| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies 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 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 the 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 2019 audited financial statements and accompanying notes included in the Company's
Annual Report on Form 10-K filed March 9, 2020. The unaudited condensed consolidated financial statements were prepared on the
same basis as the audited 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, 2020 are not necessarily indicative of the results to be expected for the fiscal year ending
December 31, 2020 or for any other interim period or other future year. COVID-19 Pandemic
Developments The COVID-19 pandemic
has impacted many aspects of our operations, directly and indirectly, including disruption of our employees, consumer behavior,
distribution and logistics, our suppliers, and the market overall. The scope and nature of these impacts continue to evolve. In
light of the COVID-19 pandemic, we have taken a number of precautionary measures to manage our resources and mitigate the
adverse impact of the pandemic, which is intended to help minimize the risk to our Company, employees, customers, and the communities
in which we operate. Employees at the Company's headquarters and certain other employees have been asked to work from home
where possible, with only limited access given to employees to work in the office when necessary. For roles that require employees
to be on-site, such as our manufacturing facility and distribution center, we mandate protective equipment be worn, perform temperature
testing at the start of each shift and again during the shift, contact trace when risk of exposure is known, stagger shifts to
reduce concentration of employees, follow social distancing guidelines and sanitize daily including complete weekly anti-viral
fumigation. The State of Utah, where all of our manufacturing operations currently take place, has experienced a significant resurgence
of COVID-19 cases. If the State of Utah, as part of efforts to control the resurgence of COVID-19, requires us to close our facilities
temporarily or to reduce the number of employees working in our manufacturing at a given time, our business and operations could
be significantly adversely affected. Despite the ongoing
challenges from COVID-19, the Company has been able to capitalize on the opportunities created by this situation. We continue to
serve our customers through our Direct to Consumer ("DTC") channel, which has remained strong throughout the year as
consumer demand for our premium, differentiated product offerings shifted to our DTC channel. We continue to focus our efforts
in our DTC core competencies resulting in a continued strength in DTC channel sales across all of our product categories throughout
the quarter. This increase in demand was a contributing factor to DTC net revenue growth of approximately 97% over the prior year
third quarter. There can be no assurance that this trend of strong demand through our DTC channel will continue. We initially experienced
a sharp decline in the wholesale side of our business as temporary shutdowns of non-essential businesses and shelter-at-home directives
occurred in most U.S. states. As the shutdowns were lifted and stores began to open again, demand through the wholesale channel
increased such that our net revenue from wholesale customers this quarter is up approximately 7% over the prior year third quarter.
As of November 9, 2020 we have our factory outlet and all of our showrooms open and servicing our customers. We recently opened
two new showrooms and have two more planned to open by the end of the year. However, due to recent resurgence of COVID-19, we may
be required to close our factory outlet and showrooms in the future. We have signed a new lease for a manufacturing facility in
Georgia and are proceeding with the buildout and purchasing of equipment to begin production. This increase in demand
allowed us to work through a portion of our on-hand inventory and required us to ramp up production. We continue to take advantage
of our vertically integrated business model to adjust production schedules to leverage inventory on hand and manage labor costs.
We also continue to dynamically adjust our significant discretionary online advertising spend in response to any changes in DTC
trends as they develop. Our supply chain has not been significantly affected by COVID-19.
Suppliers in China were temporarily closed as a result of the pandemic, but we had sufficient inventory on hand. These suppliers
have resumed production and are able to supply materials as needed. Most of our domestic suppliers are able to continue operations
and provide necessary materials when needed. We have experienced some constraints from certain suppliers due to our increased production
to meet demand. We have also experienced some shipping delays in the delivery of our product to our customers. This is due to the
increased nationwide demand placed on delivery companies. Although the Company
has taken measures to protect the business, we cannot predict the specific duration for which these precautionary measures will
stay in effect, and we may elect or need to take additional measures as the information available to us continues to develop, including
with respect to our employees, manufacturing facilities and distribution center, and relationships with our suppliers and customers.
Subject to certain assumptions regarding the duration and severity of the COVID-19 pandemic, and government, consumer, and our
responses thereto, based on our current projections we believe our cash on hand, ongoing cash generated from e-commerce, liquidity
available under our new line of credit, and continuing resumption and ramp up of store operations and our wholesale business, will
be sufficient to cover our working capital requirements and anticipated capital expenditures for the next 12 months. However, the
extent to which the COVID-19 pandemic and our precautionary measures in response thereto may impact our business will depend on
future developments, which are highly uncertain and cannot be precisely predicted at this time. 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 September 30, 2020, Purple Inc. had
approximately a 99% 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. At September 30,
2020, other parties owned approximately 1% of the economic interest in Purple LLC; however, the other parties have disproportionally
fewer voting rights, and are shown as the noncontrolling interest ("NCI") holder of Purple LLC. For further discussion
see Note 13 — Stockholders' Equity. 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 effect on the previously reported net loss. Use of Estimates The preparation of
the unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the
amounts reported in the unaudited condensed 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 returns,
the recognition and measurement of loss contingencies, warrant liabilities, 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" or "TRA"). 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. Revenue Recognition
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, 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. Debt Issuance
Costs and Discounts Debt issuance costs
and discounts that relate to borrowings are presented in the balance sheet as a direct deduction from the carrying amount of the
related debt liability and are amortized into interest expense using an effective interest rate over the duration of the debt.
Debt issuance costs for the revolving line of credit facility available from the 2020 Credit Agreement are carried as an asset
and amortized to interest expense on a straight-line basis over the term of the line of credit facility. Refer to Note 8 –
Debt Warrant Liabilities The Company
accounts for warrant liabilities 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. 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). Income Taxes
In calculating the
provision for interim income taxes, in accordance with ASC Topic 740, an estimated annual effective tax rate is applied to year-to-date
ordinary income. At the end of each interim period, the Company estimates the effective tax rate expected to be applicable for
the full fiscal year. This differs from the method utilized at the end of an annual period. For annual periods,
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. As of the third quarter of 2020, no uncertain tax positions have been recorded. The Company
will continue to monitor this position each interim period. 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. Net Income
(Loss) Per Share The two-class method
of computing net income (loss) per share is required for entities that have participating securities. The two-class method is an
earnings allocation formula that determines net income (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 September 30, 2020 or in prior periods.
Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to common shareholders by the
weighted average number of shares of Class A Stock outstanding each period. Diluted net income (loss) per share adds to those shares
the incremental shares that would have been outstanding and potentially dilutive assuming exchanges of the Company's outstanding
warrants, stock options and Class B Stock for Class A Stock, and the vesting of unvested and restricted 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 and restricted Class A Stock. Recent Accounting
Pronouncements 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 annual periods
beginning after December 15, 2018, including interim periods therein. The Company is allowed to use the private company adoption
timelines, and therefore the standard is effective for the Company for its annual period beginning January 1, 2020, and interim
periods within annual periods beginning January 1, 2021. The standard is to be applied utilizing a modified retrospective approach,
with early adoption permitted. We are in the process of implementing a new lease accounting system in connection with the adoption.
While we expect a material impact to our consolidated balance sheet as a result of the adoption of this new guidance, we continue
to evaluate the effect of the new standard on our consolidated financial statements and related disclosures. We also expect that
adoption of the new guidance will require changes to our internal controls over financial reporting. Simplifying the Accounting for Income
Taxes In December 2019,
the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (ASU No. 2019-12). The new guidance eliminates
certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an
interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies
aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions
that result in a step-up in the tax basis of goodwill. The guidance is effective for fiscal years beginning after December 15,
2020 and for interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact
of adopting ASU 2019-12. New Internal-Use Software Guidance In August 2018, the
FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350) ("ASU 2018-15").
The objective of ASU 2018-15 is to align the requirements for capitalizing implementation costs incurred in a hosting arrangement
that is a service contract with those incurred to develop or obtain internal-use software. The guidance is effective for fiscal
years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The amendments
can be applied either retrospectively or prospectively. We do not expect the adoption of this standard to have a material impact
on our consolidated financial statements. Measurement of
Credit Losses In 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 ASUs. This guidance replaces the existing incurred loss impairment guidance and establishes a single allowance framework
for financial assets carried at amortized cost based on expected credit losses. The estimate of expected credit losses requires
the incorporation of historical information, current conditions, and reasonable and supportable forecasts. These updates are effective
for public companies, excluding Smaller Reporting Companies ("SRC"), for annual periods beginning after December 15,
2019, including interim periods therein. The standard is effective for all other entities for annual periods beginning after December
15, 2022, including interim periods therein. The standard is effective for our interim and annual financial periods beginning January
1, 2023. This standard is to be applied utilizing a modified retrospective approach. We are currently evaluating the impact of
this standard on our accounts receivable, cash and cash equivalents, and any other financial assets measured at amortized cost
and do not expect that adoption will have a material impact on our consolidated financial statements or related disclosures. |
