Purple Innovation, Inc. 10-Q

ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Certifying Officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based upon this evaluation, and the above criteria, our CEO and CFO concluded that due to the material weakness described below and as previously disclosed in our Form 10-K/A filed May 10, 2021, the Company’s disclosure controls and procedures were not effective as of March 31, 2021. Material Weakness in Internal Control over Financial Reporting A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. As previously disclosed in our Annual Report on Form 10-K/A for the year ended December 31, 2020, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2020 due to the material weakness described below. Our internal control over financial reporting did not identify an error in the classification of the public and sponsor warrants issued in connection with our IPO and through a simultaneous private placement, which we determined to be a material weakness. This error in classification was brought to our attention when the SEC issued the SEC Statement informing market participants that warrants issued by special purpose acquisition companies (“SPACs”) may require classification as a liability of the entity measured at fair value, with changes in fair value each period reported in earnings. The SEC Statement addresses certain accounting and reporting considerations related to warrants of a kind similar to those public and sponsor warrants we issued. We previously classified our public warrants and sponsor warrants as equity. As a result of such misclassification, we restated our previously issued audited consolidated financial statements as of and for the years ended December 31, 2020 and 2019 and previously issued unaudited condensed consolidated financial statements as of and for the quarterly periods ended September 30, 2020 and 2019, June 30, 2020 and 2019 and March 31, 2020 and 2019. Such restated financial statements were included in our Annual Report on Form 10-K/A for the year ended December 31, 2020 filed on May 10, 2021. In response to this material weakness in internal control over financial reporting related to the assessment of complex accounting issues reached in prior periods that continue to impact the Company, we will implement a new control to assess complex accounting issues reached in the past that continue to impact the Company to ensure those conclusions reached are still appropriate. Our plans include increased communication among our personnel and third-party professionals with whom we consult regarding the application of complex accounting transactions. Our remediation plan can only be accomplished over time and will be continually reviewed to determine that it is achieving its objectives. We can offer no assurance that these initiatives will ultimately have the intended effects. (b) Changes in Internal Controls Over Financial Reporting. Other than the changes described above, during the three months ended March 31, 2021, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. 35 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is from time to time involved in various claims, legal proceedings and complaints arising in the ordinary course of business. Please refer to Note 11 — Commitments and Contingencies to the condensed consolidated financial statements contained in this report for certain information regarding our legal proceedings.