What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2021-11-09 · 401 added, 597 removed, 51 unchanged (95% of the section changed)

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is

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

obtained from reading the Unaudited Condensed Consolidated Financial Statements alone.

The discussion should be read in conjunction with

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

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

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

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

The discussion should be read

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

Financial Statements.”

FORWARD-LOOKING STATEMENTS

This quarterly report on Form

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

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

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

securities laws.

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

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

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

of these words and other similar words.

All forward-looking statements

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

It is routine for our internal projections and expectations to

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

of the next quarter or year.

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

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

except as required by law.

We caution and advise readers

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

to differ materially from the expectations and beliefs contained herein.

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

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

and delivery issues on demand for our products.

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

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

Overview of Our Business

Our mission is to help people

feel and live better through innovative comfort solutions.

We are a digitally-native

vertical brand founded on comfort product innovation with premium offerings.

We design and manufacture a variety of innovative, branded

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

Our products are the result

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

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

that differentiate our offerings from other competitors’ products.

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

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

Our business consists of Purple

FORWARD-LOOKING

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

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

current expectations and beliefs.

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

for purposes of federal and state securities laws.

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

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

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

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

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

It is routine for our internal projections

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

prior to the end of the next quarter or year.

In addition, any statements that refer to projections of our future financial performance,

our anticipated growth and trends in our businesses (including the discussion under the heading “Outlook for Growth”), and

other characterizations of future events or circumstances are forward-looking statements.

caution and advise readers that these statements are only predictions and are subject to risks, uncertainties, and assumptions that are

difficult to predict, including those included in the “Risk Factors” section of this Quarterly Report and in our Annual Report

on Form 10-K filed with the Securities and Exchange Commission on March 1, 2022.

Therefore, actual results may differ materially and

adversely from those expressed in any forward-looking statements and investors are cautioned not to place undue reliance on any such

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

future events or otherwise, except as required by law.

of Our Business

Our mission is to improve

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

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

We design and manufacture a variety

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

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

of our own manufacturing processes.

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

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

We market and sell our products

directly to consumers through our e-commerce and Purple retail showroom channels and through our retail brick-and-mortar wholesale partner

business consists of Purple Inc.

and its consolidated subsidiary, Purple LLC.

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

company under the name of GPAC.

was incorporated in Delaware on May 19, 2015

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

On February 2, 2018, Purple Inc.

consummated a transaction structured similar to a reverse recapitalization

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

consummated a transaction structured

similar to a reverse recapitalization pursuant to which Purple Inc.

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

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

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

InnoHold subsequently transferred

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

September 30, 2021, Purple Inc.

At March 31, 2022, Purple Inc.

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

COVID-19 Pandemic Developments

The COVID-19 pandemic has

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

and logistics, our suppliers, and the market overall.

Developments in Our Business

In March 2022, the Company

completed a secondary offering of 16.1 million shares of Class A common stock, which included the additional 2.1 million shares

of the over-allotment option that the underwriters exercised in full.

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.

and 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.

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

revolving line of credit.

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

the full amount available under the line.

The initial borrowing rate of 3.50% for both the term loan and revolving line of credit was

based on LIBOR plus 3.00%.

The 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.

If it is not met, then the interest rate goes

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

Once the consolidated leverage ratio goes 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.

Pursuant to the first amendment

of the 2020 Credit Agreement, the Company made a $2.5 million payment on the term loan to cover the four quarterly principal payments

due in 2022 and incurred fees and expenses of $0.8 million that were recorded as debt issuance costs in the condensed consolidated balance

On March 23, 2022, the Company

entered into a second amendment to the 2020 Credit Agreement.

This amendment modified the 2020 Credit Agreement to allow 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.

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.

March 31, 2022, the Company used a portion of the net proceeds from the secondary offering to repay in full the $55.0 million of principal

outstanding on the revolving line of credit.

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

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

The scope and nature of these impacts continue to evolve.

Because of the COVID-19

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

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

the communities in which we operate.

Although we have taken measures

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

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

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

Also, we do not

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

Subject to certain assumptions

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

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

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

and anticipated capital expenditures for the next 12 months.

While most state and local

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

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

Furthermore, while the bedding industry has fared

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

have an adverse impact upon the industry and our business.

Therefore, significant uncertainty remains regarding the ongoing impact of

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

we utilize in reporting certain assets and liabilities.

Recent Developments in our Business

Production and Demand Developments

During the second quarter

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

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

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

and third quarter net revenues.

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

from our backlog position at the end of August.

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

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

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

levels to enable timely shipments to our customers.

However, even though we were

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

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

costs of shipping, materials and labor.

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

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

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

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

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

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

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

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

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

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

In addition to a slower recovery

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

in the cost of shipping, raw materials and labor.

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

materials have increased materially, consistent with general macroeconomic trends.

In addition, as experienced in other industries, in

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

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

We believe that shipping, material

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

In addition to the above issues,

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

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

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

customers, and the communities in which we operate.

Soon after the pandemic began, we also experienced an increase in demand in our e-commerce channel, and in 2020 and

2021 the Company built production capability to match actual and anticipated demand growth.

Now, on the tail-end of the pandemic, we are

experiencing a pull-back in growth that has left us with excess operational capacity in facilities, equipment, and personnel.

quarter, we began to rebalance production and fulfillment operations in our different facilities and take other actions to lower costs.

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

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

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

and shipping costs, delays and constraints.

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

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

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

Any significant delay or interruption in our supply chain

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

Mattress Firm Relationship

On November 8, 2021, Purple LLC

and Mattress Firm agreed to terminate the Master Retailer Agreement (the “Agreement”) dated September 18, 2018 between Purple

and Mattress Firm.

The Agreement was replaced by a new Master Retailer Agreement with terms consistent with the Company’s standard

retailer agreement.

The replacement agreement eliminates all of the prior exclusivity arrangements.

The new agreement provides

opportunity for continued partnership and growth with Mattress Firm.

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

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

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

Operating Results for the Three Months Ended

September 30, 2021 and 2020

The following table sets forth

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

of operations:

Three Months Ended September 30,

In addition, COVID-19

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

costs, delays and constraints.

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

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

In addition, as experienced in other industries, in order to remain competitive in hiring the labor necessary to maintain our production

levels, we have had to increase wages and other compensation.

These increases in materials and labor costs have resulted in higher cost

of goods sold and lower margins.

We believe that shipping, material and labor costs will continue to remain at elevated levels or increase

further in the foreseeable future.

While we invested in growing our

manufacturing capacity and expanding our showroom presence in 2021, post-pandemic demand has shifted away from e-commerce and back towards

retail brick-and-mortar.

Our showrooms are performing in-line with our targeted unit economics.

As a result, we are continuing our investment

into new showrooms.

Also, at the end of the first quarter, our products are sold through approximately 3,100 wholesale doors, having added

600 net new doors so far in 2022.

To capitalize on the current trend, and while expanding into new doors, our focus is primarily on improving

our sales in the retail locations where are products currently are being sold.

In February 2022, because of lower-than-expected

demand and elevated 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, we completed a restructuring of our 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, we reduced

employee headcount and incurred severance costs of $1.2 million in the first quarter of 2022.

In April 2022, we incurred an additional

$0.8 million in severance costs associated with a separate workforce restructuring to balance production and improve efficiencies.

In early 2022, to offset the impact

of higher raw material, labor and freight costs on our gross margins, we increased prices and initiated several other projects to improve

efficiencies and reduce costs.

In response to these impacts, we deferred new product launches in 2022.

Also in 2022, we are continuing

to invest in showroom expansion and effectively respond to consumers returning to brick and mortar buying by growing wholesale partner

doors and initiating a greater emphasis on improving the sales productivity of our existing wholesale partners.

After several years of

hyper growth and increased investments to support current and future expansion, we are now building the framework for strong operational

maturity and accountability as we focus on right-sizing our operations, improving our execution, and refining our strategies to drive

profitable growth in the current market environment.

support our plans for future growth, we are focusing on the following opportunities:

Develop and execute on strategies to meaningfully expand our wholesale presence.

Build premium brand position to grow market share of the premium mattress category.

Refine and enhance marketing strategies to reach a broader audience, increase customer engagement and reduce dependency on price promotions as a means of driving sales.

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

Manage production labor and capacity utilization to promote efficient use of our manufacturing facilities as we grow into our production footprint.

Manage input costs,

operating efficiencies, and pricing to offset gross margin erosion and exit the year with gross margins close to 40%.

is no guarantee that we will be able to effectively execute on these opportunities, which are subject to risks, uncertainties, and assumptions

that are difficult to predict, including the risks described under “Risk Factors” and elsewhere herein.

Therefore, actual

results may differ materially and adversely from those described above.

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

to changes in the market or our business.

Results for the Three Months Ended March 31, 2022 and 2021

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

condensed consolidated statements of operations:

Three Months Ended March 31,

Revenues, net

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Other income (expense):

Interest income (expense), net

Other income, net

Change in fair value – warrant liabilities

Loss on extinguishment of debt

Tax receivable agreement income (expense)

Total other income (expense), net

Net loss before income taxes

Income tax benefit

Net income (loss)

Net loss attributable to noncontrolling interest

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

Net revenues decreased $16.3

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

September 30, 2020.

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

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

The year-over-year decrease in net revenues

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

wholesale business.

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

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

While our wholesale

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

lower than expected demand from our wholesale customers.

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

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

wholesale customers was interrupted.

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

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

While we have returned to planned production and marketing

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

We currently anticipate that net revenues in the fourth

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

Net revenues from a

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

$0.4 million increase in other product sales.

Cost of Revenues

The cost of revenues increased

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

ended September 30, 2020.

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

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

period in 2020.

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

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

margin than revenue from the DTC channel.

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

continue to increase in the foreseeable future.

Marketing and Sales

Marketing and sales expenses

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

ended September 30, 2020.

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

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

marketing and sales expenses.

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

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

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

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

General and Administrative

General and administrative

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

the three months ended September 30, 2020.

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

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

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

Research and Development

Research and development costs

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

ended September 30, 2020.

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

Operating Income (Loss)

Operating income (loss) decreased

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

million for the three months ended September 30, 2020.

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

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

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

Interest expense

During the three months ended

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

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

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

The $0.4 million decrease

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

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

Interest expense in 2021 also includes

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

Change in Fair Value –

Warrant Liabilities

On February 26, 2019, the

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

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

We accounted for the Incremental Loan Warrants

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

date with changes in the fair value included in earnings.

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

at September 30, 2020.

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

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

There was no gain or loss on the Incremental Loan Warrants

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

There were 15.5 million public

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

private placement with the IPO.

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

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

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

The fair value of the public and sponsor

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

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

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

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

During the three months ended September 30, 2020, we

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

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

Loss on Extinguishment of Debt

On September 3, 2020, the

Company paid $45.0 million to retire, in full, all indebtedness related to Purple LLC’s Related Party Loan.

The payment included

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

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

As a result of paying off the Related Party Loan, the

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

Tax Receivable Agreement Expense

We are party to a tax receivable

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

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

Because of the Business Combination,

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

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

and December 31, 2020, respectively.

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

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

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

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

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

Income Tax Benefit

Our income tax benefit was

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

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

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

Noncontrolling Interest

We attribute net income or

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

We calculate net income

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

Net loss attributed

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

three months ended September 30, 2020.

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

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

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

Operating Results for the Nine Months Ended

September 30, 2021 and 2020

The following table sets forth

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

Nine Months Ended September 30,

Revenues, net

Cost of revenues

Operating expenses:

Marketing and sales

General and administrative

Research and development

Total operating expenses

Operating income

Other income (expense):

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

Income tax benefit (expense)

Income tax (expense) benefit

Net income (loss)

Net income attributable to noncontrolling interest

Net income (loss) attributable to noncontrolling interest

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

Net revenues increased $65.2

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

September 30, 2020.

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

decreasing $6.1 million, or 1.7%.

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

of wholesale partner doors.

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

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

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

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

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

This growth was primarily driven by an increase in wholesale

customer demand.

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

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

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

products, particularly with respect to our DTC channel.

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

when customer demand will return to expected levels.

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

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

Cost of Revenues

The cost of revenues increased

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

ended September 30, 2020.

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

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

and higher production, shipping, material and labor costs.

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

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

The decrease in our gross profit percentage was primarily

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

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

While we have returned to planned production capacity, we

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

Marketing and Sales

Marketing and sales expenses

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

months ended September 30, 2020.

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

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

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

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

months ended September 30, 2020.

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

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

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

the pandemic.

General and Administrative

Net revenues decreased $43.3 million, or 23.2%, to $143.2 million for

the three months ended March 31, 2022 compared to $186.4 million for the three months ended March 31, 2021.

The decline in net revenues

reflected a $37.6 million decrease in mattress sales, a $5.3 million decrease in other sleep product sales and a $0.4 million decrease

in other product sales.

The decrease in mattress sales was primarily due to higher net revenues in the prior year created by the pull

forward of demand driven by the effects of COVID and economic stimulus in the first quarter of 2021, coupled with the pullback in discretionary

consumer spending in early 2022.

The decline in net revenues from a sales channel perspective consisted of DTC net revenues decreasing

$39.4 million, or 31.5% and wholesale net revenues decreasing $3.9 million, or 6.3%.

Within DTC, e-commerce net revenues decreased $46.3

million, or 38.6%, and were partially offset by Purple retail showroom net revenues growing $7.0 million, or 138.2%.

The larger-than-expected

decrease in e-commerce net revenues was primarily due to a return to more normalized consumption patterns after two years of COVID-driven

demand coupled with customers shifting back to brick and mortar buying.

Wholesale net revenues comprised 40.3% of net revenues in the

first quarter of 2022 compared to 33.0% in the first quarter of 2021.

The higher proportion of wholesale net revenues was primarily due

to the impact of lower-than-expected e-commerce sales.

The growth in our showroom business from 2.7% of net revenues in the first quarter

of 2021 to 8.4% in the first quarter of 2022 resulted primarily from the opening of 25 new showrooms over the past 12 months combined

with the impact of a lower-than-expected decrease in e-commerce sales.

Cost of revenues decreased $7.4 million, or 7.4%, to $91.6 million

for the three months ended March 31, 2022 compared to $98.9 million for the three months ended March 31, 2021.

This decrease, which was

primarily due to the corresponding decrease in sales volume, reflected a $17.4 million decrease in direct material and other costs offset

in part by a $10.1 million increase in labor and overhead costs.

Our gross profit percentage, which decreased to 36.1% of net revenues

in the first quarter of 2022 from 46.9% in the first quarter of 2021, was adversely impacted by the elevated level of our labor and overhead

costs coupled with a larger than expected reduction in higher margin e-commerce sales.

We expect gross margins to improve in the near

term based on the full effect of first quarter price increases, the impact of recent reductions in our production workforce and the continued

implementation of manufacturing and supply chain efficiencies.

Marketing and sales expense decreased $4.4 million, or 8.1%, to $50.0

million for the three months ended March 31, 2022 compared to $54.4 million for the three months ended March 31, 2021.

This decrease reflected

a $15.6 million decline in advertising spending as management focused on improving marketing efficiency.

This decrease was offset in part

by a $5.0 million increase in wholesale marketing and sales costs related to enhancements in our wholesale marketing operations, a $4.8

million increase in showroom-related marketing associated with our continued showroom expansion, and a $1.4 million increase in other

marketing costs.

Marketing and sales expense as a percentage of net revenues was 34.9% in the first quarter of 2022 compared to 29.2%

in the first quarter of 2021.

This increase was primarily due to a larger-than-expected decrease in net revenues.

and Administrative

General and administrative

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

the nine months ended September 30, 2020.

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

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

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

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

Research and Development

Research and development costs

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

September 30, 2020.

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

Operating Income

Operating income decreased

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

nine months ended September 30, 2020.

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

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

lower gross margin than revenue from the DTC channel.

Interest Expense

Interest expense totaled $1.1 million

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

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

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

expense increased $3.4 million, or 23.1%, to $17.9 million for the three months ended March 31, 2022 compared to $14.5 million for the

three months ended March 31, 2021.

This increase was primarily due to a $2.1 million increase in payroll costs related to workforce

additions since the end of the prior year first quarter, a $0.7 million increase in legal and professional fees associated primarily

with executive search costs, and a $0.5 million increase in other expenses.

and Development

and development costs increased $0.4 million, or 24.4%, to $2.1 million for the three months ended March 31, 2022 from $1.7 million for

the three months ended March 31, 2021.

This increase was primarily due to an increase in payroll costs related to planned increases in

our research and development workforce.

Income (Loss)

income (loss) decreased $35.3 million to an operating loss of $18.4 million for the three months ended March 31, 2022 compared to operating

income of $16.9 million for the three months ended March 31, 2021.

This decrease was primarily due to the decrease in gross profit.

Interest expense totaled $1.0

million for the three months ended March 31, 2022 compared to $0.6 million for the three months ended March 31, 2021.

The $0.5 million

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

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

Interest expense in 2021 also includes amortization

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

Change in Fair Value – Warrant Liabilities

On February 26, 2019, the

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

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

We accounted for the Incremental Loan Warrants

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

date with changes in the fair value included in earnings.

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

at September 30, 2020.

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

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

There was no gain or loss on the Incremental Loan Warrants

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

There were 15.5 million public

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

private placement with the IPO.

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

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

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

The fair value of the public and sponsor

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

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

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

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

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

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

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

Loss on Extinguishment of Debt

On September 3, 2020, the

Company paid $45.0 million to retire, in full, all indebtedness related to Purple LLC’s Related Party Loan.

The payment included

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

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

As a result of paying off the Related Party Loan, the

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

Tax Receivable Agreement Expense

The tax receivable agreement

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

During the first nine months

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

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

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

the tax receivable agreement liability related to prior year exchanges.

Income Tax Benefit (Expense)

Income tax expense was $1.0

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

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

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

item for tax purposes.

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

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

during the nine months ended September 30, 2020.

Noncontrolling Interest

Net income attributed to noncontrolling

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

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

Liquidity and Capital Resources

Our primary cash needs have historically consisted of working capital,

capital expenditures and debt service.

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

increase was primarily due to interest expense of $0.6 million incurred on the $55.0 million revolving line of credit that was drawn down

by the Company in November 2021.

This increase was offset in part by $0.2 million of interest capitalized during the first quarter of

in Fair Value – Warrant Liabilities

There were 12.8 million sponsor warrants issued pursuant to a private

placement conducted simultaneously with the Company’s initial public offering.

We have accounted for these warrants as liabilities

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

with changes in fair value included in earnings.

The 1.9 million sponsor warrants outstanding at both March 31, 2022 and 2021 had fair

values of $0.4 million and $19.4 million, respectively.

The decrease in fair value was primarily due to the Company’s Class A stock

price, one of the primary assumptions used to re-measure the warrant liability, declining from $31.65 at March 31, 2021 to $5.85 at March

During the three months ended March 31, 2022 and 2021, we recognized gains of $3.9 million and $9.1 million, respectively, in

our condensed consolidated statements of operations related to decreases in the fair value of the warrants outstanding at the end of the

respective periods.

Tax (Expense) Benefit

had an income tax benefit of $1.8 million for the three months ended March 31, 2022 compared to income tax expense of $4.7 million for

the three months ended March 31, 2021.

The income tax benefit in the first quarter of 2022 was primarily the result of the Company having

a net loss before income taxes of $15.4 million for the three months ended March 31, 2022.

Noncontrolling

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

Net loss attributed to noncontrolling interests was $0.1 million in the first quarter of 2022 compared to net income of $0.1

million in the first quarter of 2021.

and Capital Resources

principal sources of funds are cash flows from operations and cash and cash equivalents on hand, supplemented with borrowings made pursuant

to our credit facilities and proceeds received from secondary offerings of our equity capital.

Principal uses of funds consist of payments

of principal and interest on our debt facilities, capital expenditures and working capital needs as well as other contractual obligations

described below.

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

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

Our cash and working capital positions were $62.7 million

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

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

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

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

million during the first nine months of 2021.

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

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

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

In response to the COVID-19

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

Given the initial difficulty

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

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

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

Subject to certain

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

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

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

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

On September 3, 2020, we paid

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

The payment included $25.0 million

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

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

Also on September 3, 2020,

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

million revolving line of credit.

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

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

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

Proceeds from the Term Loan

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

During the nine months ended

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

shares of Class A Stock.

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

At September 30, 2021, there were 1.9 million sponsor

warrants outstanding.

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

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

marketing spend and postpone or discontinue our growth strategies.

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

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

of our employees.

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

On November 8, 2021, we provided

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

which represents the full amount available under the revolving line of credit.

The initial borrowing rate will be 3.50%, based on the

LIBOR floor of 0.5% plus 3.00%.

As described above, we experienced

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

We have also experienced increases

in shipping, raw material and labor costs.

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

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

of operations through the fourth quarter of 2021.

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

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

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

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

However, we may not be able to obtain

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

If cash flow from operations

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

may need to raise additional capital.

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

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

from the lenders under the 2020 Credit Agreement.

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

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

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

under the 2020 Credit Agreement.

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

and $98.9 million, respectively, as of March 31, 2022 compared to $91.6 million and $87.5 million, respectively, as of December 31, 2021.

Cash used for capital expenditures increased from $12.4 million in the first quarter of 2021 to $13.1 million in the first quarter of

Our capital expenditures in the first quarter of 2022 primarily consisted of leasehold improvements and furniture and fixtures associated

with the opening of new Purple retail showrooms during the first quarter of 2022.

In the event our cash flow

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

our ability to scale back operations, reduce marketing spend, use the liquidity we have available under our revolving line of credit and

postpone or discontinue our growth strategies.

In such event, this could result in slower growth or no growth, and we may run the risk

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

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

sources including new debt or equity capital.

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

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

and approval from the lenders under the 2020 Credit Agreement.

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

on unfavorable terms.

The restrictive covenants in the 2020 Credit Agreement, as amended, may make it difficult to obtain additional capital

on terms that are favorable to us and to execute on our growth strategies, including the acquisition of other businesses or technologies.

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

As a result, there can be no assurance that

12 unchanged sentences

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

We are required to make certain

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

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

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

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

the tax receivable agreement.

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

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

Cash Flows for the Nine months Ended September

30, 2021 and 2020

The following summarizes our

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

Nine Months Ended

September 30,

Net cash provided by operating activities

on our current projections, we believe our cash on hand, amounts available under our revolving line of credit, and expected cash to be

generated from e-commerce, wholesale, and Purple retail store channels will be sufficient to cover our working capital requirements

and anticipated capital expenditures for the next 12 months.

In March 2022, the Company

completed a secondary offering of 16.1 million shares of Class A common stock, which included the additional 2.1 million shares

of the over-allotment option that the underwriters exercised in full.

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.

and 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.

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

revolving line of credit.

The 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.

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

credit, which represented the full amount available under the line.

The initial borrowing rate of 3.50% for both the term loan and revolving

line of credit was based on LIBOR plus 3.00%.

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 goes 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

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 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

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 470 – Debt .

March 31, 2022, the Company used a portion of the net proceeds from the secondary offering to repay in full the $55.0 million of principal

outstanding on the revolving line of credit.

Receivable Agreement

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

liquidity and capital resources.

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

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

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

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

As of March 31, 2022 and December 31, 2021, the tax receivable agreement

liability reflected in the Company’s consolidated balance sheet was $162.2 million and $168.1 million, respectively.

This decrease

was due to a $5.8 million payment that was made during the first quarter of 2022.

Contractual Obligations

addition to the material contractual obligations discussed above, other material contractual obligations primarily include operating

lease payments obligations.

See Note 8 of the condensed consolidated financial statements for additional information.

Flows for the Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021

following summarizes our cash flows for the three months ended March 31, 2022 and 2021 as reported in our condensed consolidated statements

of cash flows (in thousands):

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net (decrease) increase in cash

Net cash provided by

financing activities

Net decrease in cash

Cash, beginning of the period

Cash, end of the period

Nine months ended September 30, 2021 Compared

to the Nine months ended September 30, 2020

Cash provided by operating

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

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

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

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

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

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

period in the prior year.

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

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

and other assets.

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

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

Cash used in investing activities

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

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

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

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

Cash used in operating activities

totaled $44.3 million for the three months ended March 31, 2022 compared to $9.4 million for the three months ended March 31, 2021.

decrease in cash flows from operations primarily resulted from a $29.6 million decrease in cash provided by operating income which was

mainly driven by a decline in gross margin.

The decrease in cash provided by operations was further impacted by a $7.3 million decrease

in operating cash flows related to net changes in period-over-period fluctuations related to working capital items, offset in part by

an increase in cash associated with changes in period-over-period fluctuations in other long-term liabilities.

used in investing activities reflected capital expenditures of $13.1 million for the three months ended March 31, 2022 compared to $12.4

million for the three months ended March 31, 2021.

Capital expenditures in the first quarter of 2022 primarily consisted of investments

in leasehold improvements and furniture and fixtures related to the opening of new Purple retail showrooms during the first quarter of

Cash provided by financing

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

during the nine months ended September 30, 2020.

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

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

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

Critical Accounting Policies

activities was $28.4 million during the three months ended March 31, 2022 compared to $2.6 million during the three months ended March

Financing activities in the first quarter of 2022 included $92.9 million of net proceeds received from the secondary stock offering,

offset in part by a $55.0 million revolving line of credit payment, a $5.8 million payment on the tax receivable agreement, and $3.8 million

in other debt related payments.

Accounting Policies

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

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

Results of Operations in our 2021 Annual Report on Form 10-K filed March 1, 2022.

There were no significant changes in our critical

accounting policies since the end of fiscal 2021.

Off-Balance-Sheet Arrangements and Contractual

As of September 30, 2021,

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

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

There have been no material

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

for the quarterly period ended March 31, 2021.

Seasonality and Cyclicality

We believe that sales of our

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

Off-Balance-Sheet

of March 31, 2022, we were not involved in any unconsolidated special purpose entity transactions and did not have any off-balance-sheet

Also, there was no balance outstanding on our $55.0 million revolving credit facility as of March 31, 2022.

and Cyclicality

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

holidays and other seasonal factors.

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

Available Information

Our website address is www.purple.com.

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

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

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

furnish it to, the SEC.

We also use the Investor Relations

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

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

and webcasts.

website address is www.purple.com.

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

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

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

file such material with, or furnish it to, the SEC.

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

that may be deemed material.

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

and public conference calls and webcasts.

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

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

Not Applicable.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis