What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-12-09 compared with 2021-09-09 · 233 added, 209 removed, 601 unchanged (42% of the section changed)

24 unchanged sentences

Asset based credit facility

Term loan—net

Equipment promissory notes—net

8 unchanged sentences

Stockholders’ equity:

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;

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

Common stock— $ 0.0001 par value per share, 180,000,000 shares authorized, 21,465,133 shares issued and outstanding as of October 30, 2021;

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

Additional paid-in capital

Accumulated other comprehensive income

Accumulated other comprehensive income (loss)

Retained earnings (accumulated deficit)

3 unchanged sentences

FINANCIAL INFORMATION

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME

1 unchanged sentence

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

Cost of goods sold

15 unchanged sentences

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

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FINANCIAL INFORMATION

2 unchanged sentences

THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

Net gains (losses) from foreign currency translation

2 unchanged sentences

FINANCIAL INFORMATION

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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

5 unchanged sentences

INCOME (LOSS)

Balances—May 1, 2021

Balances—July 31, 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

Reclassification of equity component to mezzanine equity related to early converted senior notes outstanding―net

Net losses from foreign currency translation

Balances—July 31, 2021

Balances—May 2, 2020

Balances—October 30, 2021

Balances—August 1, 2020

Stock-based compensation

Issuance of restricted stock

Vested and delivered restricted stock units

Exercise of stock options

Shares issued in connection with warrant agreements

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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Net losses from foreign currency translation

Balances—October 31, 2020

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FINANCIAL INFORMATION

1 unchanged sentence

(In thousands) (Unaudited)

SIX MONTHS ENDED

NINE MONTHS ENDED

TREASURY STOCK

9 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—July 31, 2021

Reclassification of equity component to mezzanine equity related to early converted senior notes outstanding―net

Net losses from foreign currency translation

Balances—October 30, 2021

Balances—February 1, 2020

5 unchanged sentences

Retirement of treasury stock

Shares issued in connection with warrant agreements

Settlement of convertible senior notes

3 unchanged sentences

Net gains from foreign currency translation

Balances—August 1, 2020

Balances—October 31, 2020

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

FINANCIAL INFORMATION

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2021 THIRD QUARTER FORM 10-Q | 7

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

SIX MONTHS ENDED

NINE MONTHS ENDED

CASH FLOWS FROM OPERATING ACTIVITIES

6 unchanged sentences

Amortization of debt discount

Accretion of debt discount upon settlement of debt

Stock-based compensation expense

2 unchanged sentences

Deferred income taxes

Loss on extinguishment of debt

(Gain) loss on extinguishment of debt

Share of equity method investments losses

Other non-cash items

Cash paid attributable to accretion of debt discount upon settlement of debt

Change in assets and liabilities:

9 unchanged sentences

Net cash provided by operating activities

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FINANCIAL INFORMATION

1 unchanged sentence

(In thousands) (Unaudited)

SIX MONTHS ENDED

NINE MONTHS ENDED

CASH FLOWS FROM INVESTING ACTIVITIES

1 unchanged sentence

Equity method investments

Acquisition of business and assets

Proceeds from sale of assets

3 unchanged sentences

Repayments under asset based credit facility

Borrowings under term loan

Repayments under promissory and equipment security notes

4 unchanged sentences

Tax withholdings related to issuance of stock-based awards

Net cash used in financing activities

Net cash provided by (used in) financing activities

Effects of foreign currency exchange rate translation

Net increase (decrease) in cash and cash equivalents and restricted cash equivalents

Net increase in cash and cash equivalents and restricted cash equivalents

Cash and cash equivalents and restricted cash equivalents

13 unchanged sentences

FINANCIAL INFORMATION

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3 unchanged sentences

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

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.

As of October 30, 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 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.

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 October 30, 2021, and the results of operations for the three and nine months ended October 30, 2021 and October 31, 2020.

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

3 unchanged sentences

We have assessed various accounting estimates and other matters, including those that require consideration of forecasted financial information, in context of the unknown future impacts of the novel coronavirus disease (“COVID-19” or “the pandemic”) using information that is reasonably available to us at this time.

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 and six months ended July 31, 2021.

Our current assessment of these estimates is included in our condensed consolidated financial statements as of and for the three and nine months ended October 30, 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 and six months ended July 31, 2021 presented herein are not necessarily indicative of the results to be expected for the full fiscal year.

The results of operations for the three and nine months ended October 30, 2021 and October 31, 2020 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

1 unchanged sentence

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 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.

In addition, various constraints in our merchandise supply chain have resulted in some delays in our ability to convert business demand into revenues at normal historical rates.

We anticipate that the backlog of orders for merchandise from our vendors, coupled with business conditions related to the pandemic, will continue to adversely affect the capacity of our vendors and supply chain to meet our merchandise demand levels during fiscal 2021.

The pandemic has continued since the initial outbreak and has included spikes and operating restrictions in various locations around the world, as well as new strains of the COVID-19 virus such as the “Delta” and other variants.

In our initial response to the pandemic, 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 since the second quarter of fiscal 2020 as a result of both the reopening of most of our retail locations and strong consumer demand for our products.

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

All of our retail locations and Restaurants were open during the third quarter of fiscal 2021.

While our business 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.

In addition, various constraints in our supply chain, including port delays, have resulted in some delays in our ability to convert business demand into revenues at normal historical rates.

We anticipate that the backlog of orders for merchandise from our vendors, coupled with business conditions related to the evolving nature of the pandemic, will continue to adversely affect the capacity of our vendors and supply chain to meet our merchandise demand levels during the remainder of fiscal 2021.

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, 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.

9 unchanged sentences

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

Tenant allowance receivable

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

8 unchanged sentences

Total other non-current assets

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

(1) Presented net of accumulated amortization of $ 2.9 million and $ 0.5 million as of October 30, 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 six months ended July 31, 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 nine months ended October 30, 2021 ( in thousands ):

Tradenames, trademarks and other intangible assets

11 unchanged sentences

FINANCIAL INFORMATION

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NOTE 5—EQUITY METHOD INVESTMENTS

1 unchanged sentence

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 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.

During the three and nine months ended October 30, 2021, we recorded our proportionate share of equity method investments losses of $ 2.3 million and $ 6.9 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 October 30, 2021.

As of October 30, 2021, $ 16.1 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.

In the third quarter of fiscal 2021, we purchased an additional 20 % interest in one of the Aspen LLCs, which continues to be accounted for as an equity method investment.

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

3 unchanged sentences

Accrued freight and duty

Accrued sales taxes

Accrued occupancy

Accrued sales taxes

Accrued professional fees

3 unchanged sentences

Total accounts payable and accrued expenses

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FINANCIAL INFORMATION

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

Current portion of equipment promissory notes

Allowance for sales returns

Unredeemed gift card and merchandise credit liability

Current portion of term loan

Current portion of equipment promissory notes

Finance lease liabilities

Product recall reserve

Federal and state tax payable

3 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 July 31, 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 October 30, 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 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.

During the three months ended October 30, 2021 and October 31, 2020, we recognized $ 4.4 million and $ 5.6 million, respectively, of revenue related to previous deferrals related to our gift cards.

During the nine months ended October 30, 2021 and October 31, 2020, we recognized $ 14.2 million and $ 16.2 million, respectively, of revenue related to previous deferrals related to our gift cards.

During the three months ended October 30, 2021 and October 31, 2020, we recorded gift card breakage of $ 0.5 million and $ 0.2 million, respectively.

During the nine months ended October 30, 2021 and October 31, 2020, we recorded gift card breakage of $ 1.4 million and $ 1.0 million, respectively.

We expect that approximately 75 % of the remaining gift card liabilities as of October 30, 2021 will be recognized when the gift cards are redeemed by customers.

NOTE 7—OTHER NON-CURRENT OBLIGATIONS

1 unchanged sentence

Deferred payroll taxes

Rollover units and profit interests (1)

Unrecognized tax benefits

1 unchanged sentence

Total other non-current obligations

(1) Represents rollover units and profit interests associated with the acquisition of Waterworks.

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

NINE MONTHS ENDED

Operating lease cost (1)

9 unchanged sentences

(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 $ 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.

The amounts primarily represent contingent rent based on a percentage of retail sales over contractual levels of $ 6.9 million and $ 4.0 million for the three months ended October 30, 2021 and October 31, 2020, respectively, and $ 18.8 million and $ 8.3 million for the nine months ended October 30, 2021 and October 31, 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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(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 $ 152.3 million and $ 133.0 million as of July 31, 2021 and January 30, 2021, respectively.

(2) Finance lease right-of-use assets are recorded net of accumulated amortization of $ 162.9 million and $ 133.0 million as of October 30, 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.

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

The maturities of lease liabilities are as follows as of October 30, 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 $ 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.

Total lease payments exclude $ 719.6 million of legally binding payments under the non-cancellable term for leases signed but not yet commenced under our accounting policy as of October 30, 2021, of which $ 6.4 million, $ 31.8 million, $ 37.5 million, $ 41.8 million, $ 44.0 million and $ 42.8 million will be paid in the remainder of fiscal 2021, fiscal 2022, fiscal 2023, fiscal 2024, fiscal 2025 and fiscal 2026, respectively, and $ 515.3 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.

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(2) Excludes future commitments under short-term lease agreements of $ 0.9 million as of October 30, 2021.

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

Supplemental information related to leases consists of the following:

SIX MONTHS ENDED

NINE MONTHS ENDED

Weighted-average remaining lease term (years)

5 unchanged sentences

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

SIX MONTHS ENDED

NINE MONTHS ENDED

Cash paid for amounts included in the measurement of lease liabilities

17 unchanged sentences

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

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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 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.

The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended September 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 December 31, 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.

4 unchanged sentences

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 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 both the three months ended October 30, 2021 and October 31, 2020, we recorded $ 0.2 million related to the amortization of debt issuance costs related to the 2024 Notes, respectively.

During both the nine months ended October 30, 2021 and October 31, 2020, we recorded $ 0.5 million related to the amortization of debt issuance costs related to the 2024 Notes, respectively.

During the second quarter of fiscal 2021, holders of $ 67.2 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.

During the three months ended October 30, 2021, we paid $ 67.2 million in cash and delivered 219,738 shares of common stock to settle the early conversion of these 2024 Notes.

As a result, we recognized a loss on extinguishment of the liability component of $ 5.4 million in the three months ended October 30, 2021.

We also received 219,728 shares of common stock from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2024 Notes as described below, and therefore, on a net basis issued ten shares of our common stock in respect to such settlement of the converted 2024 Notes.

During the third quarter of fiscal 2021, holders of $ 56.7 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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As of October 30, 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 October 30, 2021.

During the fourth quarter of fiscal 2021, we expect to pay $ 56.7 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 October 30, 2021, we reclassified $ 56.7 million of the outstanding principal balance to current liabilities , as well as reclassified $ 8.6 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 October 30, 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 within other non-current obligations on our condensed consolidated balance sheets.

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FINANCIAL INFORMATION

4 unchanged sentences

Equity component (2)

(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.

(1) Includes $ 56.7 million classified within total current liabilities on the condensed consolidated balance sheets as of October 30, 2021 for the early conversion of $ 56.7 million in principal amount of 2024 Notes to be settled in the fourth quarter of fiscal 2021.

(2) Includes $ 8.6 million in mezzanine equity and the remaining amount in additional paid-in capital on the condensed consolidated balance sheets as of October 30, 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.

We recorded interest expense of $ 3.7 million and $ 4.0 million for the amortization of the debt discount related to the 2024 Notes during the three months ended October 30, 2021 and October 31, 2020, respectively.

We recorded interest expense of $ 12.0 million and $ 11.8 million for the amortization of the debt discount related to the 2024 Notes during the nine months ended October 30, 2021 and October 31, 2020, respectively.

2024 Notes—Convertible Bond Hedge and Warrant Transactions

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FINANCIAL INFORMATION

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$ 335 million 0.00 % Convertible Senior Notes due 2023

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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 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.

The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended September 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 December 31, 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.

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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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FINANCIAL INFORMATION

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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 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.

During both the three months ended October 30, 2021 and October 31, 2020, we recorded $ 0.2 million related to the amortization of debt issuance costs, respectively.

During both the nine months ended October 30, 2021 and October 31, 2020, we recorded $ 0.7 million related to the amortization of debt issuance costs, respectively.

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.

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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.

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.

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 two shares of our common stock in respect to such settlement of the converted 2023 Notes.

During the second and third quarters 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.

As a result, we recognized a loss on extinguishment of the liability component 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 one share of our common stock in respect to such settlement of the converted 2023 Notes.

During the third quarter of fiscal 2021, holders of $ 173.8 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 October 30, 2021, we paid $ 173.8 million in cash and delivered 644,352 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 $ 11.7 million in the three months ended October 30, 2021.

We also received 644,346 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 six shares 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.

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During the third quarter of fiscal 2021, holders of $ 53.5 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.

As of October 30, 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 October 30, 2021.

During the fourth quarter of fiscal 2021, we expect to pay $ 53.5 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 October 30, 2021, we reclassified $ 53.5 million of the outstanding principal balance to current liabilities, as well as reclassified $ 5.0 million of the equity component of the 2023 Notes to mezzanine equity from permanent equity on our condensed consolidated balance sheets as of October 30, 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 October 30, 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 within other non-current obligations 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 ):

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Equity component (2)

(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.

(1) Includes $ 53.5 million classified within total current liabilities on the condensed consolidated balance sheets as of October 30, 2021 for the early conversion of $ 53.5 million in principal amount of 2023 Notes to be settled in the fourth quarter of fiscal 2021.

(2) Includes $ 5.0 million in mezzanine equity and the remaining amount in additional paid-in capital on the condensed consolidated balance sheets as of October 30, 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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We recorded interest expense of $ 3.1 million and $ 4.4 million for the amortization of the debt discount related to the 2023 Notes during the three months ended October 30, 2021 and October 31, 2020, respectively.

We recorded interest expense of $ 12.3 million and $ 13.1 million for the amortization of the debt discount related to the 2023 Notes during the nine months ended October 30, 2021 and October 31, 2020, respectively.

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FINANCIAL INFORMATION

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Asset based credit facility (1)

Term loan credit agreement (2)

Equipment promissory notes (3)

Total credit facilities

(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.

(1) Deferred financing fees associated with the asset based credit facility as of October 30, 2021 and January 30, 2021 were $ 4.4 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.

entered into the ABL Credit Agreement (defined below) which extended the maturity date of the revolving line of credit from June 28, 2022 to July 29, 2026.

(2) Represents the Term Loan Credit Agreement (defined below), of which $ 1,980.0 million outstanding and $ 20.0 million outstanding was included in term loan—net and other current liabilities on the condensed consolidated balance sheets, respectively.

The maturity date of the Term Loan Credit Agreement is October 20, 2028.

(3) Represents total equipment security notes secured by certain of our property and equipment, of which $ 18.9 million outstanding was included in other current liabilities on the condensed consolidated balance sheets.

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Asset Based Credit Facility

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 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.

On August 3, 2011 , Restoration Hardware, Inc.

(“RHI”), a wholly-owned subsidiary of RH, along with its Canadian subsidiary, Restoration Hardware Canada, Inc., entered into the Ninth Amended and Restated Credit Agreement (as amended prior to June 28, 2017, the “Original Credit Agreement”) by and among RHI, Restoration Hardware Canada, Inc., certain other 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 (the “ABL Agent”).

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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.

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On June 28, 2017 , RHI entered into the Eleventh Amended and Restated Credit Agreement (as amended prior to July 29, 2021, the “11 th A&R Credit Agreement”) by and among RHI, Restoration Hardware Canada, Inc., certain other subsidiaries of RH named therein as borrowers or guarantors, the lenders party thereto and the ABL Agent, which amended and restated the Original Credit Agreement.

On July 29, 2021 , RHI entered into the Twelfth Amended and Restated Credit Agreement (as amended, the “ABL Credit Agreement”) by and among RHI, Restoration Hardware Canada, Inc., certain other subsidiaries of RH named therein as borrowers or guarantors, the lenders party thereto and the ABL Agent, which amended and restated the 11 th A&R Credit Agreement.

The ABL 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 ABL 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 ABL 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 ABL Credit Agreement are met.

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

The availability of credit at any given time under the ABL Credit Agreement will be constrained by the terms and conditions of the ABL 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 ABL Credit Agreement.

All obligations under the ABL 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) bear interest, at the borrower’s option, at either the base rate or London Inter-bank Offered Rate (“LIBOR”) subject to a 0.00 % LIBOR floor (or, in the case of the Canadian borrowings, the “BA Rate” or the “Canadian Prime Rate”, as such terms are defined in the ABL Credit Agreement, for the Canadian borrowings denominated in Canadian dollars, or the “U.S.

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

The ABL Credit Agreement contains various restrictive and affirmative covenants, including required financial reporting, limitations on granting certain liens, limitations on making certain loans or investments, limitations on incurring additional debt, restricted payment limitations limiting the payment of dividends and certain other transactions and distributions, limitations on transactions with affiliates, along with other restrictions and limitations similar to those frequently found in credit agreements of a similar type and size.

The ABL 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 ABL Credit Agreement (the “FCCR Covenant”).

The FCCR Covenant only applies in certain limited circumstances, including when the unused availability under the ABL 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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As of October 30, 2021, RHI was in compliance with the FCCR Covenant.

The ABL 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 ABL 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 ABL Credit Agreement contains customary representations and warranties, events of defaults and other customary terms and conditions for an asset based credit facility.

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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.

The availability of the revolving line of credit at any given time under the ABL Credit Agreement is limited by the terms and conditions of the ABL 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 ABL 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.

As of October 30, 2021, the amount available for borrowing under the revolving line of credit under the ABL Credit Agreement was $ 333.7 million, net of $ 19.9 million in outstanding letters of credit.

Term Loan Credit Agreement

On October 20, 2021 , RHI entered into a Term Loan Credit Agreement (the “Term Loan Credit Agreement”) by and among RHI as the borrower, the lenders party thereto and Bank of America, N.A.

as administrative agent and collateral agent (in such capacities, the “Term Agent”) with respect to an initial term loan (the “Term Loan”) in an aggregate principal amount equal to $ 2,000,000,000 with a maturity date of October 20, 2028 .

The Term Loan bears interest at an annual rate based on LIBOR subject to a 0.50 % LIBOR floor plus an interest rate margin of 2.50 % (with a stepdown of the interest rate margin if RHI achieves a specified public corporate family rating).

LIBOR is a floating interest rate that resets periodically during the life of the Term Loan.

At the date of borrowing, the interest rate was set at the LIBOR floor of 0.50 % plus 2.50 % and the Term Loan was issued at a discount of 0.50 % to face value.

The Term Loan Credit Agreement contains customary provisions addressing future transition from LIBOR.

All obligations under the Term Loan are guaranteed by certain domestic subsidiaries of RHI.

Further, RHI and such subsidiaries have granted a security interest in substantially all of their assets (subject to customary and other exceptions) to secure the Term Loan.

Substantially all of the collateral securing the Term Loan also secures the loans and other credit extensions under the ABL Credit Agreement.

On October 20, 2021, in connection with the Term Loan Credit Agreement, RHI and certain other subsidiaries of RH party to the Term Loan Credit Agreement and the ABL Credit Agreement, as the case may be, entered into an Intercreditor Agreement (the “Intercreditor Agreement”) with the Term Agent and the ABL Agent.

The Intercreditor Agreement establishes various customary inter-lender terms, including, without limitation, with respect to priority of liens, permitted actions by each party, application of proceeds, exercise of remedies in case of default, releases of liens and certain limitations on the amendment of the ABL Credit Agreement and the Term Loan Credit Agreement without the consent of the other parties.

The borrowings under the Term Loan Credit Agreement may be prepaid in whole or in part at any time, subject to a prepayment premium of 1.0 % in the event the facility is prepaid or repriced within the six months following the closing date of the Term Loan Credit Agreement.

The Term Loan Credit Agreement contains various restrictive and affirmative covenants, including required financial reporting, limitations on granting certain liens, limitations on making certain loans or investments, limitations on incurring additional debt, restricted payment limitations limiting the payment of dividends and certain other transactions and distributions, limitations on transactions with affiliates, along with other restrictions and limitations similar to those frequently found in credit agreements of a similar type and size, but provides for unlimited exceptions in the case of incurring indebtedness, granting of liens and making investments, dividend payments, and payments of material junior indebtedness, subject to satisfying specified leverage ratio tests.

The Term Loan Credit Agreement does not contain a financial maintenance covenant.

The Term Loan Credit Agreement contains customary representations and warranties, events of defaults and other customary terms and conditions for a term loan credit agreement.

Equipment Loan Facility

On September 5, 2017, Restoration Hardware, Inc.

entered into a Master Loan and Security Agreement with Banc of America Leasing & Capital, LLC (“BAL”) pursuant to which BAL and we agreed that BAL would finance certain equipment of ours from time to time, with each such equipment financing to be evidenced by an equipment security note setting forth the terms for each particular equipment loan.

On September 5, 2017, RHI entered into a Master Loan and Security Agreement with Banc of America Leasing & Capital, LLC (“BAL”) pursuant to which BAL and we agreed that BAL would finance certain equipment of ours from time to time, with each such equipment financing to be evidenced by an equipment security note setting forth the terms for each particular equipment loan.

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

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We are required to make monthly installment payments under the equipment security notes.

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NOTE 11—FAIR VALUE MEASUREMENTS

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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

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The fair value of the Waterworks reporting unit tradename was determined based on unobservable (Level 3) inputs and valuation techniques, as discussed in Note 4— Goodwill, Tradenames, Trademarks and Other Intangible Assets .

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FINANCIAL INFORMATION

The fair value of the acquired goodwill and tradename associated with acquisitions by the RH Segment in fiscal 2020 were determined based on unobservable (Level 3) inputs and valuation techniques.

The fair value of the real estate assets associated with our investment in the Aspen LLCs in fiscal 2020, as discussed in Note 5— Equity Method Investments , were determined based on unobservable (Level 3) inputs and valuation techniques.

Upon settlement of our convertible senior notes, including the settlements in which holders of the 2023 Notes and 2024 Notes elected to exercise the early conversion option, we recognize a gain or loss on extinguishment of debt in the condensed consolidated statements of income, which represents the difference between the carrying value and fair value of the convertible senior notes immediately prior to the settlement date.

The fair value of each of the 2023 Notes and 2024 Notes related to the settlement of the early conversions was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including the trading price of our convertible notes, when available, our common stock price and interest rates based on similar debt issued by parties with credit ratings similar to ours (Level 2).

NOTE 12—INCOME TAXES

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.

We recorded income tax expense of $ 54.4 million and $ 49.2 million in the three months ended October 30, 2021 and October 31, 2020, respectively.

We recorded income tax expense of $ 99.1 million and $ 66.6 million in the nine months ended October 30, 2021 and October 31, 2020, respectively.

The effective tax rate was 22.8 % and 51.4 % for the three months ended October 30, 2021 and October 31, 2020, respectively.

The effective tax rate was 15.5 % and 32.0 % for the nine months ended October 30, 2021 and October 31, 2020, respectively.

The decrease in our effective tax rate for both the three and nine months ended October 30, 2021 as compared to the three and nine months ended October 31, 2020 is primarily due to higher discrete tax benefits related to net excess tax windfalls from stock-based compensation in fiscal 2021 as compared to fiscal 2020 and non-deductible stock-based compensation in fiscal 2020.

As of October 30, 2021, we had $ 8.7 million of unrecognized tax benefits, of which $ 8.0 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 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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FINANCIAL INFORMATION

As of October 30, 2021, we had $ 6.2 million of exposures related to unrecognized tax benefits that are expected to decrease in the next 12 months .

NOTE 13—NET INCOME PER SHARE

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THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

Weighted-average shares—basic

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Refer to Note 9— Convertible Senior Notes.

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

FINANCIAL INFORMATION

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Dilutive options of 121,587 and 311,242 were excluded from the calculation of diluted net income per share for the three months ended October 30, 2021 and October 31, 2020, respectively, because their inclusion would have been anti-dilutive.

Dilutive options of 86,474 and 451,559 were excluded from the calculation of diluted net income per share for the nine months ended October 30, 2021 and October 31, 2020, respectively, because their inclusion would have been anti-dilutive.

NOTE 14—SHARE REPURCHASE PROGRAM AND SHARE RETIREMENTS

Share Repurchases Program

In 2018, our Board of Directors authorized a share repurchase program.

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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 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.

We did no t make any repurchases under this program during either the nine months ended October 30, 2021 or October 31, 2020.

The total current authorized size of the share repurchase program is up to $ 950 million (the “950 Million Repurchase Program”), of which $ 450 million remained available as of October 30, 2021 for future share investments.

Share Retirements

During the nine months ended October 31, 2020, we retired 600 shares of our common stock related to shares we had repurchased under equity plans and we retired 17 shares of our common stock related to shares we received upon the maturity of the 2020 Notes.

As a result of the retirements, we reclassified a total of $ 0.1 million from treasury stock to additional paid-in capital on the condensed consolidated balance sheets and on the condensed consolidated statements of stockholders’ equity as of October 31, 2020.

NOTE 15—STOCK-BASED COMPENSATION

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.

We recorded stock-based compensation expense of $ 12.0 million and $ 118.8 million during the three months ended October 30, 2021 and October 31, 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 $ 37.4 million and $ 131.5 million during the nine months ended October 30, 2021 and October 31, 2020, respectively.

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

2012 Stock Incentive Plan and 2012 Stock Option Plan

As of October 30, 2021, 7,844,306 options were outstanding with a weighted-average exercise price of $ 112.01 per share and 7,531,196 options were vested with a weighted-average exercise price of $ 106.68 per share.

The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of October 30, 2021 was $ 4,298 million, $ 4,166 million, and $ 3,746 million, respectively.

Stock options exercisable as of October 30, 2021 had a weighted-average remaining contractual life of 3.13 years.

As of October 30, 2021, the total unrecognized compensation expense related to unvested options was $ 112.8 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 4.96 years.

In addition, as of October 30, 2021, the total unrecognized compensation expense related to a fully vested option grant made to Mr.

Friedman in October 2020 was $ 39.0 million, which will be recognized on an accelerated basis through May 2025 (refer to Chairman and Chief Executive Officer Option Grant below).

As of October 30, 2021, we had 21,480 restricted stock units outstanding with a weighted-average grant date fair value of $ 278.37 per share.

During the three months ended October 30, 2021, 3,010 restricted stock units vested with a weighted-average grant date fair value of $ 47.67 per share.

During the nine months ended October 30, 2021, 68,770 restricted stock units vested with a weighted-average grant date fair value of $ 43.26 per share.

As of October 30, 2021, there was $ 4.2 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 2.29 years.

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Chairman and Chief Executive Officer Option Grant

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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 $ 5.8 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 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 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

In connection with the acquisition of Waterworks in May 2016, $ 1.5 million rollover units in the Waterworks subsidiary (the “Rollover Units”) were recorded as part of the transaction.

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 income.

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 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

In connection with the acquisition of Waterworks in May 2016, profit interests units in the Waterworks subsidiary (the “Profit Interests”) were issued to certain Waterworks associates.

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 income.

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

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.

The option will result in aggregate non-cash stock compensation expense of $ 173.6 million, of which $ 5.8 million and $ 17.6 million was recognized during the three and nine months ended October 30, 2021, respectively, and $ 111.2 million was recognized during the three months ended October 31, 2020 (which is included in the stock-based compensation expense noted above).

NOTE 16—COMMITMENTS AND CONTINGENCIES

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

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We had no material off balance sheet commitments as of October 30, 2021.

Contingencies

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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.

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Segment Information

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Depreciation and amortization

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SIX MONTHS ENDED

NINE 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 Real Estate Development segment share of equity method investments losses were $ 2.3 million and $ 6.9 million during the three and nine months ended October 30, 2021, respectively.

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

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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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THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

Operating income:

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THREE MONTHS ENDED

SIX MONTHS ENDED

NINE MONTHS ENDED

Non-furniture

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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.

As of October 30, 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.

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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 or six months ended July 31, 2021 and August 1, 2020.

No single customer accounted for more than 10 % of our revenues in the three and nine months ended October 30, 2021 and October 31, 2020.

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NOTE 18—BUSINESS COMBINATION

On August 28, 2020, we acquired a furniture business in North America, for total consideration of $ 15.0 million funded through available cash, of which $ 1.9 million was deposited into an escrow account for any potential post-closing adjustments.

We have deposited into escrow an additional $ 5.0 million, which represents a deferred acquisition-related payment subject to mutually agreed to conditions and expected to be paid over two years .

We believe that this addition to the RH platform further positions us as a leader in the luxury design market as we continue to enhance the RH product assortment.

For the three and nine months ended October 31, 2020, we incurred $ 0.6 million and $ 1.3 million, respectively, of acquisition-related costs associated with the transaction.

These costs and expenses include fees associated with financial, legal and accounting advisors, and employment-related costs, and are included in selling, general and administrative expenses on the condensed consolidated statements of income.

The following table summarizes the purchase price allocation based on the fair value of the assets acquired and liabilities assumed ( in thousands ):

Tangible assets acquired and liabilities assumed—net

The tradename has been assigned an indefinite life and therefore is not subject to amortization.

The goodwill, included in the RH Segment, is representative of the benefits and expected synergies from the integration of the acquired company’s products, leadership team and employees, which do not qualify for separate recognition as an intangible asset.

The tradename and goodwill are expected to be deductible for tax purposes.

Results of operations of the acquired company have been included in our condensed consolidated statements of income since the August 28, 2020 acquisition date.

Pro forma results of the acquired business have not been presented as the results were not considered material to our consolidated financial statements for any periods presented and would not have been material had the acquisition occurred at the beginning of fiscal 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