What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-08-09 compared with 2021-05-17 · 412 added, 267 removed, 115 unchanged (86% of the section changed)

31 unchanged sentences

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

are a digitally-native vertical brand founded on comfort product innovation with premium offerings.

We design and manufacture a variety

of innovative, branded and premium comfort products, including mattresses, pillows, cushions, frames, sheets, and other products.

products are the result of over 30 years of innovation and investment in proprietary and patented comfort technologies and the development

of our own manufacturing processes.

Our proprietary gel technology, Hyper-Elastic Polymer, underpins many of our comfort products and

provides a range of benefits that differentiate our offerings from other competitors’ products.

We market and sell our products

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

and Company showrooms.

Company consists of Purple Inc.

We are a digitally-native

vertical brand founded on comfort product innovation with premium offerings.

We design and manufacture a variety of innovative, branded

and premium comfort products, including mattresses, pillows, cushions, frames, sheets, and other products.

Our products are the result

of over 30 years of innovation and investment in proprietary and patented comfort technologies and the development of our own manufacturing

Our proprietary gel technology, Hyper-Elastic Polymer, underpins many of our comfort products and provides a range of benefits

that differentiate our offerings from other competitors’ products.

We market and sell our products through our DTC online channels,

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

Our business consists of

and its consolidated subsidiary, Purple LLC.

was incorporated in Delaware on May 19, 2015

as a special purpose acquisition company under the name of GPAC.

On February 2, 2018, the Company consummated a transaction structured

similar to a reverse recapitalization (the “Business Combination”) pursuant to which Purple Inc.

acquired an equity interest

in Purple LLC and became its sole managing member.

As the sole managing member of Purple LLC, Purple Inc., through its officers and directors,

is responsible for all operational and administrative decision making and control of the day-to-day business affairs of Purple LLC without

the approval of any other member.

was incorporated in Delaware on May 19, 2015 as a special purpose

acquisition company under the name of GPAC.

On February 2, 2018, Purple Inc.

consummated a transaction structured similar to a reverse

recapitalization (the “Business Combination”) pursuant to which Purple Inc.

acquired an equity interest in Purple LLC and

became its sole managing member.

As the sole managing member of Purple LLC, Purple Inc., through its officers and directors, is responsible

for all operational and administrative decision making and control of the day-to-day business affairs of Purple LLC without the approval

of any other member.

In connection with the Business Combination, InnoHold retained an 82% economic interest in Purple LLC.

InnoHold subsequently transferred a portion of its Class B Units to permitted transferees and exchanged its remaining shares for shares

of Class A Stock that it sold.

At March 31, 2021, Purple Inc.

had a 99% economic interest in Purple LLC while other Class B unit holders

had the remaining 1%.

subsequently transferred a portion of its Class B Units to permitted transferees and exchanged its remaining shares for shares of Class

A Stock that it sold.

At June 30, 2021, Purple Inc.

had a 99% economic interest in Purple LLC while other Class B Unit holders had the

remaining 1%.

Pandemic Developments

COVID-19 pandemic has impacted many aspects of our operations, directly and indirectly, including disruption of our employees, consumer

behavior, distribution and logistics, our suppliers, and the market overall.

The COVID-19 pandemic has

impacted many aspects of our operations, directly and indirectly, including disruption of our employees, consumer behavior, distribution

and logistics, our suppliers, and the market overall.

The scope and nature of these impacts continue to evolve.

Because of the COVID-19 pandemic, we have taken precautionary measures to manage our resources and mitigate the adverse impact of

the pandemic, which is intended to help minimize the risk to our Company, employees, customers, and the communities in which we operate.

Employees at the Company’s headquarters and certain other employees have been asked to work from home where possible, with only

limited access given to employees to work in the office when necessary.

For roles that require employees to be on-site, such as our manufacturing

facilities and distribution center, we require employees to wear protective equipment, perform temperature testing at the start of each

shift and again during the shift, contact trace when risk of exposure is known, stagger shifts to reduce concentration of employees,

follow social distancing guidelines and sanitize daily including complete weekly anti-viral fumigation.

the ongoing challenges from COVID-19, we have been able to capitalize on the opportunities created by this situation.

We continue to

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

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

We continue to focus our efforts in our

DTC core competencies resulting in an ongoing strength in DTC channel sales across all of our product categories.

This increase in demand

was a contributing factor to DTC net revenue growth of 54.8% over the prior year first quarter.

There can be no assurance that this trend

of strong demand through our DTC channel will continue.

We experienced a sharp decline in the wholesale side of our business during the

second quarter of 2020 as temporary shutdowns of non-essential businesses and shelter-at-home directives occurred in most U.S.

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

Net revenue from wholesale

customers the first quarter of 2021 increased 47.6% over the prior year first quarter.

All of our showrooms are currently open and we

have continued with our expansion plans by opening three new showrooms since the beginning of 2021.

increase in demand over the last twelve months allowed us to work through a portion of our on-hand inventory and required us to ramp

up production.

On March 3, 2021 we began operations at a new manufacturing facility in Georgia.

We continue to take advantage of our

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

We also continue

to dynamically adjust our significant discretionary online advertising spend in response to any changes in DTC trends as they develop.

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

Suppliers in China were temporarily closed because of the pandemic,

but we had sufficient inventory on hand.

Because of the COVID-19

pandemic, we have taken precautionary measures recommended by the appropriate national and state health agencies to manage our resources

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

the communities in which we operate.

Despite the ongoing challenges

from COVID-19, we have been able to capitalize on the opportunities created by this situation.

We were able to continue serving our customers

through our DTC channel, as strong consumer demand for our premium, differentiated product offerings shifted to our DTC channel throughout

We experienced a sharp decline in the wholesale side of our business during the second quarter of 2020 as temporary shutdowns of

non-essential businesses and shelter-at-home directives occurred in most U.S.

As the shutdowns were lifted and stores began to

open again, demand through the wholesale channel has increased and customer demand in 2021 has shifted to wholesale and DTC levels we

were experiencing prior to the COVID-19 pandemic.

All of our showrooms are currently open and we have continued with our expansion plans

by opening four new showrooms since the beginning of 2021.

Our supply chain has not

been significantly affected by COVID-19.

Suppliers in China were temporarily closed because of the pandemic, but we had sufficient

inventory on hand to meet our production needs.

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

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

We have experienced some

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

We have also experienced some shipping delays in the

delivery of our product to our customers.

Most of our domestic suppliers have been able to continue operations and provide necessary materials when needed.

We have experienced

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

We have also experienced some shipping delays

in the delivery of our product to our customers.

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

we have taken measures to protect the business, we cannot predict the specific duration for which precautionary measures relating to

COVID-19 will stay in effect, and we may elect or need to take additional measures as the information available to us continues to develop,

including with respect to our employees, manufacturing facilities and distribution center, and relationships with our suppliers and customers.

Subject to certain assumptions regarding the duration and severity of the COVID-19 pandemic, and government, consumer, and our responses

thereto, based on our current projections we believe our cash on hand, ongoing cash generated from e-commerce, liquidity available

under our line of credit, and continuing resumption and ramp up of store operations and our wholesale business, will be

sufficient to cover our working capital requirements and anticipated capital expenditures for the next 12 months.

most state and local governments have eased restrictions on commercial retail activity, it is possible that a resurgence in cases of

COVID-19 or one of its variants could prompt a return to tighter restrictions in certain areas of the country.

We also do not yet know

the impact that vaccines may have in mitigating or ending the outbreak of COVID-19, or how the availability of such vaccines may affect

our work force.

Furthermore, while the bedding industry has fared much better during the pandemic than certain other sectors of the economy,

continued economic weakness may eventually have an adverse impact upon the industry and our business.

Therefore, significant

uncertainty remains regarding the ongoing impact of the COVID-19 outbreak upon our financial condition and future results of operations,

as well as upon the significant estimates and assumptions we utilize in reporting certain assets and liabilities.

described in additional detail in the Explanatory Note to our Annual Report on Form 10-K/A for the year ended December 31, 2020, filed

on May 10, 2021, the SEC released a public statement on April 12, 2021 (the “SEC Statement”) informing market participants

that warrants issued by special purpose acquisition companies (“SPACs”) may require classification as a liability of the

entity measured at fair value, with changes in fair value each period reported in earnings.

The Company previously classified its public

warrants and sponsor warrants, which were issued in 2015, as equity.

light of the SEC Statement, on April 28, 2021, the Audit Committee of the Board of Directors of the Company, after considering the recommendations

of management, concluded that the Company’s previously issued audited consolidated financial statements as of and for the years

ended December 31, 2020 and 2019 and previously issued unaudited condensed consolidated financial statements as of and for the quarterly

periods ended September 30, 2020 and 2019, June 30, 2020 and 2019 and March 31, 2020 and 2019 (collectively, the “Non-Reliance

Periods”) should not be relied upon due to required corrections related to the accounting for warrants described in the SEC Statement.

As a result, we restated our previously issued audited consolidated financial statements and unaudited condensed consolidated financial

statements for the Non-Reliance Periods.

Such restated financial statements were included in our Annual Report on Form 10-K/A for the

year ended December 31, 2020 filed on May 10, 2021.

The unaudited condensed consolidated financial statements for the quarter ended March

31, 2020 included in this Quarterly Report on Form 10-Q reflect the impacts of such restatement.

Results for the Three Months Ended March 31, 2021 and 2020

Although we have taken measures

to protect our business, we cannot predict the specific duration for which precautionary measures relating to COVID-19 will stay in effect,

and we may elect or be required to take additional measures as the information available to us continues to develop, including with respect

to our employees, manufacturing facilities and distribution center, and relationships with our suppliers and customers.

Subject to certain

assumptions regarding the duration and severity of the COVID-19 pandemic, and government, consumer, and our responses thereto, based on

our current projections we believe our cash on hand, ongoing cash generated from e-commerce, liquidity available under our line of

credit, and continuing resumption and ramp up of store operations and our wholesale business, will be sufficient to cover

our working capital requirements and anticipated capital expenditures for the next 12 months.

While most state and local

governments have eased restrictions on commercial retail activity, it is possible that a resurgence in cases of COVID-19 or one of its

variants could prompt a return to tighter restrictions in certain areas of the country.

Furthermore, while the bedding industry has fared

much better during the pandemic than certain other sectors of the economy, continued economic weakness may eventually

have an adverse impact upon the industry and our business.

Therefore, significant uncertainty remains regarding the ongoing impact of

the COVID-19 outbreak upon our financial condition and future results of operations, as well as upon the significant estimates and assumptions

we utilize in reporting certain assets and liabilities.

Production Challenges

During the second quarter

of 2021, following an accident resulting in the death of an employee and subsequent safety improvements involving the Mattress Max machines,

the Company encountered isolated production challenges caused by unanticipated mechanical and maintenance issues when bringing the machines

As a result, the Company has experienced significantly reduced production levels causing shipment backlogs that unfavorably

affected second quarter net revenues and will also adversely impact third quarter net revenues.

The Company exited the month of July with

production back at planned levels and expects to be out of the current backlog position by the end of August.

The Company also expects

there to be no impact on completing the scheduled addition of new Mattress Max machines as previously announced.

The Company is confident

that these issues are an isolated event and will have no impact on its ability to scale beyond 2021.

Results for the Three Months Ended June 30, 2021 and 2020

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

condensed consolidated statements of income:

Months Ended March 31,

Three Months Ended June 30,

Revenues, net

1 unchanged sentence

Operating expenses:

Marketing and sales

General and administrative

Research and development

Total operating expenses

Operating income (loss)

Other income (expense):

Interest expense

Other income), 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

Net income (loss)

Net loss attributable to noncontrolling interest

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

Net revenues increased $17.5

million, or 10.6%, to $182.6 million for the three months ended June 30, 2021 compared to $165.1 million for the three months ended June

Our wholesale business generated net revenue growth of $46.5 million, or 233.2% during the second quarter of 2021 while DTC

net revenues decreased by $29.0 million, or 19.9%.

Net revenue changes associated with our DTC channel relative to our wholesale business

reflected a shift in customer demand to levels we were experiencing prior to the COVID-19 pandemic.

Our wholesale business was also favorably

impacted by wholesale expansion and the prior year second quarter being negatively impacted by the temporary shutdown of wholesale partner

operations caused by the pandemic.

Net revenues were unfavorably impacted by isolated production issues that occurred in the second quarter

of 2021 (see Isolated Production Challenges above).

The increase in net revenues from a product perspective reflected a $12.2 million

increase in mattress sales, a $4.0 million increase in other bedding product sales and a $1.3 million increase in other product sales.

This growth was primarily driven by an increase in customer demand.

The cost of revenues increased

$17.4 million, or 20.9%, to $100.9 million for the three months ended June 30, 2021 from $83.5 million for the three months ended June

This increase, which reflected a $7.9 million increase in direct material costs, a $9.2 million increase in labor and overhead

costs, and a $0.3 million increase in all other costs, was primarily due to increased product sales and higher production and material

Our gross profit percentage decreased to 44.7% of net revenues for the three months ended June 30, 2021 compared to 49.4% for the

same period in 2020.

The decrease in our gross profit percentage was primarily driven by a higher proportion of wholesale channel revenue,

which carries a lower gross margin than revenue from the DTC channel, combined with the impact of isolated production issues that occurred

in the second quarter of 2021 (see Isolated Production Challenges above).

Marketing and sales expenses

increased $20.4 million, or 51.8%, to $59.8 million for the three months ended June 30, 2021 compared to $39.4 million for the three months

ended June 30, 2020.

The increase was due to an $11.8 million increase in advertising costs due to higher advertising rates in 2021 and

advertising costs in 2020 being uncharacteristically low due to the pandemic, a $3.5 million increase in personnel costs related to planned

growth of our workforce and a $5.1 million increase in other marketing and sales expenses.

Marketing and sales expense as a percentage

of net revenues was 32.8% for the three months ended June 30, 2021 compared to 23.9% for the comparative prior period.

The higher percentage

of net revenues in the current quarter was due in part to product sales being unfavorably impacted by isolated production issues that

occurred in the second quarter of 2021 (see Isolated Production Challenges above) coupled with higher advertising rates in 2021 and advertising

costs in the prior year second quarter being uncharacteristically low because of the pandemic.

and Administrative

General and administrative

expenses increased $13.8 million, or 158.9%, to $22.5 million for the three months ended June 30, 2021 from $8.7 million for the three

months ended June 30, 2020.

The increase was primarily due to an $11.2 million increase in legal and professional fees related to offering

costs, consultants, professional staffing and executive placement costs, a $1.4 million increase in personnel costs related to planned

growth of our workforce, and a $1.2 million increase in all other expenses.

and Development

Research and development costs

increased $0.3 million, or 21.7%, to $1.9 million for the three months ended June 30, 2021 from $1.6 million for the three months ended

June 30, 2020.

The increase was primarily due to an increase in professional services costs related to product development activities.

Operating Income

Operating income decreased

$34.5 million to an operating loss of $2.5 million for the three months ended June 30, 2021, from operating income of $32.0 million for

the three months ended June 30, 2020.

This decrease was due in part to net revenues being unfavorably impacted by isolated production

issues that occurred in the second quarter of 2021 (see Isolated Production Challenges above) coupled with higher marketing and sales

expenses, increased legal and professional fees and increased expenses associated with planned growth of our workforce.

expense totaled $0.6 million for the three months ended June 30, 2021, as compared to $1.4 million for the three months ended June 30,

The $0.8 million decrease was primarily due to the $35.0 million Related Party Loan, which carried an interest rate of 12.00%,

being refinanced in the third quarter of 2020 with a $45.0 million term loan at an initial interest rate of 3.50%.

Interest expense in

2021 also includes amortization of deferred loan costs associated with the 2020 Credit Agreement and fees related to the revolving line

in Fair Value – Warrant Liabilities

On February 26, 2019, the

Incremental Lenders funded a $10.0 million increase in the Related Party Loan and received 2.6 million warrants to purchase 2.6 million

shares of our Class A Stock at a price of $5.74 per share, subject to certain adjustments.

We accounted for the Incremental Loan Warrants

as liabilities and recorded them at fair value on the date of the transaction and subsequently re-measured to fair value at each reporting

date with changes in the fair value included in earnings.

We determined the fair value of the Incremental Loan Warrants to be $47.0 million

at June 30, 2020.

During the three months ended June 30, 2020, we recognized a loss of $39.0 million in our condensed consolidated statement

of operations related to the change in fair value of these warrants.

There was no gain or loss on the Incremental Loan Warrants for the

three months ended June 30, 2021 as they were exercised in 2020.

were 15.5 million public warrants issued in connection with GPAC’s formation and IPO and 12.8 million sponsor warrants issued pursuant

to a simultaneous private placement with the IPO.

We have accounted for these warrants as liabilities and recorded them at fair value

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

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

The fair value of the public

and sponsor warrants outstanding at June 30, 2020 was $107.1 million.

During the three months ended June 30, 2021, we recognized a gain

of $4.9 million in our condensed consolidated statement of operations related to a decrease in the fair value of the sponsor warrants

exercised during the quarter or that were outstanding at the end of the quarter.

During the three months ended June 30, 2020, we recognized

a loss of $91.3 million in our condensed consolidated statement of operations related to an increase in the fair value of the public

and sponsor warrants exercised during the prior year quarter or that were outstanding at the end of the prior year quarter.

Receivable Agreement Expense

We are party to a tax receivable

agreement which generally provides for the payment by us to InnoHold of 80% of certain tax benefits, if any, that we realize as a result

of increases in its allocable share of the tax basis of the tangible and intangible assets of Purple LLC.

Because of the Business Combination,

subsequent exchanges of 43.5 million Class B Units for Class A Stock and changes in estimates relating to the expected tax benefits associated

with the tax receivable agreement, the tax receivable agreement liability totaled $172.3 million and $172.0 million at June 30, 2021 and

December 31, 2020, respectively.

During the second quarter of 2021, we incurred $0.4 million of tax receivable agreement expense due to

state tax rate changes.

Of the $78.1 million liability recorded during the three months ended June 30, 2020, $45.3 million related to

current period exchanges and was recorded as an adjustment to stockholders’ equity and $32.8 was recorded to expense as it related

to reestablishing the tax receivable agreement liability related to prior year exchanges.

Income Tax Benefit

Our income tax benefit was

$1.2 million for the three months ended June 30, 2021, compared to $35.4 million for the three months ended June 30, 2020.

This decrease

was primarily due to $32.8 million of the valuation allowance associated with the Company’s federal and state deferred tax assets

being released and recorded as an income tax benefit during the three months ended June 30, 2020.

Noncontrolling

attribute net income or loss to the Class B Units in Purple LLC as a noncontrolling interest at

their aggregate ownership percentage.

We calculate net income or loss attributable to noncontrolling interests on a quarterly basis using

their weighted average ownership percentage.

Net loss attributed to noncontrolling interests was negligible for the three months ended

June 30, 2021 compared to a net loss of $3.8 million for the three months ended June 30, 2020.

The decrease in the net income level attributed

to noncontrolling interests resulted from the noncontrolling ownership interest declining from approximately 32% at June 30, 2020 to

approximately 1% at June 30, 2021.

Results for the Six Months Ended June 30, 2021 and 2020

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

statements of operations:

Six Months Ended June 30,

Revenues, net

Cost of revenues

Operating expenses:

Marketing and sales

General and administrative

Research and development

Total operating expenses

1 unchanged sentence

Other income (expense):

income (expense), net

receivable agreement income (expense)

in fair value – warrant liabilities

Total other income,

before income taxes

tax (expense) benefit

income attributable to noncontrolling interest

income attributable to Purple Innovation, Inc.

net revenues increased $64.1 million, or 52.3%, to $186.4 million for the three months ended March 31, 2021 compared to $122.4 million

for the three months ended March 31, 2020.

We were able to further capitalize on the shift in customer demand that began in 2020 and

grew DTC net revenues by $44.2 million, or 54.8%, during the first quarter of 2021.

Our wholesale business generated net revenue growth

of $19.8 million, or 47.6%, in the first quarter.

Interest expense

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 attributable to noncontrolling interest

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

Net revenues increased $81.5

million, or 28.4%, to $369.0 million for the six months ended June 30, 2021 compared to $287.5 million for the six months ended June 30,

During the first six months of 2021, DTC net revenues increased $15.3 million, or 6.8%, while our wholesale business generated net

revenue growth of $66.3 million, or 107.6%.

Net revenue changes associated with our DTC channel relative to our wholesale business reflected

a shift in customer demand to levels we were experiencing prior to the COVID-19 pandemic.

Our wholesale business was also favorably impacted

by wholesale expansion and the prior year second quarter being negatively impacted by the temporary shutdown of wholesale partner operations

caused by the pandemic.

Net revenues were unfavorably impacted by the isolated production issues that occurred in the second quarter of

2021 (see Isolated Production Challenges above).

The increase in net revenues from a product perspective reflected a $58.3 million increase

in mattress sales, an $11.3 million increase in other bedding product sales and a $6.7 million increase in other product sales.

growth in product sales was primarily attributable to an increase in demand across all product lines.

cost of revenues increased $29.7 million, or 42.9%, to $98.9 million for the three months ended March 31, 2021 from $69.2 million for

the three months ended March 31, 2020.

This increase reflected a $18.6 million increase in direct material costs, a $6.3 million increase

in labor and overhead, a $2.6 million increase in freight charges and a $2.2 million increase in all other costs, all associated with

increased product sales.

The gross profit percentage increased to 46.9% of net revenues for the three months ended March 31, 2021 from

43.5% for the same period in 2020.

The improvement in gross profit was primarily driven by a higher proportion of DTC channel revenue,

which carries a higher gross margin than revenue from the wholesale channel.

and sales expenses increased $17.7 million, or 48.2%, to $54.4 million for the three months ended March 31, 2021 compared to $36.7 million

for the three months ended March 31, 2020.

The increase was due to an $11.0 million increase in advertising costs, a $4.2 million increase

in marketing salaries related to an increase in personnel and a $2.5 million increase in other marketing and sales expenses.

and sales expense as a percentage of net revenues was 29.2% for the three months ended March 31, 2021 compared to 30.0% for the prior

This decrease was due to efficiencies realized in our advertising spending created from enhanced marketing strategies.

in mattress sales, a $15.3 million increase in other bedding product sales and a $7.9 million increase in other product sales.

was primarily driven by an increase in customer demand.

The cost of revenues increased

$47.1 million, or 30.9%, to $199.8 million for the six months ended June 30, 2021 compared to $152.7 million for the six months ended

June 30, 2020.

The increase, which was primarily due to a $26.5 million increase in direct material costs, a $15.4 million increase in

labor and overhead costs, and a $5.2 million increase in other costs, was primarily associated with increased product sales and higher

production and material costs.

The gross profit percentage decreased to 45.9% of net revenues for the six months ended June 30, 2021 from

46.9% for the comparative prior year period.

The decrease in our gross profit percentage was primarily driven by a higher proportion of

wholesale channel revenue, which carries a lower gross margin than revenue from the DTC channel, combined with the impact of isolated

production issues that occurred in the second quarter of 2021 (see Isolated Production Challenges above).

Marketing and sales expenses

increased $38.1 million, or 50.1%, to $114.2 million for the six months ended June 30, 2021 compared to $76.1 million for the six months

ended June 30, 2020.

This increase reflected a $22.9 million increase in advertising costs due to higher advertising rates in 2021 and

advertising costs in 2020 being uncharacteristically low due to the pandemic, a $7.7 million increase in personnel costs related to planned

growth of our workforce and a $7.5 million increase in other marketing and sales expenses.

Marketing and sales expense as a percentage

of net revenues was 31.0% for the six months ended June 30, 2021 compared to 26.5% for the six months ended June 30, 2020.

percentage of net revenues in the first six months of 2021 was due in part to product sales being unfavorably impacted by isolated production

issues that occurred in the second quarter of 2021 (see Isolated Production Challenges above) coupled with higher advertising rates in

2021 and advertising costs in the prior year second quarter being uncharacteristically low because of the pandemic.

and Administrative

and administrative expenses increased $7.0 million, or 92.4%, to $14.5 million for the three months ended March 31, 2021 from $7.5 million

for the three months ended March 31, 2020.

The increase was primarily due to a $3.1 million increase in legal and professional fees,

a $1.9 million increase in salaries related to an increase in personnel, a $0.6 million increase related to a new corporate building

lease, and a $1.4 million increase in all other expenses.

General and administrative

expenses increased $20.8 million, or 128.0%, to $37.0 million for the six months ended June 30, 2021 compared to $16.2 million for the

six months ended June 30, 2020.

This increase was primarily due to a $14.3 million increase in legal and professional fees related

to offering costs, consultants, professional staffing and executive placement costs, a $3.3 million increase related to planned

increases in our workforce, and a $3.2 million increase in all other expenses.

and Development

and development costs increased $0.3 million, or 19.2%, to $1.7 million for the three months ended March 31, 2021 from $1.4 million for

the three months ended March 31, 2020.

The increase was primarily due to a $0.3 million increase in salaries and wages and other R&D

expenses as we added resources for new product innovation.

income increased $9.4 million to $16.9 million for the three months ended March 31, 2021, from operating income of $7.5 million for the

three months ended March 31, 2020.

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

sales costs as a percentage of revenue.

expense totaled $0.6 million for the three months ended March 31, 2021 as compared to $1.4 million for the three months ended March 31,

The $0.8 million decrease was primarily due to the $35.0 million Related Party Loan, which carried an interest rate of 12.00%,

being refinanced in the third quarter of 2020 with a $45.0 million term loan at an initial interest rate of 3.50%.

Interest expense also

includes amortization of deferred loan costs associated with the 2020 Credit Agreement and fees related to the revolving line of credit.

Research and development costs

increased $0.6 million, or 20.5%, to $3.6 million for the six months ended June 30, 2021 from $3.0 million for the six months ended June

This increase was primarily due to an increase in professional services costs related to product development activities.

Operating Income

Operating income decreased

$25.1 million, or 63.6%, to $14.4 million for the six months ended June 30, 2021, from operating income of $39.5 million for the six months

ended June 30, 2020.

This decrease was due in part to net revenues being unfavorably impacted by isolated production issues that occurred

in the second quarter of 2021 (see Isolated Production Challenges above) coupled with higher marketing and sales expenses, increased legal

and professional fees and increased expenses associated with planned growth of our workforce.

expense totaled $1.1 million for the six months ended June 30, 2021 as compared to $2.8 million for

the six months ended June 30, 2020.

The $1.7 million decrease was primarily due to the $35.0 million Related Party

Loan, which carried an interest rate of 12.00%, being refinanced in the third quarter of 2020 with a $45.0 million term loan at an initial

interest rate of 3.50%.

Interest expense in 2021 also includes amortization of deferred loan costs associated with the 2020 Credit Agreement

and fees related to the revolving line of credit.

in Fair Value – Warrant Liabilities

February 26, 2019, the Incremental Lenders from the 2018 credit arrangement funded a $10.0 million increase in the Related Party Loan

February 26, 2019, the Incremental Lenders funded a $10.0 million increase in the Related Party Loan

and received 2.6 million warrants to purchase 2.6 million shares of our Class A Stock at a price of $5.74 per share, subject to certain

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We determined

the fair value of the Incremental Loan Warrants to be $8.0 million at March 31, 2020.

During the three months ended March 31, 2020, we

recognized a gain of $13.6 million in our condensed consolidated statements of income.

There was no gain or loss on the Incremental Loan

Warrants for the three months ended March 31, 2021 as they were exercised in 2020.

the fair value of the Incremental Loan Warrants to be $47.0 million at June 30, 2020.

During the six months ended June 30, 2020, we recognized

a loss of $25.3 million in our condensed consolidated statement of operations related to the change in fair value of these warrants.

There was no gain or loss on the Incremental Loan Warrants for the six months ended June 30, 2021 as they were exercised in 2020.

were 15.5 million public warrants issued in connection with GPAC’s formation and IPO and 12.8 million sponsor warrants issued pursuant

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

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

The fair value of the

public and sponsor warrants outstanding at March 31, 2020 was $15.8 million.

During the three months ended March 31, 2021 and 2020, we

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 warrants exercised during the respective periods or that were outstanding at the end of the respective periods.

Receivable Agreement Expense

are party to a tax receivable agreement which generally provides for the payment by us to InnoHold of 80% of certain tax benefits, if

any, that we realize as a result of increases in its allocable share of the tax basis of the tangible and intangible assets of Purple

Because of the Business Combination, subsequent exchanges of 43.5 million Class B Units for Class A Stock and changes in estimates

relating to the expected tax benefits associated with the tax receivable agreement, the tax receivable agreement liability totaled $171.9

million and $172.0 million at March 31, 2021 and December 31, 2020, respectively.

During the first quarter, a payment of $0.6 million

was made combined with a $0.2 million decrease in tax receivable agreement expense due to a state tax rate change.

These decreases were

offset by $0.8 million related to current year exchanges that were recorded as a decrease to additional paid-in capital in the consolidated

statement of stockholders’ equity.

The tax receivable agreement expense incurred in the first quarter of 2020 was $0.1 million.

Tax (Expense) Benefit

income tax expense was $4.7 million for the three months ended March 31, 2021, compared to an income tax benefit of $0.3 million for

the three months ended March 31, 2020.

Income tax expense for the three months ended March 31, 2021 was primarily the result of no longer

having a full valuation allowance and the decrease in noncontrolling interest.

Noncontrolling

attribute net income or loss to the Class B Units in Purple LLC, owned by InnoHold and other parties, as a noncontrolling interest at

their aggregate ownership percentage.

We calculate net income or loss attributable to noncontrolling interests on a quarterly basis using

their weighted average ownership percentage.

Net income attributed to noncontrolling interests was $0.1 million and $11.2 million for

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

The decrease in the net income level attributed to noncontrolling interests

resulted from the noncontrolling ownership interest declining from 56.2% at March 31, 2020 to 1.0% at March 31, 2021.

and Capital Resources

primary cash needs have historically consisted of working capital, capital expenditures and debt service.

Our working capital needs depend

upon the timing of cash receipts from sales, payments to vendors and others, changes in inventories, and operating lease payment obligations.

Our cash and working capital positions are $103.8 million and $103.2 million, respectively, as of March 31, 2021 compared to $123.0 million

and $96.9 million, respectively, as of December 31, 2020.

Cash used for purchases of property and equipment increased from $4.5 million

during the first quarter of 2020 to $12.3 million during the first quarter of 2021.

This increase primarily resulted from enhancing our

manufacturing capabilities in Utah, scaling our infrastructure to support the growth of our workforce, opening several new Company showrooms,

and continuing to build out our new manufacturing facility in Georgia that began operations on March 3, 2021.

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

The fair value of the public

and sponsor warrants outstanding at June 30, 2020 was $107.1 million.

During the six months ended June 30, 2021, we recognized a gain

of $14.0 million in our condensed consolidated statement of operations related to a decrease in the fair value of the sponsor warrants

exercised during the six-month period or that were outstanding at June 30, 2021.

During the six months ended June 30, 2020, we recognized

a loss of $83.3 million in our condensed consolidated statement of operations related to an increase in the fair value of the public

and sponsor warrants exercised during the prior year six-month period or that were outstanding at the end of June 30, 2020.

Tax Receivable Agreement Expense

The tax receivable agreement

liability totaled $172.3 million and $172.0 million at June 30, 2021 and December 31, 2020, respectively.

During the first six months

of 2021, we incurred $0.2 million of tax receivable agreement expense due to state tax rate changes.

Of the total $78.2 million liability

recorded during the six months ended June 30, 2020, $45.3 million relates to current year exchanges and was recorded as an adjustment

to stockholders’ equity and $32.9 was recorded to expense as it related to reestablishing the tax receivable agreement liability

related to prior year exchanges.

Income Tax Benefit (Expense)

Income tax expense was $3.5

million for the six months ended June 30, 2021, compared to an income tax benefit of $35.7 million for the six months ended June 30, 2020.

Income tax expense for the six months ended June 30, 2021 was primarily the result of no longer having a full valuation allowance and

the decrease in noncontrolling interest.

The income tax benefit in the comparative prior six-month period was primarily due to $32.8 million

of the valuation allowance associated with the Company’s federal and state deferred tax assets being released and recorded as an

income tax benefit during the six months ended June 30, 2020.

Noncontrolling Interest

We attribute net income or

loss to the Class B Units in Purple LLC, owned by InnoHold and other parties, as a noncontrolling interest at their aggregate ownership

We calculate net income or loss attributable to noncontrolling interests on a quarterly basis using their weighted average

ownership percentage.

Net income attributed to noncontrolling interests was $0.1 million for the six months ended June 30, 2021 compared

to $7.3 million for the six months ended June 30, 2020.

The decrease in the net income level attributed to noncontrolling interests resulted

from the noncontrolling ownership interest declining from approximately 32% at June 30, 2020 to approximately 1% at June 30, 2021.

Liquidity and Capital Resources

Our primary cash needs have

historically consisted of working capital, capital expenditures and debt service.

Our working capital needs depend upon the timing of

cash receipts from sales, payments to vendors and others, changes in inventories, and operating lease payment obligations.

working capital positions were $110.1 million and $96.4 million, respectively, as of June 30, 2021 compared to $123.0 million and $96.9

million, respectively, as of December 31, 2020.

Cash used for purchases of property and equipment increased from $8.0 million during

the first six months of 2020 to $26.2 million during the first six months of 2021.

This increase primarily resulted from continuing to

build out our new manufacturing facility in Georgia that began operations in March 2021, enhancing our manufacturing capabilities in

Utah, scaling our infrastructure to support the growth of our workforce, and opening several new Company showrooms.

response to the COVID-19 pandemic, we took a number of precautionary measures to manage our resources and mitigate its adverse impact.

Given the initial difficultly in predicting how long the pandemic would persist and its full impact, we managed our business and opportunities

Given the initial difficulty in predicting how long the pandemic would persist and its full impact, we managed our business and opportunities

to preserve liquidity.

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thereto, based on our current projections we believe our cash on hand, ongoing cash generated from our DTC business, amounts available

under our new line of credit, continued demand of our products in the wholesale channel and continuing ramp up of store operations, will

under our line of credit, increasing demand of our products in the wholesale channel and continuing ramp up of store operations, will

be sufficient to cover our working capital requirements and anticipated capital expenditures for the next 12 months.

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interest, $2.5 million for a prepayment fee and $0.9 million for accrued interest.

on September 3, 2020, Purple LLC entered into the 2020 Credit Agreement that provided for a $45.0 million term loan and a $55.0 million

revolving line of credit.

The agreement has a five-year term and borrowing rates for both the Term Loan and revolving line of credit

are based on Purple LLC’s leverage ratio and can range from LIBOR plus a 3.00% to 3.75% margin with a LIBOR minimum of 0.50%.

of March 31, 2021, there was no balance outstanding on the revolving credit facility.

Also on September 3, 2020,

Purple LLC entered into the 2020 Credit Agreement that provided for a $45.0 million term loan (the “Term Loan”) and a $55.0

million revolving line of credit.

The agreement has a five-year term and borrowing rates for both the Term Loan and revolving line of

credit are based on Purple LLC’s leverage ratio and can range from LIBOR plus a 3.00% to 3.75% margin with a LIBOR minimum of 0.50%.

As of June 30, 2021, there was no balance outstanding on the revolving credit facility.

Proceeds from the Term Loan were

used to retire all indebtedness associated with the Related Party Loan.

the three months ended March 31, 2021, 6.6 million sponsor warrants were exercised on a cash and cashless basis resulting in the issuance

of 2.3 million shares of Class A common stock.

During the six months ended

June 30, 2021, 6.6 million sponsor warrants were exercised on a cash and cashless basis resulting in the issuance of 2.3 million shares

of Class A Stock.

The proceeds received for the cash exercise was $0.1 million.

At March 31, 2021, there

were 1.9 million sponsor warrants outstanding.

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

the event our cash flow from operations or other sources of financing are less than anticipated, we believe we will be able to fund operating

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our long-term growth strategy, maintain our growth and competitiveness or continue in business.

are required to make certain payments to InnoHold under the tax receivable agreement, which may have a material adverse effect on our

liquidity and capital resources.

We are currently unable to determine the total future amount of these payments due to the unpredictable

nature of several factors, including the timing of future exchanges, the market price of shares of Class A Stock at the time of the exchanges,

the extent to which such exchanges are taxable and the amount and timing of future taxable income sufficient to utilize tax attributes

that give rise to the payments under the tax receivable agreement.

As of March 31, 2021, the tax receivable agreement liability reflected

in our consolidated balance sheet is $171.9 million of which $5.9 million is presented as a short-term liability.

Flows for the Three months Ended March 31, 2021 and 2020

following summarizes our cash flows for the three months ended March 31, 2021 and 2020 as reported in our condensed consolidated statements

We are required to make certain

payments to InnoHold under the tax receivable agreement, which may have a material adverse effect on our liquidity and capital resources.

We are currently unable to determine the total future amount of these payments due to the unpredictable nature of several factors, including

the timing of future exchanges, the market price of shares of Class A Stock at the time of the exchanges, the extent to which such exchanges

are taxable and the amount and timing of future taxable income sufficient to utilize tax attributes that give rise to the payments under

the tax receivable agreement.

As of June 30, 2021, the tax receivable agreement liability reflected in our condensed consolidated balance

sheet is $172.3 million of which $5.9 million is classified as other current liabilities in the condensed consolidated balance sheet.

Flows for the Six months Ended June 30, 2021 and 2020

following summarizes our cash flows for the six months ended June 30, 2021 and 2020 as reported in our condensed consolidated statements

of cash flows (in thousands):

Net cash used in operating activities

Six Months Ended

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by

financing activities

Net decrease in cash

Net cash provided by financing activities

Net (decrease) increase in cash

Cash, beginning of the period

Cash, end of the period

months ended March 31, 2021 Compared to the Three months ended March 31, 2020

used in operating activities was $9.4 million for the three months ended March 31, 2021 compared to $0.3 million for the three months

ended March 31, 2020.

This increase in cash used in operations primarily resulted from a $15.1 million decrease in operating cash flows

related to unfavorable net changes in operating assets and liabilities for the three months ended March 31, 2021 compared to the corresponding

period in the prior year.

This decrease consisted of less cash from unfavorable changes in period-over-period fluctuations in accounts

receivable and liabilities, offset in part by increases in cash related to favorable changes in year-over-year fluctuations in inventory

and other assets.

The impact of this was offset in part by $6.0 million in cash provided by operating incomes which was mainly driven

by increased DTC sales.

used in investing activities was $12.4 million for the three months ended March 31, 2021 compared to $6.8 million for the three months

ended March 31, 2020.

months ended June 30, 2021 Compared to the Six months ended June 30, 2020

Cash provided by operating

activities was $11.5 million for the six months ended June 30, 2021 compared to $72.3 million for the six months ended June 30, 2020.

The decrease in cash provided by operations primarily resulted from a $43.5 million decrease in operating cash flows related to net changes

in operating assets and liabilities for the six months ended June 30, 2021 compared to the corresponding six-month period in the prior

This decrease consisted of decreased cash from changes in period-over-period fluctuations in accounts receivable, inventories and

liabilities, offset in part by an increase in cash related to a change in the year-over-year fluctuation in prepaid inventory and other

The decrease in cash provided by operations was further impacted by a $17.4 million decrease in cash provided by operating income

which was mainly driven by net revenues being unfavorably impacted by isolated production issues that occurred in the second quarter of

2021 (see Isolated Production Challenges above) coupled with higher marketing and sales expenses, increased legal and professional fees

and planned increases in our workforce.

used in investing activities was $26.4 million for the six months ended June 30, 2021 compared to $10.4 million for the six months ended

June 30, 2020.

This increase primarily resulted from enhancing our manufacturing capabilities in Utah, scaling our infrastructure

to support the growth of our workforce, opening several new Company showrooms, and continuing to expand our manufacturing capacity in

our new manufacturing facility in Georgia that began operations on March 3, 2021.

provided by financing activities during the three months ended March 31, 2021 was $2.6 million compared to a minimal amount of cash provided

by financing activities during the three months ended March 31, 2020.

Financing activities in the first quarter of 2021 included $4.1

million in proceeds from an InnoHold indemnification payment and $0.2 million of proceeds from warrant and stock option exercises, offset

in part by a $0.6 million principal payment on the term loan, a $0.6 million payment for the tax receivable agreement and member distributions

of $0.5 million.

our new manufacturing facility in Georgia that began operations in March 2021.

Cash provided by financing

activities during the six months ended June 30, 2021 was $2.1 million compared to a minimal amount of cash provided by financing activities

during the six months ended June 30, 2020.

Financing activities in the first six months of 2021 included $4.1 million in proceeds from

an InnoHold indemnification payment and $0.6 million of proceeds from warrant and stock option exercises, offset in part by $1.1 million

in principal payments on the Term Loan, member tax distributions of $0.9 million and a $0.6 million payment for the tax receivable agreement.

Accounting Policies

a description of our critical accounting policies, refer to Note 2 — Summary of Significant Accounting Policies of our condensed

consolidated financial statements.

contractual obligations and other commercial commitments as of March 31, 2021 are summarized below:

(in thousands)

Due By Period

lease obligations (4)

– Excludes amounts due during the three months ended March 31, 2021.

Excludes amounts due under the revolving credit line since no amounts have been borrowed against it.

Includes quarterly commitment fee payments based on unused portion of revolving credit line.

– Excludes $6.6 million of tenant improvement allowances which are expected to be fully utilized in fiscal 2021.

discuss our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and

Results of Operations in our 2020 Annual Report on Form 10-K/A filed May 10, 2021.

There were no significant changes in our critical

accounting policies since the end of fiscal 2020.

Off-Balance-Sheet Arrangements

and Contractual Obligations

As of June 30, 2021, we were

not involved in any unconsolidated special purpose entity transactions and did not have any off-balance-sheet financing.

Also, there was no balance

outstanding on our $55.0 million revolving credit facility as of June 30, 2021.

There have been no material

changes to our contractual obligations during the three months ended June 30, 2021 from those previously disclosed in our Form 10-Q for

the quarterly period ended March 31, 2021.

and Cyclicality

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Our sales may also vary with the performance of the broader economy consistent with the market.

website address is www.purple.com.

We make available free of charge on the Investor Relations portion of our website, investors.purple.com,

our annual report on Form 10-K/A, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed

or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically

file such material with, or furnish it to, the Securities and Exchange Commission.

also use the Investor Relations portion of our website, investors.purple.com, as a channel of distribution of additional Company information

that may be deemed material.

Accordingly, investors should monitor this channel, in addition to following our press releases, Securities

and Exchange Commission filings and public conference calls and webcasts.

The contents of our website shall not be deemed to be incorporated

herein by reference.

Our website address is www.purple.com.

We make available free of charge on the Investor Relations portion of our website, investors.purple.com, our annual report on Form 10-K/A,

quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a)

or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or

furnish it to, the SEC.

We also use the Investor

Relations portion of our website, investors.purple.com, as a channel of distribution of additional Company information that may be deemed

Accordingly, investors should monitor this channel, in addition to following our press releases, SEC filings and public conference

calls and webcasts.

The contents of our website shall not be deemed to be incorporated herein by reference.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 2. Management’s Discussion and Analysis