What changed in this filing

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Item 1. Financial Statements

2021-09-09 compared with 2021-06-10 · 293 added, 209 removed, 517 unchanged (49% of the section changed)

18 unchanged sentences

Deferred revenue and customer deposits

Convertible senior notes due 2023—net

Convertible senior notes due 2024—net

Operating lease liabilities

Federal and state tax payable

Other current liabilities

9 unchanged sentences

Commitments and contingencies (Note 16)

Mezzanine equity—convertible senior notes (Note 9)

Stockholders’ equity:

Preferred stock—$ 0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of May 1, 2021 and January 30, 2021

Common stock— $ 0.0001 par value per share, 180,000,000 shares authorized, 21,020,538 shares issued and outstanding as of May 1, 2021;

Preferred stock—$ 0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of July 31, 2021 and January 30, 2021

Common stock— $ 0.0001 par value per share, 180,000,000 shares authorized, 21,407,717 shares issued and outstanding as of July 31, 2021;

20,995,387 shares issued and outstanding as of January 30, 2021

1 unchanged sentence

Accumulated other comprehensive income

Accumulated deficit

Retained earnings (accumulated deficit)

Total stockholders’ equity

Total liabilities and stockholders’ equity

Total liabilities, mezzanine equity and stockholders’ equity

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

FINANCIAL INFORMATION

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share amounts) (Unaudited)

THREE MONTHS ENDED

SIX MONTHS ENDED

Cost of goods sold

4 unchanged sentences

Tradename impairment

Loss on extinguishment of debt

(Gain) loss on extinguishment of debt

Total other expenses

Income (loss) before income taxes

Income tax expense (benefit)

Income (loss) before equity method investments

Income before income taxes

Income tax expense

Income before equity method investments

Share of equity method investments losses

Net income (loss)

Weighted-average shares used in computing basic net income (loss) per share

Basic net income (loss) per share

Weighted-average shares used in computing diluted net income (loss) per share

Diluted net income (loss) per share

Weighted-average shares used in computing basic net income per share

Basic net income per share

Weighted-average shares used in computing diluted net income per share

Diluted net income per share

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

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FINANCIAL INFORMATION

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands) (Unaudited)

THREE MONTHS ENDED

Net income (loss)

SIX MONTHS ENDED

Net gains (losses) from foreign currency translation

Total comprehensive income (loss)

Total comprehensive income

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

FINANCIAL INFORMATION

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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

(In thousands, except share amounts) (Unaudited)

THREE MONTHS ENDED

3 unchanged sentences

INCOME (LOSS)

Balances—May 1, 2021

Stock-based compensation

Issuance of restricted stock

Vested and delivered restricted stock units

Exercise of stock options

Settlement of convertible senior notes

Exercise of call option under bond hedge upon settlement of convertible senior notes

Reclassification of equity component related to early converted senior notes outstanding

Net losses from foreign currency translation

Balances—July 31, 2021

Balances—May 2, 2020

Stock-based compensation

Issuance of restricted stock

Vested and delivered restricted stock units

Exercise of stock options

Retirement of treasury stock

Settlement of convertible senior notes

( 1,131,645 )

Exercise of call option under bond hedge upon settlement of convertible senior notes

( 1,131,662 )

Net gains from foreign currency translation

Balances—August 1, 2020

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FINANCIAL INFORMATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

(In thousands) (Unaudited)

SIX MONTHS ENDED

TREASURY STOCK

COMPREHENSIVE

STOCKHOLDERS'

INCOME (LOSS)

Balances—January 30, 2021

Stock-based compensation

Issuance of restricted stock

Vested and delivered restricted stock units

2 unchanged sentences

Exercise of call option under bond hedge upon settlement of convertible senior notes

Reclassification of equity component related to early converted senior notes outstanding

Net gains from foreign currency translation

Balances—May 1, 2021

Balances—July 31, 2021

Balances—February 1, 2020

Stock-based compensation

Issuance of restricted stock

Vested and delivered restricted stock units

1 unchanged sentence

Repurchases of common stock

Net losses from foreign currency translation

Balances—May 2, 2020

Retirement of treasury stock

Settlement of convertible senior notes

( 1,131,645 )

Exercise of call option under bond hedge upon settlement of convertible senior notes

( 1,131,662 )

Net gains from foreign currency translation

Balances—August 1, 2020

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

FINANCIAL INFORMATION

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

THREE MONTHS ENDED

SIX MONTHS ENDED

CASH FLOWS FROM OPERATING ACTIVITIES

Net income (loss)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation and amortization

2 unchanged sentences

Asset impairments

Loss on sale leaseback transaction

Amortization of debt discount

3 unchanged sentences

Product recalls

Deferred income taxes

Loss on extinguishment of debt

11 unchanged sentences

Other non-current obligations

Net cash provided by (used in) operating activities

Net cash provided by operating activities

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FINANCIAL INFORMATION

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(In thousands) (Unaudited)

THREE MONTHS ENDED

SIX MONTHS ENDED

CASH FLOWS FROM INVESTING ACTIVITIES

1 unchanged sentence

Equity method investments

Proceeds from sale of assets

Net cash used in investing activities

3 unchanged sentences

Repayments under promissory and equipment security notes

Debt issuance costs

Repayments of convertible senior notes

2 unchanged sentences

Tax withholdings related to issuance of stock-based awards

Net cash provided by (used in) financing activities

Net cash used in financing activities

Effects of foreign currency exchange rate translation

10 unchanged sentences

Landlord asset additions in accounts payable and accrued expenses at period-end

Reclassification of assets from landlord assets under construction to finance lease right-of-use assets

Shares issued on settlement of convertible senior notes

2 unchanged sentences

FINANCIAL INFORMATION

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1 unchanged sentence

Nature of Business

RH, a Delaware corporation, together with its subsidiaries (collectively, “we,” “us,” “our” or the “Company”), is a leading luxury retailer in the home furnishings market that offers merchandise assortments across a number of categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, and child and teen furnishings.

RH, a Delaware corporation, together with its subsidiaries (collectively, “we,” “us,” or the “Company”), is a leading luxury retailer in the home furnishings market that offers merchandise assortments across a number of categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, and child and teen furnishings.

These products are sold through our retail locations, websites and Source Books.

As of May 1, 2021, we operated a total of 68 RH Galleries and 38 RH outlet stores in 30 states, the District of Columbia and Canada, as well as 14 Waterworks Showrooms throughout the United States and in the U.K., and had sourcing operations in Shanghai and Hong Kong.

As of July 31, 2021, we operated a total of 66 RH Galleries and 38 RH outlet stores in 30 states, the District of Columbia and Canada, as well as 14 Waterworks Showrooms throughout the United States and in the U.K., and had sourcing operations in Shanghai and Hong Kong.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared from the Company’s records and, in our senior leadership team’s opinion, include all adjustments, consisting of normal recurring adjustments, necessary to fairly state our financial position as of May 1, 2021, and the results of operations for the three months ended May 1, 2021, and May 2, 2020.

The accompanying unaudited interim condensed consolidated financial statements have been prepared from our records and, in our senior leadership team’s opinion, include all adjustments, consisting of normal recurring adjustments, necessary to fairly state our financial position as of July 31, 2021, and the results of operations for the three and six months ended July 31, 2021 and August 1, 2020.

Our current fiscal year, which consists of 52 weeks, ends on January 29, 2022 (“fiscal 2021”).

4 unchanged sentences

The accounting estimates and other matters we have assessed include, but were not limited to, sales return reserve, inventory reserve, allowance for doubtful accounts, goodwill, intangible and other long-lived assets.

Our current assessment of these estimates is included in our condensed consolidated financial statements as of and for the three months ended May 1, 2021.

Our current assessment of these estimates is included in our condensed consolidated financial statements as of and for the three and six months ended July 31, 2021.

As additional information becomes available to us, our future assessment of these estimates, including our expectations at the time regarding the duration, scope and severity of the pandemic, as well as other factors, could materially and adversely impact our condensed consolidated financial statements in future reporting periods.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended January 30, 2021 (the “2020 Form 10-K”).

The results of operations for the three months ended May 1, 2021, presented herein are not necessarily indicative of the results to be expected for the full fiscal year.

Our business, like the businesses of retailers generally, is subject to uncertainty surrounding the financial impact of the novel coronavirus disease as discussed in Recent Developments—COVID-19 below.

The results of operations for the three and six months ended July 31, 2021 presented herein are not necessarily indicative of the results to be expected for the full fiscal year.

Our business, like the businesses of retailers generally, is subject to uncertainty surrounding the financial impact of the pandemic as discussed in Recent Developments—COVID-19 below.

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FINANCIAL INFORMATION

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Recent Developments—COVID-19

The COVID-19 outbreak in the first quarter of fiscal 2020 caused disruption to our business operations.

The COVID-19 outbreak in the first quarter of fiscal 2020 caused disruption to our business operations beginning in the first quarter of fiscal 2020.

The pandemic has continued since the initial outbreak and has included spikes and outbreaks in various locations around the world including as a result of new strains of the COVID virus such as the “Delta” variant.

In our initial response to the health crisis, we undertook immediate adjustments to our business operations including temporarily closing all of our retail locations and Restaurants, curtailing expenses, and delaying investments including scaling back some inventory orders while we assessed the status of our business.

Our approach to the crisis evolved quickly as our business trends substantially improved during the second through fourth fiscal quarters of fiscal 2020 as a result of both the reopening of most of our retail locations and also strong consumer demand for our products.

Operational restrictions related to the COVID-19 pandemic affecting our Galleries and hospitality locations continued to fluctuate in the first quarter of 2021 based upon changes in local conditions and regulations.

As of June 4, 2021, substantially all of our Galleries, Outlets, and Restaurants were open, although many of our Restaurants and Galleries continue to conduct business with occupancy limitations and other operational restrictions.

Our overall customer demand in specific markets has generally correlated favorably with our customers’ ability to access our Galleries and Outlets.

Operational restrictions related to the pandemic affecting our Galleries and hospitality locations continued to fluctuate through the second quarter of 2021 based upon changes in local conditions and regulations.

As of September 3, 2021, all of our Galleries, Outlets and Restaurants were open.

Our overall customer demand in specific markets has generally correlated favorably with our customers’ ability to experience our Galleries and Outlets.

Although our business has strengthened during the period from the second quarter of fiscal 2020 and continuing into fiscal 2021, consumer spending patterns may shift away from spending on the home and home-related categories, such as home furnishings, as pandemic restrictions are lifted and consumers return to pre-COVID consumption trends, such as spending on travel and leisure and other activities.

2 unchanged sentences

It may take several quarters for inventory receipts and manufacturing to catch up to the increase in customer demand and as a result the exact timing cannot be accurately predicted due to ongoing uncertainty of the continuing impact of the pandemic on our global supply chain.

In particular, business circumstances and operational conditions in numerous international locations where our vendors operate are subject to ongoing risks, and regions in which our vendors have production facilities, such as India, have experienced various spikes in cases related to the pandemic.

As a result, the pandemic may continue to adversely affect business operations in these jurisdictions, which could, in turn, have a negative impact on our vendors and therefore on our business as well, as including our ability to source products.

We will continue to closely manage our investments while considering both the overall economic environment as well as the needs of our business operations.

In addition, our near-term decisions regarding the sources and uses of capital in our business will continue to reflect and adapt to changes in market conditions and our business including further developments with respect to the pandemic.

In particular, business circumstances and operational conditions in numerous international locations where our vendors operate are subject to ongoing risks, and regions in which our vendors have production facilities, most notably Vietnam, have experienced various surges in outbreaks and, in some cases, facility closures related to the pandemic.

As a result, the ongoing nature of the pandemic may continue to adversely affect our business operations in various jurisdictions, which could, in turn, have a negative impact on our vendors and supply chain, and therefore, our business.

Our decisions regarding the sources and uses of capital in our business will continue to reflect and adapt to changes in market conditions and our business including further developments with respect to the pandemic.

For more information, refer to the section entitled Risk Factors in our 2020 Form 10-K.

4 unchanged sentences

The ASU impacts various topic areas within ASC 740, including accounting for taxes under hybrid tax regimes, accounting for increases in goodwill, allocation of tax amounts to separate company financial statements within a group that files a consolidated tax return, intra period tax allocation, interim period accounting, and accounting for ownership changes in investments, among other minor codification improvements.

The guidance in this ASU becomes effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

The guidance in this ASU became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

We adopted this standard in the first quarter of fiscal 2021 and the adoption did not have an impact on our condensed consolidated financial statements.

FINANCIAL INFORMATION

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New Accounting Standards or Updates Not Yet Adopted

11 unchanged sentences

Prepaid expense and other current assets

Vendor deposits

Capitalized catalog costs

Federal and state tax receivable

Promissory notes receivable, including interest (1)

Vendor deposits

Right of return asset for merchandise

3 unchanged sentences

Refer to Note 5— Equity Method Investments .

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FINANCIAL INFORMATION

Other non-current assets consist of the following ( in thousands ):

3 unchanged sentences

Other deposits

Acquisition related escrow deposits

Deferred financing fees

Acquisition related escrow deposits

Other non-current assets

Total other non-current assets

(1) Presented net of accumulated amortization of $ 1.1 million and $ 0.5 million as of May 1, 2021 and January 30, 2021, respectively.

FINANCIAL INFORMATION

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(1) Presented net of accumulated amortization of $ 1.9 million and $ 0.5 million as of July 31, 2021 and January 30, 2021, respectively.

NOTE 4—GOODWILL, TRADENAMES, TRADEMARKS AND OTHER INTANGIBLE ASSETS

The following sets forth the goodwill, tradenames, trademarks and other intangible assets activity for the RH Segment and Waterworks (See Note 17— Segment Reporting ), for the three months ended May 1, 2021 (in thousands) :

The following sets forth the goodwill, tradenames, trademarks and other intangible assets activity for the RH Segment and Waterworks (See Note 17— Segment Reporting ), for the six months ended July 31, 2021 ( in thousands ):

Tradenames, trademarks and other intangible assets

10 unchanged sentences

As a result, we recognized a $ 20.5 million non-cash impairment charge for the Waterworks reporting unit tradename during the three months ended May 2, 2020.

FINANCIAL INFORMATION

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NOTE 5—EQUITY METHOD INVESTMENTS

Equity method investments represent our 50 percent membership interests in three privately-held limited liability companies in Aspen (each, an “Aspen LLC” and collectively, the “Aspen LLCs” or the “equity method investments”) which were formed during fiscal 2020, and have the purpose of acquiring, developing, operating and selling certain real estate projects in Aspen, Colorado.

Equity method investments represent our 50 percent membership interests in three privately-held limited liability companies in Aspen, Colorado (each, an “Aspen LLC” and collectively, the “Aspen LLCs” or the “equity method investments”) which were formed during fiscal 2020, and have the purpose of acquiring, developing, operating and selling certain real estate projects in Aspen, Colorado.

As we do not have a controlling financial interest in the Aspen LLCs but have the ability to exercise significant influence over the Aspen LLCs, we account for these investments using the equity method of accounting.

During the three months ended May 1, 2021, we recorded our proportionate share of equity method investments losses of $ 2.1 million, which is included in the condensed consolidated statements of operations and a corresponding decrease to the carrying value of equity method investments on the condensed consolidated balance sheets as of May 1, 2021.

As of May 1, 2021, $ 13.8 million of promissory notes receivable are outstanding with the managing member, which are included in prepaid expense and other current assets on the condensed consolidated balance sheets.

During the three and six months ended July 31, 2021, we recorded our proportionate share of equity method investments losses of $ 2.5 million and $ 4.6 million, respectively, which is included in the condensed consolidated statements of income and a corresponding decrease to the carrying value of equity method investments on the condensed consolidated balance sheets as of July 31, 2021.

As of July 31, 2021, $ 14.1 million of promissory notes receivable, inclusive of accrued interest, are outstanding with the managing member, which are included in prepaid expense and other current assets on the condensed consolidated balance sheets.

These promissory notes are expected to be settled in cash and not converted into additional equity investment in the Aspen LLCs.

An affiliate of the managing member of the Aspen LLCs became the landlord of an additional RH Design Gallery in the first quarter of fiscal 2021.

FINANCIAL INFORMATION

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NOTE 6—ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

5 unchanged sentences

Accrued occupancy

Accrued catalog costs

Accrued professional fees

Accrued catalog costs

Deferred consideration for asset purchase

1 unchanged sentence

Total accounts payable and accrued expenses

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FINANCIAL INFORMATION

Other current liabilities consist of the following ( in thousands ):

Allowance for sales returns

Current portion of equipment promissory notes

Allowance for sales returns

Unredeemed gift card and merchandise credit liability

1 unchanged sentence

Product recall reserve

Federal and state tax payable

Other current liabilities

2 unchanged sentences

We defer revenue associated with merchandise delivered via the home-delivery channel.

We expect that substantially all of the deferred revenue and customer deposits as of May 1, 2021 will be recognized within the next six months as the performance obligations are satisfied.

We expect that substantially all of the deferred revenue and customer deposits as of July 31, 2021 will be recognized within the next six months as the performance obligations are satisfied.

New membership fees are recorded as deferred revenue when collected from customers and recognized as revenue based on expected product revenues over the annual membership period, based on historical trends of sales to members.

1 unchanged sentence

In addition, we defer revenue when cash payments are received in advance of performance for unsatisfied obligations related to our gift cards.

During the three months ended May 1, 2021 and May 2, 2020, we recognized $ 4.9 million and $ 4.1 million, respectively, of revenue related to previous deferrals related to our gift cards .

During the three months ended May 1, 2021 and May 2, 2020, we recognized gift card breakage of $ 0.4 million and $ 0.6 million, respectively.

We expect that approximately 75 % of the remaining gift card liabilities as of May 1, 2021 will be recognized when the gift cards are redeemed by customers.

FINANCIAL INFORMATION

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During the three months ended July 31, 2021 and August 1, 2020, we recognized $ 4.9 million and $ 6.5 million, respectively, of revenue related to previous deferrals related to our gift cards.

During the six months ended July 31, 2021 and August 1, 2020, we recognized $ 9.8 million and $ 10.6 million, respectively, of revenue related to previous deferrals related to our gift cards.

During the three months ended July 31, 2021 and August 1, 2020, we recorded gift card breakage of $ 0.5 million and $ 0.2 million, respectively.

During the six months ended July 31, 2021 and August 1, 2020, we recorded gift card breakage of $ 0.9 million and $ 0.8 million, respectively.

We expect that approximately 75 % of the remaining gift card liabilities as of July 31, 2021 will be recognized when the gift cards are redeemed by customers.

NOTE 7—OTHER NON-CURRENT OBLIGATIONS

7 unchanged sentences

Refer to Note 15 — Stock-Based Compensation .

FINANCIAL INFORMATION

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NOTE 8—LEASES

1 unchanged sentence

THREE MONTHS ENDED

SIX MONTHS ENDED

Operating lease cost (1)

5 unchanged sentences

Total lease costs—net

(1) Operating lease costs and amortization of finance lease right-of-use assets are included in cost of goods sold or selling, general and administrative expenses on the condensed consolidated statements of operations based on our accounting policy.

Refer to Note 3— Significant Accounting Policies in the 2020 Form 10-K.

(2) Included in interest expense—net on the condensed consolidated statements of operations.

(2) Included in interest expense—net on the condensed consolidated statements of income.

(3) Represents variable lease payments under operating and finance lease agreements.

The amounts primarily represent contingent rent based on a percentage of retail sales over contractual levels of $ 6.3 million and $ 2.0 million for the three months ended May 1, 2021 and May 2, 2020, respectively, as well as charges associated with common area maintenance of $ 2.1 million and $ 1.6 million for the three months ended May 1, 2021 and May 2, 2020, respectively.

Other variable costs include single lease cost related to variable lease payments based on an index or rate that were not included in the measurement of the initial lease liability and right-of-use asset were not material in any period.

(4) Included in selling, general and administrative expenses on the condensed consolidated statements of operations.

The amounts primarily represent contingent rent based on a percentage of retail sales over contractual levels of $ 5.6 million and $ 2.2 for the three months ended July 31, 2021 and August 1, 2020, respectively, and $ 11.9 million and $ 4.2 million for the six months ended July 31, 2021 and August 1, 2020, respectively.

Other variable costs, which include single lease cost related to variable lease payments based on an index or rate that were not included in the measurement of the initial lease liability and right-of-use asset, were not material in any period.

(4) Included in selling, general and administrative expenses on the condensed consolidated statements of income.

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FINANCIAL INFORMATION

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Lease right-of-use assets and lease liabilities consist of the following ( in thousands ):

17 unchanged sentences

(1) Finance lease right-of-use assets include capitalized amounts related to our completed construction activities to design and build leased assets, which are reclassified from other non-current assets upon lease commencement.

(2) Finance lease right-of-use assets are recorded net of accumulated amortization of $ 144.0 million and $ 133.0 million as of May 1, 2021 and January 30, 2021, respectively.

(2) Finance lease right-of-use assets are recorded net of accumulated amortization of $ 152.3 million and $ 133.0 million as of July 31, 2021 and January 30, 2021, respectively.

(3) Current portion of lease liabilities represents the reduction of the related lease liability over the next 12 months.

FINANCIAL INFORMATION

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The maturities of lease liabilities are as follows as of May 1, 2021 ( in thousands ):

The maturities of lease liabilities are as follows as of July 31, 2021 ( in thousands ):

Remainder of fiscal 2021

3 unchanged sentences

(1) Total lease payments include future obligations for renewal options that are reasonably certain to be exercised and are included in the measurement of the lease liability.

Total lease payments exclude $ 667.4 million of legally binding payments under the non-cancellable term for leases signed but not yet commenced under our accounting policy as of May 1, 2021, of which $ 24.1 million, $ 32.5 million, $ 37.3 million, $ 38.7 million, $ 40.0 million and $ 39.8 million will be paid in fiscal 2021, fiscal 2022, fiscal 2023, fiscal 2024, fiscal 2025 and fiscal 2026, respectively, and $ 455.0 million will be paid subsequent to fiscal 2026.

(2) Excludes future commitments under short-term lease agreements of $ 1.8 million as of May 1, 2021.

Total lease payments exclude $ 656.8 million of legally binding payments under the non-cancellable term for leases signed but not yet commenced under our accounting policy as of July 31, 2021, of which $ 12.3 million, $ 32.6 million, $ 37.8 million, $ 39.3 million, $ 40.2 million and $ 38.9 million will be paid in fiscal 2021, fiscal 2022, fiscal 2023, fiscal 2024, fiscal 2025 and fiscal 2026, respectively, and $ 455.7 million will be paid subsequent to fiscal 2026.

FINANCIAL INFORMATION

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(2) Excludes future commitments under short-term lease agreements of $ 1.2 million as of July 31, 2021.

(3) Calculated using the discount rate for each lease at lease commencement.

Supplemental information related to leases consists of the following:

THREE MONTHS ENDED

SIX MONTHS ENDED

Weighted-average remaining lease term (years)

4 unchanged sentences

Finance leases

FINANCIAL INFORMATION

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Other information related to leases consists of the following (in thousands) :

THREE MONTHS ENDED

SIX MONTHS ENDED

Cash paid for amounts included in the measurement of lease liabilities

6 unchanged sentences

Finance leases

Build-to-Suit Asset

During the second quarter of fiscal 2021, we opened the Dallas Design Gallery.

During the construction period of this Design Gallery, we were the “deemed owner” for accounting purposes and classified the construction costs as build-to-suit asset within property & equipment—net on our condensed consolidated balance sheets.

Upon construction completion and lease commencement, we performed a sale-leaseback analysis and determined that we cannot derecognize the build-to-suit asset.

Therefore, the asset will remain classified as a build-to-suit asset within property and equipment—net and will depreciate over the term of the useful life of the asset.

Sale-Leaseback Transaction

During the second quarter of fiscal 2020, we executed a sale-leaseback transaction for the Minneapolis Design Gallery for sales proceeds of $ 25.5 million, which qualified for sale-leaseback accounting in accordance with ASC 842.

Concurrently with the sale, we entered into an operating leaseback arrangement with an initial lease term of 20 years and a renewal option for an additional 10 years .

We recognized a loss related to the execution of the sale transaction of $ 9.4 million in the second quarter of fiscal 2020, which was recorded in selling, general and administrative expenses on the condensed consolidated statements of income.

Long-lived Asset Impairment

During the three months ended May 2, 2020, we recognized long-lived asset impairment charges of $ 3.5 million related to one RH Baby & Child and TEEN Gallery and one Waterworks showroom, comprised of lease right-of-use asset impairment of $ 2.0 million and property and equipment impairment of $ 1.5 million.

During the first quarter of fiscal 2020, we recognized long-lived asset impairment charges of $ 3.5 million related to one RH Baby & Child and TEEN Gallery and one Waterworks showroom, comprised of lease right-of-use asset impairment of $ 2.0 million and property and equipment impairment of $ 1.5 million.

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FINANCIAL INFORMATION

NOTE 9—CONVERTIBLE SENIOR NOTES

12 unchanged sentences

In addition, upon the occurrence of a “make-whole fundamental change” as defined in the indenture governing the 2024 Notes, we will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2024 Notes in connection with such make-whole fundamental change.

FINANCIAL INFORMATION

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Prior to June 15, 2024 , the 2024 Notes are convertible only under the following circumstances:

2 unchanged sentences

or (3) upon the occurrence of specified corporate transactions.

The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended March 31, 2021 and, accordingly, holders were eligible to convert their 2024 Notes beginning in the calendar quarter ended December 31, 2020 and are currently eligible to convert their 2024 Notes during the calendar quarter ending June 30, 2021.

The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended June 30, 2021 and, accordingly, holders were eligible to convert their 2024 Notes beginning in the calendar quarter ended December 31, 2020 and are currently eligible to convert their 2024 Notes during the calendar quarter ending September 30, 2021.

On and after June 15, 2024 , until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2024 Notes at any time, regardless of the foregoing circumstances.

3 unchanged sentences

however, upon the occurrence of a fundamental change (as defined in the indenture governing the notes), holders may require us to purchase all or a portion of their 2024 Notes for cash at a price equal to 100 % of the principal amount of the 2024 Notes to be purchased plus any accrued and unpaid special interest to, but excluding, the fundamental change purchase date.

FINANCIAL INFORMATION

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Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate.

8 unchanged sentences

Discounts and third party offering costs attributable to the liability component are recorded as a contra-liability and are presented net against the convertible senior notes due 2024 balance on the condensed consolidated balance sheets.

During both the three months ended May 1, 2021 and May 2, 2020, we recorded $ 0.2 million related to the amortization of debt issuance costs.

During both the three months ended July 31, 2021 and August 1, 2020, we recorded $ 0.1 million related to the amortization of debt issuance costs related to the 2024 Notes.

During both the six months ended July 31, 2021 and August 1, 2020, we recorded $ 0.3 million related to the amortization of debt issuance costs related to the 2024 Notes.

During the second quarter of fiscal 2021, holders of $ 67.0 million in aggregate principal amount of the 2024 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2024 Notes converted and shares of our common stock for the remaining conversion value.

In accordance with the provisions for such combination settlements, the conversion value is to be determined based on the average conversion value over a 45 trading day observation period.

As of July 31, 2021, the observation periods of these converted 2024 Notes had not been completed and, as a result, these converted 2024 Notes remain outstanding as of July 31, 2021.

During the third quarter of fiscal 2021, we expect to pay $ 67.0 million in cash and to deliver shares of common stock to settle the early conversion of these 2024 Notes, net of the shares of common stock we expect to receive from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2024 Notes as described below.

Accordingly, as of July 31, 2021, we reclassified $ 67.0 million of the outstanding principal balance to current liabilities , as well as reclassified $ 11.0 million of the equity component of the 2024 Notes to mezzanine equity from permanent equity on our condensed consolidated balance sheets and statements of stockholders’ equity, representing the difference between the current portion of aggregate principal of our converted 2024 Notes required to be settled in cash based on our irrevocable elections and the current portion of the carrying value of the converted 2024 Notes outstanding as of July 31, 2021.

As the settlement of conversion of the remainder of the 2024 Notes will be made, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock, the remaining liability for the 2024 Notes is classified as a non-current obligation on our condensed consolidated balance sheets.

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The carrying values of the 2024 Notes, excluding the discounts upon original issuance and third party offering costs, are as follows ( in thousands ):

The carrying value of the 2024 Notes, excluding the discounts upon original issuance and third party offering costs, is as follows ( in thousands ):

Liability component

2 unchanged sentences

Equity component (2)

(1) Included in additional paid-in capital on the condensed consolidated balance sheets.

We recorded interest expense of $ 4.1 million and $ 3.9 million for the amortization of the debt discount related to the 2024 Notes during the three months ended May 1, 2021 and May 2, 2020, respectively.

(1) Includes $ 67.0 million classified within total current liabilities on the condensed consolidated balance sheets as of July 31, 2021 for the early conversion of $ 67.0 million in principal amount of 2024 Notes to be settled in the third quarter of fiscal 2021.

(2) Includes $ 11.0 million in mezzanine equity and the remaining amount in additional paid-in capital on the condensed consolidated balance sheets as of July 31, 2021.

As of January 30, 2021, the full amount is included in additional paid-in capital on the condensed consolidated balance sheets.

We recorded interest expense of $ 4.2 million and $ 3.9 million for the amortization of the debt discount related to the 2024 Notes during the three months ended July 31, 2021 and August 1, 2020, respectively.

We recorded interest expense of $ 8.3 million and $ 7.8 million for the amortization of the debt discount related to the 2024 Notes during the six months ended July 31, 2021 and August 1, 2020, respectively.

2024 Notes—Convertible Bond Hedge and Warrant Transactions

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$ 335 million 0.00 % Convertible Senior Notes due 2023

14 unchanged sentences

or (3) upon the occurrence of specified corporate transactions.

The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended March 31, 2021 and, accordingly, holders were eligible to convert their 2023 Notes beginning in the calendar quarter ended December 31, 2020 and are currently eligible to convert their 2023 Notes during the calendar quarter ending June 30, 2021.

The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended June 30, 2021 and, accordingly, holders were eligible to convert their 2023 Notes beginning in the calendar quarter ended December 31, 2020 and are currently eligible to convert their 2023 Notes during the calendar quarter ending September 30, 2021.

On and after March 15, 2023 , until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2023 Notes at any time, regardless of the foregoing circumstances.

3 unchanged sentences

however, upon the occurrence of a fundamental change (as defined in the indenture governing the notes), holders may require us to purchase all or a portion of their 2023 Notes for cash at a price equal to 100 % of the principal amount of the 2023 Notes to be purchased plus any accrued and unpaid special interest to, but excluding, the fundamental change purchase date.

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8 unchanged sentences

Discounts and third party offering costs attributable to the liability component are recorded as a contra-liability and are presented net against the convertible senior notes due 2023 balance on the condensed consolidated balance sheets.

During the three months ended May 1, 2021 and May 2, 2020, we recorded $ 0.3 million and $ 0.2 million, respectively, related to the amortization of debt issuance costs.

In December 2020, holders of $ 2.4 million in aggregate principal amount of the 2023 Notes elected conversion at the option of the noteholders.

During the three months ended May 1, 2021, we paid $ 2.4 million in cash and delivered 7,307 shares of common stock to settle the converted 2023 Notes.

During both the three months ended July 31, 2021 and August 1, 2020, we recorded $ 0.3 million related to the amortization of debt issuance costs.

During both the six months ended July 31, 2021 and August 1, 2020, we recorded $ 0.5 million related to the amortization of debt issuance costs.

In December 2020, holders of $ 2.4 million in aggregate principal amount of the 2023 Notes elected early conversion at the option of the noteholders.

During the three months ended May 1, 2021, we paid $ 2.4 million in cash and delivered 7,307 shares of common stock to settle the early conversion of these 2023 Notes.

As a result, we recognized a loss on extinguishment of the liability component of $ 0.1 million in the three months ended May 1, 2021.

We also received 7,305 shares of common stock from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2023 Notes as described below, and therefore, on a net basis issued 2 shares of our common stock in respect to such settlement of the converted 2023 Notes.

In May 2021, holders of $ 30.8 million in aggregate principal amount of the 2023 Notes elected conversion at the option of the noteholders.

During the second quarter of fiscal 2021, we expect to pay $ 30.8 million in cash and to deliver an immaterial number of shares of common stock to settle the converted 2023 Notes, net of the shares of common stock we expect to receive from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2023 Notes as described below.

During the second quarter of fiscal 2021, holders of $ 30.8 million in aggregate principal amount of the 2023 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2023 Notes converted and shares of our common stock for the remaining conversion value.

During the three months ended July 31, 2021, we paid $ 30.8 million in cash and delivered 112,297 shares of common stock to settle the early conversion of these 2023 Notes.

As a result, we recognized a loss on extinguishment of $ 3.2 million in the three months ended July 31, 2021.

We also received 112,296 shares of common stock from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2023 Notes as described below, and therefore, on a net basis issued 1 share of our common stock in respect to such settlement of the converted 2023 Notes.

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During the second quarter of fiscal 2021, holders of $ 173.5 million in aggregate principal amount of the 2023 Notes elected to exercise the conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2023 Notes converted and shares of our common stock for the remaining conversion value.

In accordance with the provisions for such combination settlements, the conversion value is to be determined based on the average conversion value over a 45 trading day observation period.

As of July 31, 2021, the observation periods of these converted 2023 Notes had not been completed and, as a result, these converted 2023 Notes remain outstanding as of July 31, 2021.

During the third quarter of fiscal 2021, we expect to pay $ 173.5 million in cash and to deliver shares of common stock to settle the early conversion of these 2023 Notes, net of the shares of common stock we expect to receive from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2023 Notes as described below.

Accordingly, as of July 31, 2021, we reclassified $ 173.5 million of the outstanding principal balance to current liabilities, as well as reclassified $ 19.5 million of the equity component of the 2023 Notes to mezzanine equity from permanent equity on our condensed consolidated balance sheets as of July 31, 2021, representing the difference between the current portion of aggregate principal of our converted 2023 Notes required to be settled in cash based on our irrevocable elections and the current portion of the carrying value of the converted 2023 Notes outstanding as of July 31, 2021.

As the settlement of conversion of the remainder of the 2023 Notes will be made, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock, the remaining liability for the 2023 Notes is classified as a non-current obligation on our condensed consolidated balance sheets.

The carrying values of the 2023 Notes, excluding the discounts upon original issuance and third party offering costs, are as follows ( in thousands ):

3 unchanged sentences

Equity component (2)

(1) Included in additional paid-in capital on the condensed consolidated balance sheets.

We recorded interest expense of $ 4.6 million and $ 4.3 million for the amortization of the debt discount related to the 2023 Notes during the three months ended May 1, 2021 and May 2, 2020, respectively.

(1) Includes $ 173.5 million classified within total current liabilities on the condensed consolidated balance sheets as of July 31, 2021 for the early conversion of $ 173.5 million in principal amount of 2023 Notes to be settled in the third quarter of fiscal 2021.

(2) Includes $ 19.5 million in mezzanine equity and the remaining amount in additional paid-in capital on the condensed consolidated balance sheets as of July 31, 2021.

As of January 30, 2021, the full amount is included in additional paid-in capital on the condensed consolidated balance sheets.

We recorded interest expense of $ 4.6 million and $ 4.4 million for the amortization of the debt discount related to the 2023 Notes during the three months ended July 31, 2021 and August 1, 2020, respectively.

We recorded interest expense of $ 9.2 million and $ 8.7 million for the amortization of the debt discount related to the 2023 Notes during the six months ended July 31, 2021 and August 1, 2020, respectively.

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2023 Notes—Convertible Bond Hedge and Warrant Transactions

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Total credit facilities

(1) Deferred financing fees associated with the asset based credit facility as of May 1, 2021 and January 30, 2021 were $ 1.3 million and $ 1.5 million, respectively, and are included in other non-current assets on the condensed consolidated balance sheets.

The deferred financing fees are amortized on a straight-line basis over the life of the revolving line of credit, which has a maturity date of June 28, 2022.

(2) Represents total equipment security notes secured by certain of our property and equipment, of which $ 28.1 million outstanding was included in other current liabilities on the condensed consolidated balance sheets as of May 1, 2021.

(1) Deferred financing fees associated with the asset based credit facility as of July 31, 2021 and January 30, 2021 were $ 4.2 million and $ 1.5 million, respectively, and are included in other non-current assets on the condensed consolidated balance sheets.

The deferred financing fees are amortized on a straight-line basis over the life of the revolving line of credit.

In July 2021, Restoration Hardware, Inc.

entered into a twelfth amended and restated credit agreement which extended the maturity date of the revolving line of credit from June 28, 2022 to July 29, 2026.

(2) Represents total equipment security notes secured by certain of our property and equipment, of which $ 24.1 million outstanding was included in other current liabilities on the condensed consolidated balance sheets.

The remaining $ 2.2 million outstanding, included in equipment promissory notes—net on the condensed consolidated balance sheets, has principal payments due of $ 1.0 million and $ 1.2 million in fiscal 2022 and fiscal 2023, respectively.

Asset Based Credit Facility

In August 2011, Restoration Hardware, Inc., along with its Canadian subsidiary, Restoration Hardware Canada, Inc., entered into a credit agreement with Bank of America, N.A., as administrative agent, and certain other lenders (the “Original Credit Agreement”).

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In August 2011 , Restoration Hardware, Inc., along with its Canadian subsidiary, Restoration Hardware Canada, Inc., entered into the ninth amended and restated credit agreement with Bank of America, N.A., as administrative agent and collateral agent (“First Lien Administrative Agent”), and certain other lenders (as amended prior to June 28, 2017, the “Original Credit Agreement”).

On June 28, 2017 , Restoration Hardware, Inc.

entered into an eleventh amended and restated credit agreement (as amended, the “Credit Agreement”) among Restoration Hardware, Inc., Restoration Hardware Canada, Inc., various subsidiaries of RH named therein as borrowers or guarantors, the lenders party thereto and Bank of America, N.A.

as administrative agent and collateral agent (“First Lien Administrative Agent”), which amended and restated the Original Credit Agreement.

The Credit Agreement has a revolving line of credit with initial availability of up to $ 600.0 million, of which $ 10.0 million is available to Restoration Hardware Canada, Inc., and includes a $ 200.0 million accordion feature under which the revolving line of credit may be expanded by agreement of the parties from $ 600.0 million to up to $ 800.0 million if and to the extent the lenders, whether existing lenders or new lenders, agree to increase their credit commitments.

In addition, the Credit Agreement established an $ 80.0 million last in, last out (“LILO”) term loan facility.

The maturity date of the Credit Agreement is June 28, 2022.

On April 4, 2019, Restoration Hardware, Inc., entered into a third amendment to the Credit Agreement (the “Third Amendment”).

The Third Amendment, among other things, (a) established a $ 120.0 million first in, last out (“FILO”) term loan facility, which amount was fully borrowed as of April 4, 2019 and which incurs interest at a rate that is 1.25 % greater than the interest rate applicable to the revolving loans provided for under the Credit Agreement at any time, (b) provided for additional permitted indebtedness, as defined in the Credit Agreement, that the loan parties can incur, and (c) modified the borrowing availability under the Credit Agreement in certain circumstances.

We repaid the full amount of the FILO term loan as of February 1, 2020.

On May 31, 2019, Restoration Hardware, Inc.

entered into a fourth amendment to the Credit Agreement (the “Fourth Amendment”).

The Fourth Amendment, among other things, amends the Credit Agreement to (a) extend the time to deliver monthly financial statements to the lenders for the fiscal months ending February 2019 and March 2019 until June 19, 2019, (b) remove the requirement to deliver monthly financial statements to the lenders for the last fiscal month of any fiscal quarter, and (c) waive any default or event of default under the Credit Agreement relating to the delivery of monthly financial statements or other information to lenders for the fiscal months ending February 2019 and March 2019.

The availability of credit at any given time under the Credit Agreement is limited by reference to a borrowing base formula based upon numerous factors, including the value of eligible inventory and eligible accounts receivable.

As a result of the borrowing base formula, actual borrowing availability under the revolving line of credit could be less than the stated amount of the revolving line of credit (as reduced by the actual borrowings and outstanding letters of credit under the revolving line of credit).

All obligations under the Credit Agreement are secured by substantially all of the assets, including accounts receivable, inventory, intangible assets, property, equipment, goods and fixtures of Restoration Hardware, Inc., Restoration Hardware Canada, Inc., RH US, LLC, Waterworks Operating Co., LLC and Waterworks IP Co., LLC.

Borrowings under the revolving line of credit are subject to interest, at the borrowers’ option, at either the bank’s reference rate or London Inter-bank Offered Rate (“LIBOR”) (or, in the case of the revolving line of credit, the Bank of America “BA” Rate or the Canadian Prime Rate, as such terms are defined in the Credit Agreement, for Canadian borrowings denominated in Canadian dollars or the United States Index Rate or LIBOR for Canadian borrowings denominated in United States dollars) plus an applicable margin rate, in each case.

The Credit Agreement contains various restrictive covenants, including, among others, limitations on the ability to incur liens, make loans or other investments, incur additional debt, issue additional equity, merge or consolidate with or into another person, sell assets, pay dividends or make other distributions, or enter into transactions with affiliates, along with other restrictions and limitations typical to credit agreements of this type and size.

The Credit Agreement also contains various affirmative covenants, including the obligation to deliver notice to the First Lien Administrative Agent following the Company’s obtaining knowledge of any matter that has resulted or could reasonably be expected to result in a “Material Adverse Effect” (as defined in the Credit Agreement).

In addition, under the Credit Agreement, we are required to meet specified financial ratios in order to undertake certain actions, and we may be required to maintain certain levels of excess availability or meet a specified consolidated fixed-charge coverage ratio (“FCCR”).

Subject to certain exceptions, the trigger for the FCCR occurs if the domestic availability under the revolving line of credit is less than the greater of (i) $ 40.0 million and (ii) 10 % of the lesser of (x) the domestic revolving commitments under the Credit Agreement and (y) the domestic revolving borrowing base.

If the availability under the Credit Agreement is less than the foregoing amount, then Restoration Hardware, Inc.

is required subject to certain exceptions to maintain an FCCR of at least one to one.

As of May 1, 2021, Restoration Hardware, Inc.

was in compliance with all applicable financial covenants of the Credit Agreement.

entered into the eleventh amended and restated credit agreement (as amended prior to July 29, 2021, the “Credit Agreement”) among Restoration Hardware, Inc., Restoration Hardware Canada, Inc., certain subsidiaries of RH named therein as borrowers or guarantors, the lenders party thereto and First Lien Administrative Agent, which amended and restated the Original Credit Agreement.

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The Credit Agreement requires a daily sweep of all cash receipts and collections to prepay the loans under the agreement while (i) an event of default exists or (ii) the availability under the revolving line of credit for extensions of credit is less than the greater of (A) $ 40.0 million and (B) 10 % of the sum of (a) the lesser of (x) the aggregate revolving commitments under the Credit Agreement and (y) the aggregate revolving borrowing base, plus (b) the lesser of (x) the then outstanding amount of the LILO term loan or (y) the LILO term loan borrowing base.

The Credit Agreement includes customary events of default, in certain cases subject to customary periods to cure.

The occurrence of an event of default, following the applicable cure period, would permit the lenders to, among other things, terminate any existing commitments under the Credit Agreement and declare the unpaid principal, accrued and unpaid interest and all other amounts payable under the Credit Agreement to be immediately due and payable.

As of May 1, 2021, we had no outstanding borrowings under the revolving credit facility portion of the Credit Agreement.

Under the terms of such provisions, the amount under the revolving line of credit borrowing base that could be available pursuant to the Credit Agreement as of May 1, 2021 was $ 285.6 million, net of $ 20.1 million in outstanding letters of credit.

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On July 29, 2021 , Restoration Hardware, Inc.

entered into the twelfth amended and restated credit agreement (as amended, the “Amended Credit Agreement”) among Restoration Hardware, Inc., Restoration Hardware Canada, Inc., certain subsidiaries of RH named therein as borrowers or guarantors, the lenders party thereto and First Lien Administrative Agent, which amended and restated the Credit Agreement.

The Amended Credit Agreement has a revolving line of credit with initial availability of up to $ 600.0 million, of which $ 10.0 million is available to Restoration Hardware Canada, Inc., and includes a $ 300.0 million accordion feature under which the revolving line of credit may be expanded by agreement of the parties from $ 600.0 million to up to $ 900.0 million if and to the extent the lenders revise their credit commitments to encompass a larger facility.

The Amended Credit Agreement provides that the $ 300.0 million accordion, or a portion thereof, may be added as a first-in, last-out term loan facility if and to the extent the lenders revise their credit commitments for such facility.

The Amended Credit Agreement further provides the borrowers may request a European sub-credit facility under the revolving line of credit or under the accordion feature for borrowing by certain European subsidiaries of RH if certain conditions set out in the Amended Credit Agreement are met.

The maturity date of the Amended Credit Agreement is July 29, 2026.

The availability of credit at any given time under the Amended Credit Agreement will be constrained by the terms and conditions of the Amended Credit Agreement, including the amount of collateral available, a borrowing base formula based upon numerous factors, including the value of eligible inventory and eligible accounts receivable, and other restrictions contained in the Amended Credit Agreement.

All obligations under the Amended Credit Agreement are secured by substantial assets of the loan parties, including inventory, receivables and certain types of intellectual property.

Borrowings under the revolving line of credit (other than swing line loans, which are subject to interest at the base rate) are subject to interest, at the borrower’s option, at either the base rate or London Inter-bank Offered Rate (“LIBOR”) (or, in the case of the Canadian borrowings, the “BA Rate” or the “Canadian Prime Rate”, as such terms are defined in the Amended Credit Agreement, for the Canadian borrowings denominated in Canadian dollars, or the “U.S.

Index Rate”, as such term is defined in the Amended Credit Agreement, or LIBOR for Canadian borrowings denominated in United States dollars) plus an applicable margin rate, in each case.

The Amended Credit Agreement contains various restrictive and affirmative covenants, including required financial reporting, limitations on the ability to grant liens, make loans or other investments, incur additional debt, issue additional equity, merge or consolidate with or into another person, sell assets, pay dividends or make other distributions or enter into transactions with affiliates, along with other restrictions and limitations similar to those frequently found in credit agreements of this type and size.

The Amended Credit Agreement does not contain any significant financial ratio covenants or coverage ratio covenants other than a consolidated fixed charge coverage ratio (“FCCR”) covenant based on the ratio of (i) consolidated EBITDA to the amount of (ii) debt service costs plus certain other amounts, including dividends and distributions and prepayments of debt as defined in the Amended Credit Agreement (the “FCCR Covenant”).

The FCCR Covenant only applies in certain limited circumstances, including when the unused availability under the Amended Credit Agreement drops below the greater of (A) $ 40.0 million and (B) an amount based on 10 % of the total borrowing availability at the time.

The FCCR Covenant ratio is set at 1.0 and measured on a trailing twelve-month basis.

As of July 31, 2021, Restoration Hardware, Inc.

was in compliance with the FCCR Covenant.

The Amended Credit Agreement requires a daily sweep of all cash receipts and collections to prepay the loans under the agreement while (i) an event of default exists or (ii) when the unused availability under the Amended Credit Agreement drops below the greater of (A) $ 40.0 million and (B) an amount based on 10 % of the total borrowing availability at the time.

The Amended Credit Agreement includes customary events of default, in certain cases subject to customary periods to cure.

The occurrence of an event of default, following the applicable cure period, would permit the lenders to, among other things, terminate any existing commitments under the Amended Credit Agreement and declare the unpaid principal, accrued and unpaid interest and all other amounts payable under the Amended Credit Agreement to be immediately due and payable.

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FINANCIAL INFORMATION

As of July 31, 2021, we had no outstanding borrowings under the revolving credit facility portion of the Amended Credit Agreement.

The availability of the revolving line of credit at any given time under the Amended Credit Agreement is limited by the terms and conditions of the Amended Credit Agreement, including the amount of collateral available, a borrowing base formula based upon numerous factors, including the value of eligible inventory and eligible accounts receivable, and other restrictions contained in the Amended Credit Agreement.

As a result, actual borrowing availability under the revolving line of credit could be less than the stated amount of the revolving line of credit (as reduced by the actual borrowings and outstanding letters of credit under the revolving line of credit).

As of July 31, 2021, the amount available for borrowing under the revolving line of credit under the Amended Credit Agreement was $ 389.1 million, net of $ 20.1 million in outstanding letters of credit.

Equipment Loan Facility

2 unchanged sentences

Each equipment loan is secured by a purchase money security interest in the financed equipment.

As of May 1, 2021, the equipment security notes bore interest at a weighted-average rate of 4.56 %.

The maturity dates of the equipment security notes vary, but generally have a maturity of three or four years .

13 unchanged sentences

The inputs used in the determination of fair value require significant management judgment or estimation.

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A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

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Fair Value Measurements—Recurring

Amounts reported as cash and equivalents, receivables, and accounts payable and accrued expenses approximate fair value due to the short-term nature of activity within these accounts.

Amounts reported as cash and equivalents , accounts receivables—net , and accounts payable and accrued expenses approximate fair value due to the short-term nature of activity within these accounts.

The estimated fair value of the asset based credit facility approximates cost as the interest rate associated with the facility is variable and resets frequently.

The estimated fair value and carrying value of the 2023 Notes and 2024 Notes are as follows ( in thousands ):

The estimated fair value and carrying value of the 2023 Notes and 2024 Notes were as follows ( in thousands ):

Convertible senior notes due 2023

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NOTE 12—INCOME TAXES

We recorded income tax expense of $ 41.7 million and an income tax benefit of $ 1.4 million in the three months ended May 1, 2021 and May 2, 2020, respectively.

The effective tax rate was 24.2 % and 30.7 % for the three months ended May 1, 2021 and May 2, 2020, respectively.

The decrease in the effective tax rate for the three months ended May 1, 2021 as compared to the three months ended May 2, 2020 is attributable to higher net excess tax benefits from stock-based compensation and income reported in the current period compared to a reported loss in the prior year.

As of May 1, 2021, we had $ 8.6 million of unrecognized tax benefits, of which $ 7.8 million would reduce income tax expense and the effective tax rate, if recognized.

We recorded income tax expense of $ 3.0 million and $ 18.9 million in the three months ended July 31, 2021 and August 1, 2020, respectively.

We recorded income tax expense of $ 44.7 million and $ 17.5 million in the six months ended July 31, 2021 and August 1, 2020, respectively.

The effective tax rate was 1.3 % and 16.1 % for the three months ended July 31, 2021 and August 1, 2020, respectively.

The effective tax rate was 11.1 % and 15.5 % for the six months ended July 31, 2021 and August 1, 2020, respectively.

The decrease in our effective tax rate for both the three and six months ended July 31, 2021 as compared to the three and six months ended August 1, 2020 is primarily due to higher discrete tax benefits related to net excess tax windfalls from stock-based compensation in 2021 as compared to 2020.

As of July 31, 2021, we had $ 8.9 million of unrecognized tax benefits, of which $ 8.1 million would reduce income tax expense and the effective tax rate, if recognized.

The remaining unrecognized tax benefits would offset other deferred tax assets, if recognized.

As of May 1, 2021, we had $ 6.2 million of exposures related to unrecognized tax benefits that are expected to decrease in the next 12 months .

As of July 31, 2021, we had $ 6.2 million of exposures related to unrecognized tax benefits that are expected to decrease in the next 12 months .

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NOTE 13—NET INCOME (LOSS) PER SHARE

The weighted-average shares used for net income (loss) per share are presented in the table below.

As we reported a net loss for the three months ended May 2, 2020, the weighted-average shares outstanding for basic and diluted are the same.

NOTE 13—NET INCOME PER SHARE

The weighted-average shares used for net income per share are as follows:

THREE MONTHS ENDED

SIX MONTHS ENDED

Weighted-average shares—basic

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Refer to Note 9— Convertible Senior Notes.

The following number of dilutive options, restricted stock units and convertible senior notes were excluded from the calculation of diluted net income (loss) per share because their inclusion would have been anti-dilutive:

THREE MONTHS ENDED

Restricted stock units

Convertible senior notes

Total anti-dilutive stock-based awards

Dilutive options of 82,562 and 800,854 were excluded from the calculation of diluted net income per share for the three months ended July 31, 2021 and August 1, 2020, respectively, because their inclusion would have been anti-dilutive.

Dilutive options of 68,918 and 521,717 were excluded from the calculation of diluted net income per share for the six months ended July 31, 2021 and August 1, 2020, respectively, because their inclusion would have been anti-dilutive.

NOTE 14—SHARE REPURCHASE PROGRAM

2 unchanged sentences

In fiscal 2019, we repurchased approximately 2.2 million shares of our common stock under this program at an average price of $ 115.36 per share, for an aggregate repurchase amount of approximately $ 250.0 million.

We did not make any repurchases under this program during either the three months ended May 1, 2021 or May 2, 2020.

The total current authorized size of the share purchase program is up to $ 950 million (the “950 Million Repurchase Program”), of which $ 450.0 million remained available as of May 1, 2021 for future share investments under this share repurchase program.

We did not make any repurchases under this program during either the six months ended July 31, 2021 or August 1, 2020.

The total current authorized size of the share repurchase program is up to $ 950 million (the “950 Million Repurchase Program”), of which $ 450.0 million remained available as of July 31, 2021 for future share investments.

NOTE 15—STOCK-BASED COMPENSATION

We recorded stock-based compensation expense of $ 15.3 million and $ 5.8 million during the three months ended May 1, 2021 and May 2, 2020, respectively, which is included in selling, general and administrative expenses on the

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condensed consolidated statements of operations.

We recorded stock-based compensation expense of $ 10.1 million and $ 6.9 million during the three months ended July 31, 2021 and August 1, 2020, respectively, which is included in selling, general and administrative expenses on the condensed consolidated statements of income.

We recorded stock-based compensation expense of $ 25.4 million and $ 12.7 million during the six months ended July 31, 2021 and August 1, 2020, respectively.

No stock-based compensation cost has been capitalized in the accompanying condensed consolidated financial statements.

3 unchanged sentences

See Note 18— Stock-Based Compensation in the 2020 Form 10-K.

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The option contains selling restrictions on the underlying shares that lapse upon the achievement of both time-based service requirements and stock price performance-based metrics as described further below.

The option is fully vested on the date of grant but the shares underlying the option remain subject to transfer restrictions to the extent the performance-based and time-based requirements have not been met.

The option will result in aggregate non-cash stock compensation expense of $ 173.6 million, of which $ 5.9 million was recognized during the three months ended May 1, 2021 (which is included in the stock-based compensation expense recorded during the three months ended May 1, 2021 noted above).

As of May 1, 2021, the total unrecognized compensation expense was $ 50.7 million, which will be recognized on an accelerated basis through May 2025.

The option will result in aggregate non-cash stock compensation expense of $ 173.6 million, of which $ 5.8 million and $ 11.7 million was recognized during the three and six months ended July 31, 2021, respectively (which is included in the stock-based compensation expense recorded during the three and six months ended July 31, 2021 noted above).

As of July 31, 2021, the total unrecognized compensation expense was $ 44.8 million, which will be recognized on an accelerated basis through May 2025.

2012 Stock Incentive Plan and 2012 Stock Option Plan

As of May 1, 2021, 8,508,074 options were outstanding with a weighted-average exercise price of $ 106.07 per share and 6,780,119 options were vested with a weighted-average exercise price of $ 89.33 per share.

The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of May 1, 2021 was $ 4,951.3 million, $ 4,755.8 million, and $ 4,059.2 million, respectively.

Stock options exercisable as of May 1, 2021 had a weighted-average remaining contractual life of 3.66 years.

As of May 1, 2021, the total unrecognized compensation expense related to unvested options was $ 114.7 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 4.68 years.

In addition, as of May 1, 2021, the total unrecognized compensation expense related to the fully vested option grant made to Mr.

As of July 31, 2021, 7,895,050 options were outstanding with a weighted-average exercise price of $ 107.35 per share and 7,555,774 options were vested with a weighted-average exercise price of $ 102.88 per share.

The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of July 31, 2021 was $ 4,395.8 million, $ 4,240.6 million, and $ 3,794.8 million, respectively.

Stock options exercisable as of July 31, 2021 had a weighted-average remaining contractual life of 3.38 years.

As of July 31, 2021, the total unrecognized compensation expense related to unvested options was $ 97.7 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 5.04 years.

In addition, as of July 31, 2021, the total unrecognized compensation expense related to the fully vested option grant made to Mr.

Friedman in October 2020 was $ 44.8 million, which will be recognized on an accelerated basis through May 2025 (refer to Chairman and Chief Executive Officer Option Grant above).

As of May 1, 2021, we had 89,830 restricted stock units outstanding with a weighted-average grant date fair value of $ 73.51 per share.

During the three months ended May 1, 2021, 4,420 restricted stock units vested with a weighted-average grant date fair value of $ 51.23 per share.

As of May 1, 2021, there was $ 2.8 million of total unrecognized compensation expense related to unvested restricted stock and restricted stock units which is expected to be recognized over a weighted-average period of 0.68 years.

As of July 31, 2021, we had 23,690 restricted stock units outstanding with a weighted-average grant date fair value of $ 157.52 per share.

During the three months ended July 31, 2021, 61,340 restricted stock units vested with a weighted-average grant date fair value of $ 42.47 per share.

During the six months ended July 31, 2021, 65,760 restricted stock units vested with a weighted-average grant date fair value of $ 43.06 per share.

As of July 31, 2021, there was $ 2.9 million of total unrecognized compensation expense related to unvested restricted stock and restricted stock units, which is expected to be recognized over a weighted-average period of 1.76 years.

Rollover Units

1 unchanged sentence

The Rollover Units are subject to the terms of the Waterworks LLC agreement, including redemption rights at an amount equal to the greater of (i) the $ 1.5 million remitted as consideration in the business combination or (ii) an amount based on the percentage interest represented in the overall valuation of the Waterworks subsidiary (the “Appreciation Rights”).

The Appreciation Rights are measured at fair value and are subject to fair value measurements during the expected life of the Rollover Units, with changes to fair value recorded in the condensed consolidated statements of operations.

The fair value of the Appreciation Rights is determined based on an option-pricing model (“OPM”).

We did not record any expense related to the Appreciation Rights during either the three months ended May 1, 2021 or May 2, 2020.

As of both May 1, 2021 and January 30, 2021, the liability associated with the Rollover Units and related Appreciation Rights was $ 1.5 million, which is included in other non-current obligations on the condensed consolidated balance sheets.

We did not record any expense related to the Appreciation Rights during both the three and six months ended July 31, 2021 and August 1, 2020.

As of both July 31, 2021 and January 30, 2021, the liability associated with the Rollover Units and related Appreciation Rights was $ 1.5 million, which is included in other non-current obligations on the condensed consolidated balance sheets.

Profit Interests

1 unchanged sentence

The Profit Interests are measured at their grant date fair value and expensed on a straight-line basis over their expected life, or five years .

The Profit Interests are subject to fair value measurements during their expected life, with changes to fair value recorded in the condensed consolidated statements of operations.

The Profit Interests are subject to fair value measurements during their expected life, with changes to fair value recorded in the condensed consolidated statements of income.

The fair value of the Profit Interests is determined based on an OPM.

For both the three months ended May 1, 2021 and May 2, 2020, we recorded $ 0.1 million related to the Profit Interests, which is included in selling, general and administrative expenses on the condensed consolidated statements of operations.

As of May 1, 2021 and

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January 30, 2021, the liability associated with the Profit Interests was $ 2.1 million and $ 2.0 million, respectively, which is included in other non-current obligations on the condensed consolidated balance sheets.

During the six months ended July 31, 2021 and August 1, 2020, we recorded $ 0.1 million and $ 0.2 million related to the Profit Interests, respectively, which is included in selling, general and administrative expenses on the condensed consolidated statements of income.

As of July 31, 2021 and January 30, 2021, the liability associated with the Profit Interests was $ 2.1 million and $ 2.0 million, respectively, which is included in other non-current obligations on the condensed consolidated balance sheets.

NOTE 16—COMMITMENTS AND CONTINGENCIES

We had no material off balance sheet commitments as of May 1, 2021.

We had no material off balance sheet commitments as of July 31, 2021.

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FINANCIAL INFORMATION

Contingencies

17 unchanged sentences

We use operating income to evaluate segment profitability for the retail operating segments.

Operating income is defined as net income (loss) before interest expense—net, tradename impairment, loss on extinguishment of debt, income tax expense (benefit) and our share of equity method investments losses.

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Operating income is defined as net income before interest expense—net, tradename impairment, (gain) loss on extinguishment of debt, income tax expense and our share of equity method investments losses.

Segment Information

The following table presents the statements of operations metrics reviewed by the CODM to evaluate performance internally or as required under ASC 280— Segment Reporting ( in thousands ):

The following table presents the statements of income metrics reviewed by the CODM to evaluate performance internally or as required under ASC 280— Segment Reporting ( in thousands ):

THREE MONTHS ENDED

Depreciation and amortization

In the three months ended May 1, 2021, the Real Estate Development segment share of equity method investments losses was $ 2.1 million.

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2021 SECOND QUARTER FORM 10-Q | 31

SIX MONTHS ENDED

Depreciation and amortization

The Real Estate Development segment share of equity method investments losses were $ 2.5 million and $ 4.6 million during the three and six months ended July 31, 2021, respectively.

The following table presents the balance sheet metrics as required under ASC 280— Segment Reporting ( in thousands ):

1 unchanged sentence

Equity method investments

(1) The Waterworks reporting unit goodwill of $ 51.1 million recognized upon acquisition in fiscal 2016 was fully impaired as of February 2, 2019, with $ 17.4 million and $ 33.7 million impairment recorded in fiscal 2018 and fiscal 2017, respectively.

(1) The Waterworks reporting unit goodwill of $ 51.1 million recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018, with $ 17.4 million and $ 33.7 million impairment recorded in fiscal 2018 and fiscal 2017, respectively.

(2) The Waterworks reporting unit tradename is presented net of an impairment charge of $ 35.1 million, with $ 20.5 million and $ 14.6 million recorded in fiscal 2020 and fiscal 2018, respectively.

We use segment operating income to evaluate segment performance and allocate resources.

Segment operating income excludes (i) non-cash compensation amortization related to the fully vested option grant made to Mr.

Friedman in October 2020, (ii) product recall accruals and adjustments, (iii) asset impairments and changes in useful lives and (iv) severance costs associated with reorganizations.

Segment operating income excludes (i) a non-cash compensation charge related to a fully vested option grant made to Mr.

Friedman in October 2020, (ii) asset impairments and lease losses, (iii) product recall accruals, (iv) severance costs associated with reorganizations and (v) loss on sale leaseback transaction.

These items are excluded from segment operating income in order to provide better transparency of segment operating results.

Accordingly, these items are not presented by segment because they are excluded from the segment profitability measure that the CODM and our senior leadership team reviews.

Accordingly, these items are not presented by segment because they are excluded from the segment profitability measure that the CODM and our senior leadership team review.

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FINANCIAL INFORMATION

2021 FIRST QUARTER FORM 10-Q | 29

The following table presents segment operating income (loss) and income (loss) before income taxes ( in thousands ):

The following table presents segment operating income and income before income taxes ( in thousands ):

THREE MONTHS ENDED

Operating income (loss):

SIX MONTHS ENDED

Operating income:

Non-cash compensation

Asset impairments and lease losses

Recall accrual

Asset impairments and change in useful lives

Reorganization related costs

Loss on sale leaseback transaction

Income from operations

Interest expense—net

Loss on extinguishment of debt

(Gain) loss on extinguishment of debt

Tradename impairment

Income (loss) before income taxes

Income before income taxes

We classify our sales into furniture and non-furniture product lines.

3 unchanged sentences

THREE MONTHS ENDED

SIX MONTHS ENDED

Non-furniture

Total net revenues

During the third quarter of fiscal 2020, we reviewed our segments and product lines and updated certain products and categories in our reporting of furniture and non-furniture product lines.

During the third fiscal quarter of 2020, we reviewed our segments and product lines and updated certain products and categories in our reporting of furniture and non-furniture product lines.

While this reporting change did not impact our consolidated results, prior period segment data has been recast for consistency in reporting.

We are domiciled in the United States and primarily operate our retail locations and outlets in the United States.

As of May 1, 2021, we operated 4 retail locations and 2 outlets in Canada, and 1 retail location in the U.K.

Geographic revenues in Canada and the U.K.

We are domiciled in the United States and primarily operate our retail and outlet locations in the United States.

As of July 31, 2021, we operated 4 retail and 2 outlet stores in Canada and 1 retail store in the U.K.

Geographical revenues in Canada and the U.K.

are based upon revenues recognized at the retail locations in the respective country and were not material in any fiscal period presented.

Long-lived assets held internationally were not material in any fiscal period presented.

No single customer accounted for more than 10 % of our revenues in the three months ended May 1, 2021 or May 2, 2020.

No single customer accounted for more than 10 % of our revenues in the three or six months ended July 31, 2021 and August 1, 2020.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements