diluted net income (loss) per share adds to those shares the incremental

shares that would have been outstanding and potentially dilutive assuming exchanges of the Company’s outstanding warrants, stock

options and shares of Class B Common Stock, par value $ 0.0001 per share (the “Class B Stock”), for Class A Stock, and the

vesting of unvested and restricted Class A Stock.

An anti-dilutive impact represents an increase in net income per share or a reduction

in net loss per share resulting from the conversion, exercise or contingent issuance of certain securities.

Company uses the “if-converted” method to determine the potential dilutive effect of conversions of its outstanding Class

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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.

In March 2020, the FASB issued

ASU 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU

2020-04”), which provides guidance to alleviate the burden in accounting for reference rate reform by allowing certain expedients

and exceptions in applying generally accepted accounting principles to contracts, hedging relationships, and other transactions impacted

by reference rate reform.

The provisions of ASU 2020-04 apply only to those transactions that reference LIBOR or another reference rate

expected to be discontinued due to reference rate reform.

This standard is currently effective and upon adoption may be applied prospectively

to contract modifications made on or before December 31, 2022, when the reference rate replacement activity is expected to be completed.

The interest rate on the Company’s term loan is based on LIBOR.

The Company plans to apply the amendments in this

update to account for any contract modifications that result from changes in the reference rate used.

The Company does not expect these

amendments to have a material impact on its condensed consolidated financial statements and related disclosures.

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.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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.

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.

In December 2019, the FASB

issued ASU No.

2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”).

The new guidance eliminates certain exceptions

related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition

of deferred tax liabilities for outside basis differences.

ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and

enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.

The guidance is effective for fiscal years beginning after December 15, 2020 and for interim periods within those fiscal years.

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”).

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of Credit Losses

June 2016, the FASB issued ASU No.

In June 2016, the FASB issued

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

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.

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

Measurement of Credit Losses on Financial Instruments (“ASU

2016-13”), which was further updated and clarified by the FASB through issuance of additional related ASUs.

This guidance replaces

the existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized

cost based on expected credit losses.

The estimate of expected credit losses requires the incorporation of historical information, current

conditions, and reasonable and supportable forecasts.

These updates are effective for public companies, excluding Smaller Reporting Companies

(“SRC”), for annual periods beginning after December 15, 2019, including interim periods therein.

The standard is effective

for all other entities for annual periods beginning after December 15, 2022, including interim periods therein.

Since the Company was

considered an SRC on the deferral date of this standard, the guidance is effective for the Company’s interim and annual financial

periods beginning January 1, 2023.

ASU 2016-13 is to be applied utilizing a modified retrospective approach.

The Company is currently

evaluating the impact of this standard on its accounts receivable, cash and cash equivalents, and any other financial assets measured

at amortized cost and do not expect that adoption will have a material impact on its consolidated financial statements or related disclosures.

Revenue from Contracts with Customers

Company markets and sells its products through direct-to-consumer online channels, traditional wholesale partners, third-party online

2 unchanged sentences

is transferring the promised products to the customer as described in Note 2 – Summary of Significant Accounting Policies .

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Disaggregated

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

Three Months Ended

Six Months Ended

Direct-to-consumer

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Revenues, net

Three Months Ended

Six Months Ended

Revenues, net

2 unchanged sentences

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.

Customer prepayments totaled $ 17.3 million and $ 6.3 million at June 30, 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

ended June 30, 2021 and 2020, the Company recognized all revenue that was deferred in customer prepayments at March 31, 2021 and 2020,

respectively.

INNOVATION, INC.

to Condensed Consolidated Financial Statements

consisted of the following (in thousands):

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Finished goods

Inventory obsolescence

Inventory obsolescence reserve

Inventories, net

and Equipment

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Property and Equipment

and equipment consisted of the following (in thousands):

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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.

Property and equipment, net

Equipment in progress reflects equipment, primarily related to mattress

manufacturing, which is being constructed and was not in service at June 30, 2021 or December 31, 2020.

Depreciation expense was $ 1.9

million and $ 3.5 million during the three and six months ended June 30, 2021, respectively, and totaled $ 1.4 million and $ 2.6 million

during the three and six months ended June 30, 2020, respectively.

Company leases its manufacturing and distribution facilities, corporate offices, showrooms and certain equipment under non-cancelable

10 unchanged sentences

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

was $ 0.8 million and $ 0.6 million as of June 30, 2021 and December 31, 2020, respectively.

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

Three Months Ended

Six Months Ended

Operating lease costs

Variable lease costs

Short-term lease

Short-term lease costs

Total lease costs

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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.

liabilities recorded on the condensed consolidated balance sheet at June 30, 2021 (in thousands):

2021 (excluding the six months ended June 30, 2021) (1)

Total operating lease payments

Less – lease payments representing interest

Present value of operating lease payments

Amount consists of $ 3.5 million of undiscounted cash flows offset by $ 1.5 million of tenant improvement allowances which are expected

to be fully utilized in fiscal 2021.

As of June 30, 2021 and December

31, 2020, the weighted-average remaining term of operating leases was 11.9 years and 11.8 years, respectively, and the weighted-average

discount rate of operating leases was 5.54 % 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 and six months ended June 30, 2021 and 2020:

Three Months Ended

Six 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

Other Current Liabilities

current liabilities consisted of the following (in thousands):

Warranty accrual – current

Warranty accrual – current portion

Long-term debt – current portion

Tax receivable agreement liability –

current portion

Tax receivable agreement liability – current portion

Insurance financing

Income taxes payable

Total other current liabilities

INNOVATION, INC.

to Condensed Consolidated Financial Statements

Notes to Condensed Consolidated Financial Statements

consisted of the following (in thousands):

unamortized debt

issuance costs

current portion

unamortized debt issuance costs

current portion of debt

Long-term debt, net

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due and payable.

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

As of June 30, 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

2 unchanged sentences

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

As of March 31, 2021,

As of June 30, 2021,

there was no balance outstanding on the revolving credit facility.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

9 unchanged sentences

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

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

March 27, 2020, the Company entered into an amendment to Purple LLC’s Credit Agreement dated February 3, 2018 and all subsequent

3 unchanged sentences

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.

the Related Party Loan was $ 1.2 million and $ 2.4 million for the three and six months ended June 30, 2020, respectively, 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.

16 unchanged sentences

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

the three and six months ended June 30, 2020, the Company recognized losses of $ 39.0 million and $ 25.3 million, respectively, in its

condensed consolidated statements of operations related to increases in the fair value of the Incremental Loan Warrants.

The fair value

of the Incremental Loan Warrants was calculated using a Monte Carlo Simulation of a Geometric Brownian Motion stock path model.

The following

are the assumptions used in calculating fair value on June 30, 2020:

Trading price of common stock on measurement date

Exercise price

4 unchanged sentences

Probability of warrant re-price

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

3 unchanged sentences

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.

During the six months ended

June 30, 2021, 6.6 million sponsor warrants were exercised resulting in the issuance of 2.3 million shares of Class A common stock.

1.9 million sponsor warrants outstanding at June 30, 2021 had a fair value of $ 14.5 million.

All of the public warrants were exercised

during fiscal 2020.

Company used public trading prices of the public warrants to determine their fair value.

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sponsor warrants using the Black Scholes model with the following assumptions:

Trading price of common stock on

measurement date

Trading price of common stock on measurement date

Exercise price

3 unchanged sentences

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

the three and six months ended June 30, 2021, the Company recognized gains of $ 4.9 million and $ 14.0 million, respectively, in its condensed

consolidated statements of operations related to decreases in the fair value of the sponsor warrants exercised during the respective

periods or that were outstanding at the end of the respective period.

For the three and six months ended June 30, 2020, the Company recognized

losses of $ 91.3 million and $ 83.3 million, respectively, in its condensed consolidated statements of operations related to increases

in the fair value of the public and sponsor warrants exercised during the respective periods or that were outstanding at the end of the

respective period.

Other Long-Term Liabilities

1 unchanged sentence

Warranty accrual

current portion

of warranty accrual

Other long-term liabilities,

net of current portion

and Contingencies

current portion of warranty accrual

Other long-term liabilities, net of current portion

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Commitments and Contingencies

Member Distributions

9 unchanged sentences

Purple LLC Agreement do not include any mandatory distributions, other than tax distributions.

During the three months ended March 31,

During the six months ended June 30, 2021,

the Company paid $ 0.9 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.

At June 30, 2021, the Company’s condensed

consolidated balance sheet had a minimal amount 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.

10 unchanged sentences

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

As of June 30, 2021, the early termination penalty was $ 0.8 million and the Company expects to fulfill its commitments under the agreement

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

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 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

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

Notes to Condensed Consolidated Financial Statements

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;

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

such persons for liabilities.

Agreement and Preemptive Rights

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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, 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.

On May 21, 2021, 7.3 million

shares of Class A common stock were sold in a secondary offering by the Coliseum Investors at a price of $ 30.00 per share.

did not receive any of the proceeds from the secondary offering.

The underwriting discount, commission and other related costs incurred

by the Company for the secondary offering totaled $ 7.9 million and was recorded in May 2021 as general and administrative expense.

The holders of the Incremental

Loan Warrants exercisable into Class A Stock were entitled to registration rights pursuant to the registration rights agreement of the

Company in connection with the Amended and Restated Credit Agreement.

In March 2019, the Company filed a registration statement registering

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 November 9, 2020, the Company issued 2.6 million shares of Class A common stock in exchange for the exercised Incremental

Loan Warrants.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

February 2, 2018, in connection with the closing of the Business Combination, the Company entered into a Registration Rights Agreement

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the Company acquires Class B Units other than through an exchange for its 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

The right of a holder of Paired

Securities to exchange may be limited by the Company if it reasonably determines in good faith that such restrictions are required by

applicable law (including securities laws), such exchange would not be permitted under other agreements of such holder with the Company

or its subsidiaries, including the Third Purple LLC Agreement, or if such exchange would cause Purple LLC to be treated as a “publicly

traded partnership” under applicable tax laws.

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

the six months ended June 30, 2021 and 2020, 0.1 million and 13.9 million, respectively, of Paired Securities were exchanged for shares

of Class A Stock.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

of One-to-One Ratios

57 unchanged sentences

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

In June of 2021 the parties were scheduled to attend examinations for discovery.

These discoveries were adjourned to allow the

parties to negotiate formal terms of settlement.

On September 20, 2020, Purple

LLC filed a complaint in the U.S.

Court of International Trade seeking to recover approximately $ 7.0 million of Section 301 duties paid

at the time of importation on certain Chinese-origin goods.

More than 4,000 other complaints have been filed by other companies seeking

similar refunds.

On March 12, 2021 the United States filed a master answer that applies to all the Section 301 cases, including Purple

On July 6, 2021, the court granted a preliminary injunction against liquidation of any unliquidated entries.

If successful,

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

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.

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.

Notes to Condensed Consolidated Financial Statements

On October 13, 2020, Purple

LLC filed a lawsuit against Responsive Surface Technology, LLC and its parent company, PatienTech, LLC (collectively referred to as “ReST”)

in the United States District Court for the District of Utah.

The lawsuit arises from ReST’s multiple breaches of its obligations

to Purple LLC, including infringing upon Purple LLC’s trademarks, patents, and trade dress, among other claims.

Purple seeks monetary

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

On October 21, 2020, shortly

after the complaint was filed in Case I, ReST filed a retaliatory lawsuit against Purple LLC, Gary DiCamillo, Adam Gray, Joseph Megibow,

Terry Pearce, and Tony Pearce, also in the United States District Court for the District of Utah (“Case II”).

Subsequently,

the two cases were consolidated into one.

Case II (now combined with Case I) involves many of the same facts and transactions as Case

On January 19, 2021, ReST filed a motion to compel arbitration of the claims in Case I.

Purple LLC opposed the motion to compel arbitration,

arguing that ReST waived any rights they may have had to arbitration and that all the claims in both cases should stay in the courts.

Briefing is complete on ReST’s motion to compel arbitration, and the Court held a hearing on May 25, 2021 to hear arguments from

The court has not yet rendered a decision on this issue.

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, and briefing on the motion to dismiss

is complete, but the motion will not likely be heard until after the Court rules on ReST’s motion to compel arbitration, which is

still pending.

Purple LLC seeks over $4 million in damages from ReST, whereas ReST claims that Purple is liable to it for tens of millions

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.

However, Purple intends to vigorously pursue its claims

and defend against the claims made by ReST.

November 19, 2020, Purple LLC sued Advanced Comfort Technologies, Inc., dba Intellibed (“Intellibed”) in the U.S.

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.

14, 2020, Intellibed filed a motion to dismiss Counts I through XI of Purple LLC’s Complaint on the ground that these Counts fail

to state a claim upon which relief can be granted.

On December 15, 2020, Intellibed filed an Answer to Purple LLC’s complaint

and also asserted against Purple LLC a total of eight counterclaims, including a number of declaratory judgment claims, breach of contract,

and tortious interference claims.

Intellibed’s main allegations are that its use of Purple LLC’s patents, trademark,

and trade secrets in connection with Mattress Firm’s Sleepy’s products is authorized under the license agreement.

January 19, 2021, Purple LLC filed a motion to dismiss Intellibed’s fifth, sixth, seventh, and eighth counterclaims on the ground

that these counterclaims fail to state a claim upon which relief can be granted.

Briefing on Purple LLC’s partial motion

to dismiss was completed on March 2, 2021.

On January 19, 2021, Purple LLC also filed an Answer to Intellibed’s counterclaims,

which were not subject to Purple LLC’s motion to dismiss.

On January 27, 2021, Purple LLC filed a First Amended Complaint in response

to Intellibed’s initial motion to dismiss.

On February 10, 2021, Intellibed filed a motion to dismiss Counts I through XI of Purple

LLC’s First Amended Complaint.

Briefing on Intellibed’s partial motion to dismiss was completed on March 24, 2021.

Both motions to dismiss are still pending

before the Court.

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.

No substantial discovery has

The Court has not yet entered a Scheduling Order governing the case, and no trial date has been set.

On June 8, 2021, Serta Simmons

Bedding, LLC (“SSB”) filed a Complaint against the Company in the Superior Court of Gwinnett County, Georgia, Case No.

(the “Georgia Litigation”).

SSB’s Complaint alleges that the Company intentionally interfered with SSB’s business

and contractual relations and violated the Georgia Trade Secrets Act by hiring one of SSB’s former employees in the face of a purportedly

valid 2015 noncompete agreement.

SSB seeks compensatory damages, punitive damages, equitable relief, and attorneys’ fees as a result

of the conduct alleged in the Complaint.

SSB also initiated arbitration against its former employee who Purple LLC has agreed to indemnify,

subject to certain conditions.

On July 9, 2021, the Company filed its own Complaint in the Fourth Judicial District Court of Salt Lake

County, Utah, Case No.

21040011 (the “Utah Litigation”), seeking:

(1) a declaratory judgment that the arbitration clause in

the former employee’s 2015 noncompete agreement is unenforceable, (2) a declaratory judgment that the restrictive covenants in the

former employee’s 2015 noncompete agreement are unenforceable, and (3) an order enjoining arbitration proceedings initiated by SSB

and currently pending against the former employee.

On July 12, 2021, the Company filed an Answer to SSB’s Complaint in the Georgia

Litigation, denying all allegations of unlawful conduct, and further moved to dismiss the Georgia Litigation on the grounds that Georgia

is an inconvenient forum and the parties’ dispute should instead be litigated in Utah.

SSB’s response is due on August 16,

The court is expected to render a decision on the Company’s motion to dismiss the Georgia Litigation in September 2021.

Company continues to deny that any illegal or wrongful conduct occurred and intends to continue to defend against SSB’s claims vigorously.

At this time, the Company is unable to determine whether an unfavorable outcome is probable and declines to express an opinion as to an

amount or range of potential loss that may result from the litigation.

INNOVATION, INC.

to Condensed Consolidated Financial Statements

Notes 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.

4 unchanged sentences

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 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.

Immediately following the

Business Combination, Adam Gray was appointed to the Company’s Board of Directors (the “Board”).

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 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

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 adjustments.

In accordance with an amendment to the Related Party Loan dated March 27, 2020, the Company did not make any cash

interest payments to the Lenders during the 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.

The 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

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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.

TNT 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 following the Business

InnoHold was a majority shareholder of the Company until it sold a portion of its interests in a secondary public offering

in May 2020 and the remainder of its interests in a secondary public offering in September 2020.

The Purple Founders also resigned as

employees of 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.

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

Notes to Condensed Consolidated Financial Statements

TNT Holdings owned the Alpine

facility Purple LLC has been leasing since 2010, and the Purple Founders informed the Company that TNT Holdings recently transferred ownership

to 123E LLC, an entity controlled by the Purple Founders.

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

Lease Agreement with TNT Holdings.

The Company determined that neither TNT Holdings nor 123E LLC are a VIE as neither the Company nor

Purple LLC hold any explicit or implicit variable interest in TNT Holdings or 123E LLC and do not have a controlling financial interest

in TNT Holdings or 123E LLC.

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 June 30, 2021 and 2020, respectively and $ 0.4 million and $ 0.4 million for the six months

ended June 30, 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.

the six months ended June 30, 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.

November 9, 2018, Purple LLC and EdiZONE executed the Second Amended and Restated Confidential Assignment and License Back Agreement

(the “Revised License Agreement”), pursuant to which EdiZONE assigned all of its comfort and cushioning intellectual property

to Purple LLC and further limited the subset of such intellectual property licensed back to EdiZONE to only those uses that enabled EdiZONE

to comply with its obligations under previously existing contracts, agreements and licenses.

On August 14, 2020, Purple LLC entered into

a separate agreement whereby EdiZONE, for consideration of $ 8.5 million, assigned a license agreement with Advanced Comfort Technologies,

Inc., dba Intellibed (“Intellibed”), and related royalties payable thereunder, to Purple LLC, along with the trademarks GEL

MATRIX and INTELLIPILLOW.

In connection with such assignment, the Company agreed to indemnify EdiZONE against claims by Intellibed relating

to EdiZONE’s breach under the agreement.

In connection with the Business

Combination, to secure payment of a certain portion of specified post-closing indemnification rights of the Company under the Merger Agreement,

0.5 million shares of Class B Stock 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.

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.

the six months ended June 30, 2021, Purple LLC paid InnoHold through withholding payments directly to various states, an aggregate of

$ 0.4 million in required tax distributions pursuant to the Third Purple LLC Agreement.

Stockholders’ Equity

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be voted on by stockholders.

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

At June 30, 2021, 66.4 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

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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

Accordingly, these 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

Notes to Condensed Consolidated Financial Statements

B Common Stock

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 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 stock.

connection with the Business Combination, approximately 44.1 million shares of Class B Stock were issued to InnoHold as part of the equity

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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.

All of the 0.4 million shares of Class B Stock outstanding at June 30, 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.

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rights, designations and other special rights or restrictions.

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

At June 30, 2021, there were no shares of preferred stock outstanding.

and Sponsor Warrants

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same as the public warrants.

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

consolidated balance sheet.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

October 27, 2020, the Company provided notice to the holders of the public warrants that the Company was exercising its right under the

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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.

the six months ended June 30, 2021, 6.6 million sponsor warrants were exercised resulting in the issuance of 2.3 million shares of Class

A common stock.

At June 30, 2021, there were 1.9 million warrants outstanding all of which were sponsor warrants.

Loan Warrants

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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

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approximately 82 %.

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

At June 30, 2021, the combined NCI percentage in Purple LLC was approximately 1 %.

The Company has consolidated the

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non-taxable nature of the change in fair value of the warrant liability.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

to the second quarter of 2020, the Company maintained a full valuation allowance on its net deferred tax assets which are comprised primarily

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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

During fiscal 2020, the Company

achieved three-year cumulative income for the first time and determined that it would likely generate sufficient taxable income to utilize

some of its deferred tax assets.

Based on this and other positive evidence, the Company concluded it was more likely than not that some

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

As a result, $ 35.5 million of the valuation allowance associated with the Company’s federal and state deferred tax assets was released

during 2020 and recorded as an income tax benefit.

The deferred tax assets at June 30, 2021 totaled $209.0 million, which is net of a

$70.4 million valuation allowance that has been recorded against the residual outside partnership basis for the amount the Company believes

is not more likely than not realizable.

As a result, there was an overall increase of $ 18.4 million in the valuation allowance from December

31, 2020 to June 30, 2021, primarily as a result of an increase in the residual outside partnership basis.

The Company currently estimates

its annual effective income tax rate to be 27.30 %.

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.

For the six months ended June

30, 2021, the Company has recorded income tax expense of $ 3.5 million.

The effective tax rate for the six months ended June 30, 2021 was

12.91 %, 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.

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

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from, payments it makes under the tax receivable agreement.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

noncontrolling interest holders exercise their right to exchange or cause Purple LLC to redeem all or a portion of their Class B Units,

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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.

The estimation of liability

under the tax receivable agreement is by its nature imprecise and subject to significant assumptions regarding the amount and timing of

future taxable income.

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

the potential future tax receivable agreement liability is $172.3 million.

Of the tax receivable agreement liability recorded during the

six months ended June 30, 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 expense in the condensed consolidated statement of operations 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.

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in the consolidated balance sheet.

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

As of June 30, 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.

Net Income (Loss) Per Common Share

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

the periods presented (in thousands, except per share amounts):

Three Months Ended

Six Months Ended

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

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 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.

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

Weighted average shares—basic

Dilutive effect of equity awards

Weighted average shares—diluted

Net income (loss) per common share:

INNOVATION, INC.

to Condensed Consolidated Financial Statements

Notes to Condensed Consolidated Financial Statements

the three and six months ended June 30, 2021, the Company excluded 0.4 million and 0.5 million, respectively, of Paired Securities convertible

into shares of Class A Stock as the effect was anti-dilutive.

For the three months ended June 30, 2020, the Company excluded 24.7 million

of Paired Securities convertible into shares of Class A Stock and 4.6 million shares of Class A Stock issuable upon conversion of certain

Company warrants, stock options and Class A shares subject to vesting as the effect was anti-dilutive.

For the six months ended June

30, 2020, the Company excluded 27.5 million of Paired Securities convertible into shares of Class A Stock and 4.1 million shares of Class

A Stock issuable upon conversion of certain Company warrants, stock options and Class A shares subject to vesting as the effect was anti-dilutive.

Equity Compensation Plans

Equity Incentive Plan

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.

As of June 30, 2021, an aggregate of 1.8 million shares remain available for issuance or use under the 2017

Incentive Plan.

A Stock Awards

May 2021, the Company granted stock awards under the Company’s 2017 Equity Incentive Plan to independent directors on the Board.

The stock awards vested immediately and the Company recognized $ 0.6 million in expense during the three months ended June 30, 2021 which

represented the fair value of the stock award on the grant date.

Stock Options

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Expected dividend yield

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

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

(in thousands)

Options outstanding as of January 1, 2021

Forfeited/cancelled

Options outstanding as of March 31, 2021

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

Options outstanding as of June 30, 2021

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

and exercisable stock options as of June 30, 2021 are as follows:

Options Outstanding

Options Exercisable

Exercise Prices

Number of Options Outstanding

(in thousands)

Remaining Life (Years)

Number of Options Exercisable

(in thousands)

Remaining Life

(in thousands)

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:

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

(in thousands)

Weighted Average

Nonvested options as of January 1, 2021

Nonvested options as of March 31, 2021

Nonvested options as of June 30, 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

For the three and six months ended June 30, 2021, the Company recognized stock option expense of $ 0.5 million and $ 0.9 million,

respectively.

The Company recorded stock option expense of $ 0.4 million and $ 0.6 million during the three and six months ended June 30,

2020, respectively.

of June 30, 2021, outstanding stock options had $ 4.3 million of unrecognized stock compensation cost with a remaining recognition period

of 2.1 years.

Restricted Stock Units

May 2021, the Company granted restricted stock units under the Company’s 2017 Equity Incentive Plan to certain management of the

The restricted stock units have a grant date fair value of $ 28.52 per share and vest over a four-year period.

The estimated

fair value of the restricted stock units is measured on the grant date and is recognized over the vesting period on a straight-line basis.

The Company recognized a minimal restricted stock unit expense for both the three and six months ended June 30, 2021,

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

Outstanding (in thousands)

Weighted Average

Nonvested restricted stock units as of January 1, 2021

Nonvested restricted stock units as of June 30, 2021

Incentive Units

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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

As of June 30, 2021, 0.4 million of the Paired Securities remain

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

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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.

awards, employee stock options and employee restricted stock units.

(in thousands)

Stock-Based Compensation

Three Months Ended

Six Months Ended

Non-Cash Stock-Based Compensation

Cost of revenues

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General and administrative

and development

Total non-cash stock-based

Retirement Plan

Research and development

Total non-cash stock-based compensation

Employee Retirement Plan

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

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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.

matching contribution expense was $ 0.8 million and $ 0.6 million for the three months ended June 30, 2021 and 2020, respectively,

and $ 1.6 million and $ 1.0 million for the six months ended June 30, 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