What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2022-03-30 compared with 2021-03-30 · 385 added, 525 removed, 1103 unchanged (45% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Comprehensive Income

Consolidated Statements of Stockholders’ Equity (Deficit)

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

PART II — FINANCIAL STATEMENTS

FORM 10-K | 65

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of RH and its subsidiaries (the “Company”) as of January 30, 2021 and February 1, 2020, and the related consolidated statements of income, comprehensive income, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended January 30, 2021, including the related notes (collectively referred to as the “consolidated financial statements”).

We have audited the accompanying consolidated balance sheets of RH and its subsidiaries (the “Company”) as of January 29, 2022 and January 30, 2021, and the related consolidated statements of income, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended January 29, 2022, including the related notes (collectively referred to as the “consolidated financial statements”).

We also have audited the Company's internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 30, 2021 and February 1, 2020, and the results of its operations and its cash flows for each of the three years in the period ended January 30, 2021 in conformity with accounting principles generally accepted in the United States of America.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 29, 2022 and January 30, 2021, and the results of its operations and its cash flows for each of the three years in the period ended January 29, 2022 in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for revenues from contracts with customers in fiscal 2018.

Basis for Opinions

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The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Initial Recognition of Investments in the Aspen LLCs

As described in Note 3 and Note 8 to the consolidated financial statements, the Company contributed capital of $99.2 million for its membership interest in three privately held limited liability companies (collectively, the “Aspen LLCs” or the “equity method investees”) that have the purpose of acquiring, developing, operating, and selling certain real estate projects in Aspen, Colorado.

As disclosed by management, these investments meet the criteria of variable interest entities (“VIEs”) and are not consolidated.

The Company accounts for its investments in the Aspen LLCs using the equity method of accounting because the Company has the ability to exercise significant influence over the VIEs but does not have the power to direct the most significant activities of each Aspen LLC and therefore is not the primary beneficiary.

In evaluating if the Company exerts control or significant influence, management considers factors such as the terms and structure of the investment agreement and the legal structure of the investee, including investor voting or other rights, and other agreements with the investee.

As of the investment date, management determined the fair value of the underlying assets and liabilities held by the Aspen LLCs for purposes of determining basis differences arising in connection with the investments.

The determination of fair value of the underlying real estate assets requires subjectivity and estimates, including the use of various valuation techniques and inputs, such as market price per square foot and assumed capitalization rate.

The principal considerations for our determination that performing procedures relating to the initial recognition of investments in the Aspen LLCs is a critical audit matter are the significant judgment by management (i) when identifying and evaluating terms and conditions in the agreements that impact the primary beneficiary assessment and initial recognition of the investments and (ii) when determining the fair value measurements of the underlying real estate assets.

This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to (i) the initial recognition of the investments and (ii) the significant assumptions related to market price per square foot and assumed capitalization rates used in the fair value measurements of the underlying real estate assets.

The audit effort involved professionals with specialized skill and knowledge.

Determination of the Classification of New Real Estate Lease Contracts

As described in Notes 3 and 11 to the consolidated financial statements, certain of the Company’s real estate leases are classified as finance leases.

Leases that do not meet the definition of a finance lease are considered operating leases.

For the year ended January 29, 2022, lease right-of-use assets obtained in exchange for lease obligations (net of lease terminations) totaled $172 million related to operating leases and $90 million related to finance leases, of which a significant portion of the operating and finance leases relates to new real estate leases.

Lease characteristics that management evaluates to determine lease classification include, but are not limited to, the reasonably certain lease term, incremental borrowing rate, and fair value of the leased asset.

The principal considerations for our determination that performing procedures relating to the determination of the classification of new real estate lease contracts is a critical audit matter are (i) the significant judgment by management when determining the classification of new real estate lease contracts based on its evaluation of the lease characteristics;

(ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the reasonably certain lease term, incremental borrowing rate, and fair value of the leased asset;

and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

PART II — FINANCIAL STATEMENTS

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Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of management’s controls over the initial recognition of the investments and over the fair value measurements of the underlying real estate assets.

These procedures also included, among others, (i) reading the purchase agreements and evaluating the terms and conditions that impact the primary beneficiary assessment and initial recognition of the investments and (ii) testing management’s process for determining the fair value measurements of the underlying real estate assets.

Testing management’s process for determining the fair value measurements included evaluating the appropriateness of the valuation methods, testing the completeness and accuracy of underlying data used in the fair value measurements and evaluating the reasonableness of significant assumptions related to market price per square foot and assumed capitalization rates.

Professionals with specialized skill and knowledge were used to assist in evaluating the terms and conditions in the agreements that impact initial recognition and in evaluating the related valuation methods and significant assumptions related to market price per square foot and assumed capitalization rates.

These procedures included testing the effectiveness of controls relating to lease accounting, including controls over management’s determination of the classification of new real estate lease contracts based on the lease characteristics.

These procedures also included, among others (i) reading the lease agreements;

(ii) testing management’s process for determining the classification of new real estate lease contracts based the lease characteristics;

(iii) testing the completeness and accuracy of the underlying data used;

and (iv) evaluating the reasonableness of the significant assumptions used by management related to the reasonably certain lease term, incremental borrowing rate, and fair value of the leased asset.

Evaluating management’s significant assumptions related to the reasonably certain lease term and incremental borrowing rate involved evaluating whether the significant assumptions used by management were reasonable considering (i) the current and past performance of the Company;

(ii) consistency with external market and industry data;

and (iii) whether the significant assumptions were consistent with evidence obtained in other areas of the audit.

Professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of the significant assumptions related to the incremental borrowing rate and fair value of the leased asset.

/s/ PricewaterhouseCoopers LLP

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Convertible senior notes due 2023—net

Convertible senior notes due 2024—net

Operating lease liabilities

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Asset based credit facility

Equipment promissory notes—net

Term loan—net

Convertible senior notes due 2023—net

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Total liabilities

87 | FORM 10-K

PART II — FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS (continued)

(In thousands, except share amounts)

Commitments and contingencies (Note 20)

Stockholders’ equity:

Preferred stock—$ 0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of January 30, 2021 and February 1, 2020

Preferred stock—$ 0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of January 29, 2022 and January 30, 2021

Common stock— $ 0.0001 par value per share, 180,000,000 shares authorized, 21,506,967 shares issued and outstanding as of January 29, 2022;

19,236,681 shares issued and outstanding as of February 1, 2020

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

Additional paid-in capital

Accumulated other comprehensive income (loss)

Accumulated deficit

Retained earnings (accumulated deficit)

Total stockholders’ equity

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

88 | FORM 10-K

PART II — FINANCIAL STATEMENTS

FORM 10-K | 69

CONSOLIDATED STATEMENTS OF INCOME

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Interest expense—net

Goodwill and tradename impairment

(Gain) loss on extinguishment of debt—net

Tradename impairment

(Gain) loss on extinguishment of debt

Other expense—net

Total other expenses

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

PART II — FINANCIAL STATEMENTS

70 | FORM 10-K

PART II — FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

90 | FORM 10-K

PART II — FINANCIAL STATEMENTS

FORM 10-K | 71

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

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TREASURY STOCK

STOCKHOLDERS'

COMPREHENSIVE

STOCKHOLDERS'

INCOME (LOSS)

Balances—February 2, 2019

( 1,000,326 )

Stock-based compensation

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( 2,170,154 )

Equity component value of convertible note issuance—net

Sale of common stock warrant

Purchase of convertible note hedge

Impact of Topic 606 adoption

Net losses from foreign currency translation

Balances—February 2, 2019

Stock-based compensation

Issuance of restricted stock

Vested and delivered restricted stock units

Exercise of stock options

Repurchases of common stock

( 2,167,396 )

Retirement of treasury stock

( 2,170,154 )

Shares issued in connection with warrant agreements

3 unchanged sentences

Conversion of convertible senior notes

91 | FORM 10-K

Net losses from foreign currency translation

PART II — FINANCIAL STATEMENTS

FORM 10-K | 72

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (continued)

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TREASURY STOCK

STOCKHOLDERS'

COMPREHENSIVE

STOCKHOLDERS'

INCOME (LOSS)

Net losses from foreign currency translation

Balances—February 1, 2020

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Balances—January 30, 2021

Stock-based compensation

Issuance of restricted stock

Vested and delivered restricted stock units

Exercise of stock options

Settlement of convertible senior notes

( 1,377,479 )

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

( 1,377,479 )

Net losses from foreign currency translation

Balances—January 29, 2022

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

92 | FORM 10-K

PART II — FINANCIAL STATEMENTS

FORM 10-K | 73

CONSOLIDATED STATEMENTS OF CASH FLOWS

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Non-cash operating lease cost

Goodwill and tradename impairment

Tradename impairment

Asset impairments

Asset held for sale (gain) loss

(Gain) loss on sale leaseback transaction

Amortization of debt discount

Accretion of debt discount upon settlement of debt

Stock-based compensation expense

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Deferred income taxes

(Gain) loss on extinguishment of debt—net

(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:

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Net cash used in investing activities

93 | FORM 10-K

PART II — FINANCIAL STATEMENTS

FORM 10-K | 74

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

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Repayments under asset based credit facility

( 1,008,970 )

Borrowings under term loans

Borrowings under term loan

Repayments under term loans

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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

Beginning of period—cash and cash equivalents

Beginning of period—restricted cash equivalents (construction related deposits)

Beginning of period—restricted cash equivalents (acquisition related escrow deposits)

Beginning of period—cash and cash equivalents

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Cash paid for taxes

PART II — FINANCIAL STATEMENTS

FORM 10-K | 75

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(In thousands)

Non-cash transactions:

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

Landlord asset additions from unpaid construction related deposits

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

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NOTE 1—NATURE OF BUSINESS

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 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.

RH, a Delaware corporation, together with its subsidiaries (collectively, “we,” “us,” or the “Company”), is a leading retailer and luxury lifestyle brand operating primarily in the home furnishings market.

Our curated and fully integrated assortments are presented consistently across our sales channels, including our retail locations, websites and Source Books.

We offer merchandise assortments across a number of categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, and child and teen furnishings.

As of January 29, 2022, we operated a total of 67 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.

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On December 15, 2016, we filed a Certificate of Amendment to our Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to change our name to “RH,” effective January 1, 2017.

Recent Developments—COVID-19

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

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 COVID-19 affecting our Galleries and hospitality locations have fluctuated during the fourth quarter of fiscal 2020 and continuing into the first quarter of 2021 based upon changes in local conditions and regulations.

As of March 24, 2021 we had reopened all of our Galleries and Outlets, and nine out of ten of our Restaurants although many of our Restaurants were continuing to conduct business under occupancy limitations and other operational restrictions.

Our overall customer demand in specific markets during fiscal 2020 has generally correlated favorably with our customers’ ability to access our Galleries and Outlets.

Although our business has strengthened during the period from the second quarter of fiscal 2020 and continuing into the first quarter of fiscal 2021, 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 business conditions related to COVID-19 will continue to adversely affect the capacity of our vendors and supply chain to meet our merchandise demand levels during fiscal 2021.

We expect that our supply chain may catch up to demand in the second half of fiscal 2021, but business circumstances and operational conditions in numerous international locations where our vendors operate cannot be predicted with certainty.

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 business and our ability to source products.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 95

In light of the COVID-19 pandemic, 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.

For example, real estate development counterparties with respect to some of our Gallery developments have withdrawn from these projects as a result of capital or liquidity constraints due to COVID-19 related difficulties, and these and other similar factors may impact the timing or scope of some of our new Galleries including delays in our previous plans to open a number of our international locations.

Impact of the COVID-19 Pandemic upon our Financial Condition and Results of Operations

We have experienced a significant improvement in our business during fiscal 2021 despite the ongoing challenges presented by the COVID-19 pandemic and the disruption it has caused in our business operations beginning in the first quarter of fiscal 2020 and throughout fiscal 2021.

Our performance demonstrates both the desirability of our exclusive products and our ability to overcome supply chain challenges, including port delays, which have impacted our ability to convert business demand into revenues at normal historical rates.

We have continued to navigate changes in operational restrictions based upon changes in local conditions and regulations, and as pandemic-related restrictions continue to be lifted in fiscal 2022 we may see consumer spending patterns shift away from spending on the home and home-related categories, such as home furnishings, and consumers return to pre-COVID consumption trends, such as spending on travel and leisure, and other activities.

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 Item 1A — Risk Factors in Part I of this Annual Report on Form 10-K.

NOTE 3—SIGNIFICANT ACCOUNTING POLICIES

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Accordingly, all intercompany balances and transactions have been eliminated through the consolidation process.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 77

Our fiscal year ends on the Saturday closest to January 31.

As a result, our fiscal year may include 53 weeks.

The fiscal years ended January 30, 2021 (“fiscal 2020”), February 1, 2020 (“fiscal 2019”) and February 2, 2019 (“fiscal 2018”) each consisted of 52 weeks.

The fiscal years ended January 29, 2022 (“fiscal 2021”), January 30, 2021 (“fiscal 2020) and February 1, 2020 (“fiscal 2019”) each consisted of 52 weeks.

Use of Accounting Estimates

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Concentration of Credit Risk

We maintain our cash and cash equivalent accounts in financial institutions in both U.S.

dollar and Canadian dollar denominations.

Accounts at the U.S.

institutions are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 and accounts at the Canadian institutions are insured by the Canada Deposit Insurance Corporation (“CDIC”) up to $100,000 Canadian dollars.

As of January 30, 2021 and February 1, 2020, and at various times throughout these fiscal years, we had cash in financial institutions in excess of the amount insured by the FDIC and CDIC.

We maintain our cash and cash equivalent accounts in high-quality financial institutions.

The amount of cash and cash equivalents held with certain financial institutions exceeds government-insured limits.

We perform ongoing evaluations of these institutions to limit our concentration of credit risk.

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Accounts receivable consist primarily of receivables from our credit card processors for sales transactions, receivables related to our Contract business and other miscellaneous receivables.

Accounts receivable is presented net of allowance for doubtful accounts, which is recorded on a specific identification basis.

The allowance for doubtful accounts was $ 3.3 million and $ 2.2 million as of January 30, 2021 and February 1, 2020, respectively.

Accounts receivable is presented net of allowance for expected credit losses, which is recorded on a specific identification basis, and was $ 3.6 million and $ 3.3 million as of January 29, 2022 and January 30, 2021, respectively.

Merchandise Inventories

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In addition, we estimate and accrue for inventory shrinkage.

96 | FORM 10-K

PART II — FINANCIAL STATEMENTS

Our inventory reserves contain uncertainties that require us to make assumptions and to apply judgment regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends.

We adjust inventory reserves for net realizable value and obsolescence based on trends, aging reports, specific identification and estimates of future retail sales prices.

Reserves for shrinkage are estimated and recorded throughout the year as a percentage of shipped sales for the direct channels, and as a percentage of cost of goods sold for the outlet business, based on historical shrinkage results, current inventory levels and results of statistical sampling, where applicable.

Actual shrinkage is recorded throughout the year based upon periodic physical inventory counts.

Actual inventory shrinkage and obsolescence can vary from estimates due to factors including the volume of inventory movement and execution against loss prevention initiatives in our distribution centers, home delivery center locations, off-site storage locations and with our third-party transportation providers.

Our inventory reserve balances were $ 23.8 million and $ 25.6 million as of January 30, 2021 and February 1, 2020, respectively.

Our inventory reserve balances were $ 24 million as of both January 29, 2022 and January 30, 2021.

Product Recalls

During fiscal 2020, fiscal 2019 and fiscal 2018, we initiated product recalls for certain of our products, as well as adjusted accruals related to certain product recalls previously initiated due to changes in estimates based on customer response and vendor and insurance recoveries.

Product recalls had the following effect on our income before income taxes (in thousands) :

(Increase) decrease to net revenues

Increase (decrease) to cost of goods sold

(Increase) decrease to gross profit

Increase (decrease) to selling, general and administrative expenses

(Increase) decrease to income before income taxes

The product recall accrual as of January 30, 2021 and February 1, 2020 was $ 8.2 million and $ 2.1 million, respectively, and is included in other current liabilities on the consolidated balance sheets.

When necessary, we initiate product recalls for certain of our products, as well as adjusted accruals related to certain product recalls previously initiated due to changes in estimates based on customer response and vendor and insurance recoveries.

The product recall accrual was $ 5.5 million and $ 8.2 million as of January 29, 2022 and January 30, 2021, respectively, and is included in other current liabilities on the consolidated balance sheets.

78 | FORM 10-K

PART II — FINANCIAL STATEMENTS

Advertising Expenses

Advertising expenses primarily represent the costs associated with our catalog mailings, as well as print and website marketing.

Advertising expenses primarily represent the costs associated with our catalog mailings, which we refer to as Source Books, as well as print and website marketing.

Total advertising expense, which is recorded in selling, general and administrative expenses on the consolidated statements of income, was $ 40 million, $ 59 million and $ 108 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively.

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In the case of multiple printings of a Source Book, the creative costs will be expensed in full upon the initial delivery of Source Books to the carrier.

We had $ 19.1 million and $ 13.7 million of capitalized catalog costs as of January 30, 2021 and February 1, 2020, respectively, which are included in prepaid expense and other current assets on the consolidated balance sheets.

We had $ 22 million and $ 19 million of capitalized catalog costs as of January 29, 2022 and January 30, 2021, respectively, which are included in prepaid expense and other current assets on the consolidated balance sheets.

Website and Print Advertising

Website and print advertising expenses, which include e-commerce advertising, web creative content and direct marketing activities such as print media, radio and other media advertising, are expensed as incurred or upon the release of the content or the initial advertisement.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 97

Property and Equipment

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3 to 10 years

The cost of leasehold improvements is amortized over the lesser of the useful life of the asset or the applicable lease term, which could include option periods reasonably certain to be exercised.

We expense all internal-use software costs incurred in the preliminary project stage and capitalize certain direct costs associated with the development and purchase of internal-use software, including external costs of materials and services and internal payroll costs related to the software project, within property and equipment.

The cost of leasehold improvements is amortized over the lesser of the useful life of the asset or the reasonably certain lease term.

We expense all internal-use software and website development costs incurred in the preliminary project stage and capitalize certain direct costs associated with the development and purchase of internal-use software or website development costs, including external costs of materials and services and internal payroll costs related to the software project, within property and equipment.

Capitalized costs are amortized on a straight-line basis over the estimated useful lives of the software, generally between three and ten years .

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Upon designation as an asset held for sale, the carrying value of the asset is recorded at the lower of its carrying value or its estimated fair value less estimated costs to sell, and we cease depreciating the asset.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 79

Lease Accounting

We lease nearly all of our retail and outlet store locations, corporate headquarters, distribution centers and home delivery center locations, as well as other storage and office space.

We lease nearly all of our retail and outlet locations, corporate headquarters, distribution centers and home delivery center locations, as well as other storage and office space.

The initial lease terms of our real estate leases generally range from ten to fifteen years , and certain leases contain renewal options for up to an additional 25 years , the exercise of which is at our sole discretion.

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Tenant allowances that are reasonably certain to be received subsequent to lease commencement are reflected as a reduction of both the lease liabilities and right-of-use assets on the consolidated balance sheets at the commencement date.

98 | FORM 10-K

PART II — FINANCIAL STATEMENTS

In the case of leases with associated construction, tenant allowances are provided for us to design and build the leased asset.

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Certain of our real estate and equipment leases are classified as finance leases.

Lease characteristics that we evaluate to determine lease classification include, but are not limited to, the reasonably certain lease term, the economic life and fair value of the leased asset.

Lease characteristics that we evaluate to determine lease classification include, but are not limited to, the reasonably certain lease term, incremental borrowing rate and fair value of the leased asset.

Additionally, the economic life of the leased asset impacts the lease classification, particularly related to historical buildings that tend to have longer lives.

Lease related assets under such classification are included in “finance lease right-of-use assets” within property and equipment—net on the consolidated balance sheets.

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While we believe our estimates and judgments in determining the lease term are reasonable, future events may occur which may require us to reassess this determination.

80 | FORM 10-K

PART II — FINANCIAL STATEMENTS

Leases, or lease extensions, with a term of twelve months or less are not recorded on the consolidated balance sheets, and we recognize lease expense for these leases on a straight-line basis over the lease term.

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Changes due to differences between the variable lease payments estimated at least commencement and actual amounts incurred are recognized in the consolidated statements of income in the period such costs are incurred.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 99

Lease concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in the rights of the lessor or our obligations as the lessee are accounted for as if no change to the lease contract were made.

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We account for COVID-19 related rent abatements as variable lease payments on the consolidated statements of income.

Lease concessions for operating and finance lease agreements included in accounts payable and accrued expenses on the consolidated balance sheets as of January 30, 2021 were $ 4.6 million.

Lease concessions for operating and finance lease agreements included in accounts payable and accrued expenses on the consolidated balance sheets as of January 29, 2022 and January 30, 2021 were not material.

Incremental Borrowing Rate

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The IBR is computed as the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the total lease payments in a similar economic environment.

We utilize our asset based credit facility as the basis for determining the applicable IBR for each lease.

We utilize our outstanding debt facilities, including our asset based credit facility or our Term Loan Credit Agreement issued in October 2021, as the basis for determining the applicable IBR for each lease.

We estimate the incremental borrowing rate for each lease primarily by reference to yield rates on debt issuances by companies of a similar credit rating, the weighted-average lease term and adjustments for differences between the yield rates and the actual term of the credit facility.

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While determining fair value requires a variety of input assumptions and judgment, we believe our estimates of fair value are reasonable.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 81

Construction Related Activities

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If the asset and liability cannot be derecognized, we account for the agreement as a debt-like arrangement.

100 | FORM 10-K

PART II — FINANCIAL STATEMENTS

If we are involved in a debt-like arrangement for a non-real estate asset under construction for which we plan to lease such asset upon construction completion and make deposits during the construction period, we recognize the related deposits as “Deposits on asset under construction” within other non-current assets on the consolidated balance sheets (refer to Note 4— Prepaid Expense and Other Assets ).

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Sale-Leaseback Activities

We occasionally enter into sale-leaseback transactions to finance certain property acquisitions and capital expenditures, pursuant to which we sell the property to a third party and agrees to lease the property back for a certain period of time.

To determine whether the transfer of the property should be accounted for as a sale, we evaluate whether it has transferred control to the third party in accordance with the guidance set forth in Topic 606.

We occasionally enter into sale-leaseback transactions to finance certain property acquisitions and capital expenditures, pursuant to which we sell the property to a third party and agree to lease the property back for a certain period of time.

To determine whether the transfer of the property should be accounted for as a sale, we evaluate whether we have transferred control to the third party in accordance with the guidance set forth in Topic 606.

If the transfer of the asset is a sale at market terms, we recognize the transaction price for the sale based on the cash proceeds received, derecognize the carrying amount of the underlying asset and recognize a gain or loss in the consolidated statements of income for any difference between the carrying value of the asset and the transaction price.

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We do not amortize our intangible assets as we define the life of these assets as indefinite.

82 | FORM 10-K

PART II — FINANCIAL STATEMENTS

We evaluate goodwill annually to determine whether it is impaired or whenever events occur or circumstances change that would indicate that the fair value of a reporting unit is less than its carrying amount.

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If multiple valuation methodologies are used, the results are weighted appropriately.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 101

Under the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate.

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Waterworks Reporting Unit

During the fourth fiscal quarter of 2018, we conducted our annual strategic planning process.

Based upon the outcome of this process, we identified indicators that there could be an impairment of the Waterworks reporting unit.

These indicators included (i) an updated long-range financial plan provided by the Waterworks segment leadership team that indicated a reduction of revenues and EBITDA as compared to prior long-range financial plans, (ii) a review of the strategic initiatives of the Waterworks segment and (iii) the Waterworks segment not achieving revenue and operating income objectives compared to plans.

In determining the Waterworks reporting unit estimated fair value using the income approach in fiscal 2018, we projected future cash flows based on our estimates and long-term plans and applied a discount rate based on a weighted-average cost of capital.

This analysis required us to make judgments about revenues, expenses, fixed asset and working capital requirements, the impact of updated tax legislation and other subjective inputs.

In determining the Waterworks reporting unit estimated fair value using the market approach, we considered assumptions that we believe market participants would use in valuing the Waterworks reporting unit, based on EBITDA multiples and including the application of a control premium.

For purposes of this analysis, we weighted the results 80 % towards the income approach and 20 % towards the market approach.

Based on the estimated fair value of the Waterworks reporting unit as of the assessment date in fiscal 2018, the Waterworks reporting unit goodwill was fully impaired in the fourth quarter of fiscal 2018.

The impairment is recorded in goodwill and tradename impairment on the consolidated statements of income.

The Waterworks reporting unit goodwill of $ 51 million recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 83

Tradenames, Trademarks and Other Intangible Assets

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Conditions that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset, a product recall or an adverse action or assessment by a regulator.

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PART II — FINANCIAL STATEMENTS

We qualitatively assess indefinite-lived intangible assets to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount.

If tradenames, trademarks and other intangible assets are not qualitatively assessed or if such intangible assets are qualitatively assessed and it is determined it is not more likely than not that the asset’s fair value is greater than its carrying amount, an impairment review is performed by comparing the carrying value to the estimated fair value, determined using a discounted cash flow methodology, which requires judgments that may significantly affect the ending asset valuation.

If tradenames, trademarks and other intangible assets are not qualitatively assessed or if such intangible assets are qualitatively assessed and it is determined it is more likely than not that the asset’s fair value is less than its carrying amount, an impairment review is performed by comparing the carrying value to the estimated fair value, determined using a discounted cash flow methodology, which requires judgments that may significantly affect the ending asset valuation.

Factors used in the valuation of intangible assets with indefinite lives include, but are not limited to, our plans for future operations, brand initiatives, recent results of operations and projected future cash flows.

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RH Segment Reporting Unit

During fourth quarters of fiscal 2020, 2019 and 2018, we qualitatively assessed the indefinite-lived intangible assets of the RH Segment reporting unit for impairment and determined it was more likely than not that the fair value of the assets were greater than their carrying amounts.

During the fourth quarters of fiscal 2021, fiscal 2020 and fiscal 2019, we qualitatively assessed the indefinite-lived intangible assets of the RH Segment reporting unit for impairment and determined it was not more likely than not that the fair value of the assets were less than their carrying amounts.

Based on the qualitative tests performed in each fiscal year, we did not perform quantitative impairment tests in any year.

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Waterworks Reporting Unit

During the fourth quarter of fiscal 2018, we updated the fiscal 2019 budget and financial projections beyond fiscal 2019 for the Waterworks reporting unit.

There were certain factors that caused the key financial inputs for the tradename valuation model to significantly decrease from the previous inputs, the most significant of which was a reduction of future forecasted net revenues resulting from an expected shift in product mix, challenges in continuing to grow the showrooms business and supply chain constraints.

These factors arising during the fourth quarter of fiscal 2018 had a significant and negative impact on the estimated future cash flows of the Waterworks reporting unit.

In connection with the goodwill impairment test performed for the Waterworks reporting unit in fiscal 2018, described above, we performed an impairment test on the tradename allocated to the reporting unit which utilized the discounted cash flow methodology under the relief-from-royalty method.

Under the relief-from-royalty method, our significant assumptions include the forecasted future revenues and the estimated royalty rate, expressed as a percentage of revenues.

Based on the quantitative impairment test performed and the result of changes in forecasted revenues and the valuation assumption around future royalty rates, we concluded that the Waterworks reporting unit tradename was impaired as of February 2, 2019.

As a result, we recognized a $ 14.6 million non-cash impairment with respect to the tradename for the Waterworks reporting unit in fiscal 2018, which was recorded in goodwill and tradename impairment on the consolidated statements of income.

During the fourth quarter of fiscal 2019, we performed our annual impairment procedures on the Waterworks tradename utilizing the discounted cash flow methodology under the relief-from-royalty method.

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Based on the quantitative impairment test performed, we did not recognize any impairment with respect to the Waterworks reporting unit tradename.

During the first quarter of fiscal 2020, as a result of the COVID-19 health crisis and related showroom closures, we updated the long-term financial projections for the Waterworks reporting unit which resulted in a significant decrease in forecasted revenues and profitability.

During the first quarter of fiscal 2020, as a result of the COVID-19 health crisis and related temporary showroom closures, we updated the long-term financial projections for the Waterworks reporting unit which resulted in a significant decrease in forecasted revenues and profitability.

We performed an interim impairment test on the Waterworks tradename and the estimated future cash flows of the Waterworks reporting unit indicated the fair value of the tradename asset was below its carrying amount.

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The impairment charge was recorded in goodwill and tradename impairment on the consolidated statements of income.

PART II — FINANCIAL STATEMENTS

During the fourth quarters of fiscal 2021 and fiscal 2020, we performed a qualitative impairment test on the Waterworks tradename and determined it was not more likely than not that the fair value of the asset was less than its carrying amount.

Accordingly, we did not recognize any further impairment with respect to the Waterworks reporting unit tradename in either period.

The carrying value of the Waterworks indefinite-lived tradename asset as of both January 29, 2022 and January 30, 2021 was $ 17 million.

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During the fourth quarter of fiscal 2020, we performed our annual impairment procedures on the tradename allocated to the Waterworks reporting unit which utilized the discounted cash flow methodology under the relief-from-royalty method.

Under the relief-from-royalty method, our significant assumptions include the forecasted future revenues and the estimated royalty rate, expressed as a percentage of revenues.

Based on the quantitative impairment test performed, we did not recognize any further impairment with respect to the Waterworks reporting unit tradename.

The carrying value of the Waterworks indefinite-lived tradename asset as of January 30, 2021 was $ 17.0 million.

PART II — FINANCIAL STATEMENTS

Long-Lived Assets

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While we believe our estimates and judgments about future cash flows are reasonable, future impairment charges may be required if the expected cash flow estimates, as projected, do not occur or if events change requiring us to revise our estimates.

During the first quarter of fiscal 2020, as a result of the COVID-19 health crisis and related showroom closures, we performed an impairment review of long-lived assets at the individual gallery level.

We also review our capital expenditures for Galleries under construction and recognize impairment charges when there is a change in the intended use of an asset, including asset disposals.

We recognized long-lived asset impairment charges related to such construction expenditures of $ 9.6 million, $ 3.1 million and $ 9.1 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively.

During the first quarter of fiscal 2020, as a result of the COVID-19 health crisis and related temporary retail location closures, we performed an impairment review of long-lived assets at the individual retail location level.

As a result of such analysis, we recognized long-lived asset impairment charges of $ 3.5 million related to one RH Baby & Child Gallery and one Waterworks showroom, comprising lease right-of-use asset impairment of $ 2.0 million and property and equipment impairment of $ 1.5 million.

Except as noted above, we did not record impairment for long-lived tangible assets at the individual gallery level in fiscal 2020, fiscal 2019 and fiscal 2018.

Due to certain distribution center closures and business line integrations in fiscal 2019 and fiscal 2018, we recorded impairment for certain corporate assets and other long-lived assets as discussed below under “Distribution Center and Home Delivery Location Center Closures” and “RH Contemporary Art Impairment.” No additional impairment has been recorded for corporate assets and other long-lived assets in fiscal 2019 and fiscal 2018.

Except as noted above, we did not record impairment for long-lived tangible assets at the individual retail location level in fiscal 2021, fiscal 2020 and fiscal 2019.

Due to certain distribution center closures and business line integrations in fiscal 2019, we recorded impairment for certain corporate assets and other long-lived assets as discussed below under “Distribution Center and Home Delivery Location Center Closures” and “RH Contemporary Art Impairment.” No additional impairment has been recorded for corporate assets and other long-lived assets in fiscal 2021, fiscal 2020 and fiscal 2019.

Distribution Center and Home Delivery Location Center Closures

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In fiscal 2020, we recorded additional operating lease right-of-use asset impairment associated with this effort of $ 0.9 million resulting from an update to both the timing and the amount of future estimated lease related cash inflows based on present market conditions, which is included in selling, general and administrative expenses on the consolidated statements of income.

During the third quarter of fiscal 2018, we initiated and executed a plan to close our distribution center located in Essex, MD.

As a result of the distribution center closure, we incurred restructuring related costs in the RH Segment in fiscal 2018, including a lease impairment charge of $ 2.2 million and a loss on disposal of capitalized property and equipment of $ 0.2 million, as well as costs for employee termination benefits of $ 0.2 million.

The impact to s elling, general and administrative expenses on the consolidated statements of income was $ 2.6 million, which represents the total charges incurred with this distribution center closure.

We did not incur any charges in fiscal 2020 and fiscal 2019 and do not expect to incur additional charges in the future associated with this distribution center closure.

During the first quarter of fiscal 2018, we recognized a $ 0.8 million reversal of an estimated loss on disposal of assets due to negotiations of the sales price being finalized.

We did not incur any charges in fiscal 2020 and fiscal 2019 and do not expect to incur additional charges in the future associated with this asset disposal.

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PART II — FINANCIAL STATEMENTS

RH Contemporary Art Impairment

In fiscal 2016, we initiated and executed a plan to integrate the RH Contemporary Art (“RHCA”) product line into the broader RH platform and no longer operates RHCA as a separate division.

We recorded additional operating lease right-of-use asset impairment associated with RHCA of $ 4.6 million and $ 3.4 million during fiscal 2019 and fiscal 2018, respectively.

These impairment charges, which are recorded in the RH Segment, resulted from an update to both the timing and the amount of future estimated lease related cash inflows based on present market conditions, which is included in selling, general and administrative expenses on the consolidated statements of income.

We recorded additional operating lease right-of-use asset impairment associated with RHCA of $ 4.6 million during fiscal 2019.

This impairment charge, which was recorded in the RH Segment, resulted from an update to both the timing and the amount of future estimated lease related cash inflows based on present market conditions, which is included in selling, general and administrative expenses on the consolidated statements of income.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 85

Equity Method Investments

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

Our investments are presented as equity method investments on the consolidated balance sheets and our proportionate share of earnings or losses of the Aspen LLCs are included in equity method investments losses on the consolidated statements of income.

Our investments are presented as equity method investments on the consolidated balance sheets and our proportionate share of earnings or losses of the Aspen LLCs are included in share of equity method investments losses on the consolidated statements of income.

We did not elect the fair value option and the equity method investments are initially measured at cost.

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While determining fair value requires a variety of input assumptions and judgment, we believe our estimates of fair value are reasonable.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 105

The carrying amount of our investments in the Aspen LLCs differs from our underlying equity in the net assets of the Aspen LLCs, resulting in equity method basis differences upon our investment, related to the real estate assets.

We account for these basis differences as if the Aspen LLCs were consolidated subsidiaries, thereby affecting the determination of the amount of our share of earnings or losses of the equity method investments.

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PART II — FINANCIAL STATEMENTS

The operating agreements for each Aspen LLC specifies distributions from operations and upon liquidation that may be disproportionate to the members’ relative ownership percentages.

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Revenues from “cash-and-carry” store sales are recognized at the point of sale in the store.

Discounts or other accommodations provided to customers are accounted for as a reduction of sales.

Discounts or other accommodations provided to customers are accounted for as a reduction of net revenues on the consolidated statements of income.

We recognize shipping and handling fees as activities to fulfill the promise to transfer the merchandise to customers.

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In instances where revenue is recognized for the related merchandise prior to delivery to customers (i.e., revenue recognized upon shipment), the related costs of shipping and handling activities are accrued for in the same period.

Costs of shipping and handling are included in cost of goods sold.

Costs of shipping and handling are included in cost of goods sold on the consolidated statements of income.

Sales tax collected is not recognized as revenue but is included in accounts payable and accrued expenses on the consolidated balance sheets as it is ultimately remitted to governmental authorities.

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Merchandise exchanges of the same product and price are not considered merchandise returns and, therefore, are excluded when calculating the sales returns reserve.

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PART II — FINANCIAL STATEMENTS

FORM 10-K | 87

A summary of the allowance for sales returns is as follows ( in thousands ):

Balance at beginning of fiscal year

Impact of Topic 606 adoption

Provision for sales returns

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Balance at end of fiscal year

We adopted Topic 606 in fiscal 2018 using the modified retrospective transition method and recorded a decrease to opening retained earnings of $ 21.0 million, inclusive of the tax impact, as shown on the consolidated statements of stockholders’ equity (deficit).

Deferred Revenue and Customer Deposits

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During fiscal 2021, fiscal 2020 and fiscal 2019, we recognized $ 20 million, $ 16 million and $ 20 million, respectively, of revenue related to previous deferrals related to our gift cards.

Customer liabilities related to gift cards was $ 19.2 million and $ 16.6 million as of January 30, 2021 and February 1, 2020, respectively.

Customer liabilities related to gift cards was $ 23 million and $ 19 million as of January 29, 2022 and January 30, 2021, respectively.

We recognize breakage associated with gift cards proportional to actual gift card redemptions.

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The projections involved in this process are subject to uncertainty related to the timing and amount of claims filed, levels of IBNR, fluctuations in health care costs and changes to regulatory requirements.

We had liabilities of $ 2.6 million and $ 2.2 million related to health care coverage as of January 30, 2021 and February 1, 2020, respectively.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 107

We had liabilities of $ 2.9 million and $ 2.6 million related to health care coverage as of January 29, 2022 and January 30, 2021, respectively.

We carry workers’ compensation insurance subject to a deductible amount for which we are responsible on each claim.

We had liabilities of $ 4.5 and $ 4.7 million related to workers’ compensation claims, primarily for claims that do not meet the per-incident deductible, as of January 30, 2021 and February 1, 2020, respectively.

We had liabilities of $ 4.8 million and $ 4.5 million related to workers’ compensation claims, primarily for claims that do not meet the per-incident deductible, as of January 29, 2022 and January 30, 2021, respectively.

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PART II — FINANCIAL STATEMENTS

Stock-Based Compensation

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Upon retirement of treasury stock, we allocate the excess of the purchase price over par value to additional paid-in capital subject to certain limitations with any remaining purchase price allocated to retained earnings (accumulated deficit).

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PART II — FINANCIAL STATEMENTS

FORM 10-K | 89

We account for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns.

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We recognize interest and penalties related to unrecognized tax benefits in income tax expense on the consolidated statements of income.

Comprehensive Income

Comprehensive income is comprised of net income and other gains and losses affecting equity that are excluded from net income.

Other comprehensive income consist of net gains (losses) on foreign currency translation, which includes intercompany gains and losses, and is presented net of tax.

Foreign Currency Translation

Local currencies are generally considered the functional currency for entities outside the United States.

Assets and liabilities denominated in non-U.S.

currencies are translated at the rate of exchange prevailing on the date of the consolidated balance sheets, and revenues and expenses are translated at average rates of exchange for the period.

The related translation gains (losses) are reflected in the accumulated other comprehensive income section on the consolidated statements of stockholders’ equity (deficit).

Transaction gains and losses resulting from intercompany balances of a long-term investment nature are also classified as accumulated other comprehensive income .

Foreign currency gains (losses) resulting from foreign currency transactions are included in selling, general and administrative expenses on the consolidated statements of income and are not material for all periods presented.

Foreign Currency Matters

The functional currency of our foreign subsidiaries is generally the local currency of the country in which the subsidiary operates.

Assets and liabilities of the foreign subsidiaries denominated in non-U.S.

dollar currencies are translated at the rate of exchange prevailing on the date of the consolidated balance sheets, and revenues and expenses are translated at average rates of exchange for the period.

The related translation gains (losses) are reflected in the accumulated other comprehensive income section on the consolidated statements of stockholders’ equity (deficit), and net gains (losses) on foreign currency translation , which includes intercompany gains and losses, is presented net of tax on the consolidated statements of comprehensive income.

Transaction gains and losses resulting from intercompany balances of a long-term investment nature are also classified as accumulated other comprehensive income on the consolidated balance sheets.

Foreign currency gains (losses) resulting from foreign currency transactions denominated in a currency other than the subsidiary's functional currency are included in other expense—net on the consolidated statements of income.

Such foreign exchange gains and losses are due to the net impact of changes in foreign exchange rates as compared to the U.S.

dollar from our third-party transactions denominated in foreign currencies, and intercompany loans held in U.S.

dollars by our international subsidiaries other than those of a long-term investment nature, where repayment is not planned or anticipated in the foreseeable future.

The foreign exchange gains or losses arising on the revaluation of intercompany loans of a long-term investment nature are reported within accumulated other comprehensive income on the consolidated balance sheets.

Recently Issued Accounting Standards

New Accounting Standards or Updates Adopted

Cloud Computing

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15—Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract , which amends Accounting Standards Update 2015-05—Customers Accounting for Fees in a Cloud Computing Agreement.

The amendments in this ASU more closely align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license).

PART II — FINANCIAL STATEMENTS

FORM 10-K | 109

We adopted the ASU as of February 2, 2020 using a prospective method.

We capitalize implementation costs related to hosted arrangements, which typically include specified service terms with additional renewal periods.

The related assets are recorded within other non-current assets on our consolidated balance sheets, net of accumulated amortization for assets placed in service.

The amortization of assets placed in service is recorded in either cost of goods sold or selling, general and administrative expenses , consistent with the costs of the hosting arrangement, on the consolidated statements of income on a straight-line basis over the term of the hosting arrangement, which includes reasonably certain renewal periods.

The adoption of the ASU did not have a material effect on our consolidated financial statements.

Refer to Note 4 —Prepaid Expense and Other Assets .

Current Expected Credit Losses

In June 2016, the FASB issued ASU 2016-13—Financial Instruments—Credit Losses:

Measurement of Credit Losses on Financial Instruments and also issued subsequent amendments to the initial guidance through ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11, ASU 2020-02 and ASU 2020-03 (collectively, the “ASUs”).

The ASUs amend the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology to result in more timely recognition of losses.

The guidance in the ASUs applies to financial assets measured at amortized cost basis, such as receivables that result from revenue transactions.

Accounts receivable consist primarily of receivables from our credit card processors for sales transactions, receivables related to our contract business and other miscellaneous receivables.

Accounts receivable is presented net of allowance for doubtful accounts as a result of the assessment of the collectability of customer accounts, which is recorded by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay.

The allowance for doubtful accounts was $ 3.3 million and $ 2.2 million as of January 30, 2021 and February 1, 2020, respectively.

We adopted the ASUs as of February 2, 2020 using a modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings.

We did not recognize a cumulative-effect adjustment upon adoption as the ASUs did not have a material effect on our consolidated financial statements.

New Accounting Standards or Updates Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12—Income Taxes (Topic 740):

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12—Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes .

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.

We will adopt this standard in the first quarter of fiscal 2021 and we do not expect the adoption of the new accounting standard to have a material impact on our consolidated financial statements.

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 consolidated financial statements.

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PART II — FINANCIAL STATEMENTS

New Accounting Standards or Updates Not Yet Adopted

Convertible Instruments and Contracts in an Entity’s Own Equity

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Additionally, the ASU removes certain conditions for equity classification related to contracts in an entity’s own equity (e.g., warrants) and amends certain guidance related to the computation of earnings per share for convertible instruments and contracts on an entity’s own equity.

The guidance in this ASU can be adopted using either a full or modified retrospective approach and becomes effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021.

We are currently evaluating the effects that the adoption of this ASU will have on our consolidated financial statements, including the timing and adoption approach.

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We will adopt the ASU in the first quarter of fiscal 2022 using a modified retrospective approach.

We anticipate that the adoption of the ASU will impact our consolidated financial statements through the cumulative effect of initially applying the ASU as an adjustment to the opening balance of retained earnings on the consolidated balance sheets of approximately $ 20 million and a related reduction to additional paid in capital of approximately $ 55 million and increase to deferred tax assets of approximately $ 15 million.

In addition, upon adoption, as a result of the removal of the separation of the outstanding equity component, the balance of convertible debt outstanding will increase by approximately $ 35 million and the resulting balance will represent the carrying amount of the outstanding par value of our convertible senior notes.

Additionally, we anticipate a reduction to property and equipment—net on the consolidated balance sheets of approximately $ 15 million related to previously capitalized interest for construction in progress.

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04 — Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting.

In January 2021, the FASB issued ASU 2021-01—Reference Rate Reform (Topic 848):

Scope , together with ASU 2020-04 the “ASUs”.

The ASUs provide optional expedients and exceptions, if certain criteria are met, for applying U.S.

GAAP to contracts, hedging relationships, and other transactions affected by the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”).

These transactions include contract modifications, hedge accounting, and the sale or transfer of debt securities classified as held-to-maturity.

The primary contracts for which we currently use LIBOR include our asset based credit facility and term loan debt arrangements.

The guidance was effective upon issuance and allows entities to adopt the amendments on a prospective basis through December 31, 2022, when the reference rate replacement activity is expected to be completed.

We are evaluating the impact that the ASUs will have on our consolidated financial statements and related disclosures, including the timing of adoption, and do not believe the adoption will materially impact our financial condition, results of operations or cash flows.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 91

NOTE 4—PREPAID EXPENSE AND OTHER ASSETS

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Capitalized catalog costs

Promissory note receivable, including interest (1)

Vendor deposits

Tenant allowance receivable

Promissory notes receivable, including interest (1)

Right of return asset for merchandise

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Other deposits

Acquisition related escrow deposits

Deferred financing fees

Deposits on asset under construction

Promissory note receivable, including interest

Other non-current assets

Acquisition related escrow deposits

Total other non-current assets

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

PART II — FINANCIAL STATEMENTS

(1) Presented net of accumulated amortization of $ 4.0 million and $ 0.5 million as of January 29, 2022 and January 30, 2021.

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PART II — FINANCIAL STATEMENTS

NOTE 5—PROPERTY AND EQUIPMENT

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(1) Refer to “Lease Accounting” within Note 3— Significant Accounting Policies and Note 11— Leases .

(2) Leasehold improvements include construction in progress of $ 31.7 million and $ 16.0 million as of January 30, 2021 and February 1, 2020, respectively.

(3) Building and building improvements as of January 30, 2021 includes $ 40.2 million of owned buildings under construction related to future Design Galleries.

(4) Includes accumulated amortization related to finance lease right-of-use assets of $ 133.0 million and $ 92.3 million as of January 30, 2021 and February 1, 2020, respectively.

(2) Leasehold improvements include construction in progress of $ 11 million and $ 32 million as of January 29, 2022 and January 30, 2021, respectively.

(3) Building and building improvements as of January 29, 2022 and January 30, 2021 includes $ 51 million and $ 40 million of owned buildings under construction related to future Design Galleries.

(4) Includes accumulated amortization related to finance lease right-of-use assets of $ 174 million and $ 133 million as of January 29, 2022 and January 30, 2021, respectively.

Refer to Note 11— Leases.

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During fiscal 2020, we incurred acquisition-related costs associated with these transactions such as financial, legal and accounting advisors, as well as employment related costs, which are included in selling, general and administrative expenses on the consolidated statements of income.

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No additional acquisition-related costs were incurred in fiscal 2021.

Acquisition related escrow deposits, included within prepaid expense and other current assets and other non-current assets on the consolidated balance sheets, were $ 4.0 million and $ 6.6 million as of January 29, 2022 and January 30, 2021, respectively.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 93

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

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The goodwill, included in the RH Segment, is representative of the benefits and expected synergies from the integration of the acquired companies’ 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.

The tradename and goodwill are deductible for tax purposes.

Results of operations of the acquired companies have been included in our consolidated statements of income since their respective acquisition dates.

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Tradenames, trademarks and other intangible assets

Tradename (1)

(1) Presented net of an impairment charge of $ 35.1 million, with $ 20.5 million recorded in the first quarter of fiscal 2020 and $ 14.6 million recorded in fiscal 2018 .

The following sets forth the fiscal 2020 goodwill, tradenames, trademarks and other intangible assets activity for the RH Segment and Waterworks ( in thousands ):

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Tradename (2)

(1) 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 of impairment recorded in fiscal 2018 and fiscal 2017, respectively.

(2) Presented net of an impairment charge of $ 14.6 million recorded in fiscal 2018 .

PART II — FINANCIAL STATEMENTS

(1) Waterworks reporting unit goodwill of $ 51 million recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018.

(2) Presented net of an impairment charge of $ 35 million, with $ 20 million recorded in fiscal 2020 .

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PART II — FINANCIAL STATEMENTS

NOTE 8—EQUITY METHOD INVESTMENTS

Equity method investments represent our investments in three Aspen privately-held limited liability companies (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.

We hold 50 percent of the membership interests in each Aspen LLC.

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.

Refer to Note 3— Significant Accounting Policies for further discussion.

We contributed capital of $ 99.2 million for our membership interest in the Aspen LLCs and our investment includes $ 2.1 million of direct transaction costs incurred to acquire the investments.

In fiscal 2020, we contributed capital of $ 99 million for our membership interest in the Aspen LLCs and our investment includes $ 2.1 million of direct transaction costs incurred to acquire the investments.

Capital contributions comprised $ 79 million in cash and $ 20 million of promissory notes receivable from the managing member that were converted into equity upon investment in the Aspen LLCs.

As of January 30, 2021, an additional $ 13.6 million of promissory notes receivable are outstanding with the managing member, which are included in prepaid expense and other current assets on the consolidated balance sheets.

In 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.

As of January 29, 2022 and January 30, 2021, $ 8.4 million and $ 14 million of promissory notes receivable, respectively, are outstanding with the managing member, which are included in prepaid expense and other current assets on the consolidated balance sheets.

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

We are contractually required to make capital contributions to the Aspen LLCs up to a total aggregate $ 105 million investment.

Our maximum exposure to loss is the carrying value of our capital contributed to the equity method investments plus our future capital funding requirements of $ 5.8 million as of January 30, 2021.

Our maximum exposure to loss is the carrying value of our capital contributed to the equity method investments as of January 29, 2022.

The carrying amount of our investments in the Aspen LLCs differs from our underlying equity in the net assets of the Aspen LLCs, resulting in equity method basis differences upon our investment.

During fiscal 2020, we recorded our proportionate share of equity method investments losses of $ 0.9 million, which is included in the consolidated statements of income and a corresponding decrease to the carrying value of e quity method investments on the consolidated balance sheets as of January 30, 2021.

During fiscal 2020, we did not receive any distributions or have any undistributed earnings of equity method investments.

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During fiscal 2021 and fiscal 2020, we recorded our proportionate share of equity method investments losses of $ 8.2 million and $ 0.9 million, respectively, which is included in the consolidated statements of income and a corresponding decrease to the carrying value of equity method investments on the consolidated balance sheets as of January 29, 2022 and January 30, 2021.

During fiscal 2021 and fiscal 2020, we did not receive any distributions or have any undistributed earnings of equity method investments.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 95

NOTE 9 — ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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Accrued compensation

Accrued freight and duty

Accrued sales taxes

Accrued occupancy

Deferred consideration for asset purchase

Accrued sales taxes

Accrued freight and duty

Accrued professional fees

1 unchanged sentence

Other accrued expenses

Deferred consideration for asset purchase

Total accounts payable and accrued expenses

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

Federal and state taxes payable

Federal and state tax payable

Allowance for sales returns

Current portion of equipment promissory notes

Unredeemed gift card and merchandise credit liability

Current portion of term loan

Finance lease liabilities

Product recall reserve

Promissory notes on asset under construction

Current portion of equipment promissory notes

Other current liabilities

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

Deferred payroll taxes

Rollover units and profit interests (1)

Unrecognized tax benefits

Notes payable for share repurchases

Non-current portion of equipment promissory notes—net

Other non-current obligations

Deferred payroll taxes

Total other non-current obligations

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

Refer to Note 18 — Stock-Based Compensation .

PART II — FINANCIAL STATEMENTS

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PART II — FINANCIAL STATEMENTS

NOTE 11—LEASES

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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.

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PART II — FINANCIAL STATEMENTS

(2) Finance lease right-of-use assets are recorded net of accumulated amortization of $ 133.0 million and $ 92.3 million as of January 30, 2021 and February 1, 2020, respectively.

FORM 10-K | 97

(2) Finance lease right-of-use assets are recorded net of accumulated amortization of $ 174 million and $ 133 million as of January 29, 2022 and January 30, 2021, respectively.

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

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Finance leases

PART II — FINANCIAL STATEMENTS

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PART II — FINANCIAL STATEMENTS

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

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Finance leases

Build-to-Suit Asset

During 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 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.

Asset Held for Sale and Sale-Leaseback Transaction

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

During fiscal 2018, we committed to a plan to sell the Yountville Design Gallery, which resulted in a reclassification of such Gallery from property and equipment—net to asset held for sale on the consolidated balance sheets as of February 2, 2019.

We performed an assessment and determined that based on our best estimate of the fair value of such Gallery as of February 2, 2019, the Gallery had an impairment of $ 8.5 million in fiscal 2018 in the RH Segment.

During fiscal 2019, we executed a sale-leaseback transaction for the Yountville Design Gallery for sales proceeds of $ 24 million, which qualified for sale-leaseback accounting in accordance with ASC 842.

1 unchanged sentence

We recognized a gain related to the execution of the sale transaction of $ 1.2 million in fiscal 2019, which was recorded in selling, general and administrative expenses on the consolidated statements of income.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 99

NOTE 12—CONVERTIBLE SENIOR NOTES

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Events of default under the indenture for the 2024 Notes include, among other things, the occurrence of an event of default by us as defined under any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness of the Company or any of its significant subsidiaries for money borrowed, if that event of default (i) constitutes the failure to pay when due indebtedness in the aggregate principal amount in excess of $ 20 million and (ii) such event of default continues for a period of 30 days after written notice is delivered to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25 % of the aggregate principal amount of the 2024 Notes then outstanding.

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PART II — FINANCIAL STATEMENTS

The initial conversion rate applicable to the 2024 Notes is 4.7304 shares of common stock per $ 1,000 principal amount of 2024 Notes, or a total of approximately 1.656 million shares for the total $ 350 million principal amount.

6 unchanged sentences

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

The first condition was satisfied during both the calendar quarters ended September 30, 2020 and December 31, 2020 and, accordingly, holders were eligible to convert their 2024 Notes during the calendar quarter ended December 31, 2020 and are eligible to convert their 2024 Notes during the calendar quarter ending March 31, 2021.

The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended December 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 March 31, 2022.

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.

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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 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.

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PART II — FINANCIAL STATEMENTS

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 consolidated balance sheets.

During fiscal 2020 and fiscal 2019, we recorded $ 0.7 million and $ 0.2 million related to the amortization of debt issuance costs related to the 2024 Notes, respectively.

During fiscal 2021, fiscal 2020 and fiscal 2019, we recorded $ 0.7 million, $ 0.7 million and $ 0.2 million related to the amortization of debt issuance costs related to the 2024 Notes, respectively.

During fiscal 2021, holders of $ 130 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 fiscal 2021, we paid $ 130 million in cash and delivered 419,182 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 $ 10 million in fiscal 2021.

We also received 419,172 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 10 shares of our common stock in respect to such settlement of the converted 2024 Notes.

During the fourth quarter of fiscal 2021, holders of $ 3.6 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 January 29, 2022, the observation periods of these converted 2024 Notes had not been completed and, as a result, these converted 2024 Notes remain outstanding as of January 29, 2022.

In the first quarter of fiscal 2022, we expect to pay $ 3.6 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 January 29, 2022, we reclassified $ 3.6 million of the outstanding principal balance to current liabilities on our consolidated balance sheets.

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 consolidated balance sheets.

PART II — FINANCIAL STATEMENTS

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

We recorded interest expense of $ 15.8 million and $ 5.6 million for the amortization of the debt discount related to the 2024 Notes during fiscal 2020 and fiscal 2019, respectively.

We recorded interest expense of $ 15 million, $ 16 million and $ 6 million for the amortization of the debt discount related to the 2024 Notes during fiscal 2021, fiscal 2020 and fiscal 2019, respectively.

2024 Notes—Convertible Bond Hedge and Warrant Transactions

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

The first condition was satisfied during both the calendar quarters ended September 30, 2020 and December 31, 2020 and, accordingly, holders were eligible to convert their 2023 Notes during the calendar quarter ended December 31, 2020 and are eligible to convert their 2023 Notes during the calendar quarter ending March 31, 2021.

The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended December 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 March 31, 2022.

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.

14 unchanged sentences

We recorded $ 0.8 million, $ 1.0 million and $ 0.9 million related to the amortization of debt issuance costs in fiscal 2021, fiscal 2020 and fiscal 2019, respectively, related to the 2023 Notes.

In December 2020, $ 2.4 million in aggregate principal amount of the 2023 Notes were converted at the option of the noteholders.

During the first quarter of fiscal 2021 and through the date of this filing, we paid $ 2.4 million in cash and delivered 7,307 shares of common stock to settle the converted 2023 Notes.

As a result, we recognized a loss on extinguishment of the liability component of $ 0.1 million in the first quarter of fiscal 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.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 103

During fiscal 2021, holders of $ 261 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 fiscal 2021, we paid $ 261 million in cash and delivered 958,330 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 $ 19 million in fiscal 2021.

We also received 958,307 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 23 shares of our common stock in respect to such settlement of the converted 2023 Notes.

During the fourth quarter of fiscal 2021, holders of $ 9.4 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 January 29, 2022, the observation periods of these converted 2023 Notes had not been completed and, as a result, these converted 2023 Notes remain outstanding as of January 29, 2022.

In the first quarter of fiscal 2022, we expect to pay $ 9.4 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 January 29, 2022, we reclassified $ 9.4 million of the outstanding principal balance to current liabilities on our consolidated balance sheets.

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 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 ):

14 unchanged sentences

The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the consolidated balance sheets.

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PART II — FINANCIAL STATEMENTS

We recorded a deferred tax liability of $ 22 million in connection with the debt discount associated with the 2023 Notes and recorded a deferred tax asset of $ 23 million in connection with the convertible note hedge transactions.

8 unchanged sentences

The 2020 Notes were guaranteed by our primary operating subsidiary, Restoration Hardware, Inc., as Guarantor.

The 2020 Notes matured on July 15, 2020 .

The initial conversion rate applicable to the 2020 Notes was 8.4656 shares of common stock per $ 1,000 principal amount of 2020 Notes, which was equivalent to an initial conversion price of approximately $ 118.13 per share.

The conversion rate was subject to adjustment upon the occurrence of certain specified events, but was not adjusted for any accrued and unpaid special interest.

In addition, upon the occurrence of a “make-whole fundamental change” as defined in the indenture governing the 2020 Notes, we would, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elected to convert its 2020 Notes in connection with such make-whole fundamental change.

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PART II — FINANCIAL STATEMENTS

Prior to March 15, 2020 , the 2020 Notes were convertible only under the following circumstances:

(1) during any calendar quarter commencing after September 30, 2015, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding calendar quarter, the last reported sale price of our common stock on such trading day is greater than or equal to 130 % of the applicable conversion price on such trading day;

(2) during the five consecutive business day period after any ten consecutive trading day period in which, for each day of that period, the trading price per $ 1,000 principal amount of 2020 Notes for such trading day was less than 98 % of the product of the last reported sale price of our common stock and the applicable conversion rate on such trading day;

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

The first condition was satisfied during the calendar quarter ended December 31, 2019 and, accordingly, holders were eligible to convert their 2020 Notes during the calendar quarter ending March 31, 2020.

In addition, on and after March 15, 2020 , until the close of business on the second scheduled trading day immediately preceding the maturity date, holders could convert all or a portion of their 2020 Notes at any time.

4 unchanged sentences

The equity component was not remeasured as it continued to meet the conditions for equity classification.

Debt issuance costs related to the 2020 Notes were comprised of discounts upon original issuance of $ 3.8 million and third party offering costs of $ 2.3 million.

In accounting for the debt issuance costs related to the issuance of the 2020 Notes, we allocated the total amount incurred to the liability and equity components based on their relative values.

Debt issuance costs attributable to the liability component were amortized to interest expense using the effective interest method over the expected life of the 2020 Notes, and debt issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity (deficit).

Discounts and third party offering costs attributable to the liability component were recorded as a contra-liability and were presented net against the convertible senior notes due 2020 balance on the consolidated balance sheets.

We recorded $ 0.6 million, $ 1.2 million and $ 1.1 million related to the amortization of debt issuance costs in fiscal 2020, fiscal 2019 and fiscal 2018, respectively, related to the 2020 Notes.

In May 2020, $ 9.4 million in aggregate principal amount of 2020 Notes were converted at the option of the noteholders.

We paid $ 9.2 million in cash and delivered 14,927 shares of common stock to settle the converted 2020 Notes.

As a result, we recognized a gain on extinguishment of the liability component of $ 0.2 million in the second quarter of fiscal 2020.

As a result, we recognized a gain on extinguishment of the liability component of $ 0.2 million in fiscal 2020.

We also received 14,927 shares of common stock from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2020 Notes as described below, and therefore, on a net basis did not issue any shares of our common stock in respect to such settlement of the 2020 Notes.

2 unchanged sentences

We also received 1,116,735 shares of common stock from the exercise of the remainder of the convertible bond hedge we purchased concurrently with the issuance of the 2020 Notes as described below, and therefore, on a net basis received 17 shares of our common stock (which were recorded as treasury stock within the consolidated statements of stockholders’ equity (deficit) in respect to such settlement of the 2020 Notes.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 123

As of January 30, 2021, the 2020 Notes are no longer outstanding.

As of February 1, 2020, the carrying values of the 2020 Notes, excluding the discounts upon original issuance and third party offering costs, were as follows ( in thousands ):

Liability component

Debt discount

Net carrying amount

Equity component (1)

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

We recorded interest expense of $ 8.9 million, $ 18.2 million and $ 17.1 million for the amortization of the debt discount related to the 2020 Notes during fiscal 2020, fiscal 2019 and fiscal 2018, respectively.

We recorded interest expense of $ 8.9 million and $ 18 million for the amortization of the debt discount related to the 2020 Notes during fiscal 2020 and fiscal 2019, respectively.

We recorded $ 0.6 million and $ 1.2 million related to the amortization of debt issuance costs in fiscal 2020 and fiscal 2019, respectively, related to the 2020 Notes.

2020 Notes—Convertible Bond Hedge and Warrant Transactions

6 unchanged sentences

The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the consolidated balance sheets.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 105

As a result of the operation of the bond hedge in connection with the maturity of the 2020 Notes, we were not required to issue any new shares to settle the notes as these shares were delivered to us under the terms of the bond hedge.

2 unchanged sentences

The warrants expired on January 7, 2021.

We recorded a deferred tax liability of $ 32.8 million in connection with the debt discount associated with the 2020 Notes and recorded a deferred tax asset of $ 26.6 million in connection with the convertible note hedge transactions.

The deferred tax liability and deferred tax asset are recorded in deferred tax assets on the consolidated balance sheets.

There is no deferred tax asset or liability remaining as of January 30, 2021 due to the maturity of the 2020 Notes.

$ 350 million 0.00 % Convertible Senior Notes due 2019

5 unchanged sentences

Certain events were also considered “events of default” under the 2019 Notes, which could result in the acceleration of the maturity of the 2019 Notes, as described in the indenture governing the 2019 Notes.

The 2019 Notes matured on June 15, 2019 .

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PART II — FINANCIAL STATEMENTS

The initial conversion rate applicable to the 2019 Notes was 8.6143 shares of common stock per $ 1,000 principal amount of 2019 Notes, which was equivalent to an initial conversion price of approximately $ 116.09 per share.

The conversion rate was subject to adjustment upon the occurrence of certain specified events, but was not adjusted for any accrued and unpaid special interest.

In addition, upon the occurrence of a “make-whole fundamental change” as defined in the indenture governing the 2019 Notes, we would, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elected to convert its 2019 Notes in connection with such make-whole fundamental change.

Accordingly, in accounting for the issuance of the 2019 Notes, we separated the 2019 Notes into liability and equity components.

The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature.

The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the 2019 Notes and the fair value of the liability component of the 2019 Notes.

The debt discount was amortized to interest expense using an effective interest rate of 4.51 % over the expected life of the 2019 Notes.

The equity component was not remeasured as long as it continued to meet the conditions for equity classification.

Debt issuance costs related to the 2019 Notes were comprised of discounts and commissions payable to the initial purchasers of $ 4.4 million and third party offering costs of $ 1.0 million.

In accounting for the debt issuance costs related to the issuance of the 2019 Notes, we allocated the total amount incurred to the liability and equity components based on their relative values.

Debt issuance costs attributable to the liability component were amortized to interest expense using the effective interest method over the expected life of the 2019 Notes, and debt issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity (deficit).

Discounts, commissions payable to the initial purchasers and third party offering costs attributable to the liability component were recorded as a contra-liability and were presented net against the convertible senior notes due 2019 balance on the consolidated balance sheets.

We recorded $ 0.4 million and $ 0.9 million related to the amortization of debt issuance costs in fiscal 2019 and fiscal 2018, respectively, related to the 2019 Notes.

In June 2019, upon the maturity of the 2019 Notes, $ 350 million in aggregate principal amount of the 2019 Notes were settled for $ 349 million in cash and 42 shares of common stock.

As a result, we recognized a gain on extinguishment of debt of $ 1.0 million during fiscal 2019.

We recorded interest expense of $ 5.9 million and $ 15.1 million for the amortization of the debt discount related to the 2019 Notes in fiscal 2019 and fiscal 2018, respectively.

We recorded interest expense of $ 5.9 million for the amortization of the debt discount related to the 2019 Notes in fiscal 2019, respectively.

We recorded $ 0.4 million related to the amortization of debt issuance costs in fiscal 2019 related to the 2019 Notes.

2019 Notes—Convertible Bond Hedge and Warrant Transactions

9 unchanged sentences

The warrants expired on December 6, 2019.

We recorded a deferred tax liability of $ 27.5 million in connection with the debt discount associated with the 2019 Notes and recorded a deferred tax asset of $ 28.6 million in connection with the convertible note hedge transactions.

The deferred tax liability and deferred tax assets were included in deferred tax assets on the consolidated balance sheets.

There is no deferred tax asset or liability remaining as of January 30, 2021 due to the maturity of the 2019 Notes.

PART II — FINANCIAL STATEMENTS

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PART II — FINANCIAL STATEMENTS

NOTE 13—CREDIT FACILITIES

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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 January 30, 2021 and February 1, 2020 were $ 1.5 million and $ 2.6 million, respectively, and are included in other non-current assets on the 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.

(1) Deferred financing fees associated with the asset based credit facility as of January 29, 2022 and January 30, 2021 were $ 4.1 million and $ 1.5 million, respectively, and are included in other non-current assets on the 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 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 outstanding amounts of $ 2.0 billion and $ 20 million were included in term loan—net and other current liabilities on the 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 $ 14 million outstanding was included in other current liabilities on the consolidated balance sheets.

The remaining $ 14.8 million outstanding, included in o ther non-current obligations on the consolidated balance sheets, has principal payments due of $ 13.6 million and $ 1.2 million in fiscal 2022 and fiscal 2023, respectively.

The remaining $ 1.2 million outstanding, included in other non-current obligations on the consolidated balance sheets, has principal payments due in fiscal 2023.

Asset Based Credit Facility & Term Loan Facilities

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”).

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.

In June 2018, we repaid the LILO term loan in full.

As a result of the repayment, we incurred a $ 0.5 million loss on extinguishment of debt in fiscal 2018, which represents the acceleration of amortization of debt issuance costs.

We did not incur any prepayment penalties upon the early extinguishment of the LILO term loan.

On June 12, 2018, Restoration Hardware, Inc.

entered into a First Amendment (the “First Amendment”) to the Credit Agreement.

The First Amendment (a) changed the Credit Agreement’s definition of “Eligible In-Transit Inventory” to clarify the requirements to be fulfilled by the borrowers with respect to such in-transit inventory, and (b) clarified that no Default or Event of Default was caused by any prior non-compliance with such requirements with respect to in-transit inventory.

Eligible In-Transit Inventory consists of inventory being shipped from vendor locations outside of the United States.

Qualifying in-transit inventory is included within our borrowing base for eligible collateral for purposes of determining the amount of borrowing available to borrowers under the Credit Agreement.

On November 23, 2018, Restoration Hardware, Inc.

entered into a Consent and Second Amendment (the “Second Amendment”) to the Credit Agreement.

The Second Amendment included certain clarifying changes to among other things:

(a) address the processing of payments from insurance proceeds in connection with casualty or other insured losses with respect to property or assets of a Loan Party, and (b) add an additional category of permitted restricted payment to allow the lead borrower to make annual restricted payments of up to $ 3 million per fiscal year to cover payments of certain administrative and other obligations of RH in the ordinary course of business.

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PART II — FINANCIAL STATEMENTS

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.

As a result of the repayment, we incurred a $ 0.8 million loss on extinguishment of debt in fiscal 2019, which represents the acceleration of amortization of debt issuance costs.

We did not incur any prepayment penalties upon the early extinguishment of the FILO term loan.

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, amended 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 our 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 January 30, 2021, Restoration Hardware, Inc.

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

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.

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”).

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 million, of which $ 10 million is available to Restoration Hardware Canada, Inc., and includes a $ 300 million accordion feature under which the revolving line of credit may be expanded by agreement of the parties from $ 600 million to up to $ 900 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 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.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 107

As of January 30, 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 January 30, 2021 was $ 271.9 million, net of $ 15.4 million in outstanding letters of credit.

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 customary provisions addressing future transition from LIBOR.

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 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 January 29, 2022, RHI was in compliance with all applicable financial covenants of the ABL Credit Agreement.

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 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.

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 January 29, 2022, the amount available for borrowing under the revolving line of credit under the ABL Credit Agreement was $ 347 million, net of $ 20 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.

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PART II — FINANCIAL STATEMENTS

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.

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

As of January 29, 2022, 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 .

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

Second Lien Credit Agreement

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The second lien term loan of $ 200 million in principal was repaid in full on September 20, 2019.

As a result of the repayment, we incurred a $ 6.7 million loss on extinguishment of debt, which includes a prepayment penalty of $ 4.0 million and acceleration of amortization of debt issuance costs of $ 2.7 million.

As a result of the repayment, in fiscal 2019 we incurred a $ 6.7 million loss on extinguishment of debt, which includes a prepayment penalty of $ 4.0 million and acceleration of amortization of debt issuance costs of $ 2.7 million.

The Second Lien Term Loan bore interest at an annual rate generally based on LIBOR plus 6.50 % .

6 unchanged sentences

The Intercreditor Agreement is no longer in effect after repayment of the Second Lien Term Loan on September 20, 2019.

Equipment Loan Facility

On September 5, 2017, Restoration Hardware, Inc.

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

As of January 30, 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 .

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

PART II — FINANCIAL STATEMENTS

FORM 10-K | 109

NOTE 14—FAIR VALUE MEASUREMENTS

2 unchanged sentences

In determining the fair value, we utilize market data or assumptions that we believe market participants would use in pricing the asset or liability, which would maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, including assumptions about risk and the risks inherent in the inputs of the valuation technique.

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PART II — FINANCIAL STATEMENTS

The degree of judgment used in measuring the fair value of financial instruments generally correlates to the level of pricing observability.

11 unchanged sentences

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 2020 Notes, 2023 Notes and 2024 Notes were as follows ( in thousands ):

Convertible senior notes due 2020 (2)

The estimated fair value of the Term Loan Credit Agreement approximates cost as it was recently issued and the interest rate associated with the credit agreement is variable and resets frequently.

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

Convertible senior notes due 2023

Convertible senior notes due 2024

(1) Carrying value represents the principal amount less the equity component of the 2020 Notes, 2023 Notes and 2024 Notes classified in stockholders’ equity, and does not exclude the discounts upon original issuance, discounts and commissions payable to the initial purchasers and third party offering costs, as applicable.

(2) The 2020 Notes matured on July 15, 2020.

The fair value of each of the 2020 Notes, 2023 Notes and 2024 Notes 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 stock price and interest rates based on similar debt issued by parties with credit ratings similar to ours (Level 2).

(1) Carrying value represents the principal amount less the equity component of the 2023 Notes and 2024 Notes classified in stockholders’ equity, and does not exclude the discounts upon original issuance, discounts and commissions payable to the initial purchasers and third party offering costs, as applicable.

The fair value of each of the 2023 Notes and 2024 Notes 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 stock price and interest rates based on similar debt issued by parties with credit ratings similar to ours (Level 2).

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PART II — FINANCIAL STATEMENTS

Fair Value Measurements—Non-Recurring

The fair value of the Waterworks tradename was determined based on unobservable (Level 3) inputs and valuation techniques, as discussed in “Impairment” within Note 3— Significant Accounting Policies .

The fair value of the acquired goodwill and tradename associated with the acquisitions in fiscal 2020, as discussed in Note 6— Business Combinations , were determined based on unobservable (Level 3) inputs and valuation techniques.

The fair value of the acquired goodwill and tradename associated with the acquisitions by the RH Segment in fiscal 2020, as discussed in Note 6— Business Combinations , 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 discussed in “Equity Method Investments” within Note 3— Significant Accounting Policies and Note 8— Equity Method Investments , were determined based on unobservable (Level 3) inputs and valuation techniques.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 129

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 recognized a gain or loss on extinguishment of debt in the 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 15—INCOME TAXES

4 unchanged sentences

Total income tax expense

PART II — FINANCIAL STATEMENTS

FORM 10-K | 111

A reconciliation of the federal statutory tax rate to our effective tax rate is as follows:

Provision at federal statutory tax rate

Non-deductible stock-based compensation

State income taxes—net of federal tax impact

Non-deductible stock-based compensation

Tax rate adjustments and other

Stock compensation—excess benefits

Goodwill impairment

Valuation allowance

1 unchanged sentence

Effective tax rate

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PART II — FINANCIAL STATEMENTS

We have recorded deferred tax assets and liabilities based upon estimates of their realizable value, such estimates are based upon likely future tax consequences.

9 unchanged sentences

Net operating loss carryforwards

Convertible senior notes

Deferred revenue

Convertible senior notes

Non-current deferred tax assets—net

8 unchanged sentences

Total net non-current deferred tax assets

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PART II — FINANCIAL STATEMENTS

A reconciliation of our valuation allowance against deferred tax assets in certain state and foreign jurisdictions due to historical losses is as follows ( in thousands ):

6 unchanged sentences

We cannot give any assurances that it will not undergo an ownership change in the future resulting in further limitations on utilization of net operating losses.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 131

A reconciliation of the exposures related to unrecognized tax benefits is as follows ( in thousands ):

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We account for interest and penalties related to exposures as a component of income tax expense.

We had interest accruals of $ 0.5 million associated with exposures as of both January 30, 2021 and February 1, 2020.

We had interest accruals of $ 0.3 million and $ 0.5 million associated with exposures as of January 29, 2022 and January 30, 2021, respectively.

We are subject to taxation in the United States and various states and foreign jurisdictions.

2 unchanged sentences

federal, state, local, or foreign examinations by tax authorities for years before fiscal 2017.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 113

NOTE 16—NET INCOME PER SHARE

6 unchanged sentences

The 2019 Notes matured on June 15, 2019 and did not have an impact of our dilutive share count post-maturity.

The 2020 Notes matured on July 15, 2020 and did not have an impact on our dilutive share count post-termination.

The 2020 Notes matured on July 15, 2020 and did not have an impact on our dilutive share count post-maturity.

The warrants associated with our 2019 Notes, 2020 Notes, 2023 Notes and 2024 Notes have an impact on our dilutive share count beginning at stock prices of $ 171.98 per share, $ 189.00 per share, $ 309.84 per share and $ 338.24 per share, respectively.

2 unchanged sentences

Refer to Note 12— Convertible Senior Notes .

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PART II — FINANCIAL STATEMENTS

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

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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 million.

We did not make any repurchases under this program during fiscal 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 January 30, 2021 for future share investments under this share repurchase program.

We did no t make any repurchases under this program during either fiscal 2021 or fiscal 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 January 29, 2022 for future share investments.

Share Repurchases under Equity Plans

As of January 30, 2021 and February 1, 2020, the aggregate unpaid principal amount of notes payable for share repurchases was $ 0.6 million and $ 18.7 million, respectively, which was recorded in other non-current obligations on the consolidated balance sheets.

As of both January 29, 2022 and January 30, 2021, the aggregate unpaid principal amount of notes payable for share repurchases was $ 0.6 million, of which $ 0.3 million was recorded in other current liabilities on the consolidated balance sheets and $ 0.3 million was recorded in other non-current obligations on the consolidated balance sheets as of January 29, 2022, and $ 0.6 million was recorded in other non-current obligations on the consolidated balance sheets as of January 30, 2021.

During fiscal 2020, we elected to repay $ 18 million of aggregate principal amount of the notes payable for share repurchases, of which, $ 16 million was paid to a current board member of the Company.

We recorded interest expense on the notes of $ 0.1 million, $ 0.8 million and $ 0.9 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively.

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PART II — FINANCIAL STATEMENTS

Share Retirements

3 unchanged sentences

As a result of this retirement, we reclassified a total of $ 250 million from treasury stock , of which $ 13 million was allocated to additional paid-in capital and $ 237 million was allocated to retained earnings (accumulated deficit) on the consolidated balance sheets and consolidated statements of shareholders’ equity (deficit) as of February 1, 2020.

In fiscal 2018, we retired 22,267,711 shares of our common stock related to shares we had repurchased under the $ 300 Million Repurchase Program, $ 700 Million Repurchase Program and $ 950 Million Repurchase Program.

As a result of this retirement, we reclassified a total of $ 1,250.3 million from treasury stock , of which $ 591.5 million was allocated to additional paid-in capital and $ 658.8 million was allocated to retained earnings (accumulated deficit) on the consolidated balance sheets and consolidated statements of shareholders’ equity (deficit) as of February 2, 2019.

There was no impact on the consolidated statements of income or cash flows related to these share retirement activities.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 133

NOTE 18—STOCK-BASED COMPENSATION

We recorded stock-based compensation expense of $ 145.7 million, $ 21.8 million and $ 24.0 million in fiscal 2020, fiscal 2019 and fiscal 2018, respectively.

We recorded stock-based compensation expense of $ 48 million, $ 146 million and $ 22 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively, which is included in selling, general and administrative expenses on the consolidated statements of income.

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

Chairman and Chief Executive Officer Option Grant

On October 18, 2020, our Board of Directors granted Mr.

Friedman an option to purchase 700,000 shares of our common stock with an exercise price equal to $ 385.30 per share under the 2012 Stock Incentive Plan.

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 $ 117.1 million was recognized in fiscal 2020 (which is included in the stock-based compensation expense recorded in fiscal 2020 noted above).

As of January 30, 2021, the total unrecognized compensation expense was $ 56.5 million, which will be recognized on an accelerated basis through May 2025.

Time-Based Restrictions

The time-based restrictions are measured over a four-year performance year period which will begin in May 2021, on the anniversary of the option granted to Mr.

Friedman in 2017.

The time-based restrictions will lapse at the end of each of the successive anniversary dates from May 2022 through May 2025 at a rate of 175,000 shares per year if (i) Mr.

Friedman remains in service with us at the end of such year with the authority, duties, or responsibilities of a chief executive officer at such date and (ii) the stock price performance-based metrics have been achieved in such year as described further below.

Performance-Based Restrictions

The stock price performance-based restrictions of the option are measured annually over the performance year period and may lapse as to only one-quarter of the option in each of the first four performance years, with the first performance year beginning in May 2021.

The stock price performance-based metrics for the option are set at $ 500 per share, $ 650 per share and $ 800 per share.

With respect to any given performance year, if the “twenty day average trading price” our common stock exceeds $ 500 per share, $ 650 per share, or $ 800 per share during such performance year, then the selling restrictions will lapse as to 58,333 shares, 58,333 share and 58,334 shares, respectively, on the last day of such performance year, if Mr.

Friedman remains in service with us at such date.

Any selling restrictions that have not lapsed in any performance year during the first four performance years may be achieved in a successive performance year through the end of the eighth performance year which ends in May 2029, provided Mr.

Friedman continues to satisfy the service requirement through the date the performance target is achieved.

Any selling restrictions that have not lapsed by the end of the eighth performance year will thereafter only lapse in May 2041, the 20 th anniversary of the beginning of the first performance year.

2012 Stock Incentive Plan and 2012 Stock Option Plan

3 unchanged sentences

Aside from these options granted on November 1, 2012, no other awards will be granted under the Option Plan.

As of February 1, 2020, there were a total of 1,630,107 shares issuable under the Stock Incentive Plan.

As of January 30, 2021, there were a total of 427,062 shares issuable under the Stock Incentive Plan.

On February 1, 2021, an additional 419,908 shares became issuable under the Stock Incentive Plan in accordance with the Stock Incentive Plan evergreen provision, increasing the total number of shares issuable under the Stock Incentive Plan to 846,970 .

2 unchanged sentences

Cancellations and forfeitures of awards previously granted under the Option Plan are immediately retired and are no longer available for future issuance.

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PART II — FINANCIAL STATEMENTS

The number of shares available for future issuance under the Stock Incentive Plan as of January 29, 2022 was 1,185,322 .

Shares issued as a result of award exercises under the Stock Incentive Plan and Option Plan will be funded with the issuance of new shares.

On February 1, 2021 an additional 419,908 shares became issuable under the Stock Incentive Plan in accordance with the Stock Incentive Plan evergreen provision.

On January 31, 2022 an additional 430,139 shares became issuable under the Stock Incentive Plan in accordance with the Stock Incentive Plan evergreen provision.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 115

2012 Stock Incentive Plan and 2012 Stock Option Plan—Stock Options

2 unchanged sentences

EXERCISE PRICE

Outstanding—February 1, 2020

Outstanding—January 30, 2021

Outstanding—January 29, 2022

The fair value of stock options issued was estimated on the date of grant using the following assumptions:

7 unchanged sentences

Fair value of stock options vested (in thousands)

PART II — FINANCIAL STATEMENTS

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PART II — FINANCIAL STATEMENTS

Information about stock options outstanding, vested or expected to vest, and exercisable as of January 29, 2022 is as follows:

8 unchanged sentences

$ 389.34 — $ 716.75

$ 500.99 — $ 500.99

Vested or expected to vest

The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of January 30, 2021 was $ 3,161.7 million, $ 3,006.0 million, and $ 2,535.6 million, respectively.

The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of January 29, 2022 was $ 2.2 billion, $ 2.1 billion and $ 2.0 billion, respectively.

Stock options exercisable as of January 29, 2022 had a weighted-average remaining contractual life of 2.77 years.

We recorded stock-based compensation expense related to stock options of $ 45 million, $ 140 million and $ 14 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively.

The fiscal 2020 expense includes $ 117.1 million associated with the option grant to Mr.

Friedman in October 2020 (refer to Chairman and Chief Executive Officer Option Grant above).

The fiscal 2021 and fiscal 2020 expense includes $ 24 million and $ 117 million, respectively, associated with the option grant to Mr.

Friedman in October 2020 (refer to Chairman and Chief Executive Officer Option Grant below).

As of January 29, 2022, the total unrecognized compensation expense related to unvested options was $ 102 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 4.82 years.

In addition, as of January 29, 2022, the total unrecognized compensation expense related to the fully vested option grant made to Mr.

Friedman in October 2020 was $ 56.5 million, which will be recognized on an accelerated basis through May 2025 (refer to Chairman and Chief Executive Officer Option Grant above).

Friedman in October 2020 was $ 33 million, which will be recognized on an accelerated basis through May 2025 (refer to Chairman and Chief Executive Officer Option Grant below).

Chairman and Chief Executive Officer Option Grant

On October 18, 2020, our Board of Directors granted Mr.

Friedman an option to purchase 700,000 shares of our common stock with an exercise price equal to $ 385.30 per share under the 2012 Stock Incentive Plan.

The option will result in aggregate non-cash stock compensation expense of $ 174 million, of which $ 24 million and $ 117 million was recognized in fiscal 2021 and fiscal 2020, respectively, (which is included in the stock-based compensation expense amounts noted above).

Time-Based Restrictions

The time-based restrictions are measured over a four-year performance year period which will begin in May 2021, on the anniversary of the option granted to Mr.

Friedman in 2017.

The time-based restrictions will lapse at the end of each of the successive anniversary dates from May 2022 through May 2025 at a rate of 175,000 shares per year if (i) Mr.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 117

Performance-Based Restrictions

The stock price performance-based metrics for the option are set at $ 500 per share, $ 650 per share and $ 800 per share.

Friedman remains in service with us at such date.

Friedman continues to satisfy the service requirement through the date the performance target is achieved.

Any selling restrictions that have not lapsed by the end of the eighth performance year will thereafter only lapse in May 2041, the 20 th anniversary of the beginning of the first performance year.

2012 Stock Incentive Plan—Restricted Stock Awards

2 unchanged sentences

GRANT DATE FAIR

Outstanding—February 1, 2020

Outstanding—January 30, 2021

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PART II — FINANCIAL STATEMENTS

Outstanding—January 29, 2022

A summary of additional information about restricted stock awards is as follows:

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As of January 29, 2022, the total unrecognized compensation expense related to unvested restricted stock awards was $ 5.3 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.07 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 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 fiscal 2020, fiscal 2019 or fiscal 2018.

As of both January 30, 2021 and February 1, 2020, 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 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 consolidated statements of income.

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

We recorded $ 0.4 million, $ 0.5 million and $ 0.4 million of stock-based compensation expense related to the Profit Interests in fiscal 2020, fiscal 2019 and fiscal 2018, respectively, which is included in selling, general and administrative expenses on the consolidated statements of income.

As of January 30, 2021 and February 1, 2020, the liability associated with the Profit Interests was $ 2.0 million and $ 1.6 million, respectively, which is included in other non-current obligations on the consolidated balance sheets.

NOTE 19—EMPLOYEE BENEFIT PLANS

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We made no contributions to the 401(k) plan during fiscal 2021, fiscal 2020 or fiscal 2019.

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PART II — FINANCIAL STATEMENTS

NOTE 20—COMMITMENTS AND CONTINGENCIES

We had no material off balance sheet commitments as of January 29, 2022.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 137

Contingencies

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In addition, any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of our senior leadership team’s time and result in the diversion of significant operational resources.

We review the need for any loss contingency reserves and establishes reserves when, in the opinion of our senior leadership team, it is probable that a matter would result in liability, and the amount of loss, if any, can be reasonably estimated.

We review the need for any loss contingency reserves and establish reserves when, in the opinion of our senior leadership team, it is probable that a matter would result in liability, and the amount of loss, if any, can be reasonably estimated.

Generally, in view of the inherent difficulty of predicting the outcome of those matters, particularly in cases in which claimants seek substantial or indeterminate damages, it is not possible to determine whether a liability has been incurred or to reasonably estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no reserve is established until that time.

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Although we believe that the ultimate resolution of our current legal proceedings will not have a material adverse effect on our consolidated financial statements, the outcome of legal matters is subject to inherent uncertainty.

Securities Class Action

On February 2, 2017, City of Miami General Employees’ & Sanitation Employees’ Retirement Trust filed a class action complaint in the United States District Court, Northern District of California, against the Company, Gary Friedman, and Karen Boone.

On March 16, 2017, Peter J.

Errichiello, Jr.

filed a similar class action complaint in the same forum and against the same parties.

On April 26, 2017, the court consolidated the two actions.

The consolidated action is captioned In re RH, Inc.

Securities Litigation, Case No.

An amended consolidated complaint was filed in June 2017 asserting claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

The complaint asserted claims purportedly on behalf of a class of purchasers of our common stock from March 26, 2015 to June 8, 2016.

The alleged misstatements relate to statements regarding the roll out of the RH Modern product line and our inventory levels.

The complaint sought class certification, monetary damages, and other appropriate relief, including an award of costs and attorneys’ fees.

On March 21, 2019, we and the individual defendants in the case entered into a binding memorandum of understanding to settle the case.

The settlement amount was $ 50 million, which was funded entirely by our insurance carriers.

On May 6, 2019, the plaintiffs filed a motion for preliminary approval of the proposed settlement together with a settlement agreement executed by both parties.

On June 21, 2019, the court issued an order preliminarily approving the settlement.

On October 25, 2019, the court granted final approval of the settlement and entered a final judgment dismissing the action.

As a result of the court approval and adjudication of the claims in 2019, as well as our insurance carriers funding the settlement amount, we have derecognized the provision for legal settlement and unpaid legal fees within other current liabilities and the associated litigation insurance recovery receivable on the consolidated balance sheets as of January 30, 2021, which settlement resolved all of the claims that were or could have been brought in the action.

Shareholder Derivative Lawsuit

On April 24, 2018, purported Company shareholder David Magnani filed a purported shareholder derivative suit in the United States District Court, Northern District of California, captioned Magnani v.

Friedman et al., Case No.

On June 29, 2018, Hosrof Izmirliyan filed a similar purported shareholder derivative complaint in the same forum, captioned Izmirliyan v.

Friedman et al., Case No.

On July 29, 2018, the court consolidated both derivative actions, and the consolidated action is captioned In re RH Shareholder Derivative Litigation, Case No.

On August 24, 2018, plaintiffs filed an amended complaint that named the Company as a nominal defendant and Gary Friedman, Karen Boone, Carlos Alberini, Keith Belling, Eri Chaya, Mark Demilio, Katie Mitic, Ali Rowghani and Leonard Schlesinger as defendants.

The allegations substantially tracked those in the securities class action described above.

Plaintiffs brought claims against all individual defendants under Section 14(a) of the Exchange Act, as well as claims for breach of fiduciary duty, unjust enrichment, and waste of corporate assets.

The plaintiffs also alleged insider trading and misappropriation of information claims against two of the individual defendants.

The amended complaint sought monetary damages, corporate governance changes, restitution, and an award of costs and attorneys’ fees.

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PART II — FINANCIAL STATEMENTS

On September 28, 2018, we filed a motion to stay proceedings and a motion to dismiss the consolidated complaint.

On January 23, 2019, the court granted the motion to stay the case pending resolution of the securities class action discussed above.

On March 19, 2020, the parties reached an agreement in principle to settle the litigation and subsequently entered into a stipulation of settlement that was preliminarily approved by the Court on August 3, 2020.

The settlement involved certain non-monetary terms as well as payment of the plaintiffs’ attorneys’ legal fees, which payment was funded entirely by our insurance carriers.

On October 6, 2020, the Court held a final settlement hearing.

On December 18, 2020, the court granted final approval of the settlement and entered a final judgment dismissing the action.

NOTE 21—SEGMENT REPORTING

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The RH Segment and Waterworks operating segments (the “retail operating segments”) include all sales channels accessed by our customers, including sales through retail locations and outlets, websites, Source Books, and the commercial channel.

The Real Estate Development segment represents operations associated with our equity method investments entered into in fiscal 2020, as described in Note 8— Equity Method Investments.

The Real Estate Development segment represents operations associated with our equity method investments, as described in Note 8— Equity Method Investments.

The retail operating segments are strategic business units that offer products for the home furnishings customer.

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

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

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

Segment Information

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Depreciation and amortization

In fiscal 2020, the Real Estate Development segment share of equity method investments losses was $ 0.9 million.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 119

In fiscal 2021 and fiscal 2020, the Real Estate Development segment share of equity method investments losses were $ 8.2 million and $ 0.9 million, respectively.

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

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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.

PART II — FINANCIAL STATEMENTS

FORM 10-K | 139

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

(1) The Waterworks reporting unit goodwill of $ 51 million recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018.

(2) The Waterworks reporting unit tradename is presented net of an impairment charge of $ 35 million, with $ 20 million recorded in fiscal 2020.

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

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 changes in useful lives, (iii) gain (loss) on sale leaseback transactions, (iv) product recall accruals and adjustments—net, (v) severance costs associated with reorganizations, (vi) legal settlements, net of legal expenses, (vii) asset held for sale gain, (viii) disposals of inventory and property and equipment, lease related charges, inventory transfer costs and other costs and adjustments associated with distribution center closures, and (ix) non-cash amortization of the inventory fair value adjustment recorded in connection with the Waterworks acquisition.

Friedman in October 2020, (ii) asset impairments and changes in useful lives, (iii) product recall accruals and adjustments—net, (iv) severance costs associated with reorganizations, (v) gain (loss) on sale leaseback transactions, (vi) legal settlements, net of legal expenses and (vii) asset held for sale gain.

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.

The following table presents, for our retail operating segments, the segment operating income (loss) and income before income taxes ( in thousands ):

Operating income (loss):

The following table presents, for our retail operating segments, the segment operating income and income before income taxes ( in thousands ):

Operating income:

Non-cash compensation

Asset impairments and change in useful lives

Gain (loss) on sale leaseback transaction

Recall accrual

Reorganization related costs

(Gain) loss on sale leaseback transaction

Legal settlements

Asset held for sale gain

Distribution center closures

Impact of inventory step-up

Income from operations

Interest expense—net

Goodwill and tradename impairment

(Gain) loss on extinguishment of debt—net

(Gain) loss on extinguishment of debt

Other expense—net

Tradename impairment

Income before income taxes

120 | FORM 10-K

PART II — FINANCIAL STATEMENTS

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

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Total net revenues

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PART II — FINANCIAL STATEMENTS

During 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.

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.

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No single customer accounted for more than 10 % of our revenues in fiscal 2021, fiscal 2020 or fiscal 2019.

NOTE 22—SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Quarterly financial data for fiscal 2020 and fiscal 2019 are set forth below ( in thousands, except share and per share amounts ):

THREE MONTHS ENDED

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

THREE MONTHS ENDED

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

PART II — FINANCIAL STATEMENTS

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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-K

Item 8. Financial Statements and Supplementary Data