Purple Innovation, Inc. 10-Q

ITEM 4. CONTROLS AND PROCEDURES 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” and together with the CEO, the “Certifying Officers”), 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 Certifying Officers concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2023, at the reasonable assurance level due to a material weakness in our internal control over financial reporting, described below, relating to errors in our accounting for warranty reserves. Changes in Internal Controls Over Financial Reporting. Our internal control over financial reporting did not identify an error in the accounting of our warranty reserves, relating to wholesale contracts. As a result, our CEO and CFO have concluded that we did not maintain effective internal control over financial reporting, due to a material weakness in our internal control over financial reporting, described below, related to errors in our accounting for warranty reserves. In October 2023, we determined that we had not properly accounted for the warranty terms specified in contracts with our wholesale customers when estimating the liability for warranty related returns. As a result, our warranty reserves relating to wholesale customers were understated. We determined the impact of this error on our previously issued financial statements was immaterial, but that the cumulative effect would be material, if left uncorrected, in the current period. Therefore, we elected to correct these errors in our 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. In response to this material weakness in internal control over financial reporting related to the accounting of our warranty reserves, we will implement a new control to assess all wholesale customer contracts to ensure the terms contained therein are accounted for properly. Our plans include increased training and communication among our personnel regarding the appropriate consideration and application of contractual terms, including legal to review all significant contracts and implementing new processes over credit memo approvals. 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. Other than as described above relating to the material weakness we identified, there were no changes in our internal control over financial reporting during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 49 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 15 — Commitments and Contingencies to the condensed consolidated financial statements contained in this report for certain information regarding our legal proceedings.