What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-08-09 compared with 2022-05-10 · 993 added, 853 removed, 370 unchanged (83% of the section changed)

FINANCIAL STATEMENTS

INNOVATION, INC.

Consolidated Balance Sheets

– in thousands, except for par value)

PURPLE INNOVATION, INC.

Condensed Consolidated Balance Sheets

(unaudited – in thousands, except for

Current assets:

32 unchanged sentences

$ 0.0001 par value, 210,000 shares authorized;

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

82,764 issued and outstanding at June 30, 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 March 31, 2022 and at December 31, 2021

448 issued and outstanding at June 30, 2022 and at December 31, 2021

Additional paid-in capital

4 unchanged sentences

Total liabilities and stockholders’ equity

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

INNOVATION, INC.

Consolidated Statements of Operations

– in thousands, except per share amounts)

The accompanying notes are an integral part of

these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.

Condensed Consolidated Statements of Operations

(unaudited – in thousands, except per

share amounts)

Three Months Ended

Six Months Ended

Revenues, net

9 unchanged sentences

Other income (expense), net

Tax receivable agreement benefit

Change in fair value – warrant liabilities

Total other income, net

Tax receivable agreement expense

Total other income (expense), net

Net income (loss) before income taxes

5 unchanged sentences

Weighted average common shares outstanding:

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

INNOVATION, INC.

Consolidated Statements of Stockholders’ Equity

– in thousands)

The accompanying notes are an integral part of

these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.

Condensed Consolidated Statements of Stockholders’

(unaudited – in thousands)

Stockholders’

Noncontrolling

Balance - December 31, 2021

Stock-based compensation

Exercise of stock options

Issuance of stock under equity compensation plans

Issuance of stock upon underwritten public offering, net of costs

Accrued distributions

Impact of transactions affecting

Balance – March 31, 2022

Stock-based compensation

Issuance of common stock under equity compensation

Additional costs associated with underwritten public stock offering

Impact of transactions affecting

Balance – June 30, 2022

Stockholders’

Noncontrolling

- December 31, 2020

1 unchanged sentence

of stock options

of restricted stock units

of stock upon secondary offering, net of costs

Receivable Agreement liability

distributions

indemnification payment

of transactions affecting NCI

1 unchanged sentence

$ ( 245,032 )

Stockholders’

Noncontrolling

– December 31, 2020

$ ( 265,856 )

income (loss)

of stock options

1 unchanged sentence

distributions

indemnification payment

of common stock

of transactions affecting NCI

– March 31, 2021

– June 30, 2021

$ ( 242,454 )

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

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)

Six Months Ended

Cash flows from operating activities:

Net income (loss)

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

Adjustments to reconcile net income (loss) to

net cash provided by (used in) operating activities:

Depreciation and amortization

1 unchanged sentence

Change in fair value – warrant liabilities

Tax receivable agreement benefit

Tax receivable agreement expense

Stock-based compensation

Non-cash lease expense

Deferred income taxes

2 unchanged sentences

Prepaid expenses and other assets

Operating leases, net

Accounts payable

3 unchanged sentences

Accrued rebates and allowances

Operating lease obligations

Other accrued liabilities

Net cash used in operating activities

Net cash provided by (used in) operating activities

Cash flows from investing activities:

6 unchanged sentences

Payments for debt issuance costs

Proceeds from secondary stock offering

Payments for secondary stock offering costs

Proceeds from stock offering

Payments for public offering costs

Proceeds from InnoHold indemnification payment

13 unchanged sentences

Non-cash leasehold improvements

Accrued tax distributions

Accrued distributions

Tax receivable agreement liability

Deferred income taxes

Exercise of warrant liabilities

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

INNOVATION, INC.

Exercise of liability warrants

The accompanying notes are an integral part of

these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

1 unchanged sentence

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.

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 e-commerce

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

The Company was incorporated

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

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

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

At the closing of

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

Purple Innovation, Inc.

As the sole managing member

of Purple LLC, Purple Inc.

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

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

Summary of Significant Accounting Policies

of Presentation and Principles of Consolidation

condensed consolidated financial statements include the accounts of Purple Inc.

Basis of Presentation

and Principles of Consolidation

The 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 as of March 31, 2022.

For further discussion see Note 15 — Stockholders’

INNOVATION, INC.

All intercompany balances and transactions

have been eliminated in consolidation.

As of June 30, 2022, Purple Inc.

held 99.5 % of the common units of Purple LLC and Purple LLC Class

B Unit holders held 0.5 % 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 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 and six

months ended June 30, 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.

Variable Interest Entities

Purple LLC is a variable interest

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 June 30, 2022, Purple Inc.

had a 99.5 % 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 0.5 % of the economic interest

in Purple LLC as of June 30, 2022.

For further discussion see Note 15 — Stockholders’ Equity.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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.

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, 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.

In February and April 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 balance production,

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

result of the realignment and restructuring, the Company reduced employee headcount and incurred severance charges of $ 2.0 million during

the six months ended June 30, 2022.

In June 2022, the Company

incurred a one-time separation fee of $ 3.1 million with a professional services provider for not continuing with their services.

recorded as general and administrative expense in the condensed consolidated statement of operations for the three months ended June 30,

The Company has also initiated other cost reduction and efficiency

efforts to improve costs, increase margins and ensure compliance with debt covenants.

If the Company’s cash flow from operations

or other sources of financing are less than anticipated, the Company believes it will be able to fund operating expenses and comply with

debt covenants 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.

In addition, in order to continue satisfying the conditions of the debt

agreement the Company may be required to scale back operations, reduce marketing spend, prepay debt and postpone or discontinue our growth

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 rates on the Company’s term loan and revolving line of credit were originally based on LIBOR.

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.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

of Credit Losses

June 2016, the FASB issued ASU No.

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.

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

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.

Underwritten 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,

completed an underwritten 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.

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.

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

After deducting offering expenses of $ 0.3 million,

aggregate net proceeds totaled $ 92.9 million.

Fair Value Measurements

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

Fair value is the

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

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

The levels of the fair

value hierarchy are:

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

2—Significant other observable inputs (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.

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

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);

Level 3—Unobservable inputs in

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

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

significant to the measurements.

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

equivalents, receivables, accounts payable 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.

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)

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 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.

Such inputs include risk free interest rate, expected average

life, expected dividend yield, and expected volatility.

These Level 3 liabilities generally decrease (increase) in value based upon

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

Conversely, the fair value of these Level 3 liabilities

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

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 (dollars in thousands):

Sponsor warrants

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

(In thousands)

The following table summarizes

the Company’s total Level 3 liability activity for the six months ended June 30, 2022 and 2021 (in thousands):

Fair value as of December 31, 2021

1 unchanged sentence

Change in valuation inputs (1)

Fair value as of March 31, 2022

Fair value as of June 30, 2022

Fair value as of December 31, 2020

1 unchanged sentence

Change in valuation inputs (1)

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.

Fair value as of June 30, 2021

Changes in valuation

inputs are recognized as the change in fair value – warrant liabilities in the condensed consolidated statement of

Revenue from Contracts with Customers

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.

The 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.

These performance obligations generally

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

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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.

Disaggregated Revenue

The Company classifies revenue

into two sales categories:

Direct-to-Consumer (“DTC”) and wholesale.

The DTC category is comprised of the Company’s

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 Company showroom location.

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.

Sleep products include mattresses, platforms, adjustable

bases, mattress protectors, pillows and sheets.

Other products include cushions and various other products.

The following tables present

1 unchanged sentence

Three Months Ended

Sales Category

Direct-to-consumer

Six Months Ended

Revenues, net

Three Months Ended

Six Months Ended

Sleep products

Revenues, net

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.

Contract Balances

Payment 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 $ 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.

Customer prepayments

totaled $ 5.1 million and $ 10.9 million at June 30, 2022 and December 31, 2021, respectively.

During the three months ended June 30, 2022

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

Inventories, Net

net consisted of the following (in thousands):

Inventories, net consisted

of the following (in thousands):

Raw materials

Work-in-process

obsolescence reserve

INNOVATION, INC.

Finished goods

Inventory obsolescence reserve

Inventories, net

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

9 unchanged sentences

Property and equipment, net

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.

Equipment in progress reflects

equipment, primarily related to mattress manufacturing, which is being constructed and was not in service at June 30, 2022 or December

Interest capitalized on borrowings during the active construction period of major capital projects totaled $ 0.2 million and

$ 0.4 million during the three and six months ended June 30, 2022, respectively.

There was no interest capitalized during the three and

six months ended June 30, 2021.

Depreciation expense was $ 3.6 million and $ 7.1 million during the three and six months ended June 30,

2022, respectively, and totaled $ 1.9 million and $ 3.5 million during the three and six months ended June 30, 2021, respectively.

The Company leases its manufacturing

11 unchanged sentences

The right-of-use asset for finance leases was $ 0.6 million

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

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

and $ 0.7 million at June 30, 2022 and December 31, 2021, respectively.

The following table presents

the Company’s lease costs (in thousands):

Three Months Ended

Six Months Ended

Operating lease costs

Variable lease costs

Short-term lease costs

Total lease costs

INNOVATION, INC.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

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

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

The table below reconciles

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

the condensed consolidated balance sheet at June 30, 2022 (in thousands):

2022 (excluding the six months ended June 30, 2022) (1)

Total operating lease payments

2 unchanged sentences

(1) Amount consists of $ 8.0 million of undiscounted cash flows offset by $ 4.1 million of tenant improvement allowances which are expected to be fully utilized in fiscal 2022.

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.

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

As of June 30, 2022 and December 31, 2021, the weighted-average remaining

term of operating leases was 9.7 years and 10.7 years, respectively, and the weighted-average discount rate of operating leases was 5.33 %

and 5.30 %, respectively.

The following table provides

supplemental information related to the Company’s condensed consolidated statement of cash flows for the six months ended June 30,

2022 and 2021 (in thousands):

Six Months Ended

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

1 unchanged sentence

Other Current Liabilities

current liabilities consisted of the following (in thousands):

Other current liabilities

consisted of the following (in thousands):

Warranty accrual – current portion

3 unchanged sentences

Total other current liabilities

INNOVATION, INC.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

consisted of the following (in thousands):

Debt consisted of the following

(in thousands):

Revolving line of credit

2 unchanged sentences

Long-term debt, net

Loan and Revolving Line of Credit

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

(the “2020 Credit Agreement”).

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

Term Loan and Revolving

Line of Credit

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.

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.

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.

Pursuant to a Pledge and Security

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

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

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

the 2020 Credit Agreement.

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

interest in Purple LLC.

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

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

The 2020 Credit Agreement

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

While any amounts are outstanding under the

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

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

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

In particular, Purple LLC is (i) subject

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

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

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

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

Purple LLC is also restricted from paying dividends or making

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

If the Company or Purple LLC fail to perform their

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

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

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

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 an applicable margin of 4.75%, for a total rate of 5.25% if the applicable liquidity threshold is met.

If the Company does not meet

this threshold, the interest rate would increase to SOFR with a floor of 0.5% plus 9.00%.

Once the Company achieves a consolidated leverage

ratio that 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.

The interest rate on the term loan was 6.07 % as of June 30, 2022.

Pursuant to the first amendment of the 2020 Credit Agreement, the Company

incurred fees and expenses of $ 0.9 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 – Debt .

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

3 unchanged sentences

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

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

directors, serves as a managing partner of CCM.

8 unchanged sentences

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.

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

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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.

Interest expense under the 2020 Credit Agreement totaled $ 0.9 million

and $ 2.0 million for the three and six months ended June 30, 2022, respectively, and totaled $ 0.6 million and $ 1.1 million for the three

and six months ended June 30, 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

The 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 to 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 liquidation.

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 six months ended

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

were no sponsor warrants exercised during the six months ended June 30, 2022.

The 1.9 million sponsor warrants outstanding at June 30,

2022 and December 31, 2021 had fair values of $ 0.1 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

The Company determined the

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

December 31, 2021

Trading price of common stock on measurement date

Exercise price

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.

Risk free interest rate

Warrant life in years

Expected volatility

Expected dividend yield

During the three and six months

ended June 30, 2022, the Company recognized gains of $ 0.3 million and $ 4.3 million, respectively, and during the three and six months

ended June 30, 2021, the Company recognized gains of $ 4.9 million and $ 14.0 million, respectively, in its condensed consolidated statements

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

at the end of the respective period.

Other Long-Term Liabilities

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

– current portion of warranty accrual

long-term liabilities, net of current portion

INNOVATION, INC.

Other long-term liabilities

consist of the following (in thousands):

Warranty accrual

Less – current portion of warranty accrual

Other long-term liabilities, net of current portion

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

13 unchanged sentences

Three Months Ended

Six Months Ended

Balance at beginning of period

2 unchanged sentences

Balance at end of period

Member Distributions

Required Member Distributions

Prior to the Business Combination

8 unchanged sentences

mandatory distributions, other than tax distributions.

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.

During the six months ended June 30, 2021, the Company paid $ 0.9 million in tax

distributions under the Third Purple LLC Agreement.

There were no tax distributions paid during the six months ended June 30, 2022.

June 30, 2022, the Company’s condensed consolidated balance sheet had $ 0.1 million of accrued tax distributions included in other

current 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 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.

The 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.

Rights of Securities

The 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.

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.

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 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 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.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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.

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 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.

In December 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.

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 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.

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.

There were no Paired Securities

exchanged for Class A common stock during the six months ended June 30, 2022.

During the six months ended June 30, 2021, 0.1 million of

Paired Securities were exchanged for shares of Class A common stock.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

of One-to-One Ratios

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

(a) (i) the number of outstanding shares of Class A 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.

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 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.

Non-Income Related

Supreme Court ruling

in South Dakota v.

Wayfair, Inc.

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

not required to collect state and local sales taxes.

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

income or other taxes on e-commerce.

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

state and local sales taxes.

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

on e-commerce.

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

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

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

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

capture data and collect and remit taxes.

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

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

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.

On September 9, 2019, Purple

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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.

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

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

7 unchanged sentences

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

Henderson, the CEO

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

Purple opposed

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

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

or file a motion to permit Mr.

Henderson, the

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

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

After granting PerfectSense a final extension of time to either appoint

counsel or file a motion to permit Mr.

Henderson to represent the defendant, PerfectSense appointed new counsel.

The parties engaged in litigation

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

Shortly thereafter, discovery adjourned and continues

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

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.

The parties engaged

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

Shortly thereafter, discovery adjourned

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

PerfectSense has not responded to Purple’s repeated

attempts to finalize the settlement.

Purple filed a motion to enforce a settlement agreement.

The Court has directed the motion

be heard before a Judge, which will likely take place in September of 2022.

On September 20, 2020, Purple

9 unchanged sentences

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.

2022, USTR issued its remand results.

The court has not yet established a briefing schedule for comments on the remand results.

If successful,

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

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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 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

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 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.

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.

the parties are in the fact discovery phase of the arbitration.

The parties have scheduled several depositions and exchange documents

and discovery requests.

The arbitration hearing is set to begin on April 17, 2023, and it will continue through April 28, 2023.

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

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.

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.

PURPLE 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 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.

On July 9, 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.

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

its own Complaint in the Fourth Judicial District Court of Salt Lake County, Utah, Case No.

21040011 (the “Utah Litigation”),

(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.

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

SSB filed an Answer on August 18, 2021.

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.

After attending a

mediation, the parties entered in a settlement agreement on December 31, 2021 resolving all claims in the Georgia Litigation and Utah

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

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Related Party Transactions

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.

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.

See Note 13— Commitments and

Contingencies — Subscription Agreement and Preemptive Rights for further discussion .

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.

Notes to Condensed Consolidated Financial Statements

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

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 $ 0.4 million in rent expense to 123E LLC or TNT Holdings for the building

lease of the Alpine facility for the three and six months ended June 30, 2022, respectively, and $ 0.2 million and $ 0.4 million for the

three and six months ended June 30, 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

During the six months ended

June 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 common stock.

There were no such exchanges during the six months ended June 30, 2022.

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 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.

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.

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 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

The amount received from InnoHold was recorded as additional paid-in capital in the condensed consolidated balance sheet.

During the six months ended

June 30, 2021, Purple LLC paid InnoHold through withholding payments directly to various states, an aggregate of $ 0.4 million in required

tax distributions pursuant to the Third Purple LLC Agreement.

There were no such payments made by Purple LLC during the three months

ended March 31, 2022.

There were no such payments made by Purple LLC during the six months ended

June 30, 2022.

Stockholders’ Equity

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.

Class A Common Stock

The 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 June 30, 2022, 82.8 million shares of Class A common stock were outstanding.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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.

Class B Common Stock

The 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.

In 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.

subsequently transferred a portion of its shares to permitted transfers and exchanged its remaining shares for Class A common stock that

All of the 0.4 million shares of Class B common stock outstanding at June 30, 2022 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 June 30, 2022, there were no shares of preferred stock outstanding.

Sponsor Warrants

There were 12.8 million sponsor

11 unchanged sentences

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.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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.

exercised during the six months ended June 30, 2022.

During the six months ended June 30, 2021, 6.6 million sponsor warrants were exercised

resulting in the issuance of 2.3 million shares of Class A common stock.

There were 1.9 million sponsor warrants outstanding at June 30,

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, 2022, the combined NCI percentage in Purple LLC was 0.5 %.

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.

3 unchanged sentences

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.

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’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.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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.

Deferred tax assets at June

30, 2022 totaled $ 224.0 million, which is net of a $ 93.7 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 $ 23.8 million in the valuation allowance from December 31, 2021 to June 30, 2022, 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 21.6 %.

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.

For the six months ended June

30, 2022, the Company has recorded an income benefit of $ 6.0 million.

The effective tax rate for the six months ended June 30, 2022 was

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.

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 agreement.

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 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.

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, 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 June 30, 2022 and December 31, 2021, respectively.

reduction in the June 30, 2022 tax receivable agreement liability reflected a payment of $ 5.8 million made in January 2022.

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 in 2026.

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.

The effect of an ownership change may be the imposition of an annual limitation on the use of NOL carryforwards

attributable to periods before the change.

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 June 30, 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.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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.

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 June 30, 2022, no uncertain tax positions were recognized as liabilities in the condensed consolidated financial

Net Income (Loss) Per Common Share

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

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

average shares—diluted

income (loss) per common share:

INNOVATION, INC.

Basic 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.

The following table sets forth

the calculation of basic and diluted weighted average shares outstanding and earnings (loss) per share for the periods presented (in thousands,

except per share amounts):

Three Months Ended

Six Months Ended

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

Less – dilutive effect of change in fair value of warrant liabilities

Less – net loss attributed to noncontrolling interest

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

Weighted average shares—basic

Add – dilutive effect of equity awards

Add – dilutive effect of warrants

Add – dilutive effect of Class B shares

Weighted average shares—diluted

Net income (loss) per common share:

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

For the three months ended

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.

For the three and six months

ended June 30, 2022, the Company excluded 3.3 million and 3.5 million, respectively, of Class A common shares 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

and six months ended June 30, 2021, the Company excluded 0.4 million and 0.5 million, respectively, of Paired Securities convertible into

shares of Class A Stock as the effect was anti-dilutive.

Equity Compensation Plans

Equity Incentive Plan

Purple Innovation, Inc.

2017 Equity Incentive Plan (the “2017 Incentive Plan”) provides for grants of stock options, stock

appreciation rights, restricted stock 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

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 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.

June 30, 2022, an aggregate of 1.0 million shares are available for issuance or use under the 2017 Incentive Plan.

Class A Stock Awards

In May 2022, the Company granted

stock awards under the 2017 Incentive Plan to independent directors on the Board.

The stock awards vested immediately and the Company

issued 0.1 million shares of Class A common stock and recognized $ 0.6 million in expense during the three months ended June 30, 2022,

which represented the fair value of the stock awards on the grant date.

Employee Stock Options

In March and June 2022, the

Company granted 0.5 million and 0.1 million stock options, respectively, under the 2017 Incentive Plan to its chief executive officer

at an exercise price of $ 6.82 per option.

The stock options expire in five years and vest over a three-year period.

The Company determined the fair value of these

In April 2022, with

the chief executive officer’s consent, the Company rescinded and cancelled 0.4 million of the stock options granted in March 2022

because of annual limits set forth in the 2017 Incentive Plan.

The Company determined the fair value of the net award of 0.2 million stock

options to be $ 0.4 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:

The Company determined the

fair value of the options granted during the six months ended June 30, 2022 using the Black Scholes method with the following weighted

average assumptions:

Fair market value

Exercise price

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:

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 six months ended June 30, 2022:

(in thousands)

Options outstanding

as of January 1, 2022

Options outstanding as of January 1, 2022

Forfeited/cancelled

outstanding as of March 31, 2022

INNOVATION, INC.

Options outstanding as of June 30, 2022

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

and exercisable stock options as of March 31, 2022 are as follows:

of Options Outstanding

Outstanding and exercisable stock options as of

June 30, 2022 are as follows:

Options Outstanding

Options Exercisable

Exercise Prices

(in thousands)

Remaining Life (Years)

of Options Exercisable

Remaining Life

(in thousands)

1 unchanged sentence

(in thousands)

following table summarizes the Company’s unvested stock option activity for the three months ended March 31, 2022:

The following table summarizes

the Company’s unvested stock option activity for the six months ended June 30, 2022:

(in thousands)

Nonvested options as of January 1, 2022

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.

Nonvested options as of June 30, 2022

The estimated fair value of

Company stock options is amortized over the options vesting period on a straight-line basis.

For the three and six months ended June 30,

2022, the Company recognized stock option expense of $ 0.2 million and $ 0.3 million, respectively.

The Company recorded stock option expense

of $ 0.5 million and $ 0.9 million during the three and six months ended June 30, 2021, respectively.

As of June 30, 2022, outstanding

stock options had $ 1.1 million of unrecognized stock compensation cost with a remaining recognition period of 2.0 years.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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:

Employee Restricted

In March and June 2022, the

Company granted 0.5 million and 0.1 million restricted stock units, respectively, under the 2017 Incentive Plan to the Company’s

chief executive officer.

These restricted stock awards had a grant date fair value of $ 6.32 and $ 4.81 per share, respectively.

2022, with the chief executive officer’s consent, the Company rescinded and cancelled 0.4 million of the restricted stock units

granted in March 2022 because of annual limits set forth in the 2017 Incentive Plan.

The estimated fair value of the net award of 0.2

million restricted stock units is being recognized on a straight-line basis over the three-year vesting period.

During the second quarter of 2022, the Company granted 1.1 million

restricted stock units under the 2017 Incentive Plan to certain management of the Company.

Approximately one-half of the restricted stock

units granted included a market vesting condition.

The restricted stock awards that did not have a market vesting condition had a weighted

average grant date fair value of $ 5.53 per share.

The estimated fair value of these awards is recognized on a straight-line basis over

the 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.

Company determined the weighted average grant date fair value of the awards with the market vesting condition to be $ 3.68 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 six months ended June 30, 2022:

(in thousands)

Nonvested restricted stock units as of January 1, 2022

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.

Nonvested restricted stock units as of June 30, 2022

The Company recorded restricted

stock unit expense of $ 0.5 million and $ 0.9 million during the three and six months ended June 30, 2022, respectively.

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

stock units outstanding and no expense recorded during the six months ended June 30, 2021.

As of June 30, 2022, outstanding

restricted stock units had $ 6.4 million of unrecognized stock compensation cost with a remaining recognition period of 2.6 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.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

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 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):

Three Months Ended

Six Months Ended

Cost of revenues

Marketing and sales

General and administrative

Research and development

Total non-cash stock-based compensation

Employee Retirement Plan

July 2018 the Company established a 401(k) plan that qualifies as a deferred compensation arrangement under Section 401 of the IRS

All eligible employees over the age of 18 and with 4 months’ service are eligible to participate in the plan.

The plan provides

for Company matching of employee contributions up to 5% of eligible earnings.

In July 2018 the Company established

a 401(k) plan that qualifies as a deferred compensation arrangement under Section 401 of the IRS Code.

All eligible employees over

the age of 18 and with 4 months’ service are eligible to participate in the plan.

The plan provides for Company matching of employee

contributions up to 5% of eligible earnings.

Company contributions immediately vest.

The Company’s

matching contribution expense was $ 1.1 million and $ 0.7 million for the three months ended March 31, 2022 and 2021, respectively.

The Company’s matching contribution

expense was $ 0.9 million and $ 1.9 million for the three and six months ended June 30, 2022, respectively, and $ 0.8 million and

$ 1.6 million for the three and six months ended June 30, 2021, respectively.

Subsequent Events

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.

On July 20, 2022, the Company

entered into an amendment to its Alpine facility lease agreement with 123E LLC.

The amendment rescinded the Company’s previous notice

of termination that was scheduled to be effective September 30, 2022 and extended the term such that the lease will remain in effect until

September 30, 2023.

On August 5, 2022, the Company

filed a Complaint with the United States International Trade Commission (“ITC”) against numerous entities and individuals

from the People’s Republic of China and South Korea (“Respondents”) that have been violating Purple’s intellectual

property rights related to pillow and seat cushion products.

The Complaint alleges that the proposed Respondents are violating 19

§ 1337 (“Section 337”) by importing into the United States, selling for importation into the United States, and/or

selling in the United States after importation pillow and seat cushion products that infringe Purple’s trade dress rights or otherwise

constitute unfair competition, infringe a certain Purple design patent, infringe Purple trademarks, and/or infringe Purple utility patents.

The Complaint requests that the ITC issue at least the following relief:

(i) a General Exclusion Order excluding from entry into

the United States all pillow and seat cushion products that infringe any asserted Purple intellectual property right;

(ii) Limited Exclusion

Orders excluding from entry into the United States all pillow and cushion products of the proposed Respondents named in the Complaint

that infringe any asserted Purple intellectual property right;

and (iii) Cease and Desist Orders against the proposed Respondents named

in the Complaint barring them from marketing, selling, advertising, or distributing infringing products in the United States, including

via on-line retailers.

The ITC is currently determining whether to institute an unfair import investigation under Section 337 in

connection with Purple’s Complaint.

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