What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-12 compared with 2023-03-22 · 744 added, 818 removed, 89 unchanged (95% of the section changed)

Management’s Discussion

and Analysis of Financial Condition and Results of Operations

Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Annual Report on Form

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

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

as amended (the “Securities Act”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

statements other than statements of historical facts are statements that could be deemed forward-looking statements.

These statements

are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and

assumptions of our management.

Words such as “expects,” “anticipates,” “targets,” “goals,”

“projects,” “intends,” “plans,” “believes,” “momentum,” “seeks,”

“estimates,” “continues,” “endeavors,” “strives,” “may,” variations of such

words, and similar expressions are intended to identify such forward-looking statements.

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.

Readers are cautioned

that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult

to predict, including those under “Part I, Item 1A.

This Annual Report on Form 10-K, including the Management’s Discussion

and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future

results that are subject to the safe harbors created under the Securities Act and the Exchange Act.

All statements other than statements

of historical facts are statements that could be deemed forward-looking statements.

These statements are based on current expectations,

estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management.

such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,”

“plans,” “believes,” “momentum,” “seeks,” “estimates,” “continues,”

“endeavors,” “strives,” “may,” variations of such words, and similar expressions are intended to identify

such forward-looking statements.

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.

Readers are cautioned that these forward-looking statements are only

predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those under “Part

Risk Factors,” and elsewhere herein.

Therefore, actual results may

differ materially and adversely from those expressed in any forward-looking statements.

We undertake no obligation to revise or update

any forward-looking statements for any reason.

The following discussion is

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

the consolidated financial statements alone.

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

the notes thereto included in “Part II Item 8.

Therefore, actual results may differ materially and adversely from those expressed

in any forward-looking statements.

We undertake no obligation to revise or update any forward-looking statements for any reason.

The following discussion is intended to provide a more comprehensive

review of our results of operations and financial condition than can be obtained from reading our consolidated financial statements alone.

This discussion should be read in conjunction with our consolidated financial statements and the notes thereto included in “Part

Financial Statements.”

Overview of Our Business

Our mission is to help people

feel and live better through innovative comfort solutions.

We began as a digitally-native

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

We design and manufacture a variety

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

other products.

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

and the development of our own manufacturing processes.

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

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

We market and sell

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

and retail wholesale partners.

The Company consists of Purple

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 via our DTC channels, online marketplaces and retail wholesale partners.

Our business consists of

and its consolidated subsidiary, Purple LLC.

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

company under the name of GPAC.

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

“Business Combination”) pursuant to which Purple Inc.

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

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

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

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

acquisition company under the name of GPAC.

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

(the “Business Combination”) pursuant to which Purple Inc.

acquired an equity interest in Purple LLC as holder of all Class

A units and became its sole managing member.

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

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

the approval of any other member.

At December 31, 2023, Purple Inc.

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

had a 99.8% economic interest in Purple LLC while other Class B unit

holders had the remaining 0.2%.

On August 31, 2022, we acquired

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

For further discussion see Recent

Developments in Our Business — Acquisition below.

all the issued and outstanding stock of Intellibed to consolidate ownership of our licensed intellectual property while enhancing our

innovation and manufacturing capabilities and financial profile.

For further discussion see Note 4 — Acquisition.

Recent Developments in Our Business

Operational Developments – Launch of

New Premium and Luxe Product Lineups

Beginning in 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

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

While the response to our new products and enhanced brand positioning has been extremely positive, in 2023, we have continued to experience

softening demand for home-related products that can be attributed to the overall market conditions.

Also, as consumer spending habits

have moved away from the COVID era e-commerce spike to brick and mortar buying, we have grown the number of Purple showrooms to 60 as

of December 31, 2023.

In addition, we have focused on growing our placements with wholesale partners and improving wholesale door productivity.

Over the course of the third and fourth quarters, we transitioned all of our wholesale partners to our new line of mattress products.

Improving the sales productivity of both our wholesale partners and existing showrooms remains a primary focus and critical component

of our strategy to respond to shifting demand patterns.

We are also diligently working to improve e-commerce conversion by testing how

to best optimize increased traffic on our website.

We experienced several years of hyper growth during the pandemic and increased investments

to support current and future expansion.

After right-sizing our operations, improving our execution, and refining our strategies to drive

share gains in the premium mattress category, we are now building the framework for improved operational maturity and accountability to

position us for accelerated growth.

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

brand positioning and increased media investment at the top of the acquisition funnel.

As a result, during the fourth quarter of 2023,

our new product lineup became fully accessible across all sales channels which led to our highest level of quarterly net revenues since

the fourth quarter of 2021.

As we move into 2024, we believe we can achieve efficiencies with regard to our media investment, by targeting

specific segments most likely to purchase Purple and by focusing more effort on those consumers currently in the market for a sleep product.

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

Coliseum Cooperation Agreement

On February 21, 2023, Coliseum on behalf of its funds and managed accounts,

filed a lawsuit against us and several members of our Board of Directors 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.

On April 19, 2023, we entered into a Cooperation Agreement with Coliseum

to resolve the litigation.

The details of the Cooperation Agreement, which became effective on April 27, 2023, are discussed further in

Note 14 — Related Party Transactions — Coliseum Capital Management, LLC.

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.

Any future proposed offerings under the shelf registration statement are subject to the pre-emptive

right held by Coliseum or the waiver of such right by Coliseum.

In February 2023, we completed an underwritten follow-up offering of 13.4

million shares of Common Stock at a public offering price of $4.50 per share.

The aggregate net proceeds received by us from the

offering, after deducting offering fees and expenses of $3.3 million, totaled $57.0 million.

The amount available under the shelf registration

was reduced by the $60.3 million of gross proceeds from this underwritten offering.

Debt Financing

On August 7, 2023, we entered into the Term Loan Agreement with Callodine

Commercial Finance, LLC and a group of financial institutions.

Also, on August 7, 2023, we entered into a separate financing arrangement

(the “ABL Agreement”) with the Bank of Montreal and a group of financial institutions (collectively the “ABL Lenders”)

that provided for a $50.0 million revolving asset-based credit facility (the “ABL Loans” and together with the ABL Agreement

and the Term Loan Agreement the “2023 Credit Agreements”).

Term loans totaling $25.0 million were fully drawn at closing in

accordance with the Term Loan Agreement and this amount was outstanding at December 31, 2023.

Also, since the closing in August 2023,

we have executed $17.0 million in ABL loan draws and then subsequently repaid $12.0 million of those borrowings prior to the end of 2023.

The outstanding balance of ABL Loans totaled $5.0 million at December 31, 2023.

In connection with our execution

of the 2023 Credit Agreements, we terminated our 2020 Credit Agreement.

We had no outstanding borrowings under the 2020 Credit Agreement

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 were recorded as a loss on extinguishment of debt in 2023.

On January 23, 2024, we entered into the Second Amendment and concurrently

therewith the Amended and Restated Credit Agreement, which amended and restated the Term Loan Agreement, with the Lenders and Delaware

Trust Company, as administrative agent.

The Lenders agreed to assume our obligations under the Term Loan Agreement and agreed to refinance

our existing obligations.

A term loan in the amount of $61.0 million (the “Loan”) was funded by the Lenders that repaid in

full the $25.0 million of Term Loans outstanding, repaid in full the $5.0 million of ABL Loans outstanding, paid fees, premiums and expenses

incurred in connection with this transaction, and provided net proceeds to us (after payments of outstanding debt, unpaid accrued interest,

and expenses) equal to approximately $27.0 million.

Interest on the Loan is payable each month and the principal outstanding is due on

December 31, 2026, the maturity date of the Loan.

We may elect for interest to be capitalized and added to the principal amount.

bears interest at a rate equal to (i) the secured overnight financing rate as administered by the Federal Reserve Bank of New York plus

0.10%, with a floor of 3.5% per annum, plus (ii) 8.25% per annum (or, if Purple LLC elects to pay interest in kind to reduce it cash obligations,

10.25% per annum).

Any prepayments on or after August 7, 2024 but before August 7, 2025 are subject to a prepayment penalty of 1.25%,

and any prepayments on or after August 7, 2025 are subject to a prepayment penalty of 2.50%.

We may request an additional term loan from

the Lenders in an aggregate amount not to exceed $19.0 million on terms requested by us to the extent agreed to by the Lenders at their

The Amended and Restated Credit Agreement also removed restrictions and requirements typically associated with an asset-based

In connection with our execution of the Amended and Restated Credit Agreement, all obligations under the 2023 Credit Agreements

were paid in full and the 2023 Agreements were terminated.

In connection with the Amended and Restated Credit Agreement, we also

issued the Warrants to the Lenders on January 23, 2024 to purchase 20.0 million shares of our Common Stock equal to 19% of the shares

of Common Stock issued and outstanding.

Each Warrant entitles the registered holder to purchase one share of our Common Stock at a price

of $1.50 per share, subject to adjustment.

The Warrants will expire on the 10-year anniversary of issuance, or earlier upon redemption.

A holder of the Warrants will not have the right to exercise them, to the extent that after giving effect to such exercise, the holder

(together with its affiliates) would beneficially own in excess of the Beneficial Ownership Cap.

Coliseum beneficially owns 58.5 million

shares of Common Stock (which includes 11.6 million shares of Common Stock upon exercise of its Warrants), which constitutes 49.9% of

the Company’s diluted shares outstanding and voting power.

Coliseum also beneficially owns 1.8 million additional warrants that

cannot be exercised if doing so would cause Coliseum to exceed the Beneficial Ownership Cap.

Registration Rights Agreement

In connection with the issuance of the Warrants, the Registration Rights

Agreement provided that on or prior to February 22, 2024, the Company was required to prepare and file with the SEC pursuant to Rule 415

of the Securities Act a registration statement to register the resale of the Registrable Securities.

The Company received an extension

from the Holders to file the resale registration statement on or prior to March 22, 2024.

The Company will be responsible for the payment

of the Holders’ expenses in connection with any offering or sale of Registrable Securities by the Holders, including underwriting

discounts or selling commissions, placement agent or broker fees or similar discounts, commissions or fees relating to the sale of certain

Registrable Securities.

Amended Employment Agreement and Special Recognition

On January 26, 2024, our Board of Directors approved an amendment to

our Chief Executive Officer’s employment agreement.

Under the amendment, we agreed that, among other things:

(i) the Chief Executive

Officer’s base salary will be increased, effective March 19, 2024, to $0.7 million;

(ii) the Chief Executive Officer will be eligible

to earn an incremental aggregate cash bonus equal to $0.9 million that will vest 10% on August 1, 2024, 20% on February 1, 2025, and 70%

on August 1, 2025, provided he continues to be employed by us and subject to the Chief Executive Officer’s obligation to repay any

such bonus actually received in the event his employment is terminated other than by us without cause prior to June 30, 2026, subject

to certain conditions;

and (iii) the Chief Executive Officer will be eligible to earn a cash payment of up to $5.0 million, less tax and

other required withholdings, based on the Volume Weighted Average Price per share of our Common Stock on NASDAQ during the period from

March 16, 2026 through June 30, 2026 subject to his continued employment with us.

The amount earned will be payable in quarterly installments

commencing with the first payroll period following June 30, 2026.

Also, on January 26, 2024, our Board of Directors unanimously approved

a special recognition bonus payment to certain members of our senior leadership team.

Each participant is eligible to earn a special recognition

bonus payment equal to 15 months of their regular salary.

The special recognition bonus payment is payable, subject to the employee’s

continued employment with us, 10% on August 1, 2024, 20% on February 1, 2025, and 70% on August 1, 2025.

Executive Summary – Results of Operations

Net revenues decreased $62.7

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

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

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

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

consumer discretionary spending and our intentional reduction in advertising spend.

Gross profit decreased 28.6%

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

The gross profit

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

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

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

than sales from our DTC channel.

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

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

the second half of the year.

Operating expenses decreased

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

This decrease primarily reflected the impact of reduced

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

Other income was $163.2 million

in 2022 compared to $26.0 million in 2021.

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

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

of a future liability was not probable.

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

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

year ended December 31, 2022.

Income tax expense was $212.9

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

Based on available evidence, we concluded it was more likely

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

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

The net loss attributable

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

The net loss reflected an operating

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

Recent Developments in

On August 31, 2022, we acquired

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

spinal alignment and pressure point relief.

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

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

opportunities for innovation.

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

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

The total purchase consideration for the acquisition

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

In addition, the Intellibed securityholders

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

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

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

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

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

of Intellibed for up to 12 months following the closing.

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

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

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

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

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

Coliseum Capital Management, LLC Proposal

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

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

by Coliseum for $4.35 per share in cash.

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

common stock.

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

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

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

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

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

The Board expressly granted the Special Committee

the ability to decline the Coliseum proposal.

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

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

On January 12, 2023, the Company

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

On January 13, 2023, Coliseum

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

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

On January 17, 2023, Coliseum

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

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

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

On February 13, 2023, Coliseum

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

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

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

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

respect to Coliseum’s proposal.

On February 14, 2023, the

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

shareholders.

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

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

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

shareholders.

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

Any new issuance of

Common Stock will automatically include a proportionate number of PRPLS.

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

two-thirds of the members of the Board.

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

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

distributions.

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

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

Meeting and other related allegations.

On February 21, 2023, Coliseum

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

Management, LLC v.

Anthos , Case No.

2023-0220-PAF (Del.

The complaint alleges that the Company and the named

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

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

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

named directors’ fiduciary duties;

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

(3) unspecified damages

resulting from the alleged breach of duties;

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

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

2023 annual meeting of stockholders.

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

However, Purple

intends to vigorously defend against the claims made by Coliseum.

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

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

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

In addition to Dawn Zier, who

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

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

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

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

On March 16, 2023, the Special

Committee announced that Coliseum has rejected the settlement proposal.

Stockholder Rights Agreement

On September 25, 2022, with

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

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

The Special Committee adopted the Rights Agreement in response

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

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

owned by Coliseum.

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

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

The Rights Agreement applies

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

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

Upon adoption of the Rights

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

Participating Preferred Stock (the “Preferred Shares”).

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

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

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

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

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

The Rights will be exercisable only

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

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

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

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

triggering the Rights Agreement.

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

financial statements .

Proportional Representation Preferred Linked

On February 14, 2023, the

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

shareholders.

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

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

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

shareholders.

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

Any new issuance of

Common Stock will automatically include a proportionate number of PRPLS.

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

two-thirds of the members of the Board.

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

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

distributions.

On February 21, 2023, Coliseum

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

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

Equity Financing

On March 29, 2022, we completed

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

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

We received aggregate net proceeds from the offering, after deducting

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

On December 27, 2022, we filed

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

As a result, we may offer and sell

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

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

The registration became effective

on January 30, 2023.

On February 13, 2023, we completed

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

The underwriters did not exercise their over-allotment

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

$57.0 million.

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

Debt Financing

On September 3, 2020, Purple

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

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

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

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

Our operating and financial

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

On February 28, 2022, prior to the covenant compliance certification date, we entered into the first amendment of the 2020

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

This amendment contained a covenant waiver period such that

the net leverage ratio and fixed charge coverage ratio would not be tested for the fiscal quarters ended December 31, 2021, March

31, 2022 and June 30, 2022.

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

and thresholds, the addition of minimum liquidity requirements with mandatory prepayments of the revolving loan if cash exceeded $25.0 million,

new weekly and monthly reporting requirements, limits on the amount of capital expenditures, the addition of a lease incurrence test for

opening additional showrooms, additional negative covenants during a covenant amendment period that extends into 2023 until certain conditions

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

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

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

On March 23, 2022, we

entered into a second amendment to the 2020 Credit Agreement.

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

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

constituting an event of default.

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

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

Pursuant to this amendment, we incurred fees and expenses

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

On May 13, 2022 and September

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

These amendments modified

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

The amendments did

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

expense in the consolidated statement of operations.

On July 14, 2022, we received

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

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

statement of operations.

On December 30, 2022, we made

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

As of December 31, 2022, we were

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

The interest rate on the term loan

was 8.98% at December 31, 2022.

On February 17, 2023, we entered

into a fifth amendment to the 2020 Credit Agreement.

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

balance of the term loan, plus accrued interest.

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

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

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

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

Both the maximum leverage ratio and minimum fixed charge

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

quarter of 2023 and thereafter.

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

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

Beginning in the fourth quarter of 2023, we

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

The leverage ratio must be less

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

ratio is less than 2.00x.

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

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

The amendment further (i) reduces the amount available

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

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

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

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

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

on or after the third quarter of 2023 .

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

as debt issuance costs.

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

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

Operational Developments

The COVID-19 pandemic has

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

and logistics, our suppliers, and the market overall.

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

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

In 2022, after two years

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

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

actions to lower costs.

We continue to closely monitor

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

As inflationary pressures

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

In addition, COVID-19 and other events,

including port closures or labor shortages, have resulted in the continuation or worsening of manufacturing and shipping costs, delays

and constraints.

While most of our domestic suppliers have been able to continue operations and provide necessary materials when needed,

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

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

compensation.

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

In 2022, our gross profit

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

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

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

delivery times.

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

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

we continue to develop our capabilities.

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

door productivity.

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

showrooms in 2023.

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

added approximately 900 net new doors during 2022.

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

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

After several years of hyper growth

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

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

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

We also intentionally reduced our advertising spending

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

We believe the acquisition

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

impact on our target luxury market expansion.

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

the market presence of premium product offerings.

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

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

Moreover, the acquisition accelerated our product

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

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

Other Developments

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

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

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

Company’s operations, policies, or practices.

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

the Company’s 2023 annual meeting of stockholders.

million, or 10.9%, to $510.5 million for the year ended December 31, 2023 as compared to the prior year.

The decrease in net revenues

was primarily due to continued soft demand for home-related products.

This decline was partially offset by the positive response to the

launch, in May 2023, of our new Premium and Luxe product lineups.

During the fourth quarter of 2023, our new product lineup became fully

accessible across all sales channels which led to our highest level of quarterly net revenues since the fourth quarter of 2021.

Gross profit decreased $36.3 million, or 17.4%, to $171.8 million for

the year ended December 31, 2023 as compared to the prior year.

This decrease reflected the impact of our gross profit percentage declining

to 33.7% of net revenues in 2023 as compared to 36.3% in 2022.

Our reduced gross profit percentage was primarily impacted by the transition

to our new product lineup in 2023.

These transitional effects included reduced pricing on sales of new floor models to our wholesale partners,

increased labor and freight costs, decreased manufacturing efficiency, inventory reserves for legacy products and increased discounting

of legacy product line mattresses sold through our DTC channels.

Operating expenses increased

$34.7 million, or 13.8% to $285.5 million in 2023 compared to $250.8 million in the prior year.

This increase was primarily due to (i)

an increase of $9.1 million of legal and professional fees incurred in connection with actions conducted by the Special Committee of independent

directors to address an unsolicited offer to buy the Company and resolve subsequent litigation brought against us for actions taken by

the Special Committee in response to the offer;

(ii) a $16.9 million increase in marketing and selling expenses driven by showroom expansion

and higher advertising spend which began increasing in mid-May in alignment with the launch of our new product lineup;

(iii) a $3.1 million

increase in research and development costs;

and (iv) a $6.9 million loss on impairment of goodwill.

Other expense was $7.5 million in 2023 compared to other income of

$163.2 million in 2022.

Other expense in 2023 was primarily comprised of interest expense, losses on debt extinguishments, and losses

on disposals of property and equipment.

Other income in 2022 primarily related to reducing our Tax Receivable Agreement liability to zero

by the end of that year and recognizing Tax Receivable Agreement income of $162.0 million in 2022.

For reasons similar to those that led

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

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

Income tax expense was de

minimis in 2023 compared to $213.2 million in 2022.

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

tax expense in 2022 reflected the impact of establishing a full valuation allowance on our deferred tax assets by the end of that year

and recognizing deferred tax expense of $213.9 million in 2022.

Based on available evidence, we concluded it was more likely than not

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

Net loss attributable to Purple

Innovation, Inc.

was $120.8 million for the year ended December 31, 2023 compared to $92.5 million for the year ended December 31, 2022.

The net loss in 2023 reflected an operating loss of $113.7 million and other expense of $7.5 million.

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.

We believe that our four

strategic initiatives;

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

will be fundamental to our future success.

To support our plans for future growth and sustained

profitability, we are focusing on the following opportunities:

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

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

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

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

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

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

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

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

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

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

as we grow into our production footprint.

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

Expansion of the Brand in the Premium and Luxe Categories— To complement and support our expansion into the higher-priced, higher margin categories, Purple is evolving its differentiated brand to broaden appeal.

We are investing in brand demand-driving marketing and advertising to create awareness, engagement, and preference for the Purple brand and for our products across all our sales channels.

We developed a reimagined brand associated with life enhancing sleep.

We believe that this strategic focus and investment will support our growth plans in the wholesale channel, in Purple showrooms, on Purple.com and online marketplaces.

Our Luxe (“Rejuvenate”) offerings are expected to increase average sales prices significantly.

We’ll also continue to harness the evangelism of the ever-growing base of Purple owners whose advocacy of our products is one of our brand’s greatest strengths.

Further direct-to-consumer growth and penetration— We believe that we are well positioned to leverage our brand, leading product portfolio, vertical integration and strong marketing capabilities to continue to attract new customers via our e-commerce channel.

We have invested in substantial improvements to our website and analytics, enhancing the education, shopping and buying experiences, and we have expanded our contact center, enabling live voice, chat and messaging with our sales associates.

These actions are intended to drive higher customer satisfaction, higher average order value and higher conversion.

Continued successful execution on Purple.com supports our planned e-commerce growth, and also supports further growth in all channels given the importance of the site during the customer decision journey.

In addition, as of December 31, 2023, we operated 60 Purple showrooms in cities across the United States.

At our showrooms, consumers can experience our brand, learn about and engage with our technology and purchase our products, assisted by our highly-trained retail sales associates who are able to both increase door productivity and trade customers up to higher price points.

Our showrooms enable us to strengthen the relationship with the consumer and develop a more profitable DTC revenue mix.

We anticipate continued expansion of our showrooms as we optimize the format.

Expanded wholesale retail relationships — We continue to work closely with existing retail partners to improve productivity to increase market share and sales, and we are forming new partnerships to expand our wholesale footprint.

With our new Premium and Luxe collections, we believe we have an increased opportunity to tap into the large brick-and-mortar category of the sleep products market.

As a result of our new product launch in 2023, we increased the number of wholesale partner slots (a term commonly used to describe a section in a wholesale partner’s store to display a particular product).

We believe this trend is a result of the developing interest in our Premium and Luxe product categories.

This allows retailers to market these products as alternatives to other premium products to increase sales on high-end mattresses with materially higher margins for the retailer and Purple.

Existing product innovation— We have a rich

history of product innovation and have developed core competencies in design, prototyping and manufacturing.

integration, which enables us to continuously refine our existing products and manufacturing processes, combined with our

strengthened research and development disciplines and go-to-market processes allows us to further develop our current product

categories with new offerings, enhance gross margins through improved pricing, and position our business to eventually expand to

additional categories with the potential to attract new customers and drive repeat sales.

New product launches — We focus intensively on innovation, to

support our long-range growth plan.

We have a pipeline of future products we are developing.

We are constantly exploring new technologies

and ways to expand the benefits of our technologies through new product offerings.

These efforts include innovations beyond our Hyper-Elastic

Polymer technology, including products in sleep, comfort and similar categories.

International expansion— We believe there is a substantial opportunity for international expansion.

We entered the Canada market in 2020 and we plan to expand in other foreign markets in the future.

We believe that our differentiated products, multi-channel distribution strategy, manufacturing capabilities, vertical integration and marketing expertise will help enable us to successfully enter new markets.

Improve Gross Margin —

We continue to attempt to manage input costs, operating efficiencies, and pricing to help further enhance our gross margin, including

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

There is no guarantee that

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changes in the market or our business.

Critical Accounting Estimates

In connection with the preparation

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

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

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

sales, expenses and the related disclosures.

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

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

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

On a regular basis, management reviews the accounting

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

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

assumptions and estimates, and such differences could be material.

Critical Accounting Policies and Estimates

In connection with the preparation of our consolidated financial statements

in conformity with United States generally accepted accounting principles (“GAAP”), we are required to make estimates and

assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities, sales, expenses and the related

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

We base our assumptions,

estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time

our consolidated financial statements are prepared.

On a regular basis, management reviews the accounting policies, assumptions, estimates

and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP.

However, because

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

such differences could be material.

Management believes the accounting

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Revenue Recognition

Our revenue recognition

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

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

Our revenue recognition accounting

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

timing of future sales returns, uncollectible accounts and variable consideration.

Our estimates of the amount and timing of sales returns,

and uncollectible accounts are based primarily on historical transaction experience.

Our sales return liability decreased from $7.1

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

Our allowance for doubtful accounts was not material

at both December 31, 2022 and 2021.

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

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

or credit losses.

uncollectible accounts and variable consideration are based primarily on historical trends, product return rates and current contract

Accrued sales returns increased from $5.1 million at December 31, 2022 to $5.4 million as of December 31, 2023.

Our allowance for

credit losses was not material at both December 31, 2023 and 2022.

We do not believe there is a reasonable likelihood that there will

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

returns and exchanges, our allowance for credit losses or variable consideration.

However, if actual results are not consistent with our

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

We review our long-lived assets and definite-lived intangible assets

for impairment as of December 31 and whenever events or changes in indicate the carrying amount

may not be recoverable.

If there are any indications of impairment, we perform a recoverability test by comparing the carrying

value of the assets to the estimated future cash flows.

Cash flow models are reliant on various assumptions, including projected business

results and long-term growth factors.

During 2023, there were indicators of impairment and a recoverability test was required.

the results of the recoverability test, we concluded that the long-lived assets and definite-lived assets were not impaired as of December

31, 2023 and no impairment charges were recorded.

do not amortize goodwill but test it for impairment each December 31 or whenever events or changes in circumstances indicate the carrying

amount may not be recoverable.

The recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit’s

carrying amount, including goodwill, to the fair value of the reporting unit.

The ongoing decline in our market capitalization,

along with other qualitative considerations was determined to be a triggering event for potential goodwill impairment.

Accordingly, in

2023 we performed a goodwill impairment assessment analysis.

As a single reporting unit, we estimated the implied fair value of our goodwill

using a variety of valuation methods, including both the income and market approaches.

As a result of the impairment assessment performed,

we concluded goodwill was impaired and recorded an impairment charge to write off the entire $6.9 million balance of goodwill.

Accrued Warranty Liabilities

We provide a limited warranty on most of the products we sell.

warranty liability assessment methodology includes estimates in both our DTC and wholesale channels.

The estimated warranty costs associated

with products sold through DTC channels are expensed at the time of sale and included in cost of revenues.

The estimated warranty costs

associated with products sold through the wholesale channel are recorded at the time of sale and included as an offset to net revenues.

Estimates for warranty costs are based primarily on historical trends and warranty claim rates incurred, and are adjusted for any current

or expected trends as appropriate.

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

actual trends and projected claim costs.

We expect the estimated warranty liability to continue to increase as we have not yet reached

the full 10 years of history on our 10-year mattress warranty.

We classify as non-current those estimated warranty costs expected to be

paid out in greater than one year.

As of December 31, 2023, the current and non-current portions of our warranty liabilities

were $9.8 million and $25.8 million, respectively, compared to $5.8 million and $18.7 million, respectively, at December 31, 2022.

We do not believe there is a reasonable likelihood that a material change in the estimates or assumptions we use to calculate our warranty

liability will occur.

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

gains that could be material.

Warranty Liabilities

We provide a limited warranty

on most of the products we sell.

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

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

current or expected trends as appropriate.

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

for actual trends and projected claim costs.

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

than one year.

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

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

We have not made

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

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

However, if actual results are

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

Accounting for income taxes

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

in the financial statements or tax returns.

in our financial statements or tax returns.

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

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

their respective tax bases.

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

that the deferred tax assets will be realized.

Deferred tax assets and liabilities are calculated by applying existing

tax laws and the rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or

The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change.

Our effective tax rate is primarily impacted by the allocation of income taxes to the noncontrolling interest and changes in our valuation

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

realization of deferred tax assets over time.

For purposes of evaluating

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

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

Based on this and other available evidence, we concluded

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

assets was appropriate at December 31, 2022.

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

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

We had previously recognized deferred tax benefits

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

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

valuation allowance for our deferred tax assets was not appropriate.

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

respective tax bases.

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

the deferred tax assets will be realized.

Deferred tax assets and liabilities

are calculated by applying existing tax laws and the rates expected to apply to taxable income in the years in which temporary differences

are expected to be recovered or settled.

The effect of a change in tax rates on deferred tax assets and liabilities is recognized in

the year of the enacted rate change.

Our effective tax rate is primarily impacted by the allocation of income taxes to the noncontrolling

interest and changes in our valuation allowance.

Also, changes in existing federal and state tax laws and corporate income tax rates

could affect future tax results and the realization of deferred tax assets over time.

For purposes of evaluating our 2022 deferred tax assets and liabilities,

we entered a cumulative three-year loss position in the fourth quarter of 2022 due primarily to the impact of 2020’s positive results

of operations rolling out of the cumulative three-year period analysis.

Based on this and other available evidence, we concluded it was

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

was appropriate at December 31, 2022.

Due to the increase in the valuation allowance, we recognized deferred tax expense of $213.9 million

We had previously recognized a deferred tax benefit of $3.9 million for 2021, based on our previous conclusion that it was more

likely than not that some of our deferred tax assets would be realized and that a full valuation allowance for our deferred tax assets

was not appropriate.

Income tax expense in 2023 was de minimis and we have continued to maintain a full valuation allowance on our deferred

tax assets based on our cumulative three-year results of operations.

We account for uncertainty

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in the period in which we make the change.

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

in the consolidated balance sheets.

As of December 31, 2023 and 2022, the cumulative balance of unrecognized tax benefits were

$0.9 million and 0.6 million, respectively.

Tax Receivable Agreement

In connection with the Business

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

cash savings, if any, in U.S.

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

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

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

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

deemed to be paid by us as a result of, and additional tax basis arising from, payments it makes under the agreement.

As noncontrolling interest

holders exercise their right to exchange or cause Purple LLC to redeem all or a portion of its Class B Units, a liability under the Tax

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

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

The amount of the increase in asset

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

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

As a result of the initial

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

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

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

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

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

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

As result, we reduced the Tax Receivable Agreement

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

of operations for the year ended December 31, 2022.

We are currently unable to

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

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

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

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

of the net cash savings, if any, in United States federal, state and local income tax that we realize (or are deemed to realize in certain

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

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

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

interest deemed to be paid by us as a result of, and additional tax basis arising from, payments it makes under the agreement.

As noncontrolling interest holders exercise their right to exchange

or cause Purple LLC to redeem all or a portion of its Class B Units, a liability under the Tax Receivable Agreement may be recorded based

on 80% of the estimated future cash tax savings that we may realize as a result of increases in the basis of the assets of Purple LLC

attributed to us as a result of such exchange or redemption.

The amount of the increase in asset basis, the related estimated cash tax

savings and the attendant Tax Receivable Agreement liability to be recorded will depend on the price of our Common Stock at the time of

the relevant redemption or exchange.

There was no Tax Receivable Agreement liability outstanding at both

December 31, 2023 and 2022.

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.

We continued to conclude during 2023 that the likelihood of a future liability

was not probable.

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 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.

As of December 31, 2023 though, we estimated that if all the remaining 0.2 million Class B units

were redeemed for shares of its Common Stock, the Tax Receivable Agreement liability would be approximately $168.6 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”) at December 31, 2023 would be approximately $119.8 million on a discounted basis.

Results of Operations

A discussion regarding our

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

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

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

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

Operating Results for the Year Ended December 31, 2022 compared

Results of Operations for the Year Ended December 31, 2023 compared

to the year ended December 31, 2022

The following table sets

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

of operations:

The following table sets forth for the periods indicated, our results

of operations and the percentage of total net revenues represented by each line item in our consolidated statements of operations:

Years Ended December 31,

Revenues, net

Cost of revenues

Operating expenses:

Marketing and sales

General and administrative

Research and development

Loss on impairment of goodwill

Total operating expenses

Operating loss

Other (expense) income:

Interest expense

Other (expense) income, net

Loss on extinguishment of debt

Change in fair value – warrant liabilities

Tax Receivable Agreement income

Total other (expense) income, net

Net (loss) income before income taxes

Income tax expense

Net loss attributable to noncontrolling interest

Net loss attributable to Purple Innovation, Inc.

Revenues, Net

Net revenues decreased $62.7 million, or 10.9%, to $510.5 million for

2023 compared to $573.2 million for 2022.

The decrease in net revenues was primarily due to continued soft demand for home-related products.

This decline was partially offset by the positive response to the launch, in May 2023, of our new Premium and Luxe product lineups.

the fourth quarter of 2023, our new product lineup became fully accessible across all sales channels which led to our highest level of

net revenues since the fourth quarter of 2021.

The decline in net revenues from a sales channel perspective in 2023 consisted of DTC net

revenues decreasing $33.8 million, or 10.2%, and wholesale net revenues declining $28.9 million, or 11.9%.

Within DTC, e-commerce net

revenues decreased $43.8 million, or 16.4%, while Purple showroom net revenues increased $10.0 million, or 15.8%.

The decrease in e-commerce

net revenues reflected the ongoing impact of softening demand and increased discounting on our legacy products.

The growth in Purple showroom

net revenues was driven by the number of our retail locations more than doubling over the past two years and the positive response to

our new products, especially those at higher price points in our Luxe product line.

The decrease in wholesale net revenues, which was

due in part to continued soft demand, was also affected by an increase in the warranty reserve for products sold to our wholesale customers

(for further information, see Item 9A – Previously Reported Material Weakness ) and discounted sales of floor models of our

new mattress and base products to our wholesale partners.

These decreases were offset in part by the impact of increasing new wholesale

partner “slots” (a term commonly used to describe a section in a wholesale partner’s store to display a particular product)

by approximately 10% in 2023 due to our wholesale partners positive response to the new product collection.

Cost of Revenues

Cost of revenues decreased $26.4 million, or 7.2%, to $338.7 million

for 2023 compared to $365.1 million for 2022.

This decrease was due in part to lower sales volume.

Our gross profit percentage, which

decreased to 33.7% of net revenues in 2023 from 36.3% in 2022, was adversely impacted by the transition to our new product lineup in 2023.

These transitional effects included reduced pricing on sales of new floor models to our wholesale partners, increased labor and freight

costs, decreased manufacturing efficiency, inventory reserves for legacy products and increased discounting of our legacy product line

mattresses sold through our DTC channels.

Marketing and Sales

Marketing and sales expense increased $16.9 million, or 10.2%, to $182.3

million for 2023 compared to $165.4 million for 2022.

This increase was comprised of a $12.2 million, or 32.1%, increase in showroom marketing

and sales costs attributable to showroom expansion, a $5.7 million increase in advertising spending, and a $1.7 million increase in wholesale

marketing and sales costs.

These increases were offset in part by a $2.6 million decrease in other marketing costs.

The increase in advertising

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

The increase in wholesale marketing and sales

costs was primarily due to our wholesale partners transitioning to the new Premium and Luxe product lineup during the third and fourth

quarters of 2023.

The decrease in other marketing costs reflected the impact of management restructuring the marketing organization in

the first half of 2022.

Marketing and sales expense as a percentage of net revenues was 35.7% in 2023 compared to 28.9% in 2022.

percentage of revenues reflected the impact of lower sales coupled with management’s expanded marketing efforts beginning in the

second quarter of 2023 to support the launch of our new product lineup.

General and Administrative

General and administrative

expense increased $7.7 million, or 10.1%, to $84.4 million for 2023 compared to $76.7 million for 2022.

This was primarily due to an $11.9

million increase in legal and professional fees associated with actions conducted by the Special Committee to address an unsolicited offer

to buy the Company and resolve subsequent litigation brought against us for actions taken by the Special Committee in response to the

These costs were offset in part by $2.8 million of proceeds received from claims filed under our directors and officers insurance

to reimburse us for a portion of the legal and professional fees incurred by the Special Committee.

Research and Development

Research and development costs

increased $3.1 million, or 35.9%, to $11.9 million for 2023 compared to $8.8 million for 2022.

This increase primarily reflected our continued

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

Loss on Impairment of Goodwill

The ongoing decline in our

market capitalization, along with other qualitative considerations was determined to be a triggering event for potential goodwill impairment.

Accordingly, we performed a goodwill impairment analysis as of September 30, 2023.

The Company is considered as a single reporting unit.

We estimated the implied fair value of our goodwill using a variety of valuation methods, including both the income and market approaches.

As a result of the impairment assessment performed, we determined goodwill was impaired and recorded an impairment charge to write off

our entire $6.9 million balance of goodwill.

Operating Loss

Operating loss increased $71.0

million, or 166.0% to $113.7 million for 2023 compared to $42.8 million for 2022.

The larger operating loss primarily resulted from a

decrease in gross profit that was driven by reduced sales and a lower gross profit percentage, an increase in marketing and sales costs

related to the launch of our new products and showroom expansion, an increase in general and administrative expense resulting from legal

and professional fees incurred by the Special Committee, and a loss on impairment of goodwill.

Interest Expense

Interest expense totaled $2.0

million for 2023 compared to $3.5 million for 2022.

Interest expense in 2023 was primarily comprised of $2.1 million related to the 2023

Credit Agreements entered into in August 2023 and $1.3 million related to the 2020 Credit Agreement that was terminated upon entering

into the 2023 Credit Agreements.

Interest expense was reduced by capitalized interest of $1.5 million and $0.7 million during 2023 and

2022, respectively.

Other (Expense) Income, Net

Other expense was $1.2 million for 2023 compared to other income of

$0.4 million for 2022.

Other expense in 2023 was primarily comprised of a $1.7 million loss on the disposal of property and equipment,

partially offset by other income of $0.5 million.

Other income in 2022 included an estimated fair value gain of $1.4 million related to

a preexisting legal matter between us and Intellibed that was effectively settled upon our acquisition of Intellibed in August 2022.

Loss on Extinguishment of Debt

In August 2023, we entered

into the 2023 Credit Agreements that terminated our 2020 Credit Agreement.

While we had no outstanding borrowings under the 2020 Credit

Agreement at that time, the termination was accounted for as an extinguishment of debt and $3.1 million of unamortized debt issuance costs

were recorded as loss on extinguishment of debt in 2023.

In February 2023, we entered into a fifth amendment to the since terminated 2020

Credit Agreement and repaid in full the $24.7 million outstanding balance of the related term loan plus accrued interest.

This amendment

was accounted for as an extinguishment of debt and $1.2 million of unamortized debt issuance costs were recorded as loss on extinguishment

of debt in 2023.

Change in Fair Value – Warrant Liabilities

Unexercised 1.9 million sponsor warrants expired in February 2023 and

were cancelled.

These sponsor warrants had no fair value on the date of expiration and a de minimis fair value at the end of 2022.

2022, we recognized a gain of $4.3 million related to a decrease in the fair value of the warrants outstanding at the end of 2022.

Tax Receivable Agreement Income

In connection with the Business Combination, we entered into an agreement

which generally provides for the payment by us to InnoHold of 80% of certain tax benefits, if any, that we realize as a result of increases

in our allocable share of the tax basis of the tangible and intangible assets of Purple LLC.

For reasons similar to those that led to

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

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

As result, we reduced this liability

to zero at December 31, 2022 and recognized Tax Receivable Agreement income of $162.0 million in 2022.

There was no Tax Receivable Agreement

liability recorded during 2023.

Income Tax Expense

Income tax expense was de minimis for 2023 compared to $213.2 million

Income tax expense in 2022 primarily reflected the impact of establishing a full valuation allowance on our deferred tax assets

by the end of that year and recognizing deferred tax expense of $213.9 million in 2022.

Based on available evidence, we concluded it was

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

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 $0.5 million

for 2023 compared to a net loss of $0.3 million for 2022.

Results of Operations for the Year Ended December 31, 2022 compared

to the year ended December 31, 2021

The following table sets forth for the periods indicated, our results

of operations and the percentage of total net revenues represented by each line item in our consolidated statements of operations:

Year Ended December 31,

7 unchanged sentences

Operating loss

Other income (expense):

Other (expense) income:

Interest expense

Other income (expense), net

Other (expense) income, net

Change in fair value – warrant liabilities

2 unchanged sentences

Net income before income taxes

Income tax benefit (expense)

Net income (loss)

Net loss attributable to noncontrolling

Net income (loss) attributable to Purple

Innovation, Inc.

Income tax (expense) benefit

Net (loss) income

Net loss attributable to noncontrolling interest

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

Revenues, Net

Net revenues decreased $151.8 million, or 20.9%, to $573.2 million

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

The decline in net revenues reflected

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

product sales.

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

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

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

economic stimulus.

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

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

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

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

The decrease in e-commerce net revenues reflected

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

The increase in Purple owned retail

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

The decrease in wholesale

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

door productivity.

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

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

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

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

of new models in the second quarter.

for 2022 compared to $725.0 million for 2021.

The decline in net revenues reflected a $126.1 million decrease in mattress sales, a $16.9

million decrease in other sleep product sales and a $8.7 million decrease in other product sales.

The decrease in net revenues was primarily

due to softening demand for home related products and the negative effect of inflationary pressures on consumer discretionary spending,

with consumer spending shifting towards services and experiences.

In addition, net revenues in 2021 were positively impacted by demand

in the first half of 2021 that was driven by the effects of COVID and economic stimulus.

The decline in net revenues from a sales channel

perspective consisted of DTC net revenues decreasing $143.7 million, or 30.3% and wholesale net revenues decreasing $8.1 million, or 3.2%.

Within the DTC channel, e-commerce net revenue declined $174.4 million, or 39.5%, and Purple showroom net revenue increased $30.7 million,

The decrease in e-commerce net revenues reflected the impact of the reasons stated above coupled with customers shifting away

from e-commerce buying.

The increase in Purple showroom net revenue was mainly driven by the number of our showrooms increasing from 28

at the end of 2021 to 55 at the end of 2022.

The decrease in wholesale net revenues primarily reflected reduced purchases by our existing

wholesale partners during 2022 due primarily to declining wholesale door productivity.

This decrease was offset in part by the effects

of adding approximately 900 net new wholesale partner doors in fiscal 2022 coupled with the $9.7 million in net revenues from the Intellibed

acquisition, which contributed primarily wholesale net revenues.

Cost of Revenues

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

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

sales volume.

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

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

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

savings realized from cost reduction initiatives.

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

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

until the second half of the year.

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

Cost of revenues decreased

$66.1 million, or 15.3%, to $365.1 million for 2022 compared to $431.3 million for 2021 due primarily to the decrease in sales volume.

Our gross profit percentage, which decreased to 36.3% of net revenues in 2022 from 40.5% in 2021, was adversely impacted by elevated levels

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

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

from cost reduction initiatives.

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

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

half of the year.

Marketing and Sales

Marketing and sales expense

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

December 31, 2021.

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

in other marketing costs.

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

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

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

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

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

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

General and Administrative

decreased $73.9 million, or 30.9%, to $165.4 million for 2022 compared to $239.3 million for 2021.

This decrease was driven by a $95.5

million, or 58.9%, decline in advertising spending and a $15.0 million decrease in other marketing costs.

The reduction in advertising

spending was primarily due to management’s ongoing efforts to improve marketing efficiency, conserve profitability in a challenging

macroeconomic environment and align spending with current demand levels.

The decrease in other marketing costs reflected the impact of

cost management efforts, including marketing headcount reductions, executed earlier in 2022.

These decreases were offset in part by a

$13.8 million increase in wholesale-related marketing and sales costs due in part to growing the sales organization of our wholesale business

and a $22.8 million increase in marketing and sales costs associated with showroom expansion.

Marketing and sales expense as a percentage

of net revenues was 28.7% in 2022 compared to 33.0% in 2021.

General and Administrative

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

ended December 31, 2021.

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

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

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

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

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

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

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

Research and Development

General and administrative expense increased $4.6 million, or 6.4%,

to $76.7 million for 2022 compared to $72.1 million for 2021.

This increase was primarily due to a $3.7 million increase in payroll

and benefits expense and $1.2 million in costs associated with the Intellibed acquisition, offset in part by a $0.7 million decrease

in legal and professional fees.

The increase in payroll and benefit costs mainly reflected the impact of job reclassifications for certain

employees in the first half of 2022.

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

and other costs we paid in the prior year for shares sold by Coliseum.

This decrease was partially offset by a one-time separation fee

for not continuing with the services of a professional services provider, expenses incurred by the Special Committee and Intellibed transaction

Research and Development

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

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

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

Operating Income (Loss)

Operating loss increased

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

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

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

Research and development costs increased $1.8 million, or 26.2%, to

$8.8 million for 2022 from $6.9 million for 2021.

This increase primarily reflected higher payroll and benefit costs as our renewed focus

on product innovation resulted in the growth of our research and development team, which included the addition of our chief innovation

Operating (Loss) Income

Operating loss increased $18.2 million, or 174.0% to $42.8 million

for 2022 compared to $24.6 million for 2021.

This increase primarily resulted from a decrease in gross profit that was driven by lower

sales and a reduced gross profit margin, offset in part by a decrease in operating expenses related primarily to lower advertising spend.

Interest Expense

Interest expense totaled $3.5

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

Interest paid on the term

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

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

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

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

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

We incurred $2.5 million in debt issuance costs upon

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

entered into in 2022.

Other Income (Expense), Net

Other income totaled $0.4

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

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

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

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

the disposal of production machinery and equipment.

million for 2022 compared to $1.9 million for 2021.

Interest paid on our borrowings increased $1.0 million as the average interest rate

paid increased from 3.50% in 2021 to 6.31% in 2022, due mainly to the change in terms from our credit agreement amendment in February

Interest expense was also impacted by a $0.3 million increase in interest paid on the $55.0 million revolving line of credit

that we drew down in November 2021 and repaid in full on March 31, 2022.

In addition, interest expense reflected a $0.4 million increase

in debt issuance cost amortization.

We incurred $2.5 million in debt issuance costs upon entering into the 2020 Credit Agreement

and incurred an additional $1.2 million in debt issuance costs for two of the amendments entered into in 2022.

Other (Expense) Income, Net

Other income totaled $0.4 million

for 2022 compared to other expense of $0.2 million for 2021.

The increase in other income primarily resulted from the effective settlement

of a preexisting legal matter upon our acquisition of Intellibed on August 31, 2022 at an estimated fair value gain of $1.4 million.

impact of this gain was offset in part by a $0.6 million loss recorded on the disposal of production machinery and equipment.

Change in Fair Value – Warrant Liabilities

The 1.9 million sponsor warrants

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

This decrease

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

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

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

million and $24.1 million, respectively, in our consolidated statements of operations related to decreases in the fair value of the sponsor

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

The 1.9 million sponsor warrants outstanding had a negligible fair

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

This decrease in fair value was primarily due

to the five-year term of the sponsor warrants ending on February 2, 2023 coupled with our Common Stock price declining 63.9% to $4.79

at the end of 2022.

During 2022 and 2021, we recognized gains of $4.3 million and $24.1 million, respectively, related to decreases in

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

Tax Receivable Agreement Income

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

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

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

As a result of the

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

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

This balance was reduced by $0.2 million for a

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

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

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

determined the likelihood of a future liability was not probable.

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

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

the year ended December 31, 2022.

Income Tax Benefit (Expense)

Income tax expense was $212.9

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

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

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

Based on this and other available evidence, we

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

tax assets was appropriate.

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

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

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

recorded in 2022.

In connection with the Business

Combination, we entered into a Tax Receivable Agreement which generally provides for the payment by us to InnoHold of 80% of certain tax

benefits, if any, that we realize as a result of increases in our allocable share of the tax basis of the tangible and intangible assets

of Purple LLC.

As a result of the initial merger transaction and subsequent exchanges of Class B Units for Common Stock, the long-term

portion of the potential future Tax Receivable Agreement liability totaled $162.2 million at December 31, 2021.

This balance was reduced

by $0.2 million for a future payment that was classified as a short-term liability during 2022.

For similar reasons that led to the recording

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

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

As result, we reduced the Tax Receivable Agreement liability

to zero at December 31, 2022 and we recognized Tax Receivable Agreement income of $162.0 million for 2022.

Income Tax (Expense) Benefit

Income tax expense was $213.2 million for 2022 compared to an income

tax benefit of $1.5 million for 2021.

For purposes of evaluating our deferred tax assets, we entered a cumulative three-year loss position

during the fourth quarter of 2022 due primarily to the impact of positive 2020 results of operations rolling out of the cumulative three-year

period analysis.

Based on this and other available evidence, we concluded it was more likely than not that our deferred tax assets would

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

Due to the increase in our valuation allowance,

we recognized deferred tax expense of $213.9 million for 2022.

This was offset in part by a current tax benefit of $0.7 million recorded

Noncontrolling Interest

2 unchanged sentences

Net loss attributed

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

to noncontrolling interests was $0.3 million and $0.2 million in 2022 and 2021, respectively.

Liquidity and Capital Resources

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

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

our equity capital.

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

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

Our working capital needs depend largely upon the

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

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

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

Cash used for capital expenditures decreased from $57.1 million

in 2021 to $38.2 million in 2022.

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

associated with the opening of new Purple owned retail showrooms.

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

In the event our cash flow

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

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

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

In such event, this could

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 restructuring our obligations with current creditors, pursue

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

In addition, our 2020 Credit Agreement, as amended,

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

to execute on our growth strategies.

Based on our current projections,

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

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

capital expenditures for the next 12 months and beyond.

Underwritten Offering

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

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

exercised in full.

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

totaled approximately $92.9 million.

Shelf Registration Statement and Subsequent

Underwritten Offering

On December 27, 2022, we filed

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

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

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

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

million shares of Class A Stock.

The underwriters did not exercise their over-allotment option.

We received aggregate net proceeds

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

Approximately $27.7 million

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

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

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

The term loan is being repaid in accordance

with a five-year amortization schedule and may be prepaid in whole or in part at any time without premium or penalty, subject to reimbursement

of certain costs.

The revolving credit facility has a term of five years and carries the same interest provisions as the term debt.

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

In November 2021, we

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

Our operating and financial

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

On February 28, 2022, prior to the covenant compliance certification date, we entered into the first amendment of the 2020

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

This amendment contained a covenant waiver period such that

the net leverage ratio and fixed charge coverage ratio would not be tested for the fiscal quarters ended December 31, 2021, March

31, 2022 and June 30, 2022.

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

and thresholds, the addition of minimum liquidity requirements with mandatory prepayments of the revolving loan if cash exceeded $25.0 million,

new weekly and monthly reporting requirements, limits on the amount of capital expenditures, the addition of a lease incurrence test for

opening additional showrooms, additional negative covenants during a covenant amendment period that extends into 2023 until certain conditions

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

Pursuant to this amendment, we made a $2.5 million

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

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

On March 23, 2022, we

entered into a second amendment to the 2020 Credit Agreement.

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

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

constituting an event of default.

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

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

Pursuant to this amendment, we incurred fees and expenses

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

On March 31, 2022, we used

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

line of credit.

On May 13, 2022 and September

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

These amendments modified the permitted

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

The amendments did not meet the

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

consolidated statement of operations.

On July 14, 2022, we received

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

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

statement of operations.

On December 30, 2022, we made

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

As of December 31, 2022, we were

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

The interest rate on the term loan

was 8.98% at December 31, 2022.

On February 17, 2023, we entered

into a fifth amendment to the 2020 Credit Agreement.

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

balance of the term loan plus accrued interest.

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

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

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

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

Both the maximum leverage ratio and minimum fixed charge

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

quarter of 2023 and thereafter.

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

leases in 2023 and six new showroom leases in 2024.

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

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

The leverage ratio must be less than

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

is less than 2.00x.

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

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

The amendment further (i) reduces the amount available

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

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

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

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

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

on or after the third quarter of 2023.

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

as debt issuance costs.

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

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

Tax Receivable Agreement

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

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

As of December 31, 2021, the long-term

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

This balance was reduced by $0.3 million for

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

For similar reasons that led to the recording

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

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

As result, we reduced the Tax Receivable Agreement

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

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

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

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

Our principal sources of funds

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

Credit Agreement and proceeds received from offerings of our equity capital.

Principal uses of funds consist of interest

payments on our Loan , 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 $26.9 million and $30.8 million, respectively,

as of December 31, 2023 compared to $40.0 million and $61.6 million, respectively, as of December 31, 2022.

Cash used for capital expenditures

decreased from $38.2 million in 2022 to $15.2 million in 2023.

Our capital expenditures in 2023 primarily consisted of additional investments

made in our manufacturing operations and showroom facilities.

After entering into the Amended and Restated Credit Agreement in January

2024, our unrestricted cash balance increased to approximately $48.0 million.

Additional details about our Amended and Restated Credit

Agreement is described above under “ Recent Developments in our Business – Debt Financing ”

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

available under our Amended and Restated Credit Agreement, and expected cash to be generated from our operations will be sufficient

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

In the event our

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

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

could result in slower growth or no growth, and we may lose key suppliers, be unable to timely satisfy customer orders, and be unable

to retain all of our employees.

In addition, we may be forced to restructure our obligations to creditors, pursue work-out options

or other protective measures.

We may also need to seek additional funding sources including new debt from subordinated lenders or equity

However, such additional debt or equity capital may not be available on terms favorable to us or at all.

Our ability to raise

additional debt financing would require the consent of the Lenders.

Other Contractual Obligations

In addition to the material

contractual obligations discussed above, other material contractual obligations primarily include operating lease payments obligations.

See Note 8 of the consolidated financial statements for additional information.

Other material contractual

obligations primarily include operating lease payment obligations.

See Note 8 of our consolidated financial statements for additional

information on leases.

Cash Flows for the year ended December 31, 2023 compared to the

3 unchanged sentences

Years Ended December 31,

Net cash provided by (used in) operating activities

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net increase (decrease) in cash

Net decrease in cash

Cash, beginning of the period

Cash, end of the period

Cash used in operating activities

was $28.8 million and $30.9 million for the years ended December 31, 2022 and 2021, respectively.

Cash used in operating activities in

2022 was primarily comprised of a net loss of $89.9 million, offset in part by non-cash adjustments totaling $68.4 million.

These non-cash adjustments primarily related to deferred income taxes of $213.5 million and depreciation and amortization of $17.5 million,

partially offset by Tax Receivable Agreement income of $162.0 million.

Changes in operating assets and liabilities further reduced cash

used in operating activities by $7.2 million in 2022.

This decrease related mostly to a $33.6 million decrease in accounts payable combined

with a $4.1 million increase in accounts receivable due to timing of receipts, offset in part by a $29.0 million decrease in inventories.

The decline in accounts payable was mainly due to the balance at the end of 2021 being higher than normal because of payment timing coupled

with the impact of larger advertising spend in the fourth quarter of 2021.

The decrease in inventories was primarily due to management’s

efforts to rebalance production and fulfillment operations during 2022.

Cash used in investing activities

was $34.5 million for the year ended December 31, 2022 compared to $57.1 million for the year ended December 31, 2021.

expenditures in 2022 primarily consisted of leasehold improvements and furniture and fixtures associated with the opening of new Purple

owned retail showrooms.

In 2021, our capital expenditures included competing the build out of our manufacturing facility in Georgia, and

enhancing manufacturing and safety capabilities at our manufacturing facility in Utah.

Cash provided by financing

activities was $13.4 million for the year ended December 31, 2022 compared to $56.6 million for the year ended December 31, 2021.

activities in 2022 included $92.9 million of net proceeds received from the underwritten stock offering, offset in part by a $55.0 million

revolving line of credit payment, a $15.0 million prepayment made on the term loan, a $5.8 million payment on the Tax Receivable Agreement,

and $3.8 million in other debt related payments.

Cash used in operating activities increased $25.9 million to $54.7

million in 2023 as compared to 2022.

The increase in cash used in operating activities was offset in part by proceeds received from an

underwritten stock offering.

The increase in cash used in operating activities primarily reflected the impact of a $28.5 million increase

in our net loss.

Cash used in investing activities was $16.1 million for 2023 compared

to $34.5 million for 2022.

Capital expenditures of $15.2 million in 2023 primarily consisted of additional investments made to our

manufacturing operations and the addition of new showroom facilities.

Our capital expenditures of $38.2 million in 2022 primarily consisted

of additional investments made for 27 new showroom facilities opened during the year.

In 2022, cash flows used in investing activities

were offset in part by the net impact of cash received in the acquisition of Intellibed that consisted of $1.9 million of cash and cash

equivalents and $1.7 million of restricted cash.

Cash provided by financing activities was $55.8 million in 2023 compared

to $13.4 million in 2022.

Financing activities during 2023 included $57.0 million of net proceeds received from a stock offering, $25.0

million from the Term Loan Agreement entered into in August 2023, and $17.0 million in draws on the ABL Loans.

These cash proceeds were

partially offset by a $24.7 million payment to pay off the term loan from the 2020 Credit Agreement, $12.0 million in repayments against

the ABL Loans, $6.1 million in payments on debt issuance costs, and $0.4 million of other payments.

Financing activities in 2022 included

$92.9 million of net proceeds received from an underwritten stock offering, offset in part by a $55.0 million revolving line of credit

payment, a $15.0 million prepayment made on the term loan, a $5.8 million payment on the Tax Receivable Agreement, and $3.8 million in

other debt-related payments.

Recent Accounting Pronouncements

For a description of recently

adopted and issued accounting standards, including the respective dates of adoption and expected effects on our results of operations

and financial condition, refer to Note 2 to our financial statements included in this Annual Report on Form 10-K.

For a description of accounting

standards recently issued or adopted, including the respective dates of adoption and expected effects on our results of operations and

financial condition, refer to Note 2 of our consolidated financial statements included in this Annual Report on Form 10-K.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis