What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-09 compared with 2021-08-09 · 509 added, 388 removed, 139 unchanged (87% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

following discussion is intended to provide a more comprehensive review of the operating results and financial condition of Purple Innovation,

than can be obtained from reading the Unaudited Condensed Consolidated Financial Statements alone.

The discussion should be read

in conjunction with the Unaudited Condensed Consolidated Financial Statements and the notes thereto included in “Part I.

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is

intended to provide a more comprehensive review of the operating results and financial condition of Purple Innovation, Inc.

obtained from reading the Unaudited Condensed Consolidated Financial Statements alone.

The discussion should be read in conjunction with

the Unaudited Condensed Consolidated Financial Statements and the notes thereto included in “Part I.

Financial Statements.”

FORWARD-LOOKING

quarterly report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section

27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that represent our

current expectations and beliefs.

All statements other than statements of historical fact are “forward-looking statements”

for purposes of federal and state securities laws.

In some cases, you can identify these statements by forward-looking words such as

“believe,” “expect,” “project,” “anticipate,” “estimate,” “intend,”

“plan,” “targets,” “likely,” “will,” “would,” “could,” “may,”

“might,” the negative of these words and other similar words.

forward-looking statements included in this Quarterly Report are made only as of the date thereof.

It is routine for our internal projections

and expectations to change throughout the year, and any forward-looking statements based upon these projections or expectations may change

prior to the end of the next quarter or year.

FORWARD-LOOKING STATEMENTS

This quarterly report on Form

10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act

of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that represent our current expectations and beliefs.

All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state

securities laws.

In some cases, you can identify these statements by forward-looking words such as “believe,” “expect,”

“project,” “anticipate,” “estimate,” “intend,” “plan,” “targets,”

“likely,” “will,” “would,” “could,” “may,” “might,” the negative

of these words and other similar words.

All forward-looking statements

included in this Quarterly Report are made only as of the date thereof.

It is routine for our internal projections and expectations to

change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end

of the next quarter or year.

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

We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future

events or otherwise, except as required by law.

caution and advise readers that these statements are based on assumptions that may not be realized and involve risks and uncertainties

that could cause actual results to differ materially from the expectations and beliefs contained herein.

These risks include, among others,

the evolving impact and duration of the COVID-19 pandemic.

For a summary of these risks, see the risk factors included in the “Risk

Factors” section in this Quarterly Report and in our Annual Report on Form 10-K/A filed with the Securities and Exchange Commission

on May 10, 2021.

of Our Business

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

no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise,

except as required by law.

We caution and advise readers

that these statements are based on assumptions that may not be realized and involve risks and uncertainties that could cause actual results

to differ materially from the expectations and beliefs contained herein.

These risks include, among others, the evolving impact and duration

of the COVID-19 pandemic, global supply chain issues, including increased shipping, material, and labor costs, and the impact of production

and delivery issues on demand for our products.

For a summary of these risks, see the risk factors included in the “Risk Factors”

section in this Quarterly Report and in our Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on May 10,

Overview of Our Business

Our mission is to help people

feel and live better through innovative comfort solutions.

We are a digitally-native

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

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

Our business consists of

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

Our business consists of Purple

and its consolidated subsidiary, Purple LLC.

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

acquisition company under the name of GPAC.

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

company under the name of GPAC.

On February 2, 2018, Purple Inc.

consummated a transaction structured similar to a reverse

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

acquired an equity interest in Purple LLC and

became its sole managing member.

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

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

of any other member.

consummated a transaction structured similar to a reverse recapitalization

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

acquired an equity interest in Purple LLC and became its sole managing

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

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

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

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

A Stock that it sold.

At June 30, 2021, Purple Inc.

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

remaining 1%.

Pandemic Developments

InnoHold subsequently transferred

a portion of its Class B Units to permitted transferees and exchanged its remaining shares for shares of Class A Stock that it sold.

September 30, 2021, Purple Inc.

had a 99% economic interest in Purple LLC while other Class B Unit holders had the remaining 1%.

COVID-19 Pandemic Developments

The COVID-19 pandemic has

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the communities in which we operate.

Despite the ongoing challenges

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

We were able to continue serving our customers

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

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

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

As the shutdowns were lifted and stores began to

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

were experiencing prior to the COVID-19 pandemic.

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

by opening four new showrooms since the beginning of 2021.

Our supply chain has not

been significantly affected by COVID-19.

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

inventory on hand to meet our production needs.

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

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

We have experienced

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

We have also experienced some shipping delays

in the delivery of our product to our customers.

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

Although we have taken measures

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

Subject to certain

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

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

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

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

Also, we do not

know the impact proposed government mandated vaccine policies for employers will have on our workforce.

Subject to certain assumptions

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

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

continuing ramp up of store operations and our wholesale business, will be sufficient to cover our working capital requirements

and anticipated capital expenditures for the next 12 months.

While most state and local

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we utilize in reporting certain assets and liabilities.

Production Challenges

Recent Developments in our Business

Production and Demand Developments

During the second quarter

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

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

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

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

The Company exited the month of July with

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

The Company also expects

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

The Company is confident

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

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

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

condensed consolidated statements of income:

Three Months Ended June 30,

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

As a result, we experienced significantly reduced production levels causing shipment backlogs that unfavorably affected both second

and third quarter net revenues.

We exited the month of July with production from our existing machines back at planned levels and emerged

from our backlog position at the end of August.

We are confident that these mechanical and maintenance challenges are an isolated event

and will have no impact on our ability to scale production beyond 2021.

With our production back at planned levels, we were able to increase our finished goods inventory to adequate stock

levels to enable timely shipments to our customers.

However, even though we were

able to return to planned production capacity in the third quarter, our results of operations have not yet returned to expected levels,

which we believe is due primarily to slower than expected acceleration back to prior trending demand levels, as well as increases in the

costs of shipping, materials and labor.

We believe that the production challenges experienced in the second and third quarters adversely

affected the confidence of consumers and our wholesale partners in our ability to timely deliver our products, which resulted in reduced

orders and increased cancellations in both our DTC and wholesale channels.

Further, in an effort to manage costs as we worked to resolve

the production issues described above, we reduced our spending on marketing, which reduced demand for our products, particularly in our

In addition to adversely impacting demand for our products, these issues also interrupted our momentum in growth.

production has returned to normal and we have ramped up our marketing efforts, it is unclear how long it will take for demand, in both

our DTC and wholesale channels, to return to expected levels.

Given that we had not yet returned to normal levels by the end of the third

quarter of 2021, we expect such issues to adversely impact our operating results for the fourth quarter of 2021.

In addition to a slower recovery

to expected demand levels following our return to full production capacity, our business has also been adversely impacted by increases

in the cost of shipping, raw materials and labor.

While we are still able to obtain necessary materials when needed, the costs of such

materials have increased materially, consistent with general macroeconomic trends.

In addition, as experienced in other industries, in

order to remain competitive in hiring the labor necessary to maintain our production, we have had to increase wages and other compensation.

These increases in materials and labor costs have resulted in higher cost of goods sold and lower margins.

We believe that shipping, material

and labor costs will continue to remain at elevated levels or increase further in the foreseeable future.

In addition to the above issues,

we are also closely monitoring the impacts of COVID-19 and general economic conditions on global supply chain, manufacturing, and logistics

As inflationary pressures increase, we anticipate that our production and operating costs will similarly increase.

COVID-19 and other events, including port closures or labor shortages, have resulted in the continuation or worsening of manufacturing

and shipping costs, delays and constraints.

While most of our domestic suppliers have been able to continue operations and provide necessary

materials when needed, we have experienced some constraints from certain suppliers, with respect to both the availability and cost of

We have also experienced some delays in shipments from our suppliers.

Any significant delay or interruption in our supply chain

could impair our ability to meet the demands of our customers and could harm our business.

Mattress Firm Relationship

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.

The new agreement provides

opportunity for continued partnership and growth with Mattress Firm.

With this new agreement in place, our ability to work with new wholesale

customers will no longer be limited because of contractual exclusivity with specialty retailers and other constraints on entering markets

in which Mattress Firm conducts business, which creates new opportunities.

Operating Results for the Three Months Ended

September 30, 2021 and 2020

The following table sets forth

for the periods indicated, our results of operations and the percentage of total revenue represented in our condensed consolidated statements

of operations:

Three Months Ended September 30,

Revenues, net

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Other income (expense):

Interest expense

Interest income (expense), net

Other income, 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

Net income (loss) before income taxes

Net loss before income taxes

Income tax benefit

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

Net revenues increased $17.5

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

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

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

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

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

Our wholesale business was also favorably

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

operations caused by the pandemic.

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

of 2021 (see Isolated Production Challenges above).

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

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

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

Net revenues decreased $16.3

million, or 8.7%, to $170.8 million for the three months ended September 30, 2021 compared to $187.1 million for the three months ended

September 30, 2020.

We believe that third quarter 2020 revenues were positively impacted during the COVID-19 pandemic, as individuals

focused on home improvement activities, including purchasing mattresses and bedding products.

The year-over-year decrease in net revenues

consisted of DTC net revenues declining $21.4 million, or 15.9%, offset in part by net revenue growth of $5.1 million, or 9.6%, in our

wholesale business.

DTC net revenues were unfavorably impacted by the impact of production delays on our ability to manufacture and deliver

products to our DTC customers in the third quarter, as well as reduced demand in our DTC channel in the same period.

While our wholesale

business was favorably impacted by wholesale partner expansion combined with a reopening of wholesale partner doors, we also experienced

lower than expected demand from our wholesale customers.

We believe that wholesale and DTC demand were adversely affected by the production

issues we experienced in the second and third quarters of 2021, as our ability to manufacture and deliver our products to both DTC and

wholesale customers was interrupted.

In addition, in response to production delays we temporarily reduced our marketing spending, which

reduced demand for our products, particularly with respect to our DTC channel.

While we have returned to planned production and marketing

activities, it is unclear when customer demand will return to expected levels.

We currently anticipate that net revenues in the fourth

quarter of 2021 will continue to be adversely impacted by slower than anticipated recovery to prior demand levels.

Net revenues from a

product perspective reflected a $20.5 million decrease in mattress sales, a $3.8 million increase in other bedding product sales and a

$0.4 million increase in other product sales.

Cost of Revenues

The cost of revenues increased

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

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

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

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

same period in 2020.

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

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

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

$10.8 million, or 11.0%, to $109.7 million for the three months ended September 30, 2021 compared to $98.9 million for the three months

ended September 30, 2020.

This increase reflected an increase in direct material costs coupled with higher labor and overhead costs.

gross profit percentage decreased to 35.8% of net revenues for the three months ended September 30, 2021 compared to 47.2% for the same

period in 2020.

The decrease in our gross profit percentage was primarily impacted by inefficiencies as we worked to resolve production

issues, rising shipping, raw material and labor costs and a higher proportion of wholesale channel revenue, which carries a lower gross

margin than revenue from the DTC channel.

We anticipate that shipping, raw material and labor costs will remain at elevated levels or

continue to increase in the foreseeable future.

Marketing and Sales

Marketing and sales expenses

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

ended June 30, 2020.

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

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

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

Marketing and sales expense as a percentage

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

The higher percentage

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

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

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

and Administrative

decreased $2.4 million, or 4.6%, to $48.8 million for the three months ended September 30, 2021 from $51.2 million for the three months

ended September 30, 2020.

The decrease reflected a $10.1 million decrease in advertising spend in response to production delays, offset

in part by a $4.7 million increase in personnel costs related to planned growth of our workforce and a $3.0 million increase in other

marketing and sales expenses.

Marketing and sales expense as a percentage of net revenues was 28.6% for the three months ended September

30, 2021 compared to 27.4% for the comparative prior period.

The higher percentage in the current quarter was due in part to net revenues

being unfavorably impacted by production and demand issues, as described above.

General and Administrative

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

months ended June 30, 2020.

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

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

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

and Development

General and administrative

expenses increased $6.0 million, or 53.7%, to $17.0 million for the three months ended September 30, 2021 compared to $11.1 million for

the three months ended September 30, 2020.

The increase was primarily due to a $2.5 million increase in legal and professional fees associated

with increased expenses for consulting, professional staffing and executive placement costs, a $1.9 million increase in personnel costs

related to planned growth of our workforce, and a $1.5 million increase in all other expenses.

Research and Development

Research and development costs

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

June 30, 2020.

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

Operating Income

Operating income decreased

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

the three months ended June 30, 2020.

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

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

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

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

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

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

Interest expense in

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

in Fair Value – Warrant Liabilities

increased $0.1 million, or 5.7%, to $1.8 million for the three months ended September 30, 2021 from $1.7 million for the three months

ended September 30, 2020.

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

Operating Income (Loss)

Operating income (loss) decreased

$30.9 million to an operating loss of $6.6 million for the three months ended September 30, 2021 compared to operating income of $24.3

million for the three months ended September 30, 2020.

This decrease was primarily due to net revenues being unfavorably impacted during

the quarter by production and demand issues (as described above), increased costs and a higher proportion of wholesale channel revenue,

which carries a lower gross margin than revenue from the DTC channel.

Interest Expense

During the three months ended

September 30, 2021, interest expense totaling $0.8 million was offset by $0.8 million of capitalized interest, of which $0.6 million related

to periods prior to the third quarter of 2021 and was recorded as an out-of-period correction in the third quarter of 2021.

incurred interest expense of $1.2 million for the three months ended September 30, 2020.

The $0.4 million decrease

in interest expense was primarily due to the $35.0 million Related Party Loan, which carried an interest rate of 12.00%, being refinanced

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

Interest expense in 2021 also includes

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

Change in Fair Value –

Warrant Liabilities

On February 26, 2019, the

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We determined the fair value of the Incremental Loan Warrants to be $64.9 million

at June 30, 2020.

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

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

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

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

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

to a simultaneous private placement with the IPO.

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

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

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

The fair value of the public

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

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

at September 30, 2020.

During the three months ended September 30, 2020, we recognized a loss of $18.0 million in our condensed consolidated

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

There was no gain or loss on the Incremental Loan Warrants

for the three months ended September 30, 2021 as they were exercised in 2020.

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 simultaneous

private placement with the IPO.

We have accounted for these warrants as liabilities and recorded them at fair value on the date of the

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

million sponsor warrants outstanding at September 30, 2021 had a fair value of $9.0 million.

The fair value of the public and sponsor

warrants outstanding at September 30, 2020 was $188.5 million.

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

of $5.4 million in our condensed consolidated statement of operations related to a decrease in the fair value of the sponsor warrants

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

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

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

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

Receivable Agreement Expense

During the three months ended September 30, 2020, we

recognized a loss of $86.0 million in our condensed consolidated statement of operations related to an increase in the fair value of the

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

Loss on Extinguishment of Debt

On September 3, 2020, the

Company paid $45.0 million to retire, in full, all indebtedness related to Purple LLC’s 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, the

Company recognized a $5.8 million loss on extinguishment of debt during the three months ended September 30, 2020.

Tax Receivable Agreement Expense

We are party to a tax receivable

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

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

December 31, 2020, respectively.

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

state tax rate changes.

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

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

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

with the tax receivable agreement, the tax receivable agreement liability totaled $171.5 million and $172.0 million at September 30, 2021

and December 31, 2020, respectively.

During the third quarter of 2021, we realized $0.8 million of tax receivable agreement income due

to the impact of recording the 2020 provision to return adjustments.

Of the $90.2 million liability recorded during the three months ended

September 30, 2020, $89.7 million related to current period exchanges and was recorded as an adjustment to stockholders’ equity

and $0.6 was recorded to expense as it related to reestablishing the tax receivable agreement liability related to prior year exchanges.

Income Tax Benefit

Our income tax benefit was

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

This decrease

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

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

Noncontrolling

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

their aggregate ownership percentage.

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

their weighted average ownership percentage.

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

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

The decrease in the net income level attributed

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

approximately 1% at June 30, 2021.

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

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

statements of operations:

Six Months Ended June 30,

$2.5 million for the three months ended September 30, 2021, compared to $0.1 million for the three months ended September 30, 2020.

increase primarily resulted from a change in the effective tax rate due to a portion of the valuation allowance being released in 2020

and the change in fair value of the warrant liability which is treated as a permanent item for tax purposes.

Noncontrolling Interest

We attribute net income or

loss to the Class B Units in Purple LLC as a noncontrolling interest at their aggregate ownership percentage.

We calculate net income

or loss attributable to noncontrolling interests on a quarterly basis using their weighted average ownership percentage.

Net loss attributed

to noncontrolling interests was negligible for the three months ended September 30, 2021 compared to a net loss of $0.1 million for the

three months ended September 30, 2020.

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

from the noncontrolling ownership interest declining to approximately 1% for the three months ended September 30, 2021 from approximately

18% for the three months ended September 30, 2020.

Operating Results for the Nine Months Ended

September 30, 2021 and 2020

The following table sets forth

for the periods indicated, our results of operations and the percentage of total revenue represented in our statements of operations:

Nine Months Ended September 30,

Revenues, net

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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

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Net revenues increased $65.2

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

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

revenue growth of $66.3 million, or 107.6%.

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

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

Our wholesale business was also favorably impacted

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

caused by the pandemic.

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

2021 (see Isolated Production Challenges above).

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

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

was primarily driven by an increase in customer demand.

million, or 13.7%, to $539.8 million for the nine months ended September 30, 2021 compared to $474.6 million for the nine months ended

September 30, 2020.

This increase consisted of wholesale net revenues increasing $71.3 million, or 62.3%, offset in part by DTC net revenues

decreasing $6.1 million, or 1.7%.

Our wholesale business was favorably impacted by wholesale partner expansion combined with a reopening

of wholesale partner doors.

However, this favorable impact was offset by lower-than expected demand from our wholesale customers in the

third quarter of 2021, primarily due to production delays experienced in the second and third quarter of 2021, as described above.

net revenues were also unfavorably impacted by the impact of production and demand issues on second and third quarter net revenues.

increase in net revenues from a product perspective reflected a $37.8 million increase in mattress sales, a $19.0 million increase in

other bedding product sales and an $8.4 million increase in other product sales.

This growth was primarily driven by an increase in wholesale

customer demand.

However, we believe that wholesale and DTC demand were adversely affected by the production issues we experienced in

the second and third quarters of 2021, as our ability to manufacture and deliver our products to both DTC and wholesale customers was

In addition, in response to production delays, we temporarily reduced our marketing spending, which reduced demand for our

products, particularly with respect to our DTC channel.

While we have returned to planned production and marketing activities, it is unclear

when customer demand will return to expected levels.

We currently anticipate that net revenues in the fourth quarter of 2021 will continue

to be adversely impacted by slower than anticipated recovery to prior demand levels.

Cost of Revenues

The cost of revenues increased

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

June 30, 2020.

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

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

production and material costs.

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

46.9% for the comparative prior year period.

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

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

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

$58.0 million, or 23.1%, to $309.5 million for the nine months ended September 30, 2021 compared to $251.5 million for the nine months

ended September 30, 2020.

The increase, which was primarily due to a $32.7 million increase in direct material costs, a $21.3 million

increase in labor and overhead costs, and a $4.0 million increase in other costs, was primarily associated with increased product sales

and higher production, shipping, material and labor costs.

The gross profit percentage decreased to 42.7% of net revenues for the nine

months ended September 30, 2021 from 47.0% for the comparative prior year period.

The decrease in our gross profit percentage was primarily

driven by a higher proportion of wholesale channel revenue, which carries a lower gross margin than revenue from the DTC channel, rising

raw material and labor costs and the unfavorable impact of production issues.

While we have returned to planned production capacity, we

anticipate that shipping, raw material and labor costs will continue to remain at elevated levels or increase in the foreseeable future.

Marketing and Sales

Marketing and sales expenses

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

ended June 30, 2020.

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

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

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

Marketing and sales expense as a percentage

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

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

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

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

and Administrative

increased $35.7 million, or 28.1%, to $163.1 million for the nine months ended September 30, 2021 compared to $127.3 million for the nine

months ended September 30, 2020.

This increase reflected a $12.8 million increase in advertising costs due to higher advertising rates

in 2021 and advertising costs in the prior year second quarter being uncharacteristically low due to the pandemic, a $12.3 million increase

in personnel costs related to planned growth of our workforce and a $10.7 million increase in other marketing and sales expenses.

and sales expense as a percentage of net revenues was 30.2% for the nine months ended September 30, 2021 compared to 26.8% for the nine

months ended September 30, 2020.

The higher percentage of net revenues in the first nine months of 2021 was due in part to product sales

being unfavorably impacted by production and demand issues experienced in the second and third quarters of 2021, as described above, coupled

with higher advertising rates in 2021 and advertising costs in the prior year second quarter being uncharacteristically low because of

the pandemic.

General and Administrative

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

six months ended June 30, 2020.

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

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

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

and Development

General and administrative

expenses increased $26.7 million, or 97.8%, to $54.0 million for the nine months ended September 30, 2021 compared to $27.3 million for

the nine months ended September 30, 2020.

This increase was primarily due to a $16.8 million increase in legal and professional

fees related to offering costs, including underwriting commissions related to shares sold by Coliseum Capital Partners, and increased

expenses for consulting, professional staffing and executive placement costs, a $5.3 million increase related to planned increases

in our workforce, and a $4.6 million increase in all other expenses.

Research and Development

Research and development costs

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

increased $0.7 million, or 15.2%, to $5.4 million for the nine months ended September 30, 2021 from $4.7 million for the nine months ended

September 30, 2020.

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

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Operating income decreased

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

ended June 30, 2020.

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

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

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

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

the six months ended June 30, 2020.

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

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

interest rate of 3.50%.

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

and fees related to the revolving line of credit.

in Fair Value – Warrant Liabilities

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

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

We accounted for the Incremental Loan Warrants as liabilities and recorded them at fair value on the date of the transaction

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

We determined

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

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

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

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

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

to a simultaneous private placement with the IPO.

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

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

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

The fair value of the public

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

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

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

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

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

$55.9 million, or 87.8%, to $7.8 million for the nine months ended September 30, 2021, from operating income of $63.7 million for the

nine months ended September 30, 2020.

This decrease was primarily due to net revenues being unfavorably impacted by production and demand

issues in the second and third quarters of 2021, increased costs and a higher proportion of wholesale channel revenue, which carries a

lower gross margin than revenue from the DTC channel.

Interest Expense

Interest expense totaled $1.1 million

for the nine months ended September 30, 2021 as compared to $4.0 million for the nine months ended September

Interest expense in 2021 was offset in part by $0.8 million of capitalized interest of which $0.6 million related to periods

prior to the third quarter of 2021 and was recorded as an out-of-period correction in the third quarter of 2021.

The $2.9 million

decrease was also due to the $35.0 million Related Party Loan, which carried an interest rate of 12.00%, being refinanced in the third

quarter of 2020 with a $45.0 million term loan at an initial interest rate of 3.50%.

Interest expense in 2021 also includes amortization

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

Change in Fair Value – Warrant Liabilities

On February 26, 2019, the

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

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

We accounted for the Incremental Loan Warrants

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

date with changes in the fair value included in earnings.

We determined the fair value of the Incremental Loan Warrants to be $64.9 million

at September 30, 2020.

During the nine months ended September 30, 2020, we recognized a loss of $43.3 million in our condensed consolidated

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

There was no gain or loss on the Incremental Loan Warrants

for the nine months ended September 30, 2021 as they were all exercised in 2020.

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 simultaneous

private placement with the IPO.

We have accounted for these warrants as liabilities and recorded them at fair value on the date of the

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

million sponsor warrants outstanding at September 30, 2021 had a fair value of $9.0 million.

The fair value of the public and sponsor

warrants outstanding at September 30, 2020 was $188.5 million.

During the nine months ended September 30, 2021, we recognized a gain of

$19.4 million in our condensed consolidated statement of operations related to a decrease in the fair value of the sponsor warrants exercised

during the nine-month period or that were outstanding at September 30, 2021.

During the nine months ended September 30, 2020, we recognized

a loss of $169.3 million in our condensed consolidated statement of operations related to an increase in the fair value of the public

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

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

Loss on Extinguishment of Debt

On September 3, 2020, the

Company paid $45.0 million to retire, in full, all indebtedness related to Purple LLC’s 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, the

Company recognized a $5.8 million loss on extinguishment of debt during the nine months ended September 30, 2020.

Tax Receivable Agreement Expense

The tax receivable agreement

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

During the first six months

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

Of the total $78.2 million liability

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

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

related to prior year exchanges.

liability totaled $171.5 million and $172.0 million at September 30, 2021 and December 31, 2020, respectively.

During the first nine months

of 2021, we realized $0.6 million of tax receivable agreement income due to the impact of recording the 2020 provision to return adjustments.

Of the $168.3 million liability recorded during the nine months ended September 30, 2020, $134.9 million relates to current year exchanges

and was recorded as an adjustment to stockholders’ equity and $33.5 million was recorded to expense as it related to reestablishing

the tax receivable agreement liability related to prior year exchanges.

Income Tax Benefit (Expense)

Income tax expense was $1.0

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

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

the decrease in noncontrolling interest.

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

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

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

million for the nine months ended September 30, 2021, compared to an income tax benefit of $35.8 million for the nine months ended September

Income tax expense for the nine months ended September 30, 2021 was primarily the result of no longer having a full valuation

allowance, the decrease in noncontrolling interest, and the change in fair value of the warrant liability which is treated as a permanent

item for tax purposes.

The income tax benefit in the comparative prior nine-month period was primarily due to a portion of the valuation

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

during the nine months ended September 30, 2020.

Noncontrolling Interest

We attribute net income or

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

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

ownership percentage.

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

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

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

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

Net income attributed to noncontrolling

interests was $0.1 million for the nine months ended September 30, 2021, compared to $7.2 million for the nine months ended September

This decrease is the result of the noncontrolling interest ownership percentage being significantly lower in 2021 than 2020.

Liquidity and Capital Resources

Our primary cash needs have

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

Our working capital needs depend upon the timing of

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

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

million, respectively, as of December 31, 2020.

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

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

This increase primarily resulted from continuing to

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

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

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

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

to preserve liquidity.

We ended most of the cash preservation programs and returned to full production to meet increased demand during

the second half of 2020.

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

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

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

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

September 3, 2020, we paid $45.0 million to retire, in full, all indebtedness related to Purple LLC’s 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.

Our primary cash needs have historically consisted of working capital,

capital expenditures and debt service.

Our working capital needs depend upon the timing of cash receipts from sales, payments to vendors

and others, changes in inventories, and operating lease payment obligations.

Our cash and working capital positions were $83.6 million

and $74.9 million, respectively, as of September 30, 2021 compared to $123.0 million and $96.9 million, respectively, as of December 31,

Inventories as of September 30, 2021 totaled $84.0 million compared with $65.7 million as of December 31, 2020 as production returned

to planned levels and we were able to increase our finished goods inventory to adequate stock levels to enable timely shipments to our

Cash used for purchases of property and equipment increased from $14.2 million during the first nine months of 2020 to $40.1

million during the first nine months of 2021.

This increase primarily resulted from continuing to invest in our business by building out

our new manufacturing facility in Georgia that began operations in March 2021, enhancing our manufacturing capabilities in Utah, scaling

our infrastructure to support the growth of our workforce, and opening 11 new Company showrooms during the first nine months of 2021.

In response to the COVID-19

pandemic, we took a number of precautionary measures to manage our resources and mitigate its adverse impact.

Given the initial difficulty

in predicting how long the pandemic would persist and its full impact, we managed our business and opportunities to preserve liquidity.

In the second half of 2020, we ended most of the cash preservation programs and returned to full production to meet increased demand.

During 2021, we have increased our inventory levels and invested in our manufacturing capacity and showroom expansion.

Subject to certain

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

we believe our cash on hand, ongoing cash generated from our DTC business, amounts available under our line of credit, increasing

demand of our products in the wholesale channel and continuing ramp up of store operations, will be sufficient to cover

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

On September 3, 2020, we paid

$45.0 million to retire, in full, all indebtedness related to Purple LLC’s 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.

Also on September 3, 2020,

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

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

Proceeds from the Term Loan were

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

During the six months ended

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

of Class A Stock.

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

Proceeds from the Term Loan

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

During the nine months ended

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

shares of Class A Stock.

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

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

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

expenses based on our ability to scale back operations, reduce marketing spend and postpone or discontinue our growth strategies.

such event, this could result in slower growth or no growth, and we may run the risk of losing key suppliers, we may not be able to timely

satisfy customer orders, and we may not be able to retain all of our employees.

In addition, we may be forced to restructure our obligations

to current creditors or pursue work-out options.

cash flow from operations or available financing under the 2020 Credit Agreement are not sufficient to fund our operating expenses or

our growth strategies, we may need to raise additional capital.

Our ability to obtain additional or alternative capital on acceptable

terms or at all is subject to a variety of uncertainties, including instability in the credit and financial markets resulting from the

COVID-19 pandemic, political or social unrest, other macroeconomic factors and approval from the lenders under the 2020 Credit Agreement.

Adequate financing may not be available or, if offered, may only be available on unfavorable terms.

The restrictive covenants in the

2020 Credit Agreement may make it difficult to obtain additional capital on terms that are favorable to us, and we may not be able to

satisfy the conditions necessary to obtain additional funds pursuant to the revolving credit facility under the 2020 Credit Agreement.

At September 30, 2021, there were 1.9 million sponsor

warrants outstanding.

In the event our cash flow from operations or other sources of financing

are less than anticipated, we believe we will be able to fund operating expenses based on our ability to scale back operations, reduce

marketing spend and postpone or discontinue our growth strategies.

In such event, this could result in slower growth or no growth, and

we may run the risk of losing key suppliers, we may not be able to timely satisfy customer orders, and we may not be able to retain all

of our employees.

In addition, we may be forced to restructure our obligations to current creditors or pursue work-out options.

On November 8, 2021, we provided

notice to KeyBank National Association requesting a $55.0 million draw on our revolving line of credit under the 2020 Credit Agreement,

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%.

As described above, we experienced

production and demand issues in the second and third quarters of 2021 that adversely affected net revenues.

We have also experienced increases

in shipping, raw material and labor costs.

While we have returned to planned production levels, we currently anticipate that the impact

of lower-than-expected demand and higher shipping, material and labor costs will continue to adversely affect our business and results

of operations through the fourth quarter of 2021.

These issues may adversely affect our ability to comply with covenants under the 2020

Credit Agreement, which could result in our default under such covenants.

If we are unable to comply with the covenants and other conditions

under the 2020 Credit Agreement, we will need to seek a waiver or amendment to avoid a default.

However, we may not be able to obtain

such a waiver or amendment or may be required to incur additional expenses or accept unfavorable terms.

If cash flow from operations

or available financing under the 2020 Credit Agreement are not sufficient to fund our operating expenses or our growth strategies, we

may need to raise additional capital.

Our ability to obtain additional or alternative capital on acceptable terms or at all is subject

to a variety of uncertainties, including instability in the credit and financial markets resulting from macroeconomic factors and approval

from the lenders under the 2020 Credit Agreement.

Adequate financing may not be available or, if offered, may only be available on unfavorable

The restrictive covenants in the 2020 Credit Agreement may make it difficult to obtain additional capital on terms that are favorable

to us, and we may not be able to satisfy the conditions necessary to obtain additional funds pursuant to the revolving credit facility

under the 2020 Credit Agreement.

There is no assurance we will obtain the capital we require.

As a result, there can be no assurance that we will be able to fund our

future operations or growth strategies.

In addition, future equity or debt financings may require us to also issue warrants or other

equity securities that are likely to be dilutive to our existing stockholders.

Newly issued securities may include preferences or superior

voting rights or, as described above, may be combined with the issuance of warrants or other derivative securities, which each may have

additional dilutive effects.

Furthermore, we may incur substantial costs in pursuing future capital and financing, including investment

banking fees, legal fees, accounting fees, printing and distribution expenses and other costs.

We may also be required to recognize non-cash

expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our

financial condition.

If we cannot raise additional funds on favorable terms or at all, we may not be able to carry out all or parts of

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

As a result, there can be no assurance that

we will be able to fund our future operations or growth strategies.

In addition, future equity or debt financings may require us to also

issue warrants or other equity securities that are likely to be dilutive to our existing stockholders.

Newly issued securities may include

preferences or superior voting rights or, as described above, may be combined with the issuance of warrants or other derivative securities,

which each may have additional dilutive effects.

Furthermore, we may incur substantial costs in pursuing future capital and financing,

including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs.

We may also be required

to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will

adversely impact our financial condition.

If we cannot raise additional funds on favorable terms or at all, we may not be able to carry

out all or parts of our long-term growth strategy, maintain our growth and competitiveness or continue in business.

We are required to make certain

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the tax receivable agreement.

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

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

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

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

of cash flows (in thousands):

Six Months Ended

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

balance sheet is $171.5 million of which $5.9 million is classified as other current liabilities in the condensed consolidated balance

Cash Flows for the Nine months Ended September

30, 2021 and 2020

The following summarizes our

cash flows for the nine months ended September 30, 2021 and 2020 as reported in our condensed consolidated statements of cash flows (in

Nine Months Ended

September 30,

Net cash provided by operating activities

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Cash, end of the period

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

Nine months ended September 30, 2021 Compared

to the Nine months ended September 30, 2020

Cash provided by operating

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

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

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

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

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

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

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

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

and planned increases in our workforce.

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

June 30, 2020.

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

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

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

activities was minimal during the nine months ended September 30, 2021 compared to $87.4 million for the nine months ended September 30,

The decrease in cash provided by operations primarily resulted from a $49.9 million decrease in cash provided by operating income

which was mainly driven by net revenues being unfavorably impacted by production and demand issues experienced in the second and third

quarters of 2021, coupled with higher marketing and sales expenses, increased legal and professional fees and planned increases in our

The decrease in cash provided by operations was further impacted by a $37.3 million decrease in operating cash flows related

to net changes in operating assets and liabilities for the nine months ended September 30, 2021 compared to the corresponding nine-month

period in the prior year.

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

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

and other assets.

We currently anticipate that our operating results for the fourth quarter of 2021, including cash provided by operating

activities, will continue to be adversely impacted by slower recovery to prior demand levels, and rising shipping, material and labor

Cash used in investing activities

was $41.5 million for the nine months ended September 30, 2021 compared to $25.1 million for the nine months ended September 30, 2020.

increase primarily resulted from continuing to invest in our business by building out our new manufacturing facility in Georgia that began

operations in March 2021, enhancing our manufacturing capabilities in Utah, scaling our infrastructure to support the growth of our workforce,

and opening 11 new Company showrooms during the first nine months of 2021.

Cash provided by financing

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

during the six months ended June 30, 2020.

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

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

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

Accounting Policies

activities during the nine months ended September 30, 2021 was $2.0 million compared to $2.2 million of cash provided by financing activities

during the nine months ended September 30, 2020.

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

from an InnoHold indemnification payment and $1.2 million of proceeds from warrant and stock option exercises, offset in part by $1.7

million in principal payments on the Term Loan, member tax distributions of $1.0 million and a $0.6 million payment for the tax receivable

Critical Accounting Policies

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

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accounting policies since the end of fiscal 2020.

Off-Balance-Sheet Arrangements

and Contractual Obligations

As of June 30, 2021, we were

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

Also, there was no balance

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

Off-Balance-Sheet Arrangements and Contractual

As of September 30, 2021,

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

there was no balance outstanding on our $55.0 million revolving credit facility as of September 30, 2021.

There have been no material

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

the quarterly period ended March 31, 2021.

and Cyclicality

believe that sales of our products are typically subject to seasonality corresponding to different periods of the consumer spending cycle,

holidays and other seasonal factors.

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

for the quarterly period ended March 31, 2021.

Seasonality and Cyclicality

We believe that sales of our

products are typically subject to seasonality corresponding to different periods of the consumer spending cycle, holidays and other seasonal

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

Available Information

Our website address is www.purple.com.

3 unchanged sentences

furnish it to, the SEC.

We also use the Investor

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

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

calls and webcasts.

We also use the Investor Relations

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

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

and webcasts.

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

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

Not Applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis