What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-22 compared with 2022-03-01 · 835 added, 592 removed, 72 unchanged (95% of the section changed)

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

Management’s Discussion

and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Annual Report on Form

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

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

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

19 unchanged sentences

any forward-looking statements for any reason.

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

The discussion should be read in conjunction with

the Consolidated Financial Statements and the notes thereto included in “Part II Item 8.

The following discussion is

intended to provide a more comprehensive review of the operating results and financial condition of Purple than can be obtained from reading

the consolidated financial statements alone.

The discussion should be read in conjunction with the consolidated financial statements and

the notes thereto included in “Part II Item 8.

Financial Statements.”

of Our Business

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

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

with premium offerings.

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

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

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

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

Our proprietary gel technology, Hyper-Elastic

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

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

wholesale partners.

Company consists of Purple Inc.

Overview of Our Business

Our mission is to help people

feel and live better through innovative comfort solutions.

We began as a digitally-native

vertical brand founded on comfort product innovation with premium offerings, and are now omni-channel.

We design and manufacture a variety

of innovative, branded and premium comfort products, including mattresses, pillows, cushions, bases, sheets, duvets, duvet covers and

other products.

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

and the development of our own manufacturing processes.

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

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

We market and sell

our products through direct-to-consumer e-commerce and Purple owned retail showrooms (collectively “DTC”), online marketplaces,

and retail wholesale partners.

The Company consists of Purple

and its consolidated subsidiary, Purple LLC.

was incorporated in Delaware on May 19, 2015

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

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

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

acquired an equity interest

in Purple LLC and became its sole managing member.

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

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

the approval of any other member.

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

company under the name of GPAC.

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

“Business Combination”) pursuant to which Purple Inc.

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

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

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

At December 31, 2022, Purple Inc.

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

holders had the remaining 1%.

Pandemic Developments

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

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

The scope and nature of these impacts continue to evolve.

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

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

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

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

COVID-19 will stay in effect.

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

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

and customers.

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

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

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

for the next 12 months.

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

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

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

continued economic weakness may eventually have an adverse

impact upon the industry and our business.

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

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

utilize in reporting certain assets and liabilities.

Developments in Our Business

and Demand Developments

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

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

bringing the machines back online.

As a result, we experienced significantly reduced production levels causing shipment backlogs that

unfavorably affected both second and third quarter net revenues.

We exited the month of July with production from our existing machines

back at planned levels and emerged from our backlog position at the end of August.

With our production back at planned levels, we were

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

the latter part of the third quarter.

Even though we were able to

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

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

We also believe that the production challenges

experienced in the second and third quarters adversely affected the confidence of consumers and our wholesale partners in our ability

to timely deliver our products, which resulted in reduced orders and increased cancellations from e-commerce, wholesale and Purple retail

showroom customers.

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

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

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

In addition to adversely impacting immediate demand, these issues

also interrupted our momentum in growth for future periods.

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

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

costs and an increase in general and administrative expenses.

While our production and marketing efforts returned to planned levels in

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

We believe this shift

will continue through 2022.

In addition to a slower recovery to expected

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

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

While we are still able to obtain necessary materials

when needed, the costs of such materials have increased significantly, consistent with general macroeconomic trends.

In addition, as

experienced in other industries, in order to remain competitive in hiring the labor necessary to maintain our production, we have had

to increase wages and other compensation.

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

lower margins.

We believe that raw material, labor and freight costs will continue to remain at elevated levels or increase further in

the foreseeable future.

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

in the fourth quarter and early 2022.

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

of our cost structure.

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

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

Following several years of hyper growth and increased

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

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

We are also closely monitoring

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

As inflationary

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

had a 99.5% economic interest in Purple LLC while other Class B unit holders had the remaining 0.5%.

On August 31, 2022, we acquired

all the issued and outstanding stock of Intellibed, which is now a wholly owned subsidiary of Purple LLC.

For further discussion see Recent

Developments in Our Business — Acquisition below.

Executive Summary – Results of Operations

Net revenues decreased 20.7%

to $575.7 million for the year ended December 31, 2022 compared to $726.2 million for the year ended December 31, 2021 and decreased 11.2%

compared to $648.5 million for the year ended December 31, 2020.

These decreases were primarily due to post-Covid changing demand for

home related products as consumer spending shifted towards services and experiences, the negative effect of inflationary pressures on

consumer discretionary spending and our intentional reduction in advertising spend.

Gross profit decreased 28.6%

to $210.6 million in 2022 compared to $295.0 million in the prior year due primarily to the decrease in sales volume.

The gross profit

percentage in 2022 was 36.6% as compared to 40.6% in 2021.

Our gross profit percentage was adversely impacted by elevated levels of materials,

labor and freight costs, lower demand levels and a shift in revenue to our wholesale channel, which carries a lower average selling price

than sales from our DTC channel.

In addition, our efficiency and cost reduction initiatives, including greater balancing of production

and fulfillment operations between facilities, were initiated in the first half of fiscal 2022 and did not become fully impactful until

the second half of the year.

Operating expenses decreased

21.2% to $250.8 million in 2022 compared to $318.3 million in the prior year.

This decrease primarily reflected the impact of reduced

advertising spend, workforce reductions and the implementation of other cost-saving measures.

Other income was $163.2 million

in 2022 compared to $26.0 million in 2021.

For similar reasons that led to the recording of a full valuation allowance on our deferred

tax assets, we evaluated the probability of amounts being owned pursuant to the Tax Receivable Agreement and determined the likelihood

of a future liability was not probable.

As result, we reduced the Tax Receivable Agreement liability to zero at December 31,

As a result, we recognized tax receivable agreement income of $162.0 million in our consolidated statement of operations for the

year ended December 31, 2022.

Income tax expense was $212.9

million in 2022 compared to an income tax benefit of $1.2 million in 2021.

Based on available evidence, we concluded it was more likely

than not that our deferred tax assets would not be realized and that a full valuation allowance for deferred tax assets was appropriate.

In 2022, tax expense included $213.5 million related to the increase in our valuation allowance against deferred tax assets.

The net loss attributable

to us was $89.7 million in 2022 as compared to net income attributable to us of $4.0 million in 2021.

The net loss reflected an operating

loss of $40.3 million, other income of $163.2 million and income tax expense of $212.9 million.

Recent Developments in

On August 31, 2022, we acquired

Intellibed, a premium sleep and health wellness company, offering gel-based mattresses scientifically designed for maximum back support,

spinal alignment and pressure point relief.

We believe that the addition of Intellibed will increase product offerings to customers, expand

market opportunities (particularly into the luxury mattress category), capitalize on synergies of the combined companies, and increase

opportunities for innovation.

In addition, the acquisition allowed us to consolidate ownership of our intellectual property licensed to

Intellibed and more fully capitalize on growing demand for products with gel technologies.

The total purchase consideration for the acquisition

was $28.3 million, which primarily consisted of approximately 8.1 million shares of Class A Stock.

In addition, the Intellibed securityholders

are entitled to receive an additional 1.5 million shares of Class A common stock if the closing price does not equal or exceed $5.00 for

at least ten trading days over any period of 30 consecutive trading days during the period beginning on the six-month anniversary of the

closing date and ending on the 18 month anniversary of the closing date.

Also, 0.5 million shares of Class A common stock and $1.7 million

are being held in an escrow fund for the purposes of satisfying potential indemnification and other obligations of the securityholders

of Intellibed for up to 12 months following the closing.

Purchase consideration also included the fair value of 0.5 million shares of

Class A common stock held in escrow pending resolution of net working capital adjustments and general representation and warranty provisions

of the agreement, the fair value of contingent consideration of 1.5 million shares of Class A common stock issuable to Intellibed securityholders

depending upon the price of the Class A common stock over the next 18 months, $1.4 million gain related to the fair value of a preexisting

legal matter that was effectively settled on the acquisition date, and $0.9 million related to the fair value of other items.

Coliseum Capital Management, LLC Proposal

On September 17, 2022, we received an unsolicited and non-binding proposal

from Coliseum to acquire the remaining outstanding shares of Class A common stock and Class B common stock not already beneficially owned

by Coliseum for $4.35 per share in cash.

At the time of the offer, Coliseum beneficially owned approximately 44.7% of our outstanding

common stock.

The Coliseum proposal was conditioned upon the transaction being (a) negotiated by, and subject to the approval of, a special

committee of independent and disinterested members of the Board (the “Special Committee”) and (b) subject to a non-waivable

condition requiring approval by the affirmative vote of a majority of shares of common stock not owned by Coliseum or other interested

The Special Committee was formed by the Board to determine the necessary actions to evaluate the Coliseum proposal and determine

the course of action that is in the best interests of all Company’s shareholders.

The Board expressly granted the Special Committee

the ability to decline the Coliseum proposal.

In addition, the Special Committee adopted a stockholder rights agreement to have the time

and flexibility necessary to evaluate the Coliseum offer and to prevent a change of control without payment of an adequate control premium.

On January 12, 2023, the Company

issued a press release stating the Special Committee had rejected Coliseum’s unsolicited proposal.

On January 13, 2023, Coliseum

submitted a letter to the chairman of the Board setting forth a cooperation proposal (the “Cooperation Proposal”).

16, 2023, the Special Committee responded to the Cooperation Proposal.

On January 17, 2023, Coliseum

filed a Schedule 13D/A with the SEC indicating that, in the absence of an agreement, Coliseum intended to nominate a slate of directors

for election at the 2023 annual meeting of the stockholders of the Company, which slate would constitute a majority of the Board.

19, 2023, the Special Committee issued a press release stating the position of the Special Committee with respect to the Coliseum proposal.

On February 13, 2023, Coliseum

submitted a notice of its intention to nominate four persons to the Board, replacing four of the seven member Board and retaining only

DeMartini, the Company’s Chief Executive Officer, Mr.

Gray, CCM’s manager, and one of the existing non-executive directors.

In response, on February 13, 2023, the Company issued a press release expressing the Special Committee’s response and position with

respect to Coliseum’s proposal.

On February 14, 2023, the

Company declared a dividend of one new PRPLS for each 100 shares of Purple common stock (“Common Stock”) owned by Purple’s

shareholders.

Each PRPLS votes together with the Common Stock in the election of directors, and related matters, and carries 10,000 votes

Holders of PRPLS will be entitled to allocate their votes among the nominees in director elections on a cumulative basis.

holders can allocate all, none, or a portion of their votes to each director nominee up for election at the Company’s meetings of

shareholders.

On February 24, 2023, the Company issued 1.0 million PRPLS shares which trade with the Common Stock.

Any new issuance of

Common Stock will automatically include a proportionate number of PRPLS.

The PRPLS are redeemable at any time by an affirmative vote of

two-thirds of the members of the Board.

PRPLS do not have any dividend rights and will be entitled to only a limited payment upon any

liquidation, dissolution or winding up in priority to any payments on the Common Stock but will not otherwise participate in any liquidating

distributions.

On February 21, 2023, Coliseum filed a lawsuit in the Delaware Court of Chancery to invalidate Purple’s issued PRPLS,

alleging that the issuance deprived Purple stockholders of a fair and democratic election of directors at the Company’s 2023 Annual

Meeting and other related allegations.

On February 21, 2023, Coliseum

filed a Complaint against the Company and several members of the Board in the Delaware Court of Chancery, captioned Coliseum Capital

Management, LLC v.

Anthos , Case No.

2023-0220-PAF (Del.

The complaint alleges that the Company and the named

directors authorized an improper dividend of preferred stock in bad faith to impede stockholder voting rights and interfere with Coliseum’s

nomination of a competing slate of director candidates ahead of the Company’s 2023 annual meeting of stockholders.

(1) declarations that the authorization of the PRPLS violated the Company’s charter and amounted to a breach of the

named directors’ fiduciary duties;

(2) a declaration that the PRPLS is invalid, unenforceable, and void;

(3) unspecified damages

resulting from the alleged breach of duties;

and (4) an award of costs and expenses incurred in pursuing the action.

have agreed to hold an expedited trial on Coliseum’s claims that will result in a resolution of the dispute before the Company’s

2023 annual meeting of stockholders.

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

However, Purple

intends to vigorously defend against the claims made by Coliseum.

March 9, 2023, the Special Committee offered Coliseum a settlement proposal that included the following provisions, (i) Coliseum would

have the right to identify three of the six non-management members of a seven-member board, (ii) the other three non-management seats

would be filled by two existing independent directors and a new director who is a significant shareholder.

In addition to Dawn Zier, who

already announced her intention not to stand for election at the 2023 Annual Meeting due to other commitments, two other current directors

would retire at or before the 2023 Annual Meeting, (iii) Coliseum managing partner Adam Gray would become Chairman of the Board, (iv)

the Special Committee would name one of the existing incumbent independent directors as Lead Independent Director, and (v) Coliseum would

commit to customary standstill provisions to provide stability for the Company for approximately 18 months.

On March 16, 2023, the Special

Committee announced that Coliseum has rejected the settlement proposal.

Stockholder Rights Agreement

On September 25, 2022, with

the authorization of the Board, the Special Committee approved the adoption of a limited-duration stockholder rights agreement with an

expiration date of September 25, 2023 (the “Rights Agreement”).

The Special Committee adopted the Rights Agreement in response

to Coliseum’s substantial increase in ownership of our shares over the last year and the Special Committee’s desire to have

the time and flexibility necessary to evaluate Coliseum’s offer to acquire the outstanding common stock not already beneficially

owned by Coliseum.

The Rights Agreement is intended to protect against any coercive or abusive takeover tactics, and to help ensure that

our stockholders are not deprived of the opportunity to realize the full and fair value of their investment.

The Rights Agreement applies

equally to all current and future shareholders and does not deter any offer or preclude the Special Committee from considering an offer

that is fair and otherwise in the best interests of our shareholders.

Upon adoption of the Rights

Agreement, 300,000 shares of our authorized shares of preferred stock, par value $0.0001 per share, were designated as Series A Junior

Participating Preferred Stock (the “Preferred Shares”).

In accordance with the Rights Agreement, on September 25, 2022, the

Special Committee authorized and declared a dividend of one preferred share purchase right (a “Right”) for each outstanding

share of our Class A common stock and Class B common stock to stockholders of record at the close of business on October 6, 2022.

the occurrence of certain triggering events, each Right entitles the holder to purchase from us one one-thousandth of a share of the newly

designated Preferred Shares at an exercise price of $20.00, subject to certain adjustments .

The Rights will be exercisable only

if a person or group acquires beneficial ownership (including certain synthetic equity positions created by derivative securities) of

20% or more of our outstanding shares of common stock.

Any person or group that beneficially owned more than the triggering percentage

when the Board adopted the Rights Agreement may continue to own its shares of common stock but may not acquire any additional shares without

triggering the Rights Agreement.

Unless the Rights become exercisable as discussed above, the Rights Agreement has no impact on our consolidated

financial statements .

Proportional Representation Preferred Linked

On February 14, 2023, the

Company declared a dividend of one new PRPLS for each 100 shares of Purple common stock (“Common Stock”) owned by Purple’s

shareholders.

Each PRPLS votes together with the Common Stock in the election of directors, and related matters, and carries 10,000 votes

Holders of PRPLS will be entitled to allocate their votes among the nominees in director elections on a cumulative basis.

holders can allocate all, none, or a portion of their votes to each director nominee up for election at the Company’s meetings of

shareholders.

On February 24, 2023, the Company issued 1.0 million PRPLS shares which trade with the Common Stock.

Any new issuance of

Common Stock will automatically include a proportionate number of PRPLS.

The PRPLS are redeemable at any time by an affirmative vote of

two-thirds of the members of the Board.

PRPLS do not have any dividend rights and will be entitled to only a limited payment upon any

liquidation, dissolution or winding up in priority to any payments on the Common Stock but will not otherwise participate in any liquidating

distributions.

On February 21, 2023, Coliseum

filed a lawsuit in the Delaware Court of Chancery to invalidate Purple’s issued PRPLS, alleging that the issuance deprived stockholders

of a fair and democratic election of directors at the 2023 Annual Meeting, and other related allegations.

Equity Financing

On March 29, 2022, we completed

an underwritten public offering of 16.1 million shares of Class A common stock, which included the additional 2.1 million shares

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

We received aggregate net proceeds from the offering, after deducting

offering fees and expenses of $5.3 million, of approximately $92.9 million.

On December 27, 2022, we filed

a registration statement on Form S-3 with the SEC using the “shelf” registration process.

As a result, we may offer and sell

from time to time, in one or more series or issuances and on terms that we will determine at the time of the offering, any combination

of the securities described in the registration statement, up to an aggregate amount of $90.0 million.

The registration became effective

on January 30, 2023.

On February 13, 2023, we completed

an underwritten offering of 13.4 million shares of Class A common stock.

The underwriters did not exercise their over-allotment

We received aggregate net proceeds from the offering, after deducting offering fees and expenses of $3.3 million, of approximately

$57.0 million.

Approximately $27.7 million of the proceeds was used to pay off the outstanding balance of the term loan including interest

Debt Financing

On September 3, 2020, Purple

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

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

On March 31, 2022, we used a portion of the net proceeds from our underwritten public offering, described above, to repay in full

the $55.0 million of principal outstanding on the revolving line of credit.

Our operating and financial

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

On February 28, 2022, prior to the covenant compliance certification date, we 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, additional negative covenants during a covenant amendment period that extends into 2023 until certain conditions

are met, and the interest rate was changed from LIBOR plus 3.00% to the secured overnight financing rate (“SOFR”) plus 4.75%.

Pursuant to this amendment, we made a $2.5 million payment on the term loan to cover the four quarterly principal payments due in 2022

and incurred fees and expenses of $0.8 million that were recorded as debt issuance costs in the consolidated balance sheet.

On March 23, 2022, we

entered into a second amendment to the 2020 Credit Agreement.

This amendment modified the 2020 Credit Agreement to allow Coliseum to acquire

35% or more of the combined voting power of all our equity interests entitled to vote for the election of members of our Board without

constituting an event of default.

Coliseum is considered a related party of the Company in that Adam Gray, a member of our Board, serves

as a manager of Coliseum who manages the Coliseum investment funds and accounts.

Pursuant to this amendment, we incurred fees and expenses

of $0.4 million that were recorded as debt issuance costs in the consolidated balance sheet.

On May 13, 2022 and September

9, 2022, the Company entered into a third and fourth amendment, respectively, to the 2020 Credit Agreement.

These amendments modified

the permitted leases schedule to reflect a change in showroom locations and a new lease for an innovation building.

The amendments did

not meet the criteria for a modification of existing debt and a minimal amount of expenses were recorded as general and administrative

expense in the consolidated statement of operations.

On July 14, 2022, we received

consent under the 2020 Credit Agreement allowing the acquisition of Intellibed to constitute a permitted acquisition under the 2020 Credit

We incurred fees and expenses of $0.3 million that were recorded as general and administrative expense in the consolidated

statement of operations.

On December 30, 2022, we made

a $15.0 million prepayment against the outstanding term loan without payment of a premium or penalty.

As of December 31, 2022, we were

in compliance with all of the financial covenants related to the 2020 Credit Agreement, as amended.

The interest rate on the term loan

was 8.98% at December 31, 2022.

On February 17, 2023, we entered

into a fifth amendment to the 2020 Credit Agreement.

In accordance with this amendment, we repaid in full the $24.7 million outstanding

balance of the term loan, plus accrued interest.

The amendment also provides that the maximum leverage ratio covenant will not be tested

for the first two quarters of 2023 and revises the ratio to 4.50x for the third quarter of 2023 and 3.00x for all quarters thereafter.

In addition, the minimum fixed charge coverage ratio covenant will not be tested for the first two quarters of 2023 and revised to 1.50x

for the third and fourth quarters of 2023, and 2.00x for all quarters thereafter.

Both the maximum leverage ratio and minimum fixed charge

coverage ratio will be calculated on a build-up basis for the third quarter of 2023, and then on a last twelve-month basis for the fourth

quarter of 2023 and thereafter.

The amendment also revises the lease incurrence test which will allow us to incur ten new showroom leases

for stores scheduled to open in 2023 and six new leases for stores that will open in 2024.

Beginning in the fourth quarter of 2023, we

may begin incurring leases for stores that will open in 2024, subject to leverage ratio requirements.

The leverage ratio must be less

than 2.50x to sign leases, with up to a maximum of six new leases per quarter, increasing to eight new leases per quarter if the leverage

ratio is less than 2.00x.

The amendment also provides certain minimum consolidated EBITDA covenants for the first and second quarters

of 2023 based on our total unrestricted cash and unused revolver availability.

The amendment further (i) reduces the amount available

under the revolving line of credit to $50.0 million, (ii) provides that the maturity date of the 2020 Credit Agreement

will spring forward to June 30, 2024 if our consolidated EBITDA is not greater than $15.0 million for 2023, (iii) reduces limits

on maximum growth capital expenditures to $32.0 million for 2023 and $35.0 million for 2024 and 2025, and (iv) revises

the current minimum liquidity covenant of $25.0 million to provide that it will increase to $30.0 million for

each three-month period following the applicable fiscal quarter if the leverage ratio is greater than 3.00x for any fiscal quarter ending

on or after the third quarter of 2023 .

Pursuant to this amendment, we incurred fees and expenses of $2.7 million that were recorded

as debt issuance costs.

There are no amounts currently drawn on the revolver and the available amount to draw is the full $50

In order to draw any amounts on the revolver, the Company must be in compliance with the covenants outlined in the fifth amendment.

Operational Developments

The COVID-19 pandemic has

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

and logistics, our suppliers, and the market overall.

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

channel, and in 2020 and 2021 we increased our production capacity to match actual and anticipated demand growth.

In 2022, after two years

of the pandemic, we began experiencing a pull-back in growth that left us with excess operational capacity in facilities, equipment, and

Beginning in the first quarter of 2022, net of showroom growth, we reduced employee headcount approximately 45% and took other

actions to lower costs.

We continue to closely monitor

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

As inflationary pressures

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

In addition, COVID-19 and other events,

3 unchanged sentences

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

experienced some delays in shipments from our suppliers.

Any significant delay or interruption in our supply chain could impair our ability

to meet the demands of our customers and could negatively impact our business.

Firm Relationship

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

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

This new agreement provides opportunity for continued

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

With the constraints on entering

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

that were previously not available to us.

Line of Credit

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

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

In November 2021, the Company executed a $55.0

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

The outstanding balance on

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

First Amendment to 2020 Credit Agreement

Our operating and financial

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

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

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

The amendment contains a covenant

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

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

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

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

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

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

will extend into 2023 until certain conditions are met.

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

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

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

If it is not met, then the interest

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

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

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

Pursuant to the amendment, the

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

to remain competitive in hiring and retaining the labor necessary to maintain our production levels, we have increased wages and other

compensation.

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

In 2022, our gross profit

and results of operations were adversely affected by elevated levels of materials, labor and freight costs and lower demand levels.

early 2022, to offset the impact of higher costs on our gross profits, we increased prices and initiated several other projects to improve

efficiencies and reduce costs, including pursuing greater balancing of production between facilities to reduce freight costs and shorten

delivery times.

As the softening of demand for home related products continues, with consumers shifting spending towards services and

experiences, and consumer spending habits shift from e-commerce to brick and mortar, we have been investing in showroom expansion where

we continue to develop our capabilities.

We also are growing our placements with wholesale partners and focusing on improving wholesale

door productivity.

We ended 2022 with 55 Purple showrooms after adding 27 net new locations during the year and we plan to add additional

showrooms in 2023.

In addition, at the end of fiscal 2022, our products were being sold through approximately 3,400 wholesale doors, having

added approximately 900 net new doors during 2022.

Showroom expansion and improving the sales productivity of our wholesale doors remain

a primary focus and are critical components of our strategy to respond to shifting demand patterns.

After several years of hyper growth

and increased investments to support current and future expansion, we are now building the framework for improved operational maturity

and accountability after focusing on right-sizing our operations, improving our execution, and refining our strategies that will drive

share gains in the premium mattress category and position us for accelerated growth.

We also intentionally reduced our advertising spending

in 2022 to improve marketing efficiency and conserve profitability in a challenging macroeconomic environment.

We believe the acquisition

of Intellibed was a strong strategic addition because of shared technology, geographic proximity of their primary facility, and an immediate

impact on our target luxury market expansion.

We also expect to capitalize on synergies of the combined companies and benefit from expanding

the market presence of premium product offerings.

In addition, the acquisition has allowed us to consolidate ownership of our intellectual

property and more fully capitalize on growing demand for products with gel technologies.

Moreover, the acquisition accelerated our product

development program by several years and allowed us to immediately enter the luxury segment of the sleep and wellness industry as these

higher price points are a natural extension of our existing product offerings.

Other Developments

February 9, 2023, Dawn Zier, a member of the Board since November 2020, notified the Company of her decision to not stand for reelection

at the Company’s 2023 annual meeting of stockholders, in order to prioritize her time to other commitments.

decision not to stand for reelection was not the result of any disagreement with the Company or the Board on any matter relating to the

Company’s operations, policies, or practices.

Zier intends to remain on the Company’s Board until her term ends following

the Company’s 2023 annual meeting of stockholders.

Outlook for Growth

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

following immediate opportunities:

Right-size labor force

and effectively manage labor

Manage capacity utilization

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

Develop and execute on

strategies to meaningfully expand our wholesale presence

Build premium brand position

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

Manage input costs, operating

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

in 2020 by the end of 2022

Strengthen research and

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

expand to adjacent categories

There is no guarantee that we will be able to effectively

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

risks described under “Part I, Item 1A.

We believe that our four strategic initiatives;

accelerating innovation, brand elevation, developing our three distribution channels and operational excellence, will be fundamental to

our future success.

To support our plans for future growth and sustained

profitability, we are focusing on the following opportunities:

Develop and execute on strategies to meaningfully expand our wholesale business by strengthening our wholesale relationships and prioritizing existing door productivity.

With our new product line-up, initial testing with our wholesale partners has been very positive with product placement commitments exceeding our goal and dozens of shop-in-shops have confirmed with interest for several hundreds more.

Expand and mature our fleet of 11 additional Purple company owned showrooms in 2023 to increase door productivity, provide a brand halo benefit to other channels in the surrounding areas, control the relationship with the consumer and increase share of more profitable DTC revenues.

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

We plan to launch our elevated brand positioning in the second quarter of 2023.

and enhance marketing strategies to reach a broader audience, increase customer engagement

and reduce dependency on price promotions as a means of driving sales.

research and development disciplines and go-to-market processes to further develop our current

product categories and position our business to eventually expand to additional categories.

production labor and capacity utilization to promote efficient use of our manufacturing facilities

as we grow into our production footprint.

input costs, operating efficiencies, and pricing to offset gross profit erosion.

There is no guarantee that

we will be able to effectively execute on these opportunities, which are subject to risks, uncertainties, and assumptions that are difficult

to predict, including the risks described under “Part I, Item 1A.

Risk Factors” and elsewhere herein.

Therefore, actual results may differ materially

and adversely from those described above.

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

or our business.

Accounting Estimates

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

generally accepted accounting principles

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

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

Predicting future events is inherently an imprecise activity

and as such requires the use of judgment.

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

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

On a regular basis,

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

are presented fairly and in accordance with GAAP.

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

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

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

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

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

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

The Company’s estimates

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

The Company’s

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

The Company’s

allowance for doubtful accounts as of December 31, 2021

and 2020 was not material.

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

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

sales returns and exchanges or credit losses.

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

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

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

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

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

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

The Company regularly assesses and adjusts the estimate

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

The Company classifies as non-current

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

As of December 31, 2021, the current

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

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

We have not made any material

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

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

However, if actual results are not consistent

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

The Company accounts for the

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

The liability

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

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

The Company uses the Black-Scholes

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

The model uses key assumptions and inputs such

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

This liability generally

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

as sponsor warrants are exercised during the respective periods.

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

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

with changes in the valuation inputs.

We have not made any material changes in the valuation methodology

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

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

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

have been included in the financial statements or tax returns.

Under this method, deferred tax assets and liabilities are recognized

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

and liabilities and their respective tax bases.

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

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

During fiscal 2020, the Company achieved three-year cumulative

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

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

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

The Company recognized deferred

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

2020, respectively.

tax assets and liabilities are calculated by applying existing tax laws and the rates expected to apply to taxable income in the years

in which those temporary differences are expected to be recovered or settled.

The effect of a change in tax rates on deferred tax assets

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 changes in our valuation allowance .

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

Changes in positive and negative

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

valuation allowance against our deferred tax assets.

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

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

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

financial statements.

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

and the realization of deferred tax assets over time.

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

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

The tax benefit from an uncertain

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

based on technical merits of the position.

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

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

The effective tax rate and the tax basis of assets

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

is required in evaluating uncertain tax positions.

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

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

Changes in the recognition or measurement of

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

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

Receivable Agreement

Therefore, actual results

may differ materially and adversely from those described above.

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

changes in the market or our business.

Critical Accounting Estimates

In connection with the preparation

of our consolidated financial statements in conformity with U.S.

generally accepted accounting principles (“GAAP”), we are

required to make estimates and assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities,

sales, expenses and the related disclosures.

Predicting future events is inherently an imprecise activity and as such requires the use

We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management

believes to be relevant at the time our consolidated financial statements are prepared.

On a regular basis, management reviews the accounting

policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance

However, because future events and their effects cannot be determined with certainty, actual results could differ from our

assumptions and estimates, and such differences could be material.

Management believes the accounting

estimates discussed below are the most critical because they require management’s most difficult, subjective or complex judgments,

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

Revenue Recognition

Our revenue recognition

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

the amount and timing of future sales returns and uncollectible accounts.

Our estimates of the amount and timing of sales returns

and uncollectible accounts are based primarily on historical transaction experience.

Our sales return liability decreased from $7.1

million at December 31, 2021 million to $5.1 million as of December 31, 2022.

Our allowance for doubtful accounts was not material

at both December 31, 2022 and 2021.

We do not believe there is a reasonable likelihood that there will be any material changes in

the accounting methodology, future estimates or assumptions used to measure the estimated liability for sales returns and exchanges

or credit losses.

However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or

gains that could be material.

Warranty Liabilities

We provide a limited warranty

on most of the products we sell.

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

are based on the results of product testing, industry and historical trends and warranty claim rates incurred and are adjusted for any

current or expected trends as appropriate.

We regularly assess and adjust the estimate of accrued warranty claims by updating claims rates

for actual trends and projected claim costs.

We classify as non-current those estimated warranty costs expected to be paid out in greater

than one year.

As of December 31, 2022, the current and non-current portions of our warranty liabilities were $5.0 million

and $15.6 million, respectively, compared to $3.9 million and $11.1 million, respectively, at December 31, 2021.

We have not made

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

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

However, if actual results are

not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.

Accounting for income taxes

requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included

in the financial statements or tax returns.

Under this method, deferred tax assets and liabilities are recognized for the estimated future

tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and

their respective tax bases.

In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not

that the deferred tax assets will be realized.

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 temporary differences are expected to be recovered or

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 changes in our valuation

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

realization of deferred tax assets over time.

For purposes of evaluating

our deferred tax assets and liabilities, we entered a cumulative 3-year loss position in Q4 2022 due primarily to the impact of positive

2020 operating results rolling out of the cumulative 3-year period analysis.

Based on this and other available evidence, we concluded

it was more likely than not that our deferred tax assets would not be realized and a full valuation allowance for our net deferred tax

assets was appropriate at December 31, 2022.

Due to the increase in the valuation allowance, we recognized deferred tax expense of $213.5

million in our consolidated statement of operations for the year ended December 31, 2022.

We had previously recognized deferred tax benefits

of $3.6 million and $45.8 million in our consolidated statements of operations for the years ended December 31, 2021 and 2020, respectively,

based on our previous conclusion that it was more likely than not that some of our deferred tax assets would be realized and that a full

valuation allowance for our deferred tax assets was not appropriate.

We account for uncertainty

in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return, which are

subject to examination by federal and state taxing authorities.

The tax benefit from an uncertain tax position is recognized when it is

more likely than not that the position will be sustained upon examination by taxing authorities based on technical merits of the position.

amount of the tax benefit recognized is the largest amount of the benefit that has a greater than 50% likelihood of being realized

upon ultimate settlement.

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

ultimate outcome of various tax uncertainties.

Judgment is required in evaluating uncertain tax positions.

We evaluate our uncertain tax

positions quarterly based on various factors, including changes in facts or circumstances, tax laws or the status of audits by tax authorities.

Changes in the recognition or measurement of uncertain tax positions could have a material impact on our consolidated financial statements

in the period in which we make the change.

As of December 31, 2022 and 2021, no uncertain tax positions were recognized as liabilities

in the consolidated balance sheets.

Tax Receivable Agreement

In connection with the Business

Combination, the Company entered into an agreement with InnoHold LLC (InnoHold) , which provides for the payment by the Company to InnoHold

of 80% of the net cash savings, if any, in U.S.

federal, state and local income tax that the Company actually realizes (or is deemed to

realize in certain circumstances) in periods after the closing of the Business Combination as a result of (i) any tax basis increases

in the assets of Purple LLC resulting from the distribution to InnoHold of the cash consideration, (ii) the tax basis increases in the

assets of Purple LLC resulting from the redemption by Purple LLC or the exchange by the Company, as applicable, of Class B Paired Securities

or cash, as applicable, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from,

payments it makes under the agreement.

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

a liability under the Tax Receivable Agreement may be recorded based on 80% of the estimated future cash tax savings that the Company

may realize as a result of increases in the basis of the assets of Purple LLC attributed to the Company as a result of such exchange

or redemption.

The amount of the increase in asset basis, the related estimated cash tax savings and the attendant tax receivable agreement

liability to be recorded will depend on the price of the Company’s Class A Stock at the time of the relevant redemption or exchange.

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

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

In addition, we estimated

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

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

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

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

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

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

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

the tax receivable agreement.

Combination, we entered into an agreement with InnoHold LLC (InnoHold), which provides for the payments to InnoHold of 80% of the net

cash savings, if any, in U.S.

federal, state and local income tax that we realize (or are deemed to realize in certain circumstances)

in periods after the closing of the Business Combination as a result of (i) any tax basis increases in the assets of Purple LLC resulting

from the distribution to InnoHold of the cash consideration, (ii) the tax basis increases in the assets of Purple LLC resulting from the

redemption by Purple LLC or the exchange, as applicable, of Class B Paired Securities or cash, as applicable, and (iii) imputed interest

deemed to be paid by us 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 its Class B Units, a liability under the Tax

Receivable Agreement may be recorded based on 80% of the estimated future cash tax savings that we may realize as a result of increases

in the basis of the assets of Purple LLC attributed to us as a result of such exchange or redemption.

The amount of the increase in asset

basis, the related estimated cash tax savings and the attendant tax receivable agreement liability to be recorded will depend on the price

of our Class A common stock at the time of the relevant redemption or exchange.

As a result of the initial

merger transaction and subsequent exchanges of Class B Units for Class A common stock, the long-term portion of the potential future tax

receivable agreement liability was $162.2 million as of December 31, 2021.

This balance was reduced in 2022 by $0.3 million for a payment

to be made in 2023 that we classified as a short-term liability.

We evaluated the probability of amounts being owed pursuant to the Tax

Receivable Agreement and determined the likelihood of a future liability was not probable.

As result, we reduced the Tax Receivable Agreement

liability to zero at December 31, 2022 and we recognized tax receivable agreement income of $162.0 million in our consolidated statement

of operations for the year ended December 31, 2022.

We are currently unable to

determine the future amount of these payments due to the unpredictable nature of several factors, including the timing of future exchanges,

the market price of shares of Class A common stock at the time of the exchanges, the extent to which such exchanges are taxable and the

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

Results of Operations

A discussion regarding our

financial condition and results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021 is presented

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

to the year ended December 31, 2020 can be found under Item 7 of Part II of our Annual Report on Form 10-K/A for the fiscal year ended

December 31, 2021, filed with the SEC on March 16, 2022.

Operating Results for the Year Ended December 31, 2022 compared

to the year ended December 31, 2021

The following table sets

forth for the periods indicated, our results of operations and the percentage of total net revenues represented in our consolidated statements

of operations:

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

ended December 31, 2020 is presented below.

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

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

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

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

in our consolidated statements of operations:

Year Ended December 31,

6 unchanged sentences

Total operating expenses

Operating income (loss)

Operating loss

Other income (expense):

1 unchanged sentence

Other income (expense), net

Loss on extinguishment of debt

Change in fair value – warrant liabilities

Tax receivable agreement income (expense)

Total other income (expense), net

Net income (loss) before income taxes

Tax receivable agreement income

Total other income, net

Net income before income taxes

Income tax benefit (expense)

Net income (loss)

Net income (loss) attributable to noncontrolling interest

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

Net revenues increased $77.8

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

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

$21.9 million, or 207.9%.

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

Our wholesale

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

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

Net revenue growth

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

Net revenue growth overall was negatively

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

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

Also, in response to these production delays,

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

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

The growth in net revenues from a product perspective, reflected

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

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

We believe that sales of our products

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

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

The cost of revenues increased

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

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

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

and freight costs.

Net loss attributable to noncontrolling

Net income (loss) attributable to Purple

Innovation, Inc.

Revenues, Net

Net revenues decreased $150.5 million, or 20.7%, to $575.7 million

for year ended December 31, 2022 compared to $726.2 million for the year ended December 31, 2021.

The decline in net revenues reflected

a $124.9 million decrease in mattress sales, a $14.8 million decrease in other sleep product sales and a $10.8 million decrease in other

product sales.

The decrease in net revenues was primarily due to softening demand for home related products and the negative effect of

inflationary pressures on consumer discretionary spending, with consumer spending shifting towards services and experiences.

net revenues in the prior year were positively impacted by demand in the first half of 2021 that was driven by the effects of COVID and

economic stimulus.

The decline in net revenues from a sales channel perspective consisted of DTC net revenues decreasing $143.7 million,

or 30.3% and wholesale net revenues decreasing $6.8 million, or 2.7%.

Within the DTC channel, e-commerce net revenue declined $174.4 million,

or 39.5%, and Purple owned retail showroom net revenue increased $30.7 million, or 94.7%.

The decrease in e-commerce net revenues reflected

the impact of the reasons stated above coupled with customers shifting away from e-commerce buying.

The increase in Purple owned retail

showroom net revenue was mainly driven by showrooms increasing from 28 at the end of 2021 to 55 at the end of 2022.

The decrease in wholesale

net revenues primarily reflected reduced purchases by our existing wholesale partners during 2022 due primarily to declining wholesale

door productivity.

This decrease was offset in part by the effects of adding approximately 900 net new wholesale partner doors in fiscal

2022 coupled with the $9.7 million in net revenues from the Intellibed acquisition, which contributed primarily wholesale net revenues.

In addition to the continued macroeconomic effects described above, we anticipate that net revenue in the first quarter of 2023 will be

impacted by our introduction of new product models, as our retail partners sell through our legacy mattress models ahead of taking delivery

of new models in the second quarter.

Cost of Revenues

Cost of revenues decreased $66.1 million, or 15.3%, to $365.1 million

for the year ended December 31, 2022 compared to $431.3 million for the year ended December 31, 2021 due primarily to the decrease in

sales volume.

Our gross profit percentage, which decreased to 36.6% of net revenues in 2022 from 40.6% in 2021, was adversely impacted

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

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

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

While we have returned to planned production capacity, we

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

by elevated levels of materials, labor and freight costs and lower demand levels and the shift to a higher proportion of wholesale channel

revenue, which carries a lower average selling price than sales from our e-commerce and retail showroom channels, partially offset by

savings realized from cost reduction initiatives.

Our efficiency and cost saving initiatives, including greater balancing of production

and fulfillment operations between the facilities, were initiated during the first half of fiscal 2022 and did not become fully impactful

until the second half of the year.

We anticipate that we will continue to realize the benefits of our efficiency and cost saving initiatives

Marketing and Sales

Marketing and sales expense

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

decreased $73.9 million, or 30.9%, to $165.4 million for the year ended December 31, 2022 compared to $239.3 million for the year ended

December 31, 2021.

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

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

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

This decrease was driven by a $95.5 million, or 58.9%, decline in advertising spending and a $15.0 million decrease

in other marketing costs.

The reduction in advertising spending was primarily due to management’s ongoing efforts to improve marketing

efficiency, conserve profitability in a challenging macroeconomic environment and align spending with current demand levels.

in other marketing costs reflected the impact of cost management efforts, including marketing headcount reductions, executed earlier in

These decreases were offset in part by a $13.8 million increase in wholesale-related marketing and sales costs due in part to growing

the sales organization of our wholesale business and a $22.8 million increase in marketing and sales costs associated with showroom expansion.

Marketing and sales expense as a percentage of net revenues was 28.7% in 2022 compared to 33.0% in 2021.

This increase was primarily due

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

and Administrative

General and Administrative

General and administrative

expense increased $4.6 million, or 6.4%, to $76.7 million for the year ended December 31, 2022 compared to $72.1 million for the year

ended December 31, 2021.

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

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

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

The increase in legal and professional fees was primarily due

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

recruiting expenses.

and Development

Research and development costs

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

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

Income (Loss)

Operating income (loss) decreased $94.6

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

year ended December 31, 2020.

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

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

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

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

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

The remaining decrease was due to a $35.0

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

at an initial interest rate of 3.50%.

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

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

Interest expense in 2021 also included

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

on Extinguishment of Debt

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

The payment included $25.0 million for the original loan under the agreement, $10.0 million for a subsequent incremental loan, $6.6 million

for paid-in-kind interest, $2.5 million for a prepayment fee and $0.9 million for accrued interest.

As a result of paying off this loan,

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

in Fair Value – Warrant Liabilities

There were 15.5 million public warrants

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

private placement with the initial public offering.

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

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

included in earnings.

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

The fair value

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

All of the public warrants were exercised in 2020.

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

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

During the year ended December

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

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

On February 26, 2019, two of the three

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

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

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

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

On November 9,

2020, the Company issued 2.6 million shares of Class A Stock pursuant to the exercise of these warrants held by the lenders who funded

the incremental loan.

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

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

Receivable Agreement Income (Expense)

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

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

and intangible assets of Purple LLC.

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

2021 and 2020, respectively.

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

tax rates and recording the 2020 provision to return adjustments.

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

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

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

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

Tax Benefit (Expense)

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

ended December 31, 2020.

This decrease was primarily due to $35.5 million of the valuation allowance associated with the Company’s

federal and state deferred tax assets being released and recorded as an income tax benefit during 2020.

Noncontrolling

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

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

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

ownership percentage being significantly lower in 2021.

and Capital Resources

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

and cash equivalents on hand.

This increase was primarily due to a $3.7 million increase in payroll and benefits expense and $1.2 million

in costs associated with the Intellibed acquisition, offset in part by a $0.7 million decrease in legal and professional fees.

increase in payroll and benefit costs mainly reflected the impact of job reclassifications for certain employees in the first half of

The decrease in legal and professional fees was primarily due to $7.9 million of underwriting commissions and other costs we paid

in the prior year second quarter for shares sold by Coliseum.

This decrease was partially offset by a one-time separation fee for not

continuing with the services of a professional services provider, expenses incurred by the Special Committee and Intellibed transaction

Research and Development

Research and development

costs increased $1.8 million, or 26.2%, to $8.8 million for the year ended December 31, 2022 from $6.9 million for the year ended December

This increase primarily reflected higher payroll and benefit costs as our renewed focus on product innovation resulted in the

growth of our research and development team, which included the addition of our chief innovation officer.

Operating Income (Loss)

Operating loss increased

$16.9 million to $40.3 million for the year ended December 31, 2022 compared to $23.4 million for the year ended December 31, 2021.

increase primarily resulted from a decrease in gross profit that was driven by lower sales and a reduced gross profit margin, offset

in part by a decrease in operating expenses related primarily to lower advertising spend.

Interest Expense

Interest expense totaled $3.5

million for the year ended December 31, 2022 compared to $1.9 million for the year ended December 31, 2021.

Interest paid on the term

loan increased $1.0 million as the average interest rate paid increased from 3.50% in 2021 to 6.31% in 2022, due mainly to the change

in terms from our credit agreement amendment in February of 2022.

Interest expense was also impacted by a $0.3 million increase in interest

paid on the $55.0 million revolving line of credit that we drew down in November 2021 and repaid in full on March 31, 2022.

interest expense reflected a $0.4 million increase in debt issuance cost amortization.

We incurred $2.5 million in debt issuance costs upon

entering into the 2020 Credit Agreement and incurred an additional $1.2 million in debt issuance costs for two of the amendments

entered into in 2022.

Other Income (Expense), Net

Other income totaled $0.4

million for the year ended December 31, 2022 compared to other expense of $0.2 million for the year ended December 31, 2021.

in other income primarily resulted from the effective settlement of a preexisting legal matter upon our acquisition of Intellibed on August

31, 2022 at an estimated fair value gain of $1.4 million.

The impact of this gain was offset in part by a $0.6 million loss recorded on

the disposal of production machinery and equipment.

Change in Fair Value – Warrant Liabilities

The 1.9 million sponsor warrants

outstanding had a negligible fair value at December 31, 2022 compared to a fair value of $4.3 million at December 31, 2021.

This decrease

in fair value was primarily due to the five-year term of the sponsor warrants ending on February 2, 2023 coupled with our Class A common

stock price declining 63.9% to $4.79 at the end of 2022.

During the years ended December 31, 2022 and 2021, we recognized gains of $4.3

million and $24.1 million, respectively, in our 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 periods.

Tax Receivable Agreement Income

In connection with the Business Combination, we entered into a Tax

Receivable Agreement which generally provides for the payment by us to InnoHold of 80% of certain tax benefits, if any, that we realize

as a result of increases in our allocable share of the tax basis of the tangible and intangible assets of Purple LLC.

As a result of the

initial merger transaction and subsequent exchanges of Class B Units for Class A common stock, the long-term portion of the potential

future tax receivable agreement liability totaled $162.2 million at December 31, 2021.

This balance was reduced by $0.2 million for a

future payment that was classified as a short-term liability during 2022.

For similar reasons that led to the recording of a full valuation

allowance on our deferred tax assets, we evaluated the probability of amounts being owed pursuant to the Tax Receivable Agreement and

determined the likelihood of a future liability was not probable.

As result, we reduced the Tax Receivable Agreement liability to zero at

December 31, 2022 and we recognized tax receivable agreement income of $162.0 million in our consolidated statement of operations for

the year ended December 31, 2022.

Income Tax Benefit (Expense)

Income tax expense was $212.9

million for the year ended December 31, 2022 compared to an income tax benefit of $1.2 million for the year ended December 31, 2021.

purposes of evaluating our deferred tax assets, we entered a cumulative 3-year loss position during Q4 of 2022 due primarily to the impact

of positive 2020 operating results rolling out of the cumulative 3-year period analysis.

Based on this and other available evidence, we

concluded it was more likely than not that our deferred tax assets would not be realized and a full valuation allowance for our net deferred

tax assets was appropriate.

Due to the increase in our valuation allowance, we recognized deferred tax expense of $213.5 million in our

consolidated statement of operations for the year ended December 31, 2022.

This was offset in part by a current tax benefit of $0.6 million

recorded in 2022.

Noncontrolling Interest

We calculate net income or

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

Net loss attributed

to noncontrolling interests was $0.2 million in both 2022 and 2021.

Liquidity and Capital Resources

Our principal sources of funds are cash flows from operations and cash

and cash equivalents on hand, supplemented with borrowings made pursuant to our credit facility and proceeds received from offerings of

our equity capital.

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

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

Our working capital needs depend largely upon

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

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

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

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

to $57.1 million in 2021.

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

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

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

throughout 2021.

As described above, we experienced

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

increases in raw material, labor and freight costs.

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

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

results of operations into the first quarter of 2022.

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

the 2020 credit agreement.

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

in the fourth quarter and early 2022.

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

In addition, we have initiated

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

Our working capital needs depend largely upon the

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

Our unrestricted cash and working capital positions were $40.0 million and $62.0 million, respectively, as of December 31, 2022 compared

to $91.6 million and $87.5 million, respectively, as of December 31, 2021.

Cash used for capital expenditures decreased from $57.1 million

in 2021 to $38.2 million in 2022.

Our capital expenditures in 2022 primarily consisted of leasehold improvements and furniture and fixtures

associated with the opening of new Purple owned retail showrooms.

In 2023, we believe our capital expenditures will be approximately $35.0

In the event our cash flow

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

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

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

satisfying the conditions of our 2020 Credit Agreement, as amended, based on our ability to scale back operations, reduce marketing spend,

use available liquidity under our revolving line of credit, and postpone or discontinue our growth strategies.

In such event, this could

1 unchanged sentence

and we may not be able to retain all of our employees.

In addition, we may be forced to restructure our obligations to current creditors,

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

Our ability to obtain additional debt

or alternative capital on acceptable terms or at all is subject to a variety of uncertainties, including instability in the credit and

financial markets resulting from macroeconomic factors and approval from the lenders under the 2020 Credit Agreement.

Adequate financing

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

The restrictive covenants in the 2020 Credit Agreement,

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

including the acquisition of other businesses or technologies.

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

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

future equity or debt financings may require us to also issue warrants or other equity securities that are likely to be dilutive to our

existing stockholders.

Newly issued securities may include preferences or superior voting rights or, as described above, may be combined

with the issuance of warrants or other derivative securities, which each may have additional dilutive effects.

Furthermore, we may incur

substantial costs in pursuing future capital and financing, including investment banking fees, legal fees, accounting fees, printing and

distribution expenses and other costs.

We may also be required to recognize non-cash expenses in connection with certain securities we

may issue, such as convertible notes and warrants, which will adversely impact our financial condition.

If we cannot raise additional

funds on favorable terms or at all, we may not be able to carry out all or parts of our long-term growth strategy, maintain our growth

and competitiveness or continue in business.

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

to manage our resources and mitigate its adverse effect.

Given the initial difficultly in predicting how long the pandemic would persist

and its full impact, we managed our business and opportunities to preserve liquidity.

In the second half of 2020, we ended most of the

cash preservation programs and returned to full production to meet increased demand.

During 2021, we have increased our inventory levels

and invested in our manufacturing capacity and showroom expansion.

Subject to certain assumptions regarding the duration and severity

of the COVID-19 pandemic, and our responses thereto, based on our current projections we believe our cash on hand, cash generated from

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

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

During 2021, 6.6 million sponsor

warrants were exercised on a cash and cashless basis resulting in the issuance of 2.3 million shares of Class A Stock.

The proceeds received

for the cash exercise was $0.1 million.

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

During 2020, 15.5 million

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

proceeds to the Company of $46.4 million.

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

The payment included $25.0 million for the original loan under the agreement, $10.0 million for a subsequent incremental loan, $6.6 million

for paid-in-kind interest, $2.5 million for a prepayment fee and $0.9 million for accrued interest.

Also on September 3, 2020,

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

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

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

Pursuant to the first

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

as noted below.

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

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

under the line.

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

balance sheet as of December 31, 2021.

We may also consider restructuring our obligations with current creditors, pursue

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

In addition, our 2020 Credit Agreement, as amended,

includes various covenants and obligations that may make it difficult to obtain additional capital on terms that are favorable to us and

to execute on our growth strategies.

Based on our current projections,

we believe our cash on hand, amounts available under our revolving line of credit, and expected cash to be generated from our DTC and

wholesale channels will be sufficient to meet our working capital requirements, comply with debt covenants and cover anticipated

capital expenditures for the next 12 months and beyond.

Underwritten Offering

In March 2022, we completed an underwritten public offering of 16.1

million shares of Class A common stock, which included 2.1 million shares relating to the over-allotment option that the underwriters

exercised in full.

The aggregate net proceeds we received from the offering, after deducting offering fees and expenses of $5.3 million,

totaled approximately $92.9 million.

Shelf Registration Statement and Subsequent

Underwritten Offering

On December 27, 2022, we filed

a registration statement on Form S-3 with the SEC using the “shelf” registration process and on January 30, 2023, it became

As a result, we may offer and sell from time to time, in one or more series or issuances and on terms that we will determine

at the time of the offering, any combination of the securities described in the registration statement, up to an aggregate amount of $90.0

On February 13, 2023, we completed an underwritten offering of 13.4

million shares of Class A Stock.

The underwriters did not exercise their over-allotment option.

We received aggregate net proceeds

from the offering, after deducting offering fees and expenses of $3.3 million, of approximately $57.0 million.

Approximately $27.7 million

of the proceeds was used to pay off the outstanding balance of the term loan including interest and fees.

On September 3, 2020, Purple LLC entered into the 2020 Credit Agreement

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

The term loan is being 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.

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

In November 2021, we

executed a $55.0 million draw on our revolving line of credit, which represented the full amount available under the line.

Our operating and financial

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

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

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

The amendment contains a covenant

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

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

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

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

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

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

that will extend into 2023 until certain conditions are met.

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

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

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

If it is not met, then

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

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

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

Pursuant to the amendment,

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

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

On February 28, 2022, prior to the covenant compliance certification date, we 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, additional negative covenants during a covenant amendment period that extends into 2023 until certain conditions

are met, and the interest rate was changed from LIBOR plus 3.00% to SOFR plus 4.75%.

Pursuant to this amendment, we made a $2.5 million

payment on the term loan to cover the four quarterly principal payments due in 2022 and incurred fees and expenses of $0.8 million that

were recorded as debt issuance costs in the 2022 consolidated balance sheet.

On March 23, 2022, we

entered into a second amendment to the 2020 Credit Agreement.

This amendment modified the 2020 Credit Agreement to allow Coliseum to acquire

35% or more of the combined voting power of all our equity interests entitled to vote for the election of members of our Board without

constituting an event of default.

Coliseum is considered a related party of the Company in that Adam Gray, a member of our Board, serves

as a manager of Coliseum who manages the Coliseum investments funds and accounts.

Pursuant to this amendment, we incurred fees and expenses

of $0.4 million that were recorded as debt issuance costs in the 2022 consolidated balance sheet.

On March 31, 2022, we used

a portion of the net proceeds from the underwritten offering to repay in full the $55.0 million of principal outstanding on the revolving

line of credit.

On May 13, 2022 and September

9, 2022, we entered into a third and fourth amendment, respectively, to the 2020 Credit Agreement.

These amendments modified the permitted

leases schedule to reflect a change in showroom locations and a new lease for an innovation building.

The amendments did not meet the

criteria for a modification of existing debt and the minimal expenses were recorded as general and administrative expenses in the 2022

consolidated statement of operations.

On July 14, 2022, we received

consent under the 2020 Credit Agreement allowing our acquisition of Intellibed to constitute a permitted acquisition under the 2020 Credit

We incurred fees and expenses of $0.3 million that were recorded as general and administrative expense in the 2022 consolidated

statement of operations.

On December 30, 2022, we made

a $15.0 million prepayment against the outstanding term loan without payment of a premium or penalty.

As of December 31, 2022, we were

in compliance with all of the financial covenants related to the 2020 Credit Agreement, as amended.

The interest rate on the term loan

was 8.98% at December 31, 2022.

On February 17, 2023, we entered

into a fifth amendment to the 2020 Credit Agreement.

In accordance with this amendment, we repaid in full the $24.7 million outstanding

balance of the term loan plus accrued interest.

The amendment also provided that the maximum leverage ratio covenant will not be tested

for the first two quarters of 2023 and revises the ratio to 4.50x for the third quarter of 2023 and 3.00x for all quarters thereafter.

In addition, the minimum fixed charge coverage ratio covenant will not be tested for the first two quarters of 2023 and revised to 1.50x

for the third and fourth quarters of 2023, and 2.00x for all quarters thereafter.

Both the maximum leverage ratio and minimum fixed charge

coverage ratio will be calculated on a build-up basis for the third quarter of 2023, and then on a last twelve-month basis for the fourth

quarter of 2023 and thereafter.

The amendment will also revise the lease incurrence test which will allow us to incur ten new showroom

leases in 2023 and six new showroom leases in 2024.

Moreover, beginning in the fourth quarter of 2023, we will be allowed to begin incurring

leases for additional stores that will open in 2024, subject to maximum leverage ratio requirements.

The leverage ratio must be less than

2.50x to sign leases, with up to a maximum of six new leases per quarter, increasing to eight new leases per quarter if the leverage ratio

is less than 2.00x.

The amendment will also provide certain minimum consolidated EBITDA covenants for the first and second quarters of

2023 based on our total unrestricted cash and unused revolver availability.

The amendment further (i) reduces the amount available

under the revolving line of credit to $50.0 million, (ii) provides that the maturity date of amounts drawn under the 2020

Credit Agreement will accelerate to June 30, 2024 if our consolidated EBITDA is not greater than $15.0 million for 2023, (iii)

reduces limits on maximum growth capital expenditures to $32.0 million for 2023 and $35.0 million for 2024 and 2025, and (iv) revises

the current minimum liquidity covenant of $25.0 million to provide that it will increase to $30.0 million for

each three-month period following the applicable fiscal quarter if the leverage ratio is greater than 3.00x for any fiscal quarter ending

on or after the third quarter of 2023.

Pursuant to this amendment, we incurred fees and expenses of $2.7 million that were recorded

as debt issuance costs.

There are no amounts currently drawn on the revolver and the available amount to draw is the full $50

In order to draw any amounts on the revolver, we must be in compliance with the covenants outlined in the fifth amendment.

Tax Receivable Agreement

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

liquidity and capital resources.

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

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

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

that give rise to the payments under the agreement.

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

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

We are required to make certain payments to InnoHold under the Tax

Receivable Agreement, which may have a material adverse effect on our liquidity and capital resources.

As of December 31, 2021, the long-term

portion of the potential future tax receivable agreement liability totaled $162.2 million.

This balance was reduced by $0.3 million for

a payment to be made in 2023 that was classified as a short-term liability during 2022.

For similar reasons that led to the recording

of a full valuation allowance on our deferred tax assets, we evaluated the probability of amounts being owed pursuant to the Tax Receivable

Agreement and determined the likelihood of a future liability was not probable.

As result, we reduced the Tax Receivable Agreement

liability to zero at December 31, 2022 We are currently unable to determine the total future amount of these payments due to the

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

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

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

Other Contractual Obligations

In addition, we have other

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

See Note 6 of the consolidated financial statements

for additional information.

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

The following summarizes our cash flows

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

In addition to the material

contractual obligations discussed above, other material contractual obligations primarily include operating lease payments obligations.

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

Cash Flows for the year ended December 31, 2022 compared to the

year ended December 31, 2021

The following summarizes

our cash flows for the years ended December 31, 2022 and 2021 as reported in our consolidated statements of cash flows (in thousands):

Years Ended December 31,

5 unchanged sentences

Cash, end of the period

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

operating activities during the year ended December 31, 2020.

The decrease in cash flows from operations primarily resulted from an

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

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

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

The decrease in

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

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

This decrease consisted of

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

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

other assets.

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

December 31, 2020.

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

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

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

Purple retail showrooms during 2021.

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

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

Financing activities in 2021 included $55.0 million

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

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

The cash received from these financing activities was offset in part

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

receivable agreement.

Accounting Pronouncements

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

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

Cash used in operating activities

was $28.8 million and $30.9 million for the years ended December 31, 2022 and 2021, respectively.

Cash used in operating activities in

2022 was primarily comprised of a net loss of $89.9 million, offset in part by non-cash adjustments totaling $68.4 million.

These non-cash adjustments primarily related to deferred income taxes of $213.5 million and depreciation and amortization of $17.5 million,

partially offset by Tax Receivable Agreement income of $162.0 million.

Changes in operating assets and liabilities further reduced cash

used in operating activities by $7.2 million in 2022.

This decrease related mostly to a $33.6 million decrease in accounts payable combined

with a $4.1 million increase in accounts receivable due to timing of receipts, offset in part by a $29.0 million decrease in inventories.

The decline in accounts payable was mainly due to the balance at the end of 2021 being higher than normal because of payment timing coupled

with the impact of larger advertising spend in the fourth quarter of 2021.

The decrease in inventories was primarily due to management’s

efforts to rebalance production and fulfillment operations during 2022.

Cash used in investing activities

was $34.5 million for the year ended December 31, 2022 compared to $57.1 million for the year ended December 31, 2021.

expenditures in 2022 primarily consisted of leasehold improvements and furniture and fixtures associated with the opening of new Purple

owned retail showrooms.

In 2021, our capital expenditures included competing the build out of our manufacturing facility in Georgia, and

enhancing manufacturing and safety capabilities at our manufacturing facility in Utah.

Cash provided by financing

activities was $13.4 million for the year ended December 31, 2022 compared to $56.6 million for the year ended December 31, 2021.

activities in 2022 included $92.9 million of net proceeds received from the underwritten stock offering, offset in part by a $55.0 million

revolving line of credit payment, a $15.0 million prepayment made on the term loan, a $5.8 million payment on the Tax Receivable Agreement,

and $3.8 million in other debt related payments.

Recent Accounting Pronouncements

For a description of recently

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

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis