| Summary of Significant Accounting Policies | 2. Summary
of Significant Accounting Policies This summary of significant accounting policies is presented
to assist in understanding the Company's consolidated financial statements. The consolidated financial statements and notes
are representations of the Company's management, which is responsible for their integrity and objectivity. Basis of Presentation and Principles
of Consolidation The Company consists
of Purple Inc. and its consolidated subsidiary Purple LLC. Pursuant to the Business Combination described in Note 3— Business
Combination The Business Combination
was structured similar to a reverse recapitalization. The historical operations of Purple LLC are deemed to be those of the Company.
Thus, the financial statements included in this report reflect (i) the historical operating results of Purple LLC prior to
the Business Combination; (ii) the combined results of the Company following the Business Combination; (iii) the assets and liabilities
of Purple LLC at their historical cost; and (iv) the Company's equity and earnings per share for all periods presented. The accompanying 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") and reflect the financial position,
results of operations and cash flows of the Company. As an emerging growth company, Purple Inc. has elected to use extended transition
periods available to private companies for complying with new or revised accounting standards. These accounting policies have been
consistently applied in the preparation of the consolidated financial statements. Variable Interest Entities Purple LLC is a variable
interest entity ("VIE"). 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 December 31, 2019, Purple Inc. had
approximately 42% economic interest in Purple LLC and consolidated 100% of Purple LLC's assets, liabilities and results
of operations in the Company's consolidated financial statements contained herein. At December 31, 2019, InnoHold and other
Purple LLC Class B Unit holders had approximately 58% of the economic interest in Purple LLC; however, InnoHold and other Purple
LLC Class B Unit holders have disproportionally fewer voting rights, and is shown as the noncontrolling interest ("NCI")
holder of Purple LLC. For further discussion see Note 13— Stockholders' Deficit, Noncontrolling Interest Reclassification Certain amounts in
the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements.
These reclassifications had no impact on net loss, cash flows or shareholders' deficit previously reported. Use of Estimates The preparation of financial
statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. The Company regularly makes significant estimates and assumptions including, but not limited
to, estimates that affect the Company's revenue recognition, accounts receivable and allowance for doubtful accounts, valuation
of inventories, cost of revenues, sales returns, warranty liabilities, fair value liabilities, stock based compensation, the recognition
and measurement of loss contingencies and estimates of current and deferred income taxes, deferred income tax valuation allowances
and amounts associated with the Company's Tax Receivable Agreement with InnoHold (the "Tax Receivable Agreement").
Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. 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. Actual results could differ materially from those estimates. Cash and Cash Equivalents The Company considers
all highly liquid investments with an original maturity of three months or less to be cash equivalents. The carrying value of cash
and cash equivalents approximates fair value because of the short-term maturity of those instruments. Cash and cash equivalents
are invested in money market funds. Accounts Receivable and Allowance for
Doubtful Accounts Accounts receivable are
recorded net of an allowance for expected losses and consist primarily of receivables from wholesale customers and receivables
from third-party consumer financing partners and credit card processors. The allowance is recognized in an amount equal to anticipated
future write-offs. Management estimates allowance for doubtful accounts based on delinquencies, aging trends, industry risk trends,
historical experience and current trends. Account balances are charged off against the allowance when management believes it is
probable the receivable will not be recovered. The allowance for doubtful accounts as of December 31, 2019 and 2018 was not material. Inventories Inventories consist of
raw materials, work-in-process and finished goods and are stated at the lower of cost or net realizable value. Manufactured inventory
consists of raw material, direct labor and manufacturing overhead cost components. Cost is calculated using the average cost method.
The Company reviews the components of its inventory on a regular basis for excess and obsolete inventory and makes appropriate
adjustments when necessary. Once established, the original cost of the inventory less the related inventory allowance represents
the new cost basis of such products. As of December 31, 2019 and 2018, the reserve for inventory obsolescence was $0.8 million
and $0.7 million, respectively. Prepaid Inventory and Other Current Assets
The Company has made payments
and deposits for inventories, subscriptions and other products and services that will be received, consumed or used in a future
period in the amounts of $4.3 million and $2.3 million as of December 31, 2019 and 2018, respectively. Property and Equipment Property and equipment
are stated at cost, net of depreciation. Property and equipment are depreciated using the straight-line method over the estimated
useful lives of the respective assets, ranging from 1 to 16 years, as follows:
Years
Equipment 10
Furniture and fixtures 7
Computer equipment and software 3
Leasehold improvements 1 -16 Major renewals and betterments that increase value or extend
useful life are capitalized. The Company records depreciation and amortization in cost of sales for long-lived assets used in the
manufacturing process, and within each line item of operating expenses for all other long-lived assets. Leasehold improvements
are amortized over the shorter of the useful life of the leasehold improvements or the contractual term of the lease, with
consideration of lease renewal options if renewal appears probable. Assets under capital lease are included within equipment and
represent non-cash investing activities. The cost and related accumulated depreciation of assets sold or retired is removed from
the accounts with any resulting gain or loss included in the statement of operations. Intangible Assets Intangible assets with
finite useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed
for impairment annually or whenever events or changes in circumstances indicate impairment may have occurred. Any identified impairment
would result in an adjustment to the Company's results of operations. Intangible assets consist of costs related to defending
or enforcing a patent or trademark, costs for the acquisition and development of internal-use software and the acquisition of
an internet domain name. The internet domain name is being amortized using the straight-line method over its estimated useful
life of 15 years. Internal-use software that has been placed into service is amortized over its useful life of 3 years. No impairments
on intangible assets were recorded during the years ended December 31, 2019 or 2018. Impairment of Long-Lived Assets Long-lived assets are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of long-lived assets is assessed by a comparison of the carrying amount of the asset to the estimated future undiscounted
net cash flows expected to be generated by the asset or group of assets. If estimated future undiscounted net cash flows are less
than the carrying amount of the asset or group of assets, the asset is considered impaired and an expense is recorded in an amount
required to reduce the carrying amount of the asset to its then fair value. Fair value generally is determined from estimated discounted
future net cash flows (for assets held for use) or net realizable value (for assets held for sale). The Company did not identify
any indicators of impairment for the years ended December 31, 2019 or 2018. Cooperative Advertising, Rebate and Other
Promotion Programs The Company enters
into programs with certain wholesale partners to provide funds for advertising and promotions as well as volume and other rebate
programs. When sales are made to these customers, the Company records liabilities pursuant to these programs. The Company periodically
assesses these liabilities based on actual sales to determine whether all of the cooperative advertising earned will be used by
the customer or whether the customer will meet the requirements to receive rebate funds. Significant estimates are required at
any point in time with regard to the ultimate reimbursement to be claimed by the customers. Subsequent revisions to the estimates
are recorded and charged to earnings in the period in which they are identified. Rebates and certain cooperative advertising amounts
are classified as a reduction of revenue and presented within revenues, net in the accompanying consolidated statements of operations.
C ooperative advertising expenses that can be identified as a distinct good or service and
for which the fair value can be reasonably estimated are reported as components of selling and marketing expenses in the accompanying
consolidated statements of operations. Advertising Costs The Company incurs
advertising costs associated with print, digital and broadcast advertisements. Advertising costs are expensed when the advertisements
are run for the first time and included in marketing and selling expenses in the accompanying consolidated statements of operations.
Advertising expense was $112.1 million and $91.8 million for the years ended December 31, 2019 and 2018, respectively. Advertising
costs include expenditures for shared advertising costs that the Company incurs under its cooperative advertising programs to
the extent the fair value of the distinct good or service can reasonably be estimated. Revenue Recognition Policy for 2019 In May 2014, in addition to several amendments issued during
2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")
No. 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 outlines a single comprehensive model for entities
to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance,
including industry-specific guidance. The Company adopted this ASU effective January 1, 2019 on a modified retrospective basis.
Adoption of this standard did not result in significant changes to the Company's accounting policies, business processes,
systems or controls, or have a material impact on the Company's financial position, results of operations, or cash flows.
As such, prior period amounts are not adjusted and continue to be reported under accounting standards then in effect, and the
Company did not record a cumulative adjustment to the opening equity balance of accumulated deficit as of January 1, 2019. However,
additional disclosures have been added in accordance with the requirements of Topic 606 and are reflected in Note 4 – Revenue
from Contracts with Customers. The Company markets and
sells its products through direct-to-consumer online channels, traditional wholesale partners, third-party online retailers, the
Company factory outlet and Company showrooms. Revenue is recognized when the Company satisfies its performance obligations
under the contract which is transferring the promised products to the customer. This principle is achieved in the following steps: Identify the contract with the
customer. Identify the performance obligations
in the contract Determine the transaction price Allocate the transaction price
to performance obligations in the contract. Recognize revenue when or as
we satisfy a performance obligation. Revenue
Recognition Policy for 2018 The Company generates
revenues from the sale of its products. Revenue is recognized when the following revenue recognition criteria are met: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred or the service has been provided; (3) the selling price is fixed
or determinable; and (4) collection of the resulting receivable is reasonably assured. Revenue is reported net of estimated sales
returns and discounts and excludes sales taxes. As part of the Company's normal course of business, sales taxes are collected
from customers and are remitted, in a timely manner, to the appropriate governmental tax authority. The Company's policy
is to present revenue and costs, net of sales taxes. With the
exception of third-party "white glove" delivery and certain wholesale partners, revenue generated from product
sales is recognized when the inventory is shipped to the customer, which is when title passes to the customer. Revenue
generated from sales that are fulfilled through third-party "white glove" delivery is recognized when the
inventory is delivered to the customer and any required set up and removal services are complete. Revenue generated from
certain wholesale partners is recognized when the inventory is delivered to the wholesale partner's warehouse. The Company does not
normally charge additional amounts above list price to the customer for shipping and handling. Orders with an exceptionally high
shipping cost may result in an additional charge to the customer with those amounts recorded as revenue under the same policy
as product revenue. Shipping costs are recorded as a component of cost of revenues. Cost of Revenues Costs associated with net
revenues are recorded in cost of revenues in the same period in which related sales have been recorded. Cost of revenues includes
the costs of receiving, producing, inspecting, warehousing, insuring, and shipping goods during the period, as well as depreciation
and amortization of long-lived assets used in these processes. Cost of sales also includes shipping and handling costs associated
with the delivery of goods to customers. Sales Returns The Company offers up to
100-days to return a mattress or pillow and up to 30-days to return a seat cushion and other products for a full refund. The Company's policy
grants to customers a right of return requiring the Company to reduce the amount of the revenue recognized by the amount of the
estimated returns. The estimated sales returns, which are recorded as a reduction of revenue at the time of sale and recorded as
a liability on the balance sheet, are based on historical trends and product return rates and are adjusted for any current or expected
trends as appropriate. Actual sales returns could differ from these estimates. The Company regularly assesses and adjusts the estimate
of accrued sales returns by updating the return rates for actual trends and projected costs. The Company classifies the
estimated sales returns as a current liability as they are expected to be paid out in less than one year. The
Company had the following activity for sales returns:
Years Ended
(in thousands) 2019 2018
Balance at beginning of period $ 5,457 $ 4,825
Additions that reduced net sales 34,390 33,543
Deduction from reserves for current year returns (32,576 ) (32,911 )
Balance at end of period $ 7,271 $ 5,457 Warranty Liabilities The
Company provides a limited warranty on most of the products sold. The estimated warranty costs, which are expensed at the time
of sale and included in cost of revenues, are based on the results of product testing, industry and historical trends and warranty
claim rates incurred and are adjusted for any current or expected trends as appropriate. Actual warranty claim costs could differ
from these estimates. The Company regularly assesses and adjusts the estimate of accrued warranty claims by updating claims rates
for actual trends and projected claim costs. The Company classifies as non-current those estimated warranty costs expected
to be paid out in greater than one year. As of December 31, 2019 and 2018, $1.6 million and $0.9 million of
accrued warranty expense is included in current liabilities and $3.1 million and $1.1 million of accrued warranty expense
is included in other long-term liabilities on the accompanying balance sheets, respectively. The
Company had the following activity for warranties:
Years Ended
(in thousands) 2019 2018
Balance at beginning of period $ 2,009 $ 1,037
Additions charged to expense for current year sales 4,185 2,199
Deduction from reserves for current year claims (1,573 ) (1,227 )
Balance at end of period $ 4,621 $ 2,009 Debt Issuance Costs and Discounts Debt issuance costs and
discounts are presented in the balance sheet as a direct deduction from the carrying amount
of the related debt liability – Debt and Other Long-Term Liabilities Liability Warrants The Company accounts
for liability warrants under the provisions of ASC 480 - Distinguishing Liabilities from Equity Warrant Liabilities Fair Value Measurements The Company uses the fair
value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy
are: Level 1—Quoted market prices
in active markets for identical assets or liabilities; Level 2—Significant other observable
inputs (e.g. 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); and Level 3—Unobservable inputs
in which there is little or no market data, which require the reporting unit to develop its own assumptions. The classification of fair
value measurements within the established three-level hierarchy is based upon the lowest level of input that is significant to
the measurements. There were no transfers between levels for the years ended December 31, 2019 or 2018. Financial
instruments, although not recorded at fair value on a recurring basis include cash and cash equivalents, receivables, accounts
payable, accrued expenses and the Company's debt obligations. The carrying amounts of cash and cash equivalents, receivables,
accounts payable and accrued expenses approximate fair value because of the short-term nature of these accounts. The fair value
of the Company's debt instrument is estimated to be its face value based on the contractual terms of the debt instrument
and market-based expectations. The warrant liability is a Level 3 instrument and uses an internal model to estimate fair value
using certain significant unobservable inputs which requires determination of relevant inputs and assumptions. Accordingly, changes
in these unobservable inputs may have a significant impact on fair value. Such inputs include risk free interest rate, expected
average life, expected dividend yield, and expected volatility. These Level 3 liabilities would decrease (increase) in value
based upon an increase (decrease) in risk free interest rate and expected dividend yield. Conversely, the fair value of these Level 3
liabilities would generally increase (decrease) in value if the expected average life or expected volatility were to increase (decrease). Stock Based Compensation The Company has accounted
for stock-based compensation under the provisions of ASC 718 Compensation—Stock Compensation. This standard requires the
Company to record an expense associated with the fair value of stock-based compensation over the requisite service period. During 2019 and 2018, the
Company granted stock awards under the 2017 Equity Incentive Plan to members of the Company's board of directors for services
performed. Stock based compensation for these stock awards was determined on the grant date based on the publicly quoted closing
price of our common stock and was expensed on the grant date since all the awards were immediately vested. During 2019, the Company
granted a restricted stock award that has certain vesting conditions which could be met at the earliest in the twelve months ended
March 31, 2022. As this award includes a market vesting condition, stock based compensation is determined as the estimated fair
value of the restricted stock measured on the grant date using a Monte Carlo Simulation of a Geometric Brownian Motion stock path
model which incorporates the probability of vesting occurring. The fair value of the restricted stock is expensed over the derived
service period. During 2019 and 2018,
the Company granted stock options under the Company's 2017 Equity Incentive Plan to certain officers, executives and employees
of the Company. Stock based compensation for these stock options awarded was determined using the Black-Scholes option valuation
model to calculate the value of options at the date of grant and expensed on a straight-line basis over the vesting period. Option
pricing models require the input of highly subjective assumptions including the expected term of the stock option, the expected
price volatility of the Company's common stock over the period equal to the expected term of the grant, and the expected
risk-free rate. Changes in these assumptions can materially affect the fair value estimate. The Company estimates forfeitures
at the date of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In January 2017, pursuant
to the 2016 Equity Incentive Plan approved by InnoHold and Purple LLC that authorized the issuance of 12.0 million incentive units,
Purple LLC granted 11.3 million incentive units to Purple Team LLC, an entity for the benefit of certain employees who were participants
in that plan. These incentive units were non-voting and the unit holders could only participate in potential liquidating distributions
after a future majority sale of Purple LLC. Incentive unit holders were only eligible to participate after the distribution threshold
of approximately $135.0 million was met. The majority sale and $135.0 million threshold were considered performance conditions
of the incentive units. In conjunction with the Business Combination, Purple Team LLC was merged into InnoHold with InnoHold being
the surviving entity and the Purple Team LLC incentive units were cancelled and new incentive units were issued by InnoHold under
its own limited liability company agreement. On February 8, 2019, InnoHold initiated a tender offer to each of these incentive
unit holders, some of which are current employees of Purple LLC, to distribute to each a number of Purple LLC Class B Units (the
"Class B Units") and shares of Class B Stock (together with an equal number of Class B Units, the "Paired Securities")
held by InnoHold in exchange for the cancellation of their ownership interests in InnoHold. All InnoHold incentive unit holders
accepted the offer, and the terms and distribution of each transaction were finalized and closed on June 25, 2019. The distribution
by InnoHold to the incentive unit holders that are current employees of the Company resulted in the Company recognizing non-cash
stock compensation expense based on the stock price of our common stock on the respective distribution dates, which represents
the fair value of the Paired Securities. Income Taxes The Company
accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. In assessing the realizability of deferred tax
assets, management considers whether it is more-likely-than-not that the deferred tax assets will be realized. Deferred tax
assets and liabilities are calculated by applying existing tax laws and the rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in the year of the enacted rate change. Our effective tax rate is primarily
impacted by the allocation of income taxes to the noncontrolling interest and changes in our valuation allowance. The Company accounts
for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken
in a tax return, which are subject to examination by federal and state taxing authorities. The tax benefit from an uncertain tax
position is recognized when it is more likely than not that the position will be sustained upon examination by taxing authorities
based on technical merits of the position. The amount of the tax benefit recognized is the largest amount of the benefit
that has a greater than 50% likelihood of being realized upon ultimate settlement. The effective tax rate and the tax
basis of assets and liabilities reflect management's estimates of the ultimate outcome of various tax uncertainties. The
Company recognizes penalties and interest related to uncertain tax positions within the provision (benefit) for income taxes line
in the accompanying consolidated statements of operations. In the fourth quarter
of 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax
Act"). The Tax Act, which is generally effective for tax years beginning on January 1, 2018, makes broad and complex changes
to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent;
(2) eliminating the corporate alternative minimum tax (AMT); (3) bonus depreciation that will allow for full expensing of qualified
property; (4) creating a new limitation on deductible interest expense; (5) the repeal of the domestic production activity deduction;
and (5) changing rules related to uses and limitation of net operating loss carryforwards created in tax years beginning after
December 31, 2017, including limiting utilization of net operating loss carryforwards to 80% of taxable income. The Company files U.S.
federal and certain state income tax returns. The income tax returns of the Company are subject to examination by U.S. federal
and state taxing authorities for various time periods, depending on those jurisdictions' rules, generally after the income
tax returns are filed. Tax Receivable Agreement In connection with
the Business Combination, the Company entered into the 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 Tax Receivable Agreement. As noncontrolling
interest holders exercise their right to exchange or cause Purple LLC to redeem all or a portion of its Class B Units, a liability
under the Tax Receivable Agreement (a "TRA 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 TRA Liability to be recorded will depend on the price of the Company's Class A 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. No liability under the Tax Receivable
Agreement will be recognized until the realization of the tax benefit related to the Business Combination is deemed probable. Net Loss Per Share The two-class method of
computing net loss per share is required for entities that have participating securities. The two-class method is an earnings allocation
formula that determines net loss per share for participating securities according to dividends declared (or accumulated) and participation
rights in undistributed earnings. The Company's Class B Stock has no economic interest in the earnings of the Company, resulting
in the two-class method not being applicable as of December 31, 2019 or in prior periods. Basic net loss per common share is calculated
by dividing net loss attributable to common stockholders by the weighted average number of shares of Class A Stock outstanding
each period. Diluted net loss per share adds to those shares the incremental shares that would have been outstanding assuming exchanges
of the Company's outstanding Class B Stock and warrants for Class A Stock, and the vesting of unvested Class A Stock. An
anti-dilutive impact is an increase in net income per share or a reduction in net loss per share resulting from the conversion,
exercise or contingent issuance of certain securities. The Company uses the "if-converted"
method to determine the potential dilutive effect of conversions of its outstanding Class B Stock, and the treasury stock method
to determine the potential dilutive effect of its outstanding warrants and stock options exercisable for shares of Class A Stock
and the vesting of unvested Class A Stock. As of December 31, 2019 and 2018, there was no impact from these methods on net loss
per share due to the net loss position of the Company and the anti-dilutive impact. Accounting Pronouncements Adopted in
2019 New Business Combination
Guidance In January 2017, the FASB
issued ASU 2017-01, "Business Combinations: Clarifying the Definition of a Business." The purpose of this ASU is to
clarify the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions
(or disposals) of assets or businesses. The amendments affect all companies and other reporting organizations that must determine
whether they have acquired or sold a business. The Company adopted this ASU effective January 1, 2019. The guidance in this standard
did not have a material impact on the financial statements. Recent Accounting Pronouncements
Not Yet Adopted New Lease Guidance In February 2016, the FASB
issued ASU No. 2016-02, "Leases," and in March 2019, the FASB issued ASU No. 2019-01, "Leases: Codification
Improvements", which updated the accounting guidance related to leases to increase transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
They also clarify implementation issues. These updates are effective for public companies for a |
