What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2023-05-26 compared with 2022-12-08 · 268 added, 422 removed, 452 unchanged (60% of the section changed)

3 unchanged sentences

Cash and cash equivalents

Restricted cash (Note 5)

Restricted cash

Accounts receivable—net

11 unchanged sentences

Deferred revenue and customer deposits

Convertible senior notes due 2023—net

Convertible senior notes due 2023

5 unchanged sentences

Term loan B-2—net

Real estate loans (Note 5)

Convertible senior notes due 2023—net

Real estate loans

Convertible senior notes due 2024—net

1 unchanged sentence

Non-current finance lease liabilities

Deferred tax liabilities

Other non-current obligations

2 unchanged sentences

Stockholders’ equity:

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

Common stock— $ 0.0001 par value per share, 180,000,000 shares authorized, 23,609,536 shares issued and outstanding as of October 29, 2022;

Preferred stock—$ 0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of April 29, 2023 and January 28, 2023

Common stock— $ 0.0001 par value per share, 180,000,000 shares authorized, 22,051,251 shares issued and outstanding as of April 29, 2023;

22,045,385 shares issued and outstanding as of January 28, 2023

6 unchanged sentences

FINANCIAL INFORMATION

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2023 FIRST QUARTER FORM 10-Q | 3

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

THREE MONTHS ENDED

NINE MONTHS ENDED

(in thousands, except share and per share amounts)

5 unchanged sentences

Loss on extinguishment of debt

Other expense—net

Other income—net

Total other expenses

Income before income taxes

Income before income taxes and equity method investments

Income tax expense (benefit)

Income before equity method investments

Share of equity method investments losses

Share of equity method investments loss

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

Basic net income per share (Note 13)

Basic net income per share

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

Diluted net income per share (Note 13)

Diluted net income per share

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

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FINANCIAL INFORMATION

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREE MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

Net losses from foreign currency translation

Net gains (losses) from foreign currency translation

Comprehensive income

1 unchanged sentence

FINANCIAL INFORMATION

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2023 FIRST QUARTER FORM 10-Q | 5

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

3 unchanged sentences

STOCKHOLDERS'

INCOME (LOSS)

(in thousands, except share amounts)

Balances—July 30, 2022

Stock-based compensation

Vested and delivered restricted stock units

Exercise of stock options

Repurchases of common stock

Retirement of treasury stock

Settlement of convertible senior notes

Net losses from foreign currency translation

Balances—October 29, 2022

Balances—July 31, 2021

Balances—January 28, 2023

Stock-based compensation

2 unchanged sentences

Settlement of convertible senior notes

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

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

Net losses from foreign currency translation

Balances—October 30, 2021

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FINANCIAL INFORMATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

NINE MONTHS ENDED

TREASURY STOCK

COMPREHENSIVE

STOCKHOLDERS'

INCOME (LOSS)

(in thousands, except share amounts)

Net gains from foreign currency translation

Balances—April 29, 2023

Balances—January 29, 2022

Stock-based compensation

Issuance of restricted stock

Vested and delivered restricted stock units

Exercise of stock options

Repurchases of common stock

( 1,127,557 )

Retirement of treasury stock

( 1,127,557 )

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

4 unchanged sentences

Net losses from foreign currency translation

Balances—October 29, 2022

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

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

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

Net gains from foreign currency translation

Balances—October 30, 2021

Balances—April 30, 2022

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

FINANCIAL INFORMATION

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED

THREE MONTHS ENDED

(in thousands)

4 unchanged sentences

Asset impairments

Gain on sale of building and land

Amortization of debt discount

Stock-based compensation expense

4 unchanged sentences

Gain on derivative instruments—net

Share of equity method investments losses

Share of equity method investments loss

Other non-cash items

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

Change in assets and liabilities:

11 unchanged sentences

Capital expenditures

Proceeds from sale of asset

Equity method investments

Net cash used in investing activities

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FINANCIAL INFORMATION

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

NINE MONTHS ENDED

THREE MONTHS ENDED

(in thousands)

CASH FLOWS FROM FINANCING ACTIVITIES

Borrowings under term loans

Repayments under term loans

Borrowings under real estate loans

Repayments under real estate loans

1 unchanged sentence

Repayments of convertible senior notes

Repayment under convertible senior notes repurchase obligation

Debt extinguishment costs

Debt issuance costs

Principal payments under finance leases—net

Principal payments under finance lease agreements—net of tenant allowances

Proceeds from termination of convertible senior note hedges

Payments for termination of common stock warrants

Repurchases of common stock—including commissions

Proceeds from exercise of stock options

Tax withholdings related to issuance of stock-based awards

Net cash provided by (used in) financing activities

Net cash used in financing activities

Effects of foreign currency exchange rate translation

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

Net increase in cash and cash equivalents, restricted cash and restricted cash equivalents

Cash and cash equivalents, restricted cash and restricted cash equivalents

Beginning of period—cash and cash equivalents

Beginning of period—restricted cash

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

4 unchanged sentences

End of period—cash and cash equivalents, restricted cash and restricted cash equivalents

FINANCIAL INFORMATION

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(In thousands) (Unaudited)

NINE MONTHS ENDED

(in thousands)

Non-cash transactions:

Property and equipment additions in accounts payable and accrued expenses at period-end

Property and equipment additions acquired under real estate loans

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

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

Extinguishment of convertible senior notes related to repurchase obligation (Note 9)

Financing liability and embedded derivative arising from convertible senior notes repurchase (Note 9)

Extinguishment of convertible senior notes related to repurchase obligation

Financing liability and embedded derivative arising from convertible senior notes repurchase

Shares issued on settlement of convertible senior notes

Shares received on exercise of call option under bond hedge upon settlement of convertible senior notes

Conversion of loan receivables into equity of variable interest entities (Note 5)

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

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FINANCIAL INFORMATION

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4 unchanged sentences

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

As of October 29, 2022, we operated a total of 67 RH Galleries and 39 RH Outlet stores in 31 states, the District of Columbia and Canada, as well as 14 Waterworks Showrooms throughout the United States and in the U.K., and had sourcing operations in Shanghai and Hong Kong.

As of April 29, 2023, we operated a total of 67 RH Galleries and 39 RH Outlet stores in 31 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.

In September 2022, we opened our first RH Guesthouse in New York.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared from our records and, in our senior leadership team’s opinion, include all adjustments, consisting of normal recurring adjustments, necessary to fairly state our financial position as of October 29, 2022, and the results of operations for the three and nine months ended October 29, 2022 and October 30, 2021.

Our current fiscal year, which consists of 52 weeks, ends on January 28, 2023 (“fiscal 2022”).

The accompanying unaudited interim condensed consolidated financial statements have been prepared from our records and, in our senior leadership team’s opinion, include all adjustments, consisting of normal recurring adjustments, necessary to fairly state our financial position as of April 29, 2023, and the results of operations for the three months ended April 29, 2023 and April 30, 2022.

Our current fiscal year, which consists of 53 weeks, ends on February 3, 2024 (“fiscal 2023”).

The condensed consolidated financial statements include our accounts and those of our wholly-owned subsidiaries, as well as the financial information of variable interest entities (“VIEs”) where we represent the primary beneficiary and have the power to direct the activities that most significantly impact the entity’s performance.

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

Noncontrolling interests represent third-party interests in the net assets under VIEs determined by applying the hypothetical liquidation at book value methodology.

Noncontrolling interests in VIEs are immaterial as of October 29, 2022.

Refer to Note 5— Variable Interest Entities .

Certain information and disclosures normally included in the notes to annual consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted for purposes of these interim condensed consolidated financial statements.

1 unchanged sentence

Actual results could differ from those estimates and such differences could be material to the condensed consolidated financial statements.

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

We have assessed various accounting estimates and other matters, including those that require consideration of forecasted financial information, using information that is reasonably available to us at this time.

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

Our current assessment of these estimates is included in our condensed consolidated financial statements as of and for the three and nine months ended October 29, 2022.

Our current assessment of these estimates is included in our condensed consolidated financial statements as of and for the three months ended April 29, 2023.

As additional information becomes available to us, our future assessment of these estimates, as well as other factors, could change and the results of any such change could materially and adversely impact our condensed consolidated financial statements in future reporting periods.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2023 (the “2022 Form 10-K”).

The results of operations for the three and nine months ended October 29, 2022 and October 30, 2021 presented herein are not necessarily indicative of the results to be expected for the full fiscal year.

Our business, like the businesses of retailers

The results of operations for the three months ended April 29, 2023, presented herein, are not necessarily indicative of the results to be expected for the full fiscal year.

Our business, like the businesses of retailers generally, is subject to uncertainty surrounding the financial impact of the factors as discussed in Business Conditions below.

FINANCIAL INFORMATION

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generally, is subject to uncertainty surrounding the financial impact of the pandemic and other factors as discussed in Macro-Economic Factors and COVID-19 Pandemic below.

Macro-Economic Factors and COVID-19 Pandemic

There are a number of macro-economic factors and uncertainties affecting the overall business climate as well as our business, including increased inflation and rising interest rates.

These factors may have a number of adverse effects on macro-economic conditions and markets in which we operate, with the potential for an economic recession and a sustained downturn in the housing market.

Factors such as a slowdown in the housing market or negative trends in stock market prices could have a negative impact on demand for our products.

We believe that these macro-economic factors have contributed to the slowdown in demand that we have experienced in our business over the last several fiscal quarters.

The COVID-19 pandemic continues to cause challenges in certain aspects of our business operations primarily related to our supply chain, including delays in our receipt of products from vendors, which have affected our ability to convert demand into revenues at normal historic rates.

While our performance during the pandemic demonstrates the desirability of our exclusive products, consumer spending have shifted away from spending on the home and home-related categories toward travel and leisure and other areas.

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

Refer to the section entitled “Risk Factors” in our 2021 Form 10-K.

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Business Conditions

There are a number of macroeconomic factors and uncertainties affecting the overall business climate as well as our business, including increased inflation, rising interest and mortgage rates, and unpredictability in the global financial markets related to the foregoing as well as, among other things, the war in Ukraine and recent failures of several financial institutions.

We experienced increased demand for our products during the pandemic and there have been significant shifts in consumer consumption patterns with the easing of the pandemic including increases in travel and services rather than spending on home furnishings.

These and other macroeconomic factors may have a number of adverse effects on macroeconomic conditions and markets in which we operate, including the housing market, with the potential for an economic recession and a sustained downturn in the housing market.

Factors such as a slowdown in the housing market or negative trends in stock market prices could have an adverse impact on demand for our products.

We believe that these macroeconomic and other factors have contributed to the slowdown in demand that we have experienced in our business over the last several fiscal quarters.

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

For more information, refer to the section entitled “Risk Factors” in our 2022 Form 10-K.

NOTE 2—RECENTLY ISSUED ACCOUNTING STANDARDS

New Accounting Standards or Updates Adopted

Convertible Instruments and Contracts in an Entity’s Own Equity

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2020-06—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”).

ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity.

Specifically, ASU 2020-06 removes the separation models for convertible debt with a cash conversion feature or convertible instruments with a beneficial conversion feature.

As a result, after adopting ASU 2020-06’s guidance, we no longer separately present in equity an embedded conversion feature of such debt.

Instead, we account for a convertible debt instrument wholly as debt unless (i) a convertible instrument contains features that require bifurcation as a derivative or (ii) a convertible debt instrument was issued at a substantial premium.

Additionally, ASU 2020-06 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.

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FINANCIAL INFORMATION

We adopted ASU 2020-06 in the first quarter of fiscal 2022 using a modified retrospective transition method.

Accordingly, the cumulative effect of the adoption on our opening fiscal 2022 condensed consolidated balance sheets was as follows:

(in thousands)

Property and equipment—net

Deferred tax assets

Convertible senior notes due 2023—net

Convertible senior notes due 2024—net

Additional paid-in capital

Retained earnings

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 (“ASU 2020-04”) .

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

Scope , (“ASU 2021-01” and, together with ASU 2020-04, the “ASUs”).

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

All new arrangements are using alternative reference rates and we are evaluating the impact of adoption on our existing contracts, including with respect to our asset based credit facility and Term Loan B (as defined in Note 10 — Credit Facilities ), which we anticipate amending in the fourth quarter of fiscal 2022 to reference SOFR.

New Accounting Standards or Updates Not Yet Adopted

Disclosure of Supplier Finance Program Obligations

In September 2022, the FASB issued ASU 2022-04 — Disclosure of Supplier Finance Program Obligations (“ASU 2022-04”).

ASU 2022-04 requires entities to disclose the program’s nature, activity during the period, changes from period to period and potential magnitude.

In September 2022, the Financial Accounting Standards Board (“FASB”) issued ASU 2022-04 — Disclosure of Supplier Finance Program Obligations (“ASU 2022-04”).

ASU 2022-04 requires entities to disclose a program’s nature, activity during the period, changes from period to period and potential magnitude.

Under ASU 2022-04, the buyer in a supplier finance program is required to disclose information about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts during each annual period, and a description of where in the financial statements outstanding amounts are presented.

1 unchanged sentence

The rollforward requirement is effective for fiscal years beginning after December 15, 2023 and is required to be applied prospectively.

We are evaluating the impact that ASU 2022-04 will have on our consolidated financial statements and related disclosures, but do not believe the adoption will impact our financial condition, results of operations or cash flows.

We adopted ASU 2022-04 in the first quarter of fiscal 2023.

Supplier Finance Program

We facilitate a voluntary supply chain financing program (the “Financing Program”) with a third-party financial institution (the “Bank”) to provide participating suppliers with the opportunity to receive early payment on invoices, net of a discount charged to the supplier by the Bank.

We are not a party to the supplier agreements with the Bank, and the terms of our payment obligations to suppliers are not impacted by a supplier’s participation in the Financing Program.

Our responsibility is limited to making payments to the Bank on the terms originally negotiated with our suppliers, which are typically either 30 days or 60 days.

There are no assets pledged as security or other forms of guarantees provided under the Financing Program.

The Financing Program is not indicative of a borrowing arrangement and the liabilities under the Financing Program are included in accounts payable and accrued expenses on the condensed consolidated balance sheets and associated payments are included within operating activities on the condensed consolidated statements of cash flows.

As of April 29, 2023 and January 28, 2023, supplier invoices that have been confirmed as valid under the Financing Program included in accounts payable and accrued expenses were $ 24 million and $ 26 million, respectively.

FINANCIAL INFORMATION

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NOTE 3—PREPAID EXPENSE AND OTHER ASSETS

1 unchanged sentence

(in thousands)

Federal and state tax receivable (1)

Promissory notes receivable, including interest (2)

Other current assets

Prepaid expenses

Capitalized catalog costs

Vendor deposits

Prepaid expenses

Tenant allowance receivable

Federal and state tax receivable

Value added tax (VAT) receivable

Tenant allowance receivable

Right of return asset for merchandise

Acquisition related escrow deposits

Promissory notes receivable, including interest (1)

Interest income receivable

Other current assets

Total prepaid expense and other current assets

(1) Refer to Note 12— Income Taxes .

(2) Represents promissory notes, including principal and accrued interest, due from a related party.

Refer to Note 5— Variable Interest Entities .

(1) Represents promissory notes, including principal and accrued interest, due from an affiliate of the managing member of the Aspen LLCs (refer to Note 5— Variable Interest Entities ) .

Other non-current assets consist of the following:

(in thousands)

Initial direct costs prior to lease commencement

Landlord assets under construction—net of tenant allowances

Initial direct costs prior to lease commencement

Capitalized cloud computing costs—net (1)

Vendor deposits—non-current

Other deposits

2 unchanged sentences

Total other non-current assets

(1) Presented net of accumulated amortization of $ 8.8 million and $ 4.0 million as of October 29, 2022 and January 29, 2022, respectively.

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(1) Presented net of accumulated amortization of $ 12 million and $ 11 million as of April 29, 2023 and January 28, 2023, respectively.

FINANCIAL INFORMATION

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

The following sets forth the goodwill, tradenames, trademarks and other intangible assets activity for the RH Segment and Waterworks (refer to Note 17— Segment Reporting ) for the nine months ended October 29, 2022:

The following sets forth the goodwill, tradenames, trademarks and other intangible assets activity for the RH Segment and Waterworks (refer to Note 17— Segment Reporting ):

TRADEMARKS AND

OTHER INTANGIBLE

(in thousands)

Tradenames, trademarks and other intangible assets

Waterworks (1)

Tradename (2)

January 28, 2023

Foreign currency translation

April 29, 2023

(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 recognized in prior fiscal years.

(2) Presented net of an impairment charge of $ 35 million recognized in previous fiscal years.

There are no goodwill, tradenames, trademarks and other intangible assets for the Real Estate segment.

NOTE 5—VARIABLE INTEREST ENTITIES

Equity Method Investments

Equity method investments represent our 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”) that were formed during fiscal 2020 for the purpose of acquiring, developing, operating and selling certain real estate projects in Aspen, Colorado.

We hold a 50 percent membership interest in two of the Aspen LLCs and a 70 percent interest in the third Aspen LLC.

These investments meet the criteria of VIEs, however, we are not the primary beneficiary of these arrangements.

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

As of October 29, 2022 and January 29, 2022, $ 8.8 million and $ 8.4 million, respectively, of promissory notes receivable, inclusive of accrued interest, are outstanding with the managing member or entities affiliated with the managing member for the Aspen LLCs, which promissory notes are included in prepaid expense and other current assets on the condensed consolidated balance sheets.

Promissory notes related specifically to the Aspen LLCs are expected to be settled in cash and not converted into additional equity investment in the Aspen LLCs.

We have made in excess of $ 100 million in capital contributions to the Aspen LLCs as contractually required.

Our maximum exposure to loss with respect to these equity method investments is the carrying value of the equity capital contributed as of October 29, 2022.

During the three months ended October 29, 2022 and October 30, 2021, we recorded our proportionate share of equity method investments losses of $ 1.9 million and $ 2.3 million, respectively, which is included on the condensed consolidated statements of income and a corresponding decrease to the carrying value of equity method investments on the condensed consolidated balance sheets.

During the nine months ended October 29, 2022 and October 30, 2021, we recorded our proportionate share of equity method investments losses of $ 6.1 million and $ 6.9 million, respectively.

During the three and nine months ended October 29, 2022 and October 30, 2021, we did no t receive any distributions or have any undistributed earnings of equity method investments.

Consolidated Variable Interest Entities and Noncontrolling Interests

In the third quarter of fiscal 2022, we formed two real estate development limited liability companies (each, a “Member LLC” and collectively, the “Member LLCs” or the “consolidated variable interest entities”) for the purpose of acquiring, developing, operating and selling certain real estate projects, one of which is intended to be a future RH Design Gallery.

We hold a 50 percent membership interest in each Member LLC, and the remaining 50 percent is held by an affiliate of the managing member of the Aspen LLCs.

In fiscal 2022, we formed eight privately-held limited liability companies (each, a “Member LLC” and collectively, the “Member LLCs” or the “consolidated variable interest entities”) for real estate development activities related to our Gallery transformation and global expansion strategies.

We hold a 50 percent membership interest in seven of the Member LLCs, and the remaining noncontrolling interest of 50 percent in each Member LLC is held by a third-party real estate development partner affiliated with the managing member of the Aspen LLCs (as defined in “Equity Method Investments” below).

In one Member LLC we hold approximately 75 percent membership interest with the remaining noncontrolling interest of approximately 25 percent held in the same way by a real estate development partner affiliated with the managing member of the Aspen LLCs.

The Member LLCs are qualitatively determined to be VIEs due to their having insufficient equity investment at risk to finance their activities without additional subordinated financial support.

Upon the formation of each Member LLC we determined that the power to direct the most significant activities of each Member LLC is either controlled by us or shared between the members of the Member LLCs.

In the instances where there is shared power among related parties as defined in the consolidation accounting guidance, we evaluated the related-party tiebreaker guidance and determined that we are most closely associated with each Member LLC.

Accordingly, we are the primary beneficiary of the Member LLCs and we consolidate the results of operations, financial condition and cash flows of the Member LLCs in our consolidated financial statements.

We measure the noncontrolling interests in the consolidated variable interest entities using the distribution provisions set out in the operating agreements of each Member LLC.

As of April 29, 2023 and January 28, 2023, the noncontrolling interest holders had no claim to the net assets of each Member LLC based upon such distribution provisions .

Accordingly, we did not recognize any noncontrolling interests as of April 29, 2023 and January 28, 2023.

FINANCIAL INFORMATION

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We have determined that each Member LLC is a VIE and that the power to direct the most significant activities of each Member LLC is shared amongst related parties.

We have determined that we are most closely associated with each Member LLC, and, accordingly, consolidate the results of operations, financial condition and cash flows of the Member LLCs in our condensed consolidated financial statements.

Noncontrolling interests in the consolidated variable interest entities are measured using the hypothetical liquidation at book value methodology.

Noncontrolling interests in consolidated variable interest entities are immaterial as of October 29, 2022.

As of October 29, 2022, $ 27 million of promissory notes receivable, inclusive of accrued interest, are outstanding with the managing member or entities affiliated with the managing member of the Member LLCs, which promissory notes are included in prepaid expense and other current assets on the condensed consolidated balance sheets.

The promissory notes outstanding as of October 29, 2022 are related to other real estate joint ventures with entities affiliated with the managing member and such promissory notes are expected to be converted into equity in future privately-held limited liability companies for real estate development activities related to our Gallery transformation and global expansion strategies.

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The carrying amounts and classification of the VIEs’ assets and liabilities included in the condensed consolidated balance sheets were as follows:

(in thousands)

Cash and cash equivalents

Restricted cash (1)

As of October 29, 2022, $ 3.9 million of restricted cash deposits are held in escrow for one Member LLC, which escrow balances are included in restricted cash on the condensed consolidated balance sheets.

The escrow represents a portion of the proceeds from the issuance of the Promissory Note (defined below) that are required to be used for expenditures that qualify as tenant improvements under an allowance specified in a lease agreement between us and the Member LLC.

Prepaid expense and other current assets

Total current assets

Property and equipment—net (2)

Other non-current assets

Accounts payable and accrued expenses

Real estate loans (3)

Other non-current obligations

Total liabilities

(1) Restricted cash deposits are held in escrow for one Member LLC and represent a portion of the proceeds from the issuance of the Promissory Note (defined below) that are required to be used for tenant allowances specified in a lease agreement between us and the Member LLC.

(2) Includes $ 140 million and $ 125 million of construction in progress as of April 29, 2023 and January 28, 2023, respectively.

(3) Real estate loans are secured by the assets of each respective Member LLC and the associated creditors do not have recourse against RH’s general assets.

On August 3, 2022, a Member LLC as the borrower executed a Secured Promissory Note (the “Secured Promissory Note”) with a third-party in an aggregate principal amount equal to $ 2.0 million with a maturity date of August 1, 2032.

The Secured Promissory Note bears interest at a fixed rate per annum equal to 6.00 % .

In addition, we entered into an immaterial loan with the Member LLC that is eliminated upon consolidation.

On September 9, 2022, a Member LLC as the borrower executed a Promissory Note (the “Promissory Note”) with a third-party bank in an aggregate principal amount equal to $ 16 million with a maturity date of September 9, 2032.

The Promissory Note bears interest at a fixed rate per annum equal to 5.37 % until September 15, 2027, on which date the interest rate will reset based on the five-year treasury rate plus 2.00 % , subject to a total interest rate 3.00 % floor.

These real estate loans are secured by the assets of each respective Member LLC and the associated creditors do not have recourse against RH’s general assets.

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Equity Method Investments

Equity method investments represent our 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”) that were formed for the purpose of acquiring, developing, operating and selling certain real estate projects in Aspen, Colorado.

We hold a 50 percent membership interest in two of the Aspen LLCs and a 70 percent membership interest in the third Aspen LLC.

The Aspen LLCs are VIEs, however, we are not the primary beneficiary of these VIEs because we do not have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance.

Accordingly, we account for these investments using the equity method of accounting.

FINANCIAL INFORMATION

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We have previously made contractually required contributions to the Aspen LLCs in an aggregate amount of $ 105 million in prior periods.

In February 2023, we elected to make equity contributions to two of the Aspen LLCs totaling $ 31 million whereby such funding was used to repay a portion of third-party debt secured by certain real estate assets held by the Aspen LLCs.

In April 2023, we made an additional equity contribution to one Aspen LLC of $ 1.8 million whereby such funding was used in connection with the acquisition of additional real estate assets.

Inclusive of the equity contributions made during the three months ended April 29, 2023, we have made in excess of $ 135 million in capital contributions to the Aspen LLCs.

Our maximum exposure to loss with respect to these equity method investments is the carrying value of the equity method investments as of April 29, 2023.

During the three months ended April 29, 2023 and April 30, 2022, we did no t receive any distributions or have any undistributed earnings of equity method investments.

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

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Accrued compensation

Accrued sales and use tax (1)

Accrued occupancy

Accrued freight and duty

Accrued sales taxes

Accrued interest

Accrued legal reserves

Accrued professional fees

Accrued catalog costs (1)

Accrued interest

Other accrued expenses

Total accounts payable and accrued expenses

(1) Prior year amounts have been adjusted to conform to the current period presentation.

Reorganization

As reported in the 2022 Form 10-K, we implemented a restructuring on March 24, 2023 that includes workforce and expense reductions in order to improve and simplify our organizational structure, streamline certain aspects of our business operations and better position us for further growth.

The workforce reduction associated with the initiative included the elimination of numerous leadership and other positions throughout the organization, which affected approximately 440 roles.

The reorganization was completed during the first quarter of fiscal 2023.

During the three months ended April 29, 2023, we incurred total charges relating to the reorganization of $ 7.6 million consisting primarily of severance costs and related taxes.

As of April 29, 2023, we had accruals of $ 5.8 million included in accounts payable and accrued expenses related to the reorganization.

FINANCIAL INFORMATION

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Other current liabilities consist of the following:

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Finance lease liabilities

Current portion of equipment promissory notes

Federal and state tax payable (1)

Foreign tax payable

Other current liabilities

Total other current liabilities

(1) Refer to Note 12— Income Taxes .

Contract Liabilities

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

We expect that substantially all of the deferred revenue and customer deposits as of October 29, 2022 will be recognized within the next six months as the performance obligations are satisfied.

Deferred revenue also includes the unrecognized portion of the annual RH Members Program fee.

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

Membership renewal fees are recorded as deferred revenue when collected from customers and are recognized as revenue on a straight-line basis over the membership period, or one year .

We expect that substantially all of the deferred revenue and customer deposits as of April 29, 2023 will be recognized within the next six months as the performance obligations are satisfied.

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

During the three months ended October 29, 2022 and October 30, 2021, we recognized $ 5.0 million and $ 4.4 million, respectively, of revenue related to previous deferrals related to our gift cards.

During the nine months ended October 29, 2022 and October 30, 2021, we recognized $ 16 million and $ 14 million, respectively, of revenue related to previous deferrals related to our gift cards.

FINANCIAL INFORMATION

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

Breakage of $ 0.7 million and $ 0.5 million was recorded in net revenues in the three months ended October 29, 2022 and October 30, 2021, respectively.

Breakage of $ 1.8 million and $ 1.4 million was recorded in net revenues in the nine months ended October 29, 2022 and October 30, 2021, respectively.

During the three months ended April 29, 2023 and April 30, 2022, we recognized $ 6.1 million and $ 4.7 million, respectively, of revenue related to previous deferrals related to our gift cards .

We expect that approximately 70 % of the remaining gift card liabilities will be recognized when the gift cards are redeemed by customers.

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Total other non-current obligations

FINANCIAL INFORMATION

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NOTE 8—LEASES

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THREE MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

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

(3) Represents variable lease payments under operating and finance lease agreements, primarily associated with contingent rent based on a percentage of retail sales over contractual levels of $ 3.4 million and $ 6.9 million for the three months ended October 29, 2022 and October 30, 2021, respectively, and $ 15 million and $ 19 million for the nine months ended October 29, 2022 and October 30, 2021, respectively, as well as charges associated with common area maintenance of $ 2.3 million and $ 2.2 million for the three months ended October 29, 2022 and October 30, 2021, respectively, and $ 6.9 million and $ 6.6 million for the nine months ended October 29, 2022 and October 30, 2021, respectively.

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

(4) Included as an offset to selling, general and administrative expenses on the condensed consolidated statements of income.

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

FINANCIAL INFORMATION

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Lease right-of-use assets and lease liabilities consist of the following:

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Total lease liabilities

(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 on the condensed consolidated balance sheets upon lease commencement.

(2) Finance lease right-of-use assets are recorded net of accumulated amortization of $ 211 million and $ 174 million as of October 29, 2022 and January 29, 2022, respectively.

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

(2) Recorded net of accumulated amortization of $ 237 million and $ 224 million as of April 29, 2023 and January 28, 2023, respectively.

(3) Includes $ 39 million as of both April 29, 2023 and January 28, 2023 related to an RH Design Gallery lease with a landlord that is an affiliate of the managing member of the Aspen LLCs (refer to Note 5— Variable Interest Entities ).

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

FINANCIAL INFORMATION

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The maturities of lease liabilities are as follows as of October 29, 2022:

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The maturities of lease liabilities are as follows as of April 29, 2023:

(in thousands)

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

Total lease payments exclude $ 640 million of legally binding payments under the non-cancellable term for leases signed but not yet commenced under our accounting policy as of October 29, 2022, of which $ 5.0 million, $ 25 million, $ 36 million, $ 39 million, $ 40 million and $ 38 million will be paid in the remainder of fiscal 2022, fiscal 2023, fiscal 2024, fiscal 2025, fiscal 2026 and fiscal 2027, respectively, and $ 457 million will be paid subsequent to fiscal 2027.

Total lease payments exclude $ 663 million of legally binding payments under the non-cancellable term for leases signed but not yet commenced under our accounting policy as of April 29, 2023, of which $ 22 million, $ 37 million, $ 43 million, $ 43 million, $ 41 million and $ 38 million will be paid in the remainder of fiscal 2023, fiscal 2024, fiscal 2025, fiscal 2026, fiscal 2027 and fiscal 2028, respectively, and $ 439 million will be paid subsequent to fiscal 2028.

(2) Excludes an immaterial amount of future commitments under short-term lease agreements.

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Supplemental information related to leases consists of the following:

NINE MONTHS ENDED

THREE MONTHS ENDED

Weighted-average remaining lease term (years)

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Finance leases

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FINANCIAL INFORMATION

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Other information related to leases consists of the following:

NINE MONTHS ENDED

THREE MONTHS ENDED

(in thousands)

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Operating cash flows from finance leases

Financing cash flows from finance leases—net (1)

Financing cash flows from finance leases

Total cash outflows from leases

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Finance leases

(1) Represents the principal portion of lease payments offset by tenant allowances received subsequent to lease commencement.

Build-to-Suit Asset

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

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

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

Therefore, the asset remains classified as a build-to-suit asset within property and equipment—net on the condensed consolidated balance sheets and is depreciated over the term of the useful life of the asset.

NOTE 9—CONVERTIBLE SENIOR NOTES

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In September 2019, we issued in a private offering $ 350 million principal amount of 0.00 % convertible senior notes due 2024 (the “2024 Notes” and, together with the 2023 Notes, the “Convertible Senior Notes” or the “Notes”).

Refer to Note 12— Convertible Senior Notes in our consolidated financial statements in our 2021 Form 10-K for further information and terms of the Notes, including the accounting policies related to the Notes that were in effect through fiscal 2021.

In connection with our adoption of ASU 2020-06 in the first quarter of fiscal 2022, we recombined the previously outstanding equity component, which resulted in an increase in the balance of convertible debt outstanding.

Refer to Note 2— Recently Issued Accounting Standards for further discussion of the impact of our adoption of ASU 2020-06 in our condensed consolidated financial statements.

FINANCIAL INFORMATION

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The outstanding balances under the 2023 Notes and 2024 Notes were as follows:

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Total convertible senior notes

(1) As of October 29, 2022, the balance includes debt issuance costs inclusive of original issuers’ discount.

As of January 29, 2022, the balance includes debt issuance costs inclusive of original issuers’ discount, as well as the previously outstanding equity component that was recombined upon the adoption of ASU 2020-06 in the first quarter of fiscal 2022, which was $ 5.7 million for the 2023 Notes and $ 30 million for the 2024 Notes.

Refer to Note 2 —Recently Issued Accounting Standards .

(2) As of October 29, 2022, the 2023 Notes outstanding are current liabilities and are classified as convertible senior notes due 2023—net.

The 2023 Notes outstanding as of January 29, 2022 included a current portion of $ 9.4 million and a non-current portion of $ 59 million.

(3) As of October 29, 2022, the 2024 Notes outstanding are non-current liabilities and are classified as convertible senior notes due 2024—net.

The 2024 Notes outstanding as of January 29, 2022 included a current portion of $ 3.6 million and a non-current portion of $ 184 million.

(1) As of both April 29, 2023 and January 28, 2023, the 2023 Notes outstanding were classified as convertible senior notes due 2023 within current liabilities .

(2) As of both April 29, 2023 and January 28, 2023, the 2024 Notes outstanding were classified as convertible senior notes due 2024—net within non-current liabilities .

FINANCIAL INFORMATION

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2023 Notes and 2024 Notes—Bond Hedge and Warrant Terminations and Notes Repurchase

During the first quarter of fiscal 2022, we entered into agreements with certain financial institutions (collectively, the “Counterparties”) to repurchase all of the warrants issued in connection with the 2023 Notes and 2024 Notes at an aggregate purchase price of $ 184 million and $ 203 million, respectively, subject to adjustment for a settlement feature based on pricing formulations linked to the trading price of our common stock over a volume weighted-average price measurement period of two or three days .

Upon entering into these agreements, the warrants were reclassified from stockholders’ equity to current liabilities on the condensed consolidated balance sheets, and accordingly, we recognized a corresponding net loss on the fair value adjustment of the warrants of $ 4.2 million, which is classified within other expense—net on the condensed consolidated statements of income.

Bond Hedge and Warrant Terminations

During the three months ended April 30, 2022, we entered into agreements with certain financial institutions (collectively, the “Counterparties”) to repurchase all of the warrants issued in connection with the 2023 Notes and 2024 Notes at an aggregate purchase price of $ 184 million and $ 203 million, respectively, subject to adjustment for a settlement feature based on pricing formulations linked to the trading price of our common stock over a volume weighted-average price measurement period of two or three days .

Upon entering into these agreements, the warrants were reclassified from stockholders’ equity to current liabilities on the condensed consolidated balance sheets, and accordingly, we recognized a corresponding net loss on the fair value adjustment of the warrants of $ 4.2 million, which is classified within other income—net on the condensed consolidated statements of income.

Upon settlement of these agreements in April 2022, we paid an aggregate of $ 391 million in cash to terminate the warrants.

During the first quarter of fiscal 2022, we entered into agreements with the Counterparties to terminate all of the convertible note bond hedges issued in connection with the 2023 Notes and 2024 Notes to receive an aggregate closing price of $ 56 million and $ 180 million, respectively, subject to adjustment for a settlement feature based on pricing formulations linked to the trading price of our common stock over a three day volume weighted-average price measurement period.

Upon entering into these agreements, the bond hedges were reclassified from stockholders’ equity to current assets on the condensed consolidated balance sheets, and accordingly, we recognized a corresponding loss on the fair value adjustment of the settlement feature of $ 4.3 million, which is classified within other expense—net on the condensed consolidated statements of income.

During the three months ended April 30, 2022, we entered into agreements with the Counterparties to terminate all of the convertible note bond hedges issued in connection with the 2023 Notes and 2024 Notes to receive an aggregate closing price of $ 56 million and $ 180 million, respectively, subject to adjustment for a settlement feature based on pricing formulations linked to the trading price of our common stock over a three day volume weighted-average price measurement period.

Upon entering into these agreements, the bond hedges were reclassified from stockholders’ equity to current assets on the condensed consolidated balance sheets, and accordingly, we recognized a corresponding loss on the fair value adjustment of the settlement feature of $ 4.3 million, which is classified within other income—net on the condensed consolidated statements of income.

Upon settlement of these agreements in April 2022, we received an aggregate of $ 232 million in cash for the termination of the bond hedges.

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FINANCIAL INFORMATION

During the first quarter of fiscal 2022, we entered into individual privately negotiated transactions with a limited number of sophisticated investors that were holders of the 2023 Notes and/or the 2024 Notes to repurchase in cash $ 45 million and $ 135 million in aggregate principal amount of the 2023 Notes and 2024 Notes, respectively (the “Notes Repurchase”).

Notes Repurchase

During the three months ended April 30, 2022, we entered into individual privately negotiated transactions with a limited number of sophisticated investors that were holders of the 2023 Notes and/or the 2024 Notes to repurchase in cash $ 45 million and $ 135 million in aggregate principal amount of the 2023 Notes and 2024 Notes, respectively (the “Notes Repurchase”).

The Notes Repurchase provided for an estimated settlement cost of $ 325 million, subject to adjustment to the final settlement cost for an embedded feature based on pricing formulations linked to the trading price of our common stock over a five day volatility weighted-average price measurement period that ended on April 29, 2022.

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Accordingly, we recognized a loss on extinguishment of debt of $ 146 million upon the execution of these agreements, inclusive of acceleration of amortization of debt issuance costs of $ 1.0 million.

Upon the completion of the price measurement period in April 2022, a total of $ 314 million was due to the holders, representing the combined carrying value of the debt liability of $ 47 million, as well as the fair value of the bifurcated embedded equity derivative of $ 267 million.

Accordingly, we recognized a gain on the fair value adjustment of the bifurcated embedded equity derivative of $ 11 million, which is classified within other expense—net on the condensed consolidated statements of income.

The resulting debt liability and bifurcated embedded equity derivative were settled in full for $ 314 million in cash upon closing of the Notes Repurchase on May 3, 2022.

During the second quarter of fiscal 2022, we entered into additional individual privately negotiated transactions with a limited number of sophisticated investors that were holders of the 2023 Notes and/or the 2024 Notes to repurchase in cash $ 18 million and $ 39 million in aggregate principal amount of the 2023 Notes and 2024 Notes, respectively (the “Additional Notes Repurchase”) .

The Additional Notes Repurchase provided for an estimated settlement cost of $ 80 million, subject to adjustment to the final settlement cost for an embedded feature based on pricing formulations linked to the trading price of our common stock over a one day volatility weighted-average price measurement period occurring in July 2022.

Upon execution of these agreements, we determined that we had modified the debt substantially and applied an extinguishment accounting model.

Accordingly, we derecognized the aggregate principal amount of $ 57 million of the Convertible Senior Notes related to the extinguishment of such notes, and subsequently recognized a new financing liability with a fair value of $ 25 million.

An embedded derivative related to the conversion feature was bifurcated from the new financing liability and separately recognized with an initial fair value of $ 55 million.

We recognized a loss on extinguishment of debt of $ 23 million upon the execution of these agreements, inclusive of acceleration of amortization of debt issuance costs of $ 0.3 million.

Upon the remeasurement of the amount owed to the holders in terms of the embedded feature, a total of $ 82 million was paid in cash to the holders, representing the combined carrying value of the financing liability of $ 25 million, as well as the fair value of the bifurcated embedded equity derivative upon settlement of $ 57 million.

Accordingly, we recognized a loss on the fair value adjustment of the bifurcated embedded equity derivative of $ 1.5 million, which is classified within other expense—net on the condensed consolidated statements of income.

Upon the remeasurement of the amount owed to the holders in terms of the embedded feature, a total of $ 314 million was paid in cash to the holders, representing the combined carrying value of the debt liability of $ 47 million, as well as the fair value of the bifurcated embedded equity derivative upon settlement of $ 267 million.

Accordingly, we recognized a gain on the fair value adjustment of the bifurcated embedded equity derivative of $ 11 million, which is classified within other income—net on the condensed consolidated statements of income.

FINANCIAL INFORMATION

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$ 350 million 0.00 % Convertible Senior Notes due 2024

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

However, this condition was not met for the calendar quarter ended June 30, 2022 or September 30, 2022 and, as a result, the 2024 Notes were not convertible as of September 30, 2022.

However, this condition was not met for the calendar quarter ended June 30, 2022 through the calendar quarter ended March 31, 2023, as a result, the 2024 Notes were not convertible as of March 31, 2023.

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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If the Company has not delivered a notice of its election of settlement method prior to the final conversion period, it will be deemed to have elected combination settlement with a dollar amount per note to be received upon conversion of $ 1,000 .

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During the nine months ended October 29, 2022, 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.

During the nine months ended October 29, 2022, we paid $ 3.6 million in cash and delivered 9,760 shares of common stock to settle the early conversion of these 2024 Notes.

During the three months ended April 30, 2022, 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.

During the three months ended April 30, 2022, we paid $ 3.6 million in cash and delivered 9,760 shares of common stock to settle the early conversion of these 2024 Notes.

We also received 9,760 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.

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

The remaining liability for the 2024 Notes is classified as a non-current obligation on our condensed consolidated balance sheets since the settlement of the outstanding 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.

$ 335 million 0.00 % Convertible Senior Notes due 2023

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

The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended September 30, 2022 and, accordingly, holders were eligible to convert their 2023 Notes beginning in the calendar quarter ended December 31, 2020 and are currently eligible to convert their 2023 Notes during the calendar quarter ending December 31, 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.

The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended June 30, 2022 and, accordingly, holders were eligible to convert their 2023 Notes beginning in the calendar quarter ended December 31, 2020 and were eligible to convert their 2023 Notes through March 15, 2023.

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

Upon conversion, the 2023 Notes will be settled, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock.

During the nine months ended October 29, 2022, holders of $ 9.4 million in aggregate principal amount of the 2023 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2023 Notes converted and shares of our common stock for the remaining conversion value.

During the nine months ended October 29, 2022, we paid $ 9.4 million in cash and delivered 27,220 shares of common stock to settle the early conversion of these 2023 Notes.

During the three months ended April 30, 2022, holders of $ 9.4 million in aggregate principal amount of the 2023 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2023 Notes converted and shares of our common stock for the remaining conversion value.

During the three months ended April 30, 2022, we paid $ 9.4 million in cash and delivered 27,213 shares of common stock to settle the early conversion of these 2023 Notes.

We also received 27,208 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, and therefore, on a net basis issued 5 shares of our common stock in respect to such settlement of the converted 2023 Notes.

The remaining liability for the 2023 Notes is classified as a current obligation on the condensed consolidated balance sheets since the settlement of the outstanding 2023 Notes is due on June 15, 2023.

The settlement of additional early conversions received, if any, will be made, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock.

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FINANCIAL INFORMATION

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NOTE 10—CREDIT FACILITIES

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Total credit facilities

(1) The interest rates for the asset based credit facility, term loans and equipment promissory note represent the weighted-average interest rates as of October 29, 2022.

(2) Deferred financing fees associated with the asset based credit facility as of October 29, 2022 and January 29, 2022 were $ 3.4 million and $ 4.1 million, respectively, and are included in other non-current assets on the condensed consolidated balance sheets.

The deferred financing fees are amortized on a straight-line basis over the life of the revolving line of credit, which has a maturity date of July 29, 2026.

(3) Represents the outstanding balance of the Term Loan B (defined below) under the Term Loan Credit Agreement, of which outstanding amounts of $ 1,961 million and $ 20 million were included in term loan B—net and other current liabilities , respectively, on the condensed consolidated balance sheets, respectively, in both periods presented.

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

(4) Represents the outstanding balance of the Term Loan B-2 (defined below) under the Term Loan Credit Agreement, of which outstanding amounts of $ 474 million and $ 5.0 million were included in term loan B-2—net and other current liabilities , respectively, on the condensed consolidated balance sheets as of October 29, 2022.

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

(5) Represents total equipment security notes secured by certain of our property and equipment, all of which was included in other current liabilities on the condensed consolidated balance sheets as of October 29, 2022.

Asset Based Credit Facility & Term Loan Facilities

(1) Interest rates for the asset based credit facility and term loans represent the weighted-average interest rates as of April 29, 2023.

(2) Deferred financing fees associated with the asset based credit facility as of April 29, 2023 and January 28, 2023 were $ 3.3 million and $ 3.5 million, respectively, and are included in other non-current assets on the condensed consolidated balance sheets.

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

(3) Represents the Term Loan Credit Agreement (defined below), of which outstanding amounts of $ 1,950 million and $ 20 million were included in term loan—net and other current liabilities on the condensed consolidated balance sheets, respectively, as of April 29, 2023.

Outstanding amounts of $ 1,955 million and $ 20 million were included in term loan—net and other current liabilities , respectively, on the condensed consolidated balance sheets as of January 28, 2023.

(4) Represents the outstanding balance of the Term Loan B-2 (defined below) under the Term Loan Credit Agreement, of which outstanding amounts of $ 493 million and $ 5.0 million were included in term loan B-2—net and other current liabilities , respectively, on the condensed consolidated balance sheets as of April 29, 2023.

Outstanding amounts of $ 494 million and $ 5.0 million were included in term loan B-2—net and other current liabilities , respectively, on the condensed consolidated balance sheets as of January 28, 2023.

(5) Represents total equipment security notes secured by certain of our property and equipment, which was included in other current liabilities on the condensed consolidated balance sheets as of January 28, 2023.

The equipment security note was repaid in full as of April 29, 2023.

Asset Based Credit Facility

On August 3, 2011, Restoration Hardware, Inc.

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

FINANCIAL INFORMATION

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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.

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

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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.

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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 the transition from LIBOR.

The ABL Credit Agreement was amended in December 2022 to transition from LIBOR to the Secured Overnight Financing Rate (“SOFR”).

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.

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

As of October 29, 2022, RHI was in compliance with the FCCR Covenant.

As of April 29, 2023, RHI was in compliance with the FCCR Covenant.

The ABL Credit Agreement requires a daily sweep of all cash receipts and collections to prepay the loans under the agreement while (i) an event of default exists or (ii) when the unused availability under the ABL Credit Agreement drops below the greater of (A) $ 40 million and (B) an amount based on 10 % of the total borrowing availability at the time.

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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 October 29, 2022, the amount available for borrowing under the revolving line of credit under the ABL Credit Agreement was $ 578 million, net of $ 25 million in outstanding letters of credit.

As of April 29, 2023, the amount available for borrowing under the revolving line of credit under the ABL Credit Agreement was $ 478 million, net of $ 27 million in outstanding letters of credit.

FINANCIAL INFORMATION

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Term Loan Credit Agreement

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

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FINANCIAL INFORMATION

On May 13, 2022, RHI entered into a 2022 Incremental Amendment (the “2022 Incremental Amendment”) with Bank of America, N.A., as administrative agent, amending the Term Loan Credit Agreement (the Term Loan Credit Agreement as amended by the 2022 Incremental Amendment, the “Amended Term Loan Credit Agreement”).

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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, RHI entered into a Master Loan and Security Agreement with Banc of America Leasing & Capital, LLC (“BAL”) pursuant to which BAL and RHI 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.

The maturity dates of the equipment security notes varied, but generally had a maturity of three or four years and required us to make monthly installment payments.

As of October 29, 2022, one equipment security note remains outstanding with a maturity date in April 2023.

FINANCIAL INFORMATION

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NOTE 11—FAIR VALUE MEASUREMENTS

Fair Value Measurements—Recurring

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

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

The estimated fair value of the asset based credit facility approximates cost as the interest rate associated with the facility is variable and resets frequently (Level 2).

The estimated fair value of the real estate loans approximate their carrying values as they were recently issued.

The estimated fair value and carrying value of the 2023 Notes and 2024 Notes and the Term Loan Credit Agreement were as follows:

The estimated fair value and carrying value of the 2023 Notes, the 2024 Notes and the Term Loan Credit Agreement were as follows:

(in thousands)

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Term loan B-2

(1) The carrying value of the convertible senior notes as of October 29, 2022 represents the principal amount of the 2023 Notes and 2024 Notes following our adoption of ASU 2020-06 in the first quarter of fiscal 2022 (refer to Note 2— Recently Issued Accounting Standards ).

The carrying value as of January 29, 2022 represents the principal amount less the equity component of the 2023 Notes and 2024 Notes classified in stockholders’ equity , which was required prior to the adoption of ASU 2020-06.

The carrying value in both periods excludes the discounts upon original issuance, discounts and commissions payable to the initial purchasers and third party offering costs, as applicable.

The carrying values of the Term Loan B and Term Loan B-2 represent the outstanding amount under each class excluding discounts upon original issuance and third party offering costs.

(1) The principal carrying value of the 2023 Notes and 2024 Notes excludes the discounts upon original issuance, discounts and commissions payable to the initial purchasers and third-party offering costs, as applicable.

The principal carrying values of the Term Loan B and Term Loan B-2 represent the outstanding amount under each class and exclude discounts upon original issuance and third-party offering costs.

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).

The estimated fair values of the Term Loan B and Term Loan B-2 were derived from discounted cash flows using risk-adjusted rates (Level 2).

The fair values of the Term Loan B and Term Loan B-2 were derived from discounted cash flows using risk-adjusted rates (Level 2).

Fair Value Measurements—Non-Recurring

The fair value of the Waterworks reporting unit tradename was determined based on unobservable (Level 3) inputs and valuation techniques.

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

Prior to the adoption of ASU 2020-06 and through fiscal 2021, 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 condensed consolidated statements of income, which represented the difference between the carrying value and fair value of the convertible senior notes immediately prior to the settlement date.

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 condensed consolidated statements of income, which represents the difference between the carrying value and fair value of the convertible senior notes immediately prior to the settlement date.

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

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FINANCIAL INFORMATION

NOTE 12—INCOME TAXES

We recorded income tax expense of $ 36 million and $ 54 million in the three months ended October 29, 2022 and October 30, 2021, respectively.

We recorded an income tax benefit of $ 71 million and income tax expense of $ 99 million in the nine months ended October 29, 2022 and October 30, 2021, respectively.

The effective tax rate was 26.8 % and 22.8 % in the three months ended October 29, 2022 and October 30, 2021, respectively.

The effective tax rate was ( 20.2 )% and 15.5 % in the nine months ended October 29, 2022 and October 30, 2021, respectively.

The increase in our effective tax rate for the three months ended October 29, 2022 as compared to the three months ended October 30, 2021 is primarily attributable to significantly lower net excess tax benefits from stock-based compensation in the three months ended October 29, 2022.

The decrease in our effective tax rate for the nine months ended October 29, 2022 as compared to the nine months ended October 30, 2021 is primarily attributable to significantly higher net excess tax benefits from stock-based compensation in the nine months ended October 29, 2022.

As of October 29, 2022, we had $ 8.2 million of unrecognized tax benefits, of which $ 7.6 million would reduce income tax expense and the effective tax rate, if recognized.

We recorded income tax expense of $ 17 million and an income tax benefit of $ 163 million in the three months ended April 29, 2023 and April 30, 2022, respectively.

The effective tax rate was 28.4 % and ( 438.3 )% for the three months ended April 29, 2023 and April 30, 2022, respectively.

The increase in the effective tax rate for the three months ended April 29, 2023 as compared to the three months ended April 30, 2022 is primarily attributable to significantly lower net excess tax benefits from stock-based compensation in fiscal 2023.

As of April 29, 2023, we had $ 8.2 million of unrecognized tax benefits, of which $ 7.6 million would reduce income tax expense and the effective tax rate, if recognized.

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

As of October 29, 2022, we had $ 5.5 million of exposures related to unrecognized tax benefits that are expected to decrease in the next 12 months.

Inflation Reduction Act

On August 16, 2022, the U.S.

government enacted the Inflation Reduction Act of 2022 that includes, among other provisions, changes to the U.S.

corporate income tax system, including a fifteen percent minimum tax based on "adjusted financial statement income” and a one percent excise tax on net repurchases of stock after December 31, 2022.

We are continuing to evaluate the Inflation Reduction Act and its requirements, including the application to our business.

As of April 29, 2023, we had $ 5.5 million of exposures related to unrecognized tax benefits that are expected to decrease in the next 12 months .

FINANCIAL INFORMATION

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NOTE 13—NET INCOME PER SHARE

The calculation of our net income per share is as follows:

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

THREE MONTHS ENDED

NINE MONTHS ENDED

(in thousands, except share and per share amounts)

Loss on extinguishment of debt

Net income available to common stockholders (1)

Weighted-average shares—basic

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Weighted-average shares—diluted

Basic net income per share

Diluted net income per share

(1) Effective the first quarter of fiscal 2022 upon adoption of ASU 2020-06, the loss on extinguishment of debt related to convertible securities is added back to net income to calculate net income per share.

FINANCIAL INFORMATION

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(2) We adopted ASU 2020-06 in the first quarter of fiscal 2022, and the adoption requires the dilutive impact of the 2023 Notes and 2024 Notes for diluted net income per share purposes to be determined under the if-converted method which assumes share settlement of the entire convertible debt instrument.

Prior to adoption of ASU 2020-06, we applied the treasury stock method to determine the dilutive impact of the 2023 Notes and 2024 Notes for diluted net income per share purposes.

The 2023 Notes and the 2024 Notes have an impact on our dilutive share count beginning at stock prices of $ 193.65 per share and $ 211.40 per share, respectively.

(1) The dilutive effect of the 2023 Notes and 2024 Notes is calculated under the if-converted method, which assumes share settlement of the entire convertible debt instrument.

The warrants associated with the 2023 Notes and 2024 Notes had an impact on our dilutive share count beginning at stock prices of $ 309.84 per share and $ 338.24 per share, respectively.

The warrants associated with the 2023 Notes and 2024 Notes were repurchased in April 2022 and, as a result, no warrant instruments are outstanding as of October 29, 2022.

The warrants associated with the 2023 Notes and 2024 Notes were repurchased in April 2022 and, as a result, no warrant instruments were outstanding as of and after April 30, 2022.

Accordingly, the warrants have no impact on our dilutive shares post-repurchase.

Refer to Note 9— Convertible Senior Notes .

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:

The following number of options and restricted stock units, as well as shares issuable under convertible senior notes prior to extinguishment in fiscal 2022, were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive:

THREE MONTHS ENDED

NINE MONTHS ENDED

Restricted stock units

Total anti-dilutive stock-based awards

NOTE 14—SHARE REPURCHASE PROGRAM AND SHARE RETIREMENT

Share Repurchase Program

Convertible senior notes

NOTE 14—SHARE REPURCHASE PROGRAM

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

On June 2, 2022, the Board of Directors authorized an additional $ 2.0 billion for the purchase of shares of our outstanding common stock, increasing the total authorized size of the share repurchase program to $ 2,450 million (the “Share Repurchase Program”).

During the nine months ended October 29, 2022, we repurchased 1,127,557 shares of our common stock under the Share Repurchase Program at an average price of $ 254.02 per share, for an aggregate repurchase amount of approximately $ 286 million.

As of October 29, 2022, $ 2,164 million remains available for future share repurchases under this program.

Share Retirement

During the nine months ended October 29, 2022, we retired 1,127,557 shares of common stock related to shares we repurchased under the Share Repurchase Program.

As a result of this retirement, we reclassified a total of $ 286 million from treasury stock to additional paid-in capital on the condensed consolidated balance sheets and condensed consolidated statements of stockholders’ equity as of October 29, 2022.

As of April 29, 2023, $ 1,450 million remains available for future share repurchases under this program.

NOTE 15—STOCK-BASED COMPENSATION

We recorded stock-based compensation expense of $ 10 million and $ 12 million during the three months ended October 29, 2022 and October 30, 2021, respectively, which is included in selling, general and administrative expenses on the condensed consolidated statements of income.

We recorded stock-based compensation expense of $ 34 million and $ 37 million during the nine months ended October 29, 2022 and October 30, 2021, respectively.

We recorded stock-based compensation expense of $ 10 million and $ 13 million during the three months ended April 29, 2023 and April 30, 2022, respectively, which is included in selling, general and administrative expenses on the condensed consolidated statements of income.

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

2012 Stock Incentive Plan and 2012 Stock Option Plan

The Restoration Hardware 2012 Stock Incentive Plan (the “Stock Incentive Plan”) was adopted on November 1, 2012.

The Stock Incentive Plan provides for the grant of incentive stock options to our employees, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, cash-based awards and any combination thereof to our employees, directors and consultants and our parent and subsidiary corporations’ employees, directors and consultants.

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2023 Stock Incentive Plan

The RH 2023 Stock Incentive Plan (the “2023 Stock Incentive Plan”) was approved by stockholders on April 4, 2023.

The 2023 Stock Incentive Plan provides for the grant of incentive stock options to our employees and the grant of non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights and any combination thereof to our employees, directors and consultants and our parent and subsidiary corporations’ employees, directors and consultants.

FINANCIAL INFORMATION

The Restoration Hardware 2012 Stock Option Plan (the “Option Plan”) was adopted on November 1, 2012 and on such date 6,829,041 fully vested options were granted under this plan to certain of our employees and advisors.

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

As of January 29, 2022, there were a total of 1,185,322 shares issuable under the Stock Incentive Plan.

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, increasing the total number of shares issuable under the Stock Incentive Plan to 1,615,461 .

Awards under the plans reduce the number of shares available for future issuance.

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The maximum number of shares that may be issued pursuant to all awards under the 2023 Stock Incentive Plan is (i) 3,000,000 , plus (ii) any shares of our common stock covered by any outstanding award (or portion of any such award) that has been granted under the 2012 Stock Incentive Plan (as defined below) if such award (or a portion of such award) is forfeited, is canceled or expires (whether voluntarily or involuntarily) without the issuance of shares of our common stock or if the shares underlying such award (or a portion of such award) that are surrendered or withheld in payment of the award’s exercise or purchase price or in satisfaction of tax withholding obligations with respect to an award would be deemed not to have been issued for purposes of determining the maximum number of shares of our common stock that may be issued under the 2023 Stock Incentive Plan had such award been an award granted under the 2023 Stock Incentive Plan.

The 2023 Stock Incentive Plan has a ten year term.

Awards under the 2023 Stock Incentive Plan reduce the number of shares available for future issuance.

Cancellations and forfeitures of awards previously granted under the 2023 Stock Incentive Plan increase the number of shares available for future issuance.

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

On October 31, 2022, both the Stock Incentive Plan and Option Plan expired.

Upon expiration of the Stock Incentive Plan, a total of 1,607,508 shares that were available for future issuance under the plan were cancelled and are no longer available for the grant of awards under the plan.

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

OPTIONS OUTSTANDING

OPTIONS EXERCISABLE

RANGE OF EXERCISE PRICES

LIFE (IN YEARS)

$ 25.39 — $ 45.82

$ 50.00 — $ 50.00

$ 53.47 — $ 61.30

$ 75.43 — $ 75.43

$ 87.31 — $ 154.82

$ 156.40 — $ 380.53

$ 385.30 — $ 716.75

Vested or expected to vest

The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of October 29, 2022 was $ 588 million, $ 574 million, and $ 517 million, respectively.

Stock options exercisable as of October 29, 2022 had a weighted-average remaining contractual life of 4.03 years.

As of October 29, 2022, the total unrecognized compensation expense related to unvested options was $ 91 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 4.39 years.

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

Shares issued as a result of award exercises under the 2023 Stock Incentive Plan will be funded with the issuance of new shares.

We did no t make any grants under the 2023 Stock Incentive Plan during the three months ended April 29, 2023.

2012 Stock Incentive Plan and 2012 Stock Option Plan

As of April 29, 2023, 3,393,460 options granted under the Restoration Hardware 2012 Stock Incentive Plan (the “2012 Stock Incentive Plan”) and the Restoration Hardware 2012 Stock Option Plan were outstanding with a weighted-average exercise price of $ 179.73 per share and 3,216,721 options were vested with a weighted-average exercise price of $ 175.73 per share.

The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of April 29, 2023 was $ 401 million, $ 390 million and $ 343 million, respectively.

Stock options exercisable as of April 29, 2023 had a weighted-average remaining contractual life of 4.95 years.

As of April 29, 2023, the total unrecognized compensation expense related to unvested options was $ 78 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.97 years.

In addition, as of April 29, 2023, the total unrecognized compensation expense related to the fully vested option grant made to Mr.

Friedman in October 2020 was $ 11 million, which will be recognized on an accelerated basis through May 2025 (refer to Chairman and Chief Executive Officer Option Grant below).

As of October 29, 2022, we had 24,390 restricted stock units outstanding with a weighted-average grant date fair value of $ 437.37 per share.

During the three months ended October 29, 2022, 1,780 restricted stock units vested with a weighted-average grant date fair value of $ 49.53 per share.

During the nine months ended October 29, 2022, 4,700 restricted stock units vested with a weighted-average grant date fair value of $ 117.94 per share.

As of October 29, 2022, there was $ 7.7 million of total unrecognized compensation expense related to unvested restricted stock and restricted stock units, which is expected to be recognized over a weighted-average period of 4.49 years.

FINANCIAL INFORMATION

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As of April 29, 2023, we had 19,670 restricted stock units outstanding with a weighted-average grant date fair value of $ 444.30 per share.

During the three months ended April 29, 2023, 1,250 restricted stock units vested with a weighted-average grant date fair value of $ 437.82 per share.

As of April 29, 2023, there was $ 6.6 million of total unrecognized compensation expense related to unvested restricted stock and restricted stock units, which is expected to be recognized over a weighted-average period of 4.30 years.

Chairman and Chief Executive Officer Option Grant

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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.

Refer to Note 18— Stock-Based Compensation in the 2021 Form 10-K.

The option will result in aggregate non-cash stock compensation expense of $ 174 million, of which $ 4.1 million and $ 5.8 million was recognized during the three months ended October 29, 2022 and October 30, 2021, respectively, and $ 14 million and $ 18 million was recognized during the nine months ended October 29, 2022 and October 30, 2021, respectively (which is included in the stock-based compensation expense recorded during the three and nine months ended October 29, 2022 and October 30, 2021 noted above).

The option will result in aggregate non-cash stock compensation expense of $ 174 million, of which $ 3.5 million and $ 5.9 million was recognized during the three months ended April 29, 2023 and April 30, 2022 (which is included in the stock-based compensation expense recorded during the three months ended April 29, 2023 and April 30, 2022 noted above).

NOTE 16—COMMITMENTS AND CONTINGENCIES

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

We had no material off-balance sheet commitments as of April 29, 2023.

Contingencies

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In addition, we are subject to governmental and regulatory examinations, information requests, and investigations from time to time at the state and federal levels.

With respect to such matters and others, 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.

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.

When and to the extent that we do establish a reserve, there can be no assurance that any such recorded liability for estimated losses will be for the appropriate amount, and actual losses could be higher or lower than what we accrue from time to time.

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

FINANCIAL INFORMATION

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Certain legal proceedings that we currently face involve various class-action allegations regarding employment practices, including under state wage-and-hour laws.

We have faced similar litigation in the past.

Due to the inherent difficulty of predicting the course of legal actions related to these class-action allegations, such as the eventual scope, duration or outcome, we are unable to estimate the amount or range of any potential loss that could result from an unfavorable outcome arising from such matters.

Due to the inherent difficulty of predicting the course of legal actions related to these class-action allegations, such as the eventual scope, duration or outcome, we may be unable to estimate the amount or range of any potential loss that could result from an unfavorable outcome arising from such matters.

Our assessment of these legal proceedings, as well as other lawsuits, could change from future determinations or the discovery of facts that are not presently known.

We continue to defend such cases and our estimates may evolve over time.

Accordingly, the ultimate costs to resolve these cases may be substantially higher or lower than our estimates.

With respect to such contingencies, 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.

Loss contingencies determined to be probable and estimable are recorded in accounts payable and accrued expenses on the condensed consolidated balance sheets (refer to Note 6— Accounts Payable, Accrued Expenses and Other Current Liabilities ).

These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to each matter.

In view of the inherent difficulty of predicting the outcome of certain matters, particularly in cases in which claimants seek substantial or indeterminate damages, it may not be 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.

Although we are self-insured or maintain deductibles in the United States for workers’ compensation, general liability and product liability up to predetermined amounts, above which third-party insurance applies, depending on the facts and circumstances of the underlying claims, coverage under our insurance policies may not be available.

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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, result in the diversion of significant operational resources, and require changes to our business operations, policies and practices.

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FINANCIAL INFORMATION

Legal costs related to such claims are expensed as incurred.

NOTE 17—SEGMENT REPORTING

We define reportable and operating segments on the same basis that we use to evaluate our performance internally by the Chief Operating Decision Maker (the “CODM”), which we have determined is our Chief Executive Officer.

We define reportable and operating segments on the same basis that we use to evaluate our performance internally by the chief operating decision maker (“CODM”), which we have determined is our Chief Executive Officer.

We have three operating segments:

RH Segment, Waterworks and Real Estate.

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, including hospitality, websites, Source Books, and the Trade and Contract channel.

The Real Estate segment represents operations associated with our equity method investments and certain of our consolidated variable interest entities that are non-wholly owned subsidiaries and have operations that are not directly related to RH’s operations (refer to Note 5— Variable Interest Entities ).

1 unchanged sentence

While RH Segment and Waterworks have a shared senior leadership team and customer base, we have determined that their results cannot be aggregated as they do not share similar economic characteristics, as well as due to other quantitative factors.

FINANCIAL INFORMATION

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Segment Information

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

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

Segment operating income excludes (i) asset impairments, (ii) the amortization of the non-cash compensation charge related to the fully vested option grant made to Mr.

Friedman in October 2020, (iii) employer payroll tax expense related to the option exercise by Mr.

Friedman, (iv) professional fees related to the 2023 Notes and 2024 Notes transactions (refer to Note 9— Convertible Senior Notes ), (v) compensation settlements related to the Rollover Units and Profit Interest Units in the Waterworks subsidiary, (vi) product recalls, (vii) favorable legal settlement, (viii) gain on sale of building and land, and (ix) severance costs associated with reorganizations.

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

Segment operating income excludes (i) severance costs associated with a reorganization, (ii) non-cash compensation amortization related to an option grant made to Mr.

Friedman in October 2020, (iii) employer payroll tax expense related to an option exercise by Mr.

Friedman, (iv) professional fee related to the 2023 Notes and 2024 Notes transactions (refer to Note 9— Convertible Senior Notes ), (v) asset impairments, and (vi) product recalls.

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.

FINANCIAL INFORMATION

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The following table presents segment operating income and income before income taxes:

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

The following table presents segment operating income and income before income taxes and equity method investments:

THREE MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

Operating income:

Asset impairments

Total segment operating income

Reorganization related costs

Non-cash compensation

Employer payroll taxes on option exercise

Professional fees

Compensation settlements

Professional fee

Asset impairments

Recall accrual

Legal settlement

Gain on sale of building and land

Reorganization related costs

Income from operations

1 unchanged sentence

Loss on extinguishment of debt

Other expense—net

Income before income taxes

The following tables present the statements of income metrics reviewed by the CODM to evaluate performance internally or as required under ASC 280— Segment Reporting :

THREE MONTHS ENDED

(in thousands)

Depreciation and amortization

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Other income—net

Income before income taxes and equity method investments

FINANCIAL INFORMATION

NINE MONTHS ENDED

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

THREE MONTHS ENDED

(in thousands)

Depreciation and amortization

The statements of income metrics for the Real Estate segment were immaterial in the three and nine months ended October 29, 2022 and, therefore, such results are presented within the RH Segment for the respective periods.

In the three months ended October 29, 2022 and October 30, 2021, the Real Estate segment share of equity method investments losses were $ 1.9 million and $ 2.3 million, respectively, and were $ 6.1 million and $ 6.9 million in the nine months ended October 29, 2022 and October 30, 2021, respectively.

For both the three and nine months ended October 29, 2022, our share of equity method investments for the Waterworks segment was immaterial.

In the three months ended April 29, 2023 and April 30, 2022, the Real Estate segment share of equity method investments loss were $ 1.6 million and $ 1.4 million, respectively.

Our share of income from equity method investments for the Waterworks segment were immaterial for both fiscal periods presented.

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

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(1) The 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 recognized in prior fiscal years.

(2) The Waterworks reporting unit tradename is presented net of an impairment charge of $ 35 million recognized in previous fiscal years.

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

3 unchanged sentences

THREE MONTHS ENDED

NINE MONTHS ENDED

(in thousands)

2 unchanged sentences

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

As of October 29, 2022, we operated 4 retail locations and 2 outlets in Canada, and 1 retail location in the U.K.

As of April 29, 2023, we operated 4 retail locations and 2 outlets in Canada, and 1 retail location in the U.K.

Geographic revenues in Canada and the U.K.

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

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

No single customer accounted for 10% or more of our consolidated net revenues in any fiscal period presented.

FINANCIAL INFORMATION

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NOTE 18—SUBSEQUENT EVENTS

In December 2022, we entered into investments in VIEs with an affiliate of the managing member of the Aspen LLCs.

We converted $ 27 million of promissory notes receivable and accrued interest as of October 29, 2022 into an equity contribution of one of the limited liability companies (“LLC”) to acquire 50 percent of the membership interests in the LLC.

Additionally, we entered into four separate LLCs by which we contributed three owned properties in certain domestic locations, each for a 50 percent membership interest in the respective LLC, as well as one owned property in the United Kingdom.

Due to the close proximity of the acquisition date to the filing date of our Quarterly Report on Form 10-Q for the quarterly period ended October 29, 2022, the accounting for these recently completed VIEs is incomplete.

Such information will be included in our Annual Report on Form 10-K for the year ending January 28, 2023.

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No single customer accounted for 10 % or more of our consolidated net revenues in the three months ended April 29, 2023 or April 30, 2022.

FINANCIAL INFORMATION

2023 FIRST QUARTER FORM 10-Q | 30

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

What changed 10-Q

Item 1. Financial Statements