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Item 1. Financial Statements

2024-05-07 compared with 2023-11-15 · 841 added, 1523 removed, 209 unchanged (92% of the section changed)

FINANCIAL STATEMENTS

INNOVATION, INC.

Consolidated Balance Sheets

– in thousands, except for par value)

September 30,

PURPLE INNOVATION, INC.

Condensed Consolidated Balance Sheets

(unaudited – in thousands, except for

Current assets:

Cash, cash equivalents and restricted cash

Cash and cash equivalents

Accounts receivable, net

Inventories, net

Prepaid expenses

8 unchanged sentences

Accounts payable

Accrued sales returns

Accrued compensation

Customer prepayments

Accrued sales and use tax

Accrued rebates and allowances

Accrued warranty liabilities – current portion

Operating lease obligations – current portion

1 unchanged sentence

Total current liabilities

Debt, net of current portion

Accrued warranty liabilities, net of current portion

Operating lease obligations, net of current portion

Other long-term liabilities, net of current portion

Warrant liabilities

Other long-term liabilities

Total liabilities

3 unchanged sentences

$ 0.0001 par value, 210,000 shares authorized;

105,333 issued and outstanding at September 30, 2023 and 91,380 issued and outstanding at December 31, 2022

107,480 issued and outstanding at March 31, 2024 and 105,507 issued and outstanding at December 31, 2023

Class B common stock;

$ 0.0001 par value, 90,000 shares authorized;

418 issued and outstanding at September 30, 2023 and 448 issued and outstanding at December 31, 2022

205 issued and outstanding at March 31, 2024 and at December 31, 2023

Additional paid-in capital

4 unchanged sentences

Total liabilities and stockholders’ equity

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

INNOVATION, INC.

Consolidated Statements of Operations

– in thousands, except per share amounts)

The accompanying notes are an integral part of

these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.

Condensed Consolidated Statements of Operations

(unaudited – in thousands, except per

share amounts)

Three Months Ended

September 30,

Nine Months Ended

September 30,

Revenues, net

4 unchanged sentences

Research and development

Loss on impairment of goodwill

Total operating expenses

Operating income (loss)

Operating loss

Other income (expense):

1 unchanged sentence

Other income, net

Change in fair value – warrant liabilities

Loss on extinguishment of debt

Total other income (expense), net

Net income (loss) before income taxes

Income tax benefit (expense)

Net income (loss)

Net income (loss) attributable to noncontrolling interest

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

$ ( 102,424 )

Net income (loss) per share:

Change in fair value – warrant liabilities

Total other expense, net

Net loss before income taxes

Income tax expense

Net loss attributable to noncontrolling interest

Net loss attributable to Purple Innovation, Inc.

Net loss per share:

Weighted average common shares outstanding:

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

INNOVATION, INC.

Consolidated Statements of Stockholders’ Equity

– in thousands)

The accompanying notes are an integral part of

these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.

Condensed Consolidated Statements of Stockholders’

(unaudited – in thousands)

Stockholders’

Noncontrolling

- December 31, 2022

of stock under equity compensation plans

of stock upon underwritten offering, net of costs

of transactions affecting NCI

– March 31, 2023

Representation Preferred Linked Stock redemption fee

costs associated with underwritten public stock offering

of stock under equity compensation plans

of transactions affecting NCI

– June 30, 2023

of transactions affecting NCI

– September 30, 2023

Balance – December 31, 2023

$ ( 475,969 )

Stock-based compensation

Issuance of stock for Intellibed acquisition

Issuance of stock under equity compensation plans

Impact of transactions affecting NCI

Balance – March 31, 2024

$ ( 526,186 )

Stockholders’

Noncontrolling

- December 31, 2021

of stock options

of stock under equity compensation plans

of stock upon underwritten public offering, net of costs

distributions

of transactions affecting NCI

– March 31, 2022

of common stock under equity compensation plans

costs associated with underwritten public stock offering

of transactions affecting NCI

– June 30, 2022

of common stock under equity compensation plans

of common stock for Intellibed acquisition

of transactions affecting NCI

– September 30, 2022

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

INNOVATION, INC.

Consolidated Statements of Cash Flows

– in thousands)

Nine Months Ended

September 30,

Cash flows from operating activities:

Balance – December 31, 2022

$ ( 355,212 )

Stock-based compensation

Issuance of stock under equity compensation plans

Issuance of stock upon underwritten offering, net of costs

Impact of transactions affecting NCI

Balance – March 31, 2023

$ ( 381,145 )

The accompanying notes are an integral part of

these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited – in thousands)

Three Months Ended

Cash flows from operating activities:

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

1 unchanged sentence

Non-cash interest

Loss on extinguishment of debt

Loss on impairment of goodwill

Paid-in-kind interest

Change in fair value – warrant liabilities

Loss on extinguishment of debt

Stock-based compensation

Gain from effective settlement of preexisting relationship

Deferred income taxes

Loss on disposal of property and equipment

Changes in operating assets and liabilities:

Accounts receivable

Inventories, net

Prepaid expenses and other assets

1 unchanged sentence

Accounts payable

Accrued sales returns

Accrued compensation

1 unchanged sentence

Accrued rebates and allowances

Other accrued and current liabilities

Accrued warranty liabilities

Other accrued liabilities

Net cash used in operating activities

Cash flows from investing activities:

Excess restricted cash returned to acquiree

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

Purchase of property and equipment

4 unchanged sentences

Payments on revolving line of credit

Proceeds from term loan

Proceeds from related party loan

Payments for debt issuance costs

1 unchanged sentence

Payments for public offering costs

Proportional Representation Preferred Linked Stock redemption fee

Tax receivable agreement payments

Proceeds from exercise of stock options

Net cash provided by financing activities

Net decrease in cash, cash equivalents and restricted cash

Net increase (decrease) in cash

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

5 unchanged sentences

Property and equipment included in accounts payable

Issuance of common stock for Intellibed acquisition

Accrued distributions

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

INNOVATION, INC.

to Condensed Consolidated Financial Statements

Innovation, Inc.’s mission is to help people feel and live better through innovative comfort solutions.

Innovation, Inc.

collectively with its subsidiary (the “Company” or “Purple Inc.”) is an omni-channel Company

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

The Company designs and

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

other products.

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

partners, Purple owned retail showrooms, and third-party online retailers.

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

Corp (“GPAC”).

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

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

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

LLC, and GPAC was renamed Purple Innovation, Inc.

the sole managing member of Purple LLC, Purple Inc.

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

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

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

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

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

On October 3,

2022, Purple Inc.

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

of Purple LLC.

For further discussion see Note 5 — Acquisition.

The accompanying notes are an integral part of

these unaudited condensed consolidated financial statements.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

The Company’s mission

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

Purple Innovation, Inc.

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

product innovation with premium offerings, and is now omni-channel.

The Company designs and manufactures a variety of innovative, branded

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

The Company markets and sells

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

online retailers.

The Company was incorporated

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

On February 2, 2018, the Company consummated a transaction structured similar to a reverse recapitalization (the “Business Combination”)

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

At the closing of

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

Purple Innovation, Inc.

As the sole managing member

of Purple LLC, Purple Inc.

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

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

Summary of Significant Accounting Policies

of Presentation and Principles of Consolidation

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

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

All intercompany balances and transactions have been eliminated

in consolidation.

As of September 30, 2023, Purple Inc.

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

held 0.4 % of the common units in Purple LLC.

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

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

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

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

pursuant to such rules and regulations.

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

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

for the fiscal year ended December 31, 2022.

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

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

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

The results of the three and

nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the fiscal year ending December

31, 2023 or for any other interim period or other future year.

Interest Entities

LLC is a variable interest entity.

The Company determined that it is the primary beneficiary of Purple LLC as it is the sole managing

member and has the power to direct the activities most significant to Purple LLC’s economic performance as well as the obligation

to absorb losses and receive benefits that are potentially significant.

At September 30, 2023, Purple Inc.

had a 99.6% economic interest

in Purple LLC and consolidated 100% of Purple LLC’s assets, liabilities and results of operations in the Company’s unaudited

condensed consolidated financial statements contained herein.

The holders of Purple LLC Class B Units (the “Class B Units”)

held 0.4% of the economic interest in Purple LLC as of September 30, 2023.

For further discussion see Note 17 — Stockholders’

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

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

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

expenses during the reporting period.

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

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

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

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

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

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

Basis of Presentation

and Principles of Consolidation

The condensed

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

wholly owned subsidiary Advanced Comfort Technologies, Inc., dba Intellibed (“Intellibed”).

All intercompany balances

and transactions have been eliminated in consolidation.

As of March 31, 2024, Purple Inc.

held 99.8 % of the common units of Purple

LLC and other Purple LLC Class B Unit holders held 0.2 % of the common units in Purple LLC.

The accompanying unaudited

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

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

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

Certain information

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

to such rules and regulations.

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

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

year ended December 31, 2023.

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

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

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

The results of the three months ended March 31,

2024 are not necessarily indicative of the results to be expected for the year ending December 31, 2024 or for any other interim period

or other future year.

Variable Interest Entities

Purple LLC is a variable interest

The Company determined that it is the primary beneficiary of Purple LLC as it is the sole managing member and has the power to

direct the activities most significant to Purple LLC’s economic performance as well as the obligation to absorb losses and receive

benefits that are potentially significant.

At March 31, 2024, Purple Inc.

had a 99.8 % economic interest in Purple LLC and consolidated

100 % of Purple LLC’s assets, liabilities and results of operations in the Company’s unaudited condensed consolidated financial

statements contained herein.

The holders of Class B units held 0.2 % of the economic interest in Purple LLC as of March 31, 2024.

discussion see Note 16 – Stockholders’ Equity.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Use of Estimates

The preparation of the unaudited

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

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

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

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

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

The Company regularly makes significant

estimates and assumptions that affect revenue recognition, accounts receivable, allowance for credit losses, valuation of inventories,

sales returns, warranty returns, fair value of assets acquired and liabilities assumed in a business combination, impairment reviews of

long-lived assets and definite-lived intangible assets, warrant liabilities, stock based compensation, the recognition and measurement

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

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

2 unchanged sentences

Actual results could differ materially from those estimates.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Accounting Pronouncements

of Credit Losses

June 2016, the FASB issued ASU No.

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

Measurement of Credit Losses on Financial

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

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

assets carried at amortized cost based on expected credit losses.

The estimate of expected credit losses requires the incorporation of

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

These updates are effective for public companies,

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

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

The standard was adopted by the Company on January 1, 2023 utilizing a modified retrospective approach.

The adoption of this

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

Revision of Consolidated Financial Statements

for Correction of Immaterial Misstatements

In October 2023, the Company

determined that it had not properly accounted for the warranty terms specified in contracts with its wholesale customers when estimating

the liability for warranty related returns.

Based on this determination, the Company concluded that its consolidated financial statements

should be revised to properly reflect the estimated liability associated with the warranty provisions in its wholesale contracts.

In accordance

with Staff Accounting Bulletin (“SAB”) No.

99, Materiality, and SAB No.

108, Considering the Effects of Prior Year Misstatements

when Quantifying Misstatements in Current Year Financial Statements, the Company evaluated the error and determined that the related impact

was not material to results of operations or financial position for any prior annual or interim period.

However, the Company is correcting

such errors in the financial statements as of and for the three and nine months ending September 30, 2023 included in this Quarterly Report

on Form 10-Q by adjusting prior period financial statements.

As a result, the Company has revised, within this quarterly report on Form

10-Q, its unaudited condensed consolidated financial statements as of June 30, 2023 and March 31, 2023 and for each of the quarterly and

year-to-date periods therein.

Additionally, the following note disclosures have been adjusted to reflect the correction of immaterial

Note 7 – Revenue from Contracts with Customers , Note 11 – Other Current Liabilities , Note 14 –

Other Long-Term Liabilities and Note 15 – Commitments and Contingencies .

The Company has also revised its consolidated

financial statements as of December 31, 2022 and December 31, 2021 and for the years then ended, as well as the unaudited condensed consolidated

financial statements for the periods ended September 30, 2022, June 30, 2022 and March 31, 2022.

The following table sets forth

the unaudited condensed consolidated balance sheets, including the balances as reported, adjustments and the as revised balances as of

June 30, 2023 and March 31, 2023:

As of June 30, 2023

As of March 31, 2023

(In thousands)

Other current liabilities

Total current liabilities

Other long-term liabilities, net of current portion

Total liabilities

Accumulated deficit

Total stockholders’ equity attributable to Purple Innovation, Inc.

Noncontrolling interest

Total stockholders’ equity

The following table sets forth

the consolidated balance sheet, including the balances as reported, adjustments and the as revised balances as of December 31, 2022:

As of December 31, 2022

(In thousands)

Other current liabilities

Total current liabilities

Other long-term liabilities, net of current portion

Total liabilities

Accumulated deficit

Total stockholders’ equity attributable to Purple Innovation, Inc.

Noncontrolling interest

Total stockholders’ equity

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

The following table sets forth

the unaudited condensed consolidated statements of operations, including the balances as reported, adjustments and the as revised balances

for the three and six months ended June 30, 2023:

Three Months Ended

June 30, 2023

Six Months Ended

June 30, 2023

(In thousands, except per share amounts)

Revenues, net

Operating loss

Net loss before income taxes

Net loss attributable to noncontrolling interest

Net loss attributable to Purple Innovation, Inc.

Net loss per common share - basic

Net loss per common share - diluted

The following table sets forth

the unaudited condensed consolidated statements of operations, including the balances as reported, adjustments and the as revised balances

for the three months ended March 31, 2023:

Three Months Ended March 31, 2023

(In thousands, except per share amounts)

Revenues, net

Operating loss

Net loss before income taxes

Net loss attributable to noncontrolling interest

Net loss attributable to Purple Innovation, Inc.

Net loss per common share - basic

Net loss per common share - diluted

The following table sets forth

the consolidated statements of operations, including the balances as reported, adjustments and the as revised balances for the years ended

December 31, 2022 and 2021:

Year Ended December 31,

(In thousands, except per share amounts)

Revenues, net

Operating loss

Net income before income taxes

Income tax benefit (expense)

Net income (loss)

Net loss attributable to noncontrolling interest

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

Net income (loss) per common share - basic

Net loss per common share - diluted

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

The following table sets forth

the unaudited condensed consolidated statements of operations, including the balances as reported, adjustments and the as revised balances

for the three and nine months ended September 30, 2022:

Three Months Ended

September 30, 2022

Nine Months Ended

September 30, 2022

(In thousands, except per share amounts)

Revenues, net

Operating income (loss)

Net income (loss) before income taxes

Income tax benefit (expense)

Net income (loss)

Net income (loss) attributable to noncontrolling interest

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

Net income (loss) per common share - basic

Net income (loss) per common share - diluted

The following table sets forth

the unaudited condensed consolidated statements of operations, including the balances as reported, adjustments and the as revised balances

for the three and six months ended June 30, 2022:

Three Months Ended

June 30, 2022

Six Months Ended

June 30, 2022

(In thousands, except per share amounts)

Revenues, net

Operating income (loss)

Net income (loss) before income taxes

Income tax benefit (expense)

Net income (loss)

Net income (loss) attributable to noncontrolling interest

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

Net income (loss) per common share - basic

Net income (loss) per common share - diluted

The following table sets forth

the unaudited condensed consolidated statements of operations, including the balances as reported, adjustments and the as restated balances

for the three months ended March 31, 2022:

Three Months Ended March 31, 2022

(In thousands, except per share amounts)

Revenues, net

Operating income (loss)

Net income (loss) before income taxes

Income tax benefit (expense)

Net income (loss)

Net income (loss) attributable to noncontrolling interest

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

Net income (loss) per common share - basic

Net income (loss) per common share - diluted

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

The following table sets forth

the unaudited condensed consolidated statements of stockholders’ equity, including the balances as reported, adjustments and the

as revised balances for the three months ended June 30, 2023 and March 31, 2023:

(In thousands)

Stockholders’

Noncontrolling

Balance at June 30, 2023, as reported

$ ( 412,323 )

Balance at June 30, 2023, as revised

Balance at March 31, 2023, as reported

$ ( 374,814 )

Balance at March 31, 2023, as revised

The following table sets forth

the consolidated statements of stockholders’ equity, including the balances as reported, adjustments and the as revised balances

for the years ended December 31, 2022 and 2021:

(In thousands)

Stockholders’

Noncontrolling

Balance at December 31, 2022, as reported

$ ( 351,514 )

Balance at December 31, 2022, as revised

Balance at December 31, 2021, as reported

$ ( 261,825 )

Balance at December 31, 2021, as revised

The following table sets forth

the unaudited condensed consolidated statements of stockholders’ equity, including the balances as reported, adjustments and the

as revised balances for the three months ended September 30, 2022, June 30, 2022 and March 31, 2022:

(In thousands)

Stockholders’

Noncontrolling

Balance at September 30, 2022, as reported

$ ( 281,389 )

Balance at September 30, 2022, as revised

Balance at June 30, 2022, as reported

$ ( 283,667 )

Balance at June 30, 2022, as revised

Balance at March 31, 2022, as reported

$ ( 275,327 )

Balance at March 31, 2022, as revised

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

The following table sets forth

the unaudited condensed consolidated statements of cash flows from operating activities, including the balances as reported, adjustments

and the as revised balances for the six months ended June 30, 2023 and 2022.

The adjustments had no impact on cash flows from investing

or financing activities for each of the six-month periods.

Six Months Ended June 30,

(In thousands)

Cash flows from operating activities:

Change in other accrued liabilities

Net cash used in operating activities

The following table sets forth

the unaudited condensed consolidated statements of cash flows from operating activities, including the balances as reported, adjustments

and the as revised balances for the three months ended March 31, 2023 and 2022.

The adjustments had no impact on cash flows from investing

or financing activities for each of the three-month periods.

Three Months Ended March 31,

(In thousands)

Cash flows from operating activities:

Change in other accrued liabilities

Net cash used in operating activities

The following table sets forth

the consolidated statement of cash flows from operating activities, including the balances as reported, adjustments and the as revised

balances for the year ended December 31, 2022.

The adjustment had no impact on cash flows from investing or financing activities.

December 31, 2022

(In thousands)

Cash flows from operating activities:

Change in other accrued liabilities

Net cash used in operating activities

The following table sets forth

the unaudited condensed consolidated statement of cash flows from operating activities, including the balances as reported, adjustments

and the as revised balances for the nine months ended September 30, 2022.

The adjustments had no impact on cash flows from investing or

financing activities for each of the quarterly periods.

Nine Months Ended

September 30, 2022

(In thousands)

Cash flows from operating activities:

Change in other accrued liabilities

Net cash used in operating activities

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Underwritten Offering of Class A Common Stock

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

$ 4.50 per share.

The underwriters did not exercise their over-allotment option.

The aggregate net proceeds received by the Company from

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

August 31, 2022, pursuant to the Merger Agreement, the Company acquired Intellibed, a premium sleep and health wellness company, offering

gel-based mattresses scientifically designed for maximum back support, spinal alignment and pressure point relief.

The addition of Intellibed

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

opportunities for innovation.

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

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

The acquisition date fair value of the consideration

transferred for Intellibed was $ 28.2 million, which consisted of the following (in thousands):

Fair value of Class A common stock issued at closing

Fair value of Class A common stock held in escrow

Fair value of contingent consideration

Fair value of effective settlement of preexisting relationships

Transaction expenses paid on behalf of Intellibed

Due to seller

Fair value of total purchase consideration

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

date closing price of $2.86.

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

using the acquisition date closing price of $2.86.

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

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

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

closing price of the Company’s stock does not equal or exceed $ 5.00 for at least ten trading days over any period of 30 consecutive

trading days during the period beginning on the six-month anniversary of the closing date and ending on the 18-month anniversary of the

closing date.

Reclassification

Certain amounts in the prior year condensed consolidated balance sheet

have been reclassified to conform to the current year’s presentation with no effect on previously reported net (loss)

income, cash flows or stockholders’ equity.

Accrued compensation, previously included in the condensed consolidated balance sheet

within other current liabilities, is now presented separately.

Recent Accounting Pronouncements

Enhanced Segment Disclosures

In November 2023, the Financial Accounting Standards Board (the “FASB”)

issued ASU 2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures, which requires public entities,

including those that have a single reportable segment, to provide enhanced disclosures about significant expenses.

This ASU requires disclosure

to include significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”), a description

of other segment items by reportable segment, and any additional measures of a segment’s profit or loss used by the CODM when deciding

how to allocate resources.

This ASU also requires all annual disclosures currently required by Topic 280 to be included in interim periods.

The update is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December

15, 2024, with early adoption permitted and requires retrospective application to all prior periods presented in the financial statements.

The Company is currently analyzing the impact this ASU will have on its disclosures.

to Income Tax Disclosures

In December 2023, the FASB issued

ASU 2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures.

This ASU amends existing income tax

disclosure guidance, primarily requiring more detailed disclosures for income taxes paid and the effective tax rate reconciliation.

ASU is effective for fiscal years beginning after December 15, 2024, may be applied prospectively or retrospectively, and allows for early

The Company is currently evaluating the impact this update will have on its income tax disclosures in the consolidated

financial statements.

The Company acquired Intellibed,

a premium sleep and health wellness company, in August 2022.

The acquisition date fair value of the consideration transferred for Intellibed

was $ 28.2 million.

Included in this amount was $ 1.5 million for the fair value of contingent consideration related to 1.5 million shares

of Class A common stock issuable to Intellibed security holders if the closing price of the Company’s stock did not equal or exceed

certain thresholds during the period beginning on the six-month anniversary of the closing date and ending on the 18-month anniversary

of the closing date.

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

Because the contingent consideration is payable

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

Because the contingent consideration was

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

in subsequent periods.

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

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

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

As a result of effectively

settling the preexisting legal matter with Intellibed, the Company recorded a gain of $ 1.4 million as other income, net in

the consolidated statement of operations during the third quarter of 2022.

As a result of effectively settling the preexisting royalty

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

that was eliminated in consolidation.

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

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

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

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

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

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

are inherently uncertain and subject to refinement.

Consequently, during the measurement period, which could be up to one year from the

acquisition date, the Company may record adjustments to the fair values of the assets acquired and the liabilities assumed, with a corresponding

offset to goodwill.

Upon the conclusion of the measurement period or final determination of the values of assets acquired or the liabilities

assumed, whichever comes first, any subsequent adjustments will be reflected in the Company’s consolidated statement of operations.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

the assets acquired and liabilities assumed at preliminary estimates of fair value.

During the measurement period that ended August 31,

2023, the Company finalized the determination of the working capital adjustments and the fair values allocated to various assets and

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

The table below reflects final measurement

period adjustments made to various assets acquired and liabilities assumed based on updated information, and revisions to reflect the

final fair value analysis associated with the two intangible assets.

The corresponding offsets for these final measurement period adjustments

was goodwill.

The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed as of the date

of acquisition, the final measurement period adjustments and the final adjusted balances as of September 30, 2023 (in thousands):

Net tangible assets (liabilities):

September 30,

Cash, cash equivalents and restricted cash

Accounts receivable

Other current assets

Property and equipment

Operating lease right-of-use assets

Other long-term assets

Accounts payable

Other current liabilities

Operating lease obligations

Deferred tax liabilities

Net tangible assets (liabilities)

Customer relationships

Developed technology

Net assets acquired and liabilities assumed

The amount of goodwill that

resulted from the purchase price allocation was attributed to expected synergies from the assembled workforce, an increase in development

capabilities, increased offerings to customers, expanded market opportunities, and enhanced opportunities for growth and innovation.

was not being amortized but instead tested for impairment at least annually or more frequently if certain indicators of impairment were

The goodwill recorded was not deductible for income tax purposes.

The ongoing decline in the

Company’s market capitalization, along with other qualitative considerations was determined to be a triggering event for potential

goodwill impairment.

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

The Company, considered

as a single reporting unit, estimated the implied fair value of its goodwill using a variety of valuation methods, including both the

income and market approaches.

As a result of the impairment assessment performed, the Company determined goodwill was impaired and recorded

an impairment charge to write off the entire $ 6.9 million balance of goodwill.

The impairment charge was recorded during the third quarter

of 2023 in the consolidated statement of operations as a loss on impairment of goodwill.

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

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

The customer relationships intangible asset represents the estimated

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

The developed

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

using the cost to recreate method.

acquired cash, cash equivalents and restricted cash amounts included $ 1.7 million of cash deposited by Intellibed in a separate

account pursuant to an escrow agreement with the Company that ended on August 31, 2023.

The purpose of the escrow cash amount was to

cover Intellibed’s estimated state income tax liabilities, sales tax liabilities and related filing expenses that existed

prior to the acquisition date.

If the actual liabilities were less than estimated, any excess cash was to be returned to the

previous shareholders of Intellibed.

If payments for these items exceeded the escrow balance, the Company would have been required

to pay the excess.

The Company recorded the escrow account balance of $1.7 million as an acquired restricted cash balance on the

date of acquisition and used $0.9 million of the escrow account balance for actual expenses incurred.

The excess escrow balance of

$0.8 million was returned by the Company to the previous shareholders of Intellibed.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

During March 2024, the Company issued 1.5 million contingent shares to Intellibed security holders since the

Company’s stock price did not meet any of the indicated thresholds during the contingency period.

Fair Value Measurements

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

Fair value is the

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

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

The levels of the fair

value hierarchy are:

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

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

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

and market-corroborated inputs);

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

The Company uses the fair

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

Fair value is the price that would be

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

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

The levels of the fair value hierarchy are:

Level 1—Quoted market prices in

active markets for identical assets or liabilities;

Level 2—Significant other observable

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

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

Level 3—Unobservable inputs in

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

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

The classification of fair

4 unchanged sentences

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

The Company’s debt instruments are Level

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

sponsor warrant liabilities (see Note 13 — Warrant Liabilities for more information) were Level 3 instruments and used internal

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

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

Such inputs included risk free interest

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

These Level 3 liabilities generally decreased (increased)

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

Conversely, the fair value of these

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

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

warrant agreement.

were no sponsor warrants outstanding on September 30, 2023 and the 1.9 million sponsor warrants outstanding on December 31, 2022 had

a negligible fair value.

As a result, activity for the nine months ended September 30, 2023 was de minimis.

The estimated fair value of the Company’s

debt arrangement is based on Level 2 inputs, which include observable inputs approximated using

discounted cash flows and market-based expectations for interest rates, credit risk and the contractual terms of debt instruments.

of March 31, 2024, the estimated fair value of the Company’s debt arrangement was $ 41.1 million.

The warrant liabilities (see

Note 11 — Warrant Liabilities for more information) are Level 3 instruments and use internal models to estimate fair value

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

Accordingly, changes in

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

Such inputs include risk free interest rate, expected average life,

expected dividend yield, and expected volatility.

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

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

Conversely, the fair value of these Level 3 liabilities

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

The following table summarizes

the Company’s total Level 3 liability activity for the nine months ended September 30, 2022.

the Company’s total Level 3 liability activity for the three months ended March 31, 2024.

(In thousands)

as of December 31, 2021

Fair value of warrants

in valuation inputs (1)

value as of September 30, 2022

Fair value as of December 31, 2023

Initial measurement at time of issuance

Change in valuation inputs (1)

Fair value as of March 31, 2024

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

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Revenue from Contracts with Customers

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

showrooms, and third-party online retailers.

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

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

Disaggregated

Company classifies revenue into two sales categories:

The Company markets and sells

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

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

the promised products to the customer, subject to shipping terms.

Disaggregated Revenue

The Company classifies revenue

into two sales categories:

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

The DTC category is comprised

of the Company’s e-commerce channel that sells directly to consumers who purchase online and through our contact center, and the

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

The wholesale channel includes

all product sales to our wholesale partners where consumers make purchases at their retail locations or through their online channels.

The Company classifies products into two major types:

The DTC category is comprised of the e-commerce channel

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

to consumers who purchase at a showroom location.

The wholesale channel includes all product sales to our retail brick and mortar wholesale

partners where consumers make purchases at their retail locations or through their online channels.

The Company classifies products into

two major types:

sleep products and other.

Sleep products include mattresses, platforms, adjustable

bases, mattress protectors, pillows and sheets.

Sleep products include mattresses, platforms, adjustable bases, mattress protectors, pillows

Other products include cushions and various other products.

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

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

The following tables present

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

Sales Category

1 unchanged sentence

Three Months Ended

September 30,

Nine Months Ended

September 30,

Sleep products

Revenues, net

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

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

Contract Balances

Payments for the sale of products

through the e-commerce online channel, third-party online retailers, Purple showrooms and contact center are collected at point of sale

in advance of shipping the products.

Amounts received for unshipped products are recorded as customer prepayments.

Customer prepayments totaled $ 5.2 million and $ 4.5 million at September 30, 2023 and December 31, 2022, respectively.

During the three

months ended September 30, 2023 and 2022, the Company recognized all revenue that was deferred in customer prepayments at June 30, 2023

and 2022, respectively.

Inventories, Net

net consisted of the following (in thousands):

Customer prepayments

totaled $ 4.0 million and $ 5.7 million at March 31, 2024 and December 31, 2023, respectively.

During the three months ended March 31, 2024

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

Inventories consisted of the

following (in thousands):

Raw materials

1 unchanged sentence

Finished goods

Inventory obsolescence reserve

INNOVATION, INC.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Property and Equipment, Net

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

Property and equipment, net

consisted of the following (in thousands):

Equipment in progress

4 unchanged sentences

Accumulated depreciation

and equipment, net

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

30, 2023 or December 31, 2022.

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

$ 0.4 million and $ 0.9 million during the three and nine months ended September 30, 2023, respectively, and totaled $ 0.2 million and $ 0.6

million during the three and nine months ended September 30, 2022, respectively.

Depreciation expense was $ 5.0 million and $ 14.7 million

during the three and nine months ended September 30, 2023, respectively, and totaled $ 4.3 million and $ 11.4 million during the three

and nine months ended September 30, 2022, respectively.

Company leases its manufacturing and distribution facilities, corporate offices, Purple owned retail showrooms and certain equipment

under non-cancelable operating leases with various expiration dates through 2036.

The Company’s office and manufacturing leases

provide for initial lease terms up to 16 years, while Purple owned retail showrooms have initial lease terms of up to ten years .

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

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

Any lease renewal options are included in the lease term if exercise is reasonably certain at lease commencement.

also leases vehicles and other equipment under both operating and finance leases with initial lease terms of three to five years .

right-of-use asset balances for finance leases, which totaled $ 0.8 million and $ 1.0 million at September 30, 2023 and December 31, 2022,

respectively, were included with operating lease right-of-use assets on the condensed consolidated balance sheets.

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

September 30,

Property and equipment, net

Equipment in progress reflects

equipment, primarily related to mattress manufacturing, which is being constructed and was not in service at March 31, 2024 or December

Interest capitalized on borrowings during the active construction period of major capital projects totaled $ 0.4 million during

each of the three months ended March 31, 2024 and 2023.

Depreciation expense totaled $ 5.2 million and $ 4.8 million during the three months

ended March 31, 2024 and 2023, respectively.

The Company leases its manufacturing and distribution facilities, corporate

offices, Purple showrooms and certain equipment under non-cancelable operating leases with various expiration dates through 2036.

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

terms of up to 10 years.

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

The exercise of lease renewal options

is at the Company’s discretion.

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

commencement.

The Company also leases vehicles and other equipment under both operating and finance leases with initial lease terms of

three to five years .

The right of use (“ROU”) asset for finance leases was $ 0.6 million and $ 0.7 million at March 31, 2024

and December 31, 2023, respectively.

The following table presents

the Company’s lease costs (in thousands):

Three Months Ended

Operating lease costs

Variable lease costs

Total lease costs

INNOVATION, INC.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

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

liabilities recorded on the condensed consolidated balance sheet at September 30, 2023 (in thousands):

2023 (excluding

the nine months ended September 30, 2023) (a)

The table below reconciles

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

the condensed consolidated balance sheet at March 31, 2024 (in thousands):

2024 (excluding the three months ended March 31, 2024) (a)

Total operating lease payments

Less – lease payments

representing interest

value of operating lease payments

(a) Amount consists of $ 5.3 million of undiscounted cash flows offset by $ 1.1 million of tenant improvement allowances which are expected to be fully utilized in fiscal 2023.

As of September 30, 2023 and December 31, 2022, the weighted-average

remaining term of operating leases was 8.2 years and 8.8 years, respectively, and the weighted-average discount rate of operating leases

was 5.69 % and 5.51 %, respectively.

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

nine months ended September 30, 2023 and 2022 (in thousands):

September 30,

Cash paid for

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

Right-of-use assets obtained in exchange for

operating lease liabilities

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

Less – lease payments representing interest

Present value of operating lease payments

(a) Amount consists of $ 16.1 million of undiscounted cash flows offset by $ 0.7 million of tenant improvement allowances which are expected to be fully utilized in 2024.

As of March 31, 2024 and December

31, 2023, the weighted-average remaining term of operating leases was 7.8 years and 8.0 years, respectively, and the weighted-average

discount rate of operating leases was 5.76 % and 5.77 %, respectively.

The following table provides

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

31, 2024 and 2023:

Three Months Ended

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

ROU assets obtained in exchange for operating lease liabilities

(b) Operating cash flows paid for operating leases are included within the change in operating leases, net within the condensed consolidated statement of cash flows offset by non-cash ROU asset amortization and lease liability accretion.

Other Current Liabilities

current liabilities consisted of the following (in thousands):

September 30,

Warranty expense accrual – current portion

Warranty returns accrual – current portion

Other current liabilities

consisted of the following (in thousands):

Accrued sales returns

Insurance financing

Debt – current portion

Accrued sales tax liability assumed in acquisition

Accrued property taxes

Tax receivable agreement liability – current portion

Accrued sales and use tax

Long-term debt and unamortized issuance costs – current portion

Accrued interest

Total other current liabilities

INNOVATION, INC.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

consisted of the following (in thousands):

September 30,

Term loan – 2023 credit agreement

Term loan – 2020 credit agreement

unamortized issuance costs

current portion of debt, net of unamortized issuance costs

Long-term debt, net

Credit Agreements

August 7, 2023, Purple LLC, Purple Inc.

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

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

Loan Lenders”).

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

and a group of financial institutions (collectively the “ABL Lenders”) that provides for a revolving asset-based credit facility

(the “ABL Agreement”).

Pursuant to entering into these agreements (the “2023 Credit Agreements”), the Company incurred fees

and expenses of $ 3.1 million that were recorded as debt issuance costs in the third quarter of 2023.

Loan Agreement and Term Loan Pledge and Security Agreement

Term Loan Agreement provides for up to $ 25.0 million of term loans, with up to $ 5.0 million of incremental term loans available, subject

to certain conditions (collectively, the “Term Loans”).

Proceeds from the Term Loans, which were fully drawn at closing,

are to be used for general corporate purposes.

The borrowing rates under the Term Loan Agreement are based on SOFR, plus a credit spread

adjustment of 0.15% per annum, plus 8.5% per annum, with a SOFR floor of 2.0% per annum.

The Term Loans will be repaid at the earlier

of (a) a three-year amortization schedule ending on August 7, 2026 or (b) the payment in full of the ABL Agreement.

The Term Loans may

be prepaid in whole or in part at any time, but subject to a prepayment premium.

There may also be mandatory prepayment obligations based

on certain asset dispositions, casualty events and extraordinary receipts.

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

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

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

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

Loan Parties, subject to certain exceptions.

Term Loan Agreement provides for customary events of default which include non-payment and failure to perform or observe covenants.

Term Loan Agreement contains customary indemnifications that benefit the Term Loan Lenders.

Term Loan Agreement also contains representations, warranties and certain covenants of the Loan Parties.

While any amounts are outstanding

under the Term Loan Agreement, the Loan Parties are subject to a number of affirmative and negative covenants, including covenants regarding

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

indebtedness, and transactions with affiliates, among other customary covenants, each of which are subject to certain exceptions.

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

as set forth in the Term Loan Agreement, and (ii) required to maintain a minimum revolving loan availability under the ABL Agreement.

Each Loan Party is also restricted from paying dividends or making other distributions or payments on its respective capital stock, subject

to limited exceptions.

If the Loan Parties fail to perform their obligations under these and other covenants, or should any event of

default occur, the Term Loans, together with accrued interest, could be declared immediately due and payable.

Agreement and ABL Pledge and Security Agreement

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

subject to a borrowing base calculation and minimum availability requirements (with sub-facilities for swing line loans and the issuance

of letters of credit), with incremental increases available up to $ 20.0 million (the “ABL Loans”), subject to certain conditions,

availability reserves, minimum availability requirements, borrowing base calculations, and restrictive covenants.

In October 2023, the

ABL Lenders implemented an availability reserve of $ 5.0 million, which reduces the amount available under our borrowing base.

were drawn under the ABL Agreement at closing and there was no balance outstanding at September 30, 2023.

Since September 30, 2023, we

have drawn approximately $ 17.0 million in ABL Loans and given notice to repay $ 2.0 million.

Based on our borrowing base calculation, including

application of the $ 5.0 million availability reserve and a minimum availability requirement of $ 11.0 million applicable as of November

13, 2023, we have approximately $ 4.6 million available for borrowings under our ABL Agreement.

As of November 13, 2023, the Company had

$ 31.0 million in cash.

However, the amount available under the ABL Agreement depends on our borrowing base calculations and minimum availability

requirements at the time of any draw.

Therefore, the amount available to us under the ABL Agreement will change from time to time.

may use the funds drawn from the ABL Agreement to finance permitted acquisitions defined in the agreement and for working capital, capital

expenditures and other general corporate purposes.

Outstanding principal and accrued interest on the ABL Loans shall be repaid on August

INNOVATION, INC.

Debt consisted of the following

(in thousands):

Related party loan

Revolving line of credit

unamortized debt issuance costs

Current portion of debt and unamortized issuance costs (c)

Debt, net of current portion

condensed consolidated balance sheet.

2024 Credit Agreement

On January 23, 2024, Purple

LLC, Purple Inc.

and Intellibed, (collectively the “Loan Parties”) entered into an amended and restated credit agreement (the

“Amended and Restated Credit Agreement”), which amended and restated the then existing term loan agreement (“Term Loan

Agreement”), with Coliseum Capital Partners (“CCP”) and other lenders (collectively the “Lenders”) and Delaware

Trust Company, as administrative agent.

The Lenders agreed to assume the Loan Parties’ obligations under the Term Loan Agreement

and refinance their existing obligations.

A term loan in the amount of $ 61.0 million (the “Related Party 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 asset based lending

loans outstanding, paid fees, premiums and expenses incurred in connection with this transaction, and provided net proceeds to the Company

(after payments of outstanding debt, unpaid accrued interest, and expenses) equal to approximately $ 27.0 million.

Interest on the Related

Party Loan is payable each month and the principal outstanding matures and is due on December 31, 2026.

The Company may elect for interest

to be capitalized and added to the principal amount.

The Related Party Loan 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 %.

The Loan Parties may request an additional term loan from the Lenders in an aggregate amount

not to exceed $ 19.0 million on terms requested by them to the extent agreed to by the Lenders at their discretion.

The Amended and Restated

Credit Agreement also removed restrictions and requirements typically associated with an asset-based loan.

Pursuant to entering into

the Amended and Restated Credit Agreement, the Company incurred fees and expenses of $ 3.5 million that were recorded as debt issuance

costs in the first quarter of 2024.

Interest expense under the Related Party Loan was $ 3.3 million for the three months ended March 31,

The Amended and Restated Credit

Agreement granted a security interest to the Lenders in substantially all of the assets (subject to certain limited exceptions) of the

Loan Parties to secure the Loan Parties’ loans and other obligations under the Amended and Restated Credit Agreement, including

a security interest in the intellectual property owned by the Loan Parties.

The Loan Parties (other than

Purple LLC) provided an unconditional guaranty of the payment of all obligations and liabilities of Purple LLC under the Amended and Restated

Credit Agreement.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

borrowing rates under the ABL Agreement will accrue on a three-tiered grid based on revolving availability, ranging from (i) SOFR, plus

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

plus 3.25% per annum, with a SOFR floor of 0% per annum.

The ABL Loans may be prepaid in whole or in part at any time without premium

or penalty, subject to reimbursement of certain costs.

There may be mandatory prepayment obligations based on certain asset dispositions,

casualty events, equity issuances and extraordinary receipts.

to a pledge and security agreement, the Loan Parties’ obligations under the ABL Agreement are secured by a perfected first-priority

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

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

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

The Amended and Restated Credit Agreement also provides for standard

indemnification of the Lenders and contains representations, warranties and certain covenants of the Loan Parties.

While any amounts are

outstanding under the Amended and Restated Credit Agreement, the Loan Parties are subject to a number of affirmative and negative covenants,

including covenants regarding dispositions of property, investments, forming or acquiring subsidiaries, business combinations or acquisitions,

incurrence of additional indebtedness and transactions with affiliates, among other customary covenants.

The Loan Parties are also restricted

from paying dividends or making other distributions or payments on their capital stock, subject to limited exceptions.

As of March 31,

2024, the Company was in compliance with all covenants under the Amended and Restated Credit Agreement.

2023 Credit Agreements

On August 7, 2023, the Loan

Parties entered into the Term Loan Agreement.

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

with a group of financial institutions (collectively the “ABL Lenders”) that provided for a revolving asset-based credit facility

(the “ABL Agreement”).

contains customary indemnifications that benefit the ABL Lenders.

ABL Agreement also contains representations, warranties and certain covenants of the Loan Parties.

The Loan Parties are subject to affirmative

and negative covenants, including covenants regarding dispositions of property, investments, forming or acquiring subsidiaries, business

combinations or acquisitions, incurrence of additional indebtedness, and transactions with affiliates, among other customary covenants,

in each case, subject to certain exceptions.

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

certain amounts, subject to limited exceptions, as set forth in the ABL Agreement, and (ii) if revolving availability under the ABL Agreement

is less than a specified amount, required to maintain a minimum Consolidated Fixed Charge Coverage Ratio (as defined in the ABL Agreement),

and (iii) required to maintain a specified minimum revolving availability.

Each Loan Party is also restricted from paying dividends or

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

If the Loan Parties fail to perform

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

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

and any outstanding letters of credit may be required to be cash collateralized.

2023 Credit Agreement Defaults

As of September 30, 2023 the

Company was not in compliance with its debt covenants under each of the 2023 Credit Agreements due to (i) the Company’s failure

to (a) provide certain financial reporting and related materials on a timely basis and (b) complete certain post-closing deliverables

as required under the ABL Agreement and (ii) the Company drawing on the loan under the ABL Agreement while the above events of default

were in existence (collectively, the “Subject Events of Default”).

On November 6, 2023, we entered

into (i) a First Amendment and Waiver to the ABL Agreement (the “ABL Amendment”) and (ii) a First Amendment and Waiver to

the Term Loan Agreement (the “Term Loan Amendment”), with the Term Loan Lenders and ABL Lenders, respectively (collectively,

the “Lenders”), including waivers of the Subject Events of Default.

In addition, the ABL Amendment and Term Loan Amendment

also amended certain provisions of the 2023 Credit Agreements, including, among other changes, to require (i) weekly borrowing base certificates,

(ii) 13-week cash flow reports and budgets, (iii) budget variance reports, (iv) the appointment of a third-party consultant, and (v) daily

cash sweeps from the Loan Parties’ accounts to an account at the ABL Lender (collectively, the “2023 Credit Agreement Amendments”).

In addition, the ABL Amendment and Term Loan Amendment increased our reporting obligations under the 2023 Credit Agreements and if we

are not able to maintain compliance with such additional requirements we may experience future events of default, which could limit our

ability to access the ABL Loans and adversely affect our financial position and operations.

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

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

Principal uses of funds consist of payments

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

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

in inventories, and operating lease payment obligations.

Our unrestricted cash and working capital positions were $26.6 million and $40.2

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

used for capital expenditures decreased from $34.1 million in the first nine months of 2022 to $9.4 million during the first nine months

Our capital expenditures in 2023 have primarily consisted of additional investments made in our manufacturing and showroom facilities.

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 use the liquidity we have available under our ABL Loans.

Pursuant to entering into these agreements (collectively the “2023 Credit Agreements”),

the Company incurred fees and expenses of $ 3.1 million that were recorded as debt issuance costs in the third quarter of 2023.

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

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

Proceeds from the Term Loans were used for general corporate purposes.

The borrowing rates under the Term Loan Agreement were based on

SOFR, plus a credit spread adjustment of 0.15 % per annum, plus 8.5 % per annum, with a SOFR floor of 2.0 % per annum.

The Term Loans were

to be repaid at the earlier of (i) a three-year amortization schedule ending on August 7, 2026 or (ii) the payment in full of the ABL

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

There were also potential

mandatory prepayment obligations based on certain asset dispositions, casualty events and extraordinary receipts.

Once repaid, no portion

of the Term Loans could be reborrowed.

The ABL Agreement provided

for up to $ 50.0 million of revolving loans subject to a borrowing base calculation and minimum availability requirements (with sub-facilities

for swing line loans and the issuance of letters of credit), with incremental increases available up to $ 20.0 million (the “ABL

Loans”), subject to certain conditions, availability reserves, minimum availability requirements, borrowing base calculations, and

restrictive covenants.

In October 2023, the ABL Lenders implemented an availability reserve of $ 5.0 million, which reduced the amount

available under the borrowing base.

Outstanding principal and accrued interest on the ABL Loans were to be repaid on August 7, 2026.

Term loans totaling $ 25.0

million were fully drawn at closing and, subsequent to the closing in August 2023, the Company executed $ 17.0 million in ABL loan draws

and then 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 the Amended and Restated Credit Agreement, all obligations under the 2023 Credit Agreements were

paid in full and the agreements were terminated.

The termination was accounted for as an extinguishment of debt and $ 3.4 million of unamortized

debt issuance costs related to the 2023 Credit Agreements were recorded as a loss on extinguishment of debt in the first quarter of 2024.

Interest expense under the 2023 Credit Agreements was $ 0.4 million for the three months ended March 31, 2024.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

If we experience further events

of default in the future, we will not be able to access the ABL Loans unless such defaults are resolved, including by obtaining required

waivers from the ABL Lenders.

Even if we are able to obtain such waivers, the ABL Lenders may adopt additional availability reserves,

which would limit the amount we can draw under the ABL Loans.

We may also need to seek additional

funding sources including new debt from subordinated lenders or equity capital.

However, such additional debt or equity capital may not

be available on terms favorable to us or at all.

In addition, our ability to raise additional debt financing is restricted by our covenants

under the 2023 Credit Agreements and would require the consent of the Lenders.

If we are unable to access

sufficient liquidity, we will need to take other actions to fund operational expenses, such as scaling back operations, reducing marketing

spend, and postponing or discontinuing our growth strategies.

Such actions 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.

Based on our current projections,

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

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

2020 Credit Agreement

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

(the “2020 Credit Agreement”).

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

line of credit.

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

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

The revolving credit facility had a term of five years

and carried the same interest provisions as the term debt.

A commitment fee was due quarterly based on the applicable margin applied

to the unused total revolving commitment.

In connection with the Company’s execution of the 2023 Credit Agreements, the Company

terminated its 2020 Credit Agreement.

The Company had no outstanding borrowings under the 2020 Credit Agreement at the time of termination.

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

the 2020 Credit Agreement.

The amendment, among other things, revised various covenants associated with the 2020 Credit Agreement.

a condition of entering into the amendment, the Company repaid the $ 24.7 million outstanding balance on the term loan plus accrued interest.

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

consolidated balance sheet.

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

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

On September 3, 2020, Purple

LLC entered into a financing arrangement with a group of financial institutions (the “2020 Credit Agreement”).

The 2020 Credit

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

The term loan was to be repaid in accordance

with a five-year amortization schedule or prepaid in whole or in part at any time without premium or penalty, subject to reimbursement

of certain costs.

The revolving credit facility had a term of five years and carried the same interest provisions as the term debt.

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

In connection with the

Company’s execution of the 2023 Credit Agreements, the Company terminated its 2020 Credit Agreement.

The Company had no outstanding

borrowings under the 2020 Credit Agreement at the time of termination.

On February 17, 2023, the

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

The amendment, among other things, revised various covenants associated

with the 2020 Credit Agreement.

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

on the term loan plus accrued interest.

Pursuant to this amendment, the Company incurred fees and expenses of $ 2.9 million that were recorded

as debt issuance costs in the condensed consolidated balance sheet.

The amendment was accounted for as an extinguishment of debt and $ 1.2

million of unamortized debt issuance costs related to the term loan were recorded as loss on extinguishment of debt in the first quarter

On April 26, 2023, the Company

2 unchanged sentences

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

Note 16— Related Party Transactions — Coliseum Capital Management, LLC for information regarding events leading

up to the Company’s issuance of the PRPLS, and for information regarding terms of the Cooperation Agreement and redemption of the

INNOVATION, INC.

16— Related Party Transactions — Coliseum Capital Management, LLC for information regarding events leading up to

the Company’s issuance of the PRPLS, and for information regarding terms of the Cooperation Agreement and redemption of the PRPLS.)

Interest expense under the

2020 Credit Agreement totaled $ 0.6 million for the three months ended March 31, 2023.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

connection with the Company’s execution of the Term Loan Agreement and ABL Agreement, the Company terminated its 2020 Credit Agreement

in August 2023.

The Company 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 the condensed consolidated statement of operations.

expense under the 2023 Credit Agreements was $ 0.9 million for the three and nine months ended September 30, 2023.

Interest expense under

the 2020 Credit Agreement totaled $ 0.2 million and $ 1.3 million for the three and nine months ended September 30, 2023, respectively,

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

Warrant Liabilities

Company issued 12.8 million sponsor warrants pursuant to a private placement conducted simultaneously with its initial public offering.

Each of these warrants entitled the registered holder to purchase one-half of one share of the Company’s Class A common stock at

a price of $ 5.75 per half share ($ 11.50 per full share), subject to adjustment pursuant to the terms of the warrant agreement.

sponsor warrants contained certain provisions that do not meet the criteria for equity classification and therefore were recorded as

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

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

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

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

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

The 1.9 million sponsor warrants outstanding at September

30, 2022 had a fair value of $ 0.1 million.

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

September 30,

On January 23, 2024, in connection

with the Amended and Restated Credit Agreement, the Company issued 20.0 million warrants to the Lenders (the “Warrants”).

Each Warrant entitles the registered holder to purchase one share of the Company’s Class A 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.

do not have the rights or privileges of holders of Class A common stock or any voting rights until they exercise their Warrants.

the issuance of shares of Class A common stock upon exercise of the Warrants, each holder will be entitled to one vote for each share

of Class A common stock held on all matters to be voted on by stockholders generally.

A holder of the Warrants will not have the right

to exercise its Warrants, to the extent that after giving effect to such exercise, the holder (together with its affiliates) would beneficially

own in excess of 49.9 % of the shares of Class A common stock outstanding immediately after giving effect to such exercise.

contain a repurchase provision which, upon an occurrence of a fundamental transaction as defined in the warrant agreement, could give

rise to an obligation of the Company to pay cash to the warrant holders.

In addition, other provisions may lead to a reduction in the

exercise price of the Warrants.

The Company determined the fundamental transaction provisions require the Warrants to be accounted for

as a liability at fair value on the date of the transaction, with changes in fair value recognized in earnings in the period of change.

As a result, the liability for these Warrants was recorded at fair value on the date of issuance with the offset included in debt issuance

This liability is subsequently re-measured to fair value at each reporting date or exercise date with changes in the fair value

included in earnings.

The Company uses the Monte

Carlo Simulation of a Geometric Brownian Motion stock path model to determine the fair value of the liability associated with the Warrants.

The model uses key assumptions and inputs such as exercise price, fair market value of common stock, risk free interest rate, warrant

life, expected volatility and the probability of a warrant re-price event.

The following are the assumptions used in calculating fair

value of the Warrants on the date of issuance:

Trading price of common stock on measurement date

4 unchanged sentences

Expected dividend yield

the three months ended September 30, 2022, the Company recognized a loss of $ 0.1 million in its condensed consolidated statement of operations

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

For the nine months ended September

30, 2022, the Company recognized a gain of $ 4.2 million in its condensed consolidated statements of operations related to a decrease

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

Probability of an event causing a warrant re-price

The following are the assumptions

used in calculating fair value of the Warrants on March 31, 2024:

Trading price of common stock on measurement date

Exercise price

Risk free interest rate

Warrant life in years

Expected volatility

Expected dividend yield

Probability of an event causing a warrant re-price

During the three months ended

March 31, 2024, the Company recognized a loss of $ 23.6 million in its condensed consolidated statement of operations related to an increase

in the fair value of the Warrants outstanding at the end of the period.

Other Long-Term Liabilities

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

September 30,

Warranty expense accrual

Warranty returns accrual

Other long-term liabilities

consist of the following (in thousands):

Asset retirement obligations

Less – current portion of warranty accrual

Other long-term liabilities, net of current portion

INNOVATION, INC.

Total other long-term liabilities

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Commitments and Contingencies

Warranty Liabilities

The Company provides a limited

10 unchanged sentences

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

The Company classifies estimated warranty

costs expected to be paid beyond a year as a long-term liability.

Member Distributions

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

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

net taxable income following the end of each fiscal year.

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

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

the Business Combination.

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

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

The Second Purple LLC Agreement and the Third

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

There were no tax distributions paid during

the nine months ended September 30, 2023 and 2022.

At September 30, 2023, the Company’s condensed consolidated balance sheet had

$ 0.1 million of accrued tax distributions included in other current liabilities.

Agreement and Preemptive Rights

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

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

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

(the “Coliseum Private Placement”).

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

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

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

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

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

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

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

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

The Company has filed a registration statement with respect

to such securities.

of Securities Holders

holders of certain warrants exercisable into Class A common stock, including CCP, Blackwell and CDF, were entitled to registration rights

pursuant to certain registration rights agreements of the Company as of the Business Combination date.

In March 2018, the Company filed

a registration statement registering these warrants (and any shares of Class A common stock issuable upon the exercise of the warrants),

and certain unregistered shares of Class A common stock.

The Company classifies estimated

warranty costs expected to be paid beyond a year as a long-term liability.

Chief Executive Officer

Cash Bonus Award

On January 26, 2024, the Company’s

board of directors (the “Board”) approved an amendment to the Chief Executive Officer’s employment agreement.

the amendment, the Company agreed that, among other things, 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 the Company’s

Class A common stock on NASDAQ during the period from March 16, 2026 through June 30, 2026 subject to his continued employment with the

The amount earned will be payable in quarterly installments commencing with the first payroll period following June 30, 2026.

For the three months ended March 31, 2024, the Company recorded compensation expense of $ 0.4 million related to this future bonus payment.

Partial Settlement

of Insurance Claim

In January 2024, the Company

received $ 4.3 million for partial settlement of a previously filed business interruption claim.

The Company recorded the cash upon receipt

as other income, net in the condensed consolidated statement of operations for the three months ended March 31, 2024.

Rights of Securities

On January 23, 2024, in connection

with the issuance of the Warrants, the Company entered into an amended and restated registration rights agreement (the “Registration

Rights Agreement”) with holders of the Warrants (the “Holders”), providing for the registration under the Securities

Act of 1933, as amended of the Warrants, the shares issuable upon the exercise of the Warrants and

Class A Stock held by the Holders as of such date (the “Registrable Securities”), subject to customary terms and conditions.

This agreement entitles the Holders to demand registration of the Registrable Securities and to piggyback on the registration of securities

by the Company and other Company securityholders.

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.

The Registration

Rights Agreement provided further that the Company was required to prepare and file with the SEC a registration statement to register

the resale of the Registrable Securities.

On March 21, 2024, the Company filed a registration statement registering the Registrable Securities.

The holders of certain warrants exercisable into Class A common stock,

including CCP, Blackwell Partners LLC – Series A (“Blackwell”) and Coliseum Co-Invest Debt Fund, L.P.

and collectively with CCP and Blackwell, the “Coliseum Investors”), were entitled to registration rights pursuant to certain

registration rights agreements of the Company as of the Business Combination date.

In March 2018, the Company filed a registration statement

registering these warrants (and any shares of Class A common stock issuable upon the exercise of the warrants), and certain unregistered

shares of Class A common stock.

The registration statement was declared effective on April 3, 2018.

Registration Rights Agreement dated February 2, 2018 between the Company and CCP, Blackwell, and CDF (the “Coliseum Investors”),

the Coliseum Investors have the right to make written demands for up to three registrations of certain warrants and shares of Class A

common stock held by them, including in underwritten offerings.

In an underwritten offering of such warrants and shares of Class A common

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

In May 2021, the Coliseum Investors exercised the first of their three written demands for registration in an underwritten

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

LLC Class B Unit Exchange Right

February 2, 2018, in connection with the closing of the Business Combination, the Company entered into an exchange agreement with Purple

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

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

B Units, the “Paired Securities”) for, at the Company’s option, either (A) shares of Class A common stock at an initial

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

of the volume-weighted closing price of one share of Class A common stock for the ten trading days immediately prior to the date InnoHold

or other Class B Unit holders deliver a notice of exchange multiplied by the number of Paired Securities being exchanged.

2018, InnoHold distributed Paired Securities to Terry Pearce and Tony Pearce who agreed to become parties to the Exchange Agreement.

In June 2019, InnoHold distributed Paired Securities to certain current and former employees who also agreed to become parties to the

exchange agreement.

Holders of Class B Units may elect to exchange all or any portion of their Paired Securities as described above by

delivering a notice to Purple LLC.

certain cases, adjustments to the exchange ratio will occur in case of a split, reclassification, recapitalization, subdivision or similar

transaction of or relating to the Class B Units or the shares of Class A common stock and Class B common stock or a transaction in which

the Class A common stock is exchanged or converted into other securities or property.

The exchange ratio will also adjust in certain

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

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

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

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

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

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

for transfer taxes, stamp taxes and similar duties.

the nine months ended September 30, 2023, 29,965 of Paired Securities were exchanged for Class A common stock.

There were no Paired Securities

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

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

of One-to-One Ratios

Third Purple LLC Agreement includes provisions intended to ensure that the Company at all times maintains a one-to-one ratio between

(a) (i) the number of outstanding shares of Class A common stock and (ii) the number of Class A Units owned by the Company (subject to

certain exceptions for certain rights to purchase equity securities of the Company under a “poison pill” or similar stockholder

rights plan, if any, certain convertible or exchangeable securities issued under the Company’s equity compensation plan and certain

equity securities issued pursuant to the Company’s equity compensation plan (other than a stock option plan) that are restricted

or have not vested thereunder) and (b) (i) the number of other outstanding equity securities of the Company (including the warrants exercisable

for shares of Class A common stock) and (ii) the number of corresponding outstanding equity securities of Purple LLC.

These provisions

are intended to result in non-controlling interest holders having a voting interest in the Company that is identical to their economic

interest in Purple LLC.

Related Taxes

Company complies with current law and collects and reports on sales tax and other taxes and required fees in all states in which it does

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

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

The application of these taxes and fees on the Company’s business could also create significant increases in internal

costs necessary to capture data and collect and remit taxes and pay the fees.

There have been, and will continue to be, substantial ongoing

costs associated with complying with the various indirect tax requirements in the numerous markets in which the Company conducts or will

conduct business.

On October 13, 2020, Purple LLC filed a lawsuit against Responsive

Surface Technology, LLC and its parent company, PatienTech, LLC (collectively referred to as “ReST”) in the U.S.

Court for the District of Utah.

The lawsuit arises from ReST’s multiple breaches of its obligations to Purple LLC, including infringing

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

Purple seeks monetary damages, injunctive relief, and

declaratory judgment based on certain conduct by ReST (“Case I”).

On October 21, 2020, shortly after the complaint was filed

in Case I, ReST filed a retaliatory lawsuit against Purple LLC, and some of the Company’s board members, Gary DiCamillo, Adam Gray,

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

Subsequently, the two cases were consolidated into one.

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

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

Purple LLC opposed the motion to compel arbitration,

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

However, the Court

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

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

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

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

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

ReST filed its counterclaim

with the AAA on September 21, 2021.

In the course of the pre-hearing litigation, ReST was sanctioned for improper litigation conduct,

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

A two-week arbitration hearing

was held between July 31, 2023 and August 11, 2023.

The parties presented evidence, and subsequently presented post-hearing briefing to

the Arbitrator.

At this time, the Arbitrator has not issued a decision, though a decision is expected before the end of November 2023.

Purple LLC seeks over $ 5 million in damages from ReST, whereas ReST claims that Purple LLC is liable to it for approximately $ 4 million.

The outcome of the Arbitration cannot be predicted at this stage.

However, Purple LLC has vigorously pursued its claims and defended against

the claims made by ReST.

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

On May 3, 2022, Purple

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

District Court for the District of

Delaware regarding a Master Professional Services Agreement with Photon dated on or around November 1, 2019.

Pursuant to the

agreement, Photon was required to rebuild Purple Innovation LLC’s website architecture and checkout process.

Purple LLC paid

Photon $ 0.9 million under the Agreement.

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

Purple LLC withheld payment of the final $ 0.1 million due pursuant to Photon’s invoices pending a resolution with

Since resolution discussions with Photon failed, Purple LLC filed its complaint for breach of contract against Photon

seeking, among other damages, reimbursement for all amounts paid to Photon under the agreement.

Photon counter-sued, seeking payment

for the $ 0.1 million withheld by Purple LLC, and also advancing a vague claim for tortious interference.

On August 31, 2022, Purple

LLC filed an amended complaint adding additional claims pertaining to Photon’s failure to deliver a point-of-sale system

pursuant to the Master Professional Services Agreement.

Purple LLC is seeking judgment against Photon in the amount of $ 4 million.

The case was stayed in September 2023 to allow the parties to mediate the dispute.

Mediation is scheduled for November 15,

August 5, 2022, Purple LLC filed a complaint with the U.S.

International Trade Commission (“ITC”) against numerous entities

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

LLC’s intellectual property rights related to pillow and seat cushion products.

The complaint alleged that the Respondents have

been violating 19 U.S.C.

§ 1337 by importing into the United States, selling for importation into the United States, and/or selling

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

constitute unfair competition, infringe a certain Purple LLC design patent, infringe certain Purple LLC registered trademarks, and/or

infringe certain Purple LLC utility patents, specifically including U.S.

The complaint requested at least

the following relief:

(i) a General Exclusion Order excluding from entry into the United States all pillow and seat cushion products,

regardless of the source of those products, that infringe Purple LLC’s asserted intellectual property right;

(ii) Limited Exclusion

Orders excluding from entry into the United States all pillow and cushion products of the Respondents named in the complaint that infringe

any asserted intellectual property rights;

and (iii) Cease and Desist Orders against the Respondents named in the complaint barring them

from marketing, selling, advertising, or distributing infringing products in the United States, including via on-line retailers.

6, 2022, the ITC instituted Investigation No.

337-TA-1328 in response to Purple LLC’s complaint.

Fact and expert discovery

have been completed.

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

which those seven Respondents agreed to no longer import infringing products into the United States.

Purple LLC also has voluntarily

terminated the Investigation as to a number of other Respondents.

No actively litigating Respondents remain in the case.

13, 2023, the ITC Administrative Law Judge issued an Initial Determination (“ID”) in which she granted Purple LLC’s

Motion for Summary Determination finding that the four remaining Respondents have violated Section 337.

The ID also recommended that

the ITC issue a General Exclusion Order excluding from entry into the United States all pillows that infringe certain asserted claims

of the ’445 patent, regardless of the source of those products, or, in the alternative, Limited Exclusion Orders directed specifically

to the four remaining Respondents.

The ID further recommended that the ITC issue Cease and Desist Orders directed specifically to the

four remaining Respondents.

On August 28, 2023, the ITC announced that it had determined it would not review the ALJ’s determination

that the four remaining respondents had violated Section 337 through the infringement of the asserted claims of the ‘445 patent.

The ITC’s decision regarding remedy remains pending.

The ITC’s target date for completion of the investigation is currently

November 13, 2023.

INNOVATION, INC.

Under the registration rights agreement

dated February 2, 2018, the Coliseum Investors have the right to make written demands for up to three registrations of certain warrants

and shares of Class A common stock held by them, including in underwritten offerings.

In an underwritten offering of such warrants and

shares of Class A common stock by the Coliseum Investors, the Company will pay underwriting discounts and commissions and certain expenses

incurred by the Coliseum Investors.

In May, 2021, the Coliseum Investors exercised the first of their three written demands for registration

in an underwritten offering.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

In December 2022, Terry and

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

Non-Income Related

Supreme Court ruling in South Dakota v.

Wayfair, Inc.

No.17-494, reversed a longstanding precedent that remote sellers are not required to collect state and local sales taxes.

cannot predict the effect of these and other attempts to impose sales, income or other taxes on e-commerce.

The Company currently collects

and reports on sales tax in all states in which it does business.

However, the application of existing, new or revised taxes on the Company’s

business, in particular, sales taxes, value-added tax and similar taxes would likely increase the cost of doing business online and decrease

the attractiveness of selling products over the internet.

The application of these taxes on the Company’s business could also create

significant increases in internal costs necessary to capture data and collect and remit taxes.

There have been, and will continue to be,

substantial ongoing costs associated with complying with the various indirect tax requirements in the numerous markets in which the Company

conducts or will conduct business.

Legal Proceedings

On December 16, 2022, Purple’s

founders filed a complaint against Purple Inc.

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

The Pearces allege that they each entered into employment agreements with Purple LLC in February 2018.

The Pearces contend that certain

corporate transactions between May 2019 and June 2020 reduced their “ownership interest and voting power in Purple” and that,

as a result, they should have continued to be paid a salary between August 2020, when they retired from Purple LLC, and December 2021.

The Pearces calculate that they are each owed “no less than $ 500,000 ” in unpaid salary.

has moved to dismiss the

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

inability to rehabilitate their claims.

In October 2023, the Fourth Judicial District Court granted Purple’s motion and ordered

that the claims brought by the Pearces be dismissed in full, with prejudice.

As of this update, the final judgment for this action is

The Company maintains insurance to cover the costs of defending against claims of this nature and intends to continue to vigorously

defend against these claims.

April 3, 2023, InnoHold, LLC, Terry Pearce, and Tony Pearce (collectively, the “InnoHold Parties”) filed a complaint against

Purple LLC in the Delaware Court of Chancery, captioned InnoHold, LLC et al.

Purple Innovation, LLC , Case No.

2023-0393-PAF

The complaint alleges that Purple LLC breached the Second Amended and Restated Limited Liability Company Agreement

of Purple Innovation, LLC, dated as of February 2, 2018 (the “LLC Agreement”), and the implied covenant of good faith and

fair dealing contained therein by failing to pay the full amount of tax distributions owed under the LLC Agreement.

The complaint also

asserts a claim for indemnification under the LLC Agreement.

The InnoHold Parties seek damages of approximately $ 3.0 million in allegedly

unpaid tax distributions as well as its legal fees and expenses incurred in connection with the litigation.

On June 13, 2023, Purple

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

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

The outcome of the litigation cannot be predicted at this

early stage in the proceedings.

Purple LLC intends to vigorously defend against these claims.

March 24, 2023, Purple LLC filed a complaint against Tempur Sealy International, Inc., Sealy Technology LLC and Sealy Mattress Manufacturing

Co., LLC (collectively, “Sealy”) in the U.S.

District Court for the Middle District of North Carolina for infringement of

Purple LLC’s U.S.

11,317,733 entitled “Mattress Including an Elastomeric Cushioning Element and a Pocketed Coil

Layer and Related Methods.” On July 17, 2023, Purple LLC filed a First Amended Complaint further detailing Sealy’s infringement

of the patent through Sealy’s direct and indirect infringement by making, using, offering for sale, and/or importing into the United

States Sealy FlexGrid Hybrid Construction mattresses.

Purple seeks judgment of willful infringement, trebled damages, a permanent injunction,

prejudgment and post-judgment interest, costs, expenses, and attorneys’ fees.

Sealy filed its response to Purple’s First

Amended Complaint on July 31, 2023.

Discovery is scheduled to conclude April 18, 2024;

no trial date has been set.

Purple LLC intends

to vigorously litigate its claims to resolution.

On March 27, 2023, Sealy Technology,

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

Patent and Trademark Office, Trademark Trial and

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

5,416,146 for HYPER-ELASTIC POLYMER

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

On June 18, 2023, Sealy Technology filed an Amended Petition, which seeks cancellation of the Registration on the basis that the term

On September 25, 2023, the TTAB denied Purple LLC’s previously filed motion to dismiss and issued a new schedule.

October 16, 2023, Purple LLC filed its Answer to the Amended Petition.

Discovery is scheduled to open on November 14, 2023, and to conclude

on May 12, 2024.

Trial and post-trial briefing is scheduled to conclude March 8, 2025.

Purple LLC intends to vigorously defend against

Sealy Technology’s petition.

August 16, 2023, Sealy Technology filed a Notice of Opposition with the TTAB, requesting that the U.S.

Patent and Trademark Office deny

Purple LLC’s pending Trademark Application No.

97,650,658 for HYPER-ELASTIC POLYMER in Class 20 for “mattresses;

seat cushions”

(the “Application”), on the grounds that the mark is merely descriptive or deceptively misdescriptive.

On September 25, 2023,

Purple LLC filed a motion to dismiss all claims.

On October 5, 2023, the TTAB suspended all deadlines in the proceeding, pending the

outcome of the motion to dismiss.

On October 17, 2023, Sealy Technology filed its opposition to the motion to dismiss.

reply in support of its motion to dismiss is due November 6, 2023.

Purple LLC intends to vigorously defend against Sealy Technology’s

Company is from time to time involved in various other claims, legal proceedings and complaints arising in the ordinary course of business.

The Company does not believe that adverse decisions in any such pending or threatened proceedings, or any amount that the Company might

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

INNOVATION, INC.

In that suit, the plaintiffs

alleged that they each entered into employment agreements with Purple LLC in February 2018.

The plaintiffs contended that certain corporate

transactions reduced their “ownership interest and voting power in Purple” and that, as a result, they should have continued

to be paid a salary when they retired from Purple LLC.

The plaintiffs calculated that they were each owed “no less than $ 500,000 ”

in unpaid salary.

In October 2023, the Court granted Purple Inc.’s motion and ordered that the claims brought by the plaintiffs

be dismissed in full, with prejudice.

The Court entered a final judgment dismissing the case in January 2024.

The plaintiffs have filed

an appeal to the Utah Court of Appeals.

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

and intends to continue to vigorously defend against these claims in the course of the plaintiffs’ appeal.

On April 3, 2023, Purple’s founders filed a complaint against

Purple LLC in the Delaware Court of Chancery.

The complaint alleges that Purple LLC breached the limited liability company agreement of

Purple LLC by failing to pay the full amount of tax distributions owed under the agreement.

The plaintiffs seek damages of approximately

$ 3.0 million in allegedly unpaid tax distributions as well as legal fees and expenses incurred in connection with the litigation.

On June 13, 2023, Purple LLC filed an answer to the complaint denying the plaintiffs’ allegations, setting forth its affirmative

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

The outcome of the litigation cannot

be predicted at this early stage in the proceedings.

Purple LLC denies all allegations and intends to vigorously defend against these

On January 17,

2024, two customers filed a punitive class action lawsuit against Purple LLC in California Superior Court

in the County of San Francisco alleging unlawful marketing and pricing practices, fraud and unjust enrichment.

The suit seeks

damages and other relief on behalf of all persons who purchased Purple LLC products during the applicable statutory periods in

On February 22, 2024, Purple LLC removed the case to the United States District for the Northern District of

Purple LLC denies all allegations and intends to vigorously defend against these claims.

The Company is from time to

time involved in various other claims, legal proceedings and complaints arising in the ordinary course of business.

The Company does not

believe that adverse decisions in any such pending or threatened proceedings, or any amount that the Company might be required to pay

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

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Related Party Transactions

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

Capital Management, LLC

The Company had various transactions

with entities or individuals which are considered related parties.

Coliseum Capital Management,

Immediately following the

Business Combination, Adam Gray was appointed to the Company’s Board.

Gray is a manager of Coliseum Capital, LLC, which is

the general partner of CCP and CDF, and he is also a managing partner of CCM, which is the investment manager of Blackwell and also manages

Gray is a manager of Coliseum Capital, LLC, which is the

general partner of CCP and CDF, and he is also a managing partner of CCM, which is the investment manager of Blackwell and also manages

investment funds and accounts.

Gray has voting and dispositive control over securities held by CCP, CDF and Blackwell which were

also Lenders under the Amended and Restated Credit Agreement.

See Note 15— Commitments and Contingencies — Subscription

Agreement and Preemptive Rights for further discussion .

September 17, 2022, the Company received an unsolicited and non-binding proposal from Coliseum on behalf of certain investment funds

and accounts to acquire the remaining outstanding common stock of the Company not already beneficially owned by Coliseum for $ 4.35 per

share in cash.

At the time of the offer, Coliseum beneficially owned approximately 44.7 % of the outstanding equity of the Company.

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

(the “Special Committee”) was formed to determine the necessary actions to evaluate the Coliseum proposal and determine the

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

Initially, the Special Committee approved the

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

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

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

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

owned by Coliseum.

On January 12, 2023, the Company issued a press release stating the Special Committee had rejected Coliseum’s

unsolicited proposal.

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

were designated as Series A Junior Participating Preferred Shares (the “Preferred Shares”).

In accordance with the Rights

Agreement, on September 25, 2022, the Special Committee authorized and declared a dividend of one preferred share purchase right (a “Right”)

for each outstanding share of the Company’s Class A common stock and Class B common stock to stockholders of record at the close

of business on October 6, 2022.

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

The fair value of the Rights was nominal

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

Additionally, the Rights did not meet the definition

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

Accordingly, the Rights Agreement had

no impact on the Company’s consolidated financial statements .

February 14, 2023, the Company declared a dividend of one new PRPLS for each 100 shares of its common stock owned by the Company’s

shareholders.

Each PRPLS would have voted together with the common stock in the election of directors, and related matters, and carried

10,000 votes each.

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

PRPLS holders could have allocated all, none, or a portion of their votes to each director nominee up for election at the Company’s

meetings of shareholders.

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

the PRPLS were outstanding, any new issuance of common stock would have automatically included a proportionate number of PRPLS.

were redeemable at any time by an affirmative vote of two-thirds of the members of the Board.

The PRPLS did not have any dividend rights

and were entitled to only a limited payment upon any liquidation, dissolution or winding up in priority to any payments on the common

stock but would not have otherwise participated in any liquidating distributions.

February 21, 2023, Coliseum filed a lawsuit against the Company and several members of its Board alleging that the Company and the named

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

nomination of a competing slate of director candidates ahead of our 2023 annual meeting of stockholders.

On April 19, 2023, the

Company entered into a Cooperation Agreement with Coliseum to resolve the litigation.

The Cooperation Agreement, which became effective

on April 27, 2023, resulted in the following:

The size of the Board was

increased from seven directors to eight directors.

The Company amended and

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

Board member and Coliseum

managing partner Adam Gray was appointed Chairman of the Board.

Board member Gary DiCamillo

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

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Paul Zepf and Pano Anthos

resigned as directors of the Company.

The Board appointed S.

Hoby Darling, R.

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

Scott Peterson, a stockholder

and Board Observer since the Company’s acquisition of Intellibed, was included as a nominee on the Board’s slate of directors

at the 2023 Annual Meeting in place of Dawn Zier, who had previously announced her decision not to stand for re-election.

Other than as described

above with respect to Dawn Zier, the Board nominated all incumbent directors for election at our annual meetings of stockholders

to be held in 2023 and 2024.

The Company amended its

Corporate Governance Guidelines for Operation of the Board of Directors and adopted a Lead Independent Director Charter to provide

for the responsibilities of the Lead Independent Director.

● The Company terminated the stockholder rights agreement adopted on September 25, 2022 and agreed not to adopt a new stockholder rights agreement prior to the termination of the Cooperation Agreement without Coliseum’s prior consent.

As a result, all shares of preferred stock previously designated as Series A Junior Participating Preferred Stock were eliminated and returned to the status of authorized but unissued shares of preferred stock, without designation.

● The Company redeemed all outstanding shares of PRPLS and agreed not to issue any similar security or take any other action prior to the termination of the Cooperation Agreement that would change the stockholder voting standards from those in effect prior to the issuance of the PRPLS.

As a result, all shares of preferred stock previously designated as PRPLS were eliminated and returned to the status of authorized but unissued shares of preferred stock, without designation.

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

The PRPLS redemption payment was reflected in the Company’s consolidated balance sheet as a reduction to additional paid-in capital.

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

● The Company terminated the Special Committee.

Gray has voting and dispositive control over securities held by CCP, CDF and Blackwell.

Lenders under

the Amended and Restated Credit Agreement included CCP and Blackwell.

See Note 10— Debt — 2024 Credit Agreement for

further discussion .

On September 17, 2022, the

Company received an unsolicited and non-binding proposal from Coliseum on behalf of certain investment funds and accounts to acquire the

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

At the time of the offer, Coliseum beneficially

owned approximately 44.7 % of the outstanding equity of the Company.

In response, the Board authorized the formation of a special committee

of independent and disinterested directors of the Company (the “Special Committee”) to evaluate the Coliseum proposal and

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

The Special Committee approved

the adoption of a limited-duration stockholder rights agreement to prevent a change of control without payment of an adequate control

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

filed a lawsuit against the Company and several members of the Board alleging the Company made an improper dividend of preferred stock

and interfered with Coliseum’s nomination of a competing slate of director candidates ahead of the 2023 Annual Meeting.

April 19, 2023, the Company entered into a Cooperation Agreement with Coliseum to resolve the litigation.

The Cooperation Agreement, which

became effective on April 27, 2023, included, among other things, the following:

Board was increased from seven directors to eight and Adam Gray was appointed Chairman of the Board.

● All shares of preferred stock previously designated as Series A Junior

Participating Preferred Stock were redeemed, eliminated and returned to the status of authorized but unissued shares of preferred stock,

without designation.

● The Company made a $ 0.1 million payment to redeem the PRPLS that was

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

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

● Coliseum dismissed its litigation against the Company.

● At the 2023 and 2024 annual meetings of stockholders, Coliseum caused or will cause all of the common stock that Coliseum or any of its affiliates had the direct or indirect right to vote as of the applicable record date, to be present in person or by proxy for quorum purposes and to be voted (i) in favor of each of the candidates for election on the Company’s slate of nominees for election to the Board, (ii) against any stockholder nominations for any other directors, and (iii) against any proposals or resolutions to remove any member of the Board other than for cause.

● Coliseum agreed to be bound by customary standstill restrictions, including, among others, agreements not to acquire additional shares of the Company’s securities that would cause Coliseum’s ownership of Voting Securities to exceed 44.4 % of the total outstanding Common Stock (other than acquisitions directly from the Company), engage in proxy solicitations and related matters, form or join any “group” with respect to shares of the Company, encourage others to pursue a “contested solicitation,” or make any public proposals, subject to certain exceptions.

● Coliseum agreed to condition any proposal from it or any of its affiliates to acquire the Company or all or substantially all of the outstanding stock of the Company held by stockholders unaffiliated with Coliseum on (i) such transaction being negotiated by, and subject to the approval of, a special committee of directors of the Board who are independent with respect to Coliseum and disinterested under Delaware law and (ii) a nonwaivable condition that such transaction be approved by the affirmative vote of the holders of a majority of the Company’s outstanding common stock not beneficially owned by Coliseum or its affiliates or other parties with a material conflict of interest in such transaction.

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

INNOVATION, INC.

both the 2023 and 2024 annual meetings of stockholders, Coliseum agreed to cause all of the common stock that it or any of its affiliates

had the direct or indirect right to vote as of the applicable record date, to be present in person or by proxy for quorum purposes and

to be voted (i) in favor of each of the candidates for election on the Company’s slate of nominees for election to the Board, (ii)

against any stockholder nominations for any other directors, and (iii) against any proposals or resolutions to remove any member of the

Board other than for cause.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Founder Entities

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

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

TNT Holdings and InnoHold are majority owned and controlled by Terry Pearce and Tony Pearce (the “Purple Founders”), who

were appointed to the Company’s Board following the Business Combination.

InnoHold was a majority shareholder of the Company until

it sold a portion of its interests in a secondary public offering in May 2020 and the remainder of its interests in a secondary public

offering in September 2020.

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

TNT Holdings owned the Alpine

facility Purple LLC has been leasing since 2010, and the Purple Founders informed Purple LLC that TNT Holdings transferred ownership to

123E LLC, an entity controlled by the Purple Founders.

Effective as of October 31, 2017, Purple LLC entered into an Amended and Restated

Lease Agreement with TNT Holdings.

The Company determined that neither TNT Holdings nor 123E LLC are a VIE as neither the Company nor

Purple LLC hold any explicit or implicit variable interest in TNT Holdings or 123E LLC and do not have a controlling financial interest

in TNT Holdings or 123E LLC.

Purple LLC incurred $ 0.3 million and $ 0.8 million in rent expense to 123E LLC or TNT Holdings for the building

lease of the Alpine facility for the three and nine months ended September 30, 2023, respectively, and $ 0.2 million and $ 0.7 million for

the three and nine months ended September 30, 2022, respectively.

Purple LLC continued to lease the Alpine facility that was formerly

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

In accordance with the terms of that lease,

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

occur on September 30, 2022.

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

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

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

The Company vacated the Alpine facility and returned

the property back to 123E LLC on September 30, 2023, in accordance with the terms of the lease agreement and notice of termination.

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

Company’s securities that would cause Coliseum’s ownership to exceed 44.7% of the total outstanding common stock (other than

acquisitions directly from the Company), engage in proxy solicitations and related matters, form or join any “group” with

respect to shares of the Company, encourage others to pursue a “contested solicitation,” or make any public proposals, subject

to certain exceptions.

agreed to condition any proposal from it or any of its affiliates to acquire the Company or all or substantially all of the outstanding

stock of the Company held by stockholders unaffiliated with Coliseum on (i) such transaction being negotiated by, and subject to the

approval of, a special committee of directors of the Board who are independent with respect to Coliseum and disinterested under Delaware

law and on (ii) a nonwaivable condition that such transaction be approved by the affirmative vote of the holders of a majority of the

Company’s outstanding common stock not beneficially owned by Coliseum or its affiliates or other parties with a material conflict

of interest in such transaction.

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

Purple Founder Entities

Purple LLC began leasing its

Alpine facility from entities controlled by Purple’s founders in 2010.

On September 3, 2021, in accordance with the terms of that

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

On July 20, 2022, the Company entered into an amendment to its Alpine facility lease agreement that rescinded the Company’s

previous notice of termination and extended the lease term to remain in effect until September 30, 2023.

The Company vacated the Alpine

facility and returned the property back to its owner on September 30, 2023, in accordance with the terms of the lease agreement and notice

of termination.

In conjunction with leasing the Alpine facility, Purple LLC incurred rent expense of $ 0.3 million for the three months

ended March 31, 2023.

Stockholders’ Equity

A Common Stock

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

Holders of the Company’s

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

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

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

Holders of Class A common stock and holders

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

other matters properly submitted to a vote of the stockholders.

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

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

At September 30, 2023, 105.3 million shares of Class A common stock

were outstanding.

B Common Stock

Company has 90.0 million shares of Class B common stock authorized at a par value of $ 0.0001 per share.

Holders of the Company’s

Class B common stock will vote together as a single class with holders of the Company’s Class A common stock on all matters properly

submitted to a vote of the stockholders.

Shares of Class B common stock may be issued only to InnoHold, their respective successors and

assigns, as well as any permitted transferees of InnoHold.

A holder may transfer their shares of Class B common stock to any transferee

(other than the Company) only if such holder also simultaneously transfers an equal number of such holder’s Purple LLC Class B

Units to such transferee in compliance with the Third Purple LLC Agreement.

The Class B common stock is not entitled to receive dividends,

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

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

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

the equity consideration.

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

shares for Class A common stock that it sold.

All of the 0.4 million shares of Class B common stock outstanding at September 30, 2023

were held by other parties.

INNOVATION, INC.

Class A Common Stock

The Company has 210.0 million

shares of Class A common stock authorized.

Holders of the Company’s Class A common stock are entitled to one vote for each share

held on all matters to be voted on by the stockholders.

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

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

of the stockholders.

At March 31, 2024, 107.5 million shares of Class A common stock were outstanding.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Company has 5.0 million shares of preferred stock authorized at a par value of $ 0.0001 per share.

The preferred stock may be issued from

time to time in one or more series.

The directors are expressly authorized to provide for the issuance of shares of the preferred stock

in one or more series and to establish from time to time the number of shares to be included in each such series and to fix the voting

rights, designations and other special rights or restrictions.

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

On February 14, 2023, the

Company declared a dividend of one new PRPLS for each 100 shares of its common stock owned by the Company’s shareholders.

PRPLS had the right to vote together with the common stock in the election of directors, and related matters, and carried 10,000 votes

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

PRPLS holders

could have allocated all, none, or a portion of their votes to each director nominee up for election at the Company’s meetings

of shareholders.

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

While the PRPLS

were outstanding, any new issuance of common stock would have automatically included a proportionate number of PRPLS.

The PRPLS were

redeemable at any time by an affirmative vote of two-thirds of the members of the Board.

The PRPLS did not have any dividend rights and

were entitled to only a limited payment upon any liquidation, dissolution or winding up in priority to any payments on the common stock

but would not have otherwise participated in any liquidating distributions.

As a result of the Cooperation Agreement, all shares of preferred

stock previously designated as PRPLS were eliminated and returned to the status of authorized but unissued shares of preferred stock,

without designation.

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

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

30, 2023 there were no PRPLS issued or outstanding.

See Note 16— Related Parties — Coliseum Capital Management, LLC

for additional detail regarding redemption of the PRPLS.

were 12.8 million sponsor warrants issued pursuant to a private placement simultaneously with the Company’s initial public offering.

The 1.9 million sponsor warrants that remained outstanding at December 31, 2022 expired in February 2023 and were cancelled pursuant

to the terms of the warrant agreement.

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

There were no sponsor warrants

exercised during the nine months ended September 30, 2022.

Noncontrolling

interest (“NCI”) is the membership interest in Purple LLC held by holders other than the Company.

At September 30, 2023 and

December 31, 2022, the combined NCI percentage in Purple LLC was 0.4 % and 0.5 %, respectively.

The Company has consolidated the financial

position and results of operations of Purple LLC and reflected the proportionate interest held by all such Purple LLC Class B Unit holders

Company’s sole material asset is Purple LLC, which is treated as a partnership for U.S.

federal income tax purposes and for purposes

of certain state and local income taxes.

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

members and are included in the members’ tax returns, even though such net taxable income or tax credits may not have actually

been distributed.

While the Company consolidates Purple LLC for financial reporting purposes, the Company will be taxed on its share

of earnings of Purple LLC not attributed to the noncontrolling interest holders, which will continue to bear their share of income tax

on its allocable earnings of Purple LLC.

The income tax burden on the earnings taxed to the noncontrolling interest holders is not reported

by the Company in its consolidated financial statements under GAAP.

INNOVATION, INC.

Class B Common Stock

The Company has 90.0 million

shares of Class B common stock authorized.

Holders of the Company’s Class B common stock will vote together as a single class with

holders of the Company’s Class A common stock on all matters properly submitted to a vote of the stockholders.

Shares of Class B

common stock may be issued only to InnoHold, their respective successors and assigns, as well as any permitted transferees of InnoHold.

A holder may transfer their shares of Class B common stock to any transferee (other than the Company) only if such holder also simultaneously

transfers an equal number of such holder’s Purple LLC Class B units to such transferee.

The Class B common stock is not entitled

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

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

At March 31, 2024, 0.2 million

shares of Class B common stock were outstanding.

Preferred Stock

The Company has 5.0 million

shares of preferred stock authorized.

The preferred stock may be issued from time to time in one or more series.

The Board is expressly

authorized to provide for the issuance of shares of the preferred stock in one or more series and to establish from time to time the number

of shares to be included in each such series and to fix the voting rights, designations and other special rights or restrictions.

31, 2024, there were no shares of preferred stock outstanding.

On September 25, 2022, 0.3 million shares of the Company’s preferred

stock were designated as Series A Junior Participating Preferred Shares.

See Note 14— Related Party Transactions — Coliseum

Capital Management LLC for discussion regarding the Rights Agreement and the PRPLS.

In connection with the Amended

and Restated Credit Agreement, the Company issued 20.0 million Warrants to the Lenders.

Each Warrant entitles the registered holder to

purchase one share of the Company’s Class A common stock at a price of $ 1.50 per share, subject to adjustment.

While the Warrants are exercisable,

the Company may call the Warrants for redemption in whole and not in part at any time at a price of $ 0.01 per share of Class A common

stock issuable upon exercise of the Warrants upon not less than 45 days’ prior written notice of redemption to each holder, provided

that this redemption right is only available if the reported last sale price of the Class A common stock equals or exceeds $ 24.00 per

share on each of 20 trading days within a 30 -trading day period ending three business days before the Company sends the notice of redemption

to the holders.

A holder of the Warrants will

not have the right to exercise its Warrants, to the extent that after giving effect to such exercise, the holder (together with its affiliates)

would beneficially own in excess of 49.9 % of the shares of Class A common stock outstanding immediately after giving effect to such exercise.

Sponsor Warrants

There were 12.8 million sponsor

warrants issued pursuant to a private placement simultaneously with the Company’s initial public offering.

Unexercised sponsor warrants

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

These sponsor warrants

had no fair value on the date of expiration.

There were no sponsor warrants exercised during the three months ended March 31, 2023.

Noncontrolling Interest

Noncontrolling interest (“NCI”)

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

At March 31, 2024 and December 31, 2023, the combined

NCI percentage in Purple LLC was 0.2 % and 0.2 %, respectively.

The Company has consolidated the financial position and results of operations

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

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

The Company reported income

tax expense related to various state taxes of $ 0.2 million on a pretax loss of $ 102.7 million for the nine months ended September 30,

2023 as compared to an income tax benefit of $ 7.0 million on a pretax loss of $ 28.0 million for the nine months ended September 30, 2022.

This resulted in an effective tax rate of ( 0.2 )% for the nine months ended September 30, 2023 as compared to 25.1 % for the nine months

ended September 30, 2022.

The Company’s effective tax rate for the nine months ended September 30, 2023 differs from the statutory

federal rate of 21 % primarily due to the impact of the full valuation allowance recorded against the Company’s deferred tax assets

at September 30, 2023.

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

by the Company to InnoHold of 80 % of the net cash savings, if any, in U.S.

federal, state and local income tax that the Company actually

realizes (or is deemed to realize in certain circumstances) in periods after the Closing as a result of (i) any tax basis increases in

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

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

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

from, payments it makes under the agreement.

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

a tax receivable agreement liability may be recorded based on 80 % of the estimated future cash tax savings that the Company may realize

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

The amount of the increase in asset basis, the related estimated cash tax savings and the attendant liability to be recorded will depend

on the price of the Company’s Class A common stock at the time of the relevant redemption or exchange.

The estimation of liability

under the tax receivable agreement is by its nature imprecise and subject to significant assumptions regarding the amount and timing of

future taxable income.

As of September 30, 2023, the Company estimated that if all the remaining 0.4 million Class B units were redeemed

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

If the Company

experiences a change of control (as defined under the tax receivable agreement, which includes certain mergers, asset sales and other

forms of business combinations and change of control events), it could be required to make an immediate lump-sum payment under the terms

of the tax receivable agreement.

Management currently estimates the liability associated with this lump-sum payment (or “early termination

payment”) would be approximately $ 110.6 million on a discounted basis.

This potential early termination payment can be significantly

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

INNOVATION, INC.

The Company’s sole material

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

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

income taxes.

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

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

While the Company consolidates

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

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

The income tax burden

on the earnings taxed to the noncontrolling interest holders is not reported by the Company in its consolidated financial statements under

The Company reported income tax expense related to various state taxes

of $ 0.1 million on a pretax loss of $ 50.2 million for the three months ended March 31, 2024 as compared to income tax expense of $ 0.1

million on a pretax loss of $ 26.0 million for the three months ended March 31, 2023.

This resulted in an effective tax rate of - 0.12 %

for the three months ended March 31, 2024 as compared to 0.28 % for the three months ended March 31, 2023.

The Company’s effective

tax rate differs from the statutory federal rate of 21 % primarily due to the impact of the full valuation allowance recorded against the

Company’s deferred tax assets at March 31, 2024.

In connection with the Business

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

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

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

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

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

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

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

the agreement.

As noncontrolling interest

holders exercise their right to exchange or cause Purple LLC to redeem all or a portion of their Class B units, a tax receivable agreement

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

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

The amount of the increase

in asset basis, the related estimated cash tax savings and the attendant liability to be recorded will depend on the price of the Company’s

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

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

effects of uncertain tax positions are recognized in the consolidated financial statements if these positions meet a “more-likely-than-not”

For those uncertain tax positions that are recognized in the consolidated financial statements, liabilities are established

to reflect the portion of those positions it cannot conclude “more-likely-than-not” to be realized upon ultimate settlement.

The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits on the income tax expense line

in the accompanying consolidated statement of operations.

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

line in the consolidated balance sheet.

As of September 30, 2023, no material uncertain tax positions were recognized as liabilities

in the condensed consolidated financial statements.

The effects of uncertain tax

positions are recognized in the consolidated financial statements if these positions meet a “more-likely-than-not” threshold.

For those uncertain tax positions that are recognized in the consolidated financial statements, liabilities are established to reflect

the portion of those positions it cannot conclude “more-likely-than-not” to be realized upon ultimate settlement.

The Company’s

policy is to recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying

consolidated statement of operations.

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

balance sheet.

As of March 31, 2024, the Company had unrecognized tax benefits of $ 0.9 million.

Net Loss Per Common Share

net income (loss) per common share is calculated by dividing net income (loss) attributable to common stockholders by the weighted average

number of shares of Class A stock outstanding during each period.

Diluted net income (loss) per share reflects the weighted-average number

of common shares outstanding during the period used in the basic net income (loss) computation plus the effect of common stock equivalents

that are dilutive.

following table sets forth the calculation of basic and diluted weighted average shares outstanding and net loss per share for the periods

presented (in thousands, except per share amounts):

Basic net income (loss) per

common share is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of shares

of Class A common stock outstanding during each period.

Diluted net income (loss) per share reflects the weighted-average number of common

shares outstanding during the period used in the basic net income (loss) computation plus the effect of common stock equivalents that

are dilutive.

The following table sets forth

the calculation of basic and diluted weighted average shares outstanding and net loss per share for the periods presented (in thousands,

except per share amounts):

Three Months Ended

September 30,

Nine Months Ended

September 30,

Net loss attributable to Purple Innovation, Inc.

$ ( 102,424 )

Net income (loss) attributed to noncontrolling interest

Less – net loss attributed to noncontrolling interest

Net loss attributable to Purple Innovation, Inc.

$ ( 102,424 )

Weighted average shares—basic

Add – dilutive effect of equity awards

Add – dilutive effect of Class B shares

1 unchanged sentence

Net loss per common share:

For the three and nine months

ended September 30, 2023, the Company excluded 2.8 million and 4.4 million, respectively, of Paired Securities convertible

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

For the three and nine months

ended September 30, 2022, the Company excluded 3.2 million and 3.5 million, respectively, of Class A common shares issuable upon conversion

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

INNOVATION, INC.

For the three months ended March 31, 2024, the Company excluded 24.8

million shares of Class A common stock issuable upon conversion of certain warrants, stock options, restricted stock and exchange of Class

B common stock as the effect was anti-dilutive.

For the three months ended March 31, 2023, the Company excluded 2.4 million shares of

Class A common stock issuable upon conversion of certain warrants, stock options, restricted stock and Class A shares subject to vesting

as the effect was anti-dilutive.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Equity Compensation Plans

Equity Incentive Plan

Purple Innovation, Inc.

2017 Equity Incentive Plan, as amended and restated (the “2017 Plan”), provides for grants of stock

options, stock appreciation rights, restricted stock units and other stock-based awards.

Directors, officers and other employees and

subsidiaries and affiliates, as well as others performing consulting or advisory services for the Company and its subsidiaries, will

be eligible for grants under the 2017 Plan.

As of September 30, 2023, an aggregate of 2.6 million shares remain available for issuance

or use under the 2017 Plan.

A Stock Awards

June 2023, the Company granted stock awards under the 2017 Incentive Plan to non-executive directors on the Board.

The stock awards vested

immediately and the Company issued 0.2 million shares of Class A common stock and recognized $ 0.6 million in expense during the three

months ended June 30, 2023, which represented the fair value of the stock awards on the grant date.

and Restated Grant Agreements

On March 15, 2023, in accordance

with the 2017 Incentive Plan, the Company entered into amended and restated grant agreements relating to stock options and restricted

stock unit awards previously granted to the Company’s chief executive officer in March 2022 and June 2022.

The amended agreements

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

Pursuant to these agreements, 0.3 million of restricted stock units

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

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

of conditionally granted awards approved by shareholders at the 2023 Annual Meeting will vest in full on March 25, 2025.

These amendments

resulted in the acceleration of $ 0.8 million of stock-based compensation expense into the first quarter of 2023 compared to the expense

that would have been recorded based on vesting under the original agreements.

Stock Options

receipt of shareholder approval of certain amendments to the 2017 Plan at the 2023 Annual Meeting, the 0.3 million stock options granted

to the Company’s chief executive officer in June 2023 have an exercise price of $ 6.82 per option, expire in four years and vest

over a two-year period.

The Company determined the fair value of this award to be $ 0.1 million on the effective date, which will be expensed

on a straight-line basis over the vesting period.

Company determined the fair value of the options granted during the nine months ended September 30, 2023 using the Black Scholes method

with the following weighted average assumptions:

Fair market value

Exercise price

Risk free interest rate

Expected term in years

Expected volatility

Expected dividend yield

following table summarizes the Company’s total stock option activity for the nine months ended September 30, 2023:

2017 Equity Incentive

The Purple Innovation, Inc.

2017 Equity Incentive Plan (the “2017

Incentive Plan”) provides for grants of stock options, stock appreciation rights, restricted stock units and other stock-based awards.

Directors, officers and other employees, as well as others performing consulting or advisory services for the Company and its subsidiaries,

may be eligible for grants under the 2017 Incentive Plan.

As of March 31, 2024, an aggregate of 3.0 million shares remain available for

issuance or use under the 2017 Incentive Plan.

Employee Stock Options

The following table summarizes the Company’s

total stock option activity for the three months ended March 31, 2024:

(in thousands)

1 unchanged sentence

Options outstanding as of January 1, 2024

Forfeited/cancelled

Options outstanding as of September 30,

INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

and exercisable stock options as of September 30, 2023 are as follows:

Options outstanding as of March 31, 2024

Outstanding and exercisable stock options as of

March 31, 2024 are as follows:

Options Outstanding

Options Exercisable

Exercise Prices

(in thousands)

Remaining Life

Remaining Life (Years)

(in thousands)

1 unchanged sentence

(in thousands)

following table summarizes the Company’s unvested stock option activity for the nine months ended September 30, 2023:

The following table summarizes

the Company’s unvested stock option activity for the three months ended March 31, 2024:

(in thousands)

Weighted Average

Nonvested options as of January 1, 2024

Nonvested options as of September 30, 2023

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

For the three and

nine months ended September 30, 2023, the Company recognized stock option expense of $ 0.1 million and $ 0.5 million, respectively.

Company recorded stock option expense of $ 0.2 million and $ 0.5 million during the three and nine months ended September 30, 2022, respectively.

of September 30, 2023, outstanding stock options had $ 0.2 million of unrecognized stock compensation cost with a remaining recognition

period of 1.1 years.

INNOVATION, INC.

Nonvested options as of March 31, 2024

The estimated fair value of

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

For the three months ended March 31, 2023,

the Company recognized stock option expense of $ 0.3 million.

Stock option expense was de minimis for the three months ended March 31,

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Restricted Stock Units

the second quarter of 2023, the Company granted 2.4 million restricted stock units under the 2017 Incentive Plan to certain members of

the Company’s management team.

Approximately one-half of the restricted stock units granted included a market vesting condition.

The restricted stock awards that did not have a market vesting condition had a weighted average grant date fair value of $ 2.75 per share.

The estimated fair value of these awards is recognized on a straight-line basis over the vesting period.

For those awards that include

a market vesting condition, the estimated fair value of the restricted stock was measured on the grant date and incorporated the probability

of vesting occurring.

The estimated fair value is recognized over the derived service period (as determined by the valuation model),

with such recognition occurring regardless of whether the market condition is met.

The Company determined the weighted average grant

date fair value of the awards with the market vesting condition to be $ 1.92 per share using a Monte Carlo Simulation of a Geometric Brownian

Motion stock path model with the following weighted average assumptions:

Trading price of common stock on

measurement date

As of March 31, 2024, outstanding

stock options had a de minimis amount of unrecognized stock compensation cost with a remaining recognition period of 1.1 years.

value of stock options vested during the three months ended March 31, 2024 totaled $ 0.1 million.

Employee Restricted

During the first quarter of

2024, the Company granted 0.7 million restricted stock units under the 2017 Incentive Plan to certain members of the Company’s management

Of the restricted stock units granted, 0.4 million included a market vesting condition.

The restricted stock awards that did not

have a market vesting condition had a weighted average grant date fair value of $ 1.48 per share.

The estimated fair value of these awards

is recognized on a straight-line basis over the vesting period.

For those awards that include a market vesting condition, the estimated

fair value of the restricted stock was measured on the grant date and incorporated the probability of vesting occurring.

The estimated

fair value is recognized over the derived service period (as determined by the valuation model), with such recognition occurring regardless

of whether the market condition is met.

The Company determined the weighted average grant date fair value of the awards with the market

vesting condition to be $ 1.13 per share using a Monte Carlo Simulation of a Geometric Brownian Motion stock path model with the following

weighted average assumptions:

Trading price of common stock on measurement date

Risk free interest rate

2 unchanged sentences

Expected dividend yield

following table summarizes the Company’s restricted stock unit activity for the nine months ended September 30, 2023:

The following table summarizes

the Company’s restricted stock unit activity for the three months ended March 31, 2024:

(in thousands)

Nonvested restricted

stock units as of January 1, 2023

restricted stock units as of September 30, 2023

Company recorded restricted stock unit expense of $ 0.9 million and $ 2.7 million during the three and nine months ended September 30,

2023, respectively, and $ 0.6 million and $ 1.5 million during the three and nine months ended September 30, 2022, respectively.

of September 30, 2023, outstanding restricted stock units had $ 6.7 million of unrecognized stock compensation cost with a remaining recognition

period of 2.0 years.

INNOVATION, INC.

Nonvested restricted stock units as of January 1, 2024

Nonvested restricted stock units as of March 31, 2024

The Company recorded restricted

stock unit expense of $ 0.5 million and $ 0.8 million during the three months ended March 31, 2024 and 2023, respectively.

As of March 31, 2024, outstanding

restricted stock units had $ 5.2 million of unrecognized stock compensation cost with a remaining recognition period of 1.9 years.

PURPLE INNOVATION, INC.

Notes to Condensed Consolidated Financial Statements

Non-Cash Stock-Based Compensation

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

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

service period.

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

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

September 30,

Aggregate Non-Cash

Stock-Based Compensation

The Company has accounted

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

This standard requires

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

The following table summarizes

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

employee restricted stock units (in thousands):

Three Months Ended

Cost of revenues

1 unchanged sentence

General and administrative

and development

Total non-cash stock-based

Research and development

Total non-cash stock-based compensation

Employee Retirement Plan

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

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

The plan provides

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

In July 2018 the Company established

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

All eligible employees over

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

The plan provides for Company matching of employee

contributions up to 5 % of eligible earnings.

Company contributions immediately vest.

The Company’s

matching contribution expense was $ 1.0 million and $ 2.8 million for the three and nine months ended September 30, 2023, respectively,

and $ 0.8 million and $ 2.7 million for the three and nine months ended September 30, 2022, respectively.

The Company’s matching contribution

expense was $ 1.1 million and $ 0.9 million for the three months ended March 31, 2024 and 2023, respectively.

Subsequent Events

Draws on ABL Credit

The company has received $ 17.0 million from various draws on the ABL

credit facility.

$ 6.0 million was received on October 16, 2023 under a six-month SOFR contract with an interest rate of 8.54 %.

$ 6.0 million

was received on October 30, 2023 under a six-month SOFR contract with an interest rate of 8.43 %.

$ 5.0 million was received on November

7, 2023 under a six-month SOFR contract with an interest rate of 8.53 %.

Based on the Company’s borrowing base calculation, including

application of the $ 5.0 million availability reserve and an $ 11.0 million minimum availability requirement, as of November 13, 2023, the

Company has approximately $ 4.6 million available for borrowings on its ABL credit facility.

As of November 13, 2023, the Company had $ 31.0

million in cash.

On November 13, 2023, the Company gave notice that on November 16, 2023 they would repay $ 2.0 million on the SOFR contract

received on October 16, 2023.

Notice of Default and Waiver

Certain events of default

occurred under each of the 2023 Credit Agreements due to (i) the Company’s failure to (a) provide certain financial reporting and

related materials on a timely basis and (b) complete certain post-closing deliverables as required under the ABL Agreement and (ii) the

Company drawing on the loan under the ABL Agreement while the above events of default were in existence.

On November 6, 2023, we entered

into (i) the ABL Amendment and (ii) the Term Loan Amendment, with the Term Loan Lenders and ABL Lenders, respectively, including waivers

of the Subject Events of Default.

In addition, the ABL Amendment and Term Loan Amendment also amended certain provisions of the 2023

Credit Agreements, including, among other changes, to require (i) weekly borrowing base certificates, (ii) 13-week cash flow reports

and budgets, (iii) budget variance reports, (iv) the appointment of a third-party consultant, and (v) daily cash sweeps from the Loan

Parties’ accounts to an account at the ABL Lender.

On April 16, 2024, Purple’s founders, in their capacity as a

former landlord of Purple LLC, brought a lawsuit against Purple LLC, as lessee, for amounts allegedly owed under a real estate lease

which the parties terminated effective September 30, 2023.

In the suit, the plaintiffs allege approximately $ 2.5 million in damages,

based primarily on a dispute regarding whether Purple LLC left the premises in the condition required by the lease.

The plaintiffs

further claim approximately $ 0.8 million in holdover rent, as well as unspecified amounts in interest, late fees, liquidated damages,

attorney fees and costs.

Purple LLC denies all allegations and intends to vigorously defend against these claims.

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

What changed 10-Q

Item 1. Financial Statements