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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(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, 2023
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 filer
Smaller 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 October 27, 2023 the registrant had 53,167,306 shares of Class A common stock and 87,115,600 shares of Class B common stock outstanding.
EXPLANATORY NOTE
Arhaus, Inc. (the “Company”) is filing this Amendment No. 1 (the “Form 10-Q/A”) to its Quarterly Report on Form 10-Q for the period ended September 30, 2023 (the “Q3 Form 10-Q” and such period, the “Affected Period”), filed with the U.S. Securities and Exchange Commission (the “SEC”) on November 2, 2023 as further described below:
As disclosed in the Company’s Current Report of Form 8-K filed on March 6, 2024, the Company is amending and restating its previously issued unaudited condensed consolidated financial statements for the Affected Period. In preparation of the December 31, 2023 consolidated financial statements, the Company identified an error within the unaudited condensed consolidated balance sheet as of September 30, 2023, related to certain leasehold and landlord improvements prior to showroom completion being incorrectly included in prepaid and other current assets rather than property, furniture and equipment, net. The error resulted in inaccurate cash flows ascribed to operating and investing activities in the unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2023. The unaudited condensed consolidated financial statements are being amended and restated to correct the error in this Form 10-Q/A.

In connection with the restatement of the Company’s unaudited condensed consolidated financial statements for the Affected Period, the Company determined it is appropriate to correct for certain other previously identified immaterial errors.

The Company has also revised the unaudited condensed consolidated balance sheet as of December 31, 2022 and the unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2022 to correct for the error described above as well as for certain other previously identified errors, which were considered immaterial both individually and in the aggregate to such unaudited condensed consolidated financial statements.

For more detailed financial information related to the restatement and revision, refer to Note 1 in the Notes to Condensed Consolidated Financial Statements (Unaudited) – Nature of Business and Basis of Presentation. The following sections have been amended to reflect this restatement:

Part I – Item 1. Financial Statements of Arhaus Inc, and Subsidiaries
Part I – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Part II – Item 4. Controls and Procedures
Part II – Item 6. Exhibits

The Company’s management has previously concluded and disclosed that the Company's disclosure controls and procedures were not effective due to the existence of material weaknesses in the Company’s internal control over financial reporting ("ICFR"). The Company has evaluated the impact of the errors described above on its ICFR and concluded the existing material weaknesses resulted in these errors.

Further, in accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended, the Company is including currently dated certifications from its chief executive officer and chief financial officer with this Form 10-Q/A. These certifications are filed or furnished, as applicable, as Exhibits 31.1, 31.2, 32.1 and 32.2.

This Form 10-Q/A sets forth the original Q3 Form 10-Q in its entirety, as amended to reflect the restatement and revisions. Except as specifically noted above, this Form 10-Q/A does not modify, amend or update disclosures in the original Q3 Form 10-Q and this Form 10-Q/A does not reflect events occurring after the filing of the original Q3 Form 10-Q or modify or update any other disclosures.

This Form 10-Q/A should be read in conjunction with the Company’s filings with the SEC subsequent to the date on which the original Q3 Form 10-Q was filed.


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,
2023
December 31,
2022
As Restated
Assets
Current assets
Cash and cash equivalents$236,930 $145,181 
Restricted cash equivalents3,465 7,346 
Accounts receivable, net1,962 1,734 
Merchandise inventory, net268,960 286,419 
Prepaid and other current assets36,699 29,868 
Total current assets548,016 470,548 
Operating right-of-use assets309,572 257,347 
Financing right-of-use assets39,480 38,522 
Property, furniture and equipment, net
183,073 140,613 
Deferred tax asset16,585 16,841 
Goodwill10,961 10,961 
Other noncurrent assets3,081 2,252 
Total assets$1,110,768 $937,084 
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable$58,138 $62,636 
Accrued taxes13,134 12,256 
Accrued wages12,015 20,860 
Accrued other expenses47,073 35,169 
Client deposits212,406 202,587 
Current portion of operating lease liabilities42,566 39,250 
Current portion of financing lease liabilities925 531 
Total current liabilities386,257 373,289 
Operating lease liabilities, long-term355,808 295,657 
Financing lease liabilities, long-term54,010 51,835 
Deferred rent and lease incentives2,032 2,272 
Other long-term liabilities4,173 4,336 
Total liabilities$802,280 $727,389 
Commitments and contingencies (Note 9)
Stockholders' equity
Class A shares, par value $0.001 per share (600,000,000 shares authorized, 52,749,450 issued and 52,666,334 outstanding and 51,437,348 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively)
52 51 
Class B shares, par value $0.001 per share (100,000,000 shares authorized, 87,115,600 shares issued and outstanding as of September 30, 2023 and December 31, 2022)
87 87 
Retained earnings114,076 20,053 
Additional paid-in capital194,273 189,504 
Total Arhaus, Inc. stockholders' equity308,488 209,695 
Total liabilities and stockholders' equity$1,110,768 $937,084 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2




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,
2023
2022
20232022
Net revenue$943,696 $872,595 $326,229 $320,030 
Cost of goods sold544,481 505,561 195,372 183,739 
Gross margin399,215 367,034 130,857 136,291 
Selling, general and administrative expenses275,890 246,767 106,977 89,145 
Income from operations$123,325 $120,267 $23,880 $47,146 
Interest expense (income), net(1,731)3,367 (1,080)751 
Other income(738)(584)(78)(109)
Income before taxes125,794 117,484 25,038 46,504 
Income tax expense31,771 27,851 5,297 9,568 
Net and comprehensive income$94,023 $89,633 $19,741 $36,936 
Net and comprehensive income per share, basic
Weighted-average number of common shares outstanding, basic139,365,870 137,939,577139,628,776 138,484,495 
Net and comprehensive income per share, basic$0.67 $0.65 $0.14 $0.27 
Net and comprehensive income per share, diluted
Weighted-average number of common shares outstanding, diluted140,021,670 139,545,802140,140,899 139,845,333 
Net and comprehensive income per share, diluted$0.67 $0.64 $0.14 $0.26 
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
(Unaudited, amounts in thousands)
Nine Months Ended
Common StockTreasury StockTotal Stockholders'
Equity
Class AClass BClass A
SharesAmountSharesAmountSharesAmountRetained Earnings Additional
Paid-in Capital
Total Stockholders' Equity
Balances as of December 31, 202251,437 $51 87,116 $87  $ $20,053 $189,504 $209,695 
Net income— — — — — — 94,023 — 94,023 
Shareholder capital contribution— — — — — — — 42 42 
Equity based compensation1,312 1 — — — — — 5,751 5,752 
Shares withheld to cover employees' withholding taxes for equity based compensation(83)— — — 83 — — (1,024)(1,024)
September 30, 202352,666 $52 87,116 $87 83 $ $114,076 $194,273 $308,488 
Nine Months Ended
Common StockTreasury StockTotal Stockholders'
Equity
Class AClass BClass A
SharesAmountSharesAmountSharesAmountRetained Earnings (Accumulated
Deficit)
Additional
Paid-in Capital
Total Stockholders' Equity
Balances as of December 31, 202150,428 $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 compensation1,009 1 597 — — — — 2,612 2,613 
September 30, 202251,437 $51 87,116 $87  $ $(26,948)$187,605 $160,795 




The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4


Arhaus, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity (continued)
(Unaudited, amounts in thousands)
Three Months Ended
Common StockTreasury StockTotal Stockholders'
Equity
Class AClass BClass A
SharesAmountSharesAmountSharesAmountRetained Earnings Additional
Paid-in Capital
Total Stockholders' Equity
Balances as of June 30, 202352,345 $52 87,116 $87 25 $ 94,335 $193,090 $287,564 
Net income— — — — — — 19,741 — 19,741 
Shareholder capital contribution— — — — — — — 12 12 
Equity based compensation379 — — — — — — 1,848 1,848 
Shares withheld to cover employees' withholding taxes for equity based compensation(58)$— — $— $58 $— $— $(677)$(677)
September 30, 202352,666 $52 87,116 $87 83 $ $114,076 $194,273 $308,488 
Three Months Ended
Common StockTreasury StockTotal Stockholders'
Equity
Class AClass BClass A
SharesAmountSharesAmountSharesAmountRetained Earnings (Accumulated
Deficit)
Additional
Paid-in Capital
Total Stockholders' Equity
Balances as of June 30, 202251,360 $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 compensation77 — — — — — — 1,224 1,224 
Balances as of September 30, 202251,437 $51 87,116 $87  $ $(26,948)$187,605 $160,795 
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,
20232022
As Restated
Cash flows from operating activities
Net income$94,023 $89,633 
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization21,439 18,319 
Amortization of operating lease right-of-use asset24,733 21,976 
Amortization of deferred financing fees, interest on finance lease in excess of principal paid and interest on operating leases16,037 8,731 
Equity based compensation5,752 2,613 
Deferred tax assets256 5,458 
Amortization of cloud computing arrangements386  
Amortization and write-off of lease incentives(241)(224)
Insurance proceeds60  
Changes in operating assets and liabilities
Accounts receivable(228)(1,550)
Merchandise inventory17,399 (84,228)
Prepaid and other assets(8,448)(6,217)
Other noncurrent liabilities273 456 
Accounts payable(10,141)8,524 
Accrued expenses3,502 23,682 
Operating lease liabilities(28,797)(22,586)
Client deposits9,819 (3,128)
Net cash provided by operating activities145,824 61,459 
Cash flows from investing activities
Purchases of property, furniture and equipment(56,762)(40,172)
Insurance proceeds 333  
Net cash used in investing activities(56,429)(40,172)
Cash flows from financing activities
Principal payments under finance leases(503)(113)
Repurchase of shares for payment of withholding taxes for equity based compensation(1,024) 
Net cash used in financing activities(1,527)(113)
Net increase (decrease) in cash, cash equivalents and restricted cash equivalents87,868 21,174 
Cash, cash equivalents and restricted cash equivalents
Beginning of period152,527 130,908 
End of period$240,395 $152,082 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6

Arhaus, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (continued)
(Unaudited, amounts in thousands)
Nine months ended September 30,
20232022
As Restated
Supplemental disclosure of cash flow information
Interest paid in cash$3,962 $3,858 
Interest received in cash5,395 316 
Income taxes paid in cash28,856 20,579 
Noncash investing activities:
Purchase of property, furniture and equipment in accounts payable8,804 4,471 
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)
Capital contributions42 62 
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 86 Showrooms at September 30, 2023.
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.
The accompanying condensed consolidated balance sheets at September 30, 2023 and December 31, 2022, the condensed consolidated statements of comprehensive income and changes in stockholders’equity for the nine and three months ended September 30, 2023 and 2022, the condensed consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022 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 normal recurring adjustments, necessary for a fair statement of the Company’s financial position at September 30, 2023, the results of operations and changes in stockholders’equity for the nine and three months ended September 30, 2023 and 2022 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022. The condensed consolidated balance sheet as of December 31, 2022 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, 2023 and 2022 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, 2022.
Restatement and Revision of Previously Issued Condensed Consolidated Financial Statements

The Company identified an error within the unaudited condensed consolidated balance sheet as of September 30, 2023, related to certain leasehold and landlord improvements prior to showroom completion being incorrectly included in prepaid and other current assets rather than property, furniture and equipment, net. The error resulted in inaccurate cash flows ascribed to operating and investing activities in the unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2023. The unaudited condensed consolidated balance sheet as of September 30, 2023 and the unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2023 have been restated to correct for this error.

In connection with the restatement of the Company’s unaudited condensed consolidated financial statements for the nine months ended September 30, 2023, we determined it is appropriate to correct for certain other previously identified immaterial errors.

The Company has also revised the unaudited condensed consolidated balance sheet as of December 31, 2022 and the unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2022 to correct for the
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Arhaus, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
error described above as well as for certain other previously identified errors, which were considered immaterial both individually and in the aggregate to such unaudited condensed consolidated financial statements.

We have also restated and revised impacted amounts within the accompanying notes to the unaudited condensed consolidated financial statements, as applicable.

The following tables summarize the impact of these corrections for the periods presented (amounts in thousands):
September 30, 2023
Condensed Consolidated Balance Sheet
As ReportedAdjustment
As Restated
Prepaid and other current assets$63,140 $(26,441)$36,699 
Total current assets$574,457 $(26,441)$548,016 
Operating right-of-use assets(1)
$314,378 $(4,806)$309,572 
Property, furniture and equipment, net156,632 26,441 183,073 
Total assets$1,115,574 $(4,806)$1,110,768 
Current portion of operating lease liabilities(1)
$42,472 $94 $42,566 
Total current liabilities$386,163 $94 $386,257 
Operating lease liabilities, long-term(1)
$360,708 $(4,900)$355,808 
Total liabilities$807,086 $(4,806)$802,280 
Total liabilities and stockholders' equity$1,115,574 $(4,806)$1,110,768 
(1) These identified adjustments are to correct other immaterial errors.

Nine months ended
September 30, 2023
Condensed Consolidated Statement of Cash Flows
As ReportedAdjustmentAs Restated
Cash flows from operating activities
Changes in prepaid and other assets
$(28,952)$20,504 $(8,448)
Changes in accounts payable
(4,093)(6,048)(10,141)
Net cash provided by operating activities$131,368 $14,456 $145,824 
Cash flows from investing activities
Purchases of property, furniture and equipment
$(42,306)$(14,456)$(56,762)
Net cash used in investing activities
$(41,973)$(14,456)$(56,429)
Supplemental disclosure of cash flow information
Noncash operating activities:
Lease incentives
$7,313 $(7,313)$ 
Noncash investing activities:
Purchase of property, furniture and equipment in accounts payable$2,756 $6,048 $8,804 



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Arhaus, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
December 31, 2022
Condensed Consolidated Balance Sheet
As ReportedAdjustmentAs Revised
Prepaid and other current assets$37,371 $(7,503)$29,868 
Total current assets$478,051 $(7,503)$470,548 
Operating right-of-use assets$252,055 $5,292 $257,347 
Property, furniture and equipment, net
135,066 5,547 140,613 
Other noncurrent assets296 1,956 2,252 
Total assets$931,792 $5,292 $937,084 
Current portion of operating lease liabilities$39,744 $(494)$39,250 
Total current liabilities$373,783 $(494)$373,289 
Operating lease liabilities, long-term$289,871 $5,786 $295,657 
Total liabilities$722,097 $5,292 $727,389 
Total liabilities and stockholders' equity$931,792 $5,292 $937,084 

Nine months ended
September 30, 2022
Condensed Consolidated Statement of Cash Flows
As ReportedAdjustment
As Revised
Cash flows from operating activities
Changes in prepaid and other assets
$(11,249)$5,032 $(6,217)
Changes in accounts payable
10,334 (1,810)8,524 
Net cash provided by operating activities$58,237 $3,222 $61,459 
Cash flows from investing activities
Purchases of property, furniture and equipment$(36,950)$(3,222)$(40,172)
Net cash used in investing activities$(36,950)$(3,222)$(40,172)
Supplemental disclosure of cash flow information
Noncash operating activities:
Lease incentives$7,532 $(7,532)$ 
Noncash investing activities:
Purchase of property, furniture and equipment in accounts payable$2,661 $1,810 $4,471 

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 we have assessed include, but were not limited to, revenue recognition, including a reserve for merchandise returns, inventory reserves, goodwill and fair value of financial instruments which include, but are not limited to, accounts receivable, payables and lease obligations.
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Arhaus, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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, 2023 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 at September 30, 2023 and December 31, 2022 of $0.4 million and $1.0 million, 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. For the nine and three months ended September 30, 2023, breakage income was $0.8 million and $0.1 million, respectively. For the nine and three months ended September 30, 2022, breakage was minimal.
Fair Values of Financial Instruments
The Company’s primary financial instruments are cash and cash equivalent investments, accounts receivable, payables, lease obligations 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, 2023 and December 31, 2022. See Note 5 Leases for discussion of our lease obligations and Note 6 Equity Based Compensation 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, 2023, the Company earned $5.8 million and $2.5 million, respectively, in interest income. For the nine and three months ended September 30, 2022, interest income was $0.6 million and $0.6 million, respectively. Interest income is included within interest expense (income), net on our condensed consolidated statements of comprehensive income.

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Arhaus, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Prepaid and Other Current Assets
Prepaid and other current assets consist of the following (amounts in thousands):
September 30, 2023December 31, 2022
As Restated
Tenant allowance receivable$7,373 $4,312 
Prepaid expenses8,802 11,228 
Right of return asset2,576 2,938 
Prepaid advertising3,760 816 
Prepaid cloud computing arrangements, net(1)
2,845 1,054 
Other current assets11,343 9,520 
Total prepaid and other current assets$36,699 $29,868 
(1) Presented net of accumulated amortization of $1.2 million as of September 30, 2023.
2. Recently Issued Accounting Standards
New Accounting Standards Adopted in Fiscal 2023
We did not adopt any Accounting Standards Updates (“ASU”) in the nine months ended September 30, 2023 that had a material impact on our accounting policies or our condensed consolidated financial statements.

Accounting Standards Not Yet Adopted
The following table summarizes accounting pronouncements which we have not yet adopted but will be adopted in the upcoming fiscal year. ASU 2023-01 is effective for annual periods beginning after December 15, 2023. We believe the adoption will not have a material impact on our accounting policies or our consolidated financial statements and related disclosures.
ASUDescriptionAdoption Date
ASU 2023-01Leases (Topic 842): Common Control ArrangementsJanuary 1, 2024
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,
2023202220232022
Balance as of beginning of period$6,375 $4,724 $6,578 $5,412 
Accruals during the period10,292 8,285 3,543 3,181 
Settlements during the period(9,854)(7,152)(3,308)(2,736)
Balance as of end of the period(1)
$6,813 $5,857 $6,813 $5,857 
(1) $3.9 million and $3.7 million were recorded in accrued other expenses at September 30, 2023 and December 31, 2022, 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 November 8, 2021, the Company entered into a 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 was initially $50.0 million. 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, 2023 and 2022), whereas the applicable margin is adjusted quarterly based on the Company’s consolidated rent-adjusted total leverage ratio.
On December 9, 2022, the Company amended the 2021 Credit Facility to increase the revolving credit commitment thereunder by $25.0 million. After giving effect to such increase, the aggregate amount of all commitments under the 2021 Credit Facility is $75.0 million. The 2021 Credit Facility expires on November 8, 2026.
At September 30, 2023 and December 31, 2022, we had no borrowings on the 2021 Credit Facility. Deferred financing costs related to the 2021 Credit Facility of $0.4 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. Accumulated amortization related to deferred financing costs for the 2021 Credit Facility was $0.1 million as of September 30, 2023 and December 31, 2022.
The Company was in compliance with all applicable debt covenants at September 30, 2023 and December 31, 2022, and expects to remain in compliance over the next 12 months.
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.
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Arhaus, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes the amounts recognized in our condensed consolidated balance sheets related to leases as of September 30, 2023 and December 31, 2022, respectively (amounts in thousands):
Condensed Consolidated Balance Sheet ClassificationSeptember 30, 2023December 31, 2022
As Restated
Assets
Operating lease assetsOperating right-of-use assets$309,572 $257,347 
Finance lease assetsFinancing right-of-use assets39,480 38,522 
Total leased assets$349,052 $295,869 
Liabilities
Current operating leasesCurrent portion of operating lease liabilities$42,566 $39,250 
Non-current operating leasesOperating lease liabilities, long-term355,808 295,657 
Total operating lease liabilities398,374 334,907 
Current finance leasesCurrent portion of financing lease liabilities925 531 
Non-current finance leasesFinancing lease liabilities, long-term54,010 51,835 
Total finance lease liabilities54,935 52,366 
Total lease liabilities$453,309 $387,273 
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Arhaus, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The components of lease cost recognized within our condensed consolidated statements of comprehensive income for the nine and three months ended September 30, 2023 and 2022, respectively are as follows (amounts in thousands):
Nine months ended September 30,Three months ended September 30,
Condensed Consolidated Income Statement Classification2023202220232022
Lease costs:
Operating lease costsCost of goods sold$31,894 $25,798 $11,518 $8,716 
Operating lease costsSelling, general and administrative expenses7,375 4,743 2,518 1,955 
Finance lease costs
Amortization of right-of-use assetsSelling, general and administrative expenses1,838 1,516 758 540 
Interest expense on lease liabilitiesInterest expense (income), net3,852 3,758 1,316 1,270 
Variable lease costs(1)
Cost of goods sold28,474 26,764 9,327 9,961 
Short term lease costsSelling, general and administrative expenses165 507 29 170 
Total lease costs$73,598 $63,086 $25,466 $22,612 
(1) Includes $0.4 million of month-to-month lease costs for the nine months ended September 30, 2023. The Company did not have month-to-month lease costs for the nine and three months ended September 30, 2022 or the three months ended September 30, 2023.
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 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, 2023 and 2022, respectively.
Weighted Average Remaining Lease Term (In Years)September 30, 2023September 30, 2022
As Restated
Operating leases9.278.72
Finance leases21.0222.66
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 in which the discount rate is not explicit, 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, 2023 and 2022, respectively.
Weighted Average Discount RateSeptember 30, 2023September 30, 2022
As Restated
Operating leases5.94 %4.56 %
Finance leases9.63 %9.72 %
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Arhaus, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Future lease liabilities at September 30, 2023 are as follows (amounts in thousands):
Year Ending December 31,
Operating Lease Liabilities (1)
Finance Lease LiabilitiesTotal Lease Liabilities
As Restated
As Restated
Remainder of 2023
$15,087 $1,533 $16,620 
202465,085 5,789 70,874 
202561,146 5,789 66,935 
202656,918 6,249 63,167 
202753,111 6,060 59,171 
202847,930 5,610 53,540 
Thereafter229,657 109,943 339,600 
Total lease payments528,934 140,973 669,907 
Less: Amounts representing interest(130,560)(86,038)(216,598)
Total$398,374 $54,935 $453,309 
(1) Includes leases with related parties. See Note 10 Related Party Transactions for amounts leased from related parties.
At September 30, 2023, the Company has entered into leases for Showrooms and equipment which have not yet commenced with expected lease terms ranging from 3 to 17 years. The aggregate minimum rental payments over the term of the leases of approximately $159.5 million are not included in the above table.
Supplemental cash flow information related to leases for the nine months ended September 30, 2023 and 2022, respectively is as follows (amounts in thousands):
Nine months ended September 30,
20232022
As Restated
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases$41,759 $35,587 
Operating cash flows for finance leases3,642 3,758 
Financing cash flows for finance leases503 113 
Right-of-use assets obtained in exchange for lease obligations:
Operating leases$76,375 $50,565 
Finance leases2,813 2,018 
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Arhaus, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. Equity Based Compensation
The following tables summarize the activity of the Company’s Restricted Stock for the nine months ended September 30, 2023 and the equity based compensation expense for the nine and three months ended September 30, 2023 and 2022, respectively (dollars in thousands):
Restricted Stock - Class A
AmountWeighted Average Grant Date Fair Value
Unvested at December 31, 20221,510,269 $6.94 
Granted  
Forfeited  
Vested(1,009,965)2.71 
Unvested at September 30, 2023500,304 $15.47 
Nine months ended September 30,Three months ended September 30,
2023202220232022
Equity based compensation expense - Restricted Stock(1)
$2,028 $2,073 $668 $684 
(1) Total unrecognized equity based compensation to be recognized in future periods is $6.8 million at September 30, 2023, and will be recognized over a weighted average period of 2.65 years. Equity based compensation expense is recorded within selling, general and administrative expenses on our condensed consolidated statements of comprehensive income.
The Arhaus, Inc. 2021 Equity Incentive Plan (the “2021 Plan”) was adopted on November 8, 2021. The 2021 Plan authorizes the Company the ability to grant stock options (either incentive or non-qualified), stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”), performance shares, performance share units (“PSUs”) and other stock-based awards with respect to our Class A common stock to our employees, officers, consultants, advisors and directors. The maximum number of Class A common stock that may be granted under the 2021 Plan is 11,205,100 shares.
As of September 30, 2023, the Company has granted RSUs and PSUs to certain named executive officers and other key employees (“Award Recipient”). The Company has also issued 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 Compensation Committee of the Board of Directors 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 applicable performance period. PSUs will vest as of the end of the performance period subject to the Award Recipient’s Continuous Service, but will not settle and payout until the number of PSUs earned is determined by the Compensation 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.
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Arhaus, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes the activity of the Company’s PSU and RSU awards for the nine months ended September 30, 2023, and their equity based compensation expense for the nine and three months ended September 30, 2023 and 2022, respectively (dollars in thousands):
PSU AwardsRSU Awards
AmountWeighted Average Grant Date Fair ValueAmountWeighted Average Grant Date Fair Value
Unvested at December 31, 2022513,125 $5.95 731,661 $5.84 
Granted281,163 9.47 468,483 9.05 
Forfeited(89,336)7.20 (82,368)7.18 
Vested  (302,137)5.75 
Unvested at September 30, 2023704,952 $7.20 815,639 $7.58 
Nine months ended September 30,Three months ended September 30,
2023
2022
2023
2022
Equity based compensation expense - PSUs(1)
$1,662 $238 $417 $238 
Equity based compensation expense - RSUs(2)
$2,062 $302 $763 $302 
(1) Total unrecognized equity based compensation for the PSUs to be recognized in future periods is $4.2 million at September 30, 2023, and will be recognized over a weighted average period of 1.74 years. Equity based compensation expense is recorded within selling, general and administrative expenses on our condensed consolidated statements of comprehensive income.
(2) Total unrecognized equity based compensation for the RSUs to be recognized in future periods is $5.1 million at September 30, 2023, and will be recognized over a weighted average period of 2.07 years. Equity based compensation expense is recorded within selling, general and administrative expenses on our condensed consolidated statements of comprehensive income.
7. Segment Reporting
Our chief operating decision maker is our Chief Executive Officer (“CEO”), who reviews financial information presented on a consolidated basis for purposes of making decisions, assessing financial performance and allocating resources. We operate our business as one operating segment and therefore we have one reportable segment that offers an assortment of merchandise across a number of categories, including furniture, outdoor, lighting, textiles, and décor. The assortment of merchandise can be purchased through our retail and eCommerce sales channels.
The majority of our net revenue is generated through sales to clients in the United States. Sales to clients outside of the United States are not significant. Further, no single client represents more than ten percent or more of our net revenue.
The following table shows net revenue by merchandise sales channel for the nine and three months ended September 30, 2023 and 2022, respectively (amounts in thousands):
Nine months ended September 30,Three months ended September 30,
2023202220232022
Retail$768,624 $727,953 $261,786 $268,988 
eCommerce175,072 144,642 64,443 51,042 
Total net revenue$943,696 $872,595 $326,229 $320,030 
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Arhaus, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
8. Net and Comprehensive Income per Share
Basic and diluted net and comprehensive income per share for the nine and three months ended September 30, 2023 and 2022, was calculated by dividing net and comprehensive income by the number of basic and diluted weighted average common shares outstanding.
Basic and diluted net and comprehensive income per share for the nine and three months ended September 30, 2023 and 2022, is as follows (amounts in thousands except share and per share data):
Nine months ended September 30,Three months ended September 30,
2023202220232022
Numerator
Net and comprehensive income$94,023 $89,633 $19,741 $36,936 
Denominator—Weighted Average Shares Outstanding
Weighted-average number of common shares outstanding, basic139,365,870 137,939,577 139,628,776 138,484,495 
Effect of dilutive restricted stock (1)
655,800 1,606,225 512,123 1,360,838 
Weighted-average number of common shares outstanding, diluted140,021,670 139,545,802 140,140,899 139,845,333 
Net and Comprehensive Income Per Share
Net and comprehensive income per share, basic$0.67 $0.65 $0.14 $0.27 
Net and comprehensive income per share, diluted$0.67 $0.64 $0.14 $0.26 
(1) During the nine and three months ended September 30, 2023, 736,173 and 416,123 shares of unvested restricted stock and RSUs were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive, respectively. During the nine and three months ended September 30, 2022, 594,312 and 546,164 shares of unvested restricted stock and RSUs were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive, respectively.
9. Commitments and Contingencies
The Company is involved in litigation and claims that are incidental to its business. Although the outcome of these matters cannot be determined at the present time, management of the Company believes that the ultimate resolution of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
From time to time, the Company has received inquiries from a number of state and local taxing agencies with respect to the remittance of sales, use, telecommunications, excise, and income taxes. Several jurisdictions are currently conducting tax audits of the Company's records. The Company collects, or has accrued for, taxes that it believes are required to be remitted. The amounts that have been remitted have historically been within the accruals established by the Company. The Company adjusts its accrual when facts relating to specific exposures warrant such adjustment. As of September 30, 2023 and December 31, 2022, we recorded liabilities of $0.3 million and $0.4 million, respectively, in accrued taxes on the condensed consolidated balance sheets for non-income tax matters that were probable and reasonably estimable.
In August 2023, the Company committed to make a $10.0 million donation to The Nature Conservancy. For the nine and three months ended September 30, 2023, the Company recorded expense of $10.0 million and $10.0 million, respectively, within selling, general and administrative expenses on our condensed consolidated statements of comprehensive income. As of September 30, 2023, we recorded a liability of $10.0 million in accrued other expense on our condensed consolidated balance sheet.
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Arhaus, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
10. Related Party Transactions
Leasing transactions
In November 2000, the Company entered into a lease agreement with Pagoda Partners, LLC, a company of which John Reed, our CEO, indirectly owns 50%, for our warehouse in Walton Hills, Ohio. The base lease term was 17 years with a 5-year renewal option. In August 2020, the Company amended the lease agreement to extend the lease term to April 2024. The monthly rental payments are $0.1 million. In July 2023, the Company amended the lease agreement to extend the lease term to April 2034 with one additional 5-year renewal option. The monthly rental payments range from $0.1 million to $0.2 million. Rent expense was $1.1 million and $1.0 million for the nine months ended September 30, 2023 and 2022, respectively. Rent expense was $0.4 million and $0.3 million for the three months ended September 30, 2023 and 2022, respectively.
In July 2010, the Company entered into a lease agreement with Brooklyn Arhaus, a company of which our CEO and Mr. Beargie, a Director of the Company, own 85% and 15%, respectively, for our Outlet in Brooklyn, Ohio. The base lease term is 15 years with no lease renewal options. The monthly rental payments are $20 thousand. Rent expense was $0.2 million and $0.2 million for the nine months ended September 30, 2023 and 2022, respectively. Rent expense was $0.1 million and $0.1 million for the three months ended September 30, 2023 and 2022, respectively.
In March 2021, the Company entered into a lease agreement with Premier Conover, LLC, a company of which our CEO indirectly owns 40%, for a distribution center and manufacturing building, for which construction was completed in the fourth quarter of 2021. The base lease term is for 12 years, with a 10-year renewal option and two additional 5-year renewal options at the higher of the minimum base rent or the fair market rent at the time of renewal execution. The monthly rental payments range from $0.2 million to $0.3 million during the 12-year base lease term and from $0.4 million to $0.5 million during the 10-year renewal period. Rent expense was $3.0 million and $2.8 million for the nine months ended September 30, 2023 and 2022, respectively. Rent expense was $1.0 million and $1.0 million for the three months ended September 30, 2023 and 2022, respectively.
Other transactions
The accounts payable due to related parties for state and federal income tax refunds were $2.4 million and $1.8 million at September 30, 2023 and December 31, 2022, respectively, and are included within accounts payable on the condensed consolidated balance sheets.
11. Income Taxes
Income tax expenses were $31.8 million and $27.9 million in the nine months ended September 30, 2023 and 2022, respectively. Income tax expenses were $5.3 million and $9.6 million in the three months ended September 30, 2023 and 2022, respectively. The effective tax rate was 25.3% and 23.7% for the nine months ended September 30, 2023 and 2022, respectively. The effective tax rate was 21.2% and 20.6% for the three months ended September 30, 2023 and 2022, respectively.
As of September 30, 2023, no unrecognized tax benefits have been recognized. The Company files income tax returns in the U.S. and various state and local jurisdictions. The tax years after 2018 remain open to examination by the state taxing jurisdictions in which the Company is subject to tax. As of September 30, 2023, the Company was not under examination by the Internal Revenue Service or any state tax jurisdiction.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2022. This Quarterly Report on Form 10-Q contains forward looking statements that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or are proven incorrect, could cause our business and results of operations to differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements can generally be identified by the use of forward-looking terminology, including, but not limited to, “may,” “could,” “seek,” “guidance,” “predict,” “potential,” “likely,” “believe,” “will,” “expect,” “anticipate,” “estimate,” “plan,” “intend,” “believe,” “forecast,” or variations of these terms and similar expressions, or the negative of these terms or similar expressions. Past performance is not a guarantee of future results or returns and no representation or warranty is made regarding future performance. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors beyond our control that could cause our actual results, performance or achievements to be materially different from the expected results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the following:
Our ability to manage and maintain the growth rate of our business;
Our ability to obtain quality merchandise in sufficient quantities;
Disruption in our receiving and distribution system, including delays in the integration of our new distribution centers and the possibility that we may not realize the anticipated benefits of multiple distribution centers;
The possibility of cyberattacks and our ability to maintain adequate cybersecurity systems and procedures;
Loss, corruption and misappropriation of data and information relating to clients and employees;
Changes in and compliance with applicable data privacy rules and regulations;
Risks as a result of constraints in our supply chain;
A failure of our vendors to meet our quality standards;
Declines in general economic conditions that affect consumer confidence and consumer spending that could adversely affect our revenue;
Our ability to anticipate changes in consumer preferences;
Risks related to maintaining and increasing Showroom traffic and sales;
Our ability to compete in our market;
Our ability to adequately protect our intellectual property;
Compliance with applicable governmental regulations;
Effectively managing our eCommerce business and digital marketing efforts;
Our reliance on third-party transportation carriers and risks associated with freight and transportation costs;
The COVID-19 pandemic and its effect on our business; and
Compliance with SEC rules and regulations as a public reporting company.
The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under Item 1A. Risk Factors, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2022. All forward-looking statements included in this document are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements. These statements are based on information available to us as of the date of this Form 10-Q. While we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
The following discussion contains references to the nine and three months ended September 30, 2023 and 2022, which represents the condensed consolidated financial results of Arhaus, Inc. and subsidiaries for the nine and three months ended September 30, 2023 and 2022, respectively.
Restatement and Revision of Previously Issued Condensed Consolidated Financial Statements
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” has been amended to give effect to the restatement and revision of our condensed consolidated balance sheets and condensed consolidated statements of cash flows, as more fully described in Note 1 - Nature of Business and Basis of Presentation to the Notes to Condensed Consolidated Financial Statements (Unaudited) – Restatement and Revision of Previously Issued Condensed Consolidated
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Financial Statements. For further detail regarding the restatement, see the “Explanatory Note” to this Quarterly Report on Form 10-Q/A.
Overview
Arhaus is a rapidly growing lifestyle brand and premium retailer in the U.S. home furnishings market, specializing in livable luxury supported by globally-sourced, heirloom-quality merchandise. We offer a differentiated direct-to-consumer approach to furniture and décor. Our curated assortments are presented across our sales channels in sophisticated, family friendly and unique lifestyle settings. We offer merchandise assortments across a number of categories, including furniture, lighting, textiles, décor, and outdoor. Our products, designed to be used and enjoyed throughout the home, are sourced directly from factories and vendors with no wholesale or dealer markup, allowing us to offer an exclusive assortment at an attractive value. Our direct sourcing network consists of more than 400 vendors, some of whom we have had relationships with since our founding. Our product development teams work alongside our direct sourcing partners to bring to market proprietary merchandise that is a great value to clients, while delivering attractive margins.
We believe in providing a dynamic and welcoming experience in our Showrooms and online with the conviction that retail is theater. Our national omni-channel business positions our retail locations as Showrooms for our brand, while our website acts as a virtual extension of our Showrooms. Our theater-like Showrooms are highly inspirational and function as an invaluable brand awareness vehicle. Our seasoned sales associates and in-home designers provide expert advice and assistance to our client base that drives significant client engagement. Our omni-channel model allows clients to begin or end their shopping journey online, while also experiencing our theater-like Showrooms throughout the shopping journey.
We have one reportable segment as of September 30, 2023. At September 30, 2023, we operated 86 Showrooms, 71 with in-home interior designers. At December 31, 2022, we operated 81 Showrooms, 65 with in-home interior designers.
September 30, 2023December 31, 2022
Traditional showrooms7472
Design Studios86
Outlets43
Total Showroom locations86 81 
Total square footage (in thousands)1,371 1,308 
For the nine months ended September 30, 2023, we generated $943.7 million of net revenue, $399.2 million of gross margin and $94.0 million of net and comprehensive income. For the three months ended September 30, 2023, we generated $326.2 million of net revenue, $130.9 million of gross margin and $19.7 million of net and comprehensive income.
How We Assess the Performance of Our Business
In addition to U.S. GAAP results, this Form 10-Q contains references to the non-GAAP financial measures below. We use these non-GAAP measures to help assess the performance of our business, identify trends affecting our business, formulate business plans and make strategic decisions. In addition to our results determined in accordance with U.S. GAAP, we believe that providing these non-GAAP financial measures are useful to our investors as they present an informative supplemental view of our results from period to period by removing the effect of non-recurring items.
The non-GAAP financial measures presented herein are specific to us and may not be comparable to similar measures disclosed by other companies because of differing methods used by other companies in calculating them. These measures are also not intended to be measures of free cash flow for management’s discretionary use, as they do not reflect tax payments, debt service requirements and certain other cash costs that may recur in the future, including, among other things, cash requirements for working capital needs. Management compensates for these limitations by relying on our U.S. GAAP results in addition to using these non-GAAP financial measures. The non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. We consider the following financial and operating measures that affect our results of operations:
Net Revenue and Demand. Net revenue is recognized when a client obtains control of the merchandise. We also track demand in our business which is a key performance indicator linked to the level of client orders placed. Demand is an operating metric that we use to measure the dollar value of orders (based on purchase price) at the time the order is placed, net of the dollar value of cancellations and returns (based on unpaid purchase price and amount credited to client). These
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orders are recognized as net revenue when a client obtains control of the merchandise. Because demand is measured net of cancellations, all demand will eventually become net revenue, with appropriate reserves, when delivered to the client.
Comparable Growth. Comparable growth is the year-over-year percentage change of the dollar value of orders delivered (based on purchase price), net of the dollar value of returns (based on amount credited to client), from comparable Showrooms and eCommerce, including through our catalogs and other mailings. This metric is a key performance indicator used by management to evaluate Showroom performance for locations that have been opened for at least 15 consecutive months, which enables management to view the performance of those Showrooms without the dollar value of orders delivered for new Showrooms being included. Comparable Showrooms are defined as permanent Showrooms open for at least 15 consecutive months, including relocations in the same market. Showrooms record demand immediately upon opening, while orders delivered take additional time because product must be delivered to the client. The dollar value of orders delivered for Outlet comparable locations is included.
Demand Comparable Growth. Demand comparable growth is the year-over-year percentage change of demand from our comparable Showrooms and eCommerce, including through our catalogs and other mailings. This metric is a key performance indicator used by management to evaluate Showroom demand performance for locations that have been opened for at least 13 consecutive months, which enables management to view the performance of those Showrooms without new Showroom demand included. For demand purposes, comparable Showrooms are defined as permanent Showrooms open for at least 13 consecutive months, including relocations in the same market. Outlet comparable location demand is included.
Demand comparable growth provides insight into business levels in a particular period by comparing the dollar value of orders (based on purchase price) placed in that period to the prior comparable period. Although these orders do not result in net revenue until the order is delivered at a later point in time, management utilizes this metric to evaluate core performance.
Comparable growth is an additional measure that management utilizes to compare the dollar value of orders delivered (based on purchase price) in a period compared to the prior comparable period. Since delivery generally coincides with recognition of net revenue, with appropriate reserves, comparable growth trends will more closely track trends in reported net revenue than demand comparable growth trends. While increases or decreases in demand comparable growth will translate into increases or decreases in comparable growth over time, the trends do not necessarily correlate in any particular period. This is partially due to the general lag in time between when an order is placed and when an order is delivered. When the time gap from order to delivery increases, due to supply chain challenges for example, it may take longer for comparable growth to reflect demand comparable growth. Notwithstanding these limitations, management considers it useful to assess both measures together to get a more complete picture of overall performance trends, and believes these measures can be useful to investors for the same purpose, when viewed together with our reported results and other metrics.

Gross Margin. Gross margin is equal to our net revenue less cost of goods sold. Cost of goods sold includes the direct cost of purchased merchandise, inventory shrinkage, inbound freight, all freight costs to get merchandise to our Showrooms, credit card fees, design, buying and allocation costs, our supply chain, such as product development and sourcing, occupancy costs related to Showroom operations, such as rent and common area maintenance for our leases, depreciation and amortization of leasehold improvements, equipment and other assets in our Showrooms. In addition, cost of goods sold includes all logistics costs associated with shipping product to our clients, partially offset by delivery fees collected from clients (recorded in net revenue on the condensed consolidated statements of comprehensive income).

Selling, General and Administrative Expenses. Selling, general and administrative, or SG&A, expenses include all operating costs not included in cost of goods sold. These expenses include payroll and payroll related expenses, Showroom expenses other than occupancy and expenses related to many of our operations at our distribution centers and corporate headquarters, including marketing, information technology, legal, human resources, utilities and depreciation and amortization expense. Payroll includes both fixed compensation and variable compensation. Variable compensation includes Showroom commissions and Showroom bonus compensation related to demand, likely before the client obtains control of the merchandise. Variable compensation is not significant in our eCommerce channel. All new Showroom opening expenses, other than occupancy, are included in SG&A expenses and are expensed as incurred. We expect certain of these expenses to continue to increase as we open new Showrooms, develop new product categories and otherwise pursue our current business initiatives. SG&A expenses as a percentage of net revenue are usually higher in lower-volume quarters and lower in higher-volume quarters because a significant portion of the costs are relatively fixed.
EBITDA. We define EBITDA as consolidated net income before depreciation and amortization, interest expense (income), net and income tax expense.
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Adjusted EBITDA. We believe that adjusted EBITDA is a useful measure of operating performance as the adjustments eliminate items that we believe are not reflective of underlying operating performance in a particular period. Adjusted EBITDA facilitates a comparison of our operating performance on a consistent basis from period-to-period and provides for a more complete understanding of factors and trends affecting our business.
Because adjusted EBITDA omits certain non-cash items and items that we believe are not reflective of underlying operating performance in a particular period, we feel that it is less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and can be more reflective of our operating performance in a particular period. We also use adjusted EBITDA as a method for planning and forecasting overall expected performance and for evaluating, on a quarterly and annual basis, actual results against such expectations.
The following is a reconciliation of our net and comprehensive income to EBITDA and adjusted EBITDA for the periods presented:
Nine months ended September 30,Three months ended September 30,
(In thousands)2023202220232022
Net income$94,023 $89,633 $19,741 $36,936 
Interest expense (income), net(1,731)3,367 (1,080)751 
Income tax expense31,771 27,851 5,297 9,568 
Depreciation and amortization21,439 18,319 7,299 6,324 
EBITDA145,502 139,170 31,257 53,579 
Equity based compensation5,752 2,613 1,848 1,224 
Other expenses (1)
992 6,567 555 1,909 
Adjusted EBITDA$152,246 $148,350 $33,660 $56,712 
(1)Other expenses represent costs and investments not indicative of ongoing business performance, such as public offering costs, third-party consulting costs, one-time project start-up costs, severance, signing bonuses, recruiting and project-based strategic initiatives. For the nine and three months ended September 30, 2023, these expenses largely consisted of $0.7 million and $0.6 million of public offering costs, respectively. For the nine and three months ended September 30, 2022, these expenses consisted largely of $4.6 million and $1.6 million of costs related to the opening and set-up of our Dallas distribution center, respectively.
Factors Affecting the Comparability of our Results of Operations
Our results over the past two years have been affected by the following events, which must be understood in order to assess the comparability of our period-to-period financial performance and condition.
Showroom Openings and Closings
New Showrooms contribute incremental expense, new Showroom opening expense and net revenue to the Company. In the nine months ended September 30, 2023, we opened seven Showrooms and closed two Showrooms. The two Showroom closures in the nine months ended September 30, 2023, were related to relocations. During the year ended December 31, 2022, we opened four Showrooms and closed two Showrooms. Of the two Showroom closures in 2022, one was related to relocation in 2022.
Results of Operations
The following tables summarize key components of our results of operations for the periods indicated. The following discussion should be read in conjunction with our condensed consolidated financial statements and related notes.
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Statement of Condensed Consolidated Comprehensive Income Data:
Nine months ended September 30,Three months ended September 30,
(In thousands)2023202220232022
Net revenue$943,696 $872,595 $326,229 $320,030 
Cost of goods sold544,481 505,561 195,372 183,739 
Gross margin399,215 367,034 130,857 136,291 
Selling, general and administrative expenses275,890 246,767 106,977 89,145 
Income from operations123,325 120,267 23,880 47,146 
Interest expense (income), net(1,731)3,367 (1,080)751 
Other income(738)(584)(78)(109)
Income before taxes125,794 117,484 25,038 46,504 
Income tax expense31,771 27,851 5,297 9,568 
Net and comprehensive income$94,023 $89,633 $19,741 $36,936 
Other Operational Data:
Nine months ended September 30,Three months ended September 30,
(Dollars in thousands)2023202220232022
Net revenue