What changed in this filing

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Item 1. Financial Statements

2022-05-10 compared with 2021-11-09 · 951 added, 1460 removed, 272 unchanged (90% of the section changed)

FINANCIAL STATEMENTS

PURPLE INNOVATION, INC.

Condensed Consolidated Balance Sheets

(unaudited – in thousands, except for

September 30,

INNOVATION, INC.

Consolidated Balance Sheets

– in thousands, except for par value)

Current assets:

2 unchanged sentences

Inventories, net

Prepaid inventory

Prepaid expenses

Other current assets

14 unchanged sentences

Operating lease obligations – current portion

Warrant liabilities

Other current liabilities

10 unchanged sentences

$ 0.0001 par value, 210,000 shares authorized;

66,449 issued and outstanding at September 30, 2021 and 63,914 issued and outstanding at December 31, 2020

82,638 issued and outstanding at March 31, 2022 and 66,493 issued and outstanding at December 31, 2021

Class B common stock;

$ 0.0001 par value, 90,000 shares authorized;

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

448 issued and outstanding at March 31, 2022 and at December 31, 2021

Additional paid-in capital

4 unchanged sentences

Total liabilities and stockholders’ equity

The accompanying notes are an integral part of

these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.

Condensed Consolidated Statements of Operations

(unaudited – in thousands, except per

share amounts)

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

INNOVATION, INC.

Consolidated Statements of Operations

– in thousands, except per share amounts)

Three Months Ended

September 30,

Nine Months Ended

September 30,

Revenues, net

7 unchanged sentences

Other income (expense):

Interest income (expense), net

Interest expense

Other income (expense), net

Tax receivable agreement benefit

Change in fair value – warrant liabilities

Loss on extinguishment of debt

Tax receivable agreement income (expense)

Total other income (expense), net

Total other income, net

Net income (loss) before income taxes

3 unchanged sentences

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

$ ( 163,453 )

Net income (loss) per share:

Weighted average common shares outstanding:

The accompanying notes are an integral part of these unaudited condensed

consolidated financial statements.

PURPLE INNOVATION, INC.

Condensed Consolidated Statements of Stockholders’

Equity (Deficit)

(unaudited – in thousands)

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

INNOVATION, INC.

Consolidated Statements of Stockholders’ Equity

– in thousands)

Stockholders’

Noncontrolling

Balance - December 31, 2020

$ ( 265,856 )

Stock-based compensation

Exchange of stock

Exercise of warrants

Exercise of stock options

Tax Receivable Agreement liability

Deferred income taxes

Accrued distributions

indemnification payment

Impact of transactions affecting NCI

Balance – March 31, 2021

$ ( 245,032 )

Net income (loss)

Stock-based compensation

Exercise of warrants

Exercise of stock options

Tax Receivable Agreement liability

Deferred income taxes

Accrued distributions

Issuance of common stock

Impact of transactions affecting NCI

Balance – June 30, 2021

– December 31, 2021

$ ( 261,825 )

Net income (loss)

Stock-based compensation

Exercise of warrants

Exercise of stock options

Tax Receivable Agreement liability

Deferred income taxes

Accrued distributions

Impact of transactions affecting NCI

Balance – September 30, 2021

of stock options

of restricted stock units

of stock upon secondary offering, net of costs

distributions

of transactions affecting NCI

– March 31, 2022

$ ( 275,327 )

1 unchanged sentence

Noncontrolling

Balance – December 31, 2019

Stock-based compensation

Exchange of stock

Exercise of warrants

Tax Receivable Agreement liability

Accrued distributions

Issuance of common stock

Impact of transactions affecting NCI

Balance – March 31, 2020

Stock-based compensation

Exchange of stock

Exercise of warrants

Exercise of stock options

Tax Receivable Agreement liability

Deferred income taxes

Accrued distributions

Issuance of common stock

Impact of transactions affecting NCI

Balance – June 30, 2020

$ ( 105,429 )

Net income (loss)

Stock-based compensation

Exchange of stock

Exercise of warrants

Exercise of stock options

Tax Receivable Agreement liability

Deferred income taxes

Accrued distributions

Forfeiture of unvested common stock

Impact of transactions affecting NCI

Balance – September 30, 2020

$ ( 192,442 )

– December 31, 2020

$ ( 265,856 )

of stock options

receivable agreement liability

distributions

indemnification payment

of transactions affecting NCI

– March 31, 2021

$ ( 245,032 )

The accompanying notes are an integral part of

these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited – in thousands)

Nine Months Ended

September 30,

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

INNOVATION, INC.

Consolidated Statements of Cash Flows

– in thousands)

Three Months Ended

Cash flows from operating activities:

Net income (loss)

$ ( 156,275 )

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

Adjustments to reconcile net income (loss) to net cash used in operating activities:

Depreciation and amortization

Non-cash interest

Paid-in-kind interest

Loss on extinguishment of debt

Change in fair value – warrant liabilities

Tax receivable agreement (income) expense

Tax receivable agreement benefit

Stock-based compensation

3 unchanged sentences

Accounts receivable

Prepaid inventory and other assets

Prepaid expenses and other assets

Accounts payable

5 unchanged sentences

Other accrued liabilities

Net cash provided by operating activities

Net cash used in operating activities

Cash flows from investing activities:

3 unchanged sentences

Cash flows from financing activities:

Proceeds from term loan

Payments on term loan

Payments on related party loan

Payments on revolving line of credit

Payments for debt issuance costs

Proceeds from secondary stock offering

Payments for secondary stock offering costs

Proceeds from InnoHold indemnification payment

4 unchanged sentences

Net cash provided by financing activities

Net (decrease) increase in cash

Net decrease in cash

Cash and cash equivalents, beginning of the year

6 unchanged sentences

Non-cash leasehold improvements

Accrued distributions

Accrued tax distributions

Tax receivable agreement liability

Deferred income taxes

Exercise of liability warrants

The accompanying notes are an integral part of these unaudited condensed

consolidated financial statements.

PURPLE INNOVATION, INC.

Exercise of warrant liabilities

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

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

The Company’s mission

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

Purple Innovation, Inc.

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

innovation with premium offerings.

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

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

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

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

The Company was incorporated

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

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

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

At the closing of

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

Purple Innovation, Inc.

As the sole managing member

of Purple LLC, Purple Inc.

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

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

is to improve the lives of our consumers by delivering innovative better sleep solutions.

Innovation, Inc.

collectively with its subsidiary (the “Company” or “Purple Inc.”) is a digitally-native vertical

brand founded on comfort product innovation with premium offerings.

The Company designs and manufactures a variety of innovative, branded

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

The Company markets and sells

its products through its e-commerce online channels, retail brick-and-mortar wholesale partners, Purple retail showrooms, and third-party

online retailers.

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

Corp (“GPAC”).

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

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

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

LLC, and GPAC was renamed Purple Innovation, Inc.

the sole managing member of Purple LLC, Purple Inc.

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

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

Summary of Significant Accounting Policies

Basis of Presentation

and Principles of Consolidation

The Company consists of Purple

and its consolidated subsidiary, Purple LLC.

As of September 30, 2021, Purple Inc.

held approximately 99 % of the common units of

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

The accompanying unaudited

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

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

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

Certain information

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

to such rules and regulations.

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

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

filed May 10, 2021.

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

financial statements and, in the opinion of management, reflect all adjustments (all of which were considered of normal recurring nature)

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

The results of the three and nine months ended September

30, 2021 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2021 or for any other interim

period or other future year.

On December 31, 2020, the

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

apply to public companies.

As an EGC prior to this date, Purple Inc.

had elected to use extended transition periods available to private

companies for complying with new or revised accounting standards.

Variable Interest Entities

Purple LLC is a variable interest

entity (“VIE”).

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

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

losses and receive benefits that are potentially significant.

At September 30, 2021, Purple Inc.

had approximately a 99 % economic interest

in Purple LLC and consolidated 100 % of Purple LLC’s assets, liabilities and results of operations in the Company’s unaudited

condensed consolidated financial statements contained herein.

of Presentation and Principles of Consolidation

condensed consolidated financial statements include the accounts of Purple Inc.

and its controlled subsidiary Purple LLC.

All intercompany

balances and transactions have been eliminated in consolidation.

As of March 31, 2022, Purple Inc.

held approximately 99 % of the common

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

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

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

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

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

pursuant to such rules and regulations.

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

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

for the fiscal year ended December 31, 2021.

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

as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which were considered

of normal recurring nature) considered necessary to present fairly the Company’s financial results.

The results of the three months

ended March 31, 2022 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2022 or for

any other interim period or other future year.

Interest Entities

LLC is a variable interest entity.

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

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

to absorb losses and receive benefits that are potentially significant.

At March 31, 2022, Purple Inc.

had approximately a 99 % economic

interest in Purple LLC and consolidated 100 % of Purple LLC’s assets, liabilities and results of operations in the Company’s

unaudited condensed consolidated financial statements contained herein.

The holders of Purple LLC Class B Units (the “Class B Units”)

held approximately 1 % of the economic interest in Purple LLC.

For further discussion see Note 13 — Stockholders’ Equity.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Reclassification

Certain amounts in the prior

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

These reclassifications

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

Use of Estimates

The preparation of the unaudited

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

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

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

The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results

of which form the basis for making judgments about the carrying values of assets and liabilities.

The Company regularly makes significant

estimates and assumptions including, but not limited to, estimates that affect revenue recognition, accounts receivable and allowance

for doubtful accounts, valuation of inventories, cost of revenues, sales returns, warranty returns, warrant liability, stock based compensation,

the recognition and measurement of loss contingencies, estimates of current and deferred income taxes, deferred income tax valuation allowances

and amounts associated with the Company’s tax receivable agreement with InnoHold, LLC (“InnoHold”).

Predicting future

events is inherently an imprecise activity and, as such, requires the use of judgment.

Actual results could differ materially from those

In February 2016, the Financial

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

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

about an entity’s leasing arrangements.

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

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

January 1, 2020.

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

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

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

balance sheet.

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

lease ROU assets in connection with the adoption.

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

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

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

finance ROU assets and lease liabilities were not material.

The Company determines if

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

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

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

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

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

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

less any tenant improvement allowance incentives received.

The Company calculates the

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

The incremental

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

equal to the lease payments in a similar economic environment.

The Company determines the applicable incremental borrowing rate at the

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

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

the minimum lease payments within each lease agreement.

PURPLE INNOVATION, INC.

held approximately 1 % of the economic interest in Purple LLC as of March 31, 2022.

For further discussion see Note 15 — Stockholders’

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Operating lease expense is

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

Tenant incentive allowances received from the lessor are amortized through the

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

Any variable lease costs are expensed as incurred.

Leases with an initial

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

Short-term lease expense

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

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

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

not be recoverable.

Revenue Recognition

The Company markets and sells

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

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

to the customer.

This principle is achieved in the following steps:

Identify the contract with the customer.

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

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

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

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

The Company does not have significant costs to obtain

contracts with customers.

Identify the performance obligations

in the contract .

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

a period of time.

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

the contract.

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

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

The Company does not offer extended warranty or service plans.

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

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

Determine the transaction price .

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

sale in advance of shipping the products.

Amounts received for unshipped products are recorded as customer prepayments.

Payment by traditional

wholesale customers is due under customary fixed payment terms.

None of the Company’s contracts contain a significant financing

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

rebates, and other adjustments.

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

sales data, and current contract terms.

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

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

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

Allocate the transaction price to

performance obligations in the contract.

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

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

Recognize revenue when or as we satisfy

a performance obligation.

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

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

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

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

control of the products.

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

in time when the product is delivered to the customer.

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

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

The Company does not have service revenue.

PURPLE INNOVATION, INC.

preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to establish accounting

policies and to make estimates and judgments that affect the reported amounts of assets and liabilities and disclose contingent assets

and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and

expenses during the reporting period.

The Company bases its estimates on historical experience and on various other assumptions believed

to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

regularly makes significant estimates and assumptions including, but not limited to, estimates that affect revenue recognition, accounts

receivable and allowance for doubtful accounts, valuation of inventories, sales returns, warranty returns, warrant liabilities, stock

based compensation, the recognition and measurement of loss contingencies, estimates of current and deferred income taxes, deferred income

tax valuation allowances and amounts associated with the Company’s tax receivable agreement with InnoHold, LLC (“InnoHold”).

Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment.

Actual results could differ

materially from those estimates.

Restructuring Charges

In February 2022, because

of lower-than-expected demand and higher labor and overhead costs that adversely affected our results of operations in the fourth quarter

of 2021 which continued into the first quarter of 2022, the Company completed a restructuring of its workforce to improve efficiencies

and realign the Company’s cost structure to focus on quality of earnings in our current core business.

As a result of the realignment

and restructuring, the Company reduced employee headcount and incurred severance charges of $ 1.2 million during the three months ended

March 31, 2022.

Other cost reduction and efficiency efforts have also been initiated to improve costs and increase margins.

the Company’s cash flow from operations or other sources of financing are less than anticipated or required by bank covenants, the

Company believes it will be able to fund operating expenses based on its ability to scale back operations, reduce marketing spend, use

the liquidity available under its revolving line of credit and postpone or discontinue growth strategies.

Accounting Pronouncements

March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial

Reporting (“ASU 2020-04”), which provides guidance to alleviate the burden in accounting for reference rate reform by allowing

certain expedients and exceptions in applying generally accepted accounting principles to contracts, hedging relationships, and other

transactions impacted by reference rate reform.

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

another reference rate expected to be discontinued due to reference rate reform.

This standard is currently effective and upon adoption

may be applied prospectively to contract modifications made on or before December 31, 2022, when the reference rate replacement activity

is expected to be completed.

The Company plans to apply the guidance in this update to account for any contract modifications that result

from changes in the reference rate used.

The Company does not expect this guidance to have a material impact on its condensed consolidated

financial statements and related disclosures.

The interest rates on the Company’s term loan and revolving line of credit were based

In February 2022, the Company entered into an amendment to the 2020 Credit Agreement

that changed the interest reference rate from LIBOR to the Secured Overnight Financing Rate (“SOFR”).

The change to SOFR

did not have any impact on the Company’s condensed consolidated financial statements – see Note 10— Debt

for discussion of the amendment to the 2020 Credit Agreement.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Warrant Liabilities

The Company accounted for

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

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

Changes in the fair value of these liabilities are recognized in

These warrants contained a repurchase provision which, upon an occurrence of a fundamental transaction as defined in the warrant

agreement, could have given rise to an obligation of the Company to pay cash to the warrant holders.

In addition, other provisions may

have led to a reduction in the exercise price of the warrants.

The Company determined the fundamental transaction provisions required

the warrants to be accounted for as a liability at fair value on the date of the transaction, with changes in fair value recognized in

earnings in the period of change.

The Company used the Monte Carlo Simulation of a Geometric Brownian Motion stock path model to determine

the fair value of the liability.

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

risk free interest rate, warrant life, expected volatility and the probability of a warrant re-price.

All of the Incremental Loan warrants

were exercised during fiscal 2020.

The Company accounted for

its public warrants in accordance with ASC 815 – Derivatives and Hedging—Contracts in Entity’s Own Equity , under

which these warrants did not meet the criteria for equity classification and were recorded as liabilities.

Since the public warrants met

the definition of a derivative as contemplated in ASC 815, these warrants were measured at fair value at inception and at each reporting

date in accordance with ASC 820, Fair Value Measurement, with changes in fair value recognized in earnings in the period of change.

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

All of the public warrants were exercised

during fiscal 2020.

The Company accounts for its

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

recorded as liabilities.

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

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

in the period of change.

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

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

warrant life and expected volatility.

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

of Credit Losses

June 2016, the FASB issued ASU No.

2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial

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

This guidance replaces the existing incurred loss impairment guidance and establishes a single allowance framework for financial assets

carried at amortized cost based on expected credit losses.

The estimate of expected credit losses requires the incorporation of historical

information, current conditions, and reasonable and supportable forecasts.

These updates are effective for public companies, excluding

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

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

The standard is effective for the Company’s interim and annual financial periods beginning January 1, 2023.

This standard is to

be applied utilizing a modified retrospective approach.

The Company is currently evaluating the impact of this standard on its accounts

receivable, cash and cash equivalents, and any other financial assets measured at amortized cost and do not expect that adoption will

have a material impact on its consolidated financial statements or related disclosures.

Secondary Offering

In March 2022, the Company

completed a secondary offering of 16.1 million shares of Class A common stock, which included the underwriters exercising their

over-allotment option in full to purchase an additional 2.1 million shares.

The underwriter purchased the Class A common stock

from the Company at a price of $ 5.65 per share, except that any shares sold by the underwriter to Coliseum Capital Partners, L.P.

Blackwell Partners LLC – Series A, up to an aggregate of 29.81 % of the shares of Class A common stock pursuant to the offering,

were purchased from the Company by the underwriter at a price of $6.10 per share.

The aggregate gross proceeds received by the Company

from the secondary offering, including the exercise of the over-allotment, was $ 93.1 million.

After deducting offering expenses of $ 0.2

million, aggregate net proceeds totaled $ 92.9 million.

Fair Value Measurements

The Company uses the fair

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

Fair value is the price that would be

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

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

The levels of the fair value hierarchy are:

Level 1—Quoted market prices in

active markets for identical assets or liabilities;

Level 2—Significant other observable

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

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

Level 3—Unobservable inputs in

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

PURPLE INNOVATION, INC.

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

Fair value is the

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

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

The levels of the fair

value hierarchy are:

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

2—Significant other observable inputs (i.e.,.

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

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

and market-corroborated inputs);

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

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

The classification of fair

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

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

payable and the Company’s debt obligations.

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

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

The fair value of the Company’s debt

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

The public warrant liabilities

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

The sponsor and incremental loan warrant liabilities are

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

of relevant inputs and assumptions.

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

significant to the measurements.

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

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

The carrying amounts of cash and cash equivalents,

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

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

market-based expectations.

sponsor warrant liabilities (see Note 11 — Warrant Liabilities for more information) are Level 3 instruments and use internal

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

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

inputs include risk free interest rate, expected average life, expected dividend yield, and expected volatility.

These Level 3 liabilities

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

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

were to increase (decrease).

The following table presents

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

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

Such inputs include risk free interest

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

These Level 3 liabilities generally decrease (increase)

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

Conversely, the fair value of these

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

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

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

(In thousands)

September 30,

Sponsor warrants

All of the public warrants

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

The following table summarizes

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

following table summarizes the Company’s total Level 3 liability activity for the three months ended March 31, 2022 and 2021:

(In thousands)

Total Level 3

Fair value as of December 31, 2021

Fair value transfer to Level 1 measurement

Fair value of warrants exercised

Change in valuation inputs (1)

Fair value as of September 30, 2021

Fair value as of March 31, 2022

Fair value as of December 31, 2020

1 unchanged sentence

Change in valuation inputs (1)

Fair value as of September 30, 2020

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

In calculating the provision

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

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

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

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

For annual periods, the Company

accounts for income taxes using the asset and liability method.

Under this method, deferred tax assets and liabilities are recognized

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

and liabilities and their respective tax bases.

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

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

Deferred tax assets and liabilities are calculated by applying

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

be recovered or settled.

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

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

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

The Company accounts for uncertainty in income taxes using a recognition

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

and state taxing authorities.

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

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

The amount of the tax benefit

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

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

tax uncertainties.

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

line in the accompanying condensed consolidated statements of operations.

The Company files U.S.

and certain state income tax returns.

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

federal and state taxing

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

Net Income (Loss) Per

Basic net income (loss) per

common share is calculated by dividing net income (loss) attributable to common shareholders by the weighted average number of shares

of Class A Common Stock, par value $ 0.0001 per share (the “Class A Stock”), outstanding each period.

Diluted net income (loss)

per share adds to those shares the incremental shares that would have been outstanding and potentially dilutive assuming exchanges of

the Company’s outstanding warrants, stock options and shares of Class B Common Stock, par value $ 0.0001 per share (the “Class

B Stock”), for Class A Stock, and the vesting of unvested and restricted Class A Stock.

An anti-dilutive impact represents an increase

in net income per share or a reduction in net loss per share resulting from the conversion, exercise or contingent issuance of certain

The Company uses the “if-converted”

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

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

unvested Class A Stock.

Recent Accounting Pronouncements

Reference Rate Reform

In March 2020, the FASB issued

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

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

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

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

by reference rate reform.

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

expected to be discontinued due to reference rate reform.

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

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

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

The Company plans to apply the amendments in this update to account

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

The Company does not expect these amendments to have

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

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Simplifying the Accounting

for Income Taxes

In December 2019, the FASB

issued ASU No.

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

The new guidance eliminates certain exceptions

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

of deferred tax liabilities for outside basis differences.

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

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

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

of this standard by the Company on January 1, 2021 did not have a material impact on the Company’s financial position, results of

operations, or cash flows.

Internal-Use Software

In August 2018, the FASB issued

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

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

that is a service contract with those incurred to develop or obtain internal-use software.

The guidance is effective for fiscal years

beginning after December 15, 2020, and interim periods within those fiscal years.

Early adoption is permitted.

The amendments can be applied

either retrospectively or prospectively.

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

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

Company elected to apply the amendments on a prospective basis.

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

financial position, results of operations, or cash flows.

Measurement of Credit Losses

In June 2016, the FASB issued

2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“ASU

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

This guidance replaces

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

cost based on expected credit losses.

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

conditions, and reasonable and supportable forecasts.

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

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

The standard is effective

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

Since the Company was

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

periods beginning January 1, 2023.

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

The Company is currently

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

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

Fair value as of March 31, 2021

(1) Changes in valuation inputs are recognized as the change in fair value – warrant liabilities in the consolidated statement of operations.

Revenue from Contracts with Customers

The Company markets and sells

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

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

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

PURPLE INNOVATION, INC.

Company markets and sells its products through e-commerce online channels, retail brick-and-mortar wholesale partners, Purple retail

showrooms, and third-party online retailers.

Revenue is recognized when the Company satisfies its performance obligations.

These performance

obligations generally relate to delivering products to a customer, subject to the shipping terms of the contract.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Disaggregated Revenue

The Company sells products

through two channels:

Direct-to-Consumer and Wholesale.

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

including Company showrooms and contact center.

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

for both in store and online channels.

The Company classifies products into two major categories:

Bedding and Other.

Bedding products

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

Other products include cushions and various

other products.

Disaggregated

The Company classifies revenue into two sales categories:

Direct-to-Consumer

(“DTC”) and Wholesale.

The DTC category is comprised of the e-commerce channel that sells directly to consumers who purchase

online and through our contact center, and the Purple retail showrooms channel that sells directly to consumers who purchase at a showroom

The wholesale category includes all product sales to our retail brick and mortar wholesale partners where consumers make purchases

at their retail locations or through their online channels.

The Company classifies products into two major types:

sleep products and other.

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

Other products include cushions

and various other products.

The following tables present

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

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

Sales Category

Direct-to-consumer

Wholesale partner

Revenues, net

Three Months Ended

September 30,

Nine Months Ended

September 30,

Sleep products

Revenues, net

Contract Balances

Payment for sale of products

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

of shipping the products.

for sale of products through the e-commerce online channel, third-party online retailers, Purple retail showrooms and contact center

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

Amounts received for unshipped products are recorded as customer prepayments.

Customer prepayments totaled $ 9.3

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

During the three months ended September 30, 2021 and

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

Inventories consisted of the

following (in thousands):

September 30,

Raw materials

Work-in-process

Finished goods

Inventory obsolescence reserve

Customer prepayments totaled $ 4.9 million and $ 10.9 million at March 31, 2022 and December 31, 2021, respectively.

During the three months

ended March 31, 2022 and 2021, the Company recognized all revenue that was deferred in customer prepayments at December 31, 2021 and

2020, respectively.

Inventories, Net

PURPLE INNOVATION, INC.

net consisted of the following (in thousands):

Work-in-process

obsolescence reserve

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Property and Equipment

Property and equipment consisted

of the following (in thousands):

September 30,

Property and Equipment, Net

Property and equipment, net

consisted of the following (in thousands):

Equipment in progress

5 unchanged sentences

Property and equipment, net

Equipment in progress reflects

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

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

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

The Company capitalizes interest on borrowings during the active construction

period of major capital projects.

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

lives of the assets.

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

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

Such amount was

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

in the third quarter of 2021.

in progress reflects equipment, primarily related to mattress manufacturing, which is being constructed and was not in service at March

31, 2022 or December 31, 2021.

Interest capitalized on borrowings during the active construction period of major capital projects totaled

$ 0.2 million during the three months ended March 31, 2022.

There was no interest capitalized during the three months ended March 31,

Depreciation expense was $ 3.6 million and $ 1.5 million during the three months ended March 31, 2022 and 2021, respectively.

The Company leases its manufacturing

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

dates through 2036.

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

have initial lease terms of up to ten years .

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

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

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

reasonably certain at lease commencement.

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

with initial lease terms of three to five years .

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

2021 and December 31, 2020, respectively.

The following table presents

the Company’s lease costs (in thousands):

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

various expiration dates through 2036.

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

while Purple retail showrooms have initial lease terms of up to ten years .

Certain leases may contain options to extend the term of the

original lease.

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

Any lease renewal options are included in

the lease term if exercise is reasonably certain at lease commencement.

The Company also leases vehicles and other equipment under both

operating and finance leases with initial lease terms of three to five years .

The right-of-use asset for finance leases was $ 0.7 million

at both March 31, 2022 and December 31, 2021.

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

Operating lease costs

Variable lease costs

Short-term lease costs

Total lease costs

PURPLE INNOVATION, INC.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

The table below reconciles

the undiscounted cash flows for each of the first five years and total remaining years to the operating lease liabilities recorded on

the condensed consolidated balance sheet at September 30, 2021 (in thousands):

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

table below reconciles the undiscounted cash flows for each of the first five years and total remaining years to the operating lease

liabilities recorded on the condensed consolidated balance sheet at March 31, 2022 (in thousands):

2022 (excluding the three months ended March 31, 2022) (1)

Total operating lease payments

2 unchanged sentences

(1) Amount consists of $ 10.4 million of undiscounted cash flows offset by $ 3.6 million of tenant improvement allowances which are expected to be fully utilized in fiscal 2022.

As of September 30, 2021 and

As of March 31, 2022 and

December 31, 2021, the weighted-average remaining term of operating leases was 10.2 years and 10.7 years, respectively, and the weighted-average

discount rate of operating leases was 5.26 % and 5.30 %, respectively.

The following table provides

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

30, 2021 and 2020:

Nine Months Ended

September 30,

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

three months ended March 31, 2022 and 2021:

Three Months Ended

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

1 unchanged sentence

Other Current Liabilities

Other current liabilities

consisted of the following (in thousands):

September 30,

current liabilities consisted of the following (in thousands):

Warranty accrual – current portion

Long-term debt – current portion

Tax receivable agreement liability – current portion

Insurance financing

Long-term debt, net of unamortized issuance costs – current portion

Tax receivable agreement liability – current portion

Total other current liabilities

PURPLE INNOVATION, INC.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Debt consisted of the following

(in thousands):

September 30,

unamortized debt issuance costs

current portion of debt

consisted of the following (in thousands):

Revolving line of credit

unamortized issuance costs

current portion of debt, net of unamortized issuance costs

Long-term debt, net

Term Loan and Revolving

Line of Credit

On September 3, 2020, Purple

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

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

The borrowing rates for the

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

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

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

The term loan will be

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

subject to reimbursement of certain costs.

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

Pursuant to a Pledge and Security

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

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

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

the 2020 Credit Agreement.

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

interest in Purple LLC.

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

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

Loan and Revolving Line of Credit

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

(the “2020 Credit Agreement”).

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

While any amounts are outstanding under the

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

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

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

In particular, Purple LLC is (i) subject

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

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

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

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

Purple LLC is also restricted from paying dividends or making

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

If the Company or Purple LLC fail to perform their

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

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

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

The $ 55.0 million revolving

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

the term debt.

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

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

As of September 30, 2021, there was no balance

outstanding on the revolving credit facility.

PURPLE INNOVATION, INC.

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

line of credit.

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

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

The revolving credit facility has a term of five years

and carries the same interest provisions as the term debt.

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

the unused total revolving commitment.

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

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

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

interest in all intellectual property.

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

of Purple LLC under the 2020 Credit Agreement.

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

of all its ownership interest in Purple LLC.

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

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

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

While any amounts are

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

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

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

In particular,

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

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

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

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

Purple LLC is also restricted from

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

If the Company or Purple

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

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

due and payable.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

The Company incurred $ 2.5

million in debt issuance costs for the 2020 Credit Agreement.

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

between the term loan and the revolving line of credit.

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

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

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

The remaining $ 1.4

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

This amount is classified as other assets and

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

Interest expense under the

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

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

Related Party Loan

On March 27, 2020, the Company

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

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

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

The Company accounted for this amendment as

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

Interest expense on the Related Party Loan was $ 1.0 million

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

On September 3, 2020, the

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

The payment included $ 25.0 million

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

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

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

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

Warrant Liabilities

On February 26, 2019, two

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

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

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

In May 2020, Tony Pearce or Terry Pearce individually or

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

As a result, the exercise price of the warrants

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

The Company accounted for the Incremental Loan Warrants as liabilities

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

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

On November 9,

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

For the three and nine months

ended September 30, 2020, the Company recognized losses of $ 18.0 million and $ 43.3 million, respectively, in its condensed consolidated

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

The fair value of the Incremental Loan

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

The following are the assumptions

used in calculating fair value on September 30, 2020:

Trading price of common stock on measurement date

Exercise price

Risk free interest rate

Warrant life in years

Expected volatility

Expected dividend yield

Probability of warrant re-price

PURPLE INNOVATION, INC.

Company’s operating and financial results for the year ended December 31, 2021 did not satisfy the financial and performance

covenants required under the 2020 Credit Agreement.

On February 28, 2022, prior to the covenant compliance certification date, the Company

entered into the first amendment of the 2020 Credit Agreement to avoid a breach of these covenants and potential default.

This amendment

contained a covenant waiver period such that the net leverage ratio and fixed charge coverage ratio would not be tested for the fiscal

quarters ended December 31, 2021, March 31, 2022 and June 30, 2022.

Other modifications in the amendment included revised leverage

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

of the revolving loan if cash exceeded $ 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 extends into 2023 until certain conditions are met.

In addition, the interest rate on any outstanding borrowings

under the 2020 Credit Agreement was 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.

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% margin depending on the consolidated leverage ratio.

to the first amendment of the 2020 Credit Agreement, the Company incurred fees and expenses of $ 0.8 million that were recorded as debt

issuance costs in the condensed consolidated balance sheet and made a $ 2.5 million payment on the term loan to cover the four quarterly

principal payments due in 2022.

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

March 23, 2022, the Company entered into a second amendment to the 2020 Credit Agreement.

This amendment modified the 2020 Credit

Agreement to allow Coliseum Capital Management, LLC (“CCM”) and its investment affiliates to acquire 35 % or more of the combined

voting power of all equity interests of the Company entitled to vote for the election of members of the Company’s board of directors

without constituting an event of default.

CCM is considered a related party of the Company in that Adam Gray, a member of the board of

directors, serves as a managing partner of CCM.

For further discussion see Note 14— Related Party Transactions — Coliseum

Capital Management, LLC.

Pursuant to the second amendment

of the 2020 Credit Agreement, the Company incurred fees and expenses of $ 0.4 million that were recorded as debt issuance costs in the

condensed consolidated balance sheet.

The Company accounted for this amendment as a modification of existing debt in accordance with ASC

In November 2021, the Company

executed a $ 55.0 million draw on its revolving line of credit.

On March 31, 2022, the Company used a portion of the net proceeds received

from its March 2022 secondary offering to repay in full the $ 55.0 million of principal outstanding on the revolving line of credit.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

The public and sponsor warrants

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

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

The liability for these warrants was recorded

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

with changes in the fair value included in earnings.

During the nine months ended

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

The 1.9 million sponsor warrants outstanding at September 30, 2021 had a fair value of $ 9.0 million.

All of the public warrants were exercised

during fiscal 2020.

The Company used public trading

prices of the public warrants to determine their fair value.

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

Scholes model with the following assumptions:

September 30,

Trading price of common stock on measurement date

Interest expense under the 2020 Credit Agreement totaled $ 1.1 million and $ 0.6 million for the three months ended March 31, 2022 and 2021, respectively.

Warrant Liabilities

Company issued 12.8 million sponsor warrants pursuant to a private placement conducted simultaneously with its initial public offering.

Each of these warrants entitles the registered holder to purchase one-half of one share of the Company’s Class A common stock at

a price of $5.75 per half share ($11.50 per full share), subject to adjustment pursuant the terms of the warrant agreement.

In accordance

with the warrant agreement, a warrant holder may exercise its warrants only for a whole number of shares of the Class A common stock.

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

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

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

These sponsor warrants contain certain provisions that do not meet the criteria for equity classification and therefore

must be recorded as liabilities.

The liability for these warrants was recorded at fair value on the date of the Business Combination

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

During the three months ended

March 31, 2021, 6.6 million sponsor warrants were exercised resulting in the issuance of 2.3 million shares of Class A common stock.

were no sponsor warrants exercised during the three months ended March 31, 2022.

The 1.9 million sponsor warrants outstanding at March

31, 2022 and December 31, 2021 had fair values of $ 0.4 million and $ 4.3 million, respectively.

Company determined the fair value of the sponsor warrants using the Black Scholes model with the following assumptions:

price of common stock on measurement date

Exercise price

Risk free interest rate

Warrant life in years

Expected volatility

Expected dividend yield

During the three and nine

months ended September 30, 2021, the Company recognized gains of $ 5.4 million and $ 19.4 million, respectively, in its condensed consolidated

statements of operations related to decreases in the fair value of the sponsor warrants exercised during the respective periods or that

were outstanding at the end of the respective period.

For the three and nine months ended September 30, 2020, the Company recognized losses

of $ 86.0 million and $ 169.3 million, respectively, in its condensed consolidated statements of operations related to increases in the

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

Other Long-Term Liabilities

free interest rate

life in years

dividend yield

the three months ended March 31, 2022 and 2021, the Company recognized gains of $ 3.9 million and $ 9.1 million, respectively, in its condensed

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

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

Other Long-Term Liabilities

consist of the following (in thousands):

September 30,

Warranty accrual

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

– current portion of warranty accrual

Other long-term liabilities, net of current portion

PURPLE INNOVATION, INC.

long-term liabilities, net of current portion

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Commitments and Contingencies

Required Member Distributions

Warranty Liabilities

The 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.

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 estimated warranty costs expected to be paid beyond a year as a long-term liability.

The Company had the following

activity for warranty liabilities (in thousands):

Three Months Ended

Balance at beginning of period

Additions charged to expense for current period sales

Deduction from reserves for current period claims

Balance at end of period

Member Distributions

Prior to the Business Combination

8 unchanged sentences

mandatory distributions, other than tax distributions.

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

in tax distributions under the Third Purple LLC Agreement.

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

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

Service Agreement

In October 2017, the Company

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

The agreement provided for the construction

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

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

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

The agreement includes an early termination

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

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

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

As of September 30, 2021, the

early termination penalty was $ 0.8 million and the Company expects to fulfill its commitments under the agreement in the normal course

of business, and as such, no liability has been recorded.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Indemnification Obligations

From time to time, the Company

enters into contracts that contingently require it to indemnify parties against claims.

These contracts primarily relate to provisions

in the Company’s services agreements with related parties that may require the Company to indemnify the related parties against

services rendered;

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

such persons for liabilities.

Subscription Agreement

and Preemptive Rights

In February 2018, in

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

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

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

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

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

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

The subscription agreement provides

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

It also provides them with a

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

The Company also entered into a registration

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

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

CCP, Blackwell and CDF.

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

Rights of Securities

The holders of certain warrants

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

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

In March 2018, the Company filed a registration statement registering

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

During the three months ended March 31, 2021, the Company paid $ 0.5 million in

tax distributions under the Third Purple LLC Agreement.

There were no tax distributions paid during the three months ended March 31, 2022.

At March 31, 2022, the Company’s condensed consolidated balance sheet had $ 0.1 million of accrued tax distributions included in

other current liabilities.

Agreement and Preemptive Rights

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

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

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

(the “Coliseum Private Placement”).

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

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

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

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

It also provides them with a right of first refusal with respect to certain debt and preferred equity financings by the Company.

Company also entered into a registration rights agreement with CCP, Blackwell, and CDF, providing for the registration of the shares

of Class A common stock issued and assigned to CCP and Blackwell in the Coliseum Private Placement, as well as the shares of Class A

common stock underlying the warrants received by CCP, Blackwell and CDF.

The Company has filed a registration statement with respect

to such securities.

of Securities Holders

holders of certain warrants exercisable into Class A common stock, including CCP, Blackwell and CDF, were entitled to registration rights

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

In March 2018, the Company filed

a registration statement registering these warrants (and any shares of Class A common stock issuable upon the exercise of the warrants),

and certain unregistered shares of Class A common stock.

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

Under the Registration Rights Agreement dated February 2,

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

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

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

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

On May 21, 2021, 7.3 million

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

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

The underwriting discount, commission and other related costs incurred

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

The holders of the Incremental

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

Company in connection with the Amended and Restated Credit Agreement.

In March 2019, the Company filed a registration statement registering

these warrants (and any shares of Class A Stock issuable upon the exercise of the warrants).

The registration statement was declared effective

on May 17, 2019.

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

Loan Warrants.

PURPLE INNOVATION, INC.

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

the Coliseum Investors have the right to make written demands for up to three registrations of certain warrants and shares of Class A

common stock held by them, including in underwritten offerings.

In an underwritten offering of such warrants and shares of Class A common

stock by the Coliseum Investors, the Company will pay underwriting discounts and commissions and certain expenses incurred by the Coliseum

May 21, 2021, 7.3 million shares of Class A common stock were sold in a secondary offering by the Coliseum Investors at a price of $ 30.00

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

The underwriting discount, commission and other

related costs incurred by the Company for the secondary offering totaled $ 7.9 million and was recorded in May 2021 as general and administrative

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

On February 2, 2018, in connection

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

(the “InnoHold Registration Rights Agreement”).

Under the InnoHold Registration Rights Agreement, InnoHold holds registration

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

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

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

to a maximum of three demands in total).

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

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

shares of Class A Stock.

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

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

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

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

Purple LLC Class B

Unit Exchange Right

On February 2, 2018, in connection

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

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

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

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

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

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

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

In December 2018, InnoHold distributed Paired Securities

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

In June 2019, InnoHold distributed Paired

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

Holders of Class B Units

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

In certain cases, adjustments

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

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

into other securities or property.

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

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

The right of a holder of Paired

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

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

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

traded partnership” under applicable tax laws.

The Company and each holder

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

stamp taxes and similar duties.

During the nine months ended

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

PURPLE INNOVATION, INC.

LLC Class B Unit Exchange Right

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

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

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

B Units, the “Paired Securities”) for, at the Company’s option, either (A) shares of Class A common stock at an initial

exchange ratio equal to one Paired Security for one share of Class A common stock or (B) a cash payment equal to the product of the average

of the volume-weighted closing price of one share of Class A common stock for the ten trading days immediately prior to the date InnoHold

or other Class B Unit holders deliver a notice of exchange multiplied by the number of Paired Securities being exchanged.

2018, InnoHold distributed Paired Securities to Terry Pearce and Tony Pearce who agreed to become parties to the Exchange Agreement.

In June 2019, InnoHold distributed Paired Securities to certain current and former employees who also agreed to become parties to the

exchange agreement.

Holders of Class B Units may elect to exchange all or any portion of their Paired Securities as described above by

delivering a notice to Purple LLC.

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

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

the Class A common stock is exchanged or converted into other securities or property.

The exchange ratio will also adjust in certain

circumstances when the Company acquires Class B Units other than through an exchange for its shares of Class A common stock.

right of a holder of Paired Securities to exchange may be limited by the Company if it reasonably determines in good faith that such

restrictions are required by applicable law (including securities laws), such exchange would not be permitted under other agreements

of such holder with the Company or its subsidiaries, including the Third Purple LLC Agreement, or if such exchange would cause Purple

LLC to be treated as a “publicly traded partnership” under applicable tax laws.

Company and each holder of Paired Securities shall bear its own expense regarding the exchange except that the Company shall be responsible

for transfer taxes, stamp taxes and similar duties.

were no Paired Securities exchanged for Class A common stock during the three months ended March 31, 2022.

During the three months ended

March 31, 2021, 0.1 million of Paired Securities were exchanged for shares of Class A common stock.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Maintenance of One-to-One

The Third Purple LLC Agreement

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

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

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

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

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

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

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

These provisions are intended to result in non-controlling

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

Non-Income Related

Supreme Court ruling

in South Dakota v.

of One-to-One Ratios

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

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

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

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

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

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

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

These provisions

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

interest in Purple LLC.

Related Taxes

Supreme Court ruling in South Dakota v.

Wayfair, Inc.

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

state and local sales taxes.

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

on e-commerce.

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

not required to collect state and local sales taxes.

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

income or other taxes on e-commerce.

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

However, the application

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

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

The application of these taxes

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

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

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

Legal Proceedings

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

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

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

capture data and collect and remit taxes.

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

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

On September 9, 2019, Purple

6 unchanged sentences

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

to this, Purple LLC has alleged that PerfectSense has:

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

to this, Purple LLC has alleged that PerfectSense has designed their mattresses with the same look as the Purple mattresses (white mattress

top, purple stripe, and grey bottom);

6 unchanged sentences

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

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

(including delivery up of the www.purplesleep.

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

18 unchanged sentences

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

The Company believes settlement will be finalized soon and the action

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

PerfectSense has not responded to Purple’s repeated attempts

to finalize the settlement.

Purple is contemplating its next steps to bring this action to an end, including a motion to enforce a settlement

If the action is not resolved by way of settlement, Purple will resume vigorously pursuing its claims.

On September 20, 2020, Purple

6 unchanged sentences

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

If successful,

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

PURPLE INNOVATION, INC.

1, 2022, the court issued an opinion that remanded the case back to the U.S.

Trade Representative (“USTR”) to address certain

procedural flaws in USTR’s process for determining whether certain products were subject to the Section 301 duties.

remand results are currently due by June 30, 2022.

If successful, this litigation could result in a refund of some or all of the Section

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

On October 13, 2020, Purple

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

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

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

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

Purple seeks monetary

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

On October 21, 2020, shortly

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

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

Subsequently,

the two cases were consolidated into one.

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

October 13, 2020, Purple LLC filed a lawsuit against Responsive Surface Technology, LLC and its parent company, PatienTech, LLC (collectively

referred to as “ReST”) in the United States District Court for the District of Utah.

The lawsuit arises from ReST’s

multiple breaches of its obligations to Purple LLC, including infringing upon Purple LLC’s trademarks, patents, and trade dress,

among other claims.

Purple seeks monetary damages, injunctive relief, and declaratory judgment based on certain conduct by ReST (“Case

On October 21, 2020, shortly after the complaint was filed in Case I, ReST filed a retaliatory lawsuit against Purple LLC,

Gary DiCamillo, Adam Gray, Joseph Megibow, Terry Pearce, and Tony Pearce, also in the United States District Court for the District of

Utah (“Case II”).

Subsequently, the two cases were consolidated into one.

Case II (now combined with Case I) involves many

of the same facts and transactions as Case I.

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

Purple LLC opposed the motion to compel arbitration,

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

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

the District of Utah.

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

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

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

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

ReST filed its counterclaim

with the AAA on September 21, 2021.

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

No date for the arbitration hearing has been set.

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

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

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

Purple intends to vigorously pursue its claims and defend against the claims made by ReST.

On November 19, 2020, Purple

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

District Court for the District of

Utah for patent infringement, trademark infringement, trade secret misappropriation, and a number of related state law based claims.

principal allegations are that Intellibed has manufactured and sold unauthorized, infringing products under the Sleepy’s brand name

owned by third-party Mattress Firm.

Purple LLC also requested declaratory relief related to certain assignment terms of a license agreement

in which Purple LLC is the licensor and Intellibed is the licensee.

On December 14, 2020, Intellibed filed a motion to dismiss Counts

I through XI of Purple LLC’s Complaint on the ground that these Counts fail to state a claim upon which relief can be granted.

December 15, 2020, Intellibed filed an Answer to Purple LLC’s complaint and also asserted against Purple LLC a total of eight counterclaims,

including a number of declaratory judgment claims, breach of contract, and tortious interference claims.

Intellibed’s main allegations

are that its use of Purple LLC’s patents, trademark, and trade secrets in connection with Mattress Firm’s Sleepy’s products

is authorized under the license agreement.

On January 19, 2021, Purple LLC filed a motion to dismiss Intellibed’s fifth, sixth,

seventh, and eighth counterclaims on the ground that these counterclaims fail to state a claim upon which relief can be granted.

on Purple LLC’s partial motion to dismiss was completed on March 2, 2021.

On January 19, 2021, Purple LLC also filed an Answer to

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

On January 27, 2021, Purple LLC filed

a First Amended Complaint in response to Intellibed’s initial motion to dismiss.

On February 10, 2021, Intellibed filed a motion

to dismiss Counts I through XI of Purple LLC’s First Amended Complaint.

Briefing on Intellibed’s partial motion to dismiss

was completed on March 24, 2021.

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

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

license agreement.

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

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

to vigorously pursue its claims.

On June 8, 2021, Serta Simmons

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

(the “Georgia Litigation”).

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

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

valid 2015 noncompete agreement.

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

of the conduct alleged in the Complaint.

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

to indemnify, subject to certain conditions.

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

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

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

The Company’s motion to dismiss

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

The Court is expected to render a decision on the

Company’s motion to dismiss in November 2021.

On July 9, 2021, the Company filed its own Complaint in the Fourth Judicial District

Court of Salt Lake County, Utah, Case No.

Purple LLC opposed the motion to compel arbitration, arguing that ReST waived any rights they may have had to arbitration and that all

the claims in both cases should stay in the courts.

However, the Court granted ReST’s motion to compel arbitration, and stayed

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

Additionally, the Court ruled that ReST’s claims

against the Purple board members were not subject to arbitration, and the Court stayed ReST’s claims against those individuals.

Pursuant to the Court’s order, Purple filed a demand for arbitration with the American Arbitration Association (the “AAA”)

on September 1, 2021.

ReST filed its counterclaim with the AAA on September 21, 2021.The parties have selected an arbitrator and

they have agreed upon a scheduling order.

Currently, the parties are in the fact discovery phase of the arbitration and are working

to schedule depositions of key witnesses.

The arbitration hearing is set to begin on November 29, 2022 and will continue through

December 9, 2022.

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

of millions of dollars.

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

However, Purple intends to vigorously pursue

its claims and defend against the claims made by ReST.

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

Court for the District of Utah for patent infringement, trademark infringement, trade secret misappropriation, and a number of related

state law based claims.

The principal allegations are that Intellibed has manufactured and sold unauthorized, infringing products under

the Sleepy’s brand name owned by third-party Mattress Firm.

Purple LLC also requested declaratory relief related to certain assignment

terms of a license agreement in which Purple LLC is the licensor and Intellibed is the licensee.

On December 14, 2020, Intellibed filed

a motion to dismiss Counts I through XI of Purple LLC’s Complaint on the ground that these Counts fail to state a claim upon which

relief can be granted.

On December 15, 2020, Intellibed filed an Answer to Purple LLC’s complaint and also asserted against Purple

LLC a total of eight counterclaims, including a number of declaratory judgment claims, breach of contract, and tortious interference

Intellibed’s main allegations are that its use of Purple LLC’s patents, trademark, and trade secrets in connection

with Mattress Firm’s Sleepy’s products is authorized under the license agreement.

On January 19, 2021, Purple LLC filed a

motion to dismiss Intellibed’s fifth, sixth, seventh, and eighth counterclaims on the ground that these counterclaims fail to state

a claim upon which relief can be granted.

Briefing on Purple LLC’s partial motion to dismiss was completed on March 2, 2021.

January 19, 2021, Purple LLC also filed an Answer to Intellibed’s counterclaims, which were not subject to Purple LLC’s motion

On January 27, 2021, Purple LLC filed a First Amended Complaint in response to Intellibed’s initial motion to dismiss.

On February 10, 2021, Intellibed filed a motion to dismiss Counts I through XI of Purple LLC’s First Amended Complaint.

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

On September 28, 2021, the District Court dismissed

Purple’s complaint without prejudice, and also dismissed ACTI’s counterclaim without prejudice, while the parties pursued

dispute-resolution procedures set out in the license agreement.

Because the Court found that the license agreement required the

parties to follow the contractual dispute-resolution procedures prior to filing a lawsuit, Purple initiated those procedures in accordance

with the license agreement and intends to continue to vigorously pursue its claims.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

June 8, 2021, Serta Simmons Bedding, LLC (“SSB”) filed a Complaint against the Company in the Superior Court of Gwinnett

County, Georgia, Case No.

21-A-04413-1 (the “Georgia Litigation”).

SSB’s Complaint alleges that the Company intentionally

interfered with SSB’s business and contractual relations and violated the Georgia Trade Secrets Act by hiring one of SSB’s

former employees in the face of an allegedly valid 2015 noncompete agreement.

SSB seeks compensatory damages, punitive damages, equitable

relief, and attorneys’ fees as a result of the conduct alleged in the Complaint.

SSB also initiated arbitration proceedings against

its former employee who Purple LLC has agreed to indemnify, subject to certain conditions.

On July 12, 2021, the Company filed

an Answer to SSB’s Complaint in the Georgia Litigation, denying all allegations of unlawful conduct, and further moved to dismiss

the Georgia Litigation on the grounds that Georgia is an inconvenient forum and the parties’ dispute should instead be litigated

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

21040011 (the “Utah Litigation”), seeking:

(1) a declaratory judgment that the arbitration

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

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

by SSB and currently pending against the former employee.

(1) a declaratory judgment that the arbitration clause in the former

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

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

currently pending against the former employee.

The Company filed a motion for summary judgment on these claims on August 16, 2021.

SSB filed an Answer on August 18, 2021.

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

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

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

After attending a mediation, the parties entered in a settlement agreement on December 31,

2021 resolving all claims in the Georgia Litigation and Utah Litigation.

The Company did not pay any monetary consideration to

SSB in connection with the settlement agreement.

On January 12, 2022, pursuant to the terms of the settlement agreement, SSB dismissed

the Georgia Litigation without prejudice and the Company dismissed the Utah Litigation without prejudice.

On May 3, 2022, the Company

filed a Complaint against Photon Interactive UK Limited (“Photon”) in the U.S.

District Court for the District of Delaware

regarding a Master Professional Services Agreement with Photon dated on or around November 1, 2019.

Pursuant to the agreement, Photon

was required to rebuild Purple’s website architecture and checkout process.

Purple paid Photon $ 0.9 million under the Agreement.

However, Photon failed to deliver any of the required deliverables as specified in the agreement.

Purple withheld payment of the final

$ 0.1 million due pursuant to Photon’s invoices pending a resolution with Photon.

Since resolution discussions with Photon have failed,

Purple filed the aforementioned complaint for breach of contract against Photon seeking, among other damages, reimbursement for all amounts

paid to under the agreement.

It is anticipated that Photon will counter-sue for amounts they claim are owed.

The Company is from time to

4 unchanged sentences

Related Party Transactions

The Company had various transactions

with entities or individuals which are considered related parties.

Coliseum Capital Management,

Immediately following the

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

Gray is a manager

of Coliseum Capital, LLC, which is the general partner of CCP and CDF, and he is also a managing partner of Coliseum Capital Management,

LLC (“CCM”), which is the investment manager of Blackwell.

Gray has voting and dispositive control over securities held

by CCP, CDF and Blackwell which were also Lenders under the Amended and Restated Credit Agreement.

In 2018, the Lenders agreed to make

the Related Party Loan in an aggregate principal amount of $ 25.0 million pursuant to an agreement entered into as part of the Business

In conjunction with this agreement, the Sponsor agreed to assign to the Lenders an aggregate of 2.5 million warrants to purchase

1.3 million shares of its Class A Stock.

In 2019, the Incremental Lenders funded a $10.0 million increase in the Related Party Loan and

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

to certain adjustments.

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

interest payments to the Lenders during the first and second quarters of 2020.

On September 3, 2020, the Company paid $45.0 million to

retire, in full, the Related Party Loan.

The payment included the $25.0 million original loan under the agreement, $10.0 million for the

subsequent incremental loan, $6.6 million of paid-in-kind interest, $2.5 million in a prepayment fee and $0.9 million in accrued interest.

In connection with the Business Combination, the Company entered into a subscription agreement with CCP and Blackwell, pursuant to which

CCP and Blackwell agreed to purchase from the Company an aggregate of 4.0 million shares of Class A Stock at a purchase price

of $ 10.00 per share (the “Coliseum Private Placement”).

In connection with the Coliseum Private Placement, the Sponsor assigned

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

warrants to purchase 1.6 million shares of Class A Stock to CCP, Blackwell, and CDF.

The subscription agreement provides CCP and

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

It also provides them with a right of

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

The Company also entered into a registration

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

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

CCP, Blackwell and CDF.

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

In May 2020, pursuant to the

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

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

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

Purple Founder Entities

TNT Holdings, LLC (herein

“TNT Holdings”), EdiZONE, LLC, (herein EdiZONE an entity wholly owned by TNT Holdings) and InnoHold (collectively the “Purple

Founder Entities”) were entities under common control with Purple LLC prior to the Business Combination.

TNT Holdings and InnoHold

are majority owned and controlled by Terry Pearce and Tony Pearce (the “Purple Founders”), who were appointed to the Company’s

Board following the Business Combination.

InnoHold was a majority shareholder of the Company until it sold a portion of its interests

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

Founders also resigned as employees of Purple LLC and retired from the Company’s Board in August 2020.

PURPLE INNOVATION, INC.

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

Capital Management, LLC

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

Gray is a manager of Coliseum Capital, LLC, which is the general partner of CCP and CDF, and he is also a managing partner of Coliseum

Capital Management, LLC (“CCM”), which is the investment manager of Blackwell.

Gray has voting and dispositive control

over securities held by CCP, CDF and Blackwell which were also Lenders under the Amended and Restated Credit Agreement.

See Note 13— Commitments

and Contingencies — Subscription Agreement and Preemptive Rights for further discussion .

Founder Entities

Holdings, LLC (herein “TNT Holdings”), EdiZONE, LLC, (herein EdiZONE an entity wholly owned by TNT Holdings) and InnoHold

(collectively the “Purple Founder Entities”) were entities under common control with Purple LLC prior to the Business Combination.

TNT Holdings and InnoHold are majority owned and controlled by Terry Pearce and Tony Pearce (the “Purple Founders”), who

were appointed to the Company’s Board following the Business Combination.

InnoHold was a majority shareholder of the Company until

it sold a portion of its interests in a secondary public offering in May 2020 and the remainder of its interests in a secondary public

offering in September 2020.

The Purple Founders also resigned as employees of Purple LLC and retired from the Company’s Board in

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

TNT Holdings owned the Alpine

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

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

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

Lease Agreement with TNT Holdings.

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

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

in TNT Holdings or 123E LLC.

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

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

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

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

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

In accordance with the terms of that lease,

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

occur on September 30, 2022.

During the nine months ended

September 30, 2021, certain current and former employees of Purple LLC who received distributions of Paired Securities from InnoHold exchanged

0.1 million of Paired Securities for Class A Stock.

On November 9, 2018, Purple

LLC and EdiZONE executed the Second Amended and Restated Confidential Assignment and License Back Agreement (the “Revised License

Agreement”), pursuant to which EdiZONE assigned all of its comfort and cushioning intellectual property to Purple LLC and further

limited the subset of such intellectual property licensed back to EdiZONE to only those uses that enabled EdiZONE to comply with its obligations

under previously existing contracts, agreements and licenses.

On August 14, 2020, Purple LLC entered into a separate agreement whereby

EdiZONE, for consideration of $ 8.5 million, assigned a license agreement with Advanced Comfort Technologies, Inc., dba Intellibed (“Intellibed”),

and related royalties payable thereunder, to Purple LLC, along with the trademarks GEL MATRIX and INTELLIPILLOW.

In connection with such

assignment, the Company agreed to indemnify EdiZONE against claims by Intellibed relating to EdiZONE’s breach under the agreement.

In connection with the Business

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

0.5 million shares of Class B Stock and 0.5 million Class B Units otherwise issuable to InnoHold as equity consideration were deposited

in an escrow account for up to three years from the date of the Business Combination pursuant to a contingency escrow agreement.

2020, an amendment to the escrow agreement was signed whereby the 0.5 million shares of Class B Stock and 0.5 million Class B Units held

in escrow were exchanged for $5.0 million.

On February 3, 2021, the Company received $4.1 million from InnoHold as reimbursement for amounts

that qualified for indemnification from the $5.0 million being held in escrow.

Holdings owned the Alpine facility Purple LLC has been leasing since 2010, and the Purple Founders informed Purple LLC that TNT Holdings

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

Effective as of October 31, 2017, Purple LLC

entered into an Amended and Restated Lease Agreement with TNT Holdings.

The Company determined that neither TNT Holdings nor 123E LLC

are a VIE as neither the Company nor Purple LLC hold any explicit or implicit variable interest in TNT Holdings or 123E LLC and do not

have a controlling financial interest in TNT Holdings or 123E LLC.

Purple LLC incurred $ 0.2 million and $ 0.2 million in rent expense

to 123E LLC or TNT Holdings for the building lease of the Alpine facility for the three months ended March 31, 2022 and 2021, respectively.

Purple LLC continues to lease the Alpine facility that was formerly the Company headquarters, for use in production, research and development

and video production.

In accordance with the terms of that lease, on September 3, 2021, Purple LLC gave notice to 123E LLC that it intended

to exercise its right to an early termination of the lease to occur on September 30, 2022.

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

from InnoHold exchanged 0.1 million of Paired Securities for Class A common stock.

There were no such exchanges during the three months

ended March 31, 2022.

connection with the Business Combination, to secure payment of a certain portion of specified post-closing indemnification rights of

the Company under the Merger Agreement, 0.5 million shares of Class B common stock and 0.5 million Class B Units otherwise issuable to

InnoHold as equity consideration were deposited in an escrow account for up to three years from the date of the Business Combination

pursuant to a contingency escrow agreement.

In September 2020, an amendment to the escrow agreement was signed whereby the 0.5 million

shares of Class B Stock and 0.5 million Class B Units held in escrow were exchanged for $ 5.0 million.

On February 3, 2021, the Company

received $ 4.1 million from InnoHold as reimbursement for amounts that qualified for indemnification from the $ 5.0 million being held

The remaining $ 0.9 million in escrow was returned to InnoHold.

The amount received from InnoHold was recorded as additional paid-in capital in the condensed consolidated balance sheet.

During the nine months ended

September 30, 2021, Purple LLC paid InnoHold through withholding payments directly to various states, an aggregate of $ 0.4 million in

required tax distributions pursuant to the Third Purple LLC Agreement.

The amount received from InnoHold was recorded as additional

paid-in capital in the condensed consolidated balance sheet.

During the three months ended

March 31, 2021, Purple LLC paid InnoHold through withholding payments directly to various states, an aggregate of $ 0.3 million in required

tax distributions pursuant to the Third Purple LLC Agreement.

There were no such payments made by Purple LLC during the three months

ended March 31, 2022.

Stockholders’ Equity

Prior to the Business Combination,

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

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

Class A Common Stock

The Company has 210.0 million

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

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

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

receive any portion of any such assets in respect of their shares upon liquidation, dissolution, distribution of assets or winding-up

of the Company in excess of the par value of such stock.

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

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

of the stockholders.

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

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

In accordance with the terms

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

The shares of Class

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

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

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

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

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

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

During fiscal 2020, a Triggering Event occurred

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

a thirty-trading day period.

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

PURPLE INNOVATION, INC.

A Common Stock

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

Holders of the Company’s

Class A common stock are entitled to one vote for each share held on all matters to be voted on by the stockholders and participate in

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

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

Holders of Class A common stock and holders

of Class B common stock voting together as a single class, have the exclusive right to vote for the election of directors and on all

other matters properly submitted to a vote of the stockholders.

Holders of Class A common stock and Class B common stock are entitled

to one vote per share on matters to be voted on by stockholders.

At March 31, 2022, 82.6 million shares of Class A common stock were

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Class B Common Stock

The Company has 90.0 million

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

Holders of the Company’s Class B Stock will vote together

as a single class with holders of the Company’s Class A Stock on all matters properly submitted to a vote of the stockholders.

of Class B Stock may be issued only to InnoHold, their respective successors and assigns, as well as any permitted transferees of InnoHold.

A holder of Class B Stock may transfer shares of Class B Stock to any transferee (other than the Company) only if such holder also simultaneously

transfers an equal number of such holder’s Purple LLC Class B Units to such transferee in compliance with the Third Purple LLC Agreement.

The Class B Stock is not entitled to receive dividends, if declared by the Board, or to receive any portion of any such assets in respect

of their shares upon liquidation, dissolution, distribution of assets or winding-up of the Company in excess of the par value of such

In connection with the Business

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

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

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

Preferred Stock

The Company has 5.0 million

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

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

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

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

and other special rights or restrictions.

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

Public and Sponsor

There were 15.5 million public

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

simultaneously with the IPO.

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

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

of the warrant agreement.

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

of the Class A Stock.

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

will not be exercisable.

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

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

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

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

The Company may call the warrants

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

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

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

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

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

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

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

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

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

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

is sent to the warrant agent.

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

PURPLE INNOVATION, INC.

B Common Stock

Company has 90.0 million shares of Class B common stock authorized at a par value of $ 0.0001 per share.

Holders of the Company’s

Class B common stock will vote together as a single class with holders of the Company’s Class A common stock on all matters properly

submitted to a vote of the stockholders.

Shares of Class B common stock may be issued only to InnoHold, their respective successors and

assigns, as well as any permitted transferees of InnoHold.

A holder may transfer their shares of Class B common stock to any transferee

(other than the Company) only if such holder also simultaneously transfers an equal number of such holder’s Purple LLC Class B

Units to such transferee in compliance with the Third Purple LLC Agreement.

The Class B common stock is not entitled to receive dividends,

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

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

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

the equity consideration.

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

shares for Class A common stock that it sold.

All of the 0.4 million shares of Class B common stock outstanding at March 31, 2022 were

held by other parties.

Company has 5.0 million shares of preferred stock authorized at a par value of $ 0.0001 per share.

The preferred stock may be issued from

time to time in one or more series.

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

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

rights, designations and other special rights or restrictions.

At March 31, 2022, there were no shares of preferred stock outstanding.

There were 12.8 million sponsor

warrants issued pursuant to a private placement simultaneously with the Company’s IPO.

The Company may call the warrants for redemption

if the reported last sale price of the Class A common stock equals or exceeds $24.00 per share for any 20 trading days within a 30-trading

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

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

In addition, so long as such sponsor warrants are held by the Sponsor or its permitted transferee, the holder may elect to exercise the

sponsor warrants on a cashless basis, by surrendering their sponsor warrants for that number of shares of Class A common stock equal to

the quotient obtained by dividing (x) the product of the number of shares of Class A common stock underlying the sponsor warrants, multiplied

by the difference between the exercise price of the sponsor warrants and the “fair market value” (defined below), by (y) the

fair market value.

The “fair market value” means the average reported last sale price of the Class A common stock for the

10 trading days ending on the third trading day prior to the date on which the notice of warrant exercise is sent to the warrant agent.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

On October 27, 2020, the Company

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

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

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

All of the public

warrants were exercised or redeemed by November 30, 2020.

During the nine months ended

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

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

Incremental Loan Warrants

In connection with the Amended

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

million shares of the Company’s Class A Stock.

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

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

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

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

On October 27, 2020, the Company

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

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

Any exercise of the warrants prior to that date

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

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

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

Incremental Lenders.

Noncontrolling Interest

Noncontrolling interest (“NCI”)

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

Upon the close of the Business Combination, and at December

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

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

The Company has consolidated the financial position and results

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

The Company’s sole material

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

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

income taxes.

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

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

While the Company

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

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

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

financial statements under GAAP.

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

The primary factors

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

value of the warrant liability.

PURPLE INNOVATION, INC.

There were no sponsor warrants

exercised during the three months ended March 31, 2022.

During the three months ended March 31, 2021, 6.6 million sponsor warrants were

exercised resulting in the issuance of 2.3 million shares of Class A common stock.

There were 1.9 million sponsor warrants outstanding

at March 31, 2022.

Noncontrolling

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

Upon the close of the Business

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

approximately 82 %.

At March 31, 2022, the combined NCI percentage in Purple LLC was approximately 1 %.

The Company has consolidated the

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

B Unit holders as NCI.

each interim period, the Company estimates its forecasted full-year effective tax rate.

That forecasted rate is applied to year-to-date

ordinary income or loss to compute the year-to-date income tax provision.

In order to compute the annual effective tax rate, the Company

estimates its full year ordinary income and total tax provision, including both current and deferred taxes.

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

Under this method, deferred tax assets and

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

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

In assessing the realizability of deferred tax assets, management

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

Deferred tax assets and liabilities are calculated

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

expected to be recovered or settled.

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

year of the enacted rate change.

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

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

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

federal income tax purposes and for purposes

of certain state and local income taxes.

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

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

been distributed.

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

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

on its allocable earnings of Purple LLC.

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

by the Company in its consolidated financial statements under GAAP.

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

the statutory rate.

The primary factors impacting expected tax are the change in fair value of the warrant liabilities and remeasurement

of deferred taxes primarily as a result of the change in the estimated state tax rate.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Prior to the second quarter

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

in Purple LLC.

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

utilize the deferred tax assets on income tax returns.

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

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

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

Considering this and other factors, the Company maintained a

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

During fiscal 2020, the Company

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

some of its deferred tax assets.

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

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

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

during 2020 and recorded as an income tax benefit.

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

of a $70.8 million valuation allowance that has been recorded against the residual outside partnership basis for the amount the Company

believes is not more likely than not realizable.

As a result, there was an overall increase of $ 18.8 million in the valuation allowance

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

The Company currently estimates

its annual effective income tax rate to be 7.53 %.

The annualized effective tax rate for the Company differs from the federal rate of 21 %

primarily due to the non-taxable nature of the change in fair value of the warrant liability and state and local income taxes.

For the nine months ended

September 30, 2021, the Company has recorded income tax expense of $ 1.0 million.

The effective tax rate for the nine months ended September

30, 2021 was 3.77 %, which is less than the federal statutory rate because the gain related to the change in fair value of the warrant

liability is excluded from taxable income for income tax purposes.

In response to the COVID-19

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

The CARES Act lifts certain

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

Corporate taxpayers may carryback net operating

losses (NOLs) originating during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act.

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

taxable income in 2018, 2019 or 2020.

Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business

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

The CARES Act allows taxpayers with

alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through

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

On March 11, 2021, Congress

passed, and the President signed into law, the American Rescue Plan Act, 2021 (the “ARP”), which includes certain business

tax provisions.

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

The Company will continue to evaluate the impact of new legislation on its financial position, results of operations, and cash

In connection with the Business

Combination, the Company entered into a tax receivable agreement with InnoHold, which provides for the payment by the Company to InnoHold

of 80 % of the net cash savings, if any, in U.S.

federal, state and local income tax that the Company actually realizes (or is deemed to

realize in certain circumstances) in periods after the Closing as a result of (i) any tax basis increases in the assets of Purple LLC

resulting from the distribution to InnoHold of the cash consideration, (ii) the tax basis increases in the assets of Purple LLC resulting

from the redemption by Purple LLC or the exchange by the Company, as applicable, of Class B Paired Securities or cash, as applicable,

and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, payments it makes under

the tax receivable agreement.

PURPLE INNOVATION, INC.

tax assets at March 31, 2022 totaled $ 219.7 million, which is net of a $ 93.5 million valuation allowance that has been recorded against

the residual outside partnership basis for the amount the Company believes is not more likely than not realizable.

As a result, there

was an overall increase of $ 23.7 million in the valuation allowance from December 31, 2021 to March 31, 2022, primarily as a result of

an increase in the residual outside partnership basis.

Company currently estimates its annual effective income tax rate to be 14.9 %.

The annualized effective tax rate for the Company differs

from the federal rate of 21 % primarily due to the non-taxable nature of the change in fair value of the warrant liabilities and state

and local income taxes.

the three months ended March 31, 2022, the Company has recorded an income benefit of $ 1.8 million.

The effective tax rate for the three

months ended March 31, 2022 was 11.7 %.

This is less than the federal statutory rate due primarily to a reduction of deferred tax assets

associated with adjustments for stock based compensation and the gain relating to the change in fair value of the warrant liability is

excluded from taxable income for income tax purposes.

connection with the Business Combination, the Company entered into a tax receivable agreement with InnoHold, which provides for the payment

by the Company to InnoHold of 80 % of the net cash savings, if any, in U.S.

federal, state and local income tax that the Company actually

realizes (or is deemed to realize in certain circumstances) in periods after the Closing as a result of (i) any tax basis increases in

the assets of Purple LLC resulting from the distribution to InnoHold of the cash consideration, (ii) the tax basis increases in the assets

of Purple LLC resulting from the redemption by Purple LLC or the exchange by the Company, as applicable, of Class B Paired Securities

or cash, as applicable, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising

from, payments it makes under the agreement.

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

a tax receivable agreement liability may be recorded based on 80 % of the estimated future cash tax savings that the Company may realize

as a result of increases in the basis of the assets of Purple LLC attributed to the Company as a result of such exchange or redemption.

The amount of the increase in asset basis, the related estimated cash tax savings and the attendant liability to be recorded will depend

on the price of the Company’s Class A common stock at the time of the relevant redemption or exchange.

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

the amount and timing of future taxable income.

As a result of the initial merger transaction, the subsequent exchanges of Class B Units

for Class A common stock and changes in estimates relating to the expected tax benefits associated with the liability under the agreement,

the potential future tax receivable agreement liability was $ 162.2 million and $ 168.1 million as of March 31, 2022 and December 31, 2021,

respectively.

The reduction in the March 31, 2022 tax receivable agreement liability reflected a payment of $ 5.8 million made in January

As of December 31, 2021, the Company estimated $ 10.0 million of U.S.

federal and $ 2.7 million of state net operating loss carryforwards available to reduce future taxable income.

The federal net operating

losses may be carried forward indefinitely for U.S.

federal tax purposes, while some state carryforwards are subject to expiration beginning

It is possible that we will not generate taxable income in time to use all or a portion of these net operating loss carryforwards

before their expiration or at all.

Additionally, the Company may be subject to the NOL utilization provisions of Section 382 of the Internal

Revenue Code of 1986, as amended due to ownership changes that may have occurred previously or that could occur in the future.

of an ownership change may be the imposition of an annual limitation on the use of NOL carryforwards attributable to periods before the

The amount of the annual limitation depends upon the value of the Company immediately before the change, changes to the Company’s

capital during a specified period prior to the change, and the federal published interest rate.

As of March 31, 2022, the Company has

not completed its analyses in respect of Section 382 to determine whether a change in ownership has occurred, the annual

limitation, if any, or whether any of the tax attributes are subject to a permanent limitation.

Until an analysis is completed, there

can be no assurance that the existing net operating loss carry-forwards or credits are not subject to significant limitation.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

As noncontrolling interest

holders exercise their right to exchange or cause Purple LLC to redeem all or a portion of their Class B Units, a tax receivable agreement

liability may be recorded based on 80% of the estimated future cash tax savings that the Company may realize as a result of increases

in the basis of the assets of Purple LLC attributed to the Company as a result of such exchange or redemption.

The amount of the increase

in asset basis, the related estimated cash tax savings and the attendant tax receivable agreement liability to be recorded will depend

on the price of the Company’s Class A Stock at the time of the relevant redemption or exchange.

The estimation of liability

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

future taxable income.

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

the potential future tax receivable agreement liability is $171.5 million.

Of the tax receivable agreement liability recorded during the

nine months ended September 30, 2021, $0.8 million relates to current year exchanges and was recorded as an adjustment to stockholders’

equity and $0.6 million was recorded as income in the condensed consolidated statement of operations to reflect the impact of recording

the 2020 provision to return adjustments.

The Company has no federal

net operating loss (“NOL”) carryforwards after utilization of the remaining carryforwards in 2020.

The effects of uncertain tax

positions are recognized in the consolidated financial statements if these positions meet a “more-likely-than-not” threshold.

For those uncertain tax positions that are recognized in the consolidated financial statements, liabilities are established to reflect

the portion of those positions it cannot conclude “more-likely-than-not” to be realized upon ultimate settlement.

The Company’s

policy is to recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying

consolidated statement of income.

Accrued interest and penalties would be included on the related tax liability line in the consolidated

balance sheet.

As of September 30, 2021, no uncertain tax positions were recognized as liabilities in the condensed consolidated financial

effects of uncertain tax positions are recognized in the consolidated financial statements if these positions meet a “more-likely-than-not”

For those uncertain tax positions that are recognized in the consolidated financial statements, liabilities are established

to reflect the portion of those positions it cannot conclude “more-likely-than-not” to be realized upon ultimate settlement.

The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits on the income tax expense line

in the accompanying consolidated statement of income.

Accrued interest and penalties would be included on the related tax liability line

in the consolidated balance sheet.

As of March 31, 2022, no uncertain tax positions were recognized as liabilities in the condensed consolidated

financial statements.

Net Income (Loss) Per Common Share

The following table sets forth

the calculation of basic and diluted weighted average shares outstanding and earnings (loss) per share for the periods presented (in thousands,

except per share amounts):

Three Months Ended

September 30,

Nine Months Ended

September 30,

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

$ ( 163,453 )

net income (loss) per common share is calculated by dividing net income (loss) attributable to common stockholders by the weighted average

number of shares of Class A stock outstanding during each period.

Diluted net income (loss) per share reflects the weighted-average number

of common shares outstanding during the period used in the basic net income (loss) computation plus the effect of common stock equivalents

that are dilutive.

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

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

income (loss) attributable to Purple Innovation, Inc.

– dilutive effect of change in fair value – warrant liabilities

– net loss attributed to noncontrolling interest

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

$ ( 163,453 )

Weighted average shares—basic

income (loss) attributable to Purple Innovation, Inc.

average shares—basic

– dilutive effect of equity awards

– dilutive effect of warrants

– dilutive effect of Class B shares

Weighted average shares—diluted

Net income (loss) per common share:

PURPLE INNOVATION, INC.

average shares—diluted

income (loss) per common share:

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

For the three months ended

September 30, 2021, the Company excluded 1.3 million shares of Class A Stock issuable upon conversion of certain stock options, restricted

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

For the nine months ended September 30, 2021, the Company

excluded 0.5 million of Paired Securities convertible into an equal number of Class A shares as the effect was anti-dilutive.

three months ended September 30, 2020, the Company excluded 10.0 million of Paired Securities convertible into shares of Class A Stock

and 10.4 million shares of Class A Stock issuable upon conversion of certain Company warrants, stock options and Class A shares subject

to vesting as the effect was anti-dilutive.

For the nine months ended September 30, 2020, the Company excluded 21.6 million of Paired

Securities convertible into shares of Class A Stock and 7.1 million shares of Class A Stock issuable upon conversion of certain Company

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

March 31, 2022, the Company excluded 3.6 million shares of Class A common stock issuable upon conversion of certain warrants, stock options,

restricted stock and Class A shares subject to vesting as the effect was anti-dilutive.

For the three months ended March 31, 2021, the

Company excluded 0.4 million of Paired Securities convertible into an equal number of Class A common shares as the effect was anti-dilutive.

Equity Compensation Plans

2017 Equity Incentive

The Purple Innovation, Inc.

2017 Equity Incentive Plan (the “2017 Incentive Plan”) provides for grants of stock options, stock appreciation rights, restricted

stock and other stock-based awards.

Directors, officers and other employees and subsidiaries and affiliates, as well as others performing

consulting or advisory services for the Company and its subsidiaries, will be eligible for grants under the 2017 Incentive Plan.

September 30, 2021, an aggregate of 1.8 million shares remain available for issuance or use under the 2017 Incentive Plan.

Class A Stock Awards

In May 2021, the Company granted

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

The stock awards vested immediately

and the Company recognized $ 0.6 million in expense during the nine months ended September 30, 2021 which represented the fair value of

the stock award on the grant date.

Employee Stock Options

In March 2021, the Company

granted 0.1 million stock options under the Company’s 2017 Equity Incentive Plan to certain management of the Company.

options have an exercise price of $ 32.28 per option.

The stock options expire in five years and vest over a four-year period.

The estimated

fair value of the stock options, less expected forfeitures, is amortized over the options vesting period on a straight-line basis.

Company determined the fair value of these options using the Black Scholes method with the following assumptions:

Fair market value

Equity Incentive Plan

Purple Innovation, Inc.

2017 Equity Incentive Plan (the “2017 Incentive Plan”) provides for grants of stock options, stock

appreciation rights, restricted stock units and other stock-based awards.

Directors, officers and other employees and subsidiaries and

affiliates, as well as others performing consulting or advisory services for the Company and its subsidiaries, will be eligible for grants

under the 2017 Incentive Plan.

As of March 31, 2022, an aggregate of 1.2 million shares remain available for issuance or use under the

2017 Incentive Plan.

Stock Options

March 2022, the Company granted 0.5 million stock options under the Company’s 2017 Equity Incentive Plan to the Company’s

chief executive officer in conjunction with his full-time appointment to the position.

The stock options have an exercise price of $ 6.82

The stock options expire in five years and vest over a three-year period.

The Company determined the fair value of these

options to be $ 1.7 million which will be expensed on a straight-line basis over the vesting period.

Company determined the fair value of the options granted during the three months ended March 31, 2022 using the Black Scholes method

with the following assumptions:

Exercise price

Risk free interest rate

Expected term in years

Expected volatility

Expected dividend yield

The following table summarizes the Company’s

total stock option activity for the nine months ended September 30, 2021:

free interest rate

term in years

dividend yield

following table summarizes the Company’s total stock option activity for the three months ended March 31, 2022:

(in thousands)

Options outstanding as of January 1, 2021

(in thousands)

Options outstanding

as of January 1, 2022

Forfeited/cancelled

Options outstanding as of September 30, 2021

PURPLE INNOVATION, INC.

outstanding as of March 31, 2022

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Outstanding and exercisable stock options as of

September 30, 2021 are as follows:

Options Outstanding

Options Exercisable

Exercise Prices

Number of Options Outstanding

and exercisable stock options as of March 31, 2022 are as follows:

of Options Outstanding

(in thousands)

Remaining Life (Years)

Number of Options Exercisable

of Options Exercisable

(in thousands)

1 unchanged sentence

(in thousands)

The following table summarizes

the Company’s unvested stock option activity for the nine months ended September 30, 2021:

following table summarizes the Company’s unvested stock option activity for the three months ended March 31, 2022:

(in thousands)

Weighted Average

Nonvested options as of January 1, 2022

Nonvested options as of September 30, 2021

The estimated fair value of

Company stock options, less expected forfeitures, is amortized over the options vesting period on a straight-line basis.

For the three

and nine months ended September 30, 2021, the Company recognized stock option expense of $ 0.4 million and $ 1.3 million, respectively.

The Company recorded stock option expense of $ 0.3 million and $ 0.9 million during the three and nine months ended September 30, 2020,

respectively.

As of September 30, 2021,

outstanding stock options had $ 3.7 million of unrecognized stock compensation cost with a remaining recognition period of 2.0 years.

PURPLE INNOVATION, INC.

Nonvested options as of March 31, 2022

estimated fair value of Company stock options is amortized over the options vesting period on a straight-line basis.

For the three months

ended March 31, 2022 and 2021, the Company recognized stock option expense of $ 0.2 million and $ 0.5 million, respectively.

of March 31, 2022, outstanding stock options had $ 2.7 million of unrecognized stock compensation cost with a remaining recognition period

of 2.4 years.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Employee Restricted

During the first nine months of 2021, the Company granted 0.1 million

of restricted stock units under the Company’s 2017 Equity Incentive Plan to certain management of the Company.

Approximately half

of the restricted stock units granted included a market vesting condition.

The restricted stock awards that do not have the market vesting

condition had a weighted average grant date fair value of $27.80 per share.

The estimated fair value of these awards is recognized on

a straight-line basis over the four-year vesting period.

For those awards that include a market vesting condition, the estimated fair

value of the restricted stock was measured on the grant date and incorporated the probability of vesting occurring.

The estimated fair

value is recognized over the derived service period (as determined by the valuation model), with such recognition occurring regardless

of whether the market condition is met.

The Company determined the weighted average grant date fair value of the awards with the market

vesting condition to be $ 18.29 per share using a Monte Carlo Simulation of a Geometric Brownian Motion stock path model with the following

weighted average assumptions:

Trading price of common stock on measurement date

Risk free interest rate

Expected life in years

Expected volatility

Expected dividend yield

The following table summarizes

the Company’s restricted stock unit activity for the nine months ended September 30, 2021:

Outstanding (in thousands)

Weighted Average

Restricted Stock Units

March 2022, the Company granted 0.5 million of restricted stock units under the Company’s 2017 Equity Incentive Plan to the Company’s

chief executive officer in conjunction with his full-time appointment to the position.

These restricted stock awards had a grant date

fair value of $ 6.32 per share.

The estimated fair value of this award is being recognized on a straight-line basis over the three -year

vesting period.

following table summarizes the Company’s restricted stock unit activity for the three months ended March 31, 2022:

(in thousands)

Nonvested restricted stock units as of January 1, 2022

Nonvested restricted stock units as of September 30, 2021

The Company recorded restricted

stock unit expense of $ 0.3 million and $ 0.3 million during the three and nine months ended September 30, 2021, respectively.

no restricted stock unit expense recorded in 2020.

PURPLE INNOVATION, INC.

Nonvested restricted stock units as of March 31, 2022

Company recorded restricted stock unit expense of $ 0.4 million during the three months ended March 31, 2022.

There were no restricted

stock units outstanding and no expense recorded during the three months ended March 31, 2021.

As of March 31, 2022, outstanding

restricted stock units had $ 4.8 million of unrecognized stock compensation cost with a remaining recognition period of 2.8 years.

Incentive Units

January 2017, pursuant to the 2016 Equity Incentive Plan approved by InnoHold and Purple LLC that authorized the issuance of 12.0 million

incentive units, Purple LLC granted 11.3 million incentive units to Purple Team LLC, an entity for the benefit of certain employees who

were participants in that plan.

In conjunction with the Business Combination, Purple Team LLC was merged into InnoHold with InnoHold

being the surviving entity and the Purple Team LLC incentive units were cancelled and new incentive units were issued by InnoHold under

its own limited liability company agreement (the “InnoHold Agreement”).

On February 8, 2019, InnoHold initiated a tender

offer to each of these incentive unit holders, some of which are current employees of Purple LLC, to distribute to each a pro rata number

of 2.5 million Paired Securities held by InnoHold in exchange for the cancellation of their ownership interests in InnoHold.

incentive unit holders accepted the offer, and the terms and distribution of each transaction were finalized and closed on June 25, 2019.

At the closing of the tender offer, those incentive unit holders received, based on their pro rata holdings of InnoHold Class B

Units, a portion of 2.5 million Paired Securities held by InnoHold.

As of March 31, 2022, 0.4 million of the Paired Securities remain

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

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

InnoHold Incentive

In January 2017, pursuant

to the 2016 Equity Incentive Plan approved by InnoHold and Purple LLC that authorized the issuance of 12.0 million incentive units, Purple

LLC granted 11.3 million incentive units to Purple Team LLC, an entity for the benefit of certain employees who were participants in that

In conjunction with the Business Combination, Purple Team LLC was merged into InnoHold with InnoHold being the surviving entity

and the Purple Team LLC incentive units were cancelled and new incentive units were issued by InnoHold under its own limited liability

company agreement (the “InnoHold Agreement”).

On February 8, 2019, InnoHold initiated a tender offer to each of these incentive

unit holders, some of which are current employees of Purple LLC, to distribute to each a pro rata number of 2.5 million Paired Securities

held by InnoHold in exchange for the cancellation of their ownership interests in InnoHold.

All InnoHold incentive unit holders accepted

the offer, and the terms and distribution of each transaction were finalized and closed on June 25, 2019.

At the closing of the tender

offer, those incentive unit holders received, based on their pro rata holdings of InnoHold Class B Units, a portion of 2.5 million

Paired Securities held by InnoHold.

As of September 30, 2021, 0.4 million of the Paired Securities remain to be exchanged for Class A

Stock by the incentive unit holders.

Aggregate Non-Cash

Stock-Based Compensation

The Company has accounted

for all stock-based compensation under the provisions of ASC 718 Compensation—Stock Compensation.

This standard requires the Company

to record a non-cash expense associated with the fair value of stock-based compensation over the requisite service period.

The table below

summarizes the aggregate non-cash stock-based compensation recognized in the statement of operations for stock awards, employee stock

options and employee restricted stock units.

(in thousands)

Three Months Ended

September 30,

Nine Months Ended

September 30,

Non-Cash Stock-Based Compensation

Cost of revenues

Marketing and sales

General and administrative

Research and development

Total non-cash stock-based compensation

Company has accounted for all stock-based compensation under the provisions of ASC 718 Compensation—Stock Compensation .

This standard requires the Company to record a non-cash expense associated with the fair value of stock-based compensation over the requisite

service period.

following table summarizes the aggregate non-cash stock-based compensation recognized in the statement of operations for stock awards,

employee stock options and employee restricted stock units (in thousands):

and administrative

and development

non-cash stock-based compensation

Employee Retirement Plan

In July 2018 the Company established

a 401(k) plan that qualifies as a deferred compensation arrangement under Section 401 of the IRS Code.

All eligible employees over

the age of 18 and with 4 months’ service are eligible to participate in the plan.

The plan provides for Company matching of employee

contributions up to 5% of eligible earnings.

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

All eligible employees over the age of 18 and with 4 months’ service are eligible to participate in the plan.

The plan provides

for Company matching of employee contributions up to 5% of eligible earnings.

Company contributions immediately vest.

The Company’s matching contribution

expense was $ 0.8 million and $ 0.5 million for the three months ended September 30, 2021 and 2020, respectively, and $ 2.3 million

and $ 1.7 million for the nine months ended September 30, 2021 and 2020, respectively.

The Company’s

matching contribution expense was $ 1.1 million and $ 0.7 million for the three months ended March 31, 2022 and 2021, respectively.

Subsequent Events

On October 11, 2021, Purple

LLC sued The Sleep Company, an Indian private limited company, in Delhi High court case CS(COMM) 517/2021, for among other things infringement

of Purple LLC’s intellectual property.

On October 12, 2021, the Delhi High Court awarded Purple LLC a limited injunction against

The Sleep Company for its infringement.

Further legal proceedings are pending, and the Company intends to vigorously pursue its claims

against The Sleep Company.

On November 8, 2021, Purple LLC

and Mattress Firm agreed to terminate the Master Retailer Agreement (the “Agreement”) dated September 18, 2018 between Purple

and Mattress Firm.

The Agreement was replaced by a new Master Retailer Agreement with terms consistent with the Company’s standard

retailer agreement.

The replacement agreement eliminates all of the prior exclusivity arrangements.

On November 8, 2021, pursuant

to the 2020 Credit Agreement, the Company provided notice to KeyBank National Association requesting a $ 55.0 million draw on the revolving

line of credit, which represents the full amount available under the revolving line of credit.

The initial borrowing rate will be 3.50 %,

based on the LIBOR floor of 0.5 % plus 3.00 %.

In March 2022, the Company granted

to the Company’s chief executive officer in conjunction with his full-time appointment to the position 500,000 stock options and

500,000 restricted stock units under the Company’s 2017 Equity Incentive Plan.

On April 8, 2022, with the chief executive officer’s

consent, the Company rescinded and cancelled 388,530 of the previously granted stock options and 388,530 of the previously granted restricted

stock units to fall below the annual limit set forth in the 2017 Incentive Plan.

The Company is currently below such limits and

may issue additional awards to the chief executive officer in compliance with the 2017 Incentive Plan.

In April 2022, the Company

completed a restructuring of its workforce to balance production and improve efficiencies.

As a result of the realignment and restructuring,

the Company reduced employee headcount and incurred severance costs of $ 0.8 million.

On April 29, 2022, Eric Haynor

signed an offer letter to become the chief operating officer of the Company, effective June 6, 2022.

Prior to joining the Company, Mr.

Haynor, age 58, was with Ecolab, Inc.

from 2005 to present, most recently as the Senior Vice President of Global Industrial Supply Chain

In connection with his employment, the Company agreed to grant to Mr.

Haynor, effective as of his start date, a one-time equity

grant valued at $ 500,000 based on the market price of the Company’s Class A Common Stock on the day of the grant as an inducement

grant outside the Company’s 2017 Equity Incentive Plan in accordance with the NASDAQ inducement grant exception found in NASDAQ

Listing Rule 5635(c)(4).

This grant will be comprised of 65 % restricted stock units that vest in three years contingent upon the stock

price hitting certain performance thresholds.

The remaining 35 % restricted stock units have no performance conditions with one-third vesting

every 12 months.

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

What changed 10-Q

Item 1. Financial Statements