What changed in this filing

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Item 1. Financial Statements

2023-08-09 compared with 2023-05-10 · 1169 added, 943 removed, 446 unchanged (83% of the section changed)

FINANCIAL STATEMENTS

INNOVATION, INC.

Consolidated Balance Sheets

– in thousands, except for par value)

PURPLE INNOVATION, INC.

Condensed Consolidated Balance Sheets

(unaudited – in thousands, except for

Current assets:

21 unchanged sentences

Operating lease obligations, net of current portion

Other long-term liabilities, net of current

Other long-term liabilities, net of current portion

Total liabilities

3 unchanged sentences

$ 0.0001 par value, 210,000 shares authorized;

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

105,323 issued and outstanding at June 30, 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 March 31, 2023 and 448 issued and outstanding at December 31, 2022

428 issued and outstanding at June 30, 2023 and 448 issued and outstanding at December 31, 2022

Additional paid-in capital

Accumulated deficit

Total stockholders’ equity attributable to Purple Innovation,

Total stockholders’ equity attributable to Purple Innovation, Inc.

Noncontrolling interest

Total stockholders’ equity

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)

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)

Three Months Ended

Six Months Ended

Revenues, net

8 unchanged sentences

Interest expense

Other income, net

Loss on extinguishment of debt

Other income (expense), net

Change in fair value – warrant liabilities

Loss on extinguishment of debt

Total other income (expense), net

5 unchanged sentences

Weighted average common shares outstanding:

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

INNOVATION, INC.

Consolidated Statements of Stockholders’ Equity

– in thousands)

The accompanying notes are an integral part of

these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.

Condensed Consolidated Statements of Stockholders’

(unaudited – in thousands)

Stockholders’

3 unchanged sentences

Stock-based compensation

Vesting of restricted stock units

Issuance of stock upon underwritten offering, net of costs

Impact of transactions affecting

Issuance of stock under equity compensation

Issuance of stock upon underwritten

offering, net of costs

transactions affecting NCI

Balance – March 31, 2023

$ ( 374,814 )

Stock-based compensation

Exchange of stock

Proportional Representation Preferred

Linked Stock redemption fee

Additional costs associated with

underwritten public stock offering

Issuance of stock under equity compensation

transactions affecting NCI

June 30, 2023

$ ( 412,323 )

Stockholders’

1 unchanged sentence

Balance - December 31, 2021

$ ( 261,825 )

Stock-based compensation

Exercise of stock options

Vesting of restricted stock units

Issuance of stock upon underwritten offering, net of costs

Issuance of stock under equity compensation

Issuance of stock upon underwritten

public offering, net of costs

Accrued distributions

Impact of transactions affecting NCI

transactions affecting NCI

Balance – March 31, 2022

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

$ ( 275,327 )

Stock-based compensation

Issuance of common stock under equity

compensation plans

Additional costs associated with

underwritten public stock offering

transactions affecting NCI

June 30, 2022

$ ( 283,667 )

The accompanying notes are an integral part of

these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited – in thousands)

Six Months Ended

Cash flows from operating activities:

2 unchanged sentences

Non-cash interest

Change in fair value – warrant liabilities

Loss on extinguishment of debt

Change in fair value – warrant liabilities

Stock-based compensation

2 unchanged sentences

Accounts receivable

Inventories, net

Prepaid expenses and other assets

17 unchanged sentences

Payments for public offering costs

Proportional Representation Preferred Linked Stock redemption fee

Tax receivable agreement payments

1 unchanged sentence

Net cash provided by financing activities

Net increase (decrease) in cash

Net decrease in cash, cash equivalents and restricted cash

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

6 unchanged sentences

Accrued distributions

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 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.

The accompanying notes are an integral part of

these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Purple Innovation, Inc.’s

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

Purple Innovation, Inc.

with its subsidiary (the “Company” or “Purple Inc.”) is an omni-channel Company that began as 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 owned 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 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.

On October 3, 2022,

2022, Purple Inc.

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

of Purple LLC.

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

For further discussion see Note 4 — Acquisition.

Summary of Significant Accounting Policies

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

Basis of Presentation

and Principles of Consolidation

The 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.

June 30, 2023, Purple Inc.

held 99.6 % of the common units of Purple LLC and Purple LLC Class B Unit holders held 0.4 % 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, 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 and six

months ended June 30, 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.

Variable Interest Entities

Purple LLC is a variable interest

2 unchanged sentences

benefits that are potentially significant.

At March 31, 2023, Purple Inc.

At June 30, 2023, Purple Inc.

had a 99.6 % economic interest in Purple LLC and consolidated

1 unchanged sentence

statements contained herein.

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

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.

The holders of Purple LLC Class B Units (the “Class B Units”) held 0.4 % of the economic interest

in Purple LLC as of June 30, 2023.

For further discussion see Note 16 — Stockholders’ Equity.

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 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.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Recent Accounting Pronouncements

Measurement of Credit Losses

In June 2016, the FASB issued

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

Measurement of Credit Losses on Financial

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

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.

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 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):

In 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.

The 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 $ 3.3 million, totaled $ 57.0 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.

The addition of Intellibed increased product offerings

to customers, expanded market opportunities, capitalized on synergies of the combined companies, and increased 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.

The 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

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

The 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

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.

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):

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 consolidated statement

of operations during the third quarter of 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.

PURPLE 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.

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.

During the second quarter

of 2023, the Company updated the preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed,

which required a measurement period adjustment of $ 0.1 million to increase goodwill.

Based upon the purchase price allocation, the following

table summarizes the preliminary fair value of the assets acquired and liabilities assumed in the acquisition as of the date of acquisition,

the measurement period adjustments and the as adjusted as of June 30, 2023 (in thousands):

Net tangible assets (liabilities):

At date of acquisition

Measurement period adjustments

As adjusted June 30, 2023

Cash, cash equivalents and restricted cash

12 unchanged sentences

Net assets acquired and liabilities assumed

INNOVATION, INC.

Due to the close

proximity of the acquisition date to the Company’s first reporting date after the transaction, the Company recorded the assets

acquired and liabilities assumed at preliminary estimates of fair value.

As a result, 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.

While the final determination of working capital

adjustments was still pending at June 30, 2023, the table above reflects measurement period adjustments made to various assets

acquired and liabilities assumed based on updated information, and revisions to reflect the final fair value analysis associated

with the two intangible assets.

The corresponding offsets for these measurement period adjustments was goodwill.

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 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.

The 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 31, 2023.

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 June 30, 2023 and December 31, 2022.

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

was reflected in other current liabilities in the condensed consolidated balance sheet.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

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

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.

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.

The classification of fair

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

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

payable and the Company’s debt obligations.

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

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

The fair value of the Company’s debt

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

The sponsor warrant liabilities

(see Note 12 — Warrant Liabilities for more information) are Level 3 instruments and use 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 (decrease).

sponsor warrants totaling 1.9 million expired in February 2023 and were cancelled pursuant to the terms of the warrant agreement.

There were no sponsor warrants

outstanding on June 30, 2023 and the 1.9 million sponsor warrants outstanding on December 31, 2022 had a negligible fair value.

activity for the six months ended June 30, 2023 was de minimis.

The following table summarizes the Company’s total Level 3 liability

activity for the six months ended June 30, 2022.

(In thousands)

1 unchanged sentence

Fair value of warrants exercised

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.

Change in valuation inputs (1)

Fair value as of June 30, 2022

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

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Revenue from Contracts with Customers

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 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.

The 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 Revenue

The Company classifies revenue into two sales categories:

direct-to-consumer

(“DTC”) and wholesale.

The DTC category is comprised of the Company’s e-commerce channel that sells directly to consumers

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

purchase at a showroom location.

The wholesale channel includes all product sales to our wholesale partners where consumers make purchases

at their retail locations or through their online channels.

The Company classifies products into two major types:

sleep products and other.

Sleep products include mattresses, platforms, adjustable

bases, mattress protectors, pillows and sheets.

Other products include cushions and various other products.

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):

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

Other products include cushions

and various other products.

The following tables present

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

Three Months Ended

Six Months Ended

Sales Category

1 unchanged sentence

Three Months Ended

Six Months Ended

Sleep products

Revenues, net

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

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

Contract Balances

Payment for sale of products

through the e-commerce online channel, third-party online retailers, Purple 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 $ 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.

prepayments totaled $ 5.5 million and $ 4.5 million at June 30, 2023 and December 31, 2022, respectively.

During the six months ended June

30, 2023 and 2022, the Company recognized all revenue that was deferred in customer prepayments at December 31, 2023 and 2022, respectively.

Inventories, Net

net consisted of the following (in thousands):

Inventories, net consisted

of the following (in thousands):

Raw materials

3 unchanged sentences

Inventories, net

INNOVATION, INC.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Property and Equipment, Net

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

Property and equipment, net

consisted of the following (in thousands):

Equipment in progress

5 unchanged sentences

Property and equipment, net

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

31, 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):

Equipment in progress reflects

equipment, primarily related to mattress manufacturing, which is being constructed and was not in service at June 30, 2023 or December

Interest capitalized on borrowings during the active construction period of major capital projects totaled $ 0.1 million and

$ 0.5 million during the three and six months ended June 30, 2023, respectively and totaled $ 0.2 million and $ 0.4 million during the three

and six months ended June 30, 2022, respectively.

Depreciation expense was $ 4.9 million and $ 9.7 million during the three and six months

ended June 30, 2023, respectively, and totaled $ 3.6 million and $ 7.1 million during the three and six months ended June 30, 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 2036.

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.

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 balances for finance leases,

which totaled $ 0.9 million and $ 1.0 million at June 30, 2023 and December 31, 2022, respectively, were included with operating lease right-of-use

assets on the condensed consolidated balance sheets.

The following table presents

the Company’s lease costs (in thousands):

Three Months Ended

Six Months Ended

Total lease costs

INNOVATION, INC.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

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

2023 (excluding

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

The table below reconciles

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

the condensed consolidated balance sheet at June 30, 2023 (in thousands):

2023 (excluding the six months ended June 30, 2023) (a)

Total operating lease payments

1 unchanged sentence

Present value of operating lease payments

(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

consists of $ 10.5 million of undiscounted cash flows offset by $ 0.8 million of tenant improvement allowances which are expected to be

fully utilized in fiscal 2023.

As of June 30, 2023 and December

31, 2022, the weighted-average remaining term of operating leases was 8.4 years and 8.8 years, respectively, and the weighted-average

discount rate of operating leases was 5.56 % and 5.51 %, respectively.

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

The following table provides

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

2023 and 2022 (in thousands):

Six Months Ended

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

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

(b) Operating cash flows paid for operating leases are included within the change in other assets and liabilities within the Condensed Consolidated Statement of Cash Flows offset by non-cash right-of-use asset amortization and lease liability accretion.

Other Current Liabilities

current liabilities consisted of the following (in thousands):

Other current liabilities

consisted of the following (in thousands):

Warranty accrual – current portion

1 unchanged sentence

Accrued sales tax liability assumed in acquisition

Accrued affiliate marketing

Accrued property taxes

1 unchanged sentence

Total other current liabilities

INNOVATION, INC.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

consisted of the following (in thousands):

Debt consisted of the following

(in thousands):

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

Term Loan and 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.

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

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 had a term of five years and carried the same interest

provisions as the term debt.

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

(See Note 21— Subsequent Events for information on the new asset-based lending arrangement entered into by the Company on

August 7, 2023) .

Pursuant to a Pledge and Security

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

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

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

the 2020 Credit Agreement.

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

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

interest in Purple LLC.

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

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

The 2020 Credit Agreement

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

Under the 2020 Credit Agreement, Purple LLC

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

was 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

In particular, Purple LLC was (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.

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

(as defined in the 2020 Credit Agreement).

Purple LLC was 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 failed to perform their obligations under these and

other covenants, or if any event of default had occurred, the revolving loan commitments under the 2020 Credit Agreement could have been

terminated and any outstanding borrowings, together with accrued interest, could have been declared immediately due and payable.

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.

Pursuant to 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.

The Company accounted for this amendment

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

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% as long as the applicable liquidity threshold is met.

If the Company did not meet this threshold,

the interest rate would have increased to SOFR with a floor of 0.5% plus 9.00%.

Once the Company achieved a consolidated leverage ratio

that was below 3.00 to 1.00, the interest rate would have been based on SOFR with a floor of 0.5% plus a 3.00% to 3.75% margin depending

on the consolidated leverage ratio.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

covenants required under the 2020 Credit Agreement.

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

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

this amendment, 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 .

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.

considered a related party of the Company in that Adam Gray, a member of our board of directors, serves as a managing partner of Coliseum .

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 .

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

Capital Management, LLC.

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

On 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.

On 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.

In December 2022, the Company

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

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

would 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 thereafter.

In addition, the minimum fixed charge coverage ratio covenant was not to 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

The amendment also revised the lease incurrence test, which allowed the Company to incur ten new showroom leases for stores

that would open in 2023 and six new leases for stores that would open in 2024.

Moreover, beginning in the fourth quarter of 2023, we would

have been allowed to begin entering into new leases for stores that would open in 2024, subject to leverage ratio requirements.

ratio was to 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 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.

In addition, 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 would spring forward to June 30, 2024 if consolidated EBITDA was 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 would increase to $30.0 million for each three-month

period following the applicable fiscal quarter if the leverage ratio was greater than 3.00x for any fiscal quarter ending on or after

the third quarter of 2023.

Pursuant 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.

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

Linked Stock (“PRPLS”) issued by the Company on February 24, 2023, in an aggregate amount not to exceed $ 0.2 million as agreed

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

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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.

(See Note 15— Related Party Transactions — Coliseum Capital Management,

LLC for information regarding the complaint previously filed by Coliseum, for information regarding events leading up to the Company’s

issuance of the PRPLS, and for information regarding 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, which provided that Minimum Consolidated EBITDA as of each of March 31, 2023 and June

30, 2023 pertained to Consolidated EBITDA for each such fiscal quarter rather than Consolidated EBITDA for the trailing twelve-month period.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Interest expense under the

2020 Credit Agreement totaled $ 0.5 million and $ 1.1 million for the three and six months ended June 30, 2023, respectively, and totaled

$ 0.9 million and $ 2.0 million for the three and six months ended June 30, 2022, respectively.

Warrant Liabilities

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These sponsor warrants contained certain

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

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

The liability for these

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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:

Unexercised sponsor warrants

totaling 1.9 million expired in February 2023 and were cancelled pursuant to the terms of the warrant agreement.

These sponsor warrants

had no fair value on the date of expiration.

There were no sponsor warrants

exercised during the six months ended June 30, 2022.

The 1.9 million sponsor warrants outstanding at June 30, 2022 had a fair value of

$ 0.1 million.

The 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

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Expected dividend yield

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.

During the three and six months

ended June 30, 2022, the Company recognized gains of $ 0.3 million and $ 4.3 million, respectively, in its condensed consolidated statements

of operations related to decreases in the fair value of the sponsor warrants outstanding at the end of the respective period.

Other Long-Term Liabilities

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

Other long-term liabilities

consist of the following (in thousands):

Warranty accrual

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Other long-term liabilities, net of current portion

INNOVATION, INC.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Commitments and Contingencies

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.

Warranty Liabilities

The Company provides a limited

warranty on most of the products it sells.

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

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

for any current or expected trends as appropriate.

Actual warranty claim costs could differ from these estimates.

The Company regularly

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

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

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

The Company had the following

activity for warranty liabilities (in thousands) :

Three Months Ended

Six Months Ended

Balance at beginning of period

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Balance at end of period

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

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.

There were no tax distributions paid during the six months ended June 30, 2023

At June 30, 2023, the Company’s condensed consolidated balance sheet had $ 0.1 million of accrued tax distributions included

in other current liabilities.

Subscription Agreement

and Preemptive Rights

In February 2018, in

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

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

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

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

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

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

The subscription agreement

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

It also provides them

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

The Company also entered into

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

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

the warrants received by CCP, Blackwell and CDF.

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

Rights of Securities

The holders of certain warrants

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

INNOVATION, INC.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

Purple LLC Class B

Unit Exchange Right

On February 2, 2018, in connection

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Unit holders who become a party thereto (the “Exchange Agreement”), which provides for the exchange of Purple LLC 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 (the “Class B Units”) and shares of Class B common stock (together with an equal number of Class B Units, the “Paired

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

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

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

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

In December 2018, InnoHold distributed

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

In June 2019, InnoHold distributed

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

Holders of Class

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

In certain cases, adjustments

4 unchanged sentences

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

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

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

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

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

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

for transfer taxes, stamp taxes and similar duties.

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

INNOVATION, INC.

The right of a holder of Paired

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

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

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

traded partnership” under applicable tax laws.

The Company and each holder

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

stamp taxes and similar duties.

There were a de minimis number

of Paired Securities exchanged for Class A common stock during the six months ended June 30, 2023.

There were no Paired Securities exchanged

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

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

of One-to-One Ratios

Maintenance of One-to-One

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.

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.

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

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

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

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

capture data and collect and remit taxes.

Non-Income Related

The Company complies with

current law and collects and reports on sales tax and other taxes and required fees in all states in which it does business.

The application

of existing, new or revised taxes and fees 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 and fees on the Company’s business could also create significant increases in internal costs necessary to capture data and

collect and remit taxes and pay the fees.

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

18 unchanged sentences

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.

On May 12, 2023, the

opinion and order were appealed to the US Court of Appeals for the Federal Circuit.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

23 unchanged sentences

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 parties have completed the fact discovery and the expert discovery

phases of the arbitration, and a two-week arbitration hearing began on July 31, 2023.

ReST was sanctioned for improper litigation conduct,

and certain defenses and claims were stricken and costs were ordered to be paid by ReST to Purple LLC.

Purple LLC seeks over $ 4

million in damages from ReST, whereas at this time ReST has lowered its demand and claims that Purple LLC is liable to it for approximately

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

However, Purple LLC

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

However, Purple LLC intends to vigorously pursue its claims

and defend against the claims made by ReST.

On May 3, 2022, Purple LLC

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Pursuant to the agreement, Photon

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

Purple LLC paid Photon $ 0.9 million under the Agreement.

was required to rebuild Purple Innovation 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 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 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.

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 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.

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.

Purple LLC expects

discovery to conclude in fall 2023.

The Company intends to vigorously litigate its claims to resolution.

On August 5, 2022, Purple

4 unchanged sentences

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.

§ 1337 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 design patent, infringe certain Purple LLC registered trademarks, and/or infringe certain Purple LLC utility

patents, specifically including U.S.

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.

On September 6, 2022, the ITC instituted Investigation No.

(i) a General

Exclusion Order excluding from entry into the United States all pillow and seat cushion products, regardless of the source of those products,

that infringe Purple LLC’s asserted intellectual property right;

(ii) Limited 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 rights;

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.

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.

Fact and expert discovery have been completed.

Purple LLC has entered into settlement agreements with seven Respondents, and the ITC issued Consent Orders under which those seven Respondents

agreed to no longer import infringing products into the United States.

Purple LLC also has voluntarily terminated the Investigation

as to a number of other Respondents.

No actively litigating Respondents remain in the case.

On July 13, 2023, the ITC Administrative

Law Judge issued an Initial Determination (“ID”) in which she granted Purple LLC’s Motion for Summary Determination

finding that the four remaining Respondents have violated Section 337.

The ID also recommended that the ITC issue a General Exclusion

Order excluding from entry into the United States all pillows that infringe certain asserted claims of the ‘445 patent, regardless

of the source of those products, or, in the alternative, Limited Exclusion Orders directed specifically to the four remaining Respondents.

The ID further recommended that the ITC issue Cease and Desist Orders directed specifically to the four remaining Respondents.

ITC’s target date for completion of the investigation is currently November 13, 2023.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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.

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.

Trademark Registration No.

(d) violated Lanham

Act § 43(a), 15 U.S.C.

§ 1125(a) by committing acts of trademark infringement;

I infringed U.S.

(f) infringed

(g) infringed U.S.

(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,

District Court for the District of Utah, currently styled Purple Innovation, LLC v.

Foshan Dirani

Design Furniture Co., Ltd.

2:22-cv-00620-HCN-DAO, against numerous entities and individuals from the People’s Republic

of China and South Korea (“Defendants”).

Purple LLC subsequently entered into settlement agreements with seven Defendants

and voluntarily dismissed without prejudice its claims against certain other Defendants.

On March 7, 2023, Purple LLC filed a First

Amended Complaint.

The operative complaint alleges that the remaining Defendants have infringed certain Purple LLC registered trademarks,

have infringed Purple LLC trademark rights and committed unfair competition under Lanham Act § 43(a), have infringed a certain Purple

LLC design patent, have infringed certain Purple LLC utility patents, have violated Utah Unfair Competition Act, Utah Code § 13-5a-101 et

and/or have committed common law unfair competition.

The operative 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

On June 13, 2023, the Court issued

a Default Certificate entering default against all remaining Defendants.

On June 15, 2023, Purple LLC filed a Motion for Preliminary

Injunction, Asset Freeze, and Expedited Discovery, which currently remains pending, against all remaining Defendants.

intends to vigorously litigate its claims to resolution.

In December 2022, Terry and

Tony Pearce, Purple’s founders, filed a complaint against Purple Inc.

in the Fourth Judicial District Court in the State of Utah.

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 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 2021.

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.

has moved to dismiss the

Pearces’ claims in full, arguing that the Pearces’ legal theories are flawed and that the amended pleading reflects the Pearces’

inability to rehabilitate their claims.

The Company maintains insurance to cover the costs of defending against claims of this nature

and intends to continue to vigorously defend against these claims.

On April 3, 2023, InnoHold,

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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.

On June 13, 2023, Purple

LLC filed an answer to the complaint denying the InnoHold Parties’ allegations, setting forth its affirmative defenses, and requesting

dismissal of all claims and entry of judgment in Purple LLC’s favor.

The outcome of the litigation cannot be predicted

at this early stage in the proceedings.

Purple LLC intends to vigorously defend against these claims.

On March 24, 2023, Purple

LLC filed a complaint against Tempur Sealy International, Inc., Sealy Technology LLC and Sealy Mattress Manufacturing Co., LLC (collectively,

“Sealy”) in the U.S.

District Court for the Middle District of North Carolina for infringement of Purple LLC’s U.S.

11,317,733 entitled “Mattress Including an Elastomeric Cushioning Element and a Pocketed Coil Layer and Related Methods.”

On July 17, 2023, Purple LLC filed a First Amended Complaint further detailing Sealy’s infringement of the patent through Sealy’s

direct and indirect infringement by making, using, offering for sale, and/or importing into the United States Sealy FlexGrid Hybrid Construction

Purple seeks judgment of willful infringement, trebled damages, a permanent injunction, prejudgment and post-judgment interest,

costs, expenses, and attorneys’ fees.

Sealy filed its response to Purple’s First Amended Complaint on July 31, 2023.

has yet to commence;

and no trial date has been set.

Purple LLC intends to vigorously litigate its claims to resolution.

On March 27, 2023, Sealy

Technology, LLC (“Sealy Technology”) filed a Petition for Cancellation with the U.S.

Patent and Trademark Office, Trademark

Trial and Appeal Board (“TTAB”), seeking cancellation of Purple LLC’s Trademark Registration No.

5,416,146 for HYPER-ELASTIC

POLYMER in Class 20 for “elastomeric polymer in pre-shamed form sold as an integral component of pillows” (the “Registration”).

On June 6, 2023, Purple LLC filed a motion to dismiss (the “Motion”).

On June 9, 2023, the TTAB suspended proceedings

pending the resolution of the Motion.

On June 18, 2023, Sealy Technology filed a response to the Motion, along with an Amended

The Amended Petition seeks cancellation of the Registration on the basis that the term is generic.

Purple LLC filed

its reply in support of the Motion, thus completing the briefing, on July 10, 2023.

The Motion remains pending, and the proceeding

remains suspended pending its resolution.

Purple LLC intends to vigorously defend Sealy Technology’s petition.

The Company is from time to

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by reason thereof, would have a material adverse effect on the financial condition or future results of the Company.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Related Party Transactions

Company had various transactions with entities or individuals which are considered related parties.

Capital Management, LLC

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.

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

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.

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

4 unchanged sentences

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 September 25, 2022, with the

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

was formed 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.

Initially, 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 the unsolicited and non-binding proposal from

Coliseum to acquire the outstanding common stock of the Company not already beneficially owned by Coliseum.

On January 12, 2023, the Company

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

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 common stock and Class B common stock to stockholders of record at the close of business on October

The 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 .

On February 14, 2023, the

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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.

While the PRPLS were outstanding,

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.

The 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 against the Company and several members of its Board alleging that the Company and the named directors authorized an improper

dividend of preferred stock in bad faith to impede stockholder voting rights and interfered with Coliseum’s nomination of a competing

slate of director candidates ahead of our 2023 annual meeting of stockholders.

On April 19, 2023, the Company entered into a Cooperation

Agreement with Coliseum to resolve the litigation.

The Cooperation Agreement, which became effective on April 27, 2023, resulted in the

The size of the Board was increased from seven directors to eight directors.

The Company amended and restated its Second Amended and Restated Bylaws to include references to the Lead Independent Director Charter.

Board member and Coliseum managing partner Adam Gray was appointed Chairman of the Board.

Board member Gary DiCamillo continued to serve as Lead Independent Director and was appointed chair of the Nomination and Governance Committee.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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 the increased the size of the board and the resignations of Mr.

Scott Peterson, a stockholder and Board Observer since the Company’s acquisition of Intellibed, was included as a nominee on the Board’s slate of directors at the 2023 Annual Meeting in place of Dawn Zier, who had previously announced her decision not to stand for re-election.

Other than as described above with respect to Dawn Zier, the Board nominated all incumbent directors for election at our 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.

● The Company terminated the stockholder rights agreement 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.

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.

● 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.

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.

made a $ 0.1 million payment to redeem the PRPLS based on a record date as of April 28, 2023.

The PRPLS redemption payment was reflected

in the Company’s consolidated balance sheet as a reduction to additional paid-in capital.

● The Company agreed to reimburse Coliseum for up to $ 4.0 million of out-of-pocket fees, costs, and expenses incurred in connection with the lawsuit.

● The Company terminated the Special Committee.

● Coliseum dismissed its litigation against the Company.

● At the 2023 and 2024 annual meetings of stockholders, Coliseum caused or will cause all of the common stock that Coliseum or any of its affiliates had 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.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Purple Founder Entities

TNT Holdings, LLC (herein

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

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

TNT Holdings and InnoHold

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

Board following the Business Combination.

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

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

Founders also resigned as employees of Purple LLC and retired from the Company’s Board in August 2020.

TNT Holdings owned the Alpine

7 unchanged sentences

Purple LLC incurred $ 0.3 million and $ 0.6 million in rent expense to 123E LLC or TNT Holdings for the building

lease of the Alpine facility for the three months ended March 31, 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,

on September 3, 2021, Purple LLC gave notice to 123E LLC that it intended to exercise its right to an early termination of the lease to

occur on September 30, 2022.

On July 20, 2022, the Company entered into an amendment to its Alpine facility lease agreement with 123E

The amendment rescinded the Company’s previous notice of termination that was scheduled to be effective September 30, 2022

and extended the term such that the lease will remain in effect until September 30, 2023.

lease of the Alpine facility for the three and six months ended June 30, 2023, respectively, and $ 0.2 million and $ 0.4 million for the

three and six months ended June 30, 2022, respectively.

Purple LLC continues to lease the Alpine facility that was formerly the Company

headquarters, for use in production, research and development and video production.

In accordance with the terms of that lease, on September

3, 2021, Purple LLC gave notice to 123E LLC that it intended to exercise its right to an early termination of the lease to occur on September

On July 20, 2022, the Company entered into an amendment to its Alpine facility lease agreement with 123E LLC.

The amendment

rescinded the Company’s previous notice of termination that was scheduled to be effective September 30, 2022 and extended the term

such that the lease will remain in effect until September 30, 2023.

During the six months ended

June 30, 2023, a former employee of Purple LLC who received distributions of Paired Securities from InnoHold exchanged a minimal number

of Paired Securities for Class A common stock.

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

Stockholders’ Equity

A Common Stock

Company has 210.0 million shares of Class A common stock authorized at a par value of $ 0.0001 per share.

Holders of the Company’s

Class A common stock are entitled to one vote for each share held on all matters to be voted on by the stockholders and participate in

dividends, if declared by the Board, or receive any portion of any such assets in respect of their shares upon liquidation, dissolution,

distribution of assets or winding-up of the Company in excess of the par value of such stock.

Holders of Class A common stock and holders

of Class B common stock voting together as a single class, have the exclusive right to vote for the election of directors and on all

other matters properly submitted to a vote of the stockholders.

Holders of Class A common stock and Class B common stock are entitled

to one vote per share on matters to be voted on by stockholders.

At March 31, 2023, 105.0 million shares of Class A common stock were

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

B Common Stock

Class A Common Stock

The Company has 210.0 million

shares of Class A common stock authorized at a par value of $ 0.0001 per share.

Holders of the Company’s Class A common stock are

entitled to one vote for each share held on all matters to be voted on by the stockholders and participate in dividends, if declared by

the Board, or receive any portion of any such assets in respect of their shares upon liquidation, dissolution, distribution of assets

or winding-up of the Company in excess of the par value of such stock.

Holders of Class A common stock and holders of Class B common stock

voting together as a single class, have the exclusive right to vote for the election of directors and on all other matters properly submitted

to a vote of the stockholders.

Holders of Class A common stock and Class B common stock are entitled to one vote per share on matters

to be voted on by stockholders.

At June 30, 2023, 105.3 million shares of Class A common stock were outstanding.

Class B Common Stock

The Company has 90.0 million

shares of Class B common stock authorized at a par value of $ 0.0001 per share.

10 unchanged sentences

of the Company in excess of the par value of such stock.

connection with the Business Combination, approximately 44.1 million shares of Class B common stock were issued to InnoHold as part of

the equity consideration.

InnoHold subsequently transferred a portion of its shares to permitted transfers and exchanged its remaining

shares for Class A common stock that it sold.

All of the 0.4 million shares of Class B common stock outstanding at March 31, 2023 were

held by other parties.

In connection with the Business

Combination, approximately 44.1 million shares of Class B common stock were issued to InnoHold as part of the equity consideration.

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

All of the 0.4 million shares of Class B common stock outstanding at June 30, 2023 were held by other parties.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Preferred Stock

The Company has 5.0 million

4 unchanged sentences

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.

At June 30, 2023, there were no shares of preferred stock outstanding.

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.

had the right to vote 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.

On February 24, 2023, the Company issued 1.0 million PRPLS shares which traded with the common stock.

While the PRPLS were outstanding,

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.

The 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.

As a result of the Cooperation Agreement, 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.

made a $ 0.1 million payment to redeem the PRPLS based on a record date as of April 28, 2023.

The PRPLS redemption payment was reflected

in the Company’s consolidated balance sheet as a reduction to additional paid-in capital.

At June 30, 2023 there were no PRPLS issued

or outstanding.

See Note 15— Related Parties — Coliseum Capital Management, LLC for additional detail regarding

redemption of the PRPLS.

Sponsor Warrants

There were 12.8 million sponsor warrants issued pursuant to a private

placement simultaneously with the Company’s initial public offering.

The 1.9 million sponsor warrants that remained outstanding

at December 31, 2022 expired in February 2023 and were cancelled pursuant to the terms of the warrant 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

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

Noncontrolling Interest

Noncontrolling interest (“NCI”)

is the membership interest in Purple LLC held by holders other than the Company.

At March 31, 2023 and December 31, 2022, the combined

At June 30, 2023 and December 31, 2022, the combined

NCI percentage in Purple LLC was 0.4 % and 0.5 %, respectively.

1 unchanged sentence

of Purple LLC and reflected the proportionate interest held by all such Purple LLC Class B Unit holders as NCI.

INNOVATION, INC.

The Company’s sole material

asset is Purple LLC, which is treated as a partnership for U.S.

federal income tax purposes and for purposes of certain state and local

income taxes.

Purple LLC’s net taxable income and any related tax credits are passed through to its members and are included in

the members’ tax returns, even though such net taxable income or tax credits may not have actually been distributed.

While the Company

consolidates Purple LLC for financial reporting purposes, the Company will be taxed on its share of earnings of Purple LLC not attributed

to the noncontrolling interest holders, which will continue to bear their share of income tax on its allocable earnings of Purple LLC.

The income tax burden on the earnings taxed to the noncontrolling interest holders is not reported by the Company in its consolidated

financial statements under GAAP.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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.

The Company reported income

tax expense related to various state taxes of $ 0.1 million on a pretax loss of $ 60.9 million for the six months ended June 30, 2023 as

compared to an income tax benefit of $ 6.0 million on a pretax loss of $ 28.0 million for the six months ended June 30, 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.

in an effective tax rate of ( 0.24 )% for the six months ended June 30, 2023 as compared to 21.4 % for the six months ended June 30, 2022.

The Company’s effective tax rate for the six months ended June 30, 2023 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 June 30, 2023.

In connection with the Business

Combination, the Company entered into a tax receivable agreement with InnoHold, which provides for the payment by the Company to InnoHold

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

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

realize in certain circumstances) in periods after the Closing as a result of (i) any tax basis increases in the assets of Purple LLC

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

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

and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, payments it makes under

the agreement.

As noncontrolling interest

5 unchanged sentences

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

INNOVATION, INC.

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 June 30, 2023, the Company estimated that if all the remaining 0.4 million Class B units were redeemed for

shares of its Class A common stock, the tax receivable agreement liability would be approximately $ 168.5 million.

If the Company

experiences 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), it 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 $ 110.7 million on a discounted basis.

This potential early termination payment can be significantly

impacted by the discounted interest rate at the time of termination.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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.

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 operations.

Accrued interest and penalties would be included on the related tax liability line in the consolidated

balance sheet.

As of June 30, 2023, no material uncertain tax positions were recognized as liabilities in the condensed consolidated financial

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):

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 net loss per share for the periods presented (in thousands,

except per share amounts):

Three Months Ended

Six Months Ended

Net loss attributable to Purple Innovation, Inc.

5 unchanged sentences

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

Equity Incentive Plan

For the three and six months

ended June 30, 2023, the Company excluded 3.0 million and 3.4 million, respectively, of Paired Securities convertible into an equal number

of Class A shares, stock options and restricted stock as the effect was anti-dilutive.

For the three and six months ended June 30, 2022,

the Company excluded 3.3 million and 3.5 million, respectively, of Class A common shares issuable upon conversion of certain warrants,

stock options, restricted stock and Class A shares subject to vesting as the effect was anti-dilutive.

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)

Notes to Condensed Consolidated Financial Statements

Equity Compensation Plans

2017 Equity Incentive

The Purple Innovation, Inc.

2017 Equity Incentive Plan, as amended and restated (the “2017 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

As of June 30, 2023, an aggregate of 2.6 million shares remain available for issuance or use under the 2017 Plan.

Class A Stock Awards

In June 2023, the Company

granted stock awards under the 2017 Incentive Plan to non-executive directors on the Board.

The stock awards vested immediately and the

Company issued 0.2 million shares of Class A common stock and recognized $ 0.6 million in expense during the three months ended June 30,

2023, which represented the fair value of the stock awards on the grant date.

Amended and Restated

Grant Agreements

On 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 2022.

The amended agreements

revised the vesting schedule of the awards included in each grant.

Pursuant to these agreements, 0.3 million of restricted stock units

and stock options fully vested on March 25, 2023, another 0.3 million of restricted stock units and stock options, which included conditionally

granted awards that were approved by shareholders at the 2023 Annual Meeting, will vest on March 25, 2024, and the remaining 0.3 million

of conditionally granted awards approved by shareholders at the 2023 Annual Meeting 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.

Employee Stock Options

Following receipt of shareholder

approval of certain amendments to the 2017 Plan at the 2023 Annual Meeting, the 0.3 million stock options granted to the Company’s

chief executive officer in June 2023 have an exercise price of $ 6.82 per option and expire in four years and vest over a two-year period.

The Company determined the fair value of this award to be $ 0.1 million on the effective date, 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 six months ended June 30, 2023 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 six months ended June 30, 2023 :

(in thousands)

1 unchanged sentence

Forfeited/cancelled

Options outstanding as of March 31, 2023

INNOVATION, INC.

Options outstanding as of June 30, 2023

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

and exercisable stock options as of March 31, 2023 are as follows:

Outstanding and exercisable stock options as of

June 30, 2023 are as follows :

Options Outstanding

2 unchanged sentences

(in thousands)

Remaining Life (Years)

Remaining Life

(in thousands)

1 unchanged sentence

(in thousands)

following table summarizes the Company’s unvested stock option activity for the three months ended March 31, 2023:

The following table summarizes

the Company’s unvested stock option activity for the six months ended June 30, 2023:

(in thousands)

Weighted Average

Nonvested options as of January 1, 2023

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:

Nonvested options as of June 30, 2023

The estimated fair value of

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

For the three and six months ended June 30,

2023, the Company recognized stock option expense of $ 0.1 million and $ 0.4 million, respectively.

The Company recorded stock option expense

of $ 0.2 million and $ 0.3 million during the three and six months ended June 30, 2022, respectively.

As of June 30, 2023, outstanding

stock options had $ 0.3 million of unrecognized stock compensation cost with a remaining recognition period of 1.7 years.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Employee Restricted

During the second quarter

of 2023, the Company granted 2.4 million restricted stock units under the 2017 Incentive Plan to certain members of the Company’s management

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 $ 2.75 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 $ 1.92 per share using a Monte Carlo Simulation of a Geometric Brownian Motion stock path model with the following

weighted average assumptions:

Trading price of common stock on measurement date

Risk free interest rate

Expected life in years

Expected volatility

Expected dividend yield

The following table summarizes

the Company’s restricted stock unit activity for the six months ended June 30, 2023:

(in thousands)

Nonvested restricted stock units as of January 1, 2023

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.

Nonvested restricted stock units as of June 30, 2023

The Company recorded restricted

stock unit expense of $ 0.9 million and $ 1.8 million during the three and six months ended June 30, 2023, respectively, and $ 0.5 million

and $ 0.9 million during the three and six months ended June 30, 2022, respectively.

As of June 30, 2023, outstanding

restricted stock units had $ 7.7 million of unrecognized stock compensation cost with a remaining recognition period of 2.3 years.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Non-Cash Stock-Based Compensation

Company has accounted for all stock-based compensation under the provisions of ASC 718 Compensation—Stock Compensation .

This standard requires the Company to record a non-cash expense associated with the fair value of stock-based compensation over the requisite

service period.

following table summarizes the aggregate non-cash stock-based compensation recognized in the statement of operations for stock awards,

employee stock options and employee restricted stock units (in thousands):

and administrative

and development

non-cash stock-based compensation

Aggregate Non-Cash

Stock-Based Compensation

The Company has accounted

for all stock-based compensation under the provisions of ASC 718 Compensation—Stock Compensation .

This standard requires

the Company to record a non-cash expense associated with the fair value of stock-based compensation over the requisite service period.

The following table summarizes

the aggregate non-cash stock-based compensation recognized in the statement of operations for stock awards, employee stock options and

employee restricted stock units (in thousands):

Three Months Ended

Six Months Ended

Cost of revenues

Marketing and sales

General and administrative

Research and development

Total non-cash stock-based compensation

Employee Retirement Plan

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

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

The plan provides

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

In July 2018 the Company established

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

All eligible employees over

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

The plan provides for Company matching of employee

contributions up to 5% of eligible earnings.

Company contributions immediately vest.

The Company’s

matching contribution expense was $ 0.9 million and $ 1.1 million for the three months ended March 31, 2023 and 2022, respectively.

The Company’s matching contribution

expense was $ 0.9 million and $ 1.8 million for the three and six months ended June 30, 2023, respectively, and $ 0.9 million and

$ 1.9 million for the three and six months ended June 30, 2022, respectively.

Subsequent Events

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.

INNOVATION, INC.

New Credit Agreements

On August 7, 2023, Purple

LLC, Purple Inc.

and Intellibed, (collectively the “Loan Parties”) entered into a term loan credit agreement (the “Term

Loan Agreement”) with Callodine Commercial Finance, LLC and a group of financial institutions (the “Term Loan Lenders”).

Also, on August 7, 2023, the Loan parties entered into a separate financing arrangement with the Bank of Montreal and a group of financial

institutions (collectively the “ABL Lenders”) that provides for a revolving asset-based credit facility (the “ABL Agreement”).

Pursuant to entering into these agreements, the Company incurred fees and expenses of $ 3.1 million that will be reflected as debt issuance

costs in the third quarter of 2023.

Term Loan Agreement and Term Loan Pledge

and Security Agreement

The Term Loan Agreement provides for up to $ 25.0 million of term loans,

with up to $ 5.0 million of incremental term loans available, subject to certain conditions (collectively, the “Term Loans”).

Proceeds from the Term Loans, which were fully drawn at closing, will be used for general corporate purposes.

The borrowing rates under

the Term Loan Agreement are based on SOFR, plus a credit spread adjustment of 0.15% per annum, plus 8.5% per annum, with a SOFR floor

of 2.0% per annum.

The Term Loans will be repaid at the earlier of (a) a three-year amortization schedule ending on August 7, 2026 or

(b) the payment in full of the ABL Agreement.

The Term Loans may be prepaid in whole or in part at any time, but subject to a prepayment

There may also be mandatory prepayment obligations based on certain asset dispositions, casualty events and extraordinary receipts.

Once repaid, no portion of the Term Loans may be reborrowed.

Pursuant to a pledge and security

agreement, the Loan Parties’ obligations under the Term Loan Agreement are secured by a perfected second-priority security interest

in the cash, inventory and accounts receivable of the Loan Parties, and a perfected first-priority security interest in substantially

all other assets of the Loan Parties, including, without limitation, the intellectual property and equipment of the Loan Parties, subject

to certain exceptions.

The Term Loan Agreement provides

for customary events of default such as for non-payment and failure to perform or observe covenants.

The Term Loan Agreement contains

customary indemnifications that benefit the Term Loan Lenders.

The Term Loan Agreement also contains representations,

warranties and certain covenants of the Loan Parties.

While any amounts are outstanding under the Term Loan Agreement, the Loan Parties

are subject to a number of 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, each of which are subject to certain exceptions.

In particular, the Loan Parties are (i) restricted from

incurring additional debt up to certain amounts, subject to limited exceptions, as set forth in the Term Loan Agreement, and (ii) required

to maintain a minimum revolving loan availability under the ABL Agreement.

Each Loan Party is also restricted from paying dividends or

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

If the Loan Parties fail to perform

their obligations under these and other covenants, or should any event of default occur, the Term Loans, together with accrued interest,

could be declared immediately due and payable.

PURPLE 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.

● 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.

ABL Agreement and ABL Pledge and Security

The ABL Agreement provides for up to $50.0 million of revolving loans

subject to a borrowing base calculation (with sub-facilities for swing line loans and the issuance of letters of credit), with incremental

increases available up to $20.0 million, subject to certain conditions (the “ABL Loans”).

No funds were drawn under the ABL

Agreement at closing.

The Company anticipates that any funds drawn from under the ABL Agreement will be used to finance permitted acquisitions

defined in the agreement and for working capital, capital expenditures and other general corporate purposes.

Outstanding principal and

accrued interest on the ABL Loans shall be repaid on August 7, 2026.

The borrowing rates under

the ABL Agreement will accrue on a three-tiered grid based on revolving availability, ranging from (i) SOFR, plus a credit spread adjustment

of 0.10% per annum, plus 2.75% per annum to (ii) SOFR, plus a credit spread adjustment of 0.10% per annum, plus 3.25% per annum, with

a SOFR floor of 0% per annum.

The ABL Loans may be prepaid in whole or in part at any time without premium or penalty, subject to reimbursement

of certain costs.

There may be mandatory prepayment obligations based on certain asset dispositions, casualty events, equity issuances

and extraordinary receipts.

Pursuant to a pledge and security

agreement, the Loan Parties’ obligations under the ABL Agreement are secured by a perfected first-priority security interest in

the cash, inventory and accounts receivable of the Loan Parties, and a perfected second-priority security interest in substantially all

of the other assets of the Loan Parties, subject to certain exceptions.

The ABL Agreement provides

for customary events of default such as non-payment and failure to perform or observe covenants.

The ABL Agreement contains customary

indemnifications that benefit the ABL Lenders.

The ABL Agreement also contains

representations, warranties and certain covenants of the Loan Parties.

The Loan Parties are subject to 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, in each case, subject to certain

In particular, the Loan Parties are (i) restricted from incurring additional debt up to certain amounts, subject to limited

exceptions, as set forth in the ABL Agreement, and (ii) if revolving availability under the ABL Agreement is less than a specified amount,

required to maintain a minimum Consolidated Fixed Charge Coverage Ratio (as defined in the ABL Agreement), and (iii) required to maintain

a specified minimum revolving availability.

Each Loan Party is also restricted from paying dividends or making other distributions or

payments on its respective capital stock, subject to limited exceptions.

If the Loan Parties fail to perform their obligations under these

and other covenants, or should any event of default occur, the revolving loan commitments under the ABL Agreement may be terminated and

any outstanding ABL Loans, together with accrued interest, could be declared immediately due and payable and any outstanding letters of

credit may be required to be cash collateralized.

Termination of 2020 Credit Agreement

In connection with the Company’s execution of the Term Loan Agreement

and ABL Credit Agreement, the Company terminated its 2020 Credit Agreement.

The Company had no outstanding borrowings under the term loan

or the revolving line of credit at the time of termination.

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