What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-11-09 compared with 2021-08-09 · 1205 added, 1010 removed, 527 unchanged (81% of the section changed)

FINANCIAL STATEMENTS

INNOVATION, INC.

Consolidated Balance Sheets

– in thousands, except for par value)

PURPLE INNOVATION, INC.

Condensed Consolidated Balance Sheets

(unaudited – in thousands, except for

September 30,

Current assets:

31 unchanged sentences

$ 0.0001 par value, 210,000 shares authorized;

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

66,449 issued and outstanding at September 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 June 30, 2021 and 536 issued and outstanding at December 31, 2020

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

Additional paid-in capital

4 unchanged sentences

Total liabilities and stockholders’ equity

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

INNOVATION, INC.

Consolidated Statements of Operations

– in thousands, except per share amounts)

The accompanying notes are an integral part of

these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.

Condensed Consolidated Statements of Operations

(unaudited – in thousands, except per

share amounts)

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Revenues, net

7 unchanged sentences

Other income (expense):

Interest expense

Interest income (expense), net

Other income (expense), net

Change in fair value – warrant liabilities

Tax receivable agreement expense

Loss on extinguishment of debt

Tax receivable agreement income (expense)

Total other income (expense), net

4 unchanged sentences

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

$ ( 163,453 )

Net income (loss) per share:

Weighted average common shares outstanding:

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

INNOVATION, INC.

Consolidated Statements of Stockholders’ Equity (Deficit)

– in thousands)

The accompanying notes are an integral part of these unaudited condensed

consolidated financial statements.

PURPLE INNOVATION, INC.

Condensed Consolidated Statements of Stockholders’

Equity (Deficit)

(unaudited – in thousands)

Stockholders’

9 unchanged sentences

Accrued distributions

InnoHold indemnification payment

indemnification payment

Impact of transactions affecting NCI

12 unchanged sentences

$ ( 242,454 )

Net income (loss)

Stock-based compensation

Exercise of warrants

Exercise of stock options

Tax Receivable Agreement liability

Deferred income taxes

Accrued distributions

Impact of transactions affecting NCI

Balance – September 30, 2021

$ ( 240,283 )

Stockholders’

20 unchanged sentences

$ ( 105,429 )

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

INNOVATION, INC.

Consolidated Statements of Cash Flows

– in thousands)

Six Months Ended

Net income (loss)

Stock-based compensation

Exchange of stock

Exercise of warrants

Exercise of stock options

Tax Receivable Agreement liability

Deferred income taxes

Accrued distributions

Forfeiture of unvested common stock

Impact of transactions affecting NCI

Balance – September 30, 2020

$ ( 192,442 )

$ ( 147,026 )

$ ( 146,982 )

The accompanying notes are an integral part of

these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited – in thousands)

Nine Months Ended

September 30,

Cash flows from operating activities:

Net income (loss)

Adjustments to reconcile net income (loss) to net cash

provided by operating activities:

$ ( 156,275 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization

Non-cash interest

Paid-in-kind interest

Loss on extinguishment of debt

Change in fair value – warrant liabilities

Tax receivable agreement expense

Tax receivable agreement (income) expense

Stock-based compensation

17 unchanged sentences

Cash flows from financing activities:

Proceeds from term loan

Payments on term loan

Payments on related party loan

Payments for debt issuance costs

Proceeds from InnoHold indemnification payment

8 unchanged sentences

Supplemental disclosures of cash flow information:

Cash paid during the year for interest

Cash paid during the year for income taxes

Cash paid during the period for interest, net of amounts capitalized

Cash paid during the period for income taxes

Supplemental schedule of non-cash investing and financing activities:

5 unchanged sentences

Exercise of liability warrants

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

INNOVATION, INC.

The accompanying notes are an integral part of these unaudited condensed

consolidated financial statements.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

The Company’s mission

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

Purple Innovation, Inc.

collectively with its subsidiary (the “Company”

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

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

Corp (“GPAC”).

On February 2, 2018, the Company consummated a transaction structured similar to a reverse recapitalization

(the “Business Combination”) pursuant to which the Company acquired a portion of the equity of Purple Innovation, LLC (“Purple

At the closing of the Business Combination (the “Closing”), the Company became the sole managing member of Purple

LLC, and GPAC was renamed Purple Innovation, Inc.

the sole managing member of Purple LLC, Purple Inc.

through its officers and directors is responsible for all operational and administrative

decision making and control of the day-to-day business affairs of Purple LLC without the approval of any other member.

with its subsidiary (the “Company” or “Purple Inc.”) is a digitally-native vertical brand founded on comfort product

innovation with premium offerings.

The Company designs and manufactures a variety of innovative, branded and premium comfort products,

including mattresses, pillows, cushions, bases, sheets, and other products.

The Company markets and sells its products through its direct-to-consumer

(“DTC”) online channels, retail brick-and-mortar wholesale partners, Company showrooms, and third-party online retailers.

The Company was incorporated

in Delaware on May 19, 2015 as a special purpose acquisition company under the name of Global Partnership Acquisition Corp (“GPAC”).

On February 2, 2018, the Company consummated a transaction structured similar to a reverse recapitalization (the “Business Combination”)

pursuant to which the Company acquired a portion of the equity of Purple Innovation, LLC (“Purple LLC”).

At the closing of

the Business Combination (the “Closing”), the Company became the sole managing member of Purple LLC, and GPAC was renamed

Purple Innovation, Inc.

As the sole managing member

of Purple LLC, Purple Inc.

through its officers and directors is responsible for all operational and administrative decision making and

control of the day-to-day business affairs of Purple LLC without the approval of any other member.

Summary of Significant Accounting Policies

of Presentation and Principles of Consolidation

Company consists of Purple Inc.

Basis of Presentation

and Principles of Consolidation

The Company consists of Purple

and its consolidated subsidiary, Purple LLC.

As of June 30, 2021, Purple Inc.

held approximately 99%

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

accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting

principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”)

regarding interim financial reporting and reflect the financial position, results of operations and cash flows of the Company.

information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted

pursuant to such rules and regulations.

As such, these unaudited condensed consolidated financial statements should be read in conjunction

with the 2020 audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form

10-K/A filed May 10, 2021.

As of September 30, 2021, Purple Inc.

held approximately 99 % of the common units of

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

The accompanying unaudited

condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United

States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding

interim financial reporting and reflect the financial position, results of operations and cash flows of the Company.

Certain information

and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant

to such rules and regulations.

As such, these unaudited condensed consolidated financial statements should be read in conjunction with

the 2020 audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K/A

filed May 10, 2021.

The unaudited condensed consolidated financial statements were prepared on the same basis as the audited consolidated

1 unchanged sentence

considered necessary to present fairly the Company’s financial results.

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

The results of the three and nine months ended September

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

requirements that apply to public companies.

On December 31, 2020, the

Company ceased to be an emerging growth company (“EGC”) and was no longer exempt from certain reporting requirements that

apply to public companies.

As an EGC prior to this date, Purple Inc.

had elected to use extended transition periods

available to private companies for complying with new or revised accounting standards.

Interest Entities

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.

had elected to use extended transition periods available to private

companies for complying with new or revised accounting standards.

Variable Interest Entities

Purple LLC is a variable interest

entity (“VIE”).

The Company determined that it is the primary beneficiary of Purple LLC as it is the sole managing member

and has the power to direct the activities most significant to Purple LLC’s economic performance as well as the obligation to absorb

losses and receive benefits that are potentially significant.

At September 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.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Reclassification

Certain amounts in the prior period financial statements have been

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

These reclassifications had no effect on net income

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

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 assets on the balance sheet and to disclose

key information about an entity’s leasing arrangements.

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

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

annual period beginning January 1, 2020.

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

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

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

consolidated balance sheet.

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

to operating lease ROU assets in connection with the adoption.

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

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

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

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

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

For leases with an initial term greater than 12 months,

a related lease liability is recorded on the balance sheet at the present value of future payments discounted at the estimated fully

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

In addition, a ROU asset is recorded as

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

initial direct costs incurred, less any tenant improvement allowance incentives received.

Company calculates the present value of future payments using its incremental borrowing rate when the discount rate implicit in the lease

is not known.

The incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow on a collateralized basis

over a similar term at an amount equal to the lease payments in a similar economic environment.

The Company determines the applicable

incremental borrowing rate at the lease commencement date based on the rates of its secured borrowings, which is then adjusted for the

appropriate lease term and risk premium.

In determining the Company’s ROU assets and operating lease liabilities, the Company applies

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

INNOVATION, INC.

Certain amounts in the prior

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

These reclassifications

had no effect on net income (loss), cash flows or stockholders’ equity previously reported.

Use of Estimates

The preparation of the unaudited

condensed consolidated financial statements in conformity with GAAP requires the Company to establish accounting policies and to make

estimates and judgments that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities as of

the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting

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

In February 2016, the Financial

Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (“ ASC

842 ”) , which required an entity to recognize lease liabilities and assets on the balance sheet and to disclose key information

about an entity’s leasing arrangements.

Because the Company ceased being an EGC on December 31, 2020, the standard became effective

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

January 1, 2020.

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

the Company’s annual reporting period beginning January 1, 2020 resulted in the initial recognition of operating lease right-of-use

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

balance sheet.

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

lease ROU assets in connection with the adoption.

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

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

At January 1, 2020, the effective date of adoption, the Company’s

finance ROU assets and lease liabilities were not material.

The Company determines if

an agreement contains a lease at the inception of a contract.

For leases with an initial term greater than 12 months, a related lease

liability is recorded on the balance sheet at the present value of future payments discounted at the estimated fully collateralized incremental

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

In addition, a ROU asset is recorded as the initial amount of the lease

liability, plus any lease payments made to the lessor before or at the lease commencement date and any initial direct costs incurred,

less any tenant improvement allowance incentives received.

The Company calculates the

present value of future payments using its incremental borrowing rate when the discount rate implicit in the lease is not known.

The incremental

borrowing rate is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term at an amount

equal to the lease payments in a similar economic environment.

The Company determines the applicable incremental borrowing rate at the

lease commencement date based on the rates of its secured borrowings, which is then adjusted for the appropriate lease term and risk premium.

In determining the Company’s ROU assets and operating lease liabilities, the Company applies these incremental borrowing rates to

the minimum lease payments within each lease agreement.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

Tenant incentive allowances received from the lessor are amortized

through the ROU asset as a reduction of rent expense over the lease term.

Operating lease expense is

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

Tenant incentive allowances received from the lessor are amortized through the

ROU asset as a reduction of rent expense over the lease term.

Any variable lease costs are expensed as incurred.

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

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

ROU assets are assessed for impairment as part of the impairment

of long-lived assets, which is performed whenever events or changes in circumstances indicate that the carrying amount of an asset or

asset group may not be recoverable.

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

retailers, and Company showrooms.

Revenue is recognized when the Company satisfies its performance obligations under the contract which

is transferring the promised products to the customer.

Leases with an initial

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

Short-term lease expense

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

ROU assets are assessed for impairment as part of the impairment of long-lived

assets, which is performed whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may

not be recoverable.

Revenue Recognition

The Company markets and sells

its products through DTC online channels, retail brick-and-mortar wholesale partners, Company showrooms, and third-party online retailers.

Revenue is recognized when the Company satisfies its performance obligations under the contract which is transferring the promised products

to the customer.

This principle is achieved in the following steps:

the contract with the customer.

A contract with a customer exists when (i) the Company enters into an enforceable contract with a

customer that defines each party’s rights regarding the goods to be transferred and identifies the payment terms related to these

goods, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration

for the goods that are transferred is probable based on the customer’s intent and ability to pay the promised consideration.

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

the performance obligations in the contract .

The Company’s contracts with customers do not include multiple performance obligations

to be completed over a period of time.

The performance obligations generally relate to delivering products to a customer, subject to

the shipping terms of the contract.

The Company has made an accounting policy election to account for shipping and handling activities

performed after a customer obtains control of the goods, including “white glove” delivery services, as activities to fulfill

the promise to transfer the goods.

Identify the contract with the customer.

A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s

rights regarding the goods to be transferred and identifies the payment terms related to these goods, (ii) the contract has commercial

substance and, (iii) the Company determines that collection of substantially all consideration for the goods that are transferred is probable

based on the customer’s intent and ability to pay the promised consideration.

The Company does not have significant costs to obtain

contracts with customers.

Identify the performance obligations

in the contract .

The Company’s contracts with customers do not include multiple performance obligations to be completed over

a period of time.

The performance obligations generally relate to delivering products to a customer, subject to the shipping terms of

the contract.

The Company has made an accounting policy election to account for shipping and handling activities performed after a customer

obtains control of the goods, including “white glove” delivery services, as activities to fulfill the promise to transfer

The Company does not offer extended warranty or service plans.

The Company does not provide an option

to its customers to purchase future products at a discount and therefore there are no material option rights.

the transaction price .

Payment for sale of products through the direct-to-consumer online channels and third-party online retailers

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

The Company does not provide an option to its customers to purchase

future products at a discount and therefore there are no material option rights.

Determine the transaction price .

Payment for sale of products through the direct-to-consumer online channels and third-party online retailers is collected at point of

sale in advance of shipping the products.

Amounts received for unshipped products are recorded as customer prepayments.

Payment by traditional wholesale customers is due under customary fixed payment terms.

None of the Company’s contracts contain

a significant financing component.

Revenue is recorded at the net sales price, which includes estimates of variable consideration such

as product returns, volume rebates, and other adjustments.

The estimates of variable consideration are based on historical return experience,

historical and projected sales data, and current contract terms.

Variable consideration is included in revenue only to the extent that

it is probable that a significant reversal of the revenue recognized will not occur when the uncertainty associated with the variable

consideration is subsequently resolved.

Taxes collected from customers relating to product sales and remitted to governmental authorities

are excluded from revenues.

the transaction price to performance obligations in the contract.

The Company’s contracts with customers do not include multiple

performance obligations.

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

stated pricing.

revenue when or as we satisfy a performance obligation.

The Company satisfies performance obligations at a point in time upon either

shipment or delivery of goods, in accordance with the terms of each contract with the customer.

With the exception of third-party “white

glove” delivery and certain wholesale partners, revenue generated from product sales is recognized at shipping point, the point

in time the customer obtains control of the products.

Revenue generated from sales through third-party “white glove” delivery

is recognized at the point in time when the product is delivered to the customer.

Revenue generated from certain wholesale partners is

recognized at a point in time when the product is delivered to the wholesale partner’s warehouse.

The Company does not have service

INNOVATION, INC.

Payment by traditional

wholesale customers is due under customary fixed payment terms.

None of the Company’s contracts contain a significant financing

Revenue is recorded at the net sales price, which includes estimates of variable consideration such as product returns, volume

rebates, and other adjustments.

The estimates of variable consideration are based on historical return experience, historical and projected

sales data, and current contract terms.

Variable consideration is included in revenue only to the extent that it is probable that a significant

reversal of the revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues.

Allocate the transaction price to

performance obligations in the contract.

The Company’s contracts with customers do not include multiple performance obligations.

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

Recognize revenue when or as we satisfy

a performance obligation.

The Company satisfies performance obligations at a point in time upon either shipment or delivery of goods,

in accordance with the terms of each contract with the customer.

With the exception of third-party “white glove” delivery

and certain wholesale partners, revenue generated from product sales is recognized at shipping point, the point in time the customer obtains

control of the products.

Revenue generated from sales through third-party “white glove” delivery is recognized at the point

in time when the product is delivered to the customer.

Revenue generated from certain wholesale partners is recognized at a point in time

when the product is delivered to the wholesale partner’s warehouse.

The Company does not have service revenue.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Issuance Costs and Discounts

issuance costs and discounts that relate to borrowings are presented in the condensed consolidated balance sheet as a direct reduction

from the carrying amount of the related debt liability and are amortized into interest expense using an effective interest rate over

the duration of the debt.

Debt issuance costs that relate to revolving lines of credit are carried as an asset in the condensed consolidated

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

to Note 8 – Debt .

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.

Warrant Liabilities

The Company accounted for

its incremental loan warrants as liability warrants under the provisions of ASC 480 - Distinguishing Liabilities from Equity .

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

Changes in the fair value of these liabilities are recognized in

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.

Company determined the fair value of the public warrants based on their public trading price.

All of the public warrants were exercised

during fiscal 2020.

The Company accounts for its

7 unchanged sentences

warrant life and expected volatility.

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

Value Measurements

Company uses the fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.

Fair value is the

price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at

the measurement date, essentially an exit price, based on the highest and best use of the asset or liability.

The levels of the fair

value hierarchy are:

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

2—Significant other observable inputs (e.g.

quoted prices for similar items in active markets, quoted prices for identical or similar

items in markets that are not active, inputs other than quoted prices that are observable, such as interest rate and yield curves, and

market-corroborated inputs);

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

INNOVATION, INC.

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

Fair Value Measurements

The Company uses the fair

value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.

Fair value is the price that would be

received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date,

essentially an exit price, based on the highest and best use of the asset or liability.

The levels of the fair value hierarchy are:

Level 1—Quoted market prices in

active markets for identical assets or liabilities;

Level 2—Significant other observable

quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active,

inputs other than quoted prices that are observable, such as interest rate and yield curves, and market-corroborated inputs);

Level 3—Unobservable inputs in

which there is little or no market data, which require the reporting unit to develop its own assumptions.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

significant to the measurements.

Financial instruments, although not recorded at fair value on a recurring basis include cash and cash

equivalents, receivables, accounts payable, accrued expenses and the Company’s debt obligations.

The carrying amounts of cash and

cash equivalents, receivables, accounts payable and accrued expenses approximate fair value because of the short-term nature of these

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

debt arrangements and market-based expectations.

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.

The classification of fair

value measurements within the established three-level hierarchy is based upon the lowest level of input that is significant to the measurements.

Financial instruments, although not recorded at fair value on a recurring basis include cash and cash equivalents, receivables, accounts

payable and the Company’s debt obligations.

The carrying amounts of cash and cash equivalents, receivables, accounts payable and

accrued expenses approximate fair value because of the short-term nature of these accounts.

The fair value of the Company’s debt

instruments is estimated to be face value based on the contractual terms of the debt arrangements and market-based expectations.

The public warrant liabilities

are Level 1 instruments as they have quoted market prices in an active market.

The sponsor and incremental loan warrant liabilities are

Level 3 instruments and use internal models to estimate fair value using certain significant unobservable inputs which requires determination

of relevant inputs and assumptions.

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

Such inputs include risk free interest

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

These Level 3 liabilities generally decrease (increase)

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

Conversely, the fair value of these

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

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

the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:

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.

the fair value of these Level 3 liabilities generally increase (decrease) in value if the expected average life or expected volatility

were to increase (decrease).

The following table presents

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

of the valuation inputs the Company utilized to determine such fair value:

(In thousands)

September 30,

Sponsor warrants

1 unchanged sentence

(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:

The following table summarizes

the Company’s total Level 3 liability activity for the nine months ended September 30, 2021 and 2020:

(In thousands)

3 unchanged sentences

Change in valuation inputs (1)

Fair value as of June 30, 2021

Fair value as of September 30, 2021

Fair value as of December 31, 2019

1 unchanged sentence

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.

calculating the provision for interim income taxes, in accordance with ASC Topic 740, an estimated annual effective tax rate is applied

to year-to-date ordinary income.

At the end of each interim period, the Company estimates the effective tax rate expected to be applicable

for the full fiscal year.

Fair value as of September 30, 2020

Changes in valuation inputs are recognized in the change in fair value – warrant liabilities in the condensed consolidated statements of operations.

In calculating the provision

for interim income taxes, in accordance with ASC Topic 740, an estimated annual effective tax rate is applied to year-to-date ordinary

At the end of each interim period, the Company estimates the effective tax rate expected to be applicable for the full fiscal

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

INNOVATION, INC.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

Under this method, deferred tax assets and

liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying

amounts of existing assets and liabilities and their respective tax bases.

In assessing the realizability of deferred tax assets, management

considers whether it is more-likely-than-not that the deferred tax assets will be realized.

Deferred tax assets and liabilities are calculated

by applying existing tax laws and the rates expected to apply to taxable income in the years in which those temporary differences are

expected to be recovered or settled.

The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the

year of the enacted rate change.

Our effective tax rate is primarily impacted by the allocation of income taxes to the noncontrolling

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

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

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

The tax benefit from an uncertain

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

based on technical merits of the position.

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

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

The effective tax rate and the tax basis of assets

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

The Company recognizes penalties

and interest related to uncertain tax positions within the income tax benefit (expense) line in the accompanying condensed consolidated

statements of income.

Company files U.S.

federal and certain state income tax returns.

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

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

income tax returns are filed.

Income (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

B Stock, and the treasury stock method to determine the potential dilutive effect of its outstanding warrants and stock options exercisable

for shares of Class A Stock and the vesting of unvested Class A Stock.

Accounting Pronouncements

For annual periods, the Company

accounts for income taxes using the asset and liability method.

Under this method, deferred tax assets and liabilities are recognized

for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets

and liabilities and their respective tax bases.

In assessing the realizability of deferred tax assets, management considers whether it

is more-likely-than-not that the deferred tax assets will be realized.

Deferred tax assets and liabilities are calculated by applying

existing tax laws and the rates expected to apply to taxable income in the years in which those temporary differences are expected to

be recovered or settled.

The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted

Our effective tax rate is primarily impacted by the allocation of income taxes to the noncontrolling interest and the non-taxable

nature of the change in fair value of the warrant liability.

The Company accounts for uncertainty in income taxes using a recognition

and measurement threshold for tax positions taken or expected to be taken in a tax return, which are subject to examination by federal

and state taxing authorities.

The tax benefit from an uncertain tax position is recognized when it is more likely than not that the position

will be sustained upon examination by taxing authorities based on technical merits of the position.

The amount of the tax benefit

recognized is the largest amount of the benefit that has a greater than 50 % likelihood of being realized upon ultimate settlement.

The effective tax rate and the tax basis of assets and liabilities reflect management’s estimates of the ultimate outcome of various

tax uncertainties.

The Company recognizes penalties and interest related to uncertain tax positions within the income tax benefit (expense)

line in the accompanying condensed consolidated statements of operations.

The Company files U.S.

and certain state income tax returns.

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

federal and state taxing

authorities for various time periods, depending on those jurisdictions’ rules, generally after the income tax returns are filed.

Net Income (Loss) Per

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

The Company uses the “if-converted”

method to determine the potential dilutive effect of conversions of its outstanding Class B Stock, and the treasury stock method to determine

the potential dilutive effect of its outstanding warrants and stock options exercisable for shares of Class A Stock and the vesting of

unvested Class A Stock.

Recent Accounting Pronouncements

Reference Rate Reform

In March 2020, the FASB issued

13 unchanged sentences

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

INNOVATION, INC.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

the Accounting for Income Taxes

Simplifying the Accounting

for Income Taxes

In December 2019, the FASB

9 unchanged sentences

operations, or cash flows.

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

Internal-Use Software

In August 2018, the FASB issued

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

The objective of ASU 2018-15 is to align the requirements for capitalizing implementation costs incurred in a hosting arrangement

3 unchanged sentences

Early adoption is permitted.

The amendments can be

applied either retrospectively or prospectively.

Because the Company lost its EGC status on December 31, 2020, the standard became effective

for the Company for its annual period beginning January 1, 2020, and interim periods within the annual period beginning January 1, 2021.

The Company elected to apply the amendments on a prospective basis.

The amendments can be applied

either retrospectively or prospectively.

Because the Company lost its EGC status on December 31, 2020, the standard became effective for

the Company for its annual period beginning January 1, 2020, and interim periods within the annual period beginning January 1, 2021.

Company elected to apply the amendments on a prospective basis.

Adoption of this standard did not have a material impact on the Company’s

financial position, results of operations, or cash flows.

of Credit Losses

Measurement of Credit Losses

In June 2016, the FASB issued

19 unchanged sentences

Revenue from Contracts with Customers

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

retailers and Company showrooms.

Revenue is recognized when the Company satisfies its performance obligations under the contract which

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

INNOVATION, INC.

The Company markets and sells

its products through DTC online channels, retail brick-and-mortar wholesale partners, Company showrooms, and third-party online retailers.

Revenue is recognized when the Company satisfies its performance obligations under the contract which is transferring the promised products

to the customer as described in Note 2 – Summary of Significant Accounting Policies .

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Disaggregated

Company sells products through two channels:

Disaggregated Revenue

The Company sells products

through two channels:

Direct-to-Consumer and Wholesale.

The Direct-to-Consumer channel includes product sales

through various direct-to-consumer channels including Company showrooms and contact center.

The Wholesale channel includes all product

sales to traditional third-party retailers for both in store and online channels.

The Direct-to-Consumer channel includes product sales through various DTC channels

including Company showrooms and contact center.

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

for both in store and online channels.

The Company classifies products into two major categories:

Bedding and Other.

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

Bedding products

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

Other products include cushions and various

other products.

include cushions and various other products.

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

The following tables present

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

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Direct-to-consumer

2 unchanged sentences

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Revenues, net

for sale of products through the direct-to-consumer online channels, third-party online retailers, Company showrooms and contact center

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

Contract Balances

Payment for sale of products

through the DTC online channels, third-party online retailers, Company showrooms and contact center is collected at point of sale in advance

of shipping the products.

Amounts received for unshipped products are recorded as customer prepayments.

Customer prepayments totaled $ 17.3 million and $ 6.3 million at June 30, 2021 and December 31, 2020, respectively.

During the three months

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

respectively.

consisted of the following (in thousands):

Customer prepayments totaled $ 9.3

million and $ 6.3 million at September 30, 2021 and December 31, 2020, respectively.

During the three months ended September 30, 2021 and

2020, the Company recognized all revenue that was deferred in customer prepayments at June 30, 2021 and 2020, respectively.

Inventories consisted of the

following (in thousands):

September 30,

Raw materials

3 unchanged sentences

Inventories, net

INNOVATION, INC.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Property and Equipment

and equipment consisted of the following (in thousands):

Property and equipment consisted

of the following (in thousands):

September 30,

Equipment in progress

5 unchanged sentences

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

operating leases with various expiration dates through 2036.

The Company’s office and manufacturing leases provide for initial

lease terms up to 16 years, while retail showrooms have initial lease terms of up to seven years .

Certain leases may contain options

to extend the term of the original lease.

The exercise of lease renewal options is at the Company’s discretion.

Any lease renewal

options are included in the lease term if exercise is reasonably certain at lease commencement.

The Company also leases vehicles and

other equipment under both operating and finance leases with initial lease terms of three to five years .

The ROU asset for finance leases

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

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

Equipment in progress reflects

equipment, primarily related to mattress manufacturing, which is being constructed and was not in service at September 30, 2021 or December

Depreciation expense was $ 2.8 million and $ 6.2 million during the three and nine months ended September 30, 2021, respectively,

and totaled $ 1.4 million and $ 4.0 million during the three and nine months ended September 30, 2020, respectively.

The Company capitalizes interest on borrowings during the active construction

period of major capital projects.

Capitalized interest is added to the cost of the underlying assets and is amortized over the useful

lives of the assets.

Capitalized interest as of September 30, 2021 totaled $ 0.8 million of which $ 0.6 million related to an error affecting

periods prior to the third quarter of 2021 relating to unrecorded capitalized interest.

Such amount was

determined to not be material to prior or current financial statements and was recorded as an out-of-period correction

in the third quarter of 2021.

The Company leases its manufacturing

and distribution facilities, corporate offices, showrooms and certain equipment under non-cancelable operating leases with various expiration

dates through 2036.

The Company’s office and manufacturing leases provide for initial lease terms up to 16 years, while retail showrooms

have initial lease terms of up to ten years .

Certain leases may contain options to extend the term of the original lease.

of lease renewal options is at the Company’s discretion.

Any lease renewal options are included in the lease term if exercise is

reasonably certain at lease commencement.

The Company also leases vehicles and other equipment under both operating and finance leases

with initial lease terms of three to five years .

The ROU asset for finance leases was $ 0.7 million and $ 0.6 million as of September 30,

2021 and December 31, 2020, respectively.

The following table presents

the Company’s lease costs (in thousands):

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Operating lease costs

2 unchanged sentences

Total lease costs

INNOVATION, INC.

PURPLE 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 June 30, 2021 (in thousands):

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

The 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 September 30, 2021 (in thousands):

2021 (excluding the nine months ended September 30, 2021) (1)

Total operating lease payments

1 unchanged sentence

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

(1) – Amount consists of $ 2.2 million of undiscounted cash flows offset by $ 2.3 million of tenant improvement allowances which are expected to be fully utilized in fiscal 2021.

As of September 30, 2021 and

December 31, 2020, the weighted-average remaining term of operating leases was 11.2 years and 11.8 years, respectively, and the weighted-average

discount rate of operating leases was 5.38 % and 6.18 %, respectively.

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

three and six months ended June 30, 2021 and 2020:

Three Months Ended

Six Months Ended

The following table provides

supplemental information related to the Company’s condensed consolidated statement of cash flows for the nine months ended September

30, 2021 and 2020:

Nine Months Ended

September 30,

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

1 unchanged sentence

Other Current Liabilities

current liabilities consisted of the following (in thousands):

Other current liabilities

consisted of the following (in thousands):

September 30,

Warranty accrual – current portion

3 unchanged sentences

Total other current liabilities

INNOVATION, INC.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

consisted of the following (in thousands):

Debt consisted of the following

(in thousands):

September 30,

unamortized debt issuance costs

1 unchanged sentence

Long-term debt, net

Loan and Revolving Line of Credit

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

(the “2020 Credit Agreement”).

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

Term Loan and Revolving

Line of Credit

borrowing rates for the term loan are based on Purple LLC’s leverage ratio, as defined in the 2020 Credit Agreement, and can range

from LIBOR plus a 3.00 % to 3.75 % margin with a LIBOR minimum of 0.50%.

On September 3, 2020, Purple

LLC entered into a financing arrangement with KeyBank National Association and a group of financial institutions (the “2020 Credit

The 2020 Credit Agreement provides for a $ 45.0 million term loan and a $ 55.0 million revolving line of credit.

The borrowing rates for the

term loan are based on Purple LLC’s leverage ratio, as defined in the 2020 Credit Agreement, and can range from LIBOR plus a 3.00 %

to 3.75 % margin with a LIBOR minimum of 0.50%.

The initial borrowing rate of 3.50% is based on LIBOR plus 3.00%.

The term loan will be repaid in accordance with a five-year amortization schedule and may be prepaid in whole or in part at any time

without premium or penalty, subject to reimbursement of certain costs.

There may be mandatory prepayment obligations based on excess

to a Pledge and Security Agreement between Purple LLC, KeyBank and the Company (the “Security Agreement”), the 2020 Credit

Agreement is secured by a perfected first-priority security interest in the assets of Purple LLC and the Company, including a security

interest in all intellectual property.

Also, the Company agreed to an unconditional guaranty of the payment of all obligations and liabilities

of Purple LLC under the 2020 Credit Agreement.

The Security Agreement contains a pledge, as security for the Company’s guaranty,

of all its ownership interest in Purple LLC.

The 2020 Credit Agreement also provides for standard events of default, such as for non-payment

and failure to perform or observe covenants, and contains standard indemnifications benefitting the lenders.

2020 Credit Agreement includes representations, warranties and certain covenants of Purple LLC and the Company.

While any amounts are

outstanding under the 2020 Credit Agreement, Purple LLC is subject to several affirmative and negative covenants, including covenants

regarding dispositions of property, investments, forming or acquiring subsidiaries, business combinations or acquisitions, incurrence

of additional indebtedness, and transactions with affiliates, among other customary covenants, subject to certain exceptions.

In particular,

Purple LLC is (i) subject to annual capital expenditure limits that can be adjusted based on the Company achieving certain net leverage

ratio thresholds as provided in the 2020 Credit Agreement, (ii) restricted from incurring additional debt up to certain amounts, subject

to limited exceptions, as set forth in the 2020 Credit Agreement, and (iii) maintain minimum consolidated net leverage and fixed charge

coverage ratio thresholds at certain measurement dates (as defined in the 2020 Credit Agreement).

Purple LLC is also restricted from

paying dividends or making other distributions or payments on its capital stock, subject to limited exceptions.

If the Company or Purple

LLC fail to perform their obligations under these and other covenants, or should any event of default occur, the revolving loan commitments

under the 2020 Credit Agreement may be terminated and any outstanding borrowings, together with accrued interest, could be declared immediately

due and payable.

As of 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

interest provisions as the term debt.

A commitment fee is due quarterly based on the applicable margin applied to the unused total revolving

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

As of June 30, 2021,

there was no balance outstanding on the revolving credit facility.

INNOVATION, INC.

The term loan will be

repaid in accordance with a five-year amortization schedule and may be prepaid in whole or in part at any time without premium or penalty,

subject to reimbursement of certain costs.

There may be mandatory prepayment obligations based on excess cash flow.

Pursuant to a Pledge and Security

Agreement between Purple LLC, KeyBank and the Company (the “Security Agreement”), the 2020 Credit Agreement is secured by

a perfected first-priority security interest in the assets of Purple LLC and the Company, including a security interest in all intellectual

Also, the Company agreed to an unconditional guaranty of the payment of all obligations and liabilities of Purple LLC under

the 2020 Credit Agreement.

The Security Agreement contains a pledge, as security for the Company’s guaranty, of all its ownership

interest in Purple LLC.

The 2020 Credit Agreement also provides for standard events of default, such as for non-payment and failure to

perform or observe covenants, and contains standard indemnifications benefitting the lenders.

The 2020 Credit Agreement

includes representations, warranties and certain covenants of Purple LLC and the Company.

While any amounts are outstanding under the

2020 Credit Agreement, Purple LLC is subject to several affirmative and negative covenants, including covenants regarding dispositions

of property, investments, forming or acquiring subsidiaries, business combinations or acquisitions, incurrence of additional indebtedness,

and transactions with affiliates, among other customary covenants, subject to certain exceptions.

In particular, Purple LLC is (i) subject

to annual capital expenditure limits that can be adjusted based on the Company achieving certain net leverage ratio thresholds as provided

in the 2020 Credit Agreement, (ii) restricted from incurring additional debt up to certain amounts, subject to limited exceptions, as

set forth in the 2020 Credit Agreement, and (iii) maintain minimum consolidated net leverage and fixed charge coverage ratio thresholds

at certain measurement dates (as defined in the 2020 Credit Agreement).

Purple LLC is also restricted from paying dividends or making

other distributions or payments on its capital stock, subject to limited exceptions.

If the Company or Purple LLC fail to perform their

obligations under these and other covenants, or should any event of default occur, the revolving loan commitments under the 2020 Credit

Agreement may be terminated and any outstanding borrowings, together with accrued interest, could be declared immediately due and payable.

As of September 30, 2021, the Company was in compliance with all of the covenants related to the 2020 Credit Agreement.

The $ 55.0 million revolving

credit facility established under the 2020 Credit Agreement has a term of five years and carries the same interest provisions as

the term debt.

A commitment fee is due quarterly based on the applicable margin applied to the unused total revolving commitment.

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

As of September 30, 2021, there was no balance

outstanding on the revolving credit facility.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

These costs relate to the entire credit arrangement

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

The Company determined $ 1.1 million of the debt

issuance costs related to the term debt and are presented in the condensed consolidated balance sheet as a direct reduction from the

carrying amount of the debt liability.

This amount is being amortized into interest expense using an effective interest rate over the

duration of the debt.

The remaining $ 1.4 million of debt issuance costs were allocated to the revolving line of credit facility.

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

credit facility.

expense under the 2020 Credit Agreement totaled $ 0.6 million 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

amendments and agreements (collectively referred to as the “Related Party Loan”) that provided for the deferral of the full

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

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

Interest expense on

the Related Party Loan was $ 1.2 million 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.

included $ 25.0 million for the original loan under the agreement, $ 10.0 million for a subsequent incremental loan, $ 6.6 million for paid-in-kind

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

As a result of paying off the Related Party Loan during

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

The Company incurred $ 2.5

million in debt issuance costs for the 2020 Credit Agreement.

These costs relate to the entire credit arrangement and therefore were allocated

between the term loan and the revolving line of credit.

The Company determined $ 1.1 million of the debt issuance costs related to the

term debt and are presented in the condensed consolidated balance sheet as a direct reduction from the carrying amount of the debt liability.

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

The remaining $ 1.4

million of debt issuance costs were allocated to the revolving line of credit facility.

This amount is classified as other assets and

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

Interest expense under the

2020 Credit Agreement totaled $ 0.5 million and $ 1.6 million for the three and nine months ended September 30, 2021, respectively, and

totaled $ 0.2 million and $ 0.2 million during the three and nine months ended September 30, 2020, respectively.

Related Party Loan

On March 27, 2020, the Company

entered into an amendment to Purple LLC’s Credit Agreement dated February 3, 2018 and all subsequent amendments and agreements (collectively

referred to as the “Related Party Loan”) that provided for the deferral of the full amount of the interest payment due on

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

The Company accounted for this amendment as

a modification of existing debt in accordance with ASC 470 - Debt .

Interest expense on the Related Party Loan was $ 1.0 million

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

On September 3, 2020, the

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

The payment included $ 25.0 million

for the original loan under the agreement, $ 10.0 million for a subsequent incremental loan, $ 6.6 million for paid-in-kind interest, $ 2.5

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

As a result of paying off the Related Party Loan during the third

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

Warrant Liabilities

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

$10.0 million increase in the loan and received 2.6 million warrants (“Incremental Loan Warrants”) to purchase 2.6 million

shares of the Company’s Class A Stock at a price of $5.74 per share, subject to certain adjustments.

In May 2020, Tony Pearce or

Terry Pearce individually or together ceased to beneficially own at least 50% of the voting securities of the Company.

As a result, the

exercise price of the warrants was reduced to zero based on the formula established in the agreement.

The Company accounted for the Incremental

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

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

On November 9, 2020, the Company issued 2.6 million shares of Class A Stock pursuant to the exercise of all of the warrants

held by the Incremental Lenders.

the three 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:

On February 26, 2019, two

of the lenders who originally financed the Related Party loan (the “Incremental Lenders”) funded a $10.0 million increase

in the loan and received 2.6 million warrants (“Incremental Loan Warrants”) to purchase 2.6 million shares of the Company’s

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

In May 2020, Tony Pearce or Terry Pearce individually or

together ceased to beneficially own at least 50% of the voting securities of the Company.

As a result, the exercise price of the warrants

was reduced to zero based on the formula established in the agreement.

The Company accounted for the Incremental Loan Warrants as liabilities

in accordance with ASC 480 - Distinguishing Liabilities from Equity and recorded them at fair value on the date of the transaction

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

On November 9,

2020, the Company issued 2.6 million shares of Class A Stock pursuant to the exercise of all of the warrants held by the Incremental Lenders.

For the three and nine months

ended September 30, 2020, the Company recognized losses of $ 18.0 million and $ 43.3 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 September 30, 2020:

Trading price of common stock on measurement date

5 unchanged sentences

Probability of warrant re-price

INNOVATION, INC.

PURPLE 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

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

The liability for these

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

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

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.

The public and sponsor warrants

that were issued in connection with the Company’s IPO and simultaneous private placement contain certain provisions that do not

meet the criteria for equity classification and therefore must be recorded as liabilities.

The liability for these warrants was recorded

at fair value on the date of the Business Combination and subsequently re-measured to fair value at each reporting date or exercise date

with changes in the fair value included in earnings.

During the nine months ended

September 30, 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 September 30, 2021 had a fair value of $ 9.0 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.

The Company determined the fair value of the

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

The Company used public trading

prices of the public warrants to determine their fair value.

The Company determined the fair value of the sponsor warrants using the Black

Scholes model with the following assumptions:

September 30,

Trading price of common stock on measurement date

4 unchanged sentences

Expected dividend yield

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.

During the three and nine

months ended September 30, 2021, the Company recognized gains of $ 5.4 million and $ 19.4 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 nine months ended September 30, 2020, the Company recognized losses

of $ 86.0 million and $ 169.3 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

Other Long-Term Liabilities

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

Other long-term liabilities

consist of the following (in thousands):

September 30,

Warranty accrual

1 unchanged sentence

Other long-term liabilities, net of current portion

INNOVATION, INC.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Commitments and Contingencies

Member Distributions

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

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

net taxable income following the end of each fiscal year.

The First Purple LLC Agreement was amended and replaced by the Second Amended

and Restated Limited Liability Company Agreement (the “Second Purple LLC Agreement”) on February 2, 2018 as part of

the Business Combination.

The Second Purple LLC Agreement was amended and replaced by the Third Amended and Restated Limited Liability

Company Agreement (the “Third Purple LLC Agreement”) on September 3, 2020.

The Second Purple LLC Agreement and the Third

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

During the six months ended June 30, 2021,

the Company paid $ 0.9 million in tax distributions under the Third Purple LLC Agreement.

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.

The agreement

provided for the construction and installation of certain utility improvements to provide increased power capacity to the manufacturing

and warehouse facility in Grantsville, Utah.

The Company prepaid $0.5 million related to the improvements and agreed to a minimum contract

billing amount over a 15-year period based on regulated rate schedules and changes in actual demand during the billing period.

The agreement

includes an early termination clause that requires the Company to pay a pro-rata termination charge if the Company terminates within

the first 10 years of the service start date.

The original early termination charge was $1.3 million and is reduced annually on a straight-line

basis over the 10-year period.

Required Member Distributions

Prior to the Business Combination

and pursuant to the then applicable First Amended and Restated Limited Liability Company Agreement (the “First Purple LLC Agreement”),

Purple LLC was required to distribute to its members an amount equal to 45 percent of Purple LLC’s net taxable income following

the end of each fiscal year.

The First Purple LLC Agreement was amended and replaced by the Second Amended and Restated Limited Liability

Company Agreement (the “Second Purple LLC Agreement”) on February 2, 2018 as part of the Business Combination.

Purple LLC Agreement was amended and replaced by the Third Amended and Restated Limited Liability Company Agreement (the “Third

Purple LLC Agreement”) on September 3, 2020.

The Second Purple LLC Agreement and the Third Purple LLC Agreement do not include any

mandatory distributions, other than tax distributions.

During the nine months ended September 30, 2021, the Company paid $ 1.0 million

in tax distributions under the Third Purple LLC Agreement.

At September 30, 2021, the Company’s condensed consolidated balance sheet

had a minimal amount of accrued tax distributions included in other current liabilities.

Service Agreement

In October 2017, the Company

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

The agreement provided for the construction

and installation of certain utility improvements to provide increased power capacity to the manufacturing and warehouse facility in Grantsville,

The Company prepaid $0.5 million related to the improvements and agreed to a minimum contract billing amount over a 15-year period

based on regulated rate schedules and changes in actual demand during the billing period.

The agreement includes an early termination

clause that requires the Company to pay a pro-rata termination charge if the Company terminates within the first 10 years of the service

The original early termination charge was $1.3 million and is reduced annually on a straight-line basis over the 10-year period.

During 2018, the utility improvements construction was completed and were made available to the Company.

As of 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.

INNOVATION, INC.

As of September 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.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Indemnification

Indemnification Obligations

From time to time, the Company

5 unchanged sentences

such persons for liabilities.

Agreement and Preemptive Rights

February 2018, in connection with the Business Combination, the Company entered into a subscription agreement with Coliseum Capital

Partners (“CCP”) and Blackwell Partners LLC – Series A (“Blackwell”), pursuant to which CCP and Blackwell

agreed to purchase from the Company an aggregate of 4.0 million shares of Class A Stock at a purchase price of $10.00 per share

(the “Coliseum Private Placement”).

In connection with the Coliseum Private Placement, the Sponsor assigned (i) an aggregate

of 1.3 million additional shares of Class A Stock to CCP and Blackwell and (ii) an aggregate of 3.3 million warrants to purchase

1.6 million shares of Class A Stock to CCP, Blackwell, and Coliseum Co-Invest Debt Fund, L.P.

The subscription

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

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.

Subscription Agreement

and Preemptive Rights

In February 2018, in

connection with the Business Combination, the Company entered into a subscription agreement with Coliseum Capital Partners (“CCP”)

and Blackwell Partners LLC – Series A (“Blackwell”), pursuant to which CCP and Blackwell agreed to purchase from the

Company an aggregate of 4.0 million shares of Class A Stock at a purchase price of $10.00 per share (the “Coliseum Private

In connection with the Coliseum Private Placement, the Sponsor assigned (i) an aggregate of 1.3 million additional

shares of Class A Stock to CCP and Blackwell and (ii) an aggregate of 3.3 million warrants to purchase 1.6 million shares

of Class A Stock to CCP, Blackwell, and Coliseum Co-Invest Debt Fund, L.P.

The subscription agreement provides

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

It also provides them with a

right of first refusal with respect to certain debt and preferred equity financings by the Company.

The Company also entered into a registration

rights agreement with CCP, Blackwell, and CDF, providing for the registration of the shares of Class A Stock issued and assigned

to CCP and Blackwell in the Coliseum Private Placement, as well as the shares of Class A Stock underlying the warrants received by

CCP, Blackwell and CDF.

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

of Securities Holders

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

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

In March 2018, the Company filed a registration

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

shares of Class A Stock.

Rights of Securities

The holders of certain warrants

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

rights agreements of the Company as of the Business Combination date.

In March 2018, the Company filed a registration statement registering

these warrants (and any shares of Class A Stock issuable upon the exercise of the warrants), and certain unregistered shares of Class

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

Under the Registration Rights Agreement

dated February 2, 2018 between the Company and CCP, Blackwell, and CDF (the “Coliseum Investors”), the Coliseum Investors

have the right to make written demands for up to three registrations of certain Warrants and shares of Class A Stock held by them, including

in underwritten offerings.

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

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

Under the Registration Rights Agreement dated February 2,

2018 between the Company and CCP, Blackwell, and CDF (the “Coliseum Investors”), the Coliseum Investors have the right to

make written demands for up to three registrations of certain warrants and shares of Class A Stock held by them, including in underwritten

In an underwritten offering of such warrants and shares of Class A Stock by the Coliseum Investors, the Company will pay underwriting

discounts and commissions and certain expenses incurred by the Coliseum Investors.

On May 21, 2021, 7.3 million

7 unchanged sentences

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).

these 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

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.

PURPLE 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

with InnoHold and the Parent Representative (the “InnoHold Registration Rights Agreement”).

Under the InnoHold Registration

Rights Agreement, InnoHold holds registration rights that obligate the Company to register for resale under the Securities Act, all or

any portion of the Equity Consideration (including Class A Stock issued in exchange for the equity consideration received in the

Business Combination) (the “Registrable Securities”).

InnoHold is entitled to make a written demand for registration under

the Securities Act of all or part of its Registrable Securities (up to a maximum of three demands in total).

Pursuant to the InnoHold

Registration Rights Agreement, the Company filed a registration statement on Form S-3 that was declared effective on November 8, 2019,

pursuant to which InnoHold, Tony Pearce and Terry Pearce sold 11.5 million shares of Class A Stock.

The Company filed a second registration

statement on Form S-3 that was declared effective on May 14, 2020, pursuant to which InnoHold sold 12.4 million shares of Class A Stock.

The Company filed a third and final registration statement on Form S-3 that was declared effective on September 9, 2020, pursuant to

which InnoHold sold 16.8 million shares of Class A Stock.

LLC Class B Unit Exchange Right

February 2, 2018, in connection with the closing of the Business Combination, the Company entered into an exchange agreement with Purple

LLC and InnoHold and Class B Unit holders who become a party thereto (the “Exchange Agreement”), which provides for the exchange

of Purple LLC Class B Units (the “Class B Units”) and shares of Class B Stock (together with an equal number of Class B Units,

the “Paired Securities”) for, at the Company’s option, either (A) shares of Class A Stock at an initial exchange ratio

equal to one Paired Security for one share of Class A Stock or (B) a cash payment equal to the product of the average of the volume-weighted

closing price of one share of Class A Stock for the ten trading days immediately prior to the date InnoHold or other Class B Unit holders

deliver a notice of exchange multiplied by the number of Paired Securities being exchanged.

In December 2018, InnoHold distributed Paired

Securities to Terry Pearce and Tony Pearce who also agreed to become parties to the Exchange Agreement.

In June 2019, InnoHold distributed

Paired Securities to certain current and former employees who also agreed to become parties to the exchange agreement.

Holders of Class

B Units may elect to exchange all or any portion of their Paired Securities as described above by delivering a notice to Purple LLC.

certain cases, adjustments to the exchange ratio will occur in case of a split, reclassification, recapitalization, subdivision or similar

transaction of or relating to the Class B Units or the shares of Class A Stock and Class B Stock or a transaction in which the Class

A Stock is exchanged or converted into other securities or property.

The exchange ratio will also adjust in certain circumstances when

the Company acquires Class B Units other than through an exchange for its shares of Class A Stock.

On February 2, 2018, in connection

with the closing of the Business Combination, the Company entered into a Registration Rights Agreement with InnoHold and the Parent Representative

(the “InnoHold Registration Rights Agreement”).

Under the InnoHold Registration Rights Agreement, InnoHold holds registration

rights that obligate the Company to register for resale under the Securities Act, all or any portion of the Equity Consideration (including

Class A Stock issued in exchange for the equity consideration received in the Business Combination) (the “Registrable Securities”).

InnoHold is entitled to make a written demand for registration under the Securities Act of all or part of its Registrable Securities (up

to a maximum of three demands in total).

Pursuant to the InnoHold Registration Rights Agreement, the Company filed a registration statement

on Form S-3 that was declared effective on November 8, 2019, pursuant to which InnoHold, Tony Pearce and Terry Pearce sold 11.5 million

shares of Class A Stock.

The Company filed a second registration statement on Form S-3 that was declared effective on May 14, 2020, pursuant

to which InnoHold sold 12.4 million shares of Class A Stock.

The Company filed a third and final registration statement on Form S-3 that

was declared effective on September 9, 2020, pursuant to which InnoHold sold 16.8 million shares of Class A Stock.

Purple LLC Class B

Unit Exchange Right

On February 2, 2018, in connection

with the closing of the Business Combination, the Company entered into an exchange agreement with Purple LLC and InnoHold and Class B

Unit holders who become a party thereto (the “Exchange Agreement”), which provides for the exchange of Purple LLC Class B

Units (the “Class B Units”) and shares of Class B Stock (together with an equal number of Class B Units, the “Paired

Securities”) for, at the Company’s option, either (A) shares of Class A Stock at an initial exchange ratio equal to one Paired

Security for one share of Class A Stock or (B) a cash payment equal to the product of the average of the volume-weighted closing price

of one share of Class A Stock for the ten trading days immediately prior to the date InnoHold or other Class B Unit holders deliver a

notice of exchange multiplied by the number of Paired Securities being exchanged.

In December 2018, InnoHold distributed Paired Securities

to Terry Pearce and Tony Pearce who also agreed to become parties to the Exchange Agreement.

In June 2019, InnoHold distributed Paired

Securities to certain current and former employees who also agreed to become parties to the exchange agreement.

Holders of Class B Units

may elect to exchange all or any portion of their Paired Securities as described above by delivering a notice to Purple LLC.

In certain cases, adjustments

to the exchange ratio will occur in case of a split, reclassification, recapitalization, subdivision or similar transaction of or relating

to the Class B Units or the shares of Class A Stock and Class B Stock or a transaction in which the Class A Stock is exchanged or converted

into other securities or property.

The exchange ratio will also adjust in certain circumstances when the Company acquires Class B Units

other than through an exchange for its shares of Class A Stock.

The right of a holder of Paired

3 unchanged sentences

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 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.

The Company and each holder

of Paired Securities shall bear its own expense regarding the exchange except that the Company shall be responsible for transfer taxes,

stamp taxes and similar duties.

During the nine months ended

September 30, 2021 and 2020, 0.1 million and 30.8 million, respectively, of Paired Securities were exchanged for shares of Class A Stock.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

of One-to-One Ratios

Third Purple LLC Agreement includes provisions intended to ensure that the Company at all times maintains a one-to-one ratio between

(a) (i) the number of outstanding shares of Class A Stock and (ii) the number of Class A Units owned by the Company (subject to certain

exceptions for certain rights to purchase equity securities of the Company under a “poison pill” or similar stockholder rights

plan, if any, certain convertible or exchangeable securities issued under the Company’s equity compensation plan and certain equity

securities issued pursuant to the Company’s equity compensation plan (other than a stock option plan) that are restricted or have

not vested thereunder) and (b) (i) the number of other outstanding equity securities of the Company (including the warrants exercisable

for shares of Class A Stock) and (ii) the number of corresponding outstanding equity securities of Purple LLC.

These provisions are intended

to result in non-controlling interest holders having a voting interest in the Company that is identical to their economic interest in

Related Taxes

Supreme Court ruling in South Dakota v.

Maintenance of One-to-One

The Third Purple LLC Agreement

includes provisions intended to ensure that the Company at all times maintains a one-to-one ratio between (a) (i) the number of outstanding

shares of Class A Stock and (ii) the number of Class A Units owned by the Company (subject to certain exceptions for certain rights to

purchase equity securities of the Company under a “poison pill” or similar stockholder rights plan, if any, certain convertible

or exchangeable securities issued under the Company’s equity compensation plan and certain equity securities issued pursuant to

the Company’s equity compensation plan (other than a stock option plan) that are restricted or have not vested thereunder) and (b)

(i) the number of other outstanding equity securities of the Company (including the warrants exercisable for shares of Class A Stock)

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

These provisions are intended to result in non-controlling

interest holders having a voting interest in the Company that is identical to their economic interest in Purple LLC.

Non-Income Related

Supreme Court ruling

in South Dakota v.

Wayfair, Inc.

, No.17-494, reversed a longstanding precedent that remote sellers are

not required to collect state and local sales taxes.

The Company cannot predict the effect of these and other attempts to impose sales,

income or other taxes on e-commerce.

, No.17-494, reversed a longstanding precedent that remote sellers are not required to collect

state and local sales taxes.

The Company cannot predict the effect of these and other attempts to impose sales, income or other taxes

on e-commerce.

The Company currently collects and reports on sales tax in all states in which it does business.

However, the application of existing, new or revised taxes on the Company’s business, in particular, sales taxes, VAT and similar

taxes would likely increase the cost of doing business online and decrease the attractiveness of selling products over the internet.

The application of these taxes on the Company’s business could also create significant increases in internal costs necessary to

capture data and collect and remit taxes.

There have been, and will continue to be, substantial ongoing costs associated with complying

with the various indirect tax requirements in the numerous markets in which the Company conducts or will conduct business.

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

However, the application

of existing, new or revised taxes on the Company’s business, in particular, sales taxes, VAT and similar taxes would likely increase

the cost of doing business online and decrease the attractiveness of selling products over the internet.

The application of these taxes

on the Company’s business could also create significant increases in internal costs necessary to capture data and collect and remit

There have been, and will continue to be, substantial ongoing costs associated with complying with the various indirect tax requirements

in the numerous markets in which the Company conducts or will conduct business.

Legal Proceedings

On September 9, 2019, Purple

LLC filed a Statement of Claim against PerfectSense Home Inc.

and PerfectSense Trading Co.

(collectively,

“PerfectSense”) in the Federal Court of Canada.

(collectively, “PerfectSense”)

in the Federal Court of Canada.

PerfectSense is a manufacturer and supplier of mattresses and related products.

PerfectSense owns the domain name www.purplesleep.ca, which used to, but no longer, redirects to its website at www.perfectsense.ca.

In addition to this, Purple LLC has alleged that PerfectSense has:

designed their mattresses with the same look as the Purple mattresses

(white mattress top, purple stripe, and grey bottom);

used many of the marketing elements on Purple’s website (including a similar

“exploded view” image of their mattress);

PerfectSense owns the

domain name www.purplesleep.ca, which used to, but no longer, redirects to its website at www.perfectsense.ca.

to this, Purple LLC has alleged that PerfectSense has:

designed their mattresses with the same look as the Purple mattresses (white mattress

top, purple stripe, and grey bottom);

used many of the marketing elements on Purple’s website (including a similar “exploded

view” image of their mattress);

and adopted the color purple as their dominant marketing color.

Purple LLC is suing

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

Purple LLC is asking for injunctive relief, damages, an accounting of profits, interest, costs, and delivery up or destruction of

the infringing products (including delivery up of the www.purplesleep.ca domain).

After filing the statement of claim,

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

PerfectSense brought a motion to strike that was

resolved on consent.

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

Counsel for the defendant

was removed from the record at their own request by Court Order.

The Court further ordered the defendant to either appoint counsel

or file a motion to permit an officer or director to represent the defendant in legal proceedings.

On November 6, 2020, the defendant

informally requested that the Court permit Mr.

Henderson, the CEO and shareholder of the defendant, to represent the defendant in the

action until such time as a lawyer could be appointed.

Purple opposed this informal request, and it was denied by the Court.

After granting

PerfectSense a final extension of time to either appoint counsel or file a motion to permit Mr.

Henderson to represent the defendant,

PerfectSense appointed new counsel.

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

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.

Purple LLC is suing for a declaration

that PerfectSense has infringed Purple LLC’s copyright and trademark rights and committed the tort of passing off.

Purple LLC is

asking for injunctive relief, damages, an accounting of profits, interest, costs, and delivery up or destruction of the infringing products

(including delivery up of the www.purplesleep.ca domain).

After filing the statement of claim, Purple LLC posted $ 15,000 CAD

as security for PerfectSense’s costs.

PerfectSense brought a motion to strike that was resolved on consent.

Pleadings are now closed,

and the action is proceeding under case management.

Counsel for the defendant was removed from the record at their own request by

The Court further ordered the defendant to either appoint counsel or file a motion to permit an officer or director to represent

the defendant in legal proceedings.

On November 6, 2020, the defendant informally requested that the Court permit Mr.

Henderson, the CEO

and shareholder of the defendant, to represent the defendant in the action until such time as a lawyer could be appointed.

Purple opposed

this informal request, and it was denied by the Court.

After granting PerfectSense a final extension of time to either appoint counsel

or file a motion to permit Mr.

Henderson to represent the defendant, PerfectSense appointed new counsel.

The parties engaged in litigation

discovery, exchanged affidavits of documents and scheduled examinations for discovery.

Shortly thereafter, discovery adjourned and continues

to be stayed while the parties negotiate formal terms of settlement.

The Company believes settlement will be finalized soon and the action

then dismissed, but if not, Purple LLC will resume vigorously pursuing its claims.

On September 20, 2020, Purple

8 unchanged sentences

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

INNOVATION, INC.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

15 unchanged sentences

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

However, the Court granted ReST’s motion to compel arbitration, and stayed the proceedings in the United States District Court for

the District of Utah.

Additionally, the Court ruled that ReST’s claims against the Purple board members were not subject to arbitration,

and the Court stayed ReST’s claims against those individuals.

Pursuant to the Court’s order, Purple filed a demand for

arbitration with the American Arbitration Association (the “AAA”) on September 1, 2021.

ReST filed its counterclaim

with the AAA on September 21, 2021.

The parties are currently working with the AAA to select an arbitrator for the arbitration hearing.

No date for the arbitration hearing has been set.

Purple LLC seeks over $4 million in damages from ReST, whereas ReST claims that

Purple is liable to it for tens of millions of dollars.

The outcome of this litigation cannot be predicted at this early stage.

However, Purple intends to vigorously pursue its claims

and defend against the claims made by ReST.

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.

The case is in the early stages.

No substantial discovery has

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

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.

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 be granted.

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.

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.

On September 28, 2021, the District Court dismissed Purple’s complaint without prejudice,

and also dismissed ACTI’s counterclaim without prejudice, while the parties pursued dispute-resolution procedures set out in the

license agreement.

Because the Court found that the license agreement required the parties to follow the contractual dispute-resolution

procedures prior to filing a lawsuit, Purple initiated those procedures in accordance with the license agreement and intends to continue

to vigorously pursue its claims.

On June 8, 2021, Serta Simmons

2 unchanged sentences

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

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

valid 2015 noncompete agreement.

1 unchanged sentence

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.

SSB also initiated arbitration proceedings against its former employee who Purple LLC has agreed

to indemnify, subject to certain conditions.

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

1 unchanged sentence

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.

The Company’s motion to dismiss

is fully briefed and oral argument is scheduled to occur on October 26, 2021.

The Court is expected to render a decision on the

Company’s motion to dismiss in November 2021.

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.

The Company filed a motion for summary judgment on these claims on August

SSB filed an Answer on August 18, 2021.

The Company and SSB attended a mediation on August 30, 2021 and the parties anticipate

that all claims between the parties will be resolved and that the Georgia Litigation and the Utah Litigation will each be dismissed without

PURPLE INNOVATION, INC.

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.

The Company does not believe that adverse decisions in any such pending or threatened proceedings, or any amount that the Company might

be required to pay by reason thereof, would have a material adverse effect on the financial condition or future results of the Company.

The Company is from time to

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

The Company does not

believe that adverse decisions in any such pending or threatened proceedings, or any amount that the Company might be required to pay

by reason thereof, would have a material adverse effect on the financial condition or future results of the Company.

Related Party Transactions

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

Capital Management, LLC

The Company had various transactions

with entities or individuals which are considered related parties.

Coliseum Capital Management,

Immediately following the

33 unchanged sentences

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

ceased to beneficially own at least 50 % of the voting securities of the Company, the exercise price of the Incremental Loan Warrants

was adjusted to zero.

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

Loan Warrants held by the Incremental Lenders.

Founder Entities

In May 2020, pursuant to the

terms of the warrant agreement upon the condition that Tony Pearce or Terry Pearce individually or together ceased to beneficially own

at least 50 % of the voting securities of the Company, the exercise price of the Incremental Loan Warrants was adjusted to zero.

9, 2020, the Company issued 2.6 million shares of Class A common stock in exchange for the Incremental Loan Warrants held by the Incremental

Purple Founder Entities

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.

“TNT Holdings”), EdiZONE, LLC, (herein EdiZONE an entity wholly owned by TNT Holdings) and InnoHold (collectively 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 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 Purple LLC and retired from the Company’s Board in August 2020.

PURPLE INNOVATION, INC.

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

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

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

4 unchanged sentences

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.

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.

Purple LLC incurred $ 0.2 million and $ 0.2 million in rent expense to 123E LLC or TNT Holdings for the building

lease of the Alpine facility for the three months ended September 30, 2021 and 2020, respectively and $ 0.7 million and $ 0.7 million for

the nine months ended September 30, 2021 and 2020, respectively.

Purple LLC continues to lease the Alpine facility that was formerly the

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

In accordance with the terms of that lease,

on September 3, 2021, Purple LLC gave notice to 123E LLC that it intended to exercise its right to an early termination of the lease to

occur on September 30, 2022.

During the nine months ended

September 30, 2021, certain current and former employees of Purple LLC 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.

In connection with the Business

8 unchanged sentences

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.

During the nine months ended

September 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

to the Business Combination, GPAC was a shell company with no operations, formed as a vehicle to effect a business combination with one

or more operating businesses.

After the Closing, the Company became a holding company whose sole material asset consists of its interest

in Purple LLC.

A Common Stock

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

Holders of the Company’s Class

A Stock are entitled to one vote for each share held on all matters to be voted on by the stockholders and participate in dividends,

if declared by the Board, or receive any portion of any such assets in respect of their shares upon liquidation, dissolution, distribution

of assets or winding-up of the Company in excess of the par value of such stock.

Holders of the Class A Stock and holders of the Class

B Stock voting together as a single class, have the exclusive right to vote for the election of directors and on all other matters properly

submitted to a vote of the stockholders.

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

be voted on by stockholders.

At 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

The shares of Class A Stock subject to vesting will be forfeited eight years from the Closing, unless any of the following

events (each a “Triggering Event”) occurs prior to that time:(i) the closing price of the Class A Stock on the principal

exchange on which it is listed is at or above $12.50 for 20 trading days over a thirty trading day period (subject to certain adjustments),

(ii) a change of control of the Company, (iii) a “going private” transaction by the Company pursuant to Rule 13e-3 under

the Exchange Act or such other time as the Company ceases to be subject to the reporting obligations under Section 13 or 15(d) of the

Exchange Act, or (iv) the time that the Company’s Class A Stock ceases to be listed on a national securities exchange.

During fiscal

2020, a Triggering Event occurred as the closing price of the Class A Stock on the principal exchange on which it is listed was at or

above $12.50 for 20 trading days over a thirty-trading day period.

Accordingly, these shares of Class A Stock are no longer subject to

vesting or forfeiture.

INNOVATION, INC.

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

Prior to the Business Combination,

GPAC was a shell company with no operations, formed as a vehicle to effect a business combination with one or more operating businesses.

After the Closing, the Company became a holding company whose sole material asset consists of its interest in Purple LLC.

Class A Common Stock

The Company has 210.0 million

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

Holders of the Company’s Class A Stock are entitled to one

vote for each share held on all matters to be voted on by the stockholders and participate in dividends, if declared by the Board, or

receive any portion of any such assets in respect of their shares upon liquidation, dissolution, distribution 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

consideration.

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

Class A Stock that it sold.

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

The preferred stock may be issued from

time to time in one or more series.

The directors are expressly authorized to provide for the issuance of shares of the preferred stock

in one or more series and to establish from time to time the number of shares to be included in each such series and to fix the voting

rights, designations and other special rights or restrictions.

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

and Sponsor Warrants

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

to a private placement simultaneously with the IPO.

Each of the Company’s warrants entitles the registered holder to purchase one-half

of one share of the Company’s Class A Stock at a price of $5.75 per half share ($11.50 per full share), subject to adjustment pursuant

to the terms of the warrant agreement.

Pursuant to the warrant agreement, a warrant holder may exercise its warrants only for a whole

number of shares of the Class A Stock.

For example, if a warrant holder holds one warrant to purchase one-half of one share of Class

A Stock, such warrant will not be exercisable.

If a warrant holder holds two warrants, such warrants will be exercisable for one share

Holders of the Class A Stock and holders of the Class B Stock voting together

as a single class, have the exclusive right to vote for the election of directors and on all other matters properly submitted to a vote

of the stockholders.

Holders of Class A Stock and Class B Stock are entitled to one vote per share on matters to be voted on by stockholders.

At September 30, 2021, 66.4 million shares of Class A Stock were outstanding.

In accordance with the terms

of the Business Combination, approximately 1.3 million shares of Class A Stock were subject to vesting and forfeiture.

The shares of Class

A Stock subject to vesting will be forfeited eight years from the Closing, unless any of the following events (each a “Triggering

Event”) occurs prior to that time:(i) the closing price of the Class A Stock on the principal exchange on which it is listed is

at or above $12.50 for 20 trading days over a thirty trading day period (subject to certain adjustments), (ii) a change of control of

the Company, (iii) a “going private” transaction by the Company pursuant to Rule 13e-3 under the Exchange Act or such other

time as the Company ceases to be subject to the reporting obligations under Section 13 or 15(d) of the Exchange Act, or (iv) the time

that the Company’s Class A Stock ceases to be listed on a national securities exchange.

During fiscal 2020, a Triggering Event occurred

as the closing price of the Class A Stock on the principal exchange on which it is listed was at or above $12.50 for 20 trading days over

a thirty-trading day period.

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

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Class 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

In connection with the Business

Combination, approximately 44.1 million shares of Class B Stock were issued to InnoHold as part of the equity consideration.

subsequently transferred a portion of its shares to permitted transfers and exchanged its remaining shares for Class A Stock that it sold.

All of the 0.4 million shares of Class B Stock outstanding at September 30, 2021 were held by other parties.

Preferred Stock

The Company has 5.0 million

shares of preferred stock authorized at a par value of $ 0.0001 per share.

The preferred stock may be issued from time to time in one or

The directors are expressly authorized to provide for the issuance of shares of the preferred stock in one or more series

and to establish from time to time the number of shares to be included in each such series and to fix the voting rights, designations

and other special rights or restrictions.

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

Public and Sponsor

There were 15.5 million public

warrants issued in connection with GPAC’s formation and IPO and 12.8 million sponsor warrants issued pursuant to a private placement

simultaneously with the IPO.

Each of the Company’s warrants entitles the registered holder to purchase one-half of one share of

the Company’s Class A Stock at a price of $5.75 per half share ($11.50 per full share), subject to adjustment pursuant to the terms

of the warrant agreement.

Pursuant to the warrant agreement, a warrant holder may exercise its warrants only for a whole number of shares

of the Class A Stock.

For example, if a warrant holder holds one warrant to purchase one-half of one share of Class A Stock, such warrant

will not be exercisable.

If a warrant holder holds two warrants, such warrants will be exercisable for one share of the Class A Stock.

In no event will the Company be required to net cash settle any warrant.

The warrants have a five-year term which

commenced on March 2, 2018, 30 days after the completion of the Business Combination, and will expire on February 2, 2023, or earlier

upon redemption or liquidation.

Company may call the warrants for redemption if the reported last sale price of the Class A Stock equals or exceeds $24.00 per share

for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date the Company sends the notice

of redemption to the warrant holders;

provided, however, that the sponsor warrants are not redeemable by the Company so long as they

are held by the Sponsor or its permitted transferees.

In addition, with respect to the sponsor warrants, so long as such sponsor warrants

are held by the Sponsor or its permitted transferee, the holder may elect to exercise the sponsor warrants on a cashless basis, by surrendering

their sponsor warrants for that number of shares of Class A Stock equal to the quotient obtained by dividing (x) the product of the number

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

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

The “fair market value” means the

average reported last sale price of the Class A Stock for the 10 trading days ending on the third trading day prior to the date on which

the notice of warrant exercise is sent to the warrant agent.

All other terms, rights and obligations of the sponsor warrants remain the

same as the public warrants.

INNOVATION, INC.

The warrants have a five-year term which commenced on March 2,

2018, 30 days after the completion of the Business Combination, and will expire on February 2, 2023, or earlier upon redemption or liquidation.

The Company may call the warrants

for redemption if the reported last sale price of the Class A Stock equals or exceeds $24.00 per share for any 20 trading days within

a 30-trading day period ending on the third trading day prior to the date the Company sends the notice of redemption to the warrant holders;

provided, however, that the sponsor warrants are not redeemable by the Company so long as they are held by the Sponsor or its permitted

In addition, with respect to the sponsor warrants, so long as such sponsor warrants are held by the Sponsor or its permitted

transferee, the holder may elect to exercise the sponsor warrants on a cashless basis, by surrendering their sponsor warrants for that

number of shares of Class A Stock equal to the quotient obtained by dividing (x) the product of the number of shares of Class A Stock

underlying the sponsor warrants, multiplied by the difference between the exercise price of the Sponsor Warrants and the “fair market

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

The “fair market value” means the average reported last sale price

of the Class A Stock for the 10 trading days ending on the third trading day prior to the date on which the notice of warrant exercise

is sent to the warrant agent.

All other terms, rights and obligations of the sponsor warrants remain the same as the public warrants.

PURPLE 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

terms of the Public Warrants to redeem such warrants by paying to the warrant holders the redemption price of $ 0.01 per warrant on November

Any exercise of the warrants prior to that date was to be done on a cashless basis, in accordance with the terms of the warrants.

All of the public warrants were exercised or redeemed by November 30, 2020.

the 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

connection with the Amended and Restated Credit Agreement, the Company issued to the Incremental Lenders 2.6 million Incremental Loan

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

Each Incremental Loan Warrant entitled the registered

holder to purchase one share of the Company’s Class A Stock at a price of $ 5.74 per share, subject to adjustment pursuant to the

terms of the warrant agreement.

In May 2020, Tony Pearce and Terry Pearce individually or together ceased to beneficially own at least

50% of the voting securities of the Company.

As a result, the exercise price of the warrants was reduced to zero based on the formula

established in the agreement.

October 27, 2020, the Company provided notice to the holders of the Incremental Loan Warrants that the Company was exercising its right

On October 27, 2020, the Company

provided notice to the holders of the public warrants that the Company was exercising its right under the terms of the Public Warrants

to redeem such warrants by paying to the warrant holders the redemption price of $ 0.01 per warrant on November 30, 2020.

of the warrants prior to that date was to be done on a cashless basis, in accordance with the terms of the warrants.

On November 9, 2020,

upon the exercise of all the Incremental Loan Warrants, the Company issued 2.6 million shares of Class A common stock in exchange for

the Incremental Loan Warrants held by the Incremental Lenders.

Noncontrolling

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

Upon the close of the Business

Combination, and at December 31, 2018, InnoHold’s and other Class B Unit holders’ combined NCI percentage in Purple LLC was

approximately 82 %.

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

The Company has consolidated the

financial position and results of operations of Purple LLC and reflected the proportionate interest held by all such Purple LLC Class

B Unit holders as NCI.

Company’s sole material asset is Purple LLC, which is treated as a partnership for U.S.

federal income tax purposes and for purposes

of certain state and local income taxes.

Purple LLC’s net taxable income and any related tax credits are passed through to its

members and are included in the members’ tax returns, even though such net taxable income or tax credits may not have actually

been distributed.

While the Company consolidates Purple LLC for financial reporting purposes, the Company will be taxed on its share

of earnings of Purple LLC not attributed to the noncontrolling interest holders, which will continue to bear their share of income tax

on its allocable earnings of Purple LLC.

The income tax burden on the earnings taxed to the noncontrolling interest holders is not reported

by the Company in its consolidated financial statements under GAAP.

As a result, the Company’s effective tax rate differs from

the statutory rate.

The primary factors impacting the expected tax are the allocation of tax benefit to noncontrolling interest and the

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

INNOVATION, INC.

All of the public

warrants were exercised or redeemed by November 30, 2020.

During the nine months ended

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

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

Incremental Loan Warrants

In connection with the Amended

and Restated Credit Agreement, the Company issued to the Incremental Lenders 2.6 million Incremental Loan Warrants to purchase 2.6

million shares of the Company’s Class A Stock.

Each Incremental Loan Warrant entitled the registered holder to purchase one share

of the Company’s Class A Stock at a price of $ 5.74 per share, subject to adjustment pursuant to the terms of the warrant agreement.

In May 2020, Tony Pearce and Terry Pearce individually or together ceased to beneficially own at least 50% of the voting securities of

As a result, the exercise price of the warrants was reduced to zero based on the formula established in the agreement.

On October 27, 2020, the Company

provided notice to the holders of the Incremental Loan Warrants that the Company was exercising its right to redeem such warrants by paying

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

Any exercise of the warrants prior to that date

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

On November 9, 2020, upon the exercise of all the Incremental

Loan Warrants, the Company issued 2.6 million shares of Class A common stock in exchange for the Incremental Loan Warrants held by the

Incremental Lenders.

Noncontrolling Interest

Noncontrolling interest (“NCI”)

is the membership interest in Purple LLC held by holders other than the Company.

Upon the close of the Business Combination, and at December

31, 2018, InnoHold’s and other Class B Unit holders’ combined NCI percentage in Purple LLC was approximately 82 %.

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

The Company has consolidated the financial position and results

of operations of Purple LLC and reflected the proportionate interest held by all such Purple LLC Class B Unit holders as NCI.

The Company’s sole material

asset is Purple LLC, which is treated as a partnership for U.S.

federal income tax purposes and for purposes of certain state and local

income taxes.

Purple LLC’s net taxable income and any related tax credits are passed through to its members and are included in

the members’ tax returns, even though such net taxable income or tax credits may not have actually been distributed.

While the Company

consolidates Purple LLC for financial reporting purposes, the Company will be taxed on its share of earnings of Purple LLC not attributed

to the noncontrolling interest holders, which will continue to bear their share of income tax on its allocable earnings of Purple LLC.

The income tax burden on the earnings taxed to the noncontrolling interest holders is not reported by the Company in its consolidated

financial statements under GAAP.

As a result, the Company’s effective tax rate differs from the statutory rate.

The primary factors

impacting the expected tax are the allocation of tax benefit to noncontrolling interest and the non-taxable nature of the change in fair

value of the warrant liability.

PURPLE 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

of basis differences in Purple LLC.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable

income sufficient to utilize the deferred tax assets on income tax returns.

In periods prior to the second quarter of 2020, management

made the determination that its net deferred tax assets were not more likely than not going to be realized because the Company was in

a three-year cumulative loss position and the generation of future taxable income was uncertain.

Considering this and other factors,

the Company maintained a full valuation allowance of $ 44.3 million through the period ending March 31, 2020.

Prior to the second quarter

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

in Purple LLC.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income sufficient to

utilize the deferred tax assets on income tax returns.

In periods prior to the second quarter of 2020, management made the determination

that its net deferred tax assets were not more likely than not going to be realized because the Company was in a three-year cumulative

loss position and the generation of future taxable income was uncertain.

Considering this and other factors, the Company maintained a

full valuation allowance of $ 44.3 million through the period ending March 31, 2020.

During fiscal 2020, the Company

5 unchanged sentences

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 deferred tax assets at September 30, 2021 totaled $214.0 million, which is net

of a $70.8 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 $ 18.8 million in the valuation allowance

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

The Company currently estimates

2 unchanged sentences

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.

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

Corporate taxpayers

may carryback net operating losses (NOLs) originating during 2018 through 2020 for up to five years, which was not previously allowed

under the 2017 Tax Act.

The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize

NOL carryforwards to offset taxable income in 2018, 2019 or 2020.

Taxpayers may generally deduct interest up to the sum of 50% of adjusted

taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020.

CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead

of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act.

March 11, 2021, Congress passed, and the President signed into law, the American Rescue Plan Act, 2021 (the “ARP”), which

includes certain business tax provisions.

At this point the Company does not believe that these changes will have a material impact on

its income tax provision for 2021.

The Company will continue to evaluate the impact of new legislation on its financial position, results

of operations, and cash flows.

connection with the Business Combination, the Company entered into a tax receivable agreement with InnoHold, which provides for the payment

by the Company to InnoHold of 80 % of the net cash savings, if any, in U.S.

federal, state and local income tax that the Company actually

realizes (or is deemed to realize in certain circumstances) in periods after the Closing as a result of (i) any tax basis increases in

the assets of Purple LLC resulting from the distribution to InnoHold of the cash consideration, (ii) the tax basis increases in the assets

of Purple LLC resulting from the redemption by Purple LLC or the exchange by the Company, as applicable, of Class B Paired Securities

or cash, as applicable, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising

from, payments it makes under the tax receivable agreement.

INNOVATION, INC.

For the nine months ended

September 30, 2021, the Company has recorded income tax expense of $ 1.0 million.

The effective tax rate for the nine months ended September

30, 2021 was 3.77 %, 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.

In response to the COVID-19

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

The CARES Act lifts certain

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

Corporate taxpayers may carryback net operating

losses (NOLs) originating during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act.

CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset

taxable income in 2018, 2019 or 2020.

Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business

interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020.

The CARES Act allows taxpayers with

alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through

refunds over a period of years, as originally enacted by the 2017 Tax Act.

On March 11, 2021, Congress

passed, and the President signed into law, the American Rescue Plan Act, 2021 (the “ARP”), which includes certain business

tax provisions.

At this point the Company does not believe that these changes will have a material impact on its income tax provision

The Company will continue to evaluate the impact of new legislation on its financial position, results of operations, and cash

In connection with the Business

Combination, the Company entered into a tax receivable agreement with InnoHold, which provides for the payment by the Company to InnoHold

of 80 % of the net cash savings, if any, in U.S.

federal, state and local income tax that the Company actually realizes (or is deemed to

realize in certain circumstances) in periods after the Closing as a result of (i) any tax basis increases in the assets of Purple LLC

resulting from the distribution to InnoHold of the cash consideration, (ii) the tax basis increases in the assets of Purple LLC resulting

from the redemption by Purple LLC or the exchange by the Company, as applicable, of Class B Paired Securities or cash, as applicable,

and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, payments it makes under

the tax receivable agreement.

PURPLE 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,

a tax receivable agreement liability may be recorded based on 80% of the estimated future cash tax savings that the Company may realize

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

The amount of the increase in asset basis, the related estimated cash tax savings and the attendant tax receivable agreement liability

to be recorded will depend on the price of the Company’s Class A Stock at the time of the relevant redemption or exchange.

As noncontrolling interest

holders exercise their right to exchange or cause Purple LLC to redeem all or a portion of their Class B Units, a tax receivable agreement

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

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

The amount of the increase

in asset basis, the related estimated cash tax savings and the attendant tax receivable agreement liability to be recorded will depend

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

The estimation of liability

4 unchanged sentences

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.

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

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

to reflect the portion of those positions it cannot conclude “more-likely-than-not” to be realized upon ultimate settlement.

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

in the accompanying consolidated statement of income.

Accrued interest and penalties would be included on the related tax liability line

in the consolidated balance sheet.

As of June 30, 2021, no uncertain tax positions were recognized as liabilities in the condensed consolidated

financial statements.

nine months ended September 30, 2021, $0.8 million relates to current year exchanges and was recorded as an adjustment to stockholders’

equity and $0.6 million was recorded as income in the condensed consolidated statement of operations to reflect the impact of recording

the 2020 provision to return adjustments.

The Company has no federal

net operating loss (“NOL”) carryforwards after utilization of the remaining carryforwards in 2020.

The effects of uncertain tax

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

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

the portion of those positions it cannot conclude “more-likely-than-not” to be realized upon ultimate settlement.

The Company’s

policy is to recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying

consolidated statement of income.

Accrued interest and penalties would be included on the related tax liability line in the consolidated

balance sheet.

As of September 30, 2021, no uncertain tax positions were recognized as liabilities in the condensed consolidated financial

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):

The 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

September 30,

Nine Months Ended

September 30,

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

$ ( 163,453 )

Dilutive effect of change in fair value – warrant liabilities

Net loss attributed to noncontrolling interest

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

$ ( 163,453 )

Weighted average shares—basic

Dilutive effect of equity awards

Dilutive effect of Class B shares

Weighted average shares—diluted

Net income (loss) per common share:

INNOVATION, INC.

PURPLE INNOVATION, INC.

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.

For the three months ended

September 30, 2021, the Company excluded 1.3 million shares of Class A Stock issuable upon conversion of certain stock options, restricted

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

For the nine months ended September 30, 2021, the Company

excluded 0.5 million of Paired Securities convertible into an equal number of Class A shares as the effect was anti-dilutive.

three months ended September 30, 2020, the Company excluded 10.0 million of Paired Securities convertible into shares of Class A Stock

and 10.4 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 nine months ended September 30, 2020, the Company excluded 21.6 million of Paired

Securities convertible into shares of Class A Stock and 7.1 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

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

of the Company.

The stock options have an exercise price of $ 32.28 per option.

The stock options expire in five years and vest over a

four-year period.

The estimated fair value of the stock options, less expected forfeitures, is amortized over the options vesting period

on a straight-line basis.

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

2017 Equity Incentive

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.

September 30, 2021, an aggregate of 1.8 million shares remain available for issuance or use under the 2017 Incentive Plan.

Class A Stock Awards

In 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 nine months ended September 30, 2021 which represented the fair value of

the stock award on the grant date.

Employee Stock Options

In March 2021, the Company

granted 0.1 million stock options under the Company’s 2017 Equity Incentive Plan to certain management of the Company.

options have an exercise price of $ 32.28 per option.

The stock options expire in five years and vest over a four-year period.

The estimated

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

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

Fair market value

4 unchanged sentences

Expected dividend yield

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

The following table summarizes the Company’s

total stock option activity for the nine months ended September 30, 2021:

(in thousands)

1 unchanged sentence

Forfeited/cancelled

Options outstanding as of June 30, 2021

INNOVATION, INC.

Options outstanding as of September 30, 2021

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

Outstanding and exercisable stock options as of

September 30, 2021 are as follows:

Options Outstanding

8 unchanged sentences

(in thousands)

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

The following table summarizes

the Company’s unvested stock option activity for the nine months ended September 30, 2021:

(in thousands)

1 unchanged sentence

Nonvested options as of January 1, 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

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,

Nonvested options as of September 30, 2021

The estimated fair value of

Company stock options, less expected forfeitures, is amortized over the options vesting period on a straight-line basis.

For the three

and nine months ended September 30, 2021, the Company recognized stock option expense of $ 0.4 million and $ 1.3 million, respectively.

The Company recorded stock option expense of $ 0.3 million and $ 0.9 million during the three and nine months ended September 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.

As of September 30, 2021,

outstanding stock options had $ 3.7 million of unrecognized stock compensation cost with a remaining recognition period of 2.0 years.

PURPLE 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:

Employee Restricted

During the first nine months of 2021, the Company granted 0.1 million

of restricted stock units under the Company’s 2017 Equity Incentive Plan to certain management of the Company.

Approximately half

of the restricted stock units granted included a market vesting condition.

The restricted stock awards that do not have the market vesting

condition had a weighted average grant date fair value of $27.80 per share.

The estimated fair value of these awards is recognized on

a straight-line basis over the four-year vesting period.

For those awards that include a market vesting condition, the estimated fair

value of the restricted stock was measured on the grant date and incorporated the probability of vesting occurring.

The estimated fair

value is recognized over the derived service period (as determined by the valuation model), with such recognition occurring regardless

of whether the market condition is met.

The Company determined the weighted average grant date fair value of the awards with the market

vesting condition to be $ 18.29 per share using a Monte Carlo Simulation of a Geometric Brownian Motion stock path model with the following

weighted average assumptions:

Trading price of common stock on measurement date

Risk free interest rate

Expected life in years

Expected volatility

Expected dividend yield

The following table summarizes

the Company’s restricted stock unit activity for the nine months ended September 30, 2021:

Outstanding (in thousands)

1 unchanged sentence

Nonvested restricted stock units as of January 1, 2021

Nonvested restricted stock units as of June 30, 2021

Incentive Units

January 2017, pursuant to the 2016 Equity Incentive Plan approved by InnoHold and Purple LLC that authorized the issuance of 12.0 million

incentive units, Purple LLC granted 11.3 million incentive units to Purple Team LLC, an entity for the benefit of certain employees who

were participants in that plan.

In conjunction with the Business Combination, Purple Team LLC was merged into InnoHold with InnoHold

being the surviving entity and the Purple Team LLC incentive units were cancelled and new incentive units were issued by InnoHold under

its own limited liability company agreement (the “InnoHold Agreement”).

On February 8, 2019, InnoHold initiated a tender

offer to each of these incentive unit holders, some of which are current employees of Purple LLC, to distribute to each a pro rata number

of 2.5 million Paired Securities held by InnoHold in exchange for the cancellation of their ownership interests in InnoHold.

incentive unit holders accepted the offer, and the terms and distribution of each transaction were finalized and closed on June 25, 2019.

At the closing of the tender offer, those incentive unit holders received, based on their pro rata holdings of InnoHold Class B

Units, a portion of 2.5 million Paired Securities held by InnoHold.

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

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

Non-Cash Stock-Based Compensation

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

This standard

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

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

awards, employee stock options and employee restricted stock units.

Nonvested restricted stock units as of September 30, 2021

The Company recorded restricted

stock unit expense of $ 0.3 million and $ 0.3 million during the three and nine months ended September 30, 2021, respectively.

no restricted stock unit expense recorded in 2020.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

InnoHold Incentive

In January 2017, pursuant

to the 2016 Equity Incentive Plan approved by InnoHold and Purple LLC that authorized the issuance of 12.0 million incentive units, Purple

LLC granted 11.3 million incentive units to Purple Team LLC, an entity for the benefit of certain employees who were participants in that

In conjunction with the Business Combination, Purple Team LLC was merged into InnoHold with InnoHold being the surviving entity

and the Purple Team LLC incentive units were cancelled and new incentive units were issued by InnoHold under its own limited liability

company agreement (the “InnoHold Agreement”).

On February 8, 2019, InnoHold initiated a tender offer to each of these incentive

unit holders, some of which are current employees of Purple LLC, to distribute to each a pro rata number of 2.5 million Paired Securities

held by InnoHold in exchange for the cancellation of their ownership interests in InnoHold.

All InnoHold incentive unit holders accepted

the offer, and the terms and distribution of each transaction were finalized and closed on June 25, 2019.

At the closing of the tender

offer, those incentive unit holders received, based on their pro rata holdings of InnoHold Class B Units, a portion of 2.5 million

Paired Securities held by InnoHold.

As of September 30, 2021, 0.4 million of the Paired Securities remain to be exchanged for Class A

Stock by the incentive unit holders.

Aggregate Non-Cash

Stock-Based Compensation

The Company has accounted

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

This standard requires the Company

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

The table below

summarizes the aggregate non-cash stock-based compensation recognized in the statement of operations for stock awards, employee stock

options and employee restricted stock units.

(in thousands)

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Non-Cash Stock-Based Compensation

5 unchanged sentences

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

All eligible employees over the age of 18 and with 4 months’ service are eligible to participate in the plan.

The plan provides

for Company matching of employee contributions up to 5% of eligible earnings.

In July 2018 the Company established

a 401(k) plan that qualifies as a deferred compensation arrangement under Section 401 of the IRS Code.

All eligible employees over

the age of 18 and with 4 months’ service are eligible to participate in the plan.

The plan provides for Company matching of employee

contributions up to 5% of eligible earnings.

Company contributions immediately vest.

The Company’s

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.

The Company’s matching contribution

expense was $ 0.8 million and $ 0.5 million for the three months ended September 30, 2021 and 2020, respectively, and $ 2.3 million

and $ 1.7 million for the nine months ended September 30, 2021 and 2020, respectively.

Subsequent Events

On October 11, 2021, Purple

LLC sued The Sleep Company, an Indian private limited company, in Delhi High court case CS(COMM) 517/2021, for among other things infringement

of Purple LLC’s intellectual property.

On October 12, 2021, the Delhi High Court awarded Purple LLC a limited injunction against

The Sleep Company for its infringement.

Further legal proceedings are pending, and the Company intends to vigorously pursue its claims

against The Sleep Company.

On November 8, 2021, Purple LLC

and Mattress Firm agreed to terminate the Master Retailer Agreement (the “Agreement”) dated September 18, 2018 between Purple

and Mattress Firm.

The Agreement was replaced by a new Master Retailer Agreement with terms consistent with the Company’s standard

retailer agreement.

The replacement agreement eliminates all of the prior exclusivity arrangements.

On November 8, 2021, pursuant

to the 2020 Credit Agreement, the Company provided notice to KeyBank National Association requesting a $ 55.0 million draw on the revolving

line of credit, which represents the full amount available under the revolving line of credit.

The initial borrowing rate will be 3.50 %,

based on the LIBOR floor of 0.5 % plus 3.00 %.

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