What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-01 compared with 2021-03-11 · 622 added, 590 removed, 42 unchanged (97% of the section changed)

Management’s Discussion

and Analysis of Financial Condition and Results of Operations

The following discussion

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

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Annual Report on Form

10-K, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking

statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933,

as amended (the “Securities Act”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

statements other than statements of historical facts are statements that could be deemed forward-looking statements.

These statements

are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and

assumptions of our management.

Words such as “expects,” “anticipates,” “targets,” “goals,”

“projects,” “intends,” “plans,” “believes,” “momentum,” “seeks,”

“estimates,” “continues,” “endeavors,” “strives,” “may,” variations of such

words, and similar expressions are intended to identify such forward-looking statements.

In addition, any statements that refer to projections

of our future financial performance, our anticipated growth and trends in our businesses (including the discussion under the heading “Outlook

for Growth”), and other characterizations of future events or circumstances are forward-looking statements.

Readers are cautioned

that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult

to predict, including those under “Part I, Item 1A.

Risk Factors,” and elsewhere herein.

Therefore, actual results may

differ materially and adversely from those expressed in any forward-looking statements.

We undertake no obligation to revise or update

any forward-looking statements for any reason.

following discussion is intended to provide a more comprehensive review of the operating results and financial condition of Purple than can be obtained from reading the Consolidated Financial Statements alone.

The discussion should be read in conjunction with

1 unchanged sentence

Financial Statements.”

Overview of Our Business

Our mission is to help

people feel and live better through innovative comfort solutions.

We are a digitally-native vertical brand founded on comfort

product innovation with premium offerings.

We design and manufacture a variety of innovative, branded and premium comfort products,

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

Our products are the result of over 30 years of innovation

and investment in proprietary and patented comfort technologies and the development of our own manufacturing processes.

Our proprietary

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

our offerings from other competitors’ products.

We market and sell our products through our direct-to-consumer (“DTC”)

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

The Company consists

of Purple Inc.

of Our Business

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

We are a digitally-native vertical brand founded on comfort product innovation

with premium offerings.

We design and manufacture a variety of innovative, branded and premium comfort products, including mattresses,

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

Our products are the result of over 30 years of innovation and investment in proprietary

and patented comfort technologies and the development of our own manufacturing processes.

Our proprietary gel technology, Hyper-Elastic

Polymer, underpins many of our comfort products and provides a range of benefits that differentiate our offerings from other competitors’

We market and sell our products through direct-to-consumer e-commerce and Purple retail showrooms and retail brick-and-mortar

wholesale partners.

Company consists of Purple Inc.

and its consolidated subsidiary, Purple LLC.

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

purpose acquisition company under the name of GPAC.

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

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

was incorporated in Delaware on May 19, 2015

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

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

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

acquired an equity interest

in Purple LLC and became its sole managing member.

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

and directors, is responsible for all operational and administrative decision making and control of the day-to-day business affairs

of Purple LLC without the approval of any other member.

In connection with the Business Combination, InnoHold retained an 82%

economic interest in Purple LLC.

InnoHold subsequently transferred a portion of its Class B Units to permitted transferees and

exchanged its remaining shares for shares of Class A Stock that it sold.

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.

At December 31, 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 impacted many aspects of our operations,

directly and indirectly, including disruption of our employees, consumer behavior, distribution and logistics, our suppliers, and

the market overall.

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

holders had the remaining 1%.

Pandemic Developments

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

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

The scope and nature of these impacts continue to evolve.

Because of the COVID-19 pandemic, we have taken precautionary

measures to manage our resources and mitigate the adverse impact of the pandemic, which is intended to help minimize the risk to

our Company, employees, customers, and the communities in which we operate.

Employees at the Company’s headquarters and certain

other employees have been asked to work from home where possible, with only limited access given to employees to work in the office

when necessary.

For roles that require employees to be on-site, such as our manufacturing facility and distribution center, we

mandate protective equipment be worn, perform temperature testing at the start of each shift and again during the shift, contact

trace when risk of exposure is known, stagger shifts to reduce concentration of employees, follow social distancing guidelines

and sanitize daily including complete weekly anti-viral fumigation.

The State of Utah is where all our manufacturing operations

took place as of December 31, 2020.

If the State of Utah, as part of its efforts to control the resurgence of COVID-19, requires

us to close our facilities temporarily or to reduce the number of employees working in our manufacturing facility at a given time,

our business and operations could be significantly adversely affected.

Despite the ongoing challenges from COVID-19, the Company has

been able to capitalize on the opportunities created by this situation.

We continue to serve our customers through our DTC channel,

which has remained strong throughout the year as consumer demand for our premium, differentiated product offerings shifted to our

We continue to focus our efforts in our DTC core competencies resulting in a continued strength in DTC channel sales

across all our product categories throughout the year.

This increase in demand was a contributing factor to DTC net revenue growth

of 83.0% over the prior year.

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

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

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

As the shutdowns were lifted and stores began

to open again, demand through the wholesale channel increased such that our net revenue from wholesale customers during the last

six months of fiscal 2020 increased 8.1% over the prior year comparative six-month period.

We currently have all our showrooms

open and servicing our customers.

Also, in July 2020, we signed a new lease for a manufacturing facility in Georgia and began operations

on March 3, 2021 and for the remainder of 2021 will ramp up to planned capacity of four Mattress Max machines.

The increase in demand

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

We continue to take advantage

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

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

trends as they develop.

Our supply chain has

not been significantly affected by COVID-19.

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

sufficient inventory on hand.

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

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

We have experienced some constraints

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

We have also experienced some shipping delays in the delivery

of our product to our customers.

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

Although the Company

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

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

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

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

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

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

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

Whereas most state

and local governments have eased restrictions on commercial retail activity, it is possible that a resurgence in COVID-19 cases

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

We also do not yet know the impact that vaccines

may have in mitigating or ending the outbreak of COVID-19, or how the availability of such vaccines may affect our work force.

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

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

Therefore, significant

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

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

Significant Transactions in 2020

Financing Activities

On September 3, 2020,

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

3, 2018 with the Lenders and all subsequent amendments and agreements (collectively referred to as 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, the Company recognized a $5.8 million loss on extinguishment of debt in its 2020 consolidated

statement of operations.

On September 3, 2020,

Purple LLC entered into the 2020 Credit Agreement with the Institutional Lenders, KeyBank National Association and a group of

financial institutions that provided for a $45.0 million term loan (the “Term Loan”) and a $55.0 million revolving

Because of the COVID-19 pandemic, we have taken precautionary measures recommended by the appropriate national and state health agencies

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

employees, customers, and the communities in which we operate.

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

COVID-19 will stay in effect.

We may elect or be required to take additional measures as the information available to us continues to

develop, including with respect to our employees, manufacturing facilities and distribution centers, and relationships with our suppliers

and customers.

Based on our current projections, subject to certain assumptions regarding the duration and severity of the COVID-19 pandemic,

and government, consumer, and our responses thereto, we believe our cash on hand and ongoing cash generated from our e-commerce, wholesale

and retail showroom sales channels will be sufficient to cover our working capital requirements and anticipated capital expenditures

for the next 12 months.

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

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

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

continued economic weakness may eventually have an adverse

impact upon the industry and our business.

Therefore, significant uncertainty remains regarding the ongoing impact of the COVID-19

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

utilize in reporting certain assets and liabilities.

Developments in Our Business

and Demand Developments

the second quarter of 2021, following an accident that resulted in the death of an employee and subsequent safety improvements involving

the Mattress Max machines, we encountered isolated production challenges caused by unanticipated mechanical and maintenance issues when

bringing the machines back online.

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.

With our production back at planned levels, we were

able to increase our finished goods inventory to adequate stock levels that enabled us to resume timely shipments to our customers during

the latter part of the third quarter.

Even though we were able to

return to planned production capacity in the third quarter, our results of operations did not return to expected levels, which we believe

was primarily due to slower than expected acceleration back to prior trending demand levels.

We also 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 from e-commerce, wholesale and Purple retail

showroom customers.

Further, in an effort to manage costs as we worked to resolve the production issues described above, we initiated

a reduction in marketing spend late in the second quarter that carried through most of the third quarter, which further negatively affected

demand for our products, particularly in our e-commerce sales channel.

In addition to adversely impacting immediate demand, these issues

also interrupted our momentum in growth for future periods.

Although we did generate net revenue growth of 7.2% in the fourth quarter

compared to the prior year fourth quarter, we experienced an operating loss in the quarter due to lower gross margins, higher marketing

costs and an increase in general and administrative expenses.

While our production and marketing efforts returned to planned levels in

the fourth quarter, post-pandemic demand is shifting away from e-commerce and back towards retail brick-and-mortar.

We believe this shift

will continue through 2022.

In addition to a slower recovery to expected

demand levels following our return to full production capacity and shift in demand from e-commerce to physical stores, our business has

also been adversely impacted by increases in raw material, labor and freight costs.

While we are still able to obtain necessary materials

when needed, the costs of such materials have increased significantly, 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 raw material, labor and freight costs will continue to remain at elevated levels or increase further in

the foreseeable future.

In order to offset the impact of these costs on our gross margins, we have taken a number of pricing actions

in the fourth quarter and early 2022.

In February 2022, we completed a restructuring of our workforce that was necessitated by a realignment

of our cost structure.

As a result of the realignment and restructuring, we reduced employee headcount by approximately 15%.

we have initiated a number of other projects to improve efficiencies and reduce costs.

Following several years of hyper growth and increased

investments to support current and future expansion, we are now focusing on right-sizing our operations, improving our execution and

refining our strategies to drive profitable growth in the current market environment.

We are also closely monitoring

the impacts of COVID-19 and general economic conditions on global supply chain, manufacturing, and logistics operations.

As inflationary

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

In addition, 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 materials.

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 negatively impact our business.

Firm Relationship

November 8, 2021, Purple LLC and Mattress Firm agreed to terminate the September 2018 retailer agreement and replace it with a new agreement

that has terms consistent with the Company’s standard retailer agreement.

This new agreement provides opportunity for continued

partnership and growth with Mattress Firm while also eliminating the prior exclusivity arrangements.

With the constraints on entering

markets in which Mattress Firm conducts business no longer in place, this creates opportunities to partner with new specialty retailers

that were previously not available to us.

Line of Credit

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

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

As of December 31, 2020, 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.

Warrant Liability

On February 26, 2019,

the Incremental Lenders funded a $10.0 million increase in the Related Party 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.

The Company 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.

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

warrants held by the Incremental Lenders.

The Company determined the fair value of these warrants to be $81.0 million at the time

of the exercise.

The fair value of the warrants was $21.6 million at December 31, 2019.

During the year ended December 31, 2020,

the Company recognized a loss of $59.4 million in its consolidated statement of operations related to the increase in the fair

value of the warrants.

Tax Receivable Agreement

In connection with

the Business Combination, we entered into the Tax Receivable Agreement which generally provides for the payment by us to InnoHold

of 80% of certain tax benefits, if any, that we realize as a result of increases in our allocable share of the tax basis of the

tangible and intangible assets of Purple LLC.

As a result of the initial merger transaction, 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, we increased the Tax Receivable Agreement liability from $0.5 million at December 31, 2019 to $172.0 million at December

Of this $171.5 million increase, $137.3 million relates to current year exchanges and was recorded as a decrease to

additional paid-in capital in the 2020 consolidated statement of stockholders’ equity and $34.2 million was recorded in

the 2020 consolidated statement of operations as tax receivable agreement expense to re-establish the liability related to prior

year exchanges.

As of December 31, 2020, approximately 99% of the Class B Units have been exchanged.

Public and Sponsor Warrants

There were 15.5 million

public warrants (the “Public Warrants”) issued in connection with GPAC’s formation and initial public offering

(“IPO”) and 12.8 million warrants (the “Sponsor Warrants”) issued pursuant to a private placement simultaneously

with the IPO.

Each of the Company’s warrants entitled 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 each warrant

During the year ended December 31, 2020, 15.5 million Public Warrants and 4.3 million Sponsor Warrants were exercised

resulting in the issuance of 7.6 million shares of Class A Stock and cash proceeds to the Company of $46.4 million.

31, 2020, there were 8.5 million warrants outstanding all of which were Sponsor Warrants.

Income Tax Benefit

During the year ended

December 31, 2020, the Company recognized an income tax benefit of $43.7 million due to the release of federal and state valuation

allowances and the recognition of deferred tax assets as of December 31, 2020.

No income tax benefit was recorded during

the year ended December 31, 2019 as the Company had a full valuation allowance on the deferred tax assets.

Critical Accounting Policies and Estimates

The discussion and

analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been

prepared in accordance with accounting principles generally accepted in the United States.

We believe the following are the more

critical accounting policies that impact our consolidated financial statements, some of which are based on management’s best

estimates available at the time of preparation.

Actual future experience may differ significantly from these estimates.

Revenue Recognition

The Company markets

and sells its products through DTC online channels, traditional wholesale partners, third-party online retailers, and Company

Revenue is recognized when the obligations under the terms of the contract with

the customer are satisfied, which is generally when control of the product has transferred to the customer.

Transferring control

of each product sold is considered a separate performance obligation.

The Company transfers control and recognizes a sale when

the product ships to the customer or when the customer receives the product based upon agreed shipping terms.

Each unit sold is

considered an independent, unbundled performance obligation.

The Company does not have any additional performance obligations

other than product sales that are material in the context of the contract.

The Company’s revenue recognition accounting

methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the amount

and timing of future sales returns and uncollectible accounts.

The Company’s estimates of the amount and timing of sales

returns and uncollectible accounts are based primarily on historical transaction experience.

The Company does not believe there

is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to establish the liability

for sales returns and exchanges and credit losses.

However, if actual results are not consistent with the Company’s estimates

or assumptions, it may be exposed to losses or gains that could be material.

Sales Returns

The Company offers

up to 100 days to return a mattress, pet bed or pillow and 30 days to return all other products (except power bases) for a full

The Company’s policy grants to customers a right of return requiring the Company to reduce the amount of the revenue

recognized by the amount of the estimated returns.

The estimated sales returns, which are recorded as a reduction of revenue at

the time of sale and are recorded as a liability on the balance sheet, are based on historical trends and product return rates

and are adjusted for any current or expected trends as appropriate.

Actual sales returns could differ from these estimates.

Company regularly assesses and adjusts the estimate of accrued sales returns by updating the return rates for actual trends and

projected costs.

The Company classifies the estimated sales returns as a current liability as they are expected to be paid out

in less than one year.

Warranty Liabilities

The Company provides

a limited warranty on most of the products sold.

The estimated warranty costs, which are expensed at the time of sale and included

in cost of revenues, are based on the results of product testing, industry and historical trends and warranty claim rates incurred

and are adjusted for any current or expected trends as appropriate.

Actual warranty claim costs could differ from these estimates.

The Company regularly assesses and adjusts the estimate of accrued warranty claims by updating claims rates for actual trends and

projected claim costs.

The Company classifies as non-current those estimated warranty costs expected to be paid out in greater

than one year.

Liability Warrants

The Company accounts

for liability warrants under the provisions of the Financial Accounting Standards Board Accounting Standards Codification (“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.

The Incremental Loan Warrants issued to the Incremental

Lenders contained a warrant 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.

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 used 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.

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.

During fiscal 2020, the Company achieved three-year cumulative income for the first

time and determined that it would likely generate sufficient taxable income to utilize some of its deferred tax assets.

this and other positive evidence, the Company concluded it was more likely than not that some of its deferred tax assets would

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

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.

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

that provided for a $45.0 million term loan and a $55.0 million revolving line of credit.

In November 2021, the Company executed a $55.0

million draw on its revolving line of credit, which represented the full amount available under the line.

The outstanding balance on

the revolving line of credit was classified as long-term debt in the Company’s consolidated balance sheet as of December 31, 2021.

First Amendment to 2020 Credit Agreement

Our operating and financial

results for the year ended December 31, 2021 did not satisfy our financial and performance covenants required pursuant to the 2020 Credit

In order to avoid a breach of such covenants and related default, on February 28, 2022, prior to the covenant compliance certification

date under the 2020 Credit Agreement, we entered into the first amendment of the 2020 Credit Agreement.

The amendment contains a covenant

waiver period such that the net leverage ratio and fixed charge coverage ratio will not be tested for the fiscal quarter ended December

31, 2021 through the fiscal quarter ended June 30, 2022.

Other changes in the amendment include modification of leverage ratio and fixed

charge coverage definitions and thresholds, the addition of minimum liquidity requirements with mandatory prepayments of the revolving

loan if cash exceeds $25.0 million, new weekly and monthly reporting requirements, limits on the amount of capital expenditures, the addition

of a lease incurrence test for opening additional showrooms, and additional negative covenants during a covenant amendment period that

will extend into 2023 until certain conditions are met.

In addition, the interest rate on outstanding borrowings under the 2020 Credit

Agreement changed from LIBOR with a floor of 0.5% plus an applicable margin (historically at 3.0%) to an initial rate of SOFR with a floor

of 0.5% plus 4.75%, for a total rate of 5.25% as long as the applicable liquidity threshold is met.

If it is not met, then the interest

rate goes to SOFR with a floor of 0.5% plus 9.00%.

Once the consolidated leverage ratio is below 3.00 to 1.00, the interest rate will

be based on SOFR with a floor of 0.5% plus a 3.00% to 3.75% depending on the consolidated leverage ratio.

Pursuant to the amendment, the

Company paid fees and expenses of $0.9 million and prepaid all principal payments due in 2022 of $2.5 million.

Outlook for Growth

To support our plans for future growth, we are initially focusing on the

following immediate opportunities:

Right-size labor force

and effectively manage labor

Manage capacity utilization

to promote efficient use of production facilities as we grow into production footprint

Develop and execute on

strategies to meaningfully expand our wholesale presence

Build premium brand position

to deliver 20% market share of the premium mattress category, from current approximately 11% market share

Manage input costs, operating

efficiencies, and pricing to offset gross margin erosion, with a goal to return gross margins to approximately the levels achieved

in 2020 by the end of 2022

Strengthen research and

development disciplines and go-to-market processes in order to expand our current categories and position our business to eventually

expand to adjacent categories

There is no guarantee that we will be able to effectively

execute on these opportunities, which are subject to risks, uncertainties, and assumptions that are difficult to predict, including the

risks described under “Part I, Item 1A.

Risk Factors” and elsewhere herein.

Therefore, actual results may differ materially

and adversely from those described above.

In addition, we may, in the future, adapt these focuses in response to changes in the market

or our business.

Accounting Estimates

connection with the preparation of our consolidated financial statements in conformity with U.S.

generally accepted accounting principles

(“GAAP”), we are required to make estimates and assumptions about future events and apply judgments that affect the reported

amounts of assets, liabilities, sales, expenses and the related disclosures.

Predicting future events is inherently an imprecise activity

and as such requires the use of judgment.

We base our assumptions, estimates and judgments on historical experience, current trends and

other factors that management believes to be relevant at the time our consolidated financial statements are prepared.

On a regular basis,

management reviews the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements

are presented fairly and in accordance with GAAP.

However, because future events and their effects cannot be determined with certainty,

actual results could differ from our assumptions and estimates, and such differences could be material.

believes the accounting estimates discussed below are the most critical because they require management’s most difficult, subjective

or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.

Company’s revenue recognition accounting methodology contains uncertainties because it requires management to make assumptions

and to apply judgment to estimate the amount and timing of future sales returns and uncollectible accounts.

The Company’s estimates

of the amount and timing of sales returns and uncollectible accounts are based primarily on historical transaction experience.

The Company’s

sales return liability decreased from $8.4 million at December 31, 2020 million to $7.1 million as of December 31, 2021.

The Company’s

allowance for doubtful accounts as of December 31, 2021

and 2020 was not material.

The Company does not believe there is a reasonable likelihood that there

will be any material changes in the accounting methodology, future estimates or assumptions used to measure the estimated liability for

sales returns and exchanges or credit losses.

However, if actual results are not consistent with the Company’s estimates or assumptions,

it may be exposed to losses or gains that could be material.

Company provides a limited warranty on most of the products it sells.

The estimated warranty costs, which are expensed at the time of

sale and included in cost of revenues, are based on the results of product testing, industry and historical trends and warranty claim

rates incurred and are adjusted for any current or expected trends as appropriate.

The Company regularly assesses and adjusts the estimate

of accrued warranty claims by updating claims rates for actual trends and projected claim costs.

The Company classifies as non-current

those estimated warranty costs expected to be paid out in greater than one year.

As of December 31, 2021, the current

and non-current portions of the Company’s warranty liabilities were $3.9 million and $11.1 million, respectively, compared

to $2.8 million and $5.6 million, respectively, at December 31, 2020.

We have not made any material

changes in the warranty liability assessment methodology used and we do not believe there is a reasonable likelihood that a material

change in the estimates or assumptions we use to calculate our warranty liability will occur.

However, if actual results are not consistent

with our estimates or assumptions, we may be exposed to losses or gains that could be material.

The Company accounts for the

sponsor warrants issued in connection with its initial public offering and simultaneous private placement as liabilities.

The liability

for these warrants was initially measured at fair value on the date of the Business Combination and is subsequently re-measured to fair

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

The Company uses the Black-Scholes

model to determine the fair value of the liability associated with the sponsor warrants.

The model uses key assumptions and inputs such

as exercise price, fair market value of common stock, risk free interest rate, warrant life and expected volatility.

This liability generally

increases or decreases based upon changes in the fair value of sponsor warrants outstanding at the end of a respective period and decreases

as sponsor warrants are exercised during the respective periods.

During 2021, this liability decreased from $92.7 million at December

31, 2020 to $4.3 million at December 31, 2021 due to $64.3 million related to the fair value of warrants exercised and $24.1 million associated

with changes in the valuation inputs.

We have not made any material changes in the valuation methodology

Although we do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used

to calculate this liability, a 10% increase in our stock price at December 31, 2021 would have increased the warrant liability by $0.9

for income taxes requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that

have been included in the financial statements or tax returns.

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.

During fiscal 2020, the Company achieved three-year cumulative

income for the first time and determined that it would likely generate sufficient taxable income to utilize some of its deferred tax

Based on this and other positive evidence, the Company concluded it was more likely than not that some of its deferred tax assets

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

The Company recognized deferred

tax benefits of $3.6 million and $45.8 million in its consolidated statements of operations for the years ended December 31, 2021 and

2020, respectively.

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

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of income taxes to the noncontrolling interest and changes in our valuation allowance .

The Company accounts

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

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

The tax benefit from an uncertain tax position

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

on technical merits of the position.

cases, we also base this estimate on business plan forecasts and other expectations about future outcomes.

Changes in positive and negative

evidence, including differences between our future operating results and estimates, could result in the establishment of an additional

valuation allowance against our deferred tax assets.

Accounting for deferred taxes is based upon estimates of future results.

is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and/or

Differences between the anticipated and actual outcomes of these future results could have a material impact on our consolidated

financial statements.

Also, changes in existing federal and state tax laws and corporate income tax rates could affect future tax results

and the realization of deferred tax assets over time.

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

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

The tax benefit from an uncertain

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

based on technical merits of the position.

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

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

The effective tax rate and the tax basis of

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

The Company recognizes

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

consolidated statements of operations.

Tax Receivable Agreement

In connection with

the Business Combination, the Company entered into the Tax Receivable Agreement, 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 of the Business Combination 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.

As noncontrolling interest

holders exercise their right to exchange or cause Purple LLC to redeem all or a portion of its Class B Units, a liability under

the Tax Receivable Agreement 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 under the Tax Receivable Agreement is by its nature imprecise and subject to significant assumptions

regarding the amount and timing of future taxable income.

As a result of the initial merger transaction,

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, we increased the Tax Receivable Agreement liability from $0.5 million at December

31, 2019 to $172.0 million at December 31, 2020.

Of this $171.5 million increase, $137.3 million relates to current year exchanges

and was recorded as a decrease to additional paid-in capital in the 2020 consolidated statement of stockholders’ equity and

$34.2 million was recorded in the 2020 consolidated statement of operations as tax receivable agreement expense to re-establish

the liability related to prior year exchanges.

Any additional changes to the existing TRA liability will be recorded through the

statement of operations.

As of December 31, 2020, approximately 99% of the Class B Units have been exchanged for Class A Stock.

Any changes as a result of the remaining exchanges of Class B Units would be recorded through equity.

Additionally, we estimated the amount of TRA Payments expected

to be paid within the next 12 months to be $6.5 million and classified this amount as a current liability in our 2020 Consolidated

Balance Sheet.

To the extent our estimate differs from actual results, we may be required to reclassify portions of our liabilities

under the Tax Receivable Agreement between current and non-current.

Operating Results for the Year Ended December 31, 2020 and

The following table

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

The effective tax rate and the tax basis of assets

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

is required in evaluating uncertain tax positions.

We evaluate our uncertain tax positions quarterly based on various factors, including

changes in facts or circumstances, tax laws or the status of audits by tax authorities.

Changes in the recognition or measurement of

uncertain tax positions could have a material impact on our consolidated financial statements in the period in which we make the change.

As of December 31, 2021 and 2020, no uncertain tax positions were recognized as liabilities in the consolidated financial statements.

Receivable Agreement

In connection with the Business

Combination, the Company entered into an agreement with InnoHold LLC (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 of the Business Combination 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 agreement.

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

a liability under the Tax Receivable Agreement 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.

a result of the initial merger transaction and subsequent exchanges of Class B Units for Class A Stock, the potential future tax receivable

agreement liability was $168.1 million as of December 31, 2021 compared to $172.0 million as of December 31, 2020.

In addition, we estimated

the amount of payments expected to be paid within the next 12 months to be $5.8 million and classified this amount as a current liability

in our 2021 Consolidated Balance Sheet, which was paid in January 2022.

To the extent our estimate differs from actual results, we may

be required to reclassify portions of our liabilities under this agreement between current and non-current.

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

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

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

the tax receivable agreement.

of Operations

discussion regarding our financial condition and results of operations for the year ended December 31, 2021 compared to the year

ended December 31, 2020 is presented below.

A separate discussion regarding our financial condition and results of operations for

the year ended December 31, 2020 compared to the year ended December 31, 2019 can be found under Item 7 of Part II of our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2020, filed with the SEC on May 10, 2021.

Results for the Year Ended December 31, 2021 compared to the year ended December 31, 2020

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

in our consolidated statements of operations:

Year Ended December 31,

6 unchanged sentences

Total operating expenses

Operating income

Operating income (loss)

Other income (expense):

Interest expense

Other income, net

Other income (expense), net

Loss on extinguishment of debt

Change in fair value – warrant liabilities

Tax receivable agreement expense

Total other expense, net

Net loss before income taxes

Tax receivable agreement income (expense)

Total other income (expense), net

Net income (loss) before income taxes

Income tax benefit (expense)

2 unchanged sentences

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

Revenues, net

Total net revenues

increased $220.1 million, or 51.4%, to $648.5 million for the year ended December 31, 2020 compared to $428.4 million for the

year ended December 31, 2019.

Despite the ongoing challenges related to the COVID-19 pandemic, the Company was able to capitalize

on the shift in customer demand and grew DTC net revenues by $220.1 million, or 83.0%, in 2020.

Net revenues from our wholesale

business totaled $163.2 million in both 2020 and 2019.

The sales growth we experienced from our wholesale business during the

first, third and fourth quarters of 2020 was offset by a sharp decline in net revenues during the second quarter as temporary

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

states negatively impacted sales

from our wholesale channel.

The increase in net revenues from a product perspective in 2020 consisted of a $145.7 million increase

in mattress sales, a $50.9 million increase in other bedding products and a $23.5 million increase in sales of other products.

Cost of Revenues

revenues increased $104.0 million, or 43.4%, to $343.4 million for the year ended December 31, 2020 from $239.4 million for

the year ended December 31, 2019.

The increase was primarily due to a $47.7 million increase in direct material costs, a

$23.4 million increase in labor and overhead, a $16.5 million increase in freight charges, a $10.5 million increase in

merchant processing fees, and a $5.9 million increase in other costs, all associated with increased sales.

The gross profit

percentage increased to 47.0% of net revenues for the year ended December 31, 2020 compared to 44.1% for the year ended

Net revenues increased $77.8

million, or 12.0%, to $726.2 million for the year ended December 31, 2021 compared to $648.5 million for the year ended December 31, 2020.

This increase primarily consisted of wholesale net revenues growing $88.8 million, or 54.5% and Purple retail showroom net revenues increasing

$21.9 million, or 207.9%.

These increases were offset in part by e-commerce net revenues decreasing $33.0 million, or 6.9%.

Our wholesale

business was favorably impacted by wholesale partner expansion coupled with wholesale partner doors being open all of 2021 while the prior

year was negatively impacted by the pandemic and the temporary shutdown of wholesale partner operations during 2020.

Net revenue growth

associated with the Purple retail showrooms was primarily due to the opening of new showrooms.

Net revenue growth overall was negatively

affected by the production issues we experienced in the second and third quarters of 2021, as our ability to manufacture and deliver our

products was adversely impacted, which resulted in reduced orders and increased cancellations.

Also, in response to these production delays,

we initiated a reduction in marketing spend late in the second quarter that carried through most of the third quarter, which further impacted

demand for our products, particularly with respect to our e-commerce channel.

The growth in net revenues from a product perspective, reflected

a $42.4 million increase in mattress sales, a $24.1 million increase in other sleep product sales and an $11.3 million increase in other

product sales, was primarily driven by an increase in wholesale and Purple retail showroom revenues.

We believe that sales of our products

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

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

The cost of revenues increased

$87.9 million, or 25.6%, to $431.3 million for the year ended December 31, 2021 compared to $343.4 million for the year ended December

This increase, which was comprised of a $50.9 million increase in direct material costs, a $31.8 million increase in labor and

overhead costs, and a $5.2 million increase in other costs, was primarily due to increased sales volume and higher raw material, labor

and freight costs.

Our gross profit percentage, which decreased to 40.6% of net revenues in 2021 from 47.0% in 2020, was adversely impacted

by the elevated level of our material, labor and freight costs, the unfavorable impact of inefficiencies realized as we worked to resolve

the production issues described above (see Production and Demand Developments above) and a higher proportion of wholesale channel revenue,

which carries a lower gross margin than revenue from the e-commerce channel.

While we have returned to planned production capacity, we

anticipate that raw material, labor and freight costs will continue to remain at elevated levels.

Marketing and sales expense

increased $51.3 million, or 27.3%, to $239.3 million for the year ended December 31, 2021 compared to $188.0 million for the year ended

December 31, 2020.

The improvement in 2020 gross profit was primarily driven by a higher proportion of DTC channel revenue,

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

Marketing and Sales

Marketing and sales

expenses increased $46.0 million, or 32.4%, to $188.0 million for the year ended December 31, 2020 from $142.0 million for the

year ended December 31, 2019.

The increase was due to a $26.1 million increase in advertising costs, a $12.2 million increase

in marketing salaries related to an increase in personnel and a $7.7 million increase in other marketing and sales expenses.

and sales expense as a percentage of net revenues was 29.0% for the year ended December 31, 2020 compared to 33.1% for the prior

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

advertising costs in the second and third quarters of 2020 and a temporary reduction in advertising spending as part of our COVID-19

related cash preservation initiatives in the second quarter of this year.

General and Administrative

This increase reflected a $19.4 million increase in advertising costs due in part to higher advertising rates in 2021,

a $22.3 million increase in marketing costs related primarily to planned expansion of our workforce, an $8.4 million increase in showroom-related

expenses associated with our continued showroom expansion, and a $1.2 million increase in wholesale-related marketing and selling costs.

Marketing and sales expense as a percentage of net revenues was 33.0% in 2021 compared to 29.0% in 2020.

This increase was primarily due

to demand levels and net revenue growth being lower than expected relative to the increase in marketing and sales costs we incurred in

and Administrative

General and administrative

expenses increased $13.0 million, or 48.3%, to $39.9 million for the year ended December 31, 2020 from $26.9 million for the year

expense increased $32.2 million, or 80.6%, to $72.1 million for the year ended December 31, 2021 compared to $39.9 million for the year

ended December 31, 2020.

This increase was primarily due to a $4.1 million increase in salaries related to an increase in personnel,

a $4.0 million increase in software subscriptions, a $2.7 million increase in legal fees related to InnoHold’s two secondary

public offerings that concluded in May 2020 and September 2020, a $1.9 million increase related to a new corporate building lease,

and $0.3 million in all other expenses.

Research and Development

Research and development

costs increased $2.1 million, or 54.1%, to $6.0 million for the year ended December 31, 2020 from $3.9 million for the year ended

December 31, 2019.

The increase was primarily due to $1.6 million in amortization of a one-year license agreement for innovative

technology and a $0.5 million increase in other research and development expenses as we added resources for new product innovation.

Operating Income

Operating income increased

$55.0 million, or 339.3%, to $71.2 million for the year ended December 31, 2020 from operating income of $16.2 million for the

This increase was primarily due to a $18.8 million increase in legal and professional fees, a

$6.6 million increase related to payroll costs attributed to planned increases in our workforce, and a $6.8 million

increase in all other expenses consistent with the growth of the Company.

The increase in legal and professional fees was primarily due

to underwriting commissions we paid related to shares sold by Coliseum Capital Partners coupled with higher consulting, professional and

recruiting expenses.

and Development

Research and development costs

increased $1.0 million, or 16.5%, to $6.9 million for the year ended December 31, 2021 from $6.0 million for the year ended December 31,

This increase was primarily due to an increase in payroll costs related to planned increases in our research and development workforce.

Income (Loss)

Operating income (loss) decreased $94.6

million to an operating loss of $23.4 million for the year ended December 31, 2021 compared to operating income of $71.2 million for the

year ended December 31, 2020.

The increase was primarily due to an increase in higher margin DTC sales coupled with lower marketing

and sales costs as a percentage of net revenues.

Interest Expense

Interest expense totaled

$4.7 million for the year ended December 31, 2020 as compared to $5.2 million for the year ended December 31, 2019.

The $0.5 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 the $45.0 million Term Loan at an initial interest rate of 3.50%.

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.

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 in its 2020 consolidated statement of

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

The Company concluded there were separate lenders for purposes of determining if there was an extinguishment or modification.

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

agreement and therefore required to be accounted for as an extinguishment of existing debt.

Accordingly, the Company recognized

a loss on the extinguishment of its existing debt of $6.3 million in its 2019 consolidated statement of operations.

non-cash expense primarily associated with the recognition of related unamortized debt discount and debt issuance costs and the

$4.9 million fair value of the Incremental Loan Warrants at the time of issuance.

Change in Fair Value – Warrant

On February 26, 2019, the Incremental Lenders from the 2018

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

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

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.

On November 9, 2020, the

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

The Company determined the fair value of the Incremental Loan Warrants to be $81.0 million at the time of the exercise.

value of the warrants was $21.6 million at December 31, 2019.

During the years ended December 31, 2020 and 2019, the Company recorded

losses related to increases in the fair value of the warrants of $59.4 million and $16.8 million, respectively.

Tax Receivable Agreement Expense

In connection with

the Business Combination, we entered into an agreement which generally provides for the payment by us to InnoHold of 80% of certain

tax benefits, if any, that we realize as a result of increases in our allocable share of the tax basis of the tangible and intangible

assets of Purple LLC.

As a result of the Business Combination, subsequent exchanges of 43.5 million Class B Units for Class A

Stock and changes in estimates relating to the expected tax benefits associated with the Tax Receivable Agreement, we increased

the Tax Receivable Agreement liability from $0.5 million at December 31, 2019 to $172.0 million at December 31, 2020.

$171.5 million increase, $137.3 million relates to current year exchanges and was recorded as a decrease to additional paid-in

capital in the 2020 consolidated statement of stockholders’ equity and $34.2 million was recorded as tax receivable agreement

expense to re-establish the liability related to prior year exchanges in the 2020 consolidated statement of operations.

Receivable Agreement expense incurred in 2019 was $0.5 million.

Benefit from Income Taxes

Our income tax benefit

was $43.7 million for the year ended December 31, 2020, compared to no income tax benefit for the year ended December 31, 2019.

Our income tax benefit is primarily due to the release of federal and state valuation allowances and the recognition of deferred

tax assets as of December 31, 2020.

No income tax benefit was recorded during the year ended December 31, 2019 as the Company

had a full valuation allowance on its deferred tax assets.

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 percentage.

The Company calculates

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

Net income for the Company was $10.9 million in 2020 whereas net income attributed to noncontrolling interests was $7.1 million.

The high net income level attributed to noncontrolling interests resulted from the noncontrolling ownership interest in 2020 being

at its highest level during the first quarter of 2020 when the Company generated $20.0 million of net income and $11.2 million

was attributed to noncontrolling interests.

For the remainder of 2020, the Company had a net loss of $9.1 million of which only

$4.1 million of the net loss was attributed to noncontrolling interests because the noncontrolling ownership interest declined

from 56.2% at March 31, 2020 to 1.0% at December 31, 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.

Our cash and working capital positions

have grown to $123.0 million and $96.9 million, respectively, as of December 31, 2020 compared to $33.5 million and $27.3 million,

respectively, as of December 31, 2019.

While net revenues increased 51.4% during 2020, our accounts receivable balance stayed relatively

consistent compared to the prior year.

Cash used for purchases of property and equipment increased from $10.5 million in 2019 to

$27.9 million in 2020.

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

to support the doubling of our workforce, opening several new Company showrooms across the country, and expanding our manufacturing

capacity by establishing a new manufacturing facility in Georgia that began operations on March 3, 2021 and for the remainder of

2021 will ramp up to capacity of four Mattress Max machines.

In response to the

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

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

to preserve liquidity.

We temporarily reduced our capital spend by delaying all non-maintenance related projects and investments

in non-essential initiatives and headcount additions.

Other proactive steps were taken to carefully manage cash and quickly and

prudently respond to the rapidly changing circumstances including temporarily furloughing a portion of our permanent workforce,

temporarily deferring a portion of the cash compensation of Senior Executives and all the cash compensation of members of our Board

of Directors and limiting other discretionary expenses.

We also entered into an amendment to our Related Party Loan which allowed

the Company to defer 5% of the interest for quarterly payments due during the first two quarters of 2020.

In September 2020, this

debt was subsequently retired and replaced with a $45.0 million term loan at a rate of interest lower than the Related Party Loan

and a $55.0 million line of credit.

In addition, our receivables from our wholesale partners remain healthy.

Most of our wholesale

partners continue to make payments in accordance with their original contract terms and remain current on their outstanding balances.

As a result of our precautionary measures, continued payments

from wholesale customers, and our strong DTC sales, our cash balance increased by $89.5 million during the year ended December

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

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

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

our new line of credit, continued demand of our product 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,

the Company 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

This decrease was primarily due to net revenues being unfavorably impacted by production issues in the second

and third quarters of 2021, lower than expected demand, reduced gross margins due in part to elevated raw material, labor and freight

costs, increased marketing and sales expenses, and higher general and administrative costs.

expense totaled $1.9 million for the year ended December 31, 2021 as compared to $4.7 million for the year ended December 31, 2020.

$2.8 million decrease was due in part to $1.0 million of interest capitalized during 2021.

The remaining decrease was due to a $35.0

million 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%.

In November 2021, the Company executed a $55.0 million draw on its revolving line of credit at

an initial borrowing rate of 3.50%, which resulted in $0.3 million of interest expense in 2021.

Interest expense in 2021 also included

a full year of amortization of deferred loan costs associated with the term loan and fees related to the revolving line of credit.

on Extinguishment of Debt

September 3, 2020, the Company paid $45.0 million to retire, in full, all indebtedness related to Purple LLC’s 2018 credit agreement.

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.

On September 3, 2020,

Purple LLC entered into the 2020 Credit Agreement that provides for a $45.0 million term loan and a $55.0 million revolving line

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

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

December 31, 2020, 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 year ended

December 31, 2020, 15.5 million Public Warrants and 4.3 million Sponsor Warrants were exercised resulting in the issuance of 7.6

million shares of Class A common stock and cash proceeds to the Company of $46.4 million.

At December 31, 2020, there were 8.5

million warrants outstanding all of which were Sponsor Warrants.

In the event our cash

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

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

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

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

In addition, we may be forced to restructure

our obligations to current creditors or pursue work-out options.

If cash flow from

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

strategies, we may need to raise additional capital.

Our ability to obtain additional or alternative capital on acceptable terms

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

COVID-19 pandemic, political or social unrest, other macroeconomic factors and approval from the Institutional Lenders under the

2020 Credit Agreement.

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

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.

As a result of paying off this loan,

the Company recognized a $5.8 million loss on extinguishment of debt in its 2020 consolidated statement of operations.

in Fair Value – Warrant Liabilities

There were 15.5 million public warrants

issued in connection with GPAC’s formation and initial public offering and 12.8 million sponsor warrants issued pursuant to a simultaneous

private placement with the initial public offering.

The Company has accounted for these warrants as liabilities and recorded them at fair

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

included in earnings.

The 1.9 million sponsor warrants outstanding at December 31, 2021 had a fair value of $4.3 million.

The fair value

of the sponsor warrants outstanding at December 31, 2020 was $92.7 million.

All of the public warrants were exercised in 2020.

the year ended December 31, 2021, we recognized a gain of $24.1 million in our consolidated statement of operations related to a decrease

in the fair value of the sponsor warrants exercised in 2021 or that were outstanding at December 31, 2021.

During the year ended December

31, 2020, we recognized a loss of $240.7 million in our consolidated statement of operations related to increases in the fair value of

the public and sponsor warrants exercised during 2020 or that were outstanding at December 31, 2020.

On February 26, 2019, two of the three

lenders involved with the original loan under the 2018 credit arrangement also funded a $10.0 million incremental loan and received 2.6

million warrants to purchase 2.6 million shares of the Company’s Class A Stock at a price of $5.74 per share, subject to certain

The Company accounted for these warrants as liabilities and recorded them at fair value on the date of the transaction and

subsequently re-measured them 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 these warrants held by the lenders who funded

the incremental loan.

The Company determined the fair value of these warrants to be $81.0 million at the time of the exercise.

the year ended December 31, 2020, the Company recorded a loss related to increases in the fair value of the warrants of $59.4 million.

Receivable Agreement Income (Expense)

connection with the Business Combination, we entered into an agreement which generally provides for the payment by us to InnoHold of

80% of certain tax benefits, if any, that we realize as a result of increases in our allocable share of the tax basis of the tangible

and intangible assets of Purple LLC.

The tax receivable agreement liability totaled $168.1 million and $172.0 million at December 31,

2021 and 2020, respectively.

During 2021, we realized $4.0 million of tax receivable agreement income due to the impact of a change in

tax rates and recording the 2020 provision to return adjustments.

The $3.9 million reduction in the 2021 tax receivable agreement liability

reflected $4.0 million that was recorded as tax receivable agreement income coupled with a payment of $0.6 million made during the year.

These decreases in the liability were offset in part by $0.8 million that related to current year exchanges and was recorded as a decrease

to additional paid-in capital in the 2021 consolidated statement of stockholders’ equity.

Tax Benefit (Expense)

income tax benefit was $1.2 million for the year ended December 31, 2021 compared to an income tax benefit of $43.7 million for the year

ended December 31, 2020.

This decrease was primarily due to $35.5 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 2020.

Noncontrolling

Company calculates net income or loss attributable to noncontrolling interests on a quarterly basis using their weighted average ownership

Net loss attributed to noncontrolling interests was $0.2 million in 2021 compared to net income of $7.1 million in 2020.

The decrease in the level of net income (loss) attributed to noncontrolling interests primarily resulted from the noncontrolling interest

ownership percentage being significantly lower in 2021.

and Capital Resources

principal sources of funds are cash flows from operations, supplemented with borrowings made pursuant to our credit facilities and cash

and cash equivalents on hand.

Principal uses of funds consist of payments of principal and interest on our debt facilities, capital expenditures

and working capital needs as well as other contractual obligations described below.

Our working capital needs depend largely upon

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

Our cash and working capital positions were $91.6 million and $87.5 million, respectively, as of December 31, 2021 compared to $123.0

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

Cash used for capital expenditures increased from $39.1 million in 2020

to $57.1 million in 2021.

This increase primarily resulted from ongoing investments in our business that included building out our new

manufacturing facility in Georgia that became fully operational in 2021, enhancing our manufacturing and safety capabilities at our manufacturing

facility in Utah, scaling our infrastructure to support the growth of our workforce, and continued opening of new Purple retail showrooms

throughout 2021.

As described above, we experienced

production and demand issues in the second and third quarters of 2021 that adversely affected net revenues and we have also experienced

increases in raw material, labor and freight costs.

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

the impact of lower-than-expected demand and higher material, labor and freight costs will continue to adversely affect our business and

results of operations into the first quarter of 2022.

These issues have also adversely affected our ability to comply with covenants under

the 2020 credit agreement.

In order to offset the impact of these costs on our gross margins, we have taken a number of pricing actions

in the fourth quarter and early 2022.

In February 2022, we reduced employee headcount by approximately 15%.

In addition, we have initiated

a number of other projects to improve efficiencies and reduce costs.

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,

pursue work-out options or seek additional funding sources including new debt or equity capital.

Our ability to obtain additional debt

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 terms.

The restrictive covenants in the 2020 Credit Agreement,

as amended, may make it difficult to obtain additional capital on terms that are favorable to us and to execute on our growth strategies,

including the acquisition of other businesses or technologies.

There is no assurance we would be able to obtain the capital we could potentially

As a result, there can be no assurance that we will be able to fund our future operations or growth strategies.

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.

are required to make certain payments to InnoHold under the Tax Receivable Agreement, which may have a material adverse effect

on our liquidity and capital resources.

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

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

at the time of the exchanges, the extent to which such exchanges are taxable and the amount and timing of future taxable income

sufficient to utilize tax attributes that give rise to the payments under the Tax Receivable Agreement.

As of December 31, 2020,

the Tax Receivable Agreement liability reflected in the Company’s consolidated balance sheet is $172.0 million of which $6.5

million is presented as a short-term liability.

Cash Flows for the Year Ended December 31, 2020 and 2019

The following summarizes

our cash flows for the year ended December 31, 2020 and 2019 as reported in our consolidated statements of cash flows (in

Net cash provided by operating activities

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.

In response to the COVID-19 pandemic, we took a number of precautionary measures

to manage our resources and mitigate its adverse effect.

Given the initial difficultly 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, cash generated from

our e-commerce and wholesale channels, and continued ramp up of Purple retail store operations will be sufficient to cover our

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

During 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 December 31, 2021, there were 1.9 million sponsor warrants outstanding.

During 2020, 15.5 million

public warrants and 4.3 million sponsor warrants were exercised resulting in the issuance of 7.6 million shares of Class A Stock and cash

proceeds to the Company of $46.4 million.

September 3, 2020, the Company paid $45.0 million to retire, in full, all indebtedness related to Purple LLC’s 2018 credit agreement.

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,

Purple LLC entered into the 2020 Credit Agreement that provided for a $45.0 million term loan and a $55.0 million revolving line of credit.

The agreement has a five-year term and borrowing rates for both the term loan and revolving line of credit and were initially based on

Purple LLC’s leverage ratio and ranged from LIBOR plus a 3.00% to 3.75% margin with a LIBOR minimum of 0.50%.

Pursuant to the first

amendment of the 2020 Credit Agreement, the interest rates have changed from LIBOR to SOFR with new interest rate amounts and thresholds

as noted below.

Proceeds from the term loan were used to retire all indebtedness associated with the 2018 credit agreement.

November 2021, the Company executed a $55.0 million draw on its revolving line of credit, which represented the full amount available

under the line.

The outstanding balance on the revolving line of credit was classified as long-term debt in the Company’s consolidated

balance sheet as of December 31, 2021.

Our operating and financial

results for the year ended December 31, 2021 did not satisfy our financial and performance covenants required pursuant to the 2020 Credit

In order to avoid a breach of such covenants and related default, on February 28, 2022, prior to the covenant compliance certification

date under the 2020 Credit Agreement, we entered into the first amendment of the 2020 Credit Agreement.

The amendment contains a covenant

waiver period such that the net leverage ratio and fixed charge coverage ratio will not be tested for the fiscal quarter ended December

31, 2021 through the fiscal quarter ended June 30, 2022.

Other changes in the amendment include modification of leverage ratio and fixed

charge coverage definitions and thresholds, the addition of minimum liquidity requirements with mandatory prepayments of the revolving

loan if cash exceeds $25.0 million, new weekly and monthly reporting requirements, limits on the amount of capital expenditures, the

addition of a lease incurrence test for opening additional showrooms, and additional negative covenants during a covenant amendment period

that will extend into 2023 until certain conditions are met.

In addition, the interest rate on outstanding borrowings under the 2020

Credit Agreement changed from LIBOR with a floor of 0.5% plus an applicable margin (historically at 3.0%) to an initial rate of SOFR

with a floor of 0.5% plus 4.75%, for a total rate of 5.25% as long as the applicable liquidity threshold is met.

If it is not met, then

the interest rate goes to SOFR with a floor of 0.5% plus 9.00%.

Once the consolidated leverage ratio is below 3.00 to 1.00, the interest

rate will be based on SOFR with a floor of 0.5% plus a 3.00% to 3.75% depending on the consolidated leverage ratio.

Pursuant to the amendment,

the Company paid fees and expenses of $0.9 million and prepaid all principal payments due in 2022 of $2.5 million.

Tax Receivable Agreement

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

liquidity and capital resources.

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

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

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

that give rise to the payments under the agreement.

As of December 31, 2021, the tax receivable agreement liability reflected in the

Company’s consolidated balance sheet is $168.1 million of which $5.8 million is presented as other current liabilities.

Other Contractual Obligations

In addition, we have other

material contractual obligations, which primarily consist of operating lease obligations.

See Note 6 of the consolidated financial statements

for additional information.

Flows for the year ended December 31, 2021 compared to the year ended December 31, 2020

The following summarizes our cash flows

for the years ended December 31, 2021 and 2020 as reported in our consolidated statements of cash flows (in thousands):

Years Ended December 31,

Net cash provided by (used in) operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net increase in cash

Net increase (decrease) in cash

Cash, beginning of the period

Cash, end of the period

Year ended December 31, 2020 Compared

to the Year ended December 31, 2019

Cash provided by operating activities was $81.3 million for

the year ended December 31, 2020, an increase of $58.4 million from cash provided by operating activities of $22.9 million during

the year ended December 31, 2019.

The $45.3 million increase in cash provided by operations primarily resulted from operating income

growth in 2020 which was driven mainly by increased DTC sales.

This increase was also impacted by a $13.1 million increase in operating

cash flows related to favorable net changes in operating assets and liabilities in 2020 compared to the prior year.

This increase

consisted of additional cash from favorable changes in year-over-year fluctuations in accounts receivable and inventory, offset

in part by decreases in cash related to unfavorable changes in year-over-year fluctuations in accounts payable and all other operating

assets and liabilities.

Cash used in investing activities was $39.1 million for the

year ended December 31, 2020, an increase of $28.4 million from cash used in investing activities of $10.8 million during the year

ended December 31, 2019.

This increase was due mainly to increases in purchases of property and equipment and intangible assets

of $17.4 million and $10.9 million, respectively, over the same period in the prior year.

Cash provided by financing

activities was $47.4 million in the year ended December 31, 2020, an increase of $38.2 million from cash provided by financing

activities of $9.1 million during the year ended December 31, 2019.

The cash provided in 2020 consisted of $45.0 million in proceeds

from the 2020 Credit Agreement and $48.4 million of proceeds from warrant and stock option exercises.

The cash received from these

financing activities was offset in part by a $37.5 million payment to retire the Related Party Loan, a $0.6 million principal payment

on the Term Loan, $5.5 million in distributions to members and $2.5 million in debt issuance costs related to the 2020 Credit Agreement.

Off-Balance Sheet Arrangements

We have not entered

into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments

of other non-consolidated entities, or entered into any non-financial assets.

Recent Accounting Pronouncements

For a description of

recently adopted and issued accounting standards, including the respective dates of adoption and expected effects on our results

of operations and financial condition, refer to Note 2 to our financial statements included in this Annual Report on Form 10-K.

Contractual Obligations

On July 21, 2020, the Company entered into a lease agreement

(the “Lease”) with PNK S2, LLC for approximately 520,000 square feet of building space located in McDonough, Georgia

(the “Building”) to be used as a manufacturing, distribution and office facility.

The Company began operations in the

new facility on March 3, 2021 and for the remainder of 2021 will ramp up to planned capacity of four Mattress Max machines.

The term of the Lease

is 128 months including an eight-month free rent period, which will commence upon completion of the landlord’s work on the

Company’s space in the Building.

Prior to the commencement of the term, the Company has an immediate right to make use of

the Building.

Under the Lease, the Company will pay $3.41 per square foot annually or $147,675 per month for the initial lease

Thereafter the basic monthly rent increases 2% per year.

The Lease also provides the Company with an option to extend the

Lease term for two additional five-year periods at rates for the first renewal term of $4.24 per square foot with 2% annual increases

and for the second renewal term of $4.75 per square foot with annual increases of 3.5%.

The Company is also responsible for its

proportionate share of the operating expenses incurred by the landlord for the Building.

The Lease provides for a tenant improvement

allowance of $12.50 per usable square foot which equates to approximately $6.5 million.

The Lease also provides the Company with

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

Seasonality and Cyclicality

We believe that sales

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

and other seasonal factors.

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

Quantitative and Qualitative

Disclosures About Market Risk

Not applicable.

used in operating activities was $30.9 million during the year ended December 31, 2021 compared to $81.3 million of cash provided by

operating activities during the year ended December 31, 2020.

The decrease in cash flows from operations primarily resulted from an

$83.6 million decrease in cash provided by operating income items which was mainly driven by net revenues being unfavorably impacted

by production and demand issues experienced in the second and third quarters of 2021, increased material, labor and shipping costs,

higher marketing and sales expenses, increased legal and professional fees and planned increases in our workforce.

The decrease in

cash provided by operations was further impacted by a $28.5 million decrease in operating cash flows related to net changes in

operating assets and liabilities for the year ended December 31, 2021 compared to the prior year.

This decrease consisted of

decreased cash from changes in period-over-period fluctuations in inventories, accounts payable and accrued liabilities, offset in

part by an increase in cash related to changes in the year-over-year fluctuations in accounts receivable and prepaid inventory and

other assets.

used in investing activities was $57.1 million for the year ended December 31, 2021 compared to $39.1 million for the year ended

December 31, 2020.

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

manufacturing facility in Georgia that became fully operational in 2021, enhancing our manufacturing and safety capabilities at our

manufacturing facility in Utah, scaling our infrastructure to support the growth of our workforce, and continued opening of new

Purple retail showrooms during 2021.

provided by financing activities during the year ended December 31, 2021 was $56.6 million, an increase of $9.3 million from cash provided

by financing activities of $47.4 million during the year ended December 31, 2020.

Financing activities in 2021 included $55.0 million

in proceeds from the Company’s revolving line of credit, $4.1 million in proceeds from an InnoHold indemnification payment and

$1.5 million of proceeds from warrant and stock option exercises.

The cash received from these financing activities was offset in part

by $2.3 million in principal payments on the term loan, member tax distributions of $1.2 million and a $0.6 million payment for the tax

receivable agreement.

Accounting Pronouncements

a description of recently adopted and issued accounting standards, including the respective dates of adoption and expected effects on

our results of operations and financial condition, refer to Note 2 to our financial statements included in this Annual Report on Form

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-K

Item 7. Management’s Discussion and Analysis