What changed in this filing

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Item 1. Financial Statements

2023-05-10 compared with 2022-11-09 · 1043 added, 1350 removed, 346 unchanged (87% of the section changed)

FINANCIAL STATEMENTS

PURPLE INNOVATION, INC.

Condensed Consolidated Balance Sheets

(unaudited – in thousands, except for

September 30,

INNOVATION, INC.

Consolidated Balance Sheets

– in thousands, except for par value)

Current assets:

8 unchanged sentences

Intangible assets, net

Deferred income taxes

Other long-term assets

5 unchanged sentences

Customer prepayments

Accrued sales tax

Accrued sales and use tax

Accrued rebates and allowances

Operating lease obligations – current portion

Warrant liabilities

Other current liabilities

Total current liabilities

Debt, net of current portion

Operating lease obligations, net of current portion

Warrant liabilities

Tax receivable agreement liability, net of current portion

Other long-term liabilities, net of current portion

Other long-term liabilities, net of current

Total liabilities

3 unchanged sentences

$ 0.0001 par value, 210,000 shares authorized;

91,378 issued and outstanding at September 30, 2022 and 66,493 issued and outstanding at December 31, 2021

105,045 issued and outstanding at March 31, 2023 and 91,380 issued and outstanding at December 31, 2022

Class B common stock;

$ 0.0001 par value, 90,000 shares authorized;

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

448 issued and outstanding at March 31, 2023 and 448 issued and outstanding at December 31, 2022

Additional paid-in capital

Accumulated deficit

Total stockholders’ equity attributable to Purple Innovation, Inc.

Total stockholders’ equity attributable to Purple Innovation,

Noncontrolling interest

Total stockholders’ equity

Total liabilities and stockholders’ equity

The accompanying notes are an integral part of

these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.

Condensed Consolidated Statements of Operations

(unaudited – in thousands, except per

share amounts)

Total liabilities and stockholders’

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

INNOVATION, INC.

Consolidated Statements of Operations

– in thousands, except per share amounts)

Three Months Ended

September 30,

Nine Months Ended

September 30,

Revenues, net

5 unchanged sentences

Total operating expenses

Operating income (loss)

Operating loss

Other income (expense):

Interest income (expense), net

Other income (expense), net

Interest expense

Other income, net

Loss on extinguishment of debt

Change in fair value – warrant liabilities

Tax receivable agreement income

Total other income, net

Net income (loss) before income taxes

Total other income (expense), net

Net loss 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 income (loss) per share:

Net loss attributable to noncontrolling interest

Net loss attributable to Purple Innovation, Inc.

Net loss per share:

Weighted average common shares outstanding:

The accompanying notes are an integral part of

these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.

Condensed Consolidated Statements of Stockholders’

(unaudited – in thousands)

Total Stockholders’

Noncontrolling

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

INNOVATION, INC.

Consolidated Statements of Stockholders’ Equity

– in thousands)

Stockholders’

Noncontrolling

Balance – December 31, 2022

1 unchanged sentence

Stock-based compensation

Exercise of stock options

Issuance of stock under equity compensation plans

Issuance of stock upon underwritten public offering, net of costs

Accrued distributions

Impact of transactions affecting NCI

Vesting of restricted stock units

Issuance of stock upon underwritten offering, net of costs

Impact of transactions affecting

Balance – March 31, 2023

$ ( 374,814 )

Stock-based compensation

Issuance of common stock under equity compensation plans

Additional costs associated with underwritten public stock offering

Impact of transactions affecting NCI

Balance – June 30, 2022

$ ( 283,667 )

Stock-based compensation

Issuance of common stock under equity compensation plans

Issuance of common stock for Intellibed acquisition

Impact of transactions affecting NCI

Balance – September 30, 2022

$ ( 281,389 )

Total Stockholders’

Stockholders’

Noncontrolling

Balance – December 31, 2021

$ ( 265,856 )

Stock-based compensation

Exchange of stock

Exercise of warrants

Exercise of stock options

Tax Receivable Agreement liability

Deferred income taxes

Vesting of restricted stock units

Issuance of stock upon underwritten offering, net of costs

Accrued distributions

InnoHold indemnification payment

Impact of transactions affecting NCI

Balance – March 31, 2022

$ ( 245,032 )

Net income (loss)

Stock-based compensation

Exercise of warrants

Exercise of stock options

Tax Receivable Agreement liability

Deferred income taxes

Accrued distributions

Issuance of common stock

Impact of transactions affecting NCI

Balance – June 30, 2021

$ ( 242,454 )

Net income (loss)

Stock-based compensation

Exercise of warrants

Exercise of stock options

Tax Receivable Agreement liability

Deferred income taxes

Accrued distributions

Impact of transactions affecting NCI

Balance – September 30, 2021

$ ( 240,283 )

The accompanying notes are an integral part of

these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited – in thousands)

Nine Months Ended

September 30,

The accompanying notes are an integral

part of these unaudited condensed consolidated financial statements.

INNOVATION, INC.

Consolidated Statements of Cash Flows

– in thousands)

Three Months Ended

Cash flows from operating activities:

Net income (loss)

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

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

1 unchanged sentence

Change in fair value – warrant liabilities

Tax receivable agreement (income) expense

Loss on extinguishment of debt

Stock-based compensation

Gain from effective settlement of preexisting relationship

Deferred income taxes

9 unchanged sentences

Other accrued liabilities

Net cash provided by (used in) operating activities

Net cash used in operating activities

Cash flows from investing activities:

Cash, cash equivalents and restricted cash acquired from acquisition, net of cash paid

Purchase of property and equipment

7 unchanged sentences

Payments for public offering costs

Proceeds from InnoHold indemnification payment

Tax receivable agreement payments

Distributions to members

Proceeds from exercise of warrants

Proceeds from exercise of stock options

Net cash provided by financing activities

Net decrease in cash

Net increase (decrease) in cash

Cash, cash equivalents and restricted cash, beginning of the year

5 unchanged sentences

Property and equipment included in accounts payable

Issuance of common stock for Intellibed acquisition

Non-cash leasehold improvements

Accrued distributions

Tax receivable agreement liability

Deferred income taxes

Exercise of liability warrants

The accompanying notes are an integral part of

these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

INNOVATION, INC.

to Condensed Consolidated Financial Statements

The Company’s mission

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

Purple Innovation, Inc.

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

innovation with premium offerings.

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

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

The Company markets and sells its products through its e-commerce

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

The Company was incorporated

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

On February 2, 2018, the

Company consummated a transaction structured similar to a reverse recapitalization (the “Business Combination”) pursuant

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

At the closing of the

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

Purple Innovation, Inc.

As the sole managing member of Purple LLC, Purple Inc.

through its officers and directors is responsible for

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

of any other member.

On August 31, 2022, the Company

acquired all of the issued and outstanding stock of Advanced Comfort Technologies, Inc., dba Intellibed (“Intellibed”) pursuant

to an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Gelato Merger Sub, Inc., a wholly owned subsidiary

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

Innovation, Inc.

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

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

The Company designs and manufactures

a variety of innovative, branded and premium comfort products, including mattresses, pillows, cushions, bases, sheets, and other products.

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

owned retail showrooms, and third-party online retailers.

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

Corp (“GPAC”).

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

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

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

LLC, and GPAC was renamed Purple Innovation, Inc.

the sole managing member of Purple LLC, Purple Inc.

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

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

August 31, 2022, the Company acquired all the issued and outstanding stock of Advanced Comfort Technologies, Inc., dba Intellibed (“Intellibed”)

pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), in which Gelato Merger Sub, Inc., a wholly owned subsidiary

of Purple Inc., merged with and into Intellibed, with Intellibed continuing as a wholly owned subsidiary of Purple Inc.

For further discussion

see Note 4 — Acquisition.

On October 3,

2022, Purple Inc.

contributed 100 % of the membership interest in Intellibed to Purple LLC and Intellibed became a wholly owned subsidiary

of Purple LLC.

For further discussion see Note 4 — Acquisition.

Summary of Significant Accounting Policies

Basis of Presentation

and Principles of Consolidation

The condensed consolidated

financial statements include the accounts of Purple Inc., its controlled subsidiary Purple LLC and its wholly owned subsidiary, Intellibed,

from the date of acquisition.

All intercompany balances and transactions have been eliminated in consolidation.

As of September 30, 2022,

held 99.5 % of the common units of Purple LLC and Purple LLC Class B Unit holders held 0.5 % of the common units in Purple LLC.

The accompanying unaudited

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

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

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

Certain information

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

to such rules and regulations.

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

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

fiscal year ended December 31, 2021.

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

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

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

The results of the three and nine

months ended September 30, 2022 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2022

or for any other interim period or other future year.

Variable Interest Entities

of Presentation and Principles of Consolidation

condensed consolidated financial statements include the accounts of Purple Inc., its controlled subsidiary Purple LLC, and Intellibed,

Purple LLC’s wholly owned subsidiary, from the date of acquisition.

All intercompany balances and transactions have been eliminated

in consolidation.

As of March 31, 2023, Purple Inc.

held 99.6 % of the common units of Purple LLC and other Purple LLC Class B Unit holders

held 0.4 % of the common units in Purple LLC.

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

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

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

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

pursuant to such rules and regulations.

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

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

for the fiscal year ended December 31, 2022.

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

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

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

The results of the three months

ended March 31, 2023 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2023 or for

any other interim period or other future year.

Interest Entities

Purple LLC is a variable interest

2 unchanged sentences

benefits that are potentially significant.

At September 30, 2022, Purple Inc.

At March 31, 2023, Purple Inc.

had a 99.6 % economic interest in Purple LLC and consolidated

1 unchanged sentence

statements contained herein.

The holders of Purple LLC Class B Units (the “Class B Units”) held 0.5 % of the economic interest

in Purple LLC as of September 30, 2022.

For further discussion see Note 16 — Stockholders’ Equity.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Use of Estimates

The preparation of the unaudited

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

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

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

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

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

The Company regularly makes significant

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

for doubtful accounts, valuation of inventories, sales returns, warranty returns, warrant liabilities, stock based compensation, the recognition

and measurement of loss contingencies, business combinations, estimates of current and deferred income taxes, deferred income tax valuation

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

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

Actual results could differ materially from

those estimates.

Restructuring Charges

In February and April 2022,

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

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

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

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

the nine months ended September 30, 2022.

In June 2022, the Company

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

was recorded as general and administrative expense in the condensed consolidated statement of operations for the nine months ended September

The Company has also initiated

other cost reduction and efficiency efforts to improve costs, increase margins and ensure compliance with debt covenants.

If the Company’s

cash flow from operations or other sources of financing are less than anticipated, the Company believes it will be able to fund operating

expenses and comply with debt covenants based on its ability to scale back operations, reduce marketing spend, use the liquidity available

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

In addition, in order to continue satisfying the conditions

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

our growth strategies.

Recent Accounting Pronouncements

Reference Rate Reform

In March 2020, the FASB issued

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

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

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

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

by reference rate reform.

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

expected to be discontinued due to reference rate reform.

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

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

The Company does not currently have any receivables, hedging relationships, lease agreements, or debt agreements that reference LIBOR

or another reference rate expected to be discontinued.

In February 2022, the Company entered into

an amendment to its 2020 financing arrangement that changed the interest reference rate on its term loan and revolving line of credit

from LIBOR to the Secured Overnight Financing Rate (“SOFR”).

The change to SOFR did not have any impact on the Company’s

condensed consolidated financial statements – see Note 11— Debt for discussion of this amendment.

PURPLE INNOVATION, INC.

The holders of Class B units held 0.4 % of the economic interest in Purple LLC as of March 31, 2023.

discussion see Note 16— Stockholders’ Equity.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Measurement of Credit Losses

In June 2016, the FASB issued

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

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

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

expenses during the reporting period.

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

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

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

receivable and allowance for credit losses, valuation of inventories, sales returns, warranty returns, fair value of assets acquired

and liabilities assumed in a business combination, warrant liabilities, stock based compensation, the recognition and measurement of

loss contingencies, estimates of current and deferred income taxes, deferred income tax valuation allowances, and amounts associated

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

Predicting future events is inherently

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

Actual results could differ materially from those estimates.

Accounting Pronouncements

of Credit Losses

June 2016, the FASB issued ASU No.

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

Measurement of Credit Losses on Financial Instruments (“ASU

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

This guidance replaces

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

cost based on expected credit losses.

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

conditions, and reasonable and supportable forecasts.

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

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

The standard is effective

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

The standard is effective

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

This standard is to be applied utilizing a modified

retrospective approach.

The Company is currently evaluating the impact of this standard on its accounts receivable, cash, cash equivalents

and restricted cash, and any other financial assets measured at amortized cost.

Underwritten Offering

In March 2022, the Company

completed an underwritten offering of 16.1 million shares of Class A common stock, which included the underwriters exercising

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

The underwriter purchased the Class A common

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

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

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

The aggregate gross proceeds received by the Company

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

After deducting offering expenses of $ 0.2 million,

aggregate net proceeds totaled $ 92.9 million.

On August 31, 2022, pursuant

to the Merger Agreement, the Company 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, capitalize on synergies of the combined companies, and increase opportunities

for innovation.

In addition, the acquisition allowed the Company to consolidate ownership of its intellectual property and more fully

capitalize on growing demand for products with gel technologies.

The acquisition date fair

value of the consideration transferred for Intellibed was $ 28.3 million, which consisted of the following (in thousands):

Measurement of Credit Losses on Financial

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

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

assets carried at amortized cost based on expected credit losses.

The estimate of expected credit losses requires the incorporation of

historical information, current conditions, and reasonable and supportable forecasts.

These updates are effective for public companies,

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

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

This standard was adopted utilizing a modified retrospective approach.

The adoption of this standard on January 1, 2023

did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

Underwritten Offering of Class A Common

February 2023, the Company completed an underwritten offering of 13.4 million shares of Class A common stock at a price of $ 4.50 per share.

underwriters did not exercise their over-allotment option.

The aggregate net proceeds received by the Company from the offering,

after deducting offering fees and expenses of $ 3.1 million, totaled $ 57.2 million.

August 31, 2022, pursuant to the Merger Agreement, the Company 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.

The addition of Intellibed

is expected to increase product offerings to customers, expand market opportunities, capitalize on synergies of the combined companies,

and increase opportunities for innovation.

In addition, the acquisition allowed the Company to consolidate ownership of its intellectual

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

acquisition date fair value of the consideration transferred for Intellibed was $ 28.3 million, which consisted of the following (in thousands):

Fair value of Class A common stock issued at closing

5 unchanged sentences

Fair value of total purchase consideration

The fair value of common stock

issued at closing consisted of 8.1 million shares of Class A common stock valued using the acquisition date closing price of $2.86.

fair value of common stock held in escrow consisted of 0.5 million shares of Class A common stock valued using the acquisition date closing

price of $2.86.

These shares are being held in escrow pending resolution of net working capital adjustments and certain indemnification

matters, as described in the Merger Agreement.

Contingent consideration represents

the fair value of 1.5 million shares of Class A common stock issuable to Intellibed security holders if the closing price of the Company’s

stock 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.

The contingent shares were

valued using a Monte-Carlo simulation model.

Because the contingent consideration is payable with a fixed number of shares of the Company’s

Class A common stock, it is classified as equity and will not require remeasurement in subsequent periods.

The fair value of effective settlement of preexisting relationships

includes $ 1.4 million related to the fair value of a preexisting legal matter with Intellibed that was effectively settled on the acquisition

date and $ 0.3 million related to the fair value of a preexisting royalty liability owed by Intellibed to the Company that was also effectively

settled on the acquisition date.

As a result of effectively settling the preexisting legal matter with Intellibed, the Company

recorded a gain of $ 1.4 million as other income (expense), net in the condensed consolidated statement of operations for the three and

nine months ended September 30, 2022.

As a result of effectively settling the preexisting royalty liability, the Company and Intellibed

recorded a corresponding receivable and payable, respectively, for the same $ 0.3 million amount that was eliminated in consolidation as

of September 30, 2022.

PURPLE INNOVATION, INC.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

The Company recorded the acquisition based on the fair value of the

consideration transferred and then allocated the purchase price to the identifiable assets acquired and liabilities assumed based on their

respective preliminary estimated fair values as of the acquisition date.

Determining the fair value of assets acquired and liabilities

assumed required management to use significant judgment and estimates including the selection of valuation methodologies, estimates of

future revenues and cash flows, discount rates, and asset lives, among other items.

While the Company used its best estimates and assumptions

as a part of the purchase price allocation process to accurately value the assets acquired, including intangible assets, and the liabilities

assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject to refinement.

Due to the close proximity

of the acquisition date to the Company’s reporting date, the Company recorded the assets acquired and liabilities assumed at their

preliminary estimated fair values.

As of September 30, 2022, the Company had not finalized the determination of the working capital adjustments

and the fair values allocated to various assets and liabilities, intangible assets and the residual amount allocated to goodwill.

Consequently,

during the measurement period, which could be up to one year from the acquisition date, the Company may record adjustments to the fair

values of the assets acquired and the liabilities assumed, with a corresponding offset to goodwill.

Upon the conclusion of the measurement

period or final determination of the values of assets acquired or the liabilities assumed, whichever comes first, any subsequent adjustments

will be reflected in the Company’s condensed consolidated statement of operations.

Based upon the purchase price

allocation, the following table summarizes the preliminary fair value of the assets acquired and liabilities assumed at the date of the

acquisition (in thousands):

Net tangible assets (liabilities):

fair value of common stock issued at closing consisted of approximately 8.1 million shares of Class A common stock valued using the acquisition

date closing price of $2.86.

The fair value of common stock held in escrow consisted of 0.5 million shares of Class A common stock valued

using the acquisition date closing price of $2.86.

These shares are being held in escrow pending resolution of net working capital adjustments

and certain indemnification matters, as described in the Merger Agreement.

consideration represents the fair value of 1.5 million shares of Class A common stock issuable to Intellibed security holders if the

closing price of the Company’s stock 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.

The contingent shares were valued using a Monte-Carlo simulation model.

Because the contingent consideration is payable

with a fixed number of shares of the Company’s Class A common stock, it is classified as equity and will not require remeasurement

in subsequent periods.

fair value of effective settlement of preexisting relationships includes $ 1.4 million related to the fair value of a preexisting legal

matter with Intellibed that was effectively settled on the acquisition date and $ 0.3 million related to the fair value of a preexisting

royalty liability owed by Intellibed to the Company that was also effectively settled on the acquisition date.

As a result of effectively

settling the preexisting legal matter with Intellibed, the Company recorded a gain of $ 1.4 million as other income (expense),

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

As a result of effectively settling the preexisting

royalty liability, the Company and Intellibed recorded a corresponding receivable and payable, respectively, for the same $ 0.3 million

amount that was eliminated in consolidation at both March 31, 2023 and December 31, 2022.

Company recorded the acquisition based on the fair value of the consideration transferred and then allocated the purchase price

to the identifiable assets acquired and liabilities assumed based on their respective preliminary estimated fair values as of the acquisition

Determining the fair value of assets acquired and liabilities assumed required management to use significant judgment and estimates

including the selection of valuation methodologies, estimates of future revenues and cash flows, discount rates, and asset lives, among

While the Company used its best estimates and assumptions as a part of the purchase price allocation process to accurately

value the assets acquired, including intangible assets, and the liabilities assumed at the acquisition date, the Company’s estimates

are inherently uncertain and subject to refinement.

Due to the close proximity of the acquisition date to the Company’s reporting

date, the Company recorded the assets acquired and liabilities assumed at their preliminary estimated fair values.

As of March 31, 2023,

the Company had not finalized the determination of the working capital adjustments and the fair values allocated to various assets and

liabilities, income tax provision, intangible assets and the residual amount allocated to goodwill.

Consequently, during the measurement

period, which could be up to one year from the acquisition date, the Company may record adjustments to the fair values of the assets

acquired and the liabilities assumed, with a corresponding offset to goodwill.

Upon the conclusion of the measurement period or final

determination of the values of assets acquired or the liabilities assumed, whichever comes first, any subsequent adjustments will be

reflected in the Company’s consolidated statement of operations.

upon the purchase price allocation, the following table summarizes the preliminary fair value of the assets acquired and liabilities

assumed at the date of the acquisition (in thousands):

tangible assets (liabilities):

Cash, cash equivalents and restricted cash

12 unchanged sentences

Net assets acquired and liabilities assumed

The Company believes the amount

of goodwill resulting from the purchase price allocation is primarily attributable to expected synergies from the assembled workforce,

an increase in development capabilities, increased offerings to customers, expanded market opportunities, and enhanced opportunities for

growth and innovation.

Goodwill will not be amortized but instead will be tested for impairment at least annually or more frequently if

certain indicators of impairment are present.

In the event that goodwill has become impaired, the Company will record an expense for the

amount impaired during the quarter in which the determination is made.

The goodwill recorded is not deductible for income tax purposes.

The two identified definite

lived intangible assets, comprised of customer relationships and developed technology, will be amortized over their estimated useful lives

of ten and three years, respectively.

The customer relationships intangible asset represents the estimated fair value of the underlying

relationships with Intellibed customers, valued utilizing the multi-period excess earnings method.

The developed technology intangible

represents the fair value of Intellibed industry-specific cloud and mobile software and related technologies, valued using the cost to

recreate method.

The cash, cash equivalents

and restricted cash balance acquired includes $ 1.7 million of cash deposited by Intellibed in a separate account pursuant to an escrow

agreement with the Company.

The purpose of the escrow cash amount is to cover Intellibed’s estimated state income tax liabilities,

sales tax liabilities and related filing expenses that existed prior to the acquisition date.

If the actual liabilities are less than

estimated, any excess cash would be returned to the previous shareholders of Intellibed.

If payments for these items exceed the escrow

balance, the Company will be required to pay the excess.

The Company recorded the $ 1.7 million of cash as an acquired restricted cash

balance that is included in cash, cash equivalents and restricted cash in the condensed consolidated balance sheet as of September 30,

The Company also recorded an assumed liability totaling $ 1.3 million for the sales and use tax and state and local income tax liabilities

exposure that is reflected in other current liabilities in the condensed consolidated balance sheet as of September 30, 2022.

The Company has included the financial results of Intellibed in its condensed

consolidated financial statements from the date of acquisition and recorded net revenues and pre-tax income of $ 2.7 million and $ 1.3 million,

respectively, for the period from August 31, 2022 through September 30, 2022.

The transaction costs associated with the acquisition of

$ 2.8 million were recorded as general and administrative expense in the condensed consolidated statement of operations for the three and

nine months ended September 30, 2022.

PURPLE INNOVATION, INC.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

The following table provides

unaudited pro forma financial information as if Intellibed had been acquired by the Company as of January 1, 2021.

The unaudited pro forma

information reflects adjustments for transaction and litigation expenses, immediate restructuring savings and additional depreciation

and amortization resulting from the fair value adjustments to assets acquired.

The pro forma results do not include any other anticipated

cost synergies or effects of the combined companies.

Accordingly, pro forma amounts are not necessarily indicative of the results to be

expected had the acquisition been completed on the date indicated, nor is it indicative of the future operating results of the combined

company (in thousands):

Three Months Ended

September 30,

Nine Months Ended

September 30,

Net income (loss)

The unaudited pro forma amounts above include the following adjustments:

● A decrease of operating expenses by $4.4 million

during the three and nine months ended September 30, 2022, to eliminate transaction costs directly related to the acquisition that do

not have a continuing impact on operating results.

● A decrease of operating expenses by $0.4 million

and $1.3 million during the nine months ended September 30, 2022 and 2021, respectively, to eliminate litigation costs directly related

to the lawsuit between the two Companies.

● A decrease of operating expenses by $1.0 million

and $0.2 million during the three months ended September 30, 2022 and 2021, respectively and $1.5 million and $0.4 million during the

nine months ended September 30, 2022 and 2021, respectively, to eliminate costs directly related to immediate restructuring that do not

have a continuing impact on operating results.

● An increase of operating expenses by $0.5 million

and $0.4 million during the three months ended September 30, 2022 and 2021, respectively and $1.5 million and $0.8 million during the

nine months ended September 30, 2022 and 2021, respectively, to reflect the additional depreciation and amortization expense related to

the increase in property and equipment assets and definite lived intangible assets.

● The combined pro forma results were tax effected

using the Company’s effective tax rate for the respective periods.

Company believes the amount of goodwill resulting from the purchase price allocation is primarily attributable to expected synergies

from the assembled workforce, an increase in development capabilities, increased offerings to customers, expanded market opportunities,

and enhanced opportunities for growth and innovation.

Goodwill is not being amortized but instead is tested for impairment at least annually

or more frequently if certain indicators of impairment are present.

In the event that goodwill becomes impaired, the Company will record

an expense for the amount impaired during the quarter in which the determination is made.

The goodwill recorded is not deductible for

income tax purposes.

two identified definite lived intangible assets, comprised of customer relationships and developed technology, are being amortized over

their estimated useful lives of ten and two years , respectively.

The customer relationships intangible asset represents the estimated

fair value of the underlying relationships with Intellibed customers, valued utilizing the multi-period excess earnings method.

The developed

technology intangible represents the fair value of Intellibed industry-specific cloud and mobile software and related technologies, valued

using the cost to recreate method.

The cash, cash equivalents and restricted cash balance acquired included

$ 1.7 million of cash deposited by Intellibed in a separate account pursuant to an escrow agreement with the Company that will end on August

The purpose of the escrow cash amount was to cover Intellibed’s estimated state income tax liabilities, sales tax liabilities

and related filing expenses that existed prior to the acquisition date.

If the actual liabilities are less than estimated, any excess

cash will be returned to the previous shareholders of Intellibed.

If payments for these items exceed the escrow balance, the Company will

be required to pay the excess.

The Company recorded the $ 1.7 million of cash on August 31, 2022 as an acquired restricted cash balance

that is included in cash, cash equivalents and restricted cash in the condensed consolidated balance sheets as of March 31, 2023 and December

The Company also recorded on August 31, 2022, an assumed liability totaling $ 1.3 million for the sales and use tax and state

and local income tax liabilities exposure that existed at the date of acquisition and is reflected in the other current liabilities in

the condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022

Fair Value Measurements

The Company uses the fair

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

Fair value is the price that would be

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

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

The levels of the fair value hierarchy are:

Level 1—Quoted market prices in

active markets for identical assets or liabilities;

Level 2—Significant other observable

inputs (i.e., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not

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

Level 3—Unobservable inputs in

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

PURPLE INNOVATION, INC.

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

Fair value is the

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

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

The levels of the fair

value hierarchy are:

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

2—Significant other observable inputs (i.e., quoted prices for similar items in active markets, quoted prices for identical or

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

and market-corroborated inputs);

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

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

significant to the measurements.

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

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

The carrying amounts of cash and cash equivalents,

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

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

market-based expectations.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

The classification of fair value measurements within the established

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

Financial instruments, although

not recorded at fair value on a recurring basis include cash and cash equivalents, receivables, accounts payable and the Company’s

debt obligations.

The carrying amounts of cash and cash equivalents, receivables and accounts payable approximate fair value because of

the short-term nature of these accounts.

The fair value of the Company’s debt instruments is estimated to be face value based on

the contractual terms of the debt arrangements and market-based expectations.

The sponsor warrant liabilities

(see Note 12 — Warrant Liabilities for more information) are Level 3 instruments and use internal models to estimate fair

value using certain significant unobservable inputs which requires determination of relevant inputs and assumptions.

Accordingly, changes

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

Such inputs include risk free interest rate, expected average

life, expected dividend yield, and expected volatility.

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

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

Conversely, the fair value of these Level 3 liabilities

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

The following table presents

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

of the valuation inputs the Company utilized to determine such fair value (dollars in thousands):

September 30,

Sponsor warrants

The following table summarizes

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

Fair value as of December 31, 2021

Fair value of warrants exercised

Change in valuation inputs (1)

Fair value as of September 30, 2022

sponsor warrant liabilities (see Note 12 — Warrant Liabilities for more information) were Level 3 instruments and used internal

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

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

Such inputs included risk free interest

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

These Level 3 liabilities generally decreased (increased)

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

Conversely, the fair value of these

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

In February 2023, the 1.9 million sponsor warrants outstanding expired and were cancelled pursuant to the terms of the agreement.

were no sponsor warrants outstanding on March 31, 2023 and the 1.9 million sponsor warrants outstanding on December 31, 2022 had a negligible

As a result, activity for the three months ended March 31, 2023 was de minimis.

The following table summarizes the Company’s

total Level 3 liability activity for the three months ended March 31, 2022.

(In thousands)

Fair value as of December 31, 2021

Fair value of warrants exercised

Change in valuation inputs (1)

Fair value as of September 30, 2021

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

in valuation inputs (1)

Fair value as of March 31, 2022

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

Revenue from Contracts with Customers

The Company markets and sells

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

online retailers.

Revenue is recognized when the Company satisfies its performance obligations.

These performance obligations generally

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

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Disaggregated Revenue

The Company classifies revenue

into two sales categories:

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

showrooms, and third-party online retailers.

Revenue is recognized when the Company satisfies its performance obligations under the contract

which involves transferring the promised products to the customer, subject to shipping terms.

Disaggregated

Company classifies revenue into two sales categories:

direct-to-consumer (“DTC”) and wholesale.

The DTC category is comprised of the Company’s

e-commerce channel that sells directly to consumers who purchase online and through our contact center, and the Purple retail showrooms

channel that sells directly to consumers who purchase at a Company showroom location.

The wholesale category includes all product sales

The DTC category is comprised

of the e-commerce channel that sells directly to consumers who purchase online and through our contact center, and the Purple owned retail

showrooms channel that sells directly to consumers who purchase at a showroom location.

The wholesale channel includes all product sales

to our retail brick and mortar wholesale partners where consumers make purchases at their retail locations or through their online channels.

4 unchanged sentences

Other products include cushions and various other products.

The following tables present

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

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

Sales Category

Revenues, net

Three Months Ended

September 30,

Nine Months Ended

September 30,

Sleep products

Revenues, net

Contract Balances

Payment for sale of products

through the e-commerce online channel, third-party online retailers, Purple retail showrooms and contact center is collected at point

of sale in advance of shipping the products.

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

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

Amounts received for unshipped products are recorded as customer prepayments.

Customer prepayments

totaled $ 3.8 million and $ 10.9 million at September 30, 2022 and December 31, 2021, respectively.

During the three months ended September

30, 2022 and 2021, the Company recognized all revenue that was deferred in customer prepayments at June 30, 2022 and 2021, respectively.

Customer prepayments totaled $ 2.9 million and $ 4.5 million at March 31, 2023 and December 31, 2022, respectively.

During the three months

ended March 31, 2023 and 2022, the Company recognized all revenue that was deferred in customer prepayments at December 31, 2022 and

2021, respectively.

Inventories, Net

Inventories, net consisted

of the following (in thousands):

September 30,

net consisted of the following (in thousands):

Raw materials

3 unchanged sentences

Inventories, net

PURPLE INNOVATION, INC.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Property and Equipment, Net

Property and equipment, net

consisted of the following (in thousands):

September 30,

and equipment, net consisted of the following (in thousands):

Equipment in progress

5 unchanged sentences

Property and equipment, net

Equipment in progress reflects

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

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

$ 0.6 million during the three and nine months ended September 30, 2022, respectively, and totaled $ 0.8 million and $ 0.8 million during

the three and nine months ended September 30, 2021, respectively.

Depreciation expense was $ 4.3 million and $ 11.4 million during the three

and nine months ended September 30, 2022, respectively, and totaled $ 2.8 million and $ 6.2 million during the three and nine months ended

September 30, 2021, respectively.

The Company leases its manufacturing

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

various expiration dates through 2036.

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

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

Certain leases may contain options to extend the term of the

original lease.

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

Any lease renewal options are included in

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

The Company also leases vehicles and other equipment under both

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

The right-of-use asset for finance leases was $ 1.2 million

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

The following table presents

the Company’s lease costs (in thousands):

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

31, 2023 or December 31, 2022.

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

$ 0.4 million and $ 0.2 million during the three months ended March 31, 2023 and 2022, respectively.

Depreciation expense totaled $ 4.8

million and $ 3.6 million during the three months ended March 31, 2023 and 2022, respectively.

The Company leases its manufacturing and distribution facilities, corporate

offices, Purple owned retail showrooms and certain equipment under non-cancelable operating leases with various expiration dates through

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

have initial lease terms of up to ten years .

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

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

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

reasonably certain at lease commencement.

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

with initial lease terms of three to five years .

The right-of-use asset for finance leases, which totaled $ 1.0 million at both March 31,

2023 and December 31, 2022, was included with operating lease right-of-use assets on the condensed consolidated balance sheets.

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

Operating lease costs

Variable lease costs

Short-term lease costs

Total lease costs

PURPLE INNOVATION, INC.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

The table below reconciles

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

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

2022 (excluding the nine months ended September 30, 2022) (1)

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

liabilities recorded on the condensed consolidated balance sheet at March 31, 2023 (in thousands):

2023 (excluding

the three months ended March 31, 2023) (a)

Total operating lease payments

1 unchanged sentence

Present value of operating lease payments

(1) Amount consists of $ 4.9 million of undiscounted cash flows offset by $ 3.2 million of tenant improvement allowances which are expected to be fully utilized in fiscal 2022.

As of September 30, 2022 and

December 31, 2021, the weighted-average remaining term of operating leases was 9.2 years and 10.7 years, respectively, and the weighted-average

(a) Amount consists of $ 15.7 million of undiscounted cash flows offset by $ 1.0 million of tenant improvement allowances which are expected to be fully utilized in fiscal 2023.

As of March 31, 2023 and December

31, 2022, the weighted-average remaining term of operating leases was 8.6 years and 8.8 years, respectively, and the weighted-average

discount rate of operating leases was 5.54 % and 5.51 %, respectively.

The following table provides

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

30, 2022 and 2021 (in thousands):

Nine Months Ended

September 30,

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

three months ended March 31, 2023 and 2022:

Three Months Ended

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

Right-of-use assets obtained in exchange for operating lease liabilities

Other Current Liabilities

Operating cash flows paid for operating leases are included within the change in other assets and liabilities within the Consolidated

Statement of Cash Flows offset by non-cash right-of-use asset amortization and lease liability accretion.

Other Current Liabilities

consisted of the following (in thousands):

September 30,

current liabilities consisted of the following (in thousands):

Warranty accrual – current portion

Insurance financing

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

Accrued sales tax liability assumed in acquisition

Accrued property taxes

Accrued affiliate marketing

Accrued property taxes

Tax receivable agreement liability – current portion

Total other current liabilities

PURPLE INNOVATION, INC.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Debt consisted of the following

(in thousands):

September 30,

Revolving line of credit

unamortized issuance costs

current portion of debt, net of unamortized issuance costs

Long-term debt, net

Term Loan and Revolving

Line of Credit

On September 3, 2020, Purple

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

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

term loan will be repaid in accordance with a five-year amortization schedule and may be prepaid in whole or in part at any time without

premium or penalty, subject to reimbursement of certain costs.

The revolving credit facility has a term of five years and carries the

same interest provisions as the term debt.

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

revolving commitment.

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

Pursuant to a Pledge and Security

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

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

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

consisted of the following (in thousands):

unamortized debt issuance costs

Loan and Revolving Line of Credit

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

(the “2020 Credit Agreement”).

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

interest in Purple LLC.

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

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

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

line of credit.

The term loan was to be repaid in accordance with a five-year amortization schedule or prepaid in whole or in part at

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

The revolving credit facility has a term of five years

and carries the same interest provisions as the term debt.

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

the unused total revolving commitment.

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

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

interest in all intellectual property.

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

of Purple LLC under the 2020 Credit Agreement.

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

of all its ownership interest in Purple LLC.

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

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

The 2020 Credit Agreement

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

While any amounts are outstanding under the

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

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

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

In particular, Purple LLC is (i) subject

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

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

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

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

Purple LLC is also restricted from paying dividends or making

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

If the Company or Purple LLC fail to perform their

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

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

PURPLE INNOVATION, INC.

Under the 2020 Credit Agreement, Purple LLC

is subject to several affirmative and negative covenants, including covenants regarding dispositions of property, investments, forming

or acquiring subsidiaries, business combinations or acquisitions, incurrence of additional indebtedness, and transactions with affiliates,

among other customary covenants, subject to certain exceptions.

In particular, Purple LLC is (i) subject to annual capital expenditure

limits that can be adjusted based on the Company achieving certain net leverage ratio thresholds as provided in the 2020 Credit Agreement,

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

and (iii) maintain minimum consolidated net leverage and fixed charge coverage ratio thresholds at certain measurement dates (as defined

in the 2020 Credit Agreement).

Purple LLC is also restricted from paying dividends or making other distributions or payments on its capital

stock, subject to limited exceptions.

If the Company or Purple LLC fail to perform their obligations under these and other covenants,

or should any event of default occur, the revolving loan commitments under the 2020 Credit Agreement may be terminated and any outstanding

borrowings, together with accrued interest, could be declared immediately due and payable.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

The Company’s operating

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

the 2020 Credit Agreement.

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

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

This amendment contained a covenant

waiver period such that the net leverage ratio and fixed charge coverage ratio were not tested for the fiscal quarters ended December 31,

2021, March 31, 2022 and June 30, 2022.

Other modifications in the amendment included revised leverage ratio and fixed charge coverage

definitions and thresholds, the addition of minimum liquidity requirements with mandatory prepayments of the revolving loan if cash exceeded

$ 25.0 million, new weekly and monthly reporting requirements, limits on the amount of capital expenditures, the addition of a lease

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

2023 until certain conditions are met.

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

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

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

If the Company does not meet

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

Once the Company achieves a consolidated leverage

ratio that is below 3.00 to 1.00, the interest rate will be based on SOFR with a floor of 0.5% plus a 3.00% to 3.75% margin depending

on the consolidated leverage ratio.

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

As of September 30, 2022,

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

Pursuant to the first amendment

of the 2020 Credit Agreement, the Company incurred fees and expenses of $ 0.9 million that were recorded as debt issuance costs in the

condensed consolidated balance sheet and made a $ 2.5 million payment on the term loan to cover the four quarterly principal payments due

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

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

This amendment modified the 2020 Credit

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

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

without constituting an event of default.

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

directors, serves as a managing partner of CCM.

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

covenants required under the 2020 Credit Agreement.

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

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

this amendment, the Company incurred fees and expenses of $ 0.8 million that were recorded as debt issuance costs in the condensed consolidated

balance sheet and made a $ 2.5 million payment on the term loan to cover the four quarterly principal payments due in 2022.

accounted for this amendment as a modification of existing debt in accordance with ASC 470 – Debt .

This amendment also contained

a covenant waiver period such that the net leverage ratio and fixed charge coverage ratio were not tested for the fiscal quarters ended

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

Other modifications in the amendment included revised leverage ratio and

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

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

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

period that extends into 2023 until certain conditions are met.

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

2020 Credit Agreement was changed from LIBOR with a floor of 0.5% plus an applicable margin (historically at 3.0%) to an initial rate

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

If the Company

does not meet this threshold, the interest rate would increase to SOFR with a floor of 0.5% plus 9.00%.

Once the Company achieves a consolidated

leverage ratio that is below 3.00 to 1.00, the interest rate will be based on SOFR with a floor of 0.5% plus a 3.00% to 3.75% margin

depending on the consolidated leverage ratio.

On March 23, 2022, the

Company entered into a second amendment to the 2020 Credit Agreement.

This amendment modified the 2020 Credit Agreement to allow Coliseum

Capital Management, LLC, on behalf of its funds, managed accounts and its investment affiliates (individually “CCM” and collectively

“Coliseum”) to acquire 35 % or more of the combined voting power of all equity interests of the Company entitled to vote for

the election of members of the Company’s board of directors (“Board”) without constituting an event of default.

is considered a related party of the Company in that Adam Gray, a member of the Board, serves as a managing partner of Coliseum.

to the second amendment of the 2020 Credit Agreement, the Company incurred fees and expenses of $ 0.4 million that were recorded as debt

issuance costs in the condensed consolidated balance sheet.

The Company accounted for this amendment as a modification of existing debt

in accordance with ASC 470 – Debt .

For further discussion see Note 15— Related Party Transactions — Coliseum

Capital Management, LLC.

Pursuant to the second amendment of the 2020 Credit Agreement, the Company incurred fees and expenses of

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

The Company accounted for this amendment

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

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 minimal expenses were recorded as general and administrative expense in

the condensed consolidated statement of operations.

On July 14, 2022, the Company received consent under the 2020 Credit

Agreement allowing the Company’s acquisition of Intellibed to constitute a permitted acquisition under the 2020 Credit Agreement.

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

statement of operations.

In November 2021, the Company

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

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

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

September 30, 2022, there was no balance outstanding on the revolving credit facility.

PURPLE INNOVATION, INC.

May 13, 2022 and September 9, 2022, the Company entered into third and fourth amendments, 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 minimal costs were recorded as general and administrative

expense in the condensed consolidated statement of operations.

July 14, 2022, the Company received consent under the 2020 Credit Agreement that allowed the Company’s acquisition of Intellibed

to constitute a permitted acquisition under the 2020 Credit Agreement.

The Company incurred fees and expenses of $ 0.3 million that were

recorded as general and administrative expense in the condensed consolidated statement of operations.

December 2022, the Company made a $ 15.0 million prepayment against the outstanding term loan balance without payment of a premium or

On February 17, 2023, the Company entered into a fifth amendment to

the 2020 Credit Agreement.

As a condition of entering into the amendment, the Company repaid the $ 24.7 million outstanding balance on

the term loan plus accrued interest.

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

and second quarters of 2023, revised the ratio to 4.50 x for the third quarter of 2023, and revised the ratio to 3.00 x for all quarters

In addition, the minimum fixed charge coverage ratio covenant will not be tested for the first and second quarters of 2023,

was revised to 1.50 x for the third and fourth quarters of 2023, and was revised to 2.00 x for all quarters thereafter.

The amendment also

revised the lease incurrence test, which allows the Company to incur ten new showroom leases for stores that will open in 2023 and six

new leases for stores that will open in 2024.

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

into new leases for stores that will open in 2024, subject to leverage ratio requirements.

The leverage ratio must be less than 2.50 x

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 2.00 x.

The amendment further provided 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 also modified the definition of consolidated EBITDA

to allow for nonrecurring / one-time and non-cash expenses and certain other expenses that are cash capped.

for purposes of the definition of consolidated EBITDA, annual non-recurring and unusual out-of-pocket legal expenses were capped at $ 5.0 million

for 2023 and $ 2.0 million per year thereafter.

Moreover, the amendment (i) reduced the amount available under the revolving

line of credit to $50.0 million, (ii) provided that the maturity date of the 2020 Credit Agreement will spring forward

to June 30, 2024 if consolidated EBITDA is not greater than $15.0 million for 2023, (iii) reduced limits on maximum growth capital

expenditures to $32.0 million for 2023 and $35.0 million for 2024 and 2025, and (iv) revised 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.

to this amendment, the Company incurred fees and expenses of $ 2.9 million that were recorded as debt issuance costs in the condensed consolidated

balance sheet.

The amendment was accounted for as an extinguishment of debt and $ 1.2 million of unamortized debt issuance costs related

to the term loan were recorded as loss on extinguishment of debt in the condensed consolidated statement of operations.

For the Company

to draw on its revolving line of credit, the Company must be in compliance with the covenants outlined in the fifth amendment.

31, 2023, the Company complied with all the financial covenants associated with the 2020 Credit Agreement, as amended, and the full $ 50.0

million of the revolving line of credit was available for the Company to draw upon.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Interest expense under the

2020 Credit Agreement totaled $ 0.9 million and $ 2.9 million for the three and nine months ended September 30, 2022, respectively, and

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

On April 26, 2023, the Company

received consent under the 2020 Credit Agreement that allowed the Company’s redemption of Proportional Representation Preferred

Linked Stock (“PRPLS”) issued by the Company on February 24, 2023, in an aggregate amount not to exceed $150,000 as agreed

by the Company in an April 19, 2023 Cooperation Agreement (the “Cooperation Agreement”) entered into with Coliseum in connection

with a complaint filed by Coliseum against the Company, and a waiver of any possible default related to entering into that Cooperation

Agreement prior to receiving such consent.

(See Note 14— Commitments and Contingencies — Legal Proceedings for

information regarding the complaint previously filed by Coliseum;

Note 15— Related Party Transactions — Coliseum Capital

Management, LLC for information regarding events leading up to the Company’s issuance of the PRPLS;

Note 16— Shareholders’

Equity — Preferred Stock for further information regarding the issuance of the PRPLS;

and Note 21— Subsequent

Events — Coliseum Cooperation Agreement and Proportional Representation Preferred Linked Stock for further information

regarding the terms of the Cooperation Agreement and redemption of the PRPLS.)

On May 10, 2023, the Company entered into a sixth amendment to the 2020

Credit Agreement.

This amendment clarified an ambiguity identified in the first sentence of Section 7.07(d), as amended by the fifth amendment,

providing that Minimum Consolidated EBITDA as of each of March 31, 2023 and June 30, 2023 pertains to the Consolidated EBITDA for each

such fiscal quarter rather than Consolidated EBITDA for the trailing twelve-month period..

expense under the 2020 Credit Agreement totaled $ 0.6 million and $ 1.1 million for the three months ended March 31, 2023 and 2022, respectively.

Warrant Liabilities

1 unchanged sentence

sponsor warrants pursuant to a private placement conducted simultaneously with its initial public offering.

Each of these warrants entitles

Each of these warrants entitled

the registered holder to purchase one-half of one share of the Company’s Class A common stock at a price of $5.75 per half share

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

In accordance with the warrant agreement,

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

In no event will the Company

be required to net cash settle any warrant.

The warrants have a five-year term which commenced on March 2, 2018, 30 days after the completion

of the Business Combination, and will expire on February 2, 2023, or earlier upon redemption or liquidation.

These sponsor warrants contain

certain provisions that do not meet the criteria for equity classification and therefore must be recorded as liabilities.

The liability

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

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

During the nine months ended

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

There were no sponsor warrants exercised during the nine months ended September 30, 2022.

The 1.9 million sponsor warrants outstanding

at September 30, 2022 and December 31, 2021 had fair values of $ 0.1 million and $ 4.3 million, respectively.

The Company determined the

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

September 30,

These sponsor warrants contained certain

provisions that did not meet the criteria for equity classification and therefore were recorded as liabilities.

The liability for these

warrants was recorded at fair value on the date of the Business Combination and subsequently re-measured to fair value at each reporting

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

February 2023, the 1.9 million sponsor warrants outstanding expired and were cancelled pursuant to the terms of the agreement.

sponsor warrants had no fair value on the date of expiration.

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

The 1.9 million sponsor warrants outstanding at March

31, 2022 had a fair value of $ 0.4 million.

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

Trading price of common stock on measurement date

4 unchanged sentences

Expected dividend yield

During the three months ended

September 30, 2022, the Company recognized a loss of $0.1 million in its condensed consolidated statement of operations related to an

increase in the fair value of the sponsor warrants outstanding at the end of the period.

For the nine months ended September 30, 2022,

the Company recognized a gain of $4.2 million and during the three and nine months ended September 30, 2021, the Company recognized gains

of $5.4 million and $19.4 million, respectively, in its condensed consolidated statements of operations related to decreases in the fair

value of the sponsor warrants exercised during the respective periods or that were outstanding at the end of the respective periods.

Other Long-Term Liabilities

the three months ended March 31, 2022, the Company recognized a gain of $3.9 million in its condensed consolidated statements of operations

related to a decrease in the fair value of the sponsor warrants outstanding at the end of the period.

Other Long-Term Liabilities

consist of the following (in thousands):

September 30,

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

Warranty accrual

Asset retirement obligations

Less – current portion of warranty accrual

Other long-term liabilities, net of current portion

PURPLE INNOVATION, INC.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Commitments and Contingencies

Warranty Liabilities

The Company provides a limited

warranty on most of the products it sells.

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

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

for any current or expected trends as appropriate.

Actual warranty claim costs could differ from these estimates.

The Company regularly

assesses and adjusts the estimate of accrued warranty claims by updating claims rates for actual trends and projected claim costs.

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

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

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

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

Actual warranty claim costs could differ from these

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

and projected claim costs.

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

The Company had the following

activity for warranty liabilities (in thousands):

Company had the following activity for warranty liabilities (in thousands):

Three Months Ended

September 30,

Nine Months Ended

September 30,

Balance at beginning of period

Additions charged to expense for current period sales

Acquired warranty liability

Deduction from reserves for current period claims

Balance at end of period

Required Member Distributions

Prior to the Business Combination

and pursuant to the then applicable First Amended and Restated Limited Liability Company Agreement (the “First Purple LLC Agreement”),

Purple LLC was required to distribute to its members an amount equal to 45 percent of Purple LLC’s net taxable income following

the end of each fiscal year.

The First Purple LLC Agreement was amended and replaced by the Second Amended and Restated Limited Liability

Company Agreement (the “Second Purple LLC Agreement”) on February 2, 2018 as part of the Business Combination.

Purple LLC Agreement was amended and replaced by the Third Amended and Restated Limited Liability Company Agreement (the “Third

Purple LLC Agreement”) on September 3, 2020.

The Second Purple LLC Agreement and the Third Purple LLC Agreement do not include any

mandatory distributions, other than tax distributions.

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

in tax distributions under the Third Purple LLC Agreement.

There were no tax distributions paid during the nine months ended September

At September 30, 2022, the Company’s condensed consolidated balance sheet had $ 0.1 million of accrued tax distributions

included in other current liabilities.

Subscription Agreement

and Preemptive Rights

In February 2018, in

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

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

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

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

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

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

The subscription agreement

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

It also provides them

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

The Company also entered into

a registration rights agreement with CCP, Blackwell, and CDF, providing for the registration of the shares of Class A common stock

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

the warrants received by CCP, Blackwell and CDF.

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

Rights of Securities

Member Distributions

to the Business Combination and pursuant to the then applicable First Amended and Restated Limited Liability Company Agreement (the “First

Purple LLC Agreement”), Purple LLC was required to distribute to its members an amount equal to 45 percent of Purple LLC’s

net taxable income following the end of each fiscal year.

The First Purple LLC Agreement was amended and replaced by the Second Amended

and Restated Limited Liability Company Agreement (the “Second Purple LLC Agreement”) on February 2, 2018 as part of

the Business Combination.

The Second Purple LLC Agreement was amended and replaced by the Third Amended and Restated Limited Liability

Company Agreement (the “Third Purple LLC Agreement”) on September 3, 2020.

The Second Purple LLC Agreement and the Third

Purple LLC Agreement do not include any mandatory distributions, other than tax distributions.

There were no tax distributions paid during

the three months ended March 31, 2023 and 2022.

At March 31, 2023, the Company’s condensed consolidated balance sheet had $ 0.1

million of accrued tax distributions included in other current liabilities.

Agreement and Preemptive Rights

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

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

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

(the “Coliseum Private Placement”).

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

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

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

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

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

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

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

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

The Company has filed a registration statement with respect

to such securities.

of Securities Holders

The holders of certain warrants

11 unchanged sentences

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

On May 21, 2021, 7.3 million

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

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

The underwriting discount, commission and other related costs incurred

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

PURPLE INNOVATION, INC.

In May, 2021, the

Coliseum Investors exercised the first of their three written demands for registration in an underwritten offering.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Stockholder Rights

On September 25, 2022, with

the authorization of the Board, a special committee of independent and disinterested directors of the Company (the “Special Committee”)

approved the adoption of a limited-duration stockholder rights agreement (the “Rights Agreement”) with an expiration date

of September 25, 2023.

The Special Committee adopted the Rights Agreement in response to CCM’s substantial increase in ownership

of the Company’s shares over the last year and the Special Committee’s desire to have the time and flexibility necessary to

evaluate an unsolicited and non-binding proposal from CCM to acquire the outstanding common stock of the Company not already beneficially

owned by CCM (See Note 15— Related Party Transactions — Coliseum Capital Management, LLC ).

The Rights Agreement

is intended to enable the Company’s shareholders to realize the full value of their investment and to guard against any attempts

to gain control of the Company without paying all shareholders an appropriate control premium.

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 the Company’s shareholders.

Upon adopting the Rights Agreement, 300,000 shares of the Company’s

authorized shares of preferred stock, par value $ 0.0001 per share, were designated as Series A Junior Participating Preferred Shares (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 the Company’s Class

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

Upon the occurrence of certain triggering events , each Right entitles the holder to purchase from

the Company one one-thousandth of a share of the newly designated Preferred Shares at an

exercise price of $20.00 (the “Exercise Price”) .

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 the Company’s

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

If Rights become exercisable, each holder of a Right (other than the acquiring person

or group whose Rights will automatically become void) will have the right to receive, upon exercise, Class A common stock having a value

equal to two times the exercise price of the Right.

Each Preferred Share, if issued, will not be redeemable, will entitle the holder,

when, as and if declared, to quarterly dividend payments equal to the greater of $1,000 per share or 1,000 times the amount of all cash

dividends plus 1,000 times the amount of non-cash dividends or other distributions paid on one share of common stock, will entitle the

holder to receive $1,000 plus accrued and unpaid dividends per share upon liquidation, will have the same voting power as 1,000 shares

of Class A common stock and, if shares of common stock are exchanged via merger, consolidation or a similar transaction, will entitle

the holder thereof to a per share payment equal to the payment made on 1,000 shares of common stock.

The initial issuance of the

Rights as a dividend will have no financial accounting or reporting impact.

The fair value of the Rights will be nominal since the Rights

are not exercisable when issued and no value is attributable to them.

Additionally, the Rights do not meet the definition of a liability

under GAAP and will therefore not be accounted for as a long-term obligation.

Accordingly, unless the Rights become exercisable

as discussed above, the Rights Agreement has no impact on the Company’s condensed consolidated financial statements .

Purple LLC Class B

Unit Exchange Right

Rights Agreement

September 25, 2022, with the authorization of the Board, a special committee of independent and disinterested directors of the Company

(the “Special Committee”) approved the adoption of a limited-duration stockholder rights agreement (the “Rights Agreement”)

with an expiration date of September 25, 2023.

The Special Committee adopted the Rights Agreement in response to Coliseum’s substantial

increase in ownership of the Company’s shares over the last year and the Special Committee’s desire to have the time and

flexibility necessary to evaluate an unsolicited and non-binding proposal from Coliseum to acquire the outstanding common stock of the

Company not already beneficially owned by Coliseum (See Note 15— Related Party Transactions — Coliseum Capital Management,

The Rights Agreement was intended to enable the Company’s shareholders to realize the full value of their investment

and to guard against any attempts to gain control of the Company without paying all shareholders an appropriate control premium.

Rights Agreement applied equally to all current and future shareholders and did not deter any offer or preclude the Special Committee

from considering an offer that was fair and otherwise in the best interest of the Company’s shareholders.

adopting the Rights Agreement, 300,000 shares of the Company’s authorized shares of preferred stock, par value $ 0.0001 per share,

were designated as Series A Junior Participating Preferred Shares (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 the Company’s Class A common stock and Class B common stock to stockholders of record at the close

of business on October 6, 2022.

initial issuance of the Rights as a dividend had no financial accounting or reporting impact.

The fair value of the Rights was nominal

since the Rights were not exercisable when issued and no value was attributable to them.

Additionally, the Rights did not meet the definition

of a liability under GAAP and was therefore not accounted for as a long-term obligation.

Accordingly, the Rights Agreement had

no impact on the Company’s consolidated financial statements .

See Note 21— Subsequent Events for information

regarding dissolution of the Rights Agreement.

LLC Class B Unit Exchange Right

On February 2, 2018, in connection

1 unchanged sentence

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

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

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

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

closing price of one share of Class A common stock for the ten trading days immediately prior to the date InnoHold or other Class B Unit

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

In December 2018, InnoHold distributed

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

In June 2019, InnoHold distributed

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

Holders of Class

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

units and shares of Class B common stock (together with an equal number of Class B units, the “Paired Securities”) for, at

the Company’s option, either (A) shares of Class A common stock at an initial exchange ratio equal to one Paired Security for one

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

of Class A common stock for the ten trading days immediately prior to the date InnoHold or other Class B unit holders deliver a notice

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

In December 2018, InnoHold distributed Paired Securities to

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

In June 2019, InnoHold distributed Paired Securities

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

Holders of Class B units may elect

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

In certain cases, adjustments

4 unchanged sentences

acquires Class B units other than through an exchange for its shares of Class A common stock.

The right of a holder of Paired

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

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

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

traded partnership” under applicable tax laws.

PURPLE INNOVATION, INC.

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

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

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

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

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

for transfer taxes, stamp taxes and similar duties.

were no Paired Securities exchanged for Class A common stock during the three months ended March 31, 2023 and 2022.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

The Company and each holder

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

stamp taxes and similar duties.

There were no Paired Securities

exchanged for Class A common stock during the nine months ended September 30, 2022.

During the nine months ended September 30, 2021, 0.1

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

Maintenance of One-to-One

of One-to-One Ratios

The Third Purple LLC Agreement

8 unchanged sentences

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

Non-Income Related

Supreme Court ruling

in South Dakota v.

Related Taxes

Supreme Court ruling in South Dakota v.

Wayfair, Inc.

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

state and local sales taxes.

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

on e-commerce.

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

not required to collect state and local sales taxes.

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

income or other taxes on e-commerce.

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

However, the application

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

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

The application of these taxes

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

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

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

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

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

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

capture data and collect and remit taxes.

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

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

On September 20, 2020, Purple

LLC filed a Statement of Claim against PerfectSense Home Inc.

and PerfectSense Trading Co.

(collectively, “PerfectSense”)

in the Federal Court of Canada.

PerfectSense is a manufacturer and supplier of mattresses and related products.

PerfectSense owns the

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

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

top, purple stripe, and grey bottom);

used many of the marketing elements on Purple’s website (including a similar “exploded

view” image of their mattress);

and adopted the color purple as their dominant marketing color.

Purple LLC is suing for a declaration

that PerfectSense has infringed Purple LLC’s copyright and trademark rights and committed the tort of passing off.

Purple LLC is

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

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

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

as security for PerfectSense’s costs.

PerfectSense brought a motion to strike that was resolved on consent.

Pleadings are now closed,

and the action is proceeding under case management.

Counsel for the defendant was removed from the record at their own request by

The Court further ordered the defendant to either appoint counsel or file a motion to permit an officer or director to represent

the defendant in legal proceedings.

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

Henderson, the CEO

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

Purple opposed

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

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

or file a motion to permit Mr.

Henderson to represent the defendant, PerfectSense appointed new counsel.

The parties engaged in litigation

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

Shortly thereafter, discovery adjourned and continues

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

PerfectSense has not responded to Purple’s repeated attempts

to finalize the settlement.

Purple LLC filed a motion to enforce a settlement agreement.

On September 13, 2022, the Court granted

Purple’s motion to enforce the settlement agreement and deemed the action to be discontinued on a without costs basis.

the settlement, PerfectSense is required to:

(a) to change their mattress design so as not to resemble any of Purple’s mattress

designs, (b) to change their website design to move away from Purple’s product designs, (c) to not register or use any domains that

include the word “Purple”, and (d) to delete a number of domains that PerfectSense had previously registered which included

the word “Purple”.

PerfectSense was given 30 days from the date of the Court Order to comply with these terms.

Purple is continuing to monitor PerfectSense to ensure compliance with

the settlement agreement.

action has been discontinued, Purple is taking steps to have the $ 15,000 CAD that was posted as security for PerfectSense’s costs

paid out of court.

On September 20, 2020, Purple LLC filed a complaint in the U.S.

of International Trade seeking to recover approximately $ 7.0 million of Section 301 duties paid at the time of importation on certain

Chinese-origin goods.

More than 4,000 other complaints have been filed by other companies seeking similar refunds.

On March 12, 2021 the

United States filed a master answer that applies to all the Section 301 cases, including Purple LLC’s.

On July 6, 2021, the

court granted a preliminary injunction against liquidation of any unliquidated entries.

On April 1, 2022, the court issued an opinion

that remanded the case back to the U.S.

Trade Representative (“USTR”) to address certain procedural flaws in USTR’s

process for determining whether certain products were subject to the Section 301 duties.

On August 1, 2022, USTR issued its remand results.

LLC filed a complaint in the U.S.

Court of International Trade seeking to recover approximately $ 7.0 million of Section 301 duties paid

at the time of importation on certain Chinese-origin goods.

More than 4,000 other complaints have been filed by other companies seeking

similar refunds.

On March 12, 2021 the United States filed a master answer that applies to all the Section 301 cases, including Purple

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

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

Trade Representative (“USTR”) to address certain

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

2022, USTR issued its remand results.

On September 14, 2022, the plaintiffs submitted comments on the remand results.

USTR filed their response to these comments on November

The plaintiffs have until December 5, 2022 to file a reply.

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

all of the Section 301 duties.

PURPLE INNOVATION, INC.

USTR filed their

response to these comments on November 4, 2022.

The plaintiffs filed a reply on December 5, 2022 and the court held a hearing on

February 7, 2023.

On March 17, 2023, the court issued a final opinion and order upholding the remand results.

As a result, the duties

will stay in place and no refunds will be issued.

The court’s order could be appealed to the U.S.

Court of Appeals for the Federal

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

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

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

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

Purple seeks monetary

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

On October 21, 2020, shortly

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

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

Subsequently,

the two cases were consolidated into one.

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

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

Purple LLC opposed the motion to compel arbitration,

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

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

the District of Utah.

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

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

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

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

ReST filed its counterclaim

with the AAA on September 21, 2021.The parties have selected an arbitrator and they have agreed upon a scheduling order.

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

The parties have scheduled several depositions and exchange documents

and discovery requests.

The arbitration hearing is set to begin in July 2023.

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

ReST claims that Purple is liable to it for tens of millions of dollars.

District Court for the District of Utah.

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

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

Purple seeks monetary damages,

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

On October 21, 2020, shortly after

the complaint was filed in Case I, ReST filed a retaliatory lawsuit against Purple LLC, and some of the Company’s board members,

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

Utah (“Case II”).

Subsequently, the two cases were consolidated into one.

Case II (now combined with Case I) involves many

of the same facts and transactions as Case I.

ReST subsequently filed a motion to compel arbitration of the claims in Case I.

opposed the motion to compel arbitration, arguing that ReST waived any rights to arbitration and that all the claims in both cases should

stay in the courts.

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

District Court for the District of Utah.

Additionally, the Court ruled that ReST’s claims against the Company’s board members

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

Pursuant to the Court’s

order, Purple LLC filed a demand for arbitration with the American Arbitration Association (the “AAA”) on September 1, 2021.

ReST filed its counterclaim with the AAA on September 21, 2021.

Currently, the parties are nearing the end of the fact discovery

phase of the arbitration.

The parties have taken several depositions and engaged in written discovery.

The arbitration hearing

is scheduled to begin on July 31, 2023.

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

is liable to it for tens of millions of dollars.

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

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

On November 19, 2020, Purple LLC sued Intellibed in the U.S.

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

state law based claims.

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

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

Purple LLC also requested declaratory relief related to certain assignment

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

On December 14, 2020, Intellibed filed

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

relief can be granted.

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

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

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

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

On January 19, 2021, Purple LLC filed a motion to dismiss

Intellibed’s fifth, sixth, seventh, and eighth counterclaims on the ground that these counterclaims fail to state a claim upon which

relief can be granted.

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

On January 19, 2021, Purple

LLC also filed an Answer to Intellibed’s counterclaims, which were not subject to Purple LLC’s motion to dismiss.

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

On February 10, 2021,

Intellibed filed a motion to dismiss Counts I through XI of Purple LLC’s First Amended Complaint.

Briefing on Intellibed’s

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

On September 28, 2021, the District Court dismissed Purple’s complaint

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

set out in the license agreement.

On August 31, 2022, the Company acquired all of the issued and outstanding stock of Intellibed,

as discussed above.

In conjunction with the acquisition, the preexisting legal matter with Intellibed was effectively settled on the acquisition

The fair value of the effective settlement of this legal matter was estimated to be a gain of $ 1.4 million, which was

recorded by the Company as other income (expense), net in the condensed consolidated statement of operations for the three and nine months

ended September 30, 2022.

For additional information see Note 4— Acquisition .

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

On May 3, 2022, the Company

However, Purple LLC

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

On May 3, 2022, Purple LLC

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

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Pursuant to the agreement, Photon

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

The Company paid Photon $ 0.9 million under the Agreement.

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

Purple LLC paid Photon $ 0.9 million under the Agreement.

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

Purple withheld payment of the final

Purple LLC withheld payment of the final

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

Since resolution discussions with Photon have failed,

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

amounts paid to Photon under the agreement.

Photon counter-sued, seeking payment for the $ 0.1 million withheld by Purple, and also advancing

a vague claim for tortious interference.

Since resolution discussions with Photon failed,

Purple LLC filed its complaint for breach of contract against Photon seeking, among other damages, reimbursement for all amounts paid

to Photon under the agreement.

Photon counter-sued, seeking payment for the $ 0.1 million withheld by Purple LLC, and also advancing a

vague claim for tortious interference.

On August 31, 2022, Purple LLC filed an amended complaint adding additional claims pertaining to

Photon’s failure to deliver a point-of-sale system pursuant to the Master Professional Services Agreement.

Purple LLC is seeking

judgment against Photon in the amount of $ 4 million.

The litigation is presently in its discovery phase.

The Company intends to vigorously litigate

its claims to resolution.

The Company intends to vigorously

litigate its claims to resolution.

On August 5, 2022, Purple

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

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

LLC filed a complaint with the U.S.

International Trade Commission (“ITC”) against numerous entities and individuals from

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

property rights related to pillow and seat cushion products.

The Complaint alleges that the proposed Respondents are violating 19

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

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

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

The Complaint requests at least the following relief:

(i) a General Exclusion Order excluding from entry into the United States

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

(ii) Limited Exclusion Orders excluding

from entry into the United States all pillow and cushion products of the proposed Respondents named in the Complaint that infringe any

asserted Purple intellectual property right;

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

The complaint alleged that the Respondents have been violating 19 U.S.C.

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

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

constitute unfair competition, infringe a certain Purple LLC’s design patent, infringe Purple LLC’s trademarks, and/or infringe

Purple LLC’s utility patents.

The complaint requested at least the following relief:

(i) a General Exclusion Order excluding

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

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

that infringe any asserted intellectual property right;

and (iii) Cease and Desist Orders against the Respondents named in the complaint

barring them from marketing, selling, advertising, or distributing infringing products in the United States, including via on-line retailers.

The ITC Administrative Law Judge has issued a Procedural Schedule for the Investigation that includes an April 12–14, 2023, Evidentiary

Hearing and an October 12, 2023, Target Date for completion of the Investigation.

The Investigation is currently in its initial

stages and fact discovery has just commenced.

On September 22, 2022, the

Company filed an action in the U.S.

On September 6, 2022, the ITC instituted Investigation No.

337-TA-1328 in response to Purple LLC’s complaint.

Fact and expert

discovery have been completed.

Purple LLC has entered into settlement agreements with a number of Respondents.

also has voluntarily terminated the Investigation as to a number of Respondents.

No actively litigating Respondents remain in the

Purple LLC also has filed a Motion for Summary Determination seeking, among other things, the imposition of a General Exclusion

Order with respect to pillows that infringe an asserted utility patent.

Under the current Procedural Schedule for the Investigation,

the deadline for the Administrative Law Judge to issue an Initial Determination concerning Purple LLC’s Motion for Summary Determination

is June 12, 2023, and the Commission’s Target Date for completion of the Investigation has been set for October 12, 2023.

On September 22, 2022, Purple

LLC filed an action in the U.S.

District Court for the District of Utah styled Purple Innovation, LLC v.

Bedmate-U Co., Ltd.

against numerous entities and individuals from the People’s Republic of China and South Korea (“Respondents”).

The complaint alleges that the Respondents have (a) violated Lanham Act § 43(a), 15 U.S.C.

§ 1125(a) by committing acts of trade

dress infringement;

numerous entities and individuals from the People’s Republic of China and South Korea (“Respondents”).

The complaint

alleges that the Respondents have (a) violated Lanham Act § 43(a), 15 U.S.C.

§ 1125(a) by committing acts of trade dress infringement;

(b) infringed U.S.

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Trademark Registration No.

(d) violated Lanham Act § 43(a), 15 U.S.C.

(d) violated Lanham

Act § 43(a), 15 U.S.C.

§ 1125(a) by committing acts of trademark infringement;

(e) infringed U.S.

(f) infringed U.S.

I infringed U.S.

(f) infringed

(g) infringed U.S.

(h) violated Utah Unfair Competition

Act, Utah Code § 13-5a-101 et seq.

(h) violated Utah Unfair Competition Act, Utah Code § 13-5a-101

and/or (i) committed common law unfair competition.

The complaint seeks injunctive

relief, compensatory damages, disgorgement of profits, punitive and exemplary damages, and attorneys’ fees and costs.

action is in its initial stages.

The complaint seeks injunctive relief, compensatory damages,

disgorgement of profits, punitive and exemplary damages, and attorneys’ fees and costs.

This action is in its initial stages.

Purple LLC intends to vigorously litigate its claims to resolution.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

On December 16, 2022, Terry

and Tony Pearce, Purple’s founders, filed a complaint against Purple Inc.

in the Fourth Judicial District Court in the State of

The Pearces allege that they each entered into employment agreements with Purple LLC in February 2018.

The Pearces contend that

certain corporate transactions between May 2019 and June 2020 reduced their “ownership interest and voting power in Purple”

and that, as a result, they should have continued to be paid a salary between August 2020, when they retired from Purple LLC, and December

The Pearces calculate that they are each owed “no less than $ 500,000 ” in unpaid salary.

In February 2023, Purple Inc.

filed a motion to dismiss the Pearces’ claims in full.

The Pearces amended their complaint a month later.

has now moved

to dismiss that amended complaint, as well, arguing that the Pearces’ amendment did not address the flaws in their legal theory

and that the Pearces’ failed amendment reflects an inability to rehabilitate their claims.

The Company maintains insurance

to defend against claims of this nature and intends to continue to do so vigorously.

On February 21, 2023, Coliseum

filed a complaint against Purple Inc.

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 alleged 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 Proportional Representation Preferred Linked Stock violated the Company’s

charter and amounted to a breach of the named directors’ fiduciary duties;

(2) a declaration that the Proportional Representation

Preferred Linked Stock is invalid, unenforceable, and void;

(3) unspecified damages resulting from the alleged breach of duties;

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

The parties agreed to hold an expedited trial on Coliseum’s

claims that would have resulted in a resolution of the dispute before the Company’s 2023 annual meeting of stockholders.

11, 2023, Coliseum and the Company resolved the litigation by entering into a

binding memorandum of understanding in which the parties agreed to work together to prepare and enter into a formalized cooperation agreement.

The Cooperation Agreement that embodied those material terms was signed by both parties on April 19, 2023 and became effective

on April 27, 2023.

See Note 21— Subsequent Events — Coliseum Cooperation Agreement for further discussion of the

provisions of the cooperation agreement.

On April 3, 2023, InnoHold,

LLC, Terry Pearce, and Tony Pearce (collectively, the “InnoHold Parties”) filed a complaint against Purple LLC in the Delaware

Court of Chancery, captioned InnoHold, LLC et al.

Purple Innovation, LLC , Case No.

2023-0393-PAF (Del.

The complaint alleges that Purple LLC breached the Second Amended and Restated Limited Liability Company Agreement of Purple Innovation,

LLC, dated as of February 2, 2018 (the “LLC Agreement”), and the implied covenant of good faith and fair dealing contained

therein by failing to pay the full amount of tax distributions owed under the LLC Agreement.

The complaint also asserts a claim

for indemnification under the LLC Agreement.

The InnoHold Parties seek damages of approximately $ 3.0 million in allegedly unpaid

tax distributions as well as its legal fees and expenses incurred in connection with the litigation.

Purple LLC has not yet formally

responded to the allegations in the complaint, and the outcome of the litigation cannot be predicted at this early stage.

The Company is from time to

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Related Party Transactions

The Company had various transactions

with entities or individuals which are considered related parties.

Coliseum Capital Management,

Immediately following the Business Combination, Adam Gray was appointed

to the Company’s Board of Directors (the “Board”).

Gray is a manager of Coliseum Capital, LLC, which is the general

partner of CCP and CDF, and he is also a managing partner of CCM, which is the investment manager of Blackwell.

Gray has voting and

dispositive control over securities held by CCP, CDF and Blackwell which were also Lenders under the Amended and Restated Credit Agreement.

On September 17, 2022, the Company received an unsolicited and non-binding proposal from CCM to acquire the remaining outstanding common

stock of the Company not already beneficially owned by CCM for $ 4.35 per share in cash.

At the time of the offer, CCM beneficially owned

approximately 45 % of the outstanding equity of the Company.

The CCM proposal is 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 the shares of common stock not

owned by CCM or other interested parties.

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

the CCM proposal and determine the course of action that is in the best interests of all of the Company’s shareholders.

expressly granted the Special Committee the ability to decline the CCM proposal.

In addition, the Special Committee adopted the Rights

Agreement to have the time and flexibility necessary to evaluate the CCM offer.

Company had various transactions with entities or individuals which are considered related parties.

Capital Management, LLC

Immediately following the

Business Combination, Adam Gray was appointed to the Company’s Board.

Gray is a manager of Coliseum Capital, LLC, which is

the general partner of CCP and CDF, and he is also a managing partner of CCM, which is the investment manager of Blackwell and also manages

investment funds and accounts.

Gray has voting and dispositive control over securities held by CCP, CDF and Blackwell which were

also Lenders under the Amended and Restated Credit Agreement.

See Note 14— Commitments and Contingencies — Subscription

Agreement and Preemptive Rights and Commitments and Contingencies — Stockholder Rights Agreement for further discussion .

Purple Founder Entities

TNT Holdings, LLC (herein “TNT

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

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

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

to the Company’s Board following the Business Combination.

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

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

The Purple Founders also resigned as employees of Purple LLC and retired from the Company’s Board in August 2020.

Agreement and Preemptive Rights for further discussion .

On September 17, 2022, the

Company received an unsolicited and non-binding proposal from Coliseum on behalf of certain investment funds and accounts to acquire the

remaining outstanding common stock of the Company not already beneficially owned by Coliseum for $ 4.35 per share in cash.

of the offer, Coliseum beneficially owned approximately 44.7 % of the outstanding equity of the Company.

The Coliseum proposal was conditioned

upon the transaction being (a) negotiated by, and subject to the approval of, the Special Committee and (b) subject to a non-waivable

condition requiring approval by the affirmative vote of a majority of the 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 was in the best interests of all the Company’s shareholders.

The Board expressly granted the Special Committee

the ability to decline the Coliseum proposal.

In addition, the Special Committee adopted the 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.

12, 2023, the Company issued a press release stating the Special Committee had rejected Coliseum’s unsolicited proposal.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

On February 14, 2023, the

Company declared a dividend of one new PRPLS for each 100 shares of its common stock owned by the Company’s shareholders.

would have voted together with the common stock in the election of directors, and related matters, and carried 10,000 votes each.

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

PRPLS holders could have

allocated 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 traded with the common stock.

Any new issuance of common stock

would have automatically included a proportionate number of PRPLS.

The PRPLS were redeemable at any time by an affirmative vote of two-thirds

of the members of the Board.

PRPLS did not have any dividend rights and were entitled to only a limited payment upon any liquidation,

dissolution or winding up in priority to any payments on the common stock but would not have otherwise participated in any liquidating

distributions.

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

PRPLS, alleging that the issuance deprived the Company’s stockholders of a fair and democratic election of directors at the Company’s

2023 Annual Meeting and other related allegations.

Prior to the trial that was set to begin on April 12, 2023, the parties agreed to resolve

the litigation and enter into a cooperation agreement.

On April 19, 2023, the parties entered into a Cooperation Agreement which became

effective on April 27, 2023.

See Note 21— Subsequent Events — Coliseum Cooperation Agreement for further discussion

of the provisions of the agreement.

Founder Entities

Holdings, LLC (herein “TNT Holdings”), EdiZONE, LLC, (herein “EdiZONE”) an entity wholly owned by TNT Holdings,

and InnoHold (collectively the “Purple Founder Entities”) were entities under common control with Purple LLC prior to the

Business Combination.

TNT Holdings and InnoHold are majority owned and controlled by Terry Pearce and Tony Pearce (the “Purple

Founders”), who were appointed to the Company’s Board following the Business Combination.

InnoHold was a majority shareholder

of the Company until it sold a portion of its interests in a secondary public offering in May 2020 and the remainder of its interests

in a secondary public offering in September 2020.

The Purple Founders also resigned as employees of Purple LLC and retired from the Company’s

Board in August 2020.

TNT Holdings owned the Alpine

7 unchanged sentences

Purple LLC incurred $ 0.3 million and $ 0.2 million in rent expense to 123E LLC or TNT Holdings for the building

lease of the Alpine facility for the three and nine months ended September 30, 2022, respectively, and $ 0.2 million and $ 0.7 million for

the three and nine months ended September 30, 2021, respectively.

Purple LLC continues to lease the Alpine facility that was formerly

the Company headquarters, for use in production, research and development and video production.

lease of the Alpine facility for the three months ended March 31, 2023 and 2022, respectively.

Purple LLC continues to lease the Alpine

facility that was formerly the Company headquarters, for use in research and development.

In accordance with the terms of that lease,

4 unchanged sentences

and extended the term such that the lease will remain in effect until September 30, 2023.

During the nine months ended

September 30, 2021, certain current and former employees of Purple LLC who received distributions of Paired Securities from InnoHold exchanged

0.1 million of Paired Securities for Class A common stock.

There were no such exchanges during the nine months ended September 30, 2022.

In connection with the Business

Combination, to secure payment of a certain portion of specified post-closing indemnification rights of the Company under the Merger Agreement,

0.5 million shares of Class B common stock and 0.5 million Class B Units otherwise issuable to InnoHold as equity consideration were deposited

in an escrow account for up to three years from the date of the Business Combination pursuant to a contingency escrow agreement.

2020, an amendment to the escrow agreement was signed whereby the 0.5 million shares of Class B Stock and 0.5 million Class B Units held

in escrow were exchanged for $5.0 million.

On February 3, 2021, the Company received $4.1 million from InnoHold as reimbursement for amounts

that qualified for indemnification from the $5.0 million being held in escrow.

The remaining $0.9 million in escrow was returned to InnoHold.

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

During the nine months ended

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

required tax distributions pursuant to the Third Purple LLC Agreement.

There were no such payments made by Purple LLC during the nine

months ended September 30, 2022.

Stockholders’ Equity

Class A Common Stock

The Company has 210.0 million

shares of Class A common stock authorized at a par value of $ 0.0001 per share.

Holders of the Company’s Class A common stock are

entitled to one vote for each share held on all matters to be voted on by the stockholders and participate in dividends, if declared by

the Board, or receive any portion of any such assets in respect of their shares upon liquidation, dissolution, distribution of assets

or winding-up of the Company in excess of the par value of such stock.

Holders of Class A common stock and holders of Class B common stock

voting together as a single class, have the exclusive right to vote for the election of directors and on all other matters properly submitted

to a vote of the stockholders.

Holders of Class A common stock and Class B common stock are entitled to one vote per share on matters

to be voted on by stockholders.

At September 30, 2022, 91.4 million shares of Class A common stock were outstanding.

PURPLE INNOVATION, INC.

A Common Stock

Company has 210.0 million shares of Class A common stock authorized at a par value of $ 0.0001 per share.

Holders of the Company’s

Class A common stock are entitled to one vote for each share held on all matters to be voted on by the stockholders and participate in

dividends, if declared by the Board, or receive any portion of any such assets in respect of their shares upon liquidation, dissolution,

distribution of assets or winding-up of the Company in excess of the par value of such stock.

Holders of Class A common stock and holders

of Class B common stock voting together as a single class, have the exclusive right to vote for the election of directors and on all

other matters properly submitted to a vote of the stockholders.

Holders of Class A common stock and Class B common stock are entitled

to one vote per share on matters to be voted on by stockholders.

At March 31, 2023, 105.0 million shares of Class A common stock were

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Class B Common Stock

B Common Stock

The Company has 90.0 million

11 unchanged sentences

of the Company in excess of the par value of such stock.

In connection with the Business

Combination, approximately 44.1 million shares of Class B common stock were issued to InnoHold as part of the equity consideration.

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

All of the 0.4 million shares of Class B common stock outstanding at September 30, 2022 were held by other parties.

Preferred Stock

The Company has 5.0 million shares of preferred stock authorized at

a par value of $ 0.0001 per share.

The preferred stock may be issued from time to time in one or more series.

The directors are expressly

authorized to provide for the issuance of shares of the preferred stock in one or more series and to establish from time to time the number

of shares to be included in each such series and to fix the voting rights, designations and other special rights or restrictions.

30, 2022, there were no shares of preferred stock outstanding.

See Note 14— Commitments and Contingencies — Stockholder

Rights Agreement for further discussion regarding preferred stock.

Sponsor Warrants

There were 12.8 million sponsor

warrants issued pursuant to a private placement simultaneously with the Company’s IPO.

The Company may call the warrants for redemption

if the reported last sale price of the Class A common stock equals or exceeds $24.00 per share for any 20 trading days within a 30-trading

day period ending on the third trading day prior to the date the Company sends the notice of redemption to the warrant holders;

however, that the sponsor warrants are not redeemable by the Company so long as they are held by the Sponsor or its permitted transferees.

In addition, so long as such sponsor warrants are held by the Sponsor or its permitted transferee, the holder may elect to exercise the

sponsor warrants on a cashless basis, by surrendering their sponsor warrants for that number of shares of Class A common stock equal to

the quotient obtained by dividing (x) the product of the number of shares of Class A common stock underlying the sponsor warrants, multiplied

by the difference between the exercise price of the sponsor warrants and the “fair market value” (defined below), by (y) the

fair market value.

The “fair market value” means the average reported last sale price of the Class A common stock for the

10 trading days ending on the third trading day prior to the date on which the notice of warrant exercise is sent to the warrant agent.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

There were no sponsor warrants

exercised during the nine months ended September 30, 2022.

During the nine months ended September 30, 2021, 6.6 million sponsor warrants

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

There were 1.9 million sponsor warrants outstanding

at September 30, 2022.

Noncontrolling Interest

connection with the Business Combination, approximately 44.1 million shares of Class B common stock were issued to InnoHold as part of

the equity consideration.

InnoHold subsequently transferred a portion of its shares to permitted transfers and exchanged its remaining

shares for Class A common stock that it sold.

All of the 0.4 million shares of Class B common stock outstanding at March 31, 2023 were

held by other parties.

The Company has 5.0 million

shares of preferred stock authorized at a par value of $ 0.0001 per share.

The preferred stock may be issued from time to time in one or

The directors are expressly authorized to provide for the issuance of shares of the preferred stock in one or more series

and to establish from time to time the number of shares to be included in each such series and to fix the voting rights, designations

and other special rights or restrictions.

On February 24, 2023, the Company issued 1.0 million PRPLS shares which were linked to the outstanding

commons stock and traded with the common stock.

Any new issuance of common stock would have automatically included a proportionate number

The PRPLS were redeemable at any time by an affirmative vote of two-thirds of the members of the Board.

PRPLS did not have any

dividend rights and were entitled to only a limited payment upon any liquidation, dissolution or winding up in priority to any payments

on the common stock but would not have otherwise participated in any liquidating distributions.

Each PRPLS voted together with the common

stock in the election of directors, and related matters, and carried 10,000 votes each.

Holders of PRPLS were entitled to allocate their

votes among the nominees in director elections on a cumulative basis.

PRPLS holders could have allocated all, none, or a portion of their

votes to each director nominee up for election at the Company’s meetings of shareholders.

At March 31, 2023, there were 1.0 million

shares of preferred stock outstanding.

were 12.8 million sponsor warrants issued pursuant to a private placement simultaneously with the Company’s initial public offering.

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

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

In February 2023,

the 1.9 million sponsor warrants outstanding expired and were cancelled pursuant to the terms of the agreement.

These sponsor warrants

had no fair value on the date of expiration.

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

Noncontrolling

Noncontrolling interest (“NCI”)

is the membership interest in Purple LLC held by holders other than the Company.

Upon the close of the Business Combination, and at December

31, 2018, InnoHold’s and other Class B Unit holders’ combined NCI percentage in Purple LLC was approximately 82 %.

30, 2022, the combined NCI percentage in Purple LLC was 0.5 %.

At March 31, 2023 and December 31, 2022, the combined

NCI percentage in Purple LLC was 0.4 % and 0.5 %, respectively.

The Company has consolidated the financial position and results of operations

of Purple LLC and reflected the proportionate interest held by all such Purple LLC Class B unit holders as NCI.

At each interim period, the

Company estimates its forecasted full-year effective tax rate.

That forecasted rate is applied to year-to-date ordinary income or loss

to compute the year-to-date income tax provision.

In order to compute the annual effective tax rate, the Company estimates its full year

ordinary income and total tax provision, including both current and deferred taxes.

For annual periods, the Company

accounts for income taxes using the asset and liability method.

Under this method, deferred tax assets and liabilities are recognized

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

and liabilities and their respective tax bases.

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

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

Deferred tax assets and liabilities are calculated by applying

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

be recovered or settled.

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

enacted rate change.

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

the non-taxable nature of the change in fair value of the warrant liability.

As of September 30, 2022, the Company had two material assets:1) Purple

LLC, which is treated as a partnership for U.S.

federal income tax purposes and for purposes of certain state and local income taxes and

2) Intellibed, which is taxed as a corporation for U.S.

federal income tax purposes and for purposes of certain state and local income

Purple LLC’s net taxable income and any related tax credits are passed through to its members and are included in the members’

tax returns, even though such net taxable income or tax credits may not have actually been distributed.

While the Company consolidates

Purple LLC for financial reporting purposes, the Company will be taxed on its share of earnings of Purple LLC not attributed to the noncontrolling

interest holders, which will continue to bear their share of income tax on its allocable earnings of Purple LLC.

The income tax burden

on the earnings taxed to the noncontrolling interest holders is not reported by the Company in its consolidated financial statements under

As a result, the Company’s effective tax rate differs from the statutory rate.

The primary factors impacting expected tax

are the change in fair value of the warrant liabilities and adjustments for stock-based compensation.

Deferred tax assets at September

30, 2022 totaled $ 220.8 million, which is net of a $ 100.1 million valuation allowance that has been recorded against the residual outside

partnership basis for the amount the Company believes is not more likely than not realizable.

As a result, there was an overall increase

of $ 30.2 million in the valuation allowance from December 31, 2021 to September 30, 2022, primarily as a result of an increase in the

residual outside partnership basis.

PURPLE INNOVATION, INC.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

The Company currently estimates

its annual effective income tax rate to be 23.7 %.

The annualized effective tax rate for the Company differs from the federal rate of

21 % primarily due to the non-taxable nature of the change in fair value of the warrant liabilities and state and local income taxes.

For the nine months ended September 30, 2022, the Company has recorded

an income tax benefit of $ 6.6 million.

The effective tax rate for the nine months ended September 30, 2022 was 25.1 %.

This rate differed

from the federal statutory rate due primarily to a reduction of deferred tax assets associated with adjustments for stock-based compensation

and the gain relating to the change in fair value of the warrant liability is excluded from taxable income for income tax purposes.

In connection with the Business

Combination, the Company entered into a tax receivable agreement with InnoHold, which provides for the payment by the Company to InnoHold

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

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

to realize in certain circumstances) in periods after the Closing as a result of (i) any tax basis increases in the assets of Purple

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

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

and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, payments it makes

under the agreement.

Company’s sole material asset is Purple LLC, which is treated as a partnership for U.S.

federal income tax purposes and for purposes

of certain state and local income taxes.

Purple LLC’s net taxable income and any related tax credits are passed through to its

members and are included in the members’ tax returns, even though such net taxable income or tax credits may not have actually

been distributed.

While the Company consolidates Purple LLC for financial reporting purposes, the Company will be taxed on its share

of earnings of Purple LLC not attributed to the noncontrolling interest holders, which will continue to bear their share of income tax

on its allocable earnings of Purple LLC.

The income tax burden on the earnings taxed to the noncontrolling interest holders is not reported

by the Company in its consolidated financial statements under GAAP.

The Company reported income tax

expense related to various state taxes of $ 0.1 million on a pretax loss of $ 23.3 million for the three months ended March 31, 2023 as

compared to an income tax benefit of $ 1.8 million on a pretax loss of $ 15.4 million for the three months ended March 31, 2022.

This resulted

in an effective tax rate of 0.31 % for the three months ended March 31, 2023 as compared to 11.73 % for the three months ended March 31,

The Company’s effective tax rate differs from the statutory federal rate of 21 % primarily due to the impact of the full valuation

allowance recorded against the Company’s deferred tax assets at March 31, 2023.

connection with the Business Combination, the Company entered into a tax receivable agreement with InnoHold, which provides for the payment

by the Company to InnoHold of 80 % of the net cash savings, if any, in U.S.

federal, state and local income tax that the Company actually

realizes (or is deemed to realize in certain circumstances) in periods after the Closing as a result of (i) any tax basis increases in

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

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

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

from, payments it makes under the agreement.

As noncontrolling interest

5 unchanged sentences

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

The estimation of liability

under the tax receivable agreement is by its nature imprecise and subject to significant assumptions regarding the amount and timing of

future taxable income.

As a result of the initial merger transaction, the subsequent exchanges of Class B Units for Class A common stock

and changes in estimates relating to the expected tax benefits associated with the liability under the agreement, the potential future

tax receivable agreement liability was $ 162.2 million and $ 168.1 million as of September 30, 2022 and December 31, 2021, respectively.

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

As of December 31, 2021, the

Company estimated $ 13.9 million of U.S.

federal and $ 4.7 million of state net operating loss carryforwards available to reduce future

taxable income.

The federal net operating losses generally can be carried forward indefinitely for U.S.

federal tax purposes with the

exception of some NOLs acquired as part of the Intellibed acquisition which are subject to expiration beginning in 2037.

Some state carryforwards

are subject to expiration beginning in 2026.

It is possible that we will not generate taxable income in time to use all or a portion of

these net operating loss carryforwards before their expiration or at all.

Additionally, the Company may be subject to the NOL utilization

provisions of Section 382 of the Internal Revenue Code of 1986, as amended due to ownership changes that may have occurred previously

or that could occur in the future.

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

attributable to periods before the change.

The amount of the annual limitation depends upon the value of the Company immediately before

the change, changes to the Company’s capital during a specified period prior to the change, and the federal published interest rate.

As of September 30, 2022, the Company has not completed its analyses in respect of Section 382 to determine whether a change

in ownership has occurred, the annual limitation, if any, or whether any of the tax attributes are subject to a permanent limitation.

Until an analysis is completed, there can be no assurance that the existing net operating loss carry-forwards or credits are not subject

to significant limitation.

As of September 30, 2022, we had $ 220.8 million in net deferred tax

These deferred tax assets include approximately $ 213.5 million related to the investment in the partnership.

have considered both the positive and negative evidence in evaluating whether a valuation allowance is necessary.

The Company is in a

cumulative income position over the past 12 quarters, and we consider it more likely than not that we will have sufficient taxable income

in the future that will allow us to realize these deferred tax assets.

However, it is possible that certain economic conditions may decrease

the likelihood that we will have sufficient taxable income in the future.

Therefore, unless we are able to generate sufficient taxable

income from our operations, a substantial valuation allowance to reduce our deferred tax assets may be required, which would materially

increase our expenses in the period the allowance is recognized and materially adversely affect our results of operations and statement

of financial condition.

PURPLE INNOVATION, INC.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

The effects of uncertain tax positions are recognized in the consolidated

financial statements if these positions meet a “more-likely-than-not” threshold.

For those uncertain tax positions that are

recognized in the consolidated financial statements, liabilities are established to reflect the portion of those positions it cannot conclude

“more-likely-than-not” to be realized upon ultimate settlement.

The Company’s policy is to recognize interest and penalties

related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of income.

Accrued interest

and penalties would be included on the related tax liability line in the consolidated balance sheet.

As of September 30, 2022, no material

uncertain tax positions were recognized as liabilities in the condensed consolidated statements of operations.

Net Income (Loss) Per Common Share

Basic net income (loss) per

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

of Class A stock outstanding during each period.

Diluted net income (loss) per share reflects the weighted-average number of common shares

outstanding during the period used in the basic net income (loss) computation plus the effect of common stock equivalents that are dilutive.

The following table sets forth

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

thousands, except per share amounts):

The estimation of liability under the tax receivable agreement is by

its nature imprecise and subject to significant assumptions regarding the amount and timing of future taxable income.

As of March 31,

2023, the Company estimated that if all the remaining 0.4 million Class B units were redeemed for shares of our Class A common stock,

the tax receivable agreement liability would be approximately $ 168.5 million.

If we experience a change of control (as defined under

the tax receivable agreement, which includes certain mergers, asset sales and other forms of business combinations and change of control

events), we could be required to make an immediate lump-sum payment under the terms of the tax receivable agreement.

Management currently

estimates the liability associated with this lump-sum payment (or “early termination payment”) would be approximately $ 110.6 million

on a discounted basis.

This potential early termination payment can be significantly impacted by the discounted interest rate at the time

of termination.

effects of uncertain tax positions are recognized in the consolidated financial statements if these positions meet a “more-likely-than-not”

For those uncertain tax positions that are recognized in the consolidated financial statements, liabilities are established

to reflect the portion of those positions it cannot conclude “more-likely-than-not” to be realized upon ultimate settlement.

The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits on the income tax expense line

in the accompanying consolidated statement of operations.

Accrued interest and penalties would be included on the related tax liability

line in the consolidated balance sheet.

As of March 31, 2023, no material uncertain tax positions were recognized as liabilities in the

condensed consolidated financial statements.

Net Loss Per Common Share

net income (loss) per common share is calculated by dividing net income (loss) attributable to common stockholders by the weighted average

number of shares of Class A stock outstanding during each period.

Diluted net income (loss) per share reflects the weighted-average number

of common shares outstanding during the period used in the basic net income (loss) computation plus the effect of common stock equivalents

that are dilutive.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

following table sets forth the calculation of basic and diluted weighted average shares outstanding and net loss per share for the periods

presented (in thousands, except per share amounts):

Three Months Ended

September 30,

Nine Months Ended

September 30,

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

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

Net income (loss) attributed to noncontrolling interest

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

Net loss attributable to Purple Innovation, Inc.

Less – net loss attributed to noncontrolling interest

Net loss attributable to Purple Innovation, Inc.

Weighted average shares—basic

Add – dilutive effect of equity awards

Add – dilutive effect of warrants

Add – dilutive effect of Class B shares

Weighted average shares—diluted

Net income (loss) per common share:

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

For the three and nine months

ended September 30, 2022, the Company excluded 3.2 million and 3.5 million, respectively, of Class A common shares issuable upon conversion

of certain warrants, stock options, restricted stock and Class A shares subject to vesting as the effect was anti-dilutive.

For the three

months ended September 30, 2021, the Company excluded 1.3 million shares of Class A common stock issuable upon conversion of certain stock

options, restricted stock and Class A shares subject to vesting as the effect was anti-dilutive.

For the nine months ended September 30,

2021, the Company excluded 0.5 million of Paired Securities convertible into an equal number of Class A shares as the effect was anti-dilutive.

Net loss per common share:

the three months ended March 31, 2023, the Company excluded 2.4 million shares of Class A common stock issuable upon conversion of certain

warrants, stock options and restricted stock as the effect was anti-dilutive.

For the three months ended March 31, 2022, the Company

excluded 3.6 million shares of Class A common stock issuable upon conversion of certain warrants, stock options, restricted stock and

Class A shares subject to vesting as the effect was anti-dilutive.

Equity Compensation Plans

2017 Equity Incentive

The Purple Innovation, Inc.

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

stock units and other stock-based awards.

Directors, officers and other employees and subsidiaries and affiliates, as well as others

performing consulting or advisory services for the Company and its subsidiaries, will be eligible for grants under the 2017 Incentive

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

Class A Stock Awards

In May 2022, the Company granted

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

The stock awards vested immediately and the Company

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

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

Employee Stock Options

In March and June 2022, the

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

at an exercise price of $ 6.82 per option.

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

In April 2022, with

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

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

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

stock options to be $ 0.4 million which will be expensed on a straight-line basis over the vesting period.

The Company determined the

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

average assumptions:

Fair market value

Exercise price

Risk free interest rate

Expected term in years

Expected volatility

Expected dividend yield

The following table summarizes the Company’s

total stock option activity for the nine months ended September 30, 2022:

Equity Incentive Plan

Purple Innovation, Inc.

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

appreciation rights, restricted stock units and other stock-based awards.

Directors, officers and other employees and subsidiaries and

affiliates, as well as others performing consulting or advisory services for the Company and its subsidiaries, will be eligible for grants

under the 2017 Incentive Plan.

As of March 31, 2023, an aggregate of 1.5 million shares remain available for issuance or use under the

2017 Incentive Plan.

and Restated Grant Agreements

March 15, 2023, in accordance with the 2017 Incentive Plan, the Company entered into amended and restated grant agreements relating to

stock options and restricted stock unit awards previously granted to the Company’s chief executive officer in March 2022 and June

The amended agreements revised the vesting schedule of the awards included in each grant.

These agreements provided that 0.3 million

of the restricted stock units and stock options were to fully vest on March 25, 2023 and 0.3 million of the restricted stock units and

stock options and conditionally granted restricted units and stock options, conditioned on shareholder approval of the Company’s

proposed amendments to Section 5(f) of the Plan, will vest on March 25, 2024.

The amendments also provided that the remaining 0.3 million

conditionally granted restricted stock units and stock options will vest in full on March 25, 2025.

These amendments resulted in the

acceleration of $ 0.8 million of stock-based compensation expense into the first quarter of 2023 compared to the expense that would have

been recorded based on vesting under the original agreements.

Stock Options

following table summarizes the Company’s total stock option activity for the three months ended March 31, 2023:

(in thousands)

2 unchanged sentences

Forfeited/cancelled

Options outstanding as of September 30, 2022

PURPLE INNOVATION, INC.

Options outstanding as of March 31, 2023

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Outstanding and exercisable stock options as of

September 30, 2022 are as follows:

and exercisable stock options as of March 31, 2023 are as follows:

Options Outstanding

Options Exercisable

Exercise Prices

(in thousands)

Remaining Life

Remaining Life (Years)

(in thousands)

1 unchanged sentence

(in thousands)

The following table summarizes

the Company’s unvested stock option activity for the nine months ended September 30, 2022:

following table summarizes the Company’s unvested stock option activity for the three months ended March 31, 2023:

(in thousands)

Weighted Average

Nonvested options as of January 1, 2023

Nonvested options as of September 30, 2022

The estimated fair value of

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

For the three and nine months ended September

30, 2022, the Company recognized stock option expense of $ 0.2 million and $ 0.5 million, respectively.

The Company recorded stock option

expense of $ 0.4 million and $ 1.3 million during the three and nine months ended September 30, 2021, respectively.

As of September 30, 2022,

outstanding stock options had $ 0.9 million of unrecognized stock compensation cost with a remaining recognition period of 1.8 years.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Employee Restricted

In March and June 2022, the

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

chief executive officer.

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

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

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

The estimated fair value of the net award of 0.2

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

During the second quarter

of 2022, the Company granted 1.1 million restricted stock units under the 2017 Incentive Plan to certain management of the Company.

Approximately

one-half of the restricted stock units granted included a market vesting condition.

The restricted stock awards that did not have a market

vesting condition had a weighted average grant date fair value of $ 5.53 per share.

The estimated fair value of these awards is recognized

on a straight-line basis over the vesting period.

For those awards that include a market vesting condition, the estimated fair value

of the restricted stock was measured on the grant date and incorporated the probability of vesting occurring.

The estimated fair value

is recognized over the derived service period (as determined by the valuation model), with such recognition occurring regardless of whether

the market condition is met.

The Company determined the weighted average grant date fair value of the awards with the market vesting

condition to be $ 3.68 per share using a Monte Carlo Simulation of a Geometric Brownian Motion stock path model with the following weighted

average assumptions:

Trading price of common stock on measurement date

Risk free interest rate

Expected life in years

Expected volatility

Expected dividend yield

The following table summarizes

the Company’s restricted stock unit activity for the nine months ended September 30, 2022:

Nonvested options as of March 31, 2023

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

For the three months

ended March 31, 2023 and 2022, the Company recognized stock option expense of $ 0.3 million and $ 0.2 million, respectively.

of March 31, 2023, outstanding stock options had $ 0.3 million of unrecognized stock compensation cost with a remaining recognition period

of 1.0 years.

Restricted Stock Units

following table summarizes the Company’s restricted stock unit activity for the three months ended March 31, 2023:

(in thousands)

Nonvested restricted stock units as of January 1, 2023

Nonvested restricted stock units as of September 30, 2022

The Company recorded restricted

stock unit expense of $ 0.6 million and $ 1.5 million during the three and nine months ended September 30, 2022, respectively and $ 0.3 million

and $ 0.3 million during the three and nine months ended September 30, 2021, respectively.

As of September 30, 2022,

outstanding restricted stock units had $ 5.7 million of unrecognized stock compensation cost with a remaining recognition period of 2.4

PURPLE INNOVATION, INC.

Nonvested restricted stock units as of March 31, 2023

Company recorded restricted stock unit expense of $ 0.8 million and $ 0.4 million during the three months ended March 31, 2023 and 2022,

respectively.

of March 31, 2023, outstanding restricted stock units had $ 3.3 million of unrecognized stock compensation cost with a remaining recognition

period of 1.9 years.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Aggregate Non-Cash Stock-Based

The Company has accounted

for all stock-based compensation under the provisions of ASC 718 Compensation—Stock Compensation .

This standard requires

the Company to record a non-cash expense associated with the fair value of stock-based compensation over the requisite service period.

The following table summarizes

the aggregate non-cash stock-based compensation recognized in the statement of operations for stock awards, employee stock options and

employee restricted stock units (in thousands):

Three Months Ended

September 30,

Nine Months Ended

September 30,

Cost of revenues

Marketing and sales

General and administrative

Research and development

Total non-cash stock-based compensation

Non-Cash Stock-Based Compensation

Company has accounted for all stock-based compensation under the provisions of ASC 718 Compensation—Stock Compensation .

This standard requires the Company to record a non-cash expense associated with the fair value of stock-based compensation over the requisite

service period.

following table summarizes the aggregate non-cash stock-based compensation recognized in the statement of operations for stock awards,

employee stock options and employee restricted stock units (in thousands):

and administrative

and development

non-cash stock-based compensation

Employee Retirement Plan

In July 2018 the Company established

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

All eligible employees over

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

The plan provides for Company matching of employee

contributions up to 5% of eligible earnings.

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

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

The plan provides

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

Company contributions immediately vest.

The Company’s matching contribution

expense was $ 0.8 million and $ 2.7 million for the three and nine months ended September 30, 2022, respectively, and $ 0.8 million

and $ 2.3 million for the three and nine months ended September 30, 2021, respectively.

The Company’s

matching contribution expense was $ 0.9 million and $ 1.1 million for the three months ended March 31, 2023 and 2022, respectively.

Subsequent Events

On October 3, 2022, the name

of the wholly owned surviving entity from the Merger Agreement was changed to Intellibed, LLC.

contributed 100 % of the membership

interest in Intellibed, LLC to Purple LLC and Intellibed, LLC became a wholly owned subsidiary of Purple LLC.

October 15, 2022, Keira Krausz signed an offer letter to become the Chief Marketing Officer of the Company, effective November 1, 2022.

The Company will grant to Ms.

Krausz, a one-time equity grant valued at $ 400,000 based on the market price of the Company’s Class

A Common Stock on the day of the grant as an inducement grant outside the Company’s 2017 Equity Incentive Plan in accordance with

the NASDAQ inducement grant exception found in NASDAQ Listing Rule 5635(c)(4).

This grant has not yet been awarded.

InnoHold Litigation

April 3, 2023, InnoHold, LLC, Terry Pearce, and Tony Pearce (collectively, the “InnoHold Parties”) filed a complaint

against Purple LLC in the Delaware Court of Chancery, captioned InnoHold, LLC et al.

Purple Innovation, LLC , Case No.

2023-0393-PAF

The complaint alleges that Purple LLC breached the Second Amended and Restated Limited Liability Company

Agreement of Purple Innovation, LLC, dated as of February 2, 2018 (the “LLC Agreement”), and the implied covenant of good

faith and fair dealing contained therein by failing to pay the full amount of tax distributions owed under the LLC Agreement.

complaint also asserts a claim for indemnification under the LLC Agreement.

The InnoHold Parties seek damages of approximately $ 3.0

million in allegedly unpaid tax distributions as well as its legal fees and expenses incurred in connection with the litigation.

LLC has not yet formally responded to the allegations in the complaint, and the outcome of the litigation cannot be predicted at this

Cooperation Agreement

April 19, 2023, the Company entered into a Cooperation Agreement with Coliseum in connection with the previously disclosed complaint (See

Note 14— Commitments and Contingencies — Legal Proceedings for information regarding the complaint previously filed

by Coliseum).

The Cooperation Agreement became effective April 27, 2023, providing for the following :

The size of the Board was increased from seven directors to eight directors.

The Company amended and restated the Company’s Second Amended and Restated Bylaws to include references to the Company’s Lead Independent Director Charter.

Current Board member and Coliseum managing partner Adam Gray was appointed Chairman of the Board.

Current Board member Gary DiCamillo continues to serve as Lead Independent Director and was appointed chair of the Nomination and Governance Committee.

Paul Zepf and Pano Anthos resigned as directors of the Company.

The Board appointed S.

Hoby Darling, R.

Carter Pate, and Erika Serow to fill the vacancies created by increasing the size of the board and the resignations of Mr.

Scott Peterson, who is a stockholder and has served as Board Observer since the Company’s acquisition of Intellibed, will be a nominee on the Board’s slate of directors at the 2023 Annual Meeting in place of Dawn Zier, who previously announced her decision not to stand for re-election.

Other than as described above with respect to Dawn Zier, the Board will nominate all incumbent directors for election at the Company’s annual meetings of stockholders to be held in 2023 and 2024.

The Company amended its Corporate Governance Guidelines for Operation of the Board of Directors and adopted a Lead Independent Director Charter to provide for the responsibilities of the Lead Independent Director.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

The Company terminated the stockholder rights agreement it adopted on September 25, 2022 and agreed not to adopt a new stockholder rights agreement prior to the termination of the Cooperation Agreement without Coliseum’s prior consent.

The Company redeemed all outstanding shares of PRPLS and agreed not to issue any similar security or take any other action prior to the termination of the Cooperation Agreement that would change the stockholder voting standards from those in effect prior to the issuance of the PRPLS.

The PRPLS redemption payment record date was as of April 28, 2023.

● The Company will reimburse Coliseum for all out-of-pocket fees, costs, and expenses incurred in connection with the complaint, provided that such an amount shall not exceed $ 4.0 million in the aggregate.

● The Company terminated the Special Committee.

Coliseum dismissed its litigation against the Company.

● At the 2023 and 2024 annual meetings of stockholders, Coliseum will cause all of the common stock that Coliseum or any of its affiliates has the direct or indirect right to vote as of the applicable record date, to be present in person or by proxy for quorum purposes and to be voted (i) in favor of each of the candidates for election on the Company’s slate of nominees for election to the Board, (ii) against any stockholder nominations for any other directors, and (iii) against any proposals or resolutions to remove any member of the Board other than for cause.

● Coliseum agreed to be bound by customary standstill restrictions, including, among others, agreements not to acquire additional shares of the Company’s securities that would cause Coliseum’s ownership of Voting Securities to exceed 44.4 % of the total outstanding Common Stock (other than acquisitions directly from the Company), engage in proxy solicitations and related matters, form or join any “group” with respect to shares of the Company, encourage others to pursue a “contested solicitation,” or make any public proposals, subject to certain exceptions.

● Coliseum agreed to condition any proposal from it or any of its affiliates to acquire the Company or all or substantially all of the outstanding stock of the Company held by stockholders unaffiliated with Coliseum on (i) such transaction being negotiated by, and subject to the approval of, a special committee of directors of the Board who are independent with respect to Coliseum and disinterested under Delaware law and (ii) a nonwaivable condition that such transaction be approved by the affirmative vote of the holders of a majority of the Company’s outstanding common stock not beneficially owned by Coliseum or its affiliates or other parties with a material conflict of interest in such transaction.

● The Cooperation Agreement shall terminate on the day following the date on which the 2024 annual meeting of stockholders is held.

2020 Credit Agreement

On April 26, 2023, the Company

received consent under the 2020 Credit Agreement that allowed the Company’s redemption of PRPLS in an aggregate amount not to exceed

$ 150,000 as agreed by the Company in the Cooperation Agreement entered into with Coliseum, and a waiver of any possible default related

to entering into that Cooperation Agreement prior to receiving such consent.

(See Note 11— Debt — Term Loan and Revolving

Line of Credit for information regarding the consent and waiver.)

On May 10, 2023, the Company entered into a sixth amendment to the 2020

Credit Agreement.

This amendment clarified an ambiguity identified in the first sentence of Section 7.07(d), as amended by the fifth amendment,

providing that Minimum Consolidated EBITDA as of each of March 31, 2023 and June 30, 2023 pertains to the Consolidated EBITDA for each

such fiscal quarter rather than Consolidated EBITDA for the trailing twelve-month period.

Rights Agreement

April 27, 2023, pursuant to the Cooperation Agreement discussed above, the Company and Pacific Stock Transfer Company entered into the

First Amendment to the Stockholder Rights Agreement (the “Amendment”).

The Amendment changed the final expiration time of

the Stockholder Rights Agreement from September 25, 2023 to April 27, 2023.

With this, the Rights expired pursuant to the Stockholder

Rights Agreement on April 27, 2023.

As a result, all shares of preferred stock previously designated as Series A Junior Participating

Preferred Stock were eliminated and returned to the status of authorized but unissued shares of preferred stock, without designation.

Representation Preferred Linked Stock

April 27, 2023, pursuant to the Cooperation Agreement and following the consent and waiver under the 2020 Credit Agreement discussed

above, the Company redeemed all shares of the Company’s PRPLS outstanding as of April 27, 2023.

On the same date, the Company filed

with the Secretary of State for the State of Delaware a Certificate of Elimination eliminating from its Second Amended and Restated Certificate

of Incorporation, as amended, the designation of certain shares of its preferred stock as PRPLS.

As a result, all shares of preferred

stock previously designated as PRPLS were eliminated and returned to the status of authorized but unissued shares of preferred stock,

without designation.

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

What changed 10-Q

Item 1. Financial Statements