What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-10 · 621 added, 465 removed, 66 unchanged (94% of the section changed)

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

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

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

The discussion should be read

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

MANAGEMENT’S DISCUSSION

AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is

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

obtained from reading the Unaudited Condensed Consolidated Financial Statements alone.

The discussion should be read in conjunction with

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

Financial Statements.”

FORWARD-LOOKING

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

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

current expectations and beliefs.

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

for purposes of federal and state securities laws.

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

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

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

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

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

It is routine for our internal projections

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

prior to the end of the next quarter or year.

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

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

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

We caution and advise readers that these statements are only predictions

and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those included in the “Risk Factors”

section of this Quarterly Report and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 22,

2023, as amended on May 1, 2023.

Therefore, actual results may differ materially and adversely from those expressed in any forward-looking

statements and investors are cautioned not to place undue reliance on any such statements.

We undertake no obligation to publicly update

or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.

of Our Business

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

began as a digitally-native vertical brand founded on comfort product innovation with premium offerings, and are now omni-channel.

design and manufacture a variety of innovative, branded and premium comfort products, including mattresses, pillows, cushions, frames,

sheets, duvets, duvet covers, and other products.

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

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

Our proprietary Hyper-Elastic Polymer gel technology

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

We market and sell our products directly to consumers through our e-commerce and Purple owned retail showroom channels (collectively

“DTC”), online marketplaces and retail wholesale partners.

FORWARD-LOOKING STATEMENTS

This quarterly report on Form

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

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

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

securities laws.

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

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

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

of these words and other similar words.

All forward-looking statements

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

It is routine for our internal projections and expectations to

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

of the next quarter or year.

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

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

of future events or circumstances are forward-looking statements.

We caution and advise readers

that these statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including

those included in the “Risk Factors” section of this Quarterly Report and in our Annual Report on Form 10-K filed with the

Securities and Exchange Commission on March 22, 2023, as amended on May 1, 2023.

Therefore, actual results may differ materially and adversely

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

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

events or otherwise, except as required by law.

Overview of Our Business

Our mission is to help people

feel and live better through innovative comfort solutions.

We are an omni-channel Company

that began as a digitally-native vertical brand founded on comfort product innovation with premium offerings.

We design and manufacture

a variety of innovative, branded and premium comfort products, including mattresses, pillows, cushions, frames, sheets, duvets, duvet

covers, and other products.

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

technologies and the development of our own manufacturing processes.

Our proprietary Hyper-Elastic Polymer gel technology underpins many

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

and sell our products directly to consumers through our e-commerce and Purple owned retail showroom channels, online marketplaces and

retail wholesale partners.

Our business consists of Purple

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

At March 31, 2023,

had a 99.6% economic interest in Purple LLC while Class B unit holders had the remaining 0.4%.

August 31, 2022, the Company acquired all the issued and outstanding stock of Intellibed pursuant to 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.

At June 30, 2023,

had a 99.6% economic interest in Purple LLC while other Class B Unit holders had the remaining 0.4%.

On August 31, 2022, we acquired

all the issued and outstanding stock of Intellibed pursuant to the Merger Agreement.

On October 3, 2022, Purple Inc.

contributed 100% of the membership interest in Intellibed to Purple LLC and

Intellibed became a wholly owned subsidiary of Purple LLC.

contributed 100%

of the membership interest in Intellibed to Purple LLC and Intellibed became a wholly owned subsidiary of Purple LLC.

We believe the addition

of Intellibed has increased product offerings to customers, expanded market opportunities, capitalized on synergies of the combined companies,

and increased opportunities for innovation.

In addition, the acquisition consolidated ownership of our intellectual property licensed

to Intellibed and we believe will enable us to more fully capitalize on growing demand for products with our proprietary gel technologies.

For further discussion see Note 4 — Acquisition.

Summary – Results of Operations

Net revenues decreased 23.6%

to $109.4 million for the three months ended March 31, 2023 compared to $143.2 million for the three months ended March 31, 2022.

decrease was primarily due to continued softening demand for home related products as consumer spending patterns shift more towards services

and experiences, the negative effect of inflationary pressures on consumer discretionary spending, and our intentional reduction in advertising

This decrease was also due in part to wholesale demand for our legacy mattress models being negatively impacted by the upcoming

launch of our new premium and luxury product lineup in the second quarter of 2023.

profit decreased 16.3% to $43.2 million for the three months ended March 31, 2023 compared to $51.6 million for the three months ended

March 31, 2022 due primarily to the decrease in sales volume.

The gross profit percentage in 2023 was 39.5% as compared to 36.1% in 2022.

Our gross profit percentage in the prior year was adversely impacted by elevated levels of materials, labor and freight costs.

first quarter of 2023, we benefited from our efficiency and cost reduction initiatives, including greater balancing of production and

fulfillment operations between facilities, that were initiated in the first half of fiscal 2022 and became fully impactful during the

second half of that year.

Operating expenses decreased

6.8% to $65.2 million for the three months ended March 31, 2023 compared to $70.0 million for the three months ended March 31, 2022.

decrease primarily reflected a $12.0 million reduction in advertising spend due to the intentional

reduction to improve marketing efficiency, stabilize profitability and align spending with current demand levels.

Approximately $3.0 million

in launch related expenses were shifted into the second quarter.

The decrease in advertising spending was offset in part by $5.9

million of non-recurring legal and professional expenses incurred by the Board’s Special Committee.

expense totaled $1.3 million for the three months ended March 31, 2023 compared to other income of $2.9 million for the three months

ended March 31, 2022.

Other expense in 2023 included a $1.2 million loss on extinguishment of the Company’s term loan during the

Other income in 2022 primarily reflected a $3.9 million gain related to a decrease in the fair value of the sponsor warrants

outstanding at the end of March 31, 2022.

Net loss increased $9.8 million

to $23.3 million for the three months ended March 31, 2023 compared to $13.5 million for the three months ended March 31, 2022.

in net loss in 2023 was due to an $8.4 million decrease in gross profit due primarily to the decrease in net revenues, a decrease of

$6.2 million in other income and income tax benefit partially offset by $4.8 million in reduced operating costs.

Developments in Our Business

Cooperation Agreement

February 21, 2023, Coliseum filed a complaint against the Company and several members of the 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 the Company’s 2023 annual meeting of stockholders.

19, 2023, the Company entered into a Cooperation Agreement with Coliseum in connection with the previously disclosed complaint.

The Cooperation

Agreement became effective on April 27, 2023 and included the following provisions:

Executive Summary – Results of Operations

Net revenues decreased 16.1% to $120.9 million and 19.9% to $230.2 million for the three and six months ended June 30, 2023, respectively,

when compared to the corresponding periods in the prior year.

These decreases were primarily due to continued softening demand in the

industry for home-related products, inflationary pressure on consumer discretionary spending, forward buying of consumers in recent years,

industry-standard price reductions on the sell-in of new mattress and adjustable base floor models to wholesale partners and increased

discounting of discontinued models sold through our DTC channels.

Additionally, although we began ramping up marketing efforts in mid-May

to support our new product lineups, the planned pullback in advertising spend prior to that impacted demand during the quarter.

Gross profit decreased 21.2% to $38.5 million and 18.7% to $81.7 million

for the three and six months ended June 30, 2023, respectively, when compared to the corresponding periods in the prior year.

These decreases

were primarily due to corresponding decreases in sales volume.

Our gross profit percentage on a year-to-date basis, which increased to

35.5% of net revenues in 2023 from 35.0% in 2022, benefited from the ongoing realization of efficiency and cost saving initiatives put

in place during the first half of 2022.

These benefits were offset in part by new mattress and base floor models being sold to our wholesale

partners at reduced pricing coupled with increased discounting of discontinued models sold through our DTC channels as we transitioned

to our new Premium and Luxe product lineups.

expenses increased 24.4% to $75.7 million and 7.7% to $141.0 million for the three and six months ended June 30, 2023, respectively,

when compared to the corresponding periods in the prior year.

These increases were primarily due to legal and professional fees of $8.2

million and $14.1 million incurred by the Special Committee during the three and six months ended June 30, 2023, respectively.

in those amounts are a $4.0 million accrual made in the second quarter of 2023 for the settlement amount owed to Coliseum.

and sales expenses were $6.0 million higher in the second quarter due mainly to the increased number of showrooms and the associated

costs, increased wholesale marketing costs and increased advertising spend to align with the launch of our new Premium and Luxe product

lineups in May 2023.

Other expense totaled $1.7 million for the six months ended June 30, 2023 compared to other income of $2.4 million

for the six months ended June 30, 2022.

Other expense in 2023 included a $1.2 million loss on extinguishment of the Company’s term

loan during the first quarter.

Other income in 2022 primarily reflected a $4.3 million gain related to a decrease in the fair value of

the sponsor warrants outstanding at the end of June 30, 2022.

Net loss was $37.5 million

and $60.8 million for the three and six months ended June 30, 2023, respectively, compared to net losses of $29.2 million and $21.8 million

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

Recent Developments in Our Business

Operational Developments

2022 and continuing into 2023, we expanded our focus on product development and increased our innovation capabilities.

As a result, in

May 2023, we launched our new Premium and Luxe product lineups.

This launch was supported by enhancements to our in-store presence and

refinements to our marketing programs and brand messaging.

Although the response to our new products and new brand positioning has been

positive, we continue to experience softening demand for home-related products in 2023 due to forward buying in recent years and inflationary

pressures on consumer discretionary spending.

Also, as consumer spending habits have moved away from the COVID era e-commerce spike in

purchases to brick and mortar buying, we have invested in showroom expansion and grown the number of Purple owned retail showrooms to

56 at June 30, 2023 from 40 at the end of June 30, 2022.

Although we added only one new showroom during the first six months of 2023,

we expect to add additional new showrooms across the remainder of the year.

In addition, we have focused on growing our placements with

wholesale partners and improving wholesale door productivity.

In the second quarter, less than half of our approximately 3,300 wholesale

doors were transitioned to our new line of mattress products.

We expect to convert the remaining wholesale doors to our new product lineup

by the end of the year.

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

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

After several years of hyper growth

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

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

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

Beginning in 2022 and continuing into 2023, we purposely

reduced our advertising spending to improve marketing efficiency, conserve profitability in a challenging macroeconomic environment and

align spending with current demand levels.

With the introduction of our new product lineups, we initiated a new marketing campaign and

increased advertising spend in May and June 2023.

We believe we have set the right course for the next stage of growth for the Company.

June, the first full month with our new product in-market, was the strongest month of 2023 with a revenue run rate up double digits to

the first 5 months of the year.

Coliseum Cooperation Agreement

On February 21, 2023, Coliseum

filed a lawsuit against us and several members of our Board alleging that we 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, we entered into a Cooperation Agreement

with Coliseum to resolve the litigation.

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

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

Company amended and restated the Company’s Second Amended and Restated Bylaws to include references to the Company’s Lead

Independent Director Charter.

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

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

● Paul Zepf and Pano Anthos resigned as directors of the Company.

● The Board appointed S.

amended and restated our Second Amended and Restated Bylaws to include references to our Lead Independent Director Charter.

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

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

Zepf and Pano Anthos resigned as directors of the Company.

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 intention not to stand for re-election.

● Other than as described above with respect to

Dawn Zier, the Board will nominate all incumbent directors for election at the Company’s annual meetings of stockholders to be held

in 2023 and 2024.

● The Company amended its Corporate Governance Guidelines for Operation

of the Board of Directors and adopted a Lead Independent Director Charter to provide for the responsibilities of the Lead Independent

● 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 will be as of April

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 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.

Carter Pate, and Erika Serow to fill the vacancies created by the increased the size of the board

and the resignations of Mr.

Peterson, a stockholder and Board Observer since our 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.

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.

amended our 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.

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.

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.

We 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 our consolidated balance sheet as a reduction to additional paid-in

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

terminated the Special Committee.

dismissed its litigation against us.

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.

agreed to be bound by customary standstill restrictions, including, among others, agreements not to acquire additional shares of the

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such transaction.

The Cooperation Agreement shall terminate on the day following the date on which the 2024 annual meeting of stockholders is held.

Registration Statement and Equity Financing

January 30, 2023, the Form S-3 shelf registration statement we filed with the SEC in December 2022 became effective.

As a result, we

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

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

In February 2023, we completed an underwritten offering of 13.4

million shares of Class A common stock at a public offering price of $4.50 per share.

The underwriters did not exercise their over-allotment

The aggregate net proceeds received by us from the offering, after deducting offering fees and expenses of $3.1 million, totaled

$57.2 million.

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

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.

On February 17, 2023, we entered into a fifth amendment to the 2020

Credit Agreement.

As a condition of entering into the amendment, we 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 4.50x for the third quarter of 2023, and revised the ratio to 3.00x for all quarters thereafter.

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

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

The amendment also revised the lease incurrence

test which allows us to incur ten new showroom leases for stores that will open in 2023 and six new leases for stores that will open in

Moreover, beginning in the fourth quarter of 2023, we will be allowed to begin incurring leases for stores that will open in 2024,

subject to leverage ratio requirements.

The leverage ratio must be less than 2.50x to sign leases, with up to a maximum of six new leases

per quarter, increasing to eight new leases per quarter if the leverage ratio is less than 2.00x.

The amendment 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.

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.

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.

Pursuant to this amendment, we 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 us to draw on our revolving line of credit, we must be in compliance with the

covenants outlined in the fifth amendment.

As of March 31, 2023, we 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 to draw upon.

The COVID-19 pandemic has impacted many aspects of our operations,

directly and indirectly, including disruption of our employees, consumer behavior, distribution and logistics, our suppliers, and the

market overall.

Soon after the pandemic began, we experienced an increase in demand in our e-commerce channel, and in 2021 we doubled

our production capacity by opening a second, larger plant in Georgia to match actual and anticipated demand growth.

After two years of

the pandemic, we experienced a pull-back in growth.

In 2022, our gross profit and results of operations were adversely affected by elevated

levels of materials, labor and freight costs and the lower demand levels.

In the first quarter of 2023, we benefited from various efficiency

and cost reduction initiatives at the plant level that became fully impactful during the second half of 2022.

These efficiency and cost

saving initiatives helped increase our gross margin in the first quarter of 2023 to 39.5% compared to 36.1% in the first quarter of 2022.

In the first quarter of 2023,

we continued to experience a softening of demand for home-related products as consumers shift spending patterns more towards services

and experiences.

As consumer spending habits shift away from e-commerce purchases to brick and mortar buying, we have invested in showroom

expansion while continuing to develop our capabilities and improving productivity.

We have also focused on growing our placements with

wholesale partners and improving wholesale door productivity.

Although we ended both the first quarter of 2023 and year-end 2022 with

55 Purple owned retail showrooms, we expect to start adding new showrooms again across the remainder of 2023.

In addition, at March 31,

2023, our products were being sold through approximately 3,400 wholesale doors, having added approximately 300 net new doors during the

past 12 months.

Showroom expansion and improving the sales productivity of both our wholesale doors and existing showrooms remain primary

focuses and are critical components of our strategy to respond to shifting demand patterns.

After several years of hyper growth and increased

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

after focusing on right-sizing our operations, improving our execution, and refining our strategies that will drive share gains in the

premium mattress category and position us for accelerated growth.

In 2022 and continuing into the first quarter of 2023, we have purposely

reduced our advertising spending to improve marketing efficiency, conserve profitability in a challenging macroeconomic environment and

align spending with current demand levels.

As we have expanded our focus on product development and increased our innovation capabilities,

in the first quarter of 2023 we announced the upcoming May 2023 launch of our new Premium and Luxe product lineup.

This launch is being

supported by enhancements to our in-store presence, refinements to our marketing programs and brand messaging and the shift of approximately

$3.0 million of launch related expenses into the second quarter of 2023.

We believe the acquisition

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

The acquisition

also provided an immediate impact on our target luxury market expansion.

We also expect to capitalize on synergies of the combined companies

and to benefit from expanding the market presence of premium product offerings.

In addition, the acquisition has allowed us to consolidate

ownership of our intellectual property and more fully capitalize on growing demand for products with gel technologies.

Moreover, the acquisition

has accelerated our product development program by several years and allowed us to immediately enter the higher price point luxury segment

of the sleep and wellness industry that are a natural extension of our existing product offerings.

We believe that our four strategic initiatives – accelerating

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

future success.

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

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

The initial testing of our new product line-up with our wholesale partners was positive and we currently have increased our existing footprint by 1,900 slots, a 15% increase, and we continue to receive orders to further expand our existing footprint.

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

Cooperation Agreement shall terminate on the day following the date on which the 2024 annual meeting of stockholders is held.

Shelf Registration Statement and Equity Financing

On January 30, 2023, the Form

S-3 shelf registration statement we filed with the SEC in December 2022 became effective.

As a result, we may offer and sell from time

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

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

In February 2023, we completed

an underwritten offering of 13.4 million shares of Class A common stock at a public offering price of $4.50 per share.

The underwriters

did not exercise their over-allotment option.

The aggregate net proceeds received by us from the offering, after deducting offering fees

and expenses of $3.3 million, totaled $57.0 million.

Debt Financing

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.

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.

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 premium.

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 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,

as defined in the ABL 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.

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.

On February 17, 2023, we entered

into a fifth amendment to the 2020 Credit Agreement.

As a condition of entering into the amendment, we made a payment of $24.7 million

to satisfy the outstanding balance on the term loan plus accrued interest.

The amendment revised various financial covenants and certain

definitions of key terms, reduced the amount available under the revolving line of credit to $50.0 million, 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, reduced limits on maximum growth capital expenditures, and revised the current minimum liquidity covenant.

Pursuant to this

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

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.

In connection with our execution of the Term Loan Agreement and ABL

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.

The termination was accounted for as an extinguishment of debt and $3.1 million of unamortized

debt issuance costs related to the 2020 Credit Agreement will be recorded as a loss on extinguishment of debt in the third quarter of

Outlook for Growth

We believe that our four strategic initiatives

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

fundamental to our future success.

To support our plans for future growth and sustained

profitability, we are focusing on the following opportunities:

● Strengthen our wholesale relationships, prioritize existing door productivity,

and develop and execute our other strategies to meaningfully expand our wholesale business.

Expand and mature our fleet of Purple owned retail showrooms in 2023,

increase door productivity, provide a brand halo benefit to other channels in the surrounding areas, strengthen the relationship with

the consumer, and increase the share of more profitable DTC revenue mix.

Build brand position to grow our market share of the premium and luxury mattress categories.

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

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

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

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

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

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

as we grow into our production footprint.

We launched our new Premium and Luxe product lineups in the second quarter of 2023.

This launch was supported by enhancements to our in-store presence and refinements to our marketing programs and brand messaging.

and enhance marketing strategies to reach a broader audience, increase customer engagement and reduce dependency on price promotions

as a means of driving sales.

research and development disciplines and go-to-market processes to further develop our current product categories and position our business

to eventually expand to additional categories.

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

input costs, operating efficiencies, and pricing to further enhance our gross margin.

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

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

Therefore, actual

results may differ materially and adversely from those described above.

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

to changes in the market or our business.

Results for the Three Months Ended March 31, 2023 and 2022

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

condensed consolidated statements of operations (dollars in thousands):

Three Months Ended March 31,

There is no guarantee that

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

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

Therefore, actual results may differ

materially and adversely from those described above.

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

the market or our business.

Operating Results for the Three Months Ended June 30, 2023 and 2022

The following table sets forth

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

of operations:

Three Months Ended June 30,

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

Total other income (expense), net

Total other expense, net

Net loss before income taxes

2 unchanged sentences

Net loss attributable to Purple Innovation, Inc.

Net revenues decreased $33.8

million, or 23.6%, to $109.4 million for the three months ended March 31, 2023 compared to $143.2 million for the three months ended March

The decrease in net revenues was primarily due to continued softening demand for home related products as consumer spending

patterns shift more towards services and experiences, the negative effect of inflationary pressures on consumer discretionary spending,

and our intentional reduction in advertising spend.

This decrease was also due in part to wholesale demand for our legacy mattress models

being impacted by the upcoming launch of our new Premium and Luxe product lineup in the second quarter.

The decline in net revenues from

a sales channel perspective consisted of DTC net revenues decreasing $19.2 million, or 22.5% and wholesale net revenues decreasing $14.6

million, or 25.3%.

Within DTC, e-commerce net revenues decreased $22.2 million, or 30.1%, while Purple owned retail showroom net revenues

increased $2.9 million, or 24.4%.

The decrease in e-commerce net revenues reflected the impact of the reasons previously stated.

in Purple owned retail showroom net revenue was mainly driven by showrooms increasing from 34 at the end of March 2022 to 55 at the end

of March 2023.

The decrease in wholesale net revenues was due in part to reduced purchases by our existing wholesale partners ahead of

taking delivery of new models in conjunction with the upcoming launch of our new premium product lineup in the second quarter.

in wholesale net revenues was offset in part by the effects of adding $5.3 million of Intellibed wholesale net revenues.

Cost of revenues decreased

$25.4 million, or 27.7%, to $66.1 million for the three months ended March 31, 2023 compared to $91.6 million for the three months ended

March 31, 2022.

This decrease was primarily due to the corresponding decrease in sales volume.

Our gross profit percentage, which increased

to 39.5% of net revenues in the first quarter of 2023 from 36.1% in the first quarter of 2022, benefited from the continued realization

of efficiency and cost saving initiatives that we introduced in the first half of fiscal 2022 and became more fully impactful during the

second half of the year and into 2023.

Marketing and sales expense

decreased $11.8 million, or 23.6%, to $38.2 million for the three months ended March 31, 2023 compared to $50.0 million for the three

months ended March 31, 2022.

This decrease reflected a decline in advertising spending of $12.0 million, or 50.7% to $11.7 million in

2023 from $23.7 million in 2022.

This reduction was primarily due to management focusing its efforts on improving marketing efficiency

with its legacy products and delaying advertising spend increases to align with the upcoming launch of our new premium and luxury product

lineup in the second quarter.

Marketing and sales expense as a percentage of net revenues was 34.9% in both the first quarter of 2023

and the first quarter of 2022.

and Administrative

Revenues, Net

Net revenues decreased $23.2 million, or 16.1%, to $120.9 million for the three months ended June 30, 2023 compared to $144.1 million

for the three months ended June 30, 2022.

The decrease in net revenues was primarily due to continued softening demand in the industry

for home related products, inflationary pressure on consumer discretionary demand,forward buying of consumers in recent years, price reductions

of floor models and increased discounting on discontinued models sold through our DTC channels as we launched our new Premium and Luxe

product lineups.

The decline in net revenues from a sales channel perspective consisted of DTC net revenues decreasing $13.6 million,

or 16.6% and wholesale net revenues declining $9.7 million, or 15.5%.

Within DTC, e-commerce net revenues decreased $15.5 million, or

23.1%, while Purple owned retail showroom net revenues increased $2.0 million, or 13.5%.

The decrease in e-commerce net revenues reflected

the impact of the reasons previously stated.

The increase in Purple owned retail showroom net revenue was driven by showrooms increasing

from 40 at the end of June 2022 to 56 at the end of June 2023.

The decrease in wholesale net revenues, which reflected the impact of the

reasons previously stated, was also affected by reduced purchases from existing wholesale partners ahead of the launch of our new Premium

and Luxe product lineups coupled with floor models of our new mattress and base products being sold to our wholesale partners at reduced

Cost of Revenues

Cost of revenues decreased $12.9 million, or 13.5%, to $82.4 million

for the three months ended June 30, 2023 compared to $95.3 million for the three months ended June 30, 2022.

This decrease was primarily

due to a corresponding decrease in sales volume.

Our gross profit percentage, which decreased to 31.8% of net revenues in the second quarter

of 2023 from 33.9% in the second quarter of 2022, was negatively impacted by the transition to our new Premium and Luxe product lineups

whereby floor models of our new mattress and base products were sold to our wholesale partners at reduced pricing coupled with increased

discounting of discontinued models sold through our DTC channels.

Marketing and Sales

Marketing and sales expense increased $6.0 million, or 14.9%, to $46.4 million for the three months ended June 30, 2023 compared to $40.4

million for the three months ended June 30, 2022.

Marketing and sales expense as a percentage of net revenues was 38.4% in the second

quarter of 2023 compared to 28.0% in the second quarter of 2022.

This increase reflected a $3.7 million increase in costs associated with

showroom expansion, and a $2.6 million increase in wholesale marketing.

In addition, advertising spending increased $1.2 million, or 6.0%,

to $20.1 million for the three months ended June 30, 2023 compared to $18.9 million for the three months ended June 20, 2022.

spend began increasing in mid-May to align with the launch of our new Premium and Luxe product lineups.

These increases were offset in

part by a $1.5 million decrease in other marketing and sales costs.

General and Administrative

expense increased $5.8 million, or 32.3%, to $23.7 million for the three months ended March 31, 2023 compared to $17.9 million for the

three months ended March 31, 2022.

This increase was primarily due to $5.9 million in legal and professional fees associated

with expenses incurred by the Special Committee.

and Development

General and administrative

expense increased $7.7 million, or 40.8%, to $26.4 million for the three months ended June 30, 2023 compared to $18.8 million for the

three months ended June 30, 2022.

This increase was primarily due to legal and professional fees incurred by the Special Committee, which

included a $4.0 million accrual for the settlement amount owed to Coliseum.

Research and Development

Research and development costs

increased $1.2 million, or 57.3%, to $3.4 million for the three months ended March 31, 2023 compared to $2.1 million for the three months

ended March 31, 2022.

This increase primarily reflected higher costs associated with our renewed focus on product innovation.

Income (Loss)

loss increased $3.6 million to $22.0 million for the three months ended March 31, 2023 compared to $18.4 million for the three months

ended March 31, 2022.

The larger operating loss primarily resulted from a decrease in gross profit that was driven by lower sales, offset

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

expense totaled $0.2 million for the three months ended March 31, 2023 compared to $1.0 million for the three months ended March 31,

This decrease was primarily due to higher interest expense of $0.7 million incurred during the three months ended March 31, 2022

on the term loan that was paid off in February 2023 and the $55.0 million revolving line of credit that was drawn down by the Company

in November 2021 and repaid in full on March 31, 2022.

on Extinguishment of Debt

February 17, 2023, the Company entered into a fifth amendment to the 2020 Credit Agreement and repaid in full the $24.7 million outstanding

balance of the term loan plus accrued interest.

The amendment was accounted for as an extinguishment of debt during the first quarter

of 2023 and $1.2 million of unamortized debt issuance costs were recorded as loss on extinguishment of debt in the condensed consolidated

statement of operations.

in Fair Value – Warrant Liabilities

In February 2023, the 1.9 million of sponsor warrants outstanding expired

and were cancelled pursuant to the terms of the agreement.

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

the three months ended March 31, 2022, we recognized a gain of $3.9 million in our condensed consolidated statement of operations related

to a decrease in the fair value of the warrants outstanding at the end of the quarter.

The 1.9 million sponsor warrants outstanding at

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

Tax (Expense) Benefit

We had income tax expense of $0.1

million for the three months ended March 31, 2023 compared to an income tax benefit of $1.8 million for the three months ended March 31,

The income tax expense amount in the first quarter of 2023 related to various state taxes.

Noncontrolling

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

Net loss attributed to noncontrolling interests was $0.1 million for both the three months ended March 31, 2023 and 2022.

and Capital Resources

Our principal sources of funds

are cash flows from operations and cash and cash equivalents on hand, supplemented with borrowings made pursuant to our credit facility

and proceeds received from offerings of our equity capital.

Principal uses of funds consist of payments of principal and interest on our

debt facilities, capital expenditures, working capital needs, and operating lease payment obligations.

Our working capital needs depend

largely upon the timing of cash receipts from product sales, payments to vendors and others, and changes in inventories.

Our unrestricted

cash and working capital positions were $52.8 million and $77.5 million, respectively, as of March 31, 2023 compared to $40.0 million

and $62.4 million, respectively, as of December 31, 2022.

Cash used for capital expenditures decreased from $13.1 million in the first

quarter of 2022 to $2.9 million in the first quarter of 2023.

Our capital expenditures in the first quarter of 2023 primarily consisted

of additional investments made in our manufacturing facilities in Utah and Georgia.

the event our cash flow from operations or other sources of financing are less than anticipated, we believe we will be able to fund operating

expenses and continue satisfying the conditions of our 2020 Credit Agreement, as amended, based on our ability to scale back operations,

reduce marketing spend, use the liquidity we have available under our revolving line of credit, and postpone or discontinue our growth

In such event, this could result in slower growth or no growth, and we may run the risk of losing key suppliers, we may not

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

We may also consider seeking additional

funding sources including new debt or equity capital.

Our 2020 Credit Agreement, as amended, includes various covenants and obligations

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

Based on our current projections, we believe our cash on hand, amounts

available under our revolving line of credit, and expected cash to be generated from e-commerce, wholesale, and Purple owned retail store channels will

be sufficient to meet our working capital requirements, comply with debt covenants and cover anticipated capital expenditures for at least

the next 12 months.

Registration Statement and Offering of Class A Common Stock

January 30, 2023, the registration statement we filed in December 2022 on Form S-3 with the SEC using the “shelf” registration

process became effective.

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

we will determine at the time of the offering, any combination of the securities described in the registration statement, up to an aggregate

amount of $90.0 million.

In February 2023, the Company completed an underwritten offering of 13.4

million shares of Class A common stock at a public offering price of $4.50 per share.

The underwriters did not exercise their over-allotment

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.

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

revolving line of credit.

The term loan was to be repaid in accordance with a five-year amortization schedule and could be prepaid in

whole or in part at any time without premium or penalty, subject to reimbursement of certain costs.

The revolving credit facility has

a term of five years and carries the same interest provisions as the term debt.

A commitment fee is due quarterly based on the applicable

margin applied to the unused total revolving commitment.

On February 17, 2023, we entered

into a fifth amendment to the 2020 Credit Agreement.

As a condition of entering into the amendment, we 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 4.50x for the third quarter of 2023, and revised the ratio to 3.00x for all

quarters thereafter.

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

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

The amendment

also revised the lease incurrence test which allows us 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 incurring additional

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

The leverage ratio must be less than 2.50x to sign leases,

with up to a maximum of six new leases per quarter, increasing to eight new leases per quarter if the leverage ratio is less than 2.00x.

The amendment 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.

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 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.

Pursuant to this amendment, we 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 us to draw on the revolving line of credit, we must be in compliance with the

covenants outlined in the fifth amendment.

As of March 31, 2023, we 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 to draw upon.

Receivable Agreement

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

increased $1.2 million, or 67.3%, to $2.9 million for the three months ended June 30, 2023 compared to $1.7 million for the three months

ended June 30, 2022.

This increase primarily reflected our focus on new product innovation initiatives to remain competitive and advance

our current product line.

Operating Loss

Operating loss increased $25.2

million to $37.3 million for the three months ended June 30, 2023 compared to $12.1 million for the three months ended June 30, 2022.

The larger operating loss primarily resulted from a decrease in gross profit that was driven by lower sales and a reduced gross profit

percentage, an increase in higher marketing and sales costs primarily associated with our new product launch, and an increase in general

and administrative expense resulting from legal and professional fees incurred by the Special Committee and attributable to the Cooperation

Agreement with Coliseum.

Interest Expense

Interest expense totaled $0.4

million for the three months ended June 30, 2023 compared to $0.7 million for the three months ended June 30, 2022.

This decrease was

primarily due to interest expense incurred during the three months ended June 30, 2022 on the term loan that was paid off in February

Change in Fair Value – Warrant Liabilities

Unexercised sponsor warrants

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

These sponsor warrants had no

fair value on the date of expiration.

During the three months ended June 30, 2022, we recognized a gain of $0.3 million in our condensed

consolidated statement of operations related to a decrease in the fair value of the warrants outstanding at the end of the quarter.

1.9 million sponsor warrants outstanding at June 30, 2022 had a fair value of $0.1 million.

Income Tax (Expense) Benefit

We had income tax expense

of $0.1 million for the three months ended June 30, 2023 compared to an income tax benefit of $4.2 million for the three months ended

June 30, 2022.

The income tax expense amount in 2023 resulted from various state income taxes.

Noncontrolling Interest

We calculate net income or

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

Net loss attributed

to noncontrolling interests was $0.2 million for the three months ended June 30, 2023 compared to a net loss of $0.1 million for the three

months ended June 30, 2022.

Operating Results for the Six Months Ended

June 30, 2022 and 2021

The following table sets forth

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

Six Months Ended June 30,

Revenues, net

Cost of revenues

Operating expenses:

Marketing and sales

General and administrative

Research and development

Total operating expenses

Operating loss

Other income (expense):

Interest expense

Other income (expense), net

Change in fair value – warrant liabilities

Loss on extinguishment of debt

Total other income (expense), net

Net loss before income taxes

Income tax benefit (expense)

Net loss attributable to noncontrolling interest

Net loss attributable to Purple Innovation, Inc.

Revenues, Net

Net revenues decreased $57.0 million, or 19.9%, to $230.2 million for the six months ended June 30, 2023 compared to $287.3 million for

the six months ended June 30, 2022.

The decrease in net revenues was primarily due to continued softening demand in the industry for home-related

products, inflationary pressure on consumer discretionary demand, forward buying of consumers in recent years, price reductions of floor

models and increased discounting on discontinued models sold through our DTC channels as we launched our new Premium and Luxe product

The decline in net revenues from a sales channel perspective consisted of DTC net revenues decreasing $32.6 million, or 19.5%

and wholesale net revenues declining $24.4 million, or 20.4%.

Within DTC, e-commerce net revenues decreased $37.6 million, or 26.7%, while

Purple owned retail showroom net revenues increased $5.0 million, or 18.9%.

The decrease in e-commerce net revenues reflected the impact

of the reasons previously stated.

The increase in Purple owned retail showroom net revenue was driven by showrooms increasing from 40

at the end of June 2022 to 56 at the end of June 2023.

The decrease in wholesale net revenues, which reflected the impact of the reasons

previously stated, was also affected by reduced purchases from existing wholesale partners ahead of the launch of our new Premium and

Luxe product lineups coupled with floor models of our new mattress and base products being sold to our wholesale partners at reduced pricing.

Cost of Revenues

Cost of revenues decreased $38.3 million, or 20.5%, to $148.6 million

for the six months ended June 30, 2023 compared to $186.9 million for the six months ended June 30, 2022.

This decrease was primarily

due to a corresponding decrease in sales volume.

Our gross profit percentage, which increased to 35.5% of net revenues in 2023 from 35.0%

in 2022, benefited from the ongoing realization of efficiency and cost saving initiatives put in place during the first half of 2022,

offset in part floor models of our new mattress and base products being sold to our wholesale partners at reduced pricing coupled with

increased discounting of discontinued models sold through our DTC channels as we transitioned to our new Premium and Luxe product lineups.

The gross profit percentage in 2022 was adversely impacted by unfavorable cost absorption from lower than planned production volumes in

prior months, and elevated levels of materials, labor and overhead costs.

Marketing and Sales

Marketing and sales expense decreased $5.8 million, or 6.4%, to $84.6

million for the six months ended June 30, 2023 compared to $90.3 million for the six months ended June 30, 2022.

This decrease reflected

a $10.9 million decline in advertising spending and a $4.9 million decrease in other marketing costs.

The reduction in advertising spending

was primarily due to management focusing its efforts on improving marketing efficiency with its legacy products and then increasing advertising

spend to align with the launch of our new Premium and Luxe product lineups in May 2023.

The decrease in other marketing costs reflected

the impact of management restructuring the marketing organization in the first half of 2022.

These decreases were offset in part by a

$9.5 million increase in marketing and sales costs associated with showroom expansion.

Marketing and sales expense as a percentage of

net revenues was 36.7% during the first six months of 2023 compared to 31.4% for the first six months of 2022.

The higher percentage of

revenues reflected the impact of lower sales coupled with management’s expanded marketing efforts in the second quarter of 2023

to support the launch of our new Premium and Luxe product lineups in May 2023.

General and Administrative

General and administrative

expense increased $13.4 million, or 36.6%, to $50.1 million for the six months ended June 30, 2023 compared to $36.7 million for the

six months ended June 30, 2022.

This increase was primarily due to legal and professional fees incurred by the Special Committee, which

included a $4.0 million accrual made in the second quarter of 2023 for the settlement amount owed to Coliseum.

Research and Development

Research and development costs increased $2.4 million, or 61.8%, to

$6.3 million for the six months ended June 30, 2023 compared to $3.9 million for the six months ended June 30, 2022.

This increase primarily

reflected our focus on new product innovation initiatives to remain competitive and advance our current product line

Operating Income (Loss)

Operating loss increased $28.8

million to $59.3 million for the six months ended June 30, 2023 compared to $30.5 million for the six months ended June 30, 2022.

larger operating loss primarily resulted from a decrease in gross profit that was driven by lower sales coupled with an increase in general

and administrative expense resulting from legal and professional fees incurred by the Special Committee and attributable to the Cooperation

Agreement with Coliseum.

Interest Expense

Interest expense totaled $0.6

million for the six months ended June 30, 2023 compared to $1.7 million for the six months ended June 30, 2022.

The lower amount in 2023

was primarily due to the six months ended June 30, 2022 including a greater amount of interest expense related to the term loan that was

paid off in February 2023 and interest expense for the $55.0 million revolving line of credit that was drawn down by the Company in November

2021 and repaid in full on March 31, 2022.

Change in Fair Value – Warrant Liabilities

Unexercised sponsor warrants

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

These sponsor warrants had no

fair value on the date of expiration and a de minimis fair value at the previous reporting date.

During the six months ended June 30,

2022, we recognized a gain of $4.3 million in our condensed consolidated statement of operations related to a decrease in the fair value

of the warrants outstanding at the end of the quarter.

Loss on Extinguishment of Debt

On February 17, 2023, the

Company entered into a fifth amendment to the 2020 Credit Agreement and repaid in full the $24.7 million outstanding balance of the term

loan plus accrued interest.

The amendment was accounted for as an extinguishment of debt during the first quarter of 2023 and $1.2 million

of unamortized debt issuance costs were recorded as loss on extinguishment of debt in the condensed consolidated statement of operations.

Income Tax (Expense) Benefit

We had income tax expense

of $0.1 million for the six months ended June 30, 2023 compared to an income tax benefit of $6.0 million for the six months ended June

The income tax expense amount in 2023 resulted from various state income taxes.

Noncontrolling Interest

We calculate net income or loss attributable to

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

Net loss attributed to noncontrolling

interests was $0.3 million for the six months ended June 30, 2023 compared to a net loss of $0.2 million for the six months ended June

Liquidity and Capital Resources

As of both March 31, 2023 and December 31, 2022, there was no tax receivable agreement liability reflected

in the Company’s consolidated balance sheet.

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

on our deferred tax assets in the fourth quarter of 2022, we evaluated the probability of amounts being owed pursuant to the tax receivable

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

As result, we continued to record no tax receivable

agreement liability in the first quarter of 2023.

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

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

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

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

Contractual Obligations

Other material

contractual obligations primarily include operating lease payment obligations.

Also, as discussed above regarding the Cooperation

Agreement, we will reimburse Coliseum for all out-of-pocket fees, costs, and expenses incurred in connection with their complaint,

provided that such an amount shall not exceed $4 million in the aggregate.

See Note 9 of the condensed consolidated financial

statements for additional information on leases.

Flows for the Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022

following summarizes our cash flows for the three months ended March 31, 2023 and 2022 as reported in our condensed consolidated statements

of cash flows (in thousands):

Three Months Ended

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

to our asset-based lending facility and proceeds received from offerings of our equity capital.

Principal uses of funds consist of payments

of principal and interest on our debt facilities, capital expenditures, working capital needs, and operating lease payment obligations .

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

in inventories, and operating lease payment obligations.

Our unrestricted cash and working capital positions were $25.2 million and $43.9

million, respectively, as of June 30, 2023 compared to $40.0 million and $62.4 million, respectively, as of December 31, 2022.

for capital expenditures decreased from $26.1 million in the first six months of 2022 to $5.8 million during the first six months of 2023.

Our capital expenditures in the first six months of 2023 primarily consisted of primarily consisted of additional investments made in

our manufacturing facilities in Utah and Georgia.

In the event our cash flow

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

our ability to scale back operations, reduce marketing spend, use the liquidity we have available under our new credit facility and postpone

or discontinue our growth strategies.

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

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

consider seeking additional funding sources including new debt or equity capital.

Based on our current projections,

we believe our cash on hand, amounts available under our asset-based lending arrangement, and expected cash to be generated from our operations will

be sufficient to meet our working capital requirements and cover anticipated capital expenditures for at least the next 12 months.

Shelf Registration Statement and Offering of

Class A Common Stock

On January 30, 2023, the Form

S-3 shelf registration statement we filed with the SEC in December 2022 became effective.

As a result, we may offer and sell from time

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

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

In February 2023, we completed

an underwritten offering of 13.4 million shares of Class A common stock at a public offering price of $4.50 per share.

The underwriters

did not exercise their over-allotment option.

The aggregate net proceeds received by us from the offering, after deducting offering fees

and expenses of $3.1 million, totaled $57.0 million.

On August 7, 2023, the Loan Parties entered into the Term Loan Agreement

with Callodine Commercial Finance, LLC and a group of financial institutions.

Also, on August 7, 2023, the Loan parties entered into a

separate financing arrangement with the ABL Lenders.

that provides for 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.

The Term Loan Agreement provides

for up to $25.0 million of term loans, with up to $5.0 million of incremental Term Loans, 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 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 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.

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, as defined in the ABL Agreement, and for working capital, capital expenditures and other general corporate purposes.

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.

In connection with the Company’s

execution of the Term Loan Agreement and ABL 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.

Tax Receivable Agreement

We are required to make certain

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

As of both June 30, 2023 and December 31, 2022, there was no tax receivable agreement liability reflected in either of these consolidated

balance sheets.

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

fourth quarter of 2022, we evaluated the probability of amounts being owed pursuant to the tax receivable agreement and determined the

likelihood of a future liability was not probable.

As result, we continued to record no tax receivable agreement liability in the

second quarter of 2023.

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

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

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

that give rise to the payments under the agreement.

Other Contractual Obligations

Other material contractual

obligations primarily include operating lease payment obligations.

Also, as discussed above regarding the Cooperation Agreement, we will

reimburse Coliseum for all out-of-pocket fees, costs, and expenses incurred in connection with their complaint, provided that such an

amount shall not exceed $4.0 million in the aggregate.

See Notes 9 and 15 of the condensed consolidated financial statements for additional

information on leases and the Cooperation Agreement, respectively.

Cash Flows for the Six Months Ended June 30,

2023 Compared to the Six Months Ended June 30, 2022

The following summarizes our

cash flows for the six months ended June 30, 2023 and 2022 as reported in our condensed consolidated statements of cash flows (in

Six Months Ended

Net cash used in operating activities

5 unchanged sentences

Cash used in operating activities

was $13.5 million and $44.3 million for the three months ended March 31, 2023 and 2022, respectively.

Cash used in operating activities

in 2023 was primarily comprised of a net loss of $23.3 million, offset in part by non-cash adjustments totaling $9.6 million.

was $37.9 million and $52.8 million for the six months ended June 30, 2023 and 2022, respectively.

Cash used in operating activities in

2023 was primarily comprised of a net loss of $61.1 million, offset in part by non-cash adjustments totaling $17.6 million.

These non-cash adjustments primarily related to $12.9 million of depreciation and amortization, a $1.2 million loss on the extinguishment

4 unchanged sentences

in accounts payable, offset by a $5.1 million increase in inventories combined with a $4.0 million decrease in accrued rebates and allowances.

The decline in accounts receivable was due in part to a $23.3 million decrease in wholesale net revenues in the first quarter of 2023

The decline in accounts receivable was due in part to a $13.6 million decrease in wholesale net revenues in the second quarter of 2023

compared to the fourth quarter of 2022.

The increase in inventories was primarily due to an increase in finished goods inventory.

decrease in accrued rebates and allowances primarily resulted from a large credit memo issued to a wholesale partner for volume rebates

related to 2022 purchases.

decrease in accrued rebates and allowances primarily resulted from a large credit memo issued in the first quarter to a wholesale partner

for volume rebates related to 2022 purchases.

Cash used in investing activities

reflected capital expenditures of $3.1 million for the three months ended March 31, 2023 compared to $13.1 million for the three months

ended March 31, 2022.

Capital expenditures in the first quarter of 2023 primarily consisted of additional investments made in our

reflected capital expenditures of $5.8 million for the six months ended June 30, 2023 compared to $26.1 million for the six months ended

June 30, 2022.

Capital expenditures during the first six months of 2023 primarily consisted of additional investments made in our

manufacturing facilities in Utah and Georgia.

provided by financing activities was $29.4 million during the three months ended March 31, 2023 compared to $28.4 million during the

three months ended March 31, 2022.

Financing activities in the first quarter of 2023 included $57.2 million of net proceeds received

from the stock offering, offset in part by a $24.7 million term loan payment, a $0.3 million payment on the tax receivable agreement,

and $2.9 million in other debt related payments.

Accounting Policies

Cash provided by financing

activities was $28.9 million during the six months ended June 30, 2023 compared to $28.4 million during the six months ended June 30,

Financing activities during the first six months of 2023 included $57.0 million of net proceeds received from the stock offering,

offset in part by a $24.7 million term loan payment, $2.9 million in other debt related payments, and $0.4 million of other payments.

Critical Accounting Policies

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

Results of Operations in our 2022 Annual Report on Form 10-K filed March 22, 2023.

There were no significant changes in our

critical accounting policies since the end of fiscal 2022.

website address is www.purple.com.

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

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

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

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

The inclusion of our website address in this report does

not include or incorporate by reference into this report any information on our website.

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

that may be deemed material.

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

and public conference calls and webcasts.

There were no significant changes in our critical

accounting policies since the end of fiscal 2022.

Available Information

Our website address is www.purple.com.

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

and Form 10-K/A, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant

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

with, or furnish it to, the SEC.

The inclusion of our website address in this report does not include or incorporate by reference into

this report any information on our website.

We also use the Investor Relations

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

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

and webcasts.

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis