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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-41009
Arhaus, Inc.
(Exact name of registrant as specified in its charter)
Delaware87-1729256
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
51 E. Hines Hill Road, Boston Heights, Ohio
(Address of Principal Executive Offices)
44236
(Zip Code)
(440) 439-7700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A common stock, $0.001 par value per shareARHSThe Nasdaq Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No
As of November 3, 2022 the registrant had 52,947,617 shares of Class A common stock and 87,115,600 shares of Class B common stock outstanding.


Table of Contents
Table of Contents
Page

1


Part I - Financial Information
Item 1. Financial Statements of Arhaus, Inc. and Subsidiaries
Arhaus, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited, amounts in thousands, except share and per share data)
September 30,
2022
December 31,
2021
Assets
Current assets
Cash and cash equivalents$145,737 $123,777 
Restricted cash equivalents6,345 7,131 
Accounts receivable, net1,778 228 
Merchandise inventory, net292,571 208,343 
Prepaid and other current assets35,867 28,517 
Total current assets482,298 367,996 
Operating right-of-use assets224,921  
Financing right-of-use assets39,062  
Property, furniture and equipment, net
128,783 179,631 
Deferred tax asset20,948 27,684 
Goodwill10,961 10,961 
Other noncurrent assets235 278 
Total assets$907,208 $586,550 
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable$58,455 $51,429 
Accrued taxes12,706 7,302 
Accrued wages17,498 16,524 
Accrued other expenses33,756 61,047 
Client deposits261,801 264,929 
Current portion of operating lease liabilities39,248  
Current portion of financing lease liabilities522  
Total current liabilities423,986 401,231 
Operating lease liabilities, long-term263,753  
Financing lease liabilities, long-term51,908  
Capital lease obligation 50,525 
Deferred rent and lease incentives2,353 63,037 
Other long-term liabilities4,413 1,992 
Total liabilities$746,413 $516,785 
Commitments and contingencies (Note 9)
Stockholders' equity
Class A shares, par value $0.001 per share (600,000,000 shares authorized, 51,437,348 and 50,427,390 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively)
51 50 
Class B shares, par value $0.001 per share (100,000,000 shares authorized, 87,115,600 and 86,519,002 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively)
87 87 
Accumulated Deficit(26,948)(116,581)
Additional Paid-in Capital187,605 186,209 
Total Arhaus, Inc. stockholders' equity160,795 69,765 
Total liabilities and stockholders' equity$907,208 $586,550 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2

Table of Contents
Arhaus, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited, amounts in thousands, except share and per share data)
Nine months ended September 30,Three months ended September 30,
2022202120222021
Net revenue$872,595 $558,690 $320,030 $203,333 
Cost of goods sold505,561 325,710 183,739 118,522 
Gross margin367,034 232,980 136,291 84,811 
Selling, general and administrative expenses246,767 196,443 89,145 68,266 
Loss on disposal of assets 466  452 
Income from operations120,267 36,071 47,146 16,093 
Interest expense, net3,367 4,091 751 1,365 
Other income(584) (109) 
Income before taxes117,484 31,980 46,504 14,728 
Income tax expense27,851 1,704 9,568 500 
Net and comprehensive income$89,633 $30,276 $36,936 $14,228 
Less: Net income attributable to noncontrolling interest 17,499  8,231 
Net and comprehensive income attributable to Arhaus, Inc.$89,633 $12,777 $36,936 $5,997 
Net and comprehensive income per share, basic
Weighted-average number of common shares outstanding, basic137,939,577 112,058,742 138,484,495 112,058,742 
Net and comprehensive income per share, basic$0.65 $0.11 $0.27 $0.05 
Net and comprehensive income per share, diluted
Weighted-average number of common shares outstanding, diluted139,545,802 112,058,742 139,845,333 112,058,742 
Net and comprehensive income per share, diluted$0.64 $0.11 $0.26 $0.05 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3

Arhaus, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
(Unaudited, amounts in thousands)
Nine months ended
Common Shares in Homeworks Holdings, Inc.Common StockTotal Stockholders'
Equity (Deficit)
VotingNon-VotingClass AClass B
SharesAmountSharesAmountSharesAmountSharesAmountRetained Earnings (Accumulated
Deficit)
Additional
Paid-in Capital
Noncontrolling InterestTotal Stockholders' Equity (Deficit)
Balances as of December 31, 2021 $  $ 50,428 $50 86,519 $87 $(116,581)$186,209 $ $69,765 
Net income— — — — — — — — 89,633 — — 89,633 
Adjustment to deferred tax asset impact of Reorganization from partnership to a corporation— — — — — — — — — (1,278)— (1,278)
Shareholder capital contribution— — — — — — — — — 62 — 62 
Equity based compensation— — — — 1,009 1 597 — — 2,612 — 2,613 
Balances as of September 30, 2022 $  $ 51,437 $51 87,116 $87 $(26,948)$187,605 $ $160,795 
Nine months ended
Common Shares in Homeworks Holdings, Inc.Common StockTotal Stockholders'
Equity (Deficit)
VotingNon-VotingClass AClass B
SharesAmountSharesAmountSharesAmountSharesAmountRetained Earnings (Accumulated
Deficit)
Additional
Paid-in Capital
Noncontrolling InterestTotal Stockholders' Equity (Deficit)
Balances as of December 31, 2020645 $ 4,158 $  $  $ $(28,422)$1,670 $(7,689)$(34,441)
Net income— — — — — — — — 12,777 — 17,499 30,276 
Tax distribution— — — — — — — — — — (7,865)(7,865)
Shareholder distribution— — — — — — — — (12,350)— — (12,350)
Equity based compensation— — — — — — — — — 1,135 — 1,135 
Balances as of September 30, 2021645 $ 4,158 $  $  $ $(27,995)$2,805 $1,945 $(23,245)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4

Table of Contents
Arhaus, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (continued)
(Unaudited, amounts in thousands)
Three months ended
Common Shares in Homeworks Holdings, Inc.Common StockTotal Stockholders'
Equity (Deficit)
VotingNon-VotingClass AClass B
SharesAmountSharesAmountSharesAmountSharesAmountRetained Earnings (Accumulated
Deficit)
Additional
Paid-in Capital
Noncontrolling InterestTotal Stockholders' Equity (Deficit)
Balances as of June 30, 2022 $  $ 51,360 $51 87,116 $87 $(63,884)$187,640 $ $123,894 
Net income— — — — — — — — 36,936 — — 36,936 
Adjustment to deferred tax asset impact of Reorganization from partnership to a corporation— — — — — — — — — (1,278)— (1,278)
Shareholder capital contribution— — — — — — — — — 19 — 19 
Equity based compensation— — — — 77 — — — — 1,224 — 1,224 
Balances as of September 30, 2022 $  $ 51,437 $51 87,116 $87 $(26,948)$187,605 $ $160,795 
Three months ended
Common Shares in Homeworks Holdings, Inc.Common StockTotal Stockholders'
Equity (Deficit)
VotingNon-VotingClass AClass B
SharesAmountSharesAmountSharesAmountSharesAmountRetained Earnings (Accumulated
Deficit)
Additional
Paid-in Capital
Noncontrolling InterestTotal Stockholders' Equity (Deficit)
Balances as of June 30, 2021645 $ 4,158 $  $  $ $(33,992)$2,097 $(6,286)$(38,181)
Net income— — — — — — — — 5,997 — 8,231 14,228 
Equity based compensation— — — — — — — — — 708 — 708 
Balances as of September 30, 2021645 $ 4,158 $  $  $ $(27,995)$2,805 $1,945 $(23,245)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5

Arhaus, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited, amounts in thousands)
Nine months ended September 30,
20222021
Cash flows from operating activities
Net income$89,633 $30,276 
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization18,319 17,206 
Amortization of operating lease right-of-use asset21,976  
Amortization of deferred financing fees and interest on finance lease in excess of principal paid8,731 839 
Equity based compensation2,613 1,135 
Deferred tax assets5,458  
Derivative expense 29,905 
Loss on disposal of property, furniture and equipment 466 
Amortization and write-off of lease incentives(224)(5,889)
Changes in operating assets and liabilities
Accounts receivable(1,550)240 
Merchandise inventory(84,228)(62,533)
Prepaid and other current assets(11,249)(715)
Other noncurrent liabilities456 (732)
Accounts payable10,334 1,698 
Accrued expenses23,682 16,259 
Operating lease liabilities(22,586) 
Deferred rent and lease incentives 6,959 
Client deposits(3,128)106,076 
Net cash provided by operating activities58,237 141,190 
Cash flows from investing activities
Purchases of property, furniture and equipment(36,950)(29,533)
Net cash used in investing activities(36,950)(29,533)
Cash flows from financing activities
Issuance of related party notes (1,000)
Proceeds from related party notes 1,000 
Principal payments under capital leases (106)
Principal payments under finance leases(113) 
Shareholder distributions (12,350)
Distributions to noncontrolling interest holders (7,865)
Net cash used in financing activities(113)(20,321)
Net increase in cash, cash equivalents and restricted cash equivalents21,174 91,336 
Cash, cash equivalents and restricted cash equivalents
Beginning of period130,908 64,002 
End of period$152,082 $155,338 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Arhaus, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (continued)
(Unaudited, amounts in thousands)
Nine months ended September 30,
20222021
Supplemental disclosure of cash flow information
Interest paid in cash$3,858 $4,006 
Interest received in cash316  
Income taxes paid in cash20,579 1,394 
Noncash operating activities:
Lease incentives7,532 4,253 
Noncash investing activities:
Purchase of property, furniture and equipment in accounts payable2,661 (428)
Noncash financing activities:
Adjustment to deferred tax asset impact of Reorganization from partnership to a corporation(1,278) 
Derecognition of build-to-suit assets as a result of ASC 842 adoption(31,017) 
Property, furniture and equipment additions due to build-to-suit lease transactions 1,040 
Capital contributions62  
Capital lease obligation 2,591 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Arhaus, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1
1. Nature of Business and Basis of Presentation
Nature of Business
Arhaus, Inc. (the “Company,” “we” or “Arhaus”) is a Delaware corporation and is a premium retailer in the home furnishings market, specializing in livable luxury supported by heirloom quality merchandise. We offer merchandise in a number of categories, including furniture, outdoor, lighting, textiles and décor. Our curated assortments are presented across our sales channels in sophisticated, family friendly and unique lifestyle settings. We position our retail locations as Showrooms for our brand, while our website acts as a virtual extension of our Showrooms. The Company operated 80 Showrooms at September 30, 2022.
Arhaus was formed on July 14, 2021 for the purpose of completing an initial public offering (“IPO”) of its common stock and related transactions in order to carry on the business of Arhaus, LLC (“LLC”) and its subsidiaries. Pursuant to the corporate reorganization and completion of the IPO in November 2021, the Company became a holding company for LLC and its subsidiaries.
In connection with the IPO, the Company reorganized its ownership structure from a limited liability company to a corporation. Pursuant to the terms of the Integrated Contribution Agreement by and among the Company, FS Arhaus Holding, Inc. (“FS Arhaus,” “Class B Units,” or “noncontrolling interest”), a Delaware corporation, Homeworks Holdings Inc. (“Homeworks,” or “Class A Units”) and the unit holders (“Management Unitholders”) of LLC, a series of transactions were completed on November 8, 2021, which we refer to, collectively, as the “Reorganization.” LLC and Homeworks were identified as entities under common control, in which both entities are ultimately controlled by the same party before and after the Reorganization and therefore resulted in a change in reporting entity. In accordance with ASC 805-50-45-5, for transactions between entities under common control, the condensed consolidated financial statements for periods prior to the Reorganization have been adjusted to retrospectively combine the previously separate entities for presentation purposes.
Basis of Presentation
The condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying condensed consolidated financial statements include our accounts and those of our wholly owned subsidiaries. Accordingly, all intercompany balances and transactions have been eliminated through the consolidation process. Certain reclassifications have been made to prior years' condensed consolidated financial statements to conform to the current year's presentation.
The accompanying condensed consolidated balance sheets at September 30, 2022 and December 31, 2021, the condensed consolidated statements of comprehensive income and changes in stockholders’equity (deficit) for the nine and three months ended September 30, 2022 and 2021, the condensed consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021 and the related interim condensed consolidated disclosures are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
In management’s opinion, the accompanying condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the Company’s financial position at September 30, 2022; the results of operations and changes in stockholders’equity (deficit) for the nine and three months ended September 30, 2022 and 2021 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021. The condensed consolidated balance sheet as of December 31, 2021 included herein was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.
The results for the nine and three months ended September 30, 2022 and 2021 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021.
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Arhaus, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Use of Estimates
The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accounting estimates and other matters included within our condensed consolidated financial statements and notes to the condensed consolidated financial statements are revenue recognition, including a reserve for merchandise returns, goodwill and fair value of financial instruments which include, but are not limited to, accounts receivable, payables, lease obligations, derivative and equity based compensation instruments.
Client Deposits
Client deposits represent payments made by clients on orders. At the time of purchase, the Company collects deposits for all orders equivalent to at least 50 percent of the clients’ purchase price. Orders are recognized as revenue when the merchandise is delivered to the client and at the time of delivery the client deposit is no longer recorded as a liability. The Company expects substantially all client deposits as of September 30, 2022 will be recognized as net revenue within the next 12 months as the performance obligations are satisfied.
Gift Cards
The Company sells gift cards to clients in our Showrooms and through our website. Such gift cards do not have expiration dates. We defer revenue when payments are received in advance of performance for unsatisfied obligations related to our gift cards. The liability related to unredeemed gift cards of $0.9 million and $0.9 million at September 30, 2022 and December 31, 2021, respectively, is recorded in the accrued other expenses line item of the condensed consolidated balance sheets. The Company recognizes income associated with breakage proportional to actual gift card redemptions.
Fair Values of Financial Instruments
The Company’s primary financial instruments are cash and cash equivalent investments, accounts receivable, payables, lease obligations, a derivative and equity based compensation instruments. Due to the short-term maturities of cash and cash equivalent investments, accounts receivable and payables, the Company believes the fair values of these instruments approximate their respective carrying values at September 30, 2022 and December 31, 2021. See Note 4 for discussion of our derivative, Note 5 for discussion of our lease obligations and Note 6 for discussion of our equity based compensation instruments.
The Company has established a hierarchy to measure our financial instruments at fair value, which requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect the Company’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The hierarchy defines three levels of inputs that may be used to measure fair value:
Level 1Unadjusted quoted prices in active markets for identical, unrestricted assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3Unobservable inputs that reflect the entity’s own assumptions about the assumptions market participants would use in the pricing of the asset or liability and are consequently not based on market activity but rather through particular valuation techniques.

From time to time, the Company invests in money market funds and other Level 1 cash and cash equivalent investments. For the nine and three months ended September 30, 2022, the Company earned $0.6 million and $0.6 million, respectively in interest income. Interest income is included within interest expense, net on our condensed consolidated statements of comprehensive income.
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Arhaus, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2. Recently Issued Accounting Standards
New Accounting Standards Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheets. While it will still be necessary for lessees to distinguish between “operating” and “financing” (formerly known as “capital”) leases, these distinctions will primarily affect how a lessee must recognize expense in its income statement. The new guidance is effective for financial statements issued for annual periods beginning after December 15, 2021.
The Company adopted ASC 842 as of January 1, 2022, using the modified retrospective approach by applying the transition provisions at the beginning of the period of adoption. Comparative periods will continue to be presented in accordance with ASC 840. The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward the historical lease classification, lease identification and initial direct costs. The Company did not elect the “Land Easements” or “Hindsight” practical expedients. Additionally, the Company made the following accounting policy elections in connection with the adoption:
Exclude short-term leases from our consolidated balance sheets; and
Include both the lease and non-lease components as a single component and account for it as a lease.
As a result, the Company measured the right-of-use asset and lease liability for operating and finance leases as of January 1, 2022, using the remaining portion of the lease term that was determined under ASC 840. The adoption resulted in $242.0 million recognized as total right-of-use assets and $326.5 million recognized as total lease liabilities on our consolidated balance sheets as of January 1, 2022. For certain previous operating and capital leases, we qualified as the deemed owner of the construction project due to our significant involvement during the construction period under build-to-suit lease accounting requirements within ASC 840. As part of our adoption of ASC 842, we derecognized the cost of these construction projects of $31.0 million, which were previously recorded in property, furniture and equipment, net with an offsetting obligation in accrued other expenses on our consolidated balance sheets at December 31, 2021. See Note 5 — Leases for additional information.
In October 2020, the FASB issued ASU 2020-10, “Codification Improvements.” The amendments in this update represent changes to clarify the Codification or correct unintended application of guidance that are not expected to have a significant effect on current accounting practice. The amendments in this update affect a wide variety of Topics in the Codification and apply to all reporting entities within the scope of the affected accounting guidance. ASU 2020-10 is effective for annual periods beginning after December 15, 2021 for non-public business entities. Early application is permitted. The amendments in this update should be applied retrospectively. The Company adopted the standard as of January 1, 2022. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
3. Merchandise Warranties
The Company warrants certain merchandise to be free of defects in both construction materials and workmanship from the date the performance obligation was fulfilled to the client for three to ten years depending on the merchandise category. The Company accounts for merchandise warranties by accruing an estimated liability when we recognize revenue on the sale of warrantied merchandise. We estimate future warranty claims based on claim experience which includes materials and labor costs to perform the repairs or replace products. We use judgment in making our estimates. We record differences between our estimated and actual costs when the differences are known.
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Arhaus, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A reconciliation of the changes in our limited merchandise warranty liability is as follows (amounts in thousands):
Nine months ended September 30,Three months ended September 30,
2022202120222021
Balance as of beginning of period$4,724 $3,326 $5,412 $3,868 
Accruals during the period8,285 5,652 3,181 2,138 
Settlements during the period(7,152)(4,712)(2,736)(1,740)
Balance as of end of the period(1)
$5,857 $4,266 $5,857 $4,266 
(1) $3.4 million and $2.7 million were recorded in accrued other expenses at September 30, 2022 and December 31, 2021, respectively. The remainder is recorded in other long-term liabilities on our condensed consolidated balance sheets.
We recorded accruals during the periods presented in the table above, primarily to reflect charges that relate to limited merchandise warranties issued during the respective periods.
4. Long-Term Debt
On June 25, 2020, the Company entered into a credit agreement (“Revolver”), which included a revolving credit facility of $30.0 million with availability limited pursuant to a borrowing base formula based on specified percentages of eligible inventory, net of reserves. The Company’s borrowings under the Revolver bore variable interest rates at the LIBOR index rate (“LIBOR”) plus the applicable margin (5.5% at September 30, 2021). In the event LIBOR ceased to be available during the term of the Revolver, the Revolver provided procedures to determine an Alternate Base Rate. The Revolver was to expire on June 25, 2023.
Loan costs related to the Revolver of $1.5 million were recorded in other noncurrent assets and were amortized over the term of the debt on a straight-line basis, which approximated the effective interest method. Amortization expense was $0.4 million and $0.1 million for the nine and three months ended September 30, 2021, respectively, and was included in interest expense, net within the condensed consolidated statements of comprehensive income. On November 4, 2021, the Company terminated the Revolver of which there were no borrowings drawn.
On November 8, 2021, the Company entered into a new revolving credit facility (the “2021 Credit Facility”). The 2021 Credit Facility provides for, among other things, (1) a revolving credit facility in an aggregate amount not to exceed at any time outstanding the amount of such lender’s commitment, (2) a letter of credit commitment in an amount equal to the lesser of (a) $10.0 million, and (b) the amount of the revolving credit facility as of such date, and (3) a swingline loan in an amount equal to the lesser of (a) $5.0 million, and (b) the amount of the revolving credit facility as of such date. The aggregate amount of all commitments of all lenders under the 2021 Credit Facility is $50.0 million, which may be increased pursuant to the terms of the 2021 Credit Facility. The 2021 Credit Facility contains restrictive covenants and has certain financial covenants, including a minimum rent-adjusted total leverage ratio and a minimum fixed charge ratio. The 2021 Credit Facility bears variable interest rates at the prevailing Bloomberg Short-Term Bank Yield index rate plus the applicable margin (1.50% at September 30, 2022), whereas the applicable margin is adjusted quarterly based on the Company’s consolidated rent-adjusted total leverage ratio. The 2021 Credit Facility expires on November 8, 2026.
At September 30, 2022 and December 31, 2021, we had no borrowings on the 2021 Credit Facility. Deferred financing costs related to the 2021 Credit Facility of $0.3 million are recorded in other noncurrent assets on the consolidated balance sheets and will be amortized over the term of the 2021 Credit Facility on a straight-line basis, which approximates the effective interest method. Accumulated amortization related to deferred financing costs for the 2021 Credit Facility was $0.1 million as of September 30, 2022.
Prior to the Company entering into the Revolver and 2021 Credit Facility, the debt structure (“Prior Credit Facilities”) included a revolving credit facility (the “Prior Revolver”) and a term loan (the “Term Loan”). The Prior Revolver was terminated on June 25, 2020 and Term Loan was paid in full on December 28, 2020.
The Company’s Term Loan had an exit fee clause which allowed the holder of the Term Loan to receive either $3.0 million upon repayment of the Term Loan or a payout equivalent to 4.0% of the total equity value of the Company. The 4.0% of
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Arhaus, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
the total equity value of the Company payout was payable upon a change of control, qualified IPO or sale of all or substantially all assets of the Company. In connection with the repayment of the Term Loan on December 28, 2020, the holder informed the Company they would decline the option to receive the $3.0 million and elect to receive a payout equivalent to 4.0% of the equity value of the Company. The exit fee was treated as a derivative and adjusted to fair value each reporting period. The Company recorded derivative expense of $29.9 million and $0.1 million for the nine and three months ended September 30, 2021, respectively, which was included in selling, general and administrative expense within the condensed consolidated statements of comprehensive income. The Company used a portion of the net proceeds from the IPO to pay the derivative liability on November 8, 2021.
At September 30, 2021, the Company’s valuation of the derivative liability was measured using the probability-weighted expected return model (“PWERM”). The PWERM is a scenario-based methodology that estimates the fair value of the derivative based upon an analysis of future values for the Company. The Company considered two different scenarios:(a) remain private; and (b) IPO. Under the remain private scenario, as of September 30, 2021, the Company estimated the enterprise value by weighting the guideline public company method and the discounted cash flow method, and then relied on the option pricing method (“OPM”) and applied a discount for lack of marketability (“DLOM”). The OPM estimated the value using the Black-Scholes OPM. The fair value of the exit fee was determined utilizing unobservable inputs and therefore is a Level 3 measurement under the fair value hierarchy. The key assumptions used within the Black-Scholes OPM as of September 30, 2021 were as follows:
September 30,
2021
Term
10 years
Risk-free rate of return1.50%
Volatility40.00%
Dividend yield0.00%
DLOM24.70%
The assumed volatility assumption is based on that of an identified group of comparable public companies. The fair value of the exit fee has been determined utilizing unobservable inputs and therefore is a Level 3 measurement under the fair value hierarchy.
The Company was in compliance with all applicable debt covenants at September 30, 2022 and December 31, 2021.
5. Leases
The Company leases real estate and equipment under operating and finance leases, some of which are from related parties as discussed in Note 10 Related Party Transactions. The most significant obligations under these lease agreements require the payments of periodic rentals, real estate taxes, insurance and maintenance costs. Depending on particular Showroom leases, the Company can also owe a percentage rent payment if particular Showrooms meet certain sales figures.

The following table summarizes the amounts recognized in our condensed consolidated balance sheets related to leases as of September 30, 2022 (amounts in thousands):
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Arhaus, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Condensed Consolidated Balance Sheet ClassificationSeptember 30, 2022
Assets
Operating lease assetsOperating right-of-use assets$224,921 
Finance lease assetsFinancing right-of-use assets39,062 
Total leased assets$263,983 
Liabilities
Current operating leasesCurrent portion of operating lease liabilities$39,248 
Non-current operating leasesOperating lease liabilities, long-term263,753 
Total operating lease liabilities303,001 
Current finance leasesCurrent portion of financing lease liabilities522 
Non-current finance leasesFinancing lease liabilities, long-term51,908 
Total finance lease liabilities52,430 
Total lease liabilities$355,431 
The components of lease cost recognized within our condensed consolidated statements of comprehensive income for the nine and three months ended September 30, 2022 are as follows (amounts in thousands):
Nine months ended September 30,Three months ended September 30,
Condensed Consolidated Income Statement Classification20222022
Lease costs:
Operating lease costsCost of goods sold$25,798 $8,716 
Operating lease costsSelling, general and administrative expenses4,743 1,955 
Finance lease costs
Amortization of right-of-use assetsSelling, general and administrative expenses1,516 540 
Interest expense on lease liabilitiesInterest expense, net3,758 1,270 
Other lease costs(1)
Cost of goods sold26,764 9,961 
Other lease costs(1)
Selling, general and administrative expenses507 170 
Total lease costs$63,086 $22,612 
(1) Other lease costs includes short-term lease costs and variable lease costs.
Rent expense, amortization of landlord improvements and percentage rent expense calculated under ASC 840 were $47.1 million, $8.7 million and $2.5 million for the nine months ended September 30, 2021, respectively. Rent expense, amortization of landlord improvements and percentage rent expense calculated under ASC 840 were $15.8 million, $3.1 million and $1.3 million for the three months ended September 30, 2021, respectively.
We often have options to renew lease terms for Showrooms and other assets. The exercise of lease renewal options is generally at our sole discretion. In addition, certain lease agreements may be terminated prior to their original expiration date at our discretion. We evaluate each renewal and termination options at the lease commencement date to determine if
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Arhaus, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
we are reasonably certain to exercise the option on the basis of economic factors. The table below summarizes the weighted average remaining lease terms as of September 30, 2022.
Weighted Average Remaining Lease Term (In Years)September 30, 2022
Operating leases8.59
Finance leases22.66
The discount rate implicit within our finance leases was determined at the time of lease commencement. However, the discount rate implicit within our operating leases is generally not determinable at the time of lease commencement and therefore the Company determines the discount rate based on its incremental borrowing rate. For all operating leases, the Company utilized a market-based approach to estimate the incremental borrowing rate (“IBR”), which required significant judgment. The Company estimated the base IBR based on an analysis of (i) yields on the Company’s 2021 Credit Facility, as well as comparable companies and (ii) unsecured yields and discount rates. The Company applied adjustments to the base IBRs to account for full collateralization and lease term. The table below summarizes the weighted average discount rate used to measure our lease liabilities as of September 30, 2022.
Weighted Average Discount RateSeptember 30, 2022
Operating leases4.39 %
Finance leases9.72 %
Future lease liabilities at September 30, 2022 are as follows (amounts in thousands):
Year Ending December 31,
Operating Lease Liabilities (1)
Finance Lease LiabilitiesTotal Lease Liabilities
Remainder of 2022
$12,322 $1,333 $13,655 
202351,708 5,333 57,041 
202446,897 5,153 52,050 
202540,472 5,153 45,625 
202637,826 5,612 43,438 
202734,218 5,423 39,641 
Thereafter146,193 115,168 261,361 
Total lease payments369,636 143,175 512,811 
Less: Amounts representing interest(66,635)(90,745)(157,380)
Total$303,001 $52,430 $355,431 
(1) Includes leases with related parties. See Note 10 Related Party Transactions for amounts leased from related parties.

At September 30, 2022, the Company has entered into leases for the expansion of our Boston Heights distribution center, Showrooms and equipment which have not yet commenced with expected lease terms ranging from 5 to 23 years. The aggregate minimum rental payments over the term of the leases of approximately $166.7 million are not included in the above table.






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Arhaus, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Future minimum lease payments for operating and capital leases under ASC 840 at December 31, 2021, were as follows (amounts in thousands):
Year Ending December 31,
Operating Leases (1)
Capital LeasesTotal Future Lease Payments
2022$45,892 $4,673 $50,565 
202343,507 4,673 48,180 
202438,659 4,673 43,332 
202533,125 4,673 37,798 
202629,903 5,132 35,035 
Thereafter129,498 120,390 249,888 
320,584 144,214 464,798 
Less: Amounts representing interest (94,064)(94,064)
Total$320,584 $50,150 $370,734 
(1) Includes leases with related parties. See Note 10 Related Party Transactions for amounts leased from related parties.
Supplemental cash flow information related to leases for the nine months ended September 30, 2022, is as follows (amounts in thousands):
Nine months ended September 30, 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases$35,587 
Operating cash flows for finance leases3,758 
Financing cash flows for finance leases113 
Right-of-use assets obtained in exchange for lease obligations:
Operating leases$43,474 
Finance leases2,018 
6. Equity Based Compensation
The following tables summarize the activity of the Company’s management incentive unit awards granted pre-IPO for the nine months ended September 30, 2022 and their equity based compensation expense for the nine and three months ended September 30, 2022 and 2021, respectively (amounts in thousands):
Class AClass B
AmountWeighted Average Grant Date Fair ValueAmountWeighted Average Grant Date Fair Value
Unvested at December 31, 20212,520,229 $16.28 596,598 $0.13 
Granted    
Forfeited    
Vested(1,009,960)17.38 (596,598)0.10 
Unvested at September 30, 20221,510,269 $18.10  $ 

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Arhaus, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Nine months ended September 30,Three months ended September 30,
2022202120222021
Equity based compensation expense - management incentive units pre-IPO(1)
$2,073 $1,135 $684 $708 
(1) Total unrecognized equity based compensation for the management incentive unit awards granted pre-IPO to be recognized in future periods is $9.5 million at September 30, 2022, and will be recognized over a weighted average period of 3.60 years. Equity based compensation expense is recorded within selling, general and administrative expenses on our condensed consolidated statements of comprehensive income.
On August 2, 2022, the Compensation Committee (the "Committee") of the Board of Directors of the Company approved grants of performance stock units (“PSUs”) and restricted stock units (“RSUs”) under the Arhaus, Inc. 2021 Equity Incentive Plan (the “2021 Plan”) to certain of the Company’s named executive officers and other key employees (“Award Recipient”). The Committee also approved RSU awards to certain members of the Board of Directors.
Each RSU represents a contingent right to receive one share of the Company’s Class A common stock upon vesting. The RSUs granted to Award Recipients vest in one-third increments on each of the first, second and third anniversary of the date of grant, provided that the Award Recipient continues to serve the Company through the applicable vesting date (“Continuous Service”). If the Award Recipient’s Continuous Service terminates for any reason other than death, disability or in connection with a change in control (as such terms are defined in the 2021 Plan), unless the Committee determines otherwise, all RSUs that are unvested at the time of such termination shall be forfeited and canceled immediately without consideration. The RSUs issued to certain members of the Board of Directors will vest on the one-year anniversary of the grant date. The Company accounts for forfeitures as they occur.
Each PSU represents a contingent right to receive one share of the Company’s Class A common stock upon vesting. The number of PSUs earned will be based on the Company’s financial performance as measured against pre-established target goals for cumulative demand revenue and cumulative adjusted EBITDA (the “Performance Goals”) over the period beginning on January 1, 2022 and ending on December 31, 2024 (the “Performance Period”). PSUs will vest as of the end of the Performance Period (December 31, 2024) subject to the Award Recipient’s Continuous Service, but will not settle and payout until the number of PSUs earned is determined by the Committee. The Award Recipient may earn between 0% and 200% of the PSU target award based on the Company’s achievement of the Performance Goals. The Company accounts for forfeitures as they occur.
The fair value of each PSU and RSU is based on the grant date market price of $5.75. The aggregate grant date fair value of the PSUs and RSUs granted during the nine months ended September 30, 2022 was $2.9 million and $4.1 million, respectively.
The following table summarizes the activity of the Company’s PSU and RSU awards for the nine months ended September 30, 2022, and their equity based compensation expense for the nine and three months ended September 30, 2022 and 2021, respectively (amounts in thousands):
PSU AwardsRSU Awards
AmountWeighted Average Grant Date Fair ValueAmountWeighted Average Grant Date Fair Value
Unvested at December 31, 2021 $  $ 
Granted496,375 5.75 720,411 5.75 
Forfeited(750)5.75 (3,250)5.75 
Vested    
Unvested at September 30, 2022495,625 $5.75 717,161 $5.75 
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
Nine months ended September 30,Three months ended September 30,
2022202120222021
Equity based compensation expense - PSUs(1)
$238 $ $238 $ 
Equity based compensation expense - RSUs(2)
$302 $ $302 $ 
(1) Total unrecognized equity based compensation for the PSUs to be recognized in future periods is $3.2 million at September 30, 2022, and will be recognized over a weighted average period of 2.25 years. Equity based compensation expense is recorded within selling, general and administrative expenses on our